<PAGE> 1
As filed with the Commission on February 7, 2000 File No. 333-90925
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HUMBOLDT BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<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>
<S> <C> <C>
Daniel B. Eng, Esq. Gary S. Findley, Esq. Roger S. Mertz, Esq.
Regina Schroder, Esq. Gary Steven Findley & Associates Allen, Matkins, Leck, Gamble &
Bartel Eng Linn & Schroder 1470 North Hundley Street Mallory LLP
300 Capitol Mall, Suite 1100 Anaheim, California 92806 333 Bush Street, 17th Floor
Sacramento, California 95814 Telephone: (714) 630-7136 San Francisco, CA 94104
Telephone: (916) 442-0400 Telephone: (415) 837-1515
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [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. [ ]
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum
Title of each class of Amount of Shares Offering Per Proposed maximum aggregate Amount of
securities to be registered to be Registered Share offering price registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of Interest in the Humboldt $5,500,000(1) $1,529(3)
Bancorp Promissory Note
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value, of
Humboldt Bancorp, that may be exchanged
for up to $2,000,000 of Humboldt Bancorp
Note 160,000 $12.50 $2,000,000 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEE $1,529
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Rule 457(o) of the Securities Act of 1933,
as amended.
(2) Fee included in Note(1) above.
(3) Of which $1,529 has already been paid.
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> 2
PROXY STATEMENT OF: PROSPECTUS OF:
GLOBAL BANCORP HUMBOLDT BANCORP
1424 SECOND STREET 701 FIFTH STREET
NAPA, CALIFORNIA 94559 EUREKA, CALIFORNIA 95501
(707) 253-2900 (707) 445-3233
We, Humboldt Bancorp, are proposing to merge Global Bancorp with
Humboldt Bancorp, and acquire and operate Capitol Thrift & Loan Association as a
subsidiary of Humboldt Bancorp, assuming regulatory approval and upon the
completion of an offering of Humboldt Bancorp common stock. Global Bancorp is
asking you to vote on the merger of Global Bancorp with Humboldt Bancorp.
If Global Bancorp shareholders approve the merger, each share of Global
Bancorp you own will convert into the right to receive cash and a certificate of
interest in the Humboldt Bancorp promissory note, unless you exercise your
dissenter's rights.
The overall merger price is approximately $16.5 million dollars payable
as follows:
Cash: Approximately $11.8 million dollars based on Global Bancorp
shareholders' equity less Global Bancorp merger expenses in excess of
$150,000.
Humboldt Bancorp Promissory Note: Approximately $4.7 million dollars
payable on January 30, 2002. Interest of 8% per annum on this amount is
payable to you in cash on a semi-annual basis. The merger agreement
provides for adjustments for loan losses and expenses identified in the
merger agreement.
Subject to the close of a concurrent public offering, Humboldt
Bancorp's common stock has been approved for listing on the NASDAQ National
Market under the symbol "HBEK." Currently, its common stock is quoted on the OTC
Bulletin Board.
At your election, a portion of the payment under the Humboldt Bancorp
promissory note upon maturity may be paid in Humboldt Bancorp common stock.
Your board of directors carefully reviewed and considered the merger
and determined that the merger is fair to Global Bancorp and Capitol Thrift &
Loan Association and is in the best interests of Global Bancorp's shareholders.
Global Bancorp's board of directors approved the merger and recommends that you
vote in favor of the merger.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved Humboldt Bancorp common stock or Humboldt
Bancorp promissory note, or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Shares of Humboldt Bancorp common stock and Humboldt Bancorp promissory
note are not savings or deposit accounts or other obligations of any bank or
nonbank subsidiary of any of the parties, and they are not insured by the
Federal Deposit Insurance Corporation, or any other governmental agency.
Investment in Humboldt Bancorp common stock and Humboldt Bancorp
promissory note has risks. For a discussion of factors important to the decision
to approve the merger, see "Risk Factors" on page 13.
The date of this proxy statement/prospectus is February 7, 2000, and is
first being mailed to shareholders on or about February 7, 2000.
1
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................4
SUMMARY........................................................................5
WHO CAN HELP ANSWER YOUR QUESTIONS.............................................8
ORGANIZATIONAL CHART...........................................................9
SUMMARY OF FINANCIAL INFORMATION..............................................10
RISK FACTORS..................................................................13
GLOBAL BANCORP MEETING........................................................16
DESCRIPTION OF THE MERGER.....................................................18
OPINION OF GLOBAL BANCORP FINANCIAL ADVISOR...................................28
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS...............................31
RIGHTS OF DISSENTING GLOBAL BANCORP SHAREHOLDERS..............................35
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP CAPITAL STOCK...........................................37
MARKET PRICES.................................................................39
PRO FORMA FINANCIAL STATEMENTS................................................40
REGULATORY CAPITAL AND LEVERAGE RATIO.........................................46
HUMBOLDT BANCORP SELECTED FINANCIAL DATA......................................46
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................48
BUSINESS OF HUMBOLDT BANCORP .................................................75
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER..........................88
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP,
HUMBOLDT BANK AND CAPITOL VALLEY BANK....................................88
MANAGEMENT OF HUMBOLDT BANCORP................................................98
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION..................................................101
SECURITIES OWNERSHIP.........................................................106
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................108
GLOBAL BANCORP SELECTED FINANCIAL DATA.......................................108
GLOBAL BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION................................................110
BUSINESS OF GLOBAL BANCORP...................................................129
EXPERTS......................................................................135
CHANGE IN ACCOUNTANTS........................................................135
MATTERS......................................................................136
WHERE YOU CAN FIND MORE INFORMATION..........................................136
INDEX TO FINANCIAL STATEMENTS................................................F-1
APPENDIX A
RESTATED AGREEMENT AND PLAN OF REORGANIZATION ..........................A-1
APPENDIX B
OPINION OF FIRST CAPITAL GROUP, LLC ....................................B-1
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS .........................................C-1
</TABLE>
3
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What am I being asked to vote on?
A: The merger of Capitol Thrift with Humboldt Bancorp. Global Bancorp will
not continue to exist, and Capitol Thrift will become a subsidiary of
Humboldt Bancorp.
Q: What do I need to do now?
A: You need to read this document and sign your proxy card and mail it to
Global Bancorp in the enclosed return envelope as soon as possible.
Q: Should I send in my stock certificates now?
A: No. When the merger is completed, you will receive written instructions
for exchanging your shares of common stock.
Q: When is the merger expected to be completed?
A: The merger is expected to be completed by April 30, 2000.
Q: Whom should I call with questions?
A: If you have any questions about the merger and other matters to be
considered at the meeting, please call Robert F. Kelly, President of
Global Bancorp, at (707) 253-2900.
4
<PAGE> 6
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 8.
The Companies (Pages 48, 75, 110, and 129)
HUMBOLDT BANCORP
701 Fifth Street
Eureka, California 95501
(707) 445-3233
Humboldt Bancorp is a California bank holding company that owns two
banks 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
also own 50% of Bancorp Financial Services, Inc., located in Sacramento,
California. Bancorp Financial Services makes consumer automobile loans and
commercial equipment leases, of less than $100,000, to small businesses.
For the nine months ended September 30, 1999, Humboldt Bancorp had net
income of $3.2 million, and at September 30, 1999, had total assets of $419.2
million, net loans of $203.1 million, and deposits of $375.8 million. Based on
our unaudited, consolidated financials, our net income for the year ended
December 31, 1999, was $4.6 million, and our total assets as of December 31,
1999, were $424.0 million.
GLOBAL BANCORP
1424 Second Street
Napa, California 94559
(707) 253-2900
Global Bancorp is a California bank holding company that owns Capitol
Thrift & Loan Association, a California industrial loan company. Capitol Thrift
has 10 branches located throughout California.
For the nine months ended September 30, 1999, Global Bancorp had net
income of $952,000, and at September 30, 1999, had total assets of $117.7
million, net loans of $98.3 million, and deposits of $105.3 million. Based on
Global Bancorp's unaudited, consolidated financials, Global Bancorp's net income
for the year ended December 31, 1999, was $1.3 million, and Global Bancorp's
total assets as of December 31, 1999, was $116.6 million.
The merger and where you can read about the merger agreement (Page 18 and
Appendix A)
The merger will combine the business of Capitol Thrift under Humboldt
Bancorp. Capitol Thrift will become a subsidiary of Humboldt Bancorp.
You will find a complete copy of the Second Restatement of Agreement
and Plan of Reorganization and Merger, as amended, 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.
5
<PAGE> 7
What you will receive in the merger (Page 22)
When the merger is completed, each share of Global Bancorp common stock
will be converted into:
- approximately $11.8 million in cash divided by the number of
outstanding shares of Global
Bancorp; and
- a certificate evidencing an interest in the Humboldt Bancorp
promissory note payable in cash, or at your election in
Humboldt Bancorp common stock, on January 30, 2002, or 60 days
from the occurrence of a material adverse effect with respect
to Humboldt Bancorp, but in no event earlier than January 31,
2001. Humboldt Bancorp is only required to provide a maximum
$2.0 million in Humboldt Bancorp common stock based on the
price of the last trade of the stock prior to the merger, plus
7%. The principal amount of the Humboldt Bancorp promissory
note will be approximately $4.7 million in the aggregate.
Requirements to be met in the Merger (Page 26)
There are a number of requirements which must be met before the merger
is completed. Among these requirements are the following:
- Approval by Global Bancorp shareholders of the merger
agreement and the merger;
- Approval of the merger by the Federal Reserve Bank, Federal
Deposit Insurance Corporation and the California Department of
Financial Institutions;
- Receipt of fairness opinion by Global Bancorp and Capitol
Thrift, which opinion is subject to revocation;
- Completion of Humboldt Bancorp's public stock offering; and
- Completion by Humboldt Bank of the purchase of up to $43
million in loans from Capitol Thrift.
If the merger doesn't occur, Global Bancorp, Capitol Thrift or Humboldt Bancorp
may owe termination fees (Page 27)
Humboldt Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift can
terminate the merger agreement by mutual consent at any time.
- Global Bancorp or Capitol Thrift must pay to Humboldt Bancorp
$250,000 in cash if:
Global Bancorp terminates the merger agreement because its
fairness opinion is revoked, or
Humboldt Bancorp terminates the merger agreement because
- Global Bancorp's shareholders do not approve the
merger agreement, or
- there is a breach of Global Bancorp's representations
or warranties, a default by Global Bancorp or Capitol
Thrift, or a material adverse event respecting Global
Bancorp not previously disclosed
- Global Bancorp or Capitol Thrift must pay to Humboldt Bancorp
$350,000 in cash if Global Bancorp or Capitol Thrift terminates the merger
agreement and within 180 days Global Bancorp or Capitol Thrift
6
<PAGE> 8
approves another sale, executes another letter of intent, or a third party
acquires 15% or more of the outstanding shares of Global Bancorp
- Humboldt Bancorp must pay to Global Bancorp the sum of
$250,000 in cash if Global Bancorp terminates the merger agreement because:
- there is a breach of Humboldt Bancorp's
representations and warranties, a default by Humboldt
Bancorp, or a material adverse event respecting
Humboldt Bancorp not previously disclosed, or
- there is a failure to complete Humboldt Bancorp's
public offering by April 30, 2000.
Recommendations to Global Bancorp shareholders (Page 28)
Global Bancorp's board of directors unanimously recommends a vote "FOR"
approval of the merger.
Directors of Global Bancorp who own 38.4% of the outstanding shares of
Global Bancorp have already agreed to vote their shares for the merger.
The meeting (Page 16)
Global Bancorp's shareholders' meeting will be held at its executive
offices located at 920 Franklin Place, Napa, California, at 8:30 a.m. (local
time), on March 9, 2000.
Record date, voting power and vote required (Page 16)
On February 1, 2000, the record date for the Global Bancorp Meeting,
there were 699,100 shares of Global Bancorp common stock outstanding. Approval
of the merger requires the affirmative vote of the holders of a majority of the
outstanding shares of Global Bancorp common stock.
Financial advisor issues opinion that merger consideration is fair (Page 28 and
Appendix B)
First Capital Group, L.L.C. has issued a fairness opinion that states
that the terms of the merger agreement are fair, from a financial standpoint, to
the shareholders of Global Bancorp. Global Bancorp has agreed to pay First
Capital Group $200,000 for its representation and opinion. We encourage you to
read this opinion carefully.
The boards expect the merger to be taxable to you, but not to be taxable to
Global Bancorp or Capitol Thrift (Page 31)
Covington & Burling has issued an opinion as to the material tax
consequences of the merger. The opinion states that the Global Bancorp
shareholders will recognize gain or loss for federal income tax purposes but
that Global Bancorp and Capitol Thrift will not recognize gain or loss.
Interests of Global Bancorp executive officers in the merger (Page 25)
Upon completion of the merger, it is anticipated that Mr. Robert F.
Kelly will continue as President and Chief Executive Officer, and Mr. Leighton
Monroe, Jr. will continue as Chief Financial Officer, of Capitol Thrift as a
subsidiary of Humboldt Bancorp.
7
<PAGE> 9
Appraisal rights in the merger (Page 35 and Appendix C)
You may dissent from the merger and demand payment in cash equal to the
fair value of your shares in Global Bancorp. If you properly exercise your
dissenter's rights, you will not receive the cash or a certificate of interest
in the Humboldt Bancorp promissory note you otherwise would receive according to
the merger agreement.
Accounting treatment (Page 40)
Humboldt Bancorp will account for the merger as a purchase. Purchase
method accounting treatment creates goodwill in the merger. The Global Bancorp
merger will cause a significant amount of negative goodwill, which will be
accounted for as a deferred credit and amortized using the straight-line method
over 15 years.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact:
Global Bancorp
1424 Second Street
Napa, California 94559
Attention: Mr. Robert F. Kelly, President
Telephone No.: (707) 253-2900
8
<PAGE> 10
ORGANIZATIONAL CHART
COMPANIES BEFORE THE MERGER:
Humboldt Bancorp Global Bancorp
- ---------------------------------------------------- ---------------------
100% 100% 50% 100%
Humboldt Bank Capitol Valley Bancorp Financial Capitol Thrift & Loan
Bank Services Association
COMPANIES AFTER THE MERGER:
Humboldt Bancorp
- --------------------------------------------------------------------------------
100% 100% 100% 50%
Humboldt Bank Capitol Valley Capitol Thrift & Loan Bancorp Financial
Bank Association Services
9
<PAGE> 11
SUMMARY OF FINANCIAL INFORMATION
The tables on pages 10 and 11 summarize the historical financial
results of Humboldt Bancorp and Global Bancorp. This information is provided to
show growth and earnings trends for each institution over the last five years
and the first nine months of 1998 and 1999. The next table on page 12 summarizes
the pro forma financial information as if the merger, and the CalFed branch
acquisitions, had occurred at the beginning of each period presented. The pro
forma financial information combines the historical financial information shown
in the first two tables and takes into consideration the merger in each of the
earlier periods presented. Operational efficiencies or additional expenses that
might have occurred as a result of the merger is not considered. In addition,
this pro forma information is not necessarily indicative of the results that
would have been realized had the merger been completed at the beginning of the
periods presented. This summary should be read with the financial statements and
notes to the financial statements included at the end of this document.
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR HUMBOLDT BANCORP
(UNAUDITED)
<TABLE>
<CAPTION>
As Of And For The
(Dollars in Thousands As Of And For The Years Ended Nine Months Ended
except per share data) December 31, September 30,
-------------------------------------------------------------- -----------------------
1994(1) 1995(1) 1996 1997 1998 1998 1999
(unaudited)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 11,163 $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 17,789 $ 17,844
Interest expense 3,540 5,244 5,549 7,024 7,742 5,855 5,635
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,623 9,997 11,013 13,029 15,762 11,934 12,209
Provision for loan and lease losses 783 792 533 773 2,124 1,541 697
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease losses 6,840 9,205 10,480 12,256 13,638 10,393 11,512
Non-interest income 1,463 3,509 5,747 8,109 12,473 8,609 13,792
Non-interest expense 6,240 9,149 11,325 15,496 19,578 14,471 20,577
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes 2,063 3,565 4,902 4,869 6,533 4,531 4,727
Provision for income taxes 762 1,363 1,926 1,611 2,517 1,720 1,537
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,301 $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 2,811 $ 3,190
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (at period end):
Investment securities $ 37,258 $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 79,347 $ 106,210
Total net loans and leases $ 92,462 $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 180,846 $ 203,098
Total assets $ 152,863 $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 312,944 $ 419,167
Total deposits $ 137,624 $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 277,285 $ 375,815
Total stockholders' equity $ 13,569 $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 26,571 $ 32,816
PER SHARE DATA(2):
Net income
Basic $ 0.33 $ 0.48 $ 0.64 $ 0.69 $ 0.82 $ 0.58 $ 0.64
Diluted $ 0.31 $ 0.45 $ 0.58 $ 0.61 $ 0.75 $ 0.52 $ 0.58
Book value end of period $ 2.94 $ 0.65 $ 4.18 $ 4.94 $ 5.66 $ 5.43 $ 6.32
Weighted average shares outstanding
Basic 3,971,000 4,624,000 4,637,000 4,756,000 4,876,000 4,863,000 4,992,000
Diluted 4,135,000 4,913,000 5,135,000 5,325,000 5,379,000 5,372,000 5,475,000
Actual 4,622,000 4,636,000 4,694,000 4,769,000 4,917,000 4,892,000 5,193,000
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed
its reorganization as a holding company on January 2, 1996.
(2) All share and share data reflects retroactive restatement for 10% stock
dividends in 1994, 1995, 1996, 1997, 1998, and 2000, and a five-for-two
stock split in 1999.
10
<PAGE> 12
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR GLOBAL BANCORP
(UNAUDITED)
<TABLE>
<CAPTION>
As Of And For The
(Dollars in Thousands, As Of And For The Years Ended Nine Months Ended
except per share data) December 31, September 30,
------------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 8,776 $ 9,115 $ 10,793 $ 11,996 $ 12,953 $ 9,681 $ 8,723
Interest expense 3,119 4,592 5,628 6,469 6,843 5,178 4,293
--------- --------- -------- -------- -------- -------- --------
Net interest income 5,657 4,523 5,165 5,527 6,110 4,503 4,430
Provision for credit losses (287) (63) 151 416 226 57 479
--------- --------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 5,944 4,586 5,014 5,111 5,884 4,446 3,951
Non-interest income 538 478 464 494 1,302 633 733
Non-interest expense 4,787 5,042 4,158 4,624 5,473 3,860 3,369
--------- --------- -------- -------- -------- -------- --------
Income before provision for
income taxes 1,695 22 1,320 981 1,713 1,219 1,315
Provision for income taxes 694 9 501 349 658 499 363
--------- --------- -------- -------- -------- -------- --------
Net income $ 1,001 $ 13 $ 819 $ 632 $ 1,055 $ 720 $ 952
========= ========= ======== ======== ======== ======== ========
BALANCE SHEET DATA (at period end):
Investment securities $ 2,368 $ 693 $ 4,537 $ 13,634 $ 15,153 $ 16,230 $ 6,013
Total assets $ 85,571 $ 98,517 $116,646 $129,964 $124,772 $135,752 $117,660
Total net loans and leases $ 73,727 $ 78,155 $ 92,897 $101,167 $ 97,480 $108,724 $ 98,284
Total deposits $ 75,933 $ 89,146 $106,395 $118,179 $112,639 $123,732 $105,287
Total stockholders' equity $ 8,905 $ 8,800 $ 9,482 $ 9,988 $ 10,828 $ 10,587 $ 11,780
PER SHARE DATA:
Net income
Basic $ 1.53 $ 0.02 $ 1.25 $ 0.96 $ 1.57 $ 1.07 $ 1.40
Diluted $ 1.47 $ 0.02 $ 1.19 $ 0.92 $ 1.52 $ 1.04 $ 1.37
Book value end of period $ 13.56 $ 13.40 $ 14.44 $ 14.89 $ 16.14 $ 15.78 $ 16.85
Weighted average shares outstanding
Basic 656,600 656,600 656,600 660,163 670,850 670,850 680,267
Diluted 681,212 684,784 686,749 688,994 693,428 679,462 683,120
Actual 656,600 656,600 656,600 670,850 670,850 670,850 699,100
</TABLE>
11
<PAGE> 13
PRO FORMA FINANCIAL DATA
BASED ON THE PURCHASE METHOD OF ACCOUNTING
HUMBOLDT BANCORP AND GLOBAL BANCORP
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Year Ended Nine Months Ended
except per share amounts) December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
SUMMARY OF EARNINGS:
Net interest income $ 20,621 $ 15,703
Provision for loan and lease losses (2,350) $ (1,176)
Non-interest income 13,935 $ 14,645
Non-interest expense (25,572) $ (24,261)
Provision for income taxes (2,446) $ (1,378)
--------- ---------
Net income $ 4,188 $ 3,533
========= =========
FINANCIAL POSITION:
Total assets $ 514,576 $ 537,596
Total net loans and leases $ 287,018 $ 304,882
Total deposits $ 468,767 $ 481,102
Total stockholders' equity $ 31,848 $ 36,816
PER SHARE DATA:
Net income - basic $ 0.81 $ 0.67
Net income - diluted $ 0.73 $ 0.61
Book value $ 6.08 $ 6.68
SELECTED FINANCIAL RATIOS:
Return on average assets 0.82% 0.88%
Return on average shareholders' equity 14.41% 13.93%
</TABLE>
The above pro forma information is based on the assumption and
conditions as set forth in the more detailed Pro Forma Financial Statements on
page 40.
12
<PAGE> 14
RISK FACTORS
In addition to the other information we provide in this prospectus, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could impair our business,
operating results or financial condition. In evaluating the risks of investing
in us, you should also evaluate the other information set forth in this
prospectus, including our and Global Bancorp's financial statements.
WE WILL NEED TO INTEGRATE AND OPERATE THE BUSINESS OF CAPITOL THRIFT & LOAN
While we have experience in managing growth through branch
acquisitions, Capitol Thrift represents our first major banking venture into
areas of California other than Humboldt, Trinity, Mendocino and Placer Counties.
Capitol Thrift also represents our first venture into acquiring a California
industrial thrift and loan institution. Unlike Humboldt Bank and Capitol Valley
Bank, Capitol Thrift almost exclusively relies on net income generated from loan
interest income. We may experience:
- problems integrating Capitol Thrift as our separate subsidiary;
- unexpected employee departures;
- computer hardware or software problems and coordination; or
- the failure to maintain and improve customer service.
CAPITOL THRIFT IS UNDER AN AGREEMENT WITH THE FDIC AND CALIFORNIA DEPARTMENT OF
FINANCIAL INSTITUTIONS
Capitol Thrift is subject to an agreement with the FDIC and California
Department of Financial Institutions dated August 23, 1998. The agreement
requires that Capitol Thrift:
- develop a plan for the reduction of all classified assets;
- develop specific strategies for the reduction of other real estate
owned;
- develop a plan to increase its Tier 1 capital.
Although we believe that we have the business experience to address
these issues, no assurance can be given that either the FDIC or California
Department of Financial Institutions will not impose additional restrictions on
Capitol Thrift's operations.
ADVERSE PERFORMANCE OF CAPITOL THRIFT'S LOAN PORTFOLIO AND HUMBOLDT BANCORP'S
FUTURE PERFORMANCE
Making loans is the principal business of Capitol Thrift. Its
operations and performance rely almost solely on generating loan interest income
rather than other income and fees. Also, Capitol Thrift's existing loan
portfolios differ to some extent in the types of borrowers, industries and
credits represented by Humboldt Bank's and Capitol Valley Bank's loan
portfolios.
Our performance and prospects after the merger will be largely
dependent on the performance of our combined loan portfolios with Capitol
Thrift, and ultimately on the financial condition of their respective borrowers
and other customers. Our failure to effectively manage the combined loan
portfolio could have a material adverse effect on the business, financial
condition and results of our operations after the merger. Any decrease in loan
customers could adversely affect our shareholders' return on equity and cause us
to lose some of the anticipated benefit of the Capitol Thrift acquisition. For
information about our loan portfolio, see "Humboldt Bancorp Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Loans". For information about Capitol Thrift's loan portfolio, see "Global
Bancorp Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Loan Portfolio".
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DEPENDENCE ON NON-TRADITIONAL BANKING INCOME FOR GROWTH
Because of limited growth in the Humboldt-Eureka area, a substantial
portion of our revenue is derived from non-traditional banking focused on fees
on accounts, for services, leasing activity, and merchant bankcard processing.
Although we intend to diversify our growth in other geographical areas through
the acquisition of Capitol Thrift and operations of Capitol Valley Bank,
increased competition within the banking industry could reduce fees on deposits
and for services. With respect to merchant bankcard processing, we have focused
our marketing to first-time merchants and small to medium-sized merchants in the
retail, telephone, mail order and Internet commerce industries. Because these
merchants are located outside our geographic location, they require more effort
to monitor in the event the merchants experience a problem. See "Business of
Humboldt Bancorp -- Merchant Bankcard."
RECENT CHANGES MADE BY VISA WILL ADVERSELY AFFECT OUR MERCHANT BANKCARD
OPERATIONS
During November 1999, VISA adopted several rules in order to reduce
risks in high risk merchant bankcard programs. Although Humboldt Bank does not
believe that it operates a high risk merchant bankcard program, these new rules
will adversely affect our operations. We are seeking a waiver from VISA. No
assurance can be given that the waiver will be granted. See "Business of
Humboldt Bancorp -- Merchant Bankcard."
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, such as in our concurrent public offering. 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 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
- large national and super-regional banks which have
well-established branches and significant market share in many of
the communities we serve;
- finance companies, investment banking and brokerage firms, and
insurance companies that offer bank-like products;
- credit unions, which can offer highly competitive rates on loans
and deposits because they receive tax advantages not available to
commercial banks;
- government-assisted farm credit programs that offer competitive
agricultural loans;
- other community banks, including start-up banks, that can compete
with us for customers who desire a high degree of personal
service;
- technology-based financial institutions including large national
and super-regional banks offering on-line deposit, bill payment,
and mortgage loan application services; and
- other financial institutions offering merchant bankcard processing
services.
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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,
Humboldt Bank and Capitol Valley Bank -- Recent Legislation."
DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT OUR PROFITABILITY
Our operations are primarily located in Northern California and are
concentrated in Eureka and surrounding areas, and, to a lesser extent,
Roseville, California. As a result of this geographic concentration, our
financial results depend largely upon economic conditions in these areas.
Adverse local economic conditions in Northern California, and in particular,
Eureka, may have a material adverse effect on our financial condition and
results of operations.
GOVERNMENT REGULATION AND LEGISLATION COULD HURT OUR BUSINESS AND PROSPECTS
We have extensive state and federal regulation, supervision and
legislation which govern almost all aspects of our respective operations
including:
- the capital we must maintain;
- the kinds of activities in which we can engage;
- the kinds and amounts of investments we can make; and
- the location of our offices.
Bank regulation can hinder our ability to compete with financial
services companies that are not regulated or are less regulated. This regulation
is primarily intended for the protection of consumers, depositors and the
deposit insurance funds and not for the protection of our shareholders. See
"Regulation of Humboldt Bancorp, Humboldt Bank, Capitol Valley Bank."
LOSS OF KEY EMPLOYEES COULD HURT OUR PERFORMANCE
The loss of the services of a key employee, or the failure to attract
and retain other qualified persons, could have a material adverse effect on our
business, financial condition and results of operations. We are heavily
dependent on the services of Theodore S. Mason, Humboldt Bancorp's President and
Chief Executive Officer, and on several other key executives, including Messrs.
Ziegler, Dalby, and Musante, who have been instrumental in our growth. The
operation and performance of Capitol Thrift is heavily dependent on the services
of Robert F. Kelly, President and Chief Executive Officer, and Leighton Monroe,
Jr., Chief Financial Officer, of Capitol Thrift. We intend to enter into
employment arrangements with Mr. Robert F. Kelly and Mr. Leighton Monroe, Jr.
for the continuation of their services for Capitol Thrift operations.
Our rapid growth has placed significant demands on Mr. Mason's time,
who until July 15, 1999, served as President and Chief Executive Officer of both
Humboldt Bancorp and Humboldt Bank and Chairman of the Board of Capitol Valley
Bank. As of December 31, 1999, Mr. Mason serves as President and Chief Executive
Officer of Humboldt Bancorp, Mr. Paul Ziegler serves as Executive Vice President
of Humboldt Bancorp, Mr. John Dalby serves as President and Chief Executive
Officer of Humboldt Bank, and Mr. Musante serves as Vice President and Manager
of the Merchant Bankcard Department of Humboldt Bank.
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We may need to recruit additional senior level executives as our growth
continues. However, the market for qualified persons is competitive and they may
be unwilling to relocate to Eureka, a non-metropolitan city.
LIMITED TRADING MARKET FOR HUMBOLDT BANCORP COMMON STOCK AND PRICE VOLATILITY
COULD MAKE IT DIFFICULT TO SELL SHARES AFTER THE MERGER
Subject to the close of our concurrent public offering, our common
stock has been approved for listing on the NASDAQ National Market. Our common
stock is currently quoted on the OTC Bulletin Board. There is limited trading in
our common stock. We do not know if an active trading market for our common
stock will develop on the NASDAQ National Market.
Given the limited trading history of our common stock on the OTC
Bulletin Board and our inability to predict at what price level our common stock
will trade in the future, the price of our common stock may fluctuate widely,
depending on many factors that may have little to do with operating results or
intrinsic worth, and you may encounter delay in selling your shares. For
information about the trading history of Humboldt Bancorp's common stock, see
"Market Prices."
GLOBAL BANCORP MEETING
We are sending you this document for the solicitation of proxies by the
Board of Directors of Global Bancorp for use at Global Bancorp's meeting of
shareholders for the purpose of considering and voting upon the merger.
The information contained in this document concerning Humboldt Bancorp,
Humboldt Bank, Capitol Valley Bank, and Bancorp Financial Services has been
furnished by Humboldt Bancorp and is its responsibility. The information
contained in this document concerning Global Bancorp and Capitol Thrift has been
furnished by Global Bancorp and is its responsibility.
The mailing of this document commenced on or about February 7, 2000.
The completion of the merger is dependent upon a number of conditions
including bank regulatory approval, purchase by Humboldt Bank of the loans from
Capitol Thrift, and completion of Humboldt Bancorp's offering.
Matters to be Considered at Global Bancorp Shareholders' Meeting
The Global Bancorp Meeting has been called so the shareholders of
Global Bancorp can vote upon the merger.
Record Date
The close of business on February 1, 2000, has been fixed as the Global
Bancorp record date for the determination of Global Bancorp shareholders
entitled to notice of, and to vote at, the Global Bancorp Meeting.
Outstanding Securities and Voting Rights
There were 699,100 shares of Global Bancorp common stock outstanding as
of the Global Bancorp record date held by approximately 96 shareholders of
record. Each holder of Global Bancorp common stock can cast one vote for each
share of Global Bancorp common stock held as of Global Bancorp record date on
any matter presented for a vote of the shareholders at the Global Bancorp
Meeting.
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Approval of the merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Global Bancorp common stock.
The effect of broker nonvotes is that these votes are not counted as
being voted; however, these votes are counted for purposes of determining a
quorum. The effect of a broker nonvote or abstention on any matter is that the
vote is not counted as a vote for or against the matter, but is counted as an
abstention. However, because the merger must be approved by the majority of the
outstanding shares of Global Bancorp common stock, an abstention or a nonvote
has the effect of a no vote.
Recommendations of the Global Bancorp Board of Directors
The board of directors of Global Bancorp has unanimously voted in favor
of the proposal relating to the merger, and the individual members of Global
Bancorp's board of directors have indicated that they will vote all shares of
Global Bancorp common stock as to which they have voting power "FOR" approval of
the merger agreement. Further, directors owning 38.4% of the outstanding shares
of Global common stock have entered into agreements with Humboldt Bancorp to
vote for the merger. As a result, holders of only 89,335 additional shares of
Global Bancorp common stock are needed to approve the merger agreement. See
"Description of the Merger--Interests of Certain Persons in the Merger and
Material Contracts."
Revocability of Proxies
A proxy for use at the Global Bancorp Meeting is enclosed. A
shareholder executing and returning a proxy may revoke it at any time before the
vote is taken by filing with the Secretary of Global Bancorp an instrument
revoking it or a duly executed proxy bearing a later date. In addition, the
powers of the proxyholders will be suspended if the person executing the Proxy
is present at the Global Bancorp Meeting and elects to vote in person by
advising the chairman of the Global Bancorp Meeting, of his or her election to
vote in person, and voting in person. Although you may revoke or suspend your
proxy, all shares represented by a properly executed proxy received in time for
the Global Bancorp Meeting, will be voted by the proxyholders in accordance with
your instructions specified on the proxy. If no directions are given to the
contrary on the proxy, the shares of Global Bancorp common stock will be voted
"FOR" approval of the merger agreement at the merger. It is not anticipated that
any matters will be presented at the Global Bancorp Meeting other than as set
forth in the respective notices of the meeting. If, however, other matters are
properly presented at the meeting, the proxy will be voted in accordance with
the best judgment and discretion of the proxyholders.
Cost of Solicitation of Proxies
Global Bancorp will pay its own expenses of preparing, assembling,
printing and mailing this document and the material used in this solicitation of
proxies. It is contemplated that proxies will be solicited through the mail, but
officers, directors and regular employees of Global Bancorp may solicit proxies
for the meeting personally. Although there is no formal agreement to do so,
Global Bancorp may reimburse banks, brokerage houses and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding these proxy
materials to their principals. In addition, Global Bancorp may pay for and
utilize the services of individuals or companies not regularly employed by
Global Bancorp in the solicitation of proxies for the Global Bancorp Meeting if
the board of directors of Global Bancorp determines that this is advisable.
Under the terms of the merger agreement, Global Bancorp will pay up to $150,000
in connection with the merger including costs to prepare this document, which
for purposes of calculating the costs associated with the merger will not be
expensed or accrued against Global Bancorp shareholders' equity. Any expenses in
excess of $150,000 will be deducted from the Global Bancorp cash merger price.
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Other Business
The board of directors of Global Bancorp does not know of any other
matters to be presented at the Global Bancorp Meeting except the proposal
concerning the merger. If other matters properly come before the Global Bancorp
Meeting, however, it is the intention of the persons named in the accompanying
proxy cards to vote said proxy cards in accordance with their best judgment and
in their sole discretion.
DESCRIPTION OF THE MERGER
General
This section contains information furnished by the Board of Directors
of Humboldt Bancorp in connection with the merger and the Board of Directors of
Global Bancorp in its solicitation of proxies for the Global Bancorp Meeting to
approve the merger agreement. The merger agreement sets out the terms of the
merger.
Humboldt Bancorp will be the surviving corporation of the merger and
Global Bancorp will not continue to exist. As a result of the merger, Humboldt
Bancorp will own all the shares of Capitol Thrift. Upon completion of the
merger, each share of Global Bancorp, other than shares held by shareholders who
properly exercise dissenters' rights, will convert into the right to receive
cash and an interest in Humboldt Bancorp's promissory note.
Immediately prior to the merger, Humboldt Bank will purchase up to $43
million in loans from Capitol Thrift for cash.
The amount of cash and interest in Humboldt Bancorp's promissory note
to be received is based on a
- cash merger payment of an estimated $11.8 million dollars. The
cash merger payment is based on Global Bancorp's shareholders'
equity as of the last day of the calendar month immediately
preceding the calendar month in which the merger occurs less
merger expenses in excess of $150,000. Humboldt Bancorp or its
paying agent will make the cash merger payment as soon as
practicable after the merger; and
- an escrow merger payment of an estimated $4.7 million dollars. The
escrow merger price will be evidenced by a promissory note bearing
8% interest per annum issued by Humboldt Bancorp and you in turn
will be issued a certificate of interest in the Humboldt Bancorp
promissory note. Interest on the certificate will be paid
semi-annually on April 15 and October 15 to former Global Bancorp
shareholders who do not exercise their dissenters' rights. The
escrow merger payment may be adjusted downward or upward based on
criteria set forth in the merger agreement. Humboldt Bancorp's
exchange agent will pay you your share of the escrow merger
payment on January 30, 2002, or 60 days from the occurrence of a
material adverse effect with respect to Humboldt Bancorp, but in
no event earlier than January 31, 2001. If Humboldt Bancorp does
not complete its concurrent stock offering by March 31, 2000,
$200,000 of the promissory note will be paid at closing, and the
outstanding balance of the promissory note will be adjusted
accordingly.
On January 30, 2002, at your election, the escrow merger price may be
paid in Humboldt Bancorp common stock. However, Humboldt Bancorp is only
required to deliver to the exchange agent $2 million in Humboldt Bancorp common
stock based on the last trading price prior to the effective date of the merger,
plus 7%. The escrow merger payment will be satisfied by Humboldt Bancorp shares
based on the foregoing formula plus cash.
No fractional shares of Humboldt Bancorp common stock will be issued in
the merger. Global Bancorp shareholders will be entitled to cash equal to the
fractional share multiplied by the price of the last trade of Humboldt Bancorp
common stock prior to the effective date of the merger.
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As a result of the merger, Humboldt Bancorp will survive, Global
Bancorp will cease to exist, and Capitol Thrift will become a subsidiary of
Humboldt Bancorp.
A copy of the merger agreement is attached to this document as Appendix
A and 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 of
surrounding counties of Humboldt, Mendocino and Trinity, and more recently, in
Placer County, home of the main office of Capitol Valley Bank.
During early 1999, Humboldt Bancorp had preliminary discussions with
Capitol Thrift regarding a potential merger of Humboldt Bank and Capitol Thrift.
A confidentiality agreement was executed by the parties on January 8, 1999, and
extensive negotiations commenced. During the course of negotiations, the board
of directors consulted with respective senior management and its financial
advisor, as well as its legal counsel. A continuing consideration was retention
of Capitol Thrift's California industrial loan charter. The initial merger
agreement was modified in November 1999, to provide that Capitol Thrift would
become a subsidiary of Humboldt Bancorp thereby retaining the industrial loan
charter through the merger of Global Bancorp with and into Humboldt Bancorp and
that Humboldt Bank would immediately prior to the merger purchase the assets and
assume the liabilities of the San Jose branch of Capitol Thrift pursuant to a
branch purchase agreement. The restated merger agreement was amended in January
2000, to provide that Humboldt Bank would purchase up to $43 million in loans
from Capitol Thrift pursuant to a loan purchase agreement rather than purchase
assets and assume liabilities.
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:
- Expansion of Humboldt Bank's lending activities by acquiring a
California industrial loan corporation;
- Improved earnings through higher net interest margins;
- Further diversity of Humboldt Bank's asset base;
- Expansion into new areas of California including Southern
California through branch offices of Capitol Thrift;
- Favorable acquisition price and an appropriate loan loss reserve
pool for unexpected credit portfolio problems; and
- Retention, to the greatest degree possible, of qualified,
dedicated thrift staff and management.
The Humboldt Bancorp board of directors also considered the potential
problems of management incompatibility, the complexity of the data processing
conversion, assumption of a loan portfolio primarily based on real estate, and
inability to effectively combine the operations of Humboldt Bancorp and Capitol
Thrift. Meetings between Humboldt Bancorp's Executive Committee and Global
Bancorp's senior management and board of directors brought out the similarity of
banking and customer attention philosophies which the two entities share.
At the board of directors' meeting approving the merger, Humboldt
Bancorp's financial advisor orally presented its analysis. The following
material factors were considered at the meeting:
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- 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;
- The enhancement of Humboldt Bancorp's competitiveness and Humboldt
Bancorp's ability to serve its customers, depositors, creditors,
other constituents and the communities in which Humboldt Bancorp
operates as a result of a business combination with a California
industrial loan company like Capitol Thrift;
- Information concerning the business, results of operations, asset
quality and financial condition of Humboldt Bancorp on a
stand-alone basis and on a combined basis with Capitol Thrift, and
the future growth prospects following the merger;
- The cost savings in operations which the management of Humboldt
Bancorp believes may be achieved as a result of the merger;
- An assessment that, in the current economic environment, a fair
combined cash and Humboldt Bancorp common stock acquisition is
most economically advantageous to Humboldt Bancorp's shareholders
when compared to other alternatives like formation of a California
industrial loan company or additional branch acquisitions;
- The terms and conditions of the merger agreement and related
agreements;
- The potential downside of the merger. These were principally the
challenges of merging two distinctively different entities into
one well-managed institution and related credit risk if a severe
economic downturn would occur in the near future; and
- Humboldt Bancorp's financial advisor's analysis of the financial
condition, results of operations, business, prospects and stock
prices and comparison of Global Bancorp and Capitol Thrift
compared to other California banks, industrial loan companies, and
bank holding companies opening in Northern California.
Humboldt Bancorp's board of directors and management believe that the
potential issuance of additional shares in exchange for a part of the Humboldt
Bancorp promissory note and in the concurrent public offering of Humboldt
Bancorp common stock will increase the liquidity of Humboldt Bancorp common
stock. Humboldt Bancorp's board of directors and management also believe the
merger will be beneficial to shareholders because of cost savings resulting from
the combination of data processing, reduction of professional fees, reduction in
personnel costs, and other non-interest expense.
The above discussion of the factors considered by the Humboldt Bancorp
board of directors is not intended to be exhaustive. In view of the variety and
nature of the factors considered the Humboldt Bancorp board of directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
Global Bancorp's and Capitol Thrift's Analysis
During 1998 and 1999, Global Bancorp and Capitol Thrift was contacted
at various times by 13 financial institutions, including Humboldt Bancorp,
interested in acquiring Capitol Thrift. Of the 13 institutions, only one
presented a creditable formal proposal. The Board of Directors then engaged a
predecessor to First Capital Group, L.L.C. as its financial advisor to assist in
evaluating the Humboldt Bancorp proposal. A confidentiality agreement was
executed by the parties on January 8, 1999, and extensive negotiations
commenced. The predominant and deciding factors for Board approval were:
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- Humboldt Bank's presence as a community bank rather than a branch
of a much larger regional bank;
- the added services and products available to Capitol Thrift's
customers;
- favorable price and potential Humboldt Bancorp stock liquidity;
and
- retention, to the greatest degree possible, of qualified,
dedicated bank staff and management.
Meetings between Humboldt Bancorp's Executive Committee and Global
Bancorp's senior management and Board of Directors brought out the similarity of
banking and customer attention philosophies which the two banking entities
share.
No additional merger proposals were sought based on the above merger
advantages.
Humboldt Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift
entered into the merger agreement dated June 22, 1999. Present at the Global
Bancorp and Capitol Thrift's Board of Directors meeting were representatives of
Global Bancorp's and Capitol Thrift's legal counsel, and financial advisor,
First Capital Group, L.L.C. At the meeting, the representative of First Capital
Group, L.L.C. orally presented its fairness opinion.
In determining to approve the merger agreement and recommend that
Global Bancorp shareholders approve and authorize the merger agreement, the
Global Bancorp and Capitol Thrift Boards of Directors consulted with respective
senior management, their financial advisor, as well as their legal counsel, and
considered the following material factors:
- the increased liquidity to be provided to Global Bancorp
shareholders by receiving cash and an interest in a Humboldt
Bancorp promissory note that may be exchanged in part for Humboldt
Bancorp common stock in exchange for their shares of Global
Bancorp common stock;
- the economic conditions and prospects for the markets in which
Capitol Thrift operates, and competitive pressures in the
financial services industry in general and the banking industry in
particular;
- the enhancement of Capitol Thrift's competitiveness and its
ability to serve its customers, depositors, creditors, other
constituents and the communities in which it operates as a result
of a business combination with another northern California bank
holding company, like Humboldt Bancorp;
- information concerning the business, results of operations, asset
quality and financial condition of Capitol Thrift on a stand-alone
basis and on a combined basis with Humboldt Bank, and the future
growth prospects following the merger;
- the cost savings and operational synergies which the management of
Capitol Thrift believes may be achieved as a result of the merger;
- an assessment that, in the current economic environment, a fair
combined cash and Humboldt Bancorp common stock acquisition is
most economically advantageous to Global Bancorp's shareholders;
- the terms and conditions of the merger agreement and related
agreements;
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- the potential downside of the merger. This was principally the
possible adverse effect on employees of Capitol Thrift and the
potential adverse effect on Capitol Thrift's customers;
- First Capital's analysis of the financial condition, results of
operations, business, prospects and stock price of Global Bancorp
and comparison of Global Bancorp to other banks and bank holding
companies operating in its industry;
- an analysis of the terms of other similar acquisitions in the
banking industry; and
- the opinion of First Capital to the effect that, as of the date of
the opinion, the cash and shares of Humboldt Bancorp common stock
to be received is fair, from a financial point of view, to the
holders of Global Bancorp common stock.
The above discussion of the factors considered by the Global Bancorp
Board of Directors is not intended to be exhaustive. In view of the variety and
nature of the factors considered, the Global Bancorp Board of Directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
Global Bancorp Purchase Price
The Boards of Directors of Humboldt Bancorp and Global Bancorp
determined the purchase price in an arm's length negotiation.
Each share of Global Bancorp common stock which is outstanding
immediately prior to the merger, other than shares to which its holders have
properly exercised dissenters' rights, will be converted into the right to
receive:
- cash equal to the cash merger payment divided by the total number
of Global Bancorp common stock outstanding on the date of the
merger. The cash merger payment is approximately $11.8 million
dollars and is based on Global Bancorp shareholders' equity as of
the last business day of the calendar month immediately preceding
the calendar month in which the merger occurs after expensing
Global Bancorp's legal, accounting and professional costs incurred
or to be incurred by Global Bancorp which have not been paid or
accrued by Global Bancorp by the last business day of the calendar
month immediately preceding the calendar month in which the merger
occurs. However, Global Bancorp is not required to expense or
accrue up to $150,000 of legal and/or accounting costs incurred by
Global Bancorp associated with the merger and identified with
preparation of this document for Global Bancorp or Humboldt
Bancorp's offering.
The merger agreement provides that on the merger date no more than
706,600 shares of Global Bancorp common stock will be outstanding.
Assuming all 706,600 shares are outstanding and a cash merger
payment of $11.8 million, the cash per share merger price will be
approximately $16.70 per share.
- the right to receive in cash, or at your election Humboldt Bancorp
common stock, from Humboldt Bancorp's exchange agent on January
30, 2002, or 60 days from the occurrence of a material adverse
effect with respect to Humboldt Bancorp, but in no event earlier
than January 31, 2001, the escrow per share merger payment, as
adjusted. The escrow merger payment is evidenced in the form of a
certificate of interest in the Humboldt Bancorp promissory note
and will earn interest at the rate of eight percent (8%) per
annum. Humboldt Bancorp is obligated to only deliver up to $2
million in Humboldt Bancorp common stock based on the price of the
last trade of its stock prior to the effective date of the merger,
plus 7%. The escrow merger payment may be satisfied by the
Humboldt Bancorp shares based on the foregoing formula plus cash.
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The escrow per share merger payment is the merger price of $16.5
million dollars less the sum of the cash merger price of approximately $11.8
million
- adjusted (i) downward for various Capitol Thrift loan
losses and expenses for loan portfolios identified in the
merger agreement, and (ii) upward for (1) recoveries on
those loans in the loan portfolio identified in the
merger agreement with previous loan loss, and (2)
interest due but not yet paid, and (iii) upward or
downward, as appropriate, for accounting adjustments if
any,
- then divided by the number of outstanding shares of
Global Bancorp common stock on the date of the merger.
If Humboldt Bancorp does not raise at least $6 million in its
concurrent public stock offering by March 31, 2000, $200,000 of the promissory
note will be paid at closing, and the outstanding balance of the promissory note
will be adjusted accordingly.
Downward adjustments to the escrow merger price may result from:
- loan losses within identified loan portfolios
- costs of litigation of any type, inclusive of attorneys'
fees and settlements, resulting from Global Bancorp or
Capitol Thrift's actions or those of its directors,
officers, employees or agents, which litigation was in
existence prior to the merger;
- any writedowns for accounting adjustments in accordance
with the merger agreement;
- any losses on sale of other real estate owned on the
books of Capitol Thrift at the time of the merger;
- costs of the merger incurred by Global Bancorp or Capitol
Thrift in excess of $150,000 and not expended or properly
accrued by Global Bancorp or Capitol Thrift prior to the
last business day of the calendar month immediately
preceding the calendar month in which the merger
occurred;
- any of the above-described losses, net of any recoveries,
incurred by Global Bancorp or Capitol Thrift from the
last business day of the calendar month immediately
preceding the calendar month in which the merger occurs
to the date of the merger; and
- any and all expenses of the Global Bancorp shareholders
committee. The expenses of the committee, including fees
paid to accountants, attorneys, appraisers and other
consultants, will be paid by Humboldt Bancorp and will be
charged against the escrow merger price to the extent
such funds remain. The Global Bancorp shareholders'
committee, made up of a majority of the last board of
directors of Global Bancorp, will have the authority to
resolve any dispute regarding the escrow merger price
adjustments.
Upward adjustments to the escrow merger price may result from:
- recovery on any Capitol Thrift loans for which there was
a loan loss within an identified loan portfolio;
- interest accrued and due on the escrow merger price for
which payment has not been made prior to January 30,
2002; and
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- write-ups for any accounting adjustments in accordance
with the merger agreement.
Adjustments shall be made on a quarterly basis. During the escrow term,
8% per annum interest is earned and is payable by Humboldt Bancorp or its paying
agent to the certificate holders on April 15 and October 15 based on the
principal in escrow on April 1 and October 1, respectively.
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No fractional shares of Humboldt Bancorp common stock will be issued in
the merger. Global Bancorp shareholders will be entitled to cash equal to the
fractional share multiplied by the price of the last trade of Humboldt Bancorp
common stock prior to the effective date of the merger.
Exchange Procedure
Humboldt Bancorp has contracted with Illinois Stock Transfer Company to
effect the exchange and issuance of its securities in the merger. On or as soon
as practicable after the merger, Humboldt Bancorp will deliver to Illinois Stock
Transfer Company, (i) cash equal to the cash merger price, (ii) the Humboldt
Bancorp promissory note equal to the escrow merger price, and (iii) certificates
of interest in the Humboldt Bancorp promissory note.
Upon surrender for cancellation to Illinois Stock Transfer Company of
one or more Global Bancorp stock certificates for cancellation, accompanied by
the transmittal letter which will be sent to the Global Bancorp shareholders,
Illinois Stock Transfer Company will promptly deliver to each holder of
surrendered Global Bancorp stock certificates a check for payment of the cash
per share merger price, and a certificate of interest evidencing the escrow per
share merger payment.
Until Global Bancorp stock certificates have been surrendered and
exchanged, each outstanding Global Bancorp stock certificate will constitute,
for all corporate purposes, the right to receive the per share merger payment.
If any holder of Global Bancorp common stock is unable to surrender his
or her Global Bancorp stock certificates because the stock certificates have
been lost or destroyed, the holder may instead deliver an affidavit and
indemnity undertaking in form and substance and, if required, with surety
satisfactory to Illinois Stock Transfer Company and Humboldt Bancorp.
Prior to January 30, 2002, Humboldt Bancorp will send to you a letter
and an election form. You can elect to receive Humboldt Bancorp common stock
instead of cash for the escrow merger price. Humboldt Bancorp is only required
to deliver to Illinois Stock Transfer Company $2 million in Humboldt Bancorp
common stock valued at the last trade of Humboldt Bancorp's common stock as of
the date preceding the effective date of the merger plus 7%. If you do not
elect, then you will only receive cash. The escrow merger price is satisfied by
the Humboldt Bancorp shares based on the foregoing formula plus cash.
Prior to January 30, 2002, Humboldt Bancorp will deliver to Illinois
Stock Transfer Company cash or shares of Humboldt common stock for the escrow
adjusted value. If not distributed as of September 30, 2002, the cash shall be
returned to Humboldt Bancorp. No interest will be paid to former Global Bancorp
shareholders from cash deposited with Illinois Stock Transfer Company for this
purpose.
Cancellation of all Outstanding Global Bancorp Stock Options
All outstanding stock options to acquire Global Bancorp common stock
will be canceled upon the merger.
Interests of Certain Persons in the Merger and Material Contracts
Each director of Global Bancorp and Capitol Thrift has entered into a
director's agreement with Humboldt Bancorp which provides that the director
agrees to vote all shares of Global Bancorp common stock as to which the
director has voting power in favor of the merger. The directors of Global
Bancorp collectively own 38.4% of the outstanding shares of Global Bancorp
common stock.
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The directors' agreements also provide that the directors will not for
a period of two years after the completion of the merger, directly or
indirectly, without the prior written consent of Humboldt Bancorp, own more than
1% of, organize, manage, operate, finance or participate in the ownership,
management, operation or financing of, or be connected as an officer, director,
employee, principal, agent or consultant to any financial institution whose
deposits are insured by the Federal Deposit Insurance Corporation that has its
head office or a branch office within 50 miles of the head office of Capitol
Thrift.
Further, it is the intent of Humboldt Bancorp that Capitol Thrift enter
into contracts with Messrs. Kelly and Monroe. Robert F. Kelly, currently the
President and Chief Executive Officer, and Leighton Monroe, Jr., currently the
Chief Financial Officer, of Capitol Thrift, are expected to serve in the same
capacities for Capitol Thrift as a subsidiary of Humboldt Bancorp following the
merger. It is anticipated that most other present officers and employees of
Capitol Thrift will initially continue in the same or similar capacities with
Capitol Thrift. For services provided through the merger, upon closing of the
merger, Capitol Thrift will pay Messrs. Kelly and Monroe $35,000 and $7,500,
respectively, in addition to their regular salary.
Regulatory Approval and Completion of the Merger
The merger must be approved by the California Department of Financial
Institutions, by the Federal Deposit Insurance Corporation, and by the Board of
Governors of the Federal Reserve System. The approval of the merger by the
California Department of Financial Institutions, the Federal Deposit Insurance
Corporation, and the Federal Reserve Board is not a recommendation or
endorsement of the merger by any of those agencies.
Closing Date
The closing of the merger will take place no more than 10 business days
after the later of:
- receipt of the last required regulatory approval and expiration of
all applicable waiting periods, and
- completion of Humboldt Bancorp's public offering.
Also, the conditions precedent to the obligations of Humboldt Bancorp,
Humboldt Bank, Global Bancorp and Capitol Thrift must be satisfied, or written
waiver of the conditions by Humboldt Bancorp, Humboldt Bank, Global Bancorp and
Capitol Thrift must be received.
It is presently anticipated that the merger will be completed during
the first quarter of 2000.
Conditions to the Merger
The merger agreement provides that various conditions must be met for
the completion of the merger. These conditions include, but are not limited to,
the following:
- Approval of the merger agreement and authorization of the merger
by the vote of the holders of a majority of the outstanding stock
of Global Bancorp;
- Approval and issuance of any permits required, and expiration of
all waiting periods;
- No action taken, or any law, regulation or order enacted, enforced
or deemed applicable to the merger, by any government entity
which:
- makes the completion of the merger illegal;
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- requires the divestiture by Humboldt Bancorp of any material
asset or of a material portion of the business of Humboldt
Bancorp; or
- imposes any condition upon Humboldt Bancorp which in the
judgment of Humboldt Bancorp would be materially burdensome;
- Humboldt Bancorp's completion of its public offering;
- The representations and warranties of Humboldt Bancorp, Humboldt
Bank, Global Bancorp and Capitol Thrift set forth in the merger
agreement must be true in all material respects as of the date of
completion of the merger; Humboldt Bancorp, Humboldt Bank, Global
Bancorp and Capitol Thrift must perform and comply in all material
respects with the merger agreement; and no event or condition
entitling a party to terminate the merger agreement has occurred;
- No change in the consolidated financial condition, aggregate
consolidated net assets, shareholders' equity, business, or
consolidated operating results of Humboldt Bancorp from December
31, 1998, to the date of completion of the merger that results in
a material adverse effect as to Humboldt Bancorp;
- Global Bancorp's fairness opinion must not be revoked prior to the
merger;
Waiver, Amendment, and Termination
Any term or provision of the merger agreement, other than regulatory
approval or any of the provisions required by law, may be waived in writing at
any time by the party which is, or whose shareholders are, entitled to the
benefits of the term or provision.
The merger agreement provides that it may be terminated prior to the
completion of the merger. These events include, but are not limited to, the
following:
- By mutual consent of the Boards of Directors of Humboldt Bancorp
and Global Bancorp;
- By Humboldt Bancorp or Global Bancorp upon the failure to satisfy
any conditions specified in the merger agreement if the failure is
not caused by any action or inaction of the party requesting
termination;
- By Humboldt Bancorp or Global Bancorp if an Acquisition Event, as
defined in the merger agreement, involving Global Bancorp or
Capitol Thrift occurs;
- By Humboldt Bancorp or Global Bancorp if there is a material
breach of any of the representations or warranties of the other,
which breach, in the reasonable opinion of the terminating party,
cannot be cured prior to the merger and, in the reasonable opinion
of the terminating party, is likely to have a material adverse
effect on the breaching party, or upon the completion of the
merger;
- By Humboldt Bancorp or Global Bancorp upon the failure of any of
the conditions specified in the merger agreement to have been
satisfied prior to April 30, 2000;
- By Global Bancorp if Humboldt Bancorp has not completed its
offering by April 30, 2000.
Liquidated Damages
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In the event of the occurrence of an Acquisition Event involving Global
Bancorp or Capitol Thrift, then Global Bancorp or Capitol Thrift will pay to
Humboldt Bancorp $350,000 in cash.
If the merger agreement is terminated by Global Bancorp as a result of
the revocation of Global Bancorp's fairness opinion; or a termination of the
merger agreement by Humboldt Bancorp because
- Global Bancorp's shareholders do not approve the merger agreement,
or
- of a breach of Global Bancorp's representations or warranties, a
default by Global Bancorp or Capitol Thrift, or disclosure in the
updated schedules to the merger agreement of a material adverse
event respecting Global Bancorp,
then, Global Bancorp or Capitol Thrift will pay to Humboldt Bancorp the sum of
$250,000, in cash. However, if an Acquisition Event occurs involving Global
Bancorp or Capitol Thrift within 180 days following termination by Humboldt
Bancorp, Global Bancorp or Capitol Thrift will pay to Humboldt Bancorp an
additional $100,000 in cash.
If the merger agreement is terminated by Humboldt Bancorp as a result
of a termination of the merger agreement by Global Bancorp because
- of a breach of Humboldt Bancorp's representations and warranties,
a default by Humboldt Bancorp, or disclosure in the updated
schedules to the merger agreement of a material adverse event
respecting Humboldt Bancorp,
- of failure to complete Humboldt Bancorp's offering,
then Humboldt Bancorp will pay to Global Bancorp the sum of $250,000 in cash.
OPINION OF GLOBAL BANCORP FINANCIAL ADVISOR
Global Bancorp retained First Capital Group, L.L.C. to act as its
financial advisor in connection with the merger and related matters based upon
its qualifications, expertise and reputation. On July 8, 1999, First Capital
rendered its written opinion to the board of directors of Global Bancorp that
the consideration to be received pursuant to the merger agreement is fair from a
financial point of view to the holders of Global Bancorp common stock. THE FULL
TEXT OF THE OPINION WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS DOCUMENT. GLOBAL BANCORP'S
SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. THE
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF GLOBAL
BANCORP AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In connection with rendering its opinion, First Capital, among other
things:
- analyzed internal financial statements and other financial and
operating data concerning Global Bancorp prepared by the
management of Global Bancorp;
- analyzed publicly available financial statements, both audited and
unaudited, and other information of Global Bancorp and Humboldt
Bancorp, including those included in Global Bancorp's financial
statements for the period ended December 31, 1998, Humboldt
Bancorp's Annual Report for the three years ended December 31,
1998, Humboldt Bancorp's Quarterly Reports for the periods ended
March 31, 1999, September 30, 1998 and June 30, 1998, and
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Global Bancorp's financial statements for the quarters March 31,
1999, September 30, 1998 and June 30, 1998;
- analyzed financial data of Global Bancorp prepared by the
management of Global Bancorp;
- discussed the past and current operations and financial condition
of Global Bancorp with senior executives of Global Bancorp;
- reviewed the reported stock prices and trading activity for
Humboldt Bancorp common stock;
- compared the financial performance of Humboldt Bancorp common
stock and trading activity with that of other comparable publicly
traded companies and their securities;
- reviewed the financial terms, to the extent publicly available, of
comparable precedent transactions;
- reviewed the merger agreement; and
- performed such other analyses as deemed appropriate.
In connection with its review, First Capital relied upon and assumed
the accuracy and completeness of all of the foregoing information provided to it
or made publicly available, and First Capital has not assumed any responsibility
for independent verification of such information. With respect to the financial
data, First Capital assumed that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments by management
regarding Global Bancorp. First Capital has not made any independent valuation
or appraisal of the assets or liabilities of Global Bancorp, nor has First
Capital been furnished with any such appraisals, and First Capital has not
examined any individual loan files of Global Bancorp.
With respect to Humboldt Bancorp, First Capital relied solely upon
publicly available data and certain discussions with the management of Humboldt
Bancorp regarding Humboldt Bancorp's financial condition, performance, and
prospects. First Capital did not conduct any independent evaluation or appraisal
of the assets, liabilities or business prospects of Humboldt Bancorp, was not
furnished with any evaluations or appraisals, and did not review any individual
credit files. First Capital is not an expert in the evaluation of loan
portfolios for the purposes of assessing the adequacy of the allowance for
losses of such portfolios and has assumed that such allowances for Humboldt
Bancorp and Global Bancorp are, in the aggregate, adequate to cover such losses.
First Capital's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to First Capital
as of, the date of the opinion. In connection with rendering its opinion, First
Capital performed a variety of financial analyses. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. Moreover, the evaluation
of the fairness, from a financial point of view, of the purchase price to the
holders of Global Bancorp common stock was to some extent subjective based on
the experience and judgment of First Capital and not merely the result of
mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, First Capital believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by First Capital, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The ranges of valuations resulting from any particular analysis
described below should not be taken to be First Capital's view of the actual
value of Global Bancorp. In performing its analyses, First Capital made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of Global
Bancorp. The analyses performed by First Capital are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold.
In addition, First
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Capital's analyses should not be viewed as determinative of the opinion of the
Global Bancorp board or Global Bancorp's management with respect to the value of
Global Bancorp.
The following is a summary of the analyses performed by First Capital
in connection with its opinion:
Analysis of Selected Transactions.
First Capital performed an analysis of premiums paid in selected
pending or recently completed acquisitions of thrift organizations with
comparable characteristics to the merger. The comparable transactions were
comprised to reflect transactions where the seller possessed similar asset size
and form of consideration. The comparable transactions specifically consisted of
27 mergers and acquisitions of thrift organizations from January 1, 1998 to June
28, 1999, with seller's total assets ranging from $80 million to $200 million.
Based on the closing stock price of Humboldt Bancorp common stock on July 7,
1999, and Global Bancorp's financial data as of March 31, 1999, the analysis
yielded ratios of the transactions' purchase price as a multiple of:
(i) equity ranging from 0.70 times to 2.79 times with an average
of 1.73 times and a median of 1.64 times (compared with Global
Bancorp's proposed transaction with Humboldt Bancorp of 1.46
times March 31, 1999, book value);
(ii) tangible equity ranging from 0.82 times to 2.85 times with an
average of 1.77 times and a median of 1.65 times (compared
with Global Bancorp's proposed transaction with Humboldt
Bancorp of 1.46 times March 31, 1999, tangible book value);
(iii) trailing last 12 months' earnings ranging from 13.22 times to
32.39 times with an average of 21.48 times and a median of
20.21 times (compared with Global Bancorp's proposed
transaction with Humboldt Bancorp of 13.75 times March 31,
1999); and
(iv) sellers' average and median equity-to-asset ratio of 10.21%
and 7.85%, respectively, compared to 9.09% for Global Bancorp.
Discounted Cash Flow Analysis.
Using discounted cash flow analysis, First Capital estimated the
present value of the future stream of after-tax cash flow that Global Bancorp
could produce through the year 2003, under various circumstances, assuming that
Global Bancorp performed in accordance with the earnings/return projections of
management. First Capital utilized two separate terminal values for Global
Bancorp at the end of the period by applying multiples of earnings ranging from
18 times to 20 times and multiples of book ranging from 1.25 times to 2.25
times. First Capital then discounted the cash flow streams, dividends paid to
the shareholders (assuming all earnings in excess of that required to maintain
the current tangible equity to tangible asset ratio are paid out in dividends)
and terminal values using discount rates ranging from 14.0% to 18.0% chosen to
reflect different assumptions regarding the required rates of return for Global
Bancorp and the inherent risk surrounding the underlying projections. This
discounted cash flow analysis indicated a range of $20.24 per share to $25.68
per share utilizing multiples of earnings as residual values and $12.66 per
share to $22.83 per share utilizing multiples of book value. This compares
favorably to the consideration to be paid to Global Bancorp shareholders of: (i)
$23.35 per share of Global Bancorp common stock, based on a closing price of
$14.00 per share of Humboldt Bancorp common stock on the date of announcement,
June 22, 1999; and (ii) $23.35 per share of Global Bancorp common stock, based
on a closing price of $14.00 per share of Humboldt Bancorp common stock on July
7, 1999.
Comparable Company Analysis.
First Capital compared selected balance sheet data, asset quality,
capitalization and profitability ratios and market statistics using financial
data at or for the twelve months ended March 31, 1999, and market data as of
July
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7, 1999, for Humboldt Bancorp to a group of selected bank holding companies
which First Capital deemed to be relevant, including Sierra West Bancorp,
Central Coast Bancorp, SGV Bancorp, Inc., Monterey Bay Bancorp, Inc., Redwood
Empire Bancorp, Civic Bancorp, Bank of the Sierra, North County Bancorp, and
Coast Bancorp, all being bank holding companies with assets between $200 million
and $1 billion (collectively, the "Comparable Composite"). This comparison,
among other things, showed that:
(i) Humboldt Bancorp's equity-to-asset ratio was 8.80%, compared
to an average of 9.49% and a median of 9.54% for the
Comparable Composite;
(ii) for the twelve month period ended March 31, 1999, Humboldt
Bancorp's return on average assets was 1.21%, compared to an
average of 1.40% and a median of 1.30% for the Comparable
Composite;
(iii) for the twelve month period ended March 31, 1999, Humboldt
Bancorp's return on average equity was 13.94%, compared to an
average of 14.61% and a median of 13.49% for the Comparable
Composite;
(iv) at March 31, 1999, Humboldt Bancorp's non performing loans to
gross loans ratio was 0.62%, compared to an average of 0.79%
and a median of 0.51% for the Comparable Composite;
(v) at July 7, 1999, Humboldt Bancorp's price per share to book
value per share at March 31, 1999, was 2.17 times, compared to
an average of 2.18 times and median of 1.94 times for the
Comparable Composite;
(vi) at July 7, 1999, Humboldt Bancorp's price per share to
earnings per share at March 31, 1999, was 15.91 times,
compared to an average of 16.08 times and median of 15.91
times for the Comparable Composite; and
(vii) at July 7, 1999, Humboldt Bancorp's dividend yield was 0.00%,
compared to an average of 2.01% and a median of 2.03% for the
Comparable Composite; approximately half of the comparables do
not give dividends to shareholders, and they were excluded
from the average and median.
First Capital also compared selected stock market results of Humboldt
Bancorp to the publicly available corresponding data of other composites which
First Capital deemed to be relevant, including Philadelphia KBW Bank Index,
Nasdaq Bank Index of publicly traded banks and the S&P 500. Results from
indexing the S&P 500, Philadelphia KBW Bank Index, the Nasdaq Bank Index of
publicly traded banks, and Humboldt Bancorp's stock from January 1, 1999, to
July 7, 1999, revealed similar relationships in pricing movements. No company or
transaction used in the comparable company and comparable transaction analyses
is identical to Global Bancorp or the merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
Global Bancorp and other factors that could affect the public trading value of
the companies to which they are being compared. Mathematical analysis (such as
determining the average or median) is not in itself a meaningful method of using
comparable transaction data or comparable company data.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion describes the material U.S. federal income tax
consequences of the merger to shareholders of Global Bancorp and to Humboldt
Bancorp. This discussion is based on the Internal Revenue Code, Treasury
Department Regulations, published positions of the Internal Revenue Service
("IRS"), and court decisions
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now in effect, all of which are subject to change, possibly with retroactive
effect. Additionally, this discussion is based on factual representations made
by Humboldt Bancorp and Global Bancorp.
This discussion is general in nature, and it may not apply to some
Global Bancorp shareholders. In particular, this discussion pertains only to
those of you Global Bancorp shareholders who hold your Global Bancorp stock as a
"capital asset" (generally property held for investment) and who report your
income and deductions for U.S. federal income tax purposes on the cash (as
opposed to an accrual) basis. Also, this discussion does not explain all aspects
of U.S. federal income taxation that may be relevant to you because of your
personal investment circumstances or because you are subject to special
provisions of U.S. federal income tax law, such as those applicable to foreign
persons, life insurance companies, or tax-exempt organizations. Furthermore,
this discussion does not address at all the following topics that may be of
concern to you:
- State, local or foreign tax laws;
- Estate and gift tax considerations;
- Tax consequences to Global Bancorp shareholders who received their
Global Bancorp stock through stock options or otherwise as
compensation.
Since this discussion may not apply to all Global Bancorp shareholders
and may not address all topics that are relevant to any particular shareholder,
each of you should consult your own tax advisor as to the specific tax
consequences of the merger to you because of your particular circumstances.
Material Consequences to Global Bancorp Shareholders
Taxability of the Merger. Your receipt of cash and a certificate of
interest representing a share of the escrow merger price in exchange for your
stock pursuant to the merger (or your receipt of cash pursuant to your exercise
of dissenters' rights) will be a taxable exchange for U.S. federal income tax
purposes, and you will have to report capital gain (or loss) on the exchange. In
general, gain (or loss) is measured by the extent to which the amount of cash
plus the fair market value of all other property you receive is greater (or
less) than your tax basis in the Global Bancorp stock that you surrender.
Unless you elect otherwise, you must report gain or loss from your
receipt of cash and stock pursuant to the merger under the "installment method,"
which will now be described. Following this description is a discussion of how
to elect out of the installment method and the tax consequences of doing so.
Installment Method of Reporting of Gain or Loss
In General. Under the installment method, you must allocate your stock
basis, in equal annual increments, to the years in which you may receive
payments of either cash or stock. Pursuant to the merger, you will receive cash
in 2000 and may receive cash and/or Humboldt Bancorp stock in 2001 or 2002.
Accordingly, pursuant to the merger, you will or may receive payments in each of
three years. Thus, you must allocate thirty-three and one-third percent (33
1/3%) of your Global Bancorp stock basis to each of the years 2000, 2001, and
2002.
If the amount of cash you receive in 2000, less the amount treated as
interest for U.S. federal income tax purposes for that year (as discussed
below), is greater than the basis allocated to that year, you must report the
excess as capital gain. If the amount of cash you receive in 2000, less the
amount treated as interest (as discussed below), is less than the basis in your
Global Bancorp stock, you will have incurred a loss in 2000. However, you will
not be permitted to report that loss for 2000. Rather, you must defer that loss
and take it into account in 2001 or 2002, as explained below.
The tax consequences of the merger for 2001 and 2002 will depend on
whether the escrow merger price is paid in 2001 or 2002. The escrow merger price
is scheduled to be paid in 2002 but, in some circumstances, can be accelerated
into 2001. The next two paragraphs describe the tax consequences for 2001 and
2002 if the escrow
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merger price is not paid until 2002, and the following paragraph describes the
tax consequences for 2001 if the escrow merger price is paid in 2001.
Escrow Merger Price Not Accelerated. If the amount of cash that you
receive in 2001, less the amount treated as interest for U.S. federal income tax
purposes for that year (as discussed below), is greater than the basis in your
Global Bancorp stock allocated to that year, you must report the excess as
capital gain for that year. However, you may reduce this amount of capital gain
(but not below zero) by the amount of any capital loss that you incurred but did
not report with respect to your Global Bancorp stock for the year 2000. If the
amount of cash that you receive in 2001, less the amount treated as interest (as
discussed below), is less than the basis in your Global Bancorp stock allocated
to that year, you will have incurred a loss in that year. However, you will not
be permitted to report that loss for 2001. Rather, you must defer that loss and
take it into account in 2002, as explained in the next paragraph.
If the amount of cash plus the fair market value of Humboldt Bancorp
common stock that you receive in 2002, less the part of that sum that is treated
as interest for U.S. federal income tax purposes (as discussed below), is
greater than the basis in your Global Bancorp stock allocated to 2002, you must
report the excess as capital gain for 2002. However you may reduce the amount of
capital gain that you report for 2002 by the amount of any capital loss that you
incurred but did not report (or use to reduce capital gain as described above)
for 2000 and 2001. If the amount of cash plus the fair market value of Humboldt
Bancorp common stock that you receive in 2002, less any amount treated as
interest, is less than the basis allocated to 2002, you may report the
difference as a capital loss for 2002 (subject to the general limits on
deducting capital losses discussed below). Also, you may increase the amount of
any capital loss for 2002 by any capital loss incurred but not reported (or used
to reduce capital gain as described above) for 2000 and 2001 and report the
total amount (again subject to general limitations on deducting capital losses).
Escrow Merger Price Accelerated into 2001. If the amount of cash plus
the fair market value of Humboldt Bancorp common stock that you receive in 2001,
less the part of that sum that is treated as interest (as discussed below), is
greater than the basis in your Global Bancorp stock allocated to 2001 and 2002
combined, you must report the excess as capital gain for 2001. However, you may
reduce the amount of capital gain that you report for 2001 by the amount of any
capital loss that you incurred but did not report with respect to your Global
Bancorp stock for 2000. If the amount of cash plus the fair market value of
Humboldt Bancorp common stock that you receive in 2001, less any amount treated
as interest, is less than the basis allocated to 2001 and 2002 combined, you may
report the difference as a capital loss for 2001 (subject to the general limits
on deducting capital losses discussed below). Also, you may increase the amount
of any capital loss for 2001 by any capital loss incurred but not reported for
2000 and report the total amount (subject to the general limitations on
deducting capital losses).
Amounts Treated As Interest. Of the total amount of each payment that
you receive in 2000 through 2002 (including the payments labeled as "interest"
received in 2000 and 2001 and the fair market value of the Humboldt Bancorp
common stock received in 2001 or 2002), a part will be characterized as interest
for U.S. federal income tax purposes. Humboldt Bancorp will inform you of the
amount that you will need to treat as interest for each year. This amount will
be determined by discounting the payment you receive by a discount rate
published by the IRS, and this calculation will determine the amount of interest
for U.S. federal income tax purposes, irrespective of any other
characterizations of the payments that you receive. You will be required to
report the amount determined by Humboldt Bancorp as interest income, and you
will be taxed on that amount at ordinary income rates. The amount of the payment
that is not characterized as interest will be treated as the amount you receive
for your Global Bancorp stock, the tax consequences of which are described in
the preceding paragraphs.
Limitations on Capital Losses. If you are an individual and incur a
capital loss in the year in which the escrow merger price is paid (taking into
account any losses incurred yet not reportable in a prior year), you will be
able to deduct that loss only to the extent of any net capital gains on other
transactions that you report for the year of that payment plus $3,000 ($1,500 if
you are a married individual filing a separate return). If you cannot deduct a
portion of the capital loss for that year because of the $3,000 limitation, you
can deduct it for a later year to the
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extent that you do not exceed the limitation for that year. If you are a
corporation, you may deduct a capital loss only to the extent of capital gains.
However, a corporation generally may use a net capital loss for a year to offset
capital gains for the three years preceding or the five years following the year
of the net capital loss.
Special Rules For Holders of Large Amounts of Global Bancorp Stock. In
some circumstances, the recipient of an installment obligation, such as the
certificate of interest, is subject to an interest charge on the deferral of tax
payments that occurs under the installment method. If, in exchange for your
Global Bancorp stock, you might receive total payments of over $150,000 and if,
at the end of 2000, you (and related businesses and entities) might have over $5
million in total installment receivables that arose in 2000 from sales or
dispositions of property and that are still outstanding, you should consult your
tax advisor regarding your potential liability for such an interest charge.
Also, if, in exchange for your Global Bancorp stock, you receive more
than $150,000, and you either use your certificate of interest to secure a debt
or have a right to use your certificate of interest to pay a debt, you might be
required to treat the amount of the debt as additional cash that you received
for your Global Bancorp stock. Therefore, if you might receive over $150,000 and
you might use your certificate of interest as security for debt or might have a
right to use it to pay debt, you should consult your tax advisor regarding the
application of this rule to your particular situation.
Alternate Method of Installment Reporting
Treasury Department Regulations allow you to use a method of recovering
your basis in your Global Bancorp stock that is more advantageous than the
thirty-three and one-third percent (33 1/3%) basis-recovery method discussed
above if you can demonstrate to the IRS, before the due date of your 2000 tax
return (including extensions), that the recovery method discussed above will
substantially and inappropriately increase your tax liability. In order to make
this demonstration, you must file a request for a private letter ruling from the
IRS authorizing you to use an alternative method of basis recovery. You will
probably have to pay a fee in order to request a private letter ruling. You
should consult your tax advisor to determine whether you should apply for a
private letter ruling for this purpose.
Election Out of Installment Reporting
Under the installment method of reporting, you will normally be able to
use only thirty-three and one-third percent (33 1/3%) of your basis against the
cash that you receive in 2000, even though these payments could well constitute
most of the total payments that you will receive. Also, if you are an
individual, any capital loss that you incur in 2000 under this method cannot be
used to offset capital gain for 2000. Therefore, you may wish to consider
"electing out of" the installment method. To elect out of the installment
method, you should report the total amount of your gain (or loss) from the
merger on a timely filed 2000 U.S. federal income tax return (including
extensions). The total amount of gain (or loss, if negative) will be equal to
the amount of cash that you receive at the time of the merger in 2000, plus the
fair market value (at the time of the merger) of your certificate of interest,
and minus your total basis in your Global Bancorp stock.
If you elect out of the installment method and report the total amount
of gain or loss from the merger for 2000, your certificate of interest will be
treated for U.S. federal income tax purposes as a separate asset--an installment
obligation--that you own. Your basis in this installment obligation will be
equal to the fair market value (at the time of the merger) of your certificate
of interest, which is the amount you will have used to compute your gain or loss
from the merger for 2000.
When you receive a payment pursuant to the certificate of interest in
2000 and 2001 other than the escrow merger price, part of the payment will be
treated as a recovery of basis in the certificate of interest and part of the
payment will be treated as interest income. Humboldt Bancorp will inform you of
the amount of the payment that will be characterized as interest, which it will
determine by discounting the total payment by a discount rate
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<PAGE> 36
published by the IRS. This calculation will determine the amount of interest for
U.S. federal income tax purposes, irrespective of any other characterizations of
the payments that you receive. You will be required to report the amount
determined by Humboldt Bancorp as interest income, and you will be taxed on it
at ordinary income rates. You will reduce your basis in the certificate of
interest (but not below zero) by the part of the payment that is not
characterized as interest. If the payments that are not characterized as
interest exceed your basis in the certificate of interest, you must report the
excess as capital gain.
Your exchange of your certificate of interest in 2001or 2002 for cash
and/or Humboldt Bancorp common stock will be treated for tax purposes as a sale
of the certificate of interest. However, a portion of the payment--the amount of
cash plus the fair market value of any Humboldt Bancorp common stock--that you
receive will constitute interest income. Humboldt Bancorp will inform you of the
amount of the payment that will be characterized as interest, which it will
determine by discounting the total payment by a discount rate published by the
IRS. You will be required to report that amount as interest income, and you will
be taxed on it at ordinary income rates. You will treat the part of the payment
that is not characterized as interest as an amount received in exchange for your
certificate of interest. If this amount exceeds your basis in the certificate of
interest (which is adjusted in 2000 and 2001 as described in the preceding
paragraph), you will report the excess as capital gain. If the part of the
payment not characterized as interest is less than your adjusted basis in the
certificate of interest, you may report the difference as a capital loss
(subject to the general limitations on capital losses discussed above). You
should consult with your tax advisor regarding whether you should elect out of
the installment method of reporting for the merger.
Dissenting Shareholders
If you exercise your state law dissenters' rights, you will have to
report capital gain or loss equal to the difference between the amount of cash
that you receive pursuant to the exercise of these rights and your basis in your
Global Bancorp stock.
Material Consequences to Humboldt Bancorp
After the completion of the merger, Humboldt Bancorp will own all of
the assets of Global Bancorp, and Humboldt Bancorp will have assumed all of the
liabilities of Global Bancorp. The acquisition of Global Bancorp by Humboldt
Bancorp and the subsequent liquidation of Global Bancorp will be treated as a
tax-free transaction for U.S. federal income tax purposes. Accordingly, Humboldt
Bancorp will have no taxable gain or loss when it receives all the assets and
liabilities of Global Bancorp. Nor will there be any taxable gain or loss to
Global Bancorp when Global Bancorp distributes all of its assets and liabilities
to Humboldt Bancorp pursuant to the merger.
Humboldt Bancorp will have the same tax basis in the assets of Global
Bancorp as Global Bancorp had in its assets immediately prior to the merger.
Also, Humboldt Bancorp's holding period for those assets upon the completion of
the merger will include the period during which the assets were held by Global
Bancorp. Humboldt Bancorp's tax basis in the assets of Global Bancorp will not
reflect the amount paid to Global Bancorp shareholders for their Global Bancorp
stock.
RIGHTS OF DISSENTING GLOBAL BANCORP SHAREHOLDERS
If you vote against the merger or abstain from voting, you are entitled
to dissenters' rights under Chapter 13 of the California General Corporation Law
("Chapter 13"). Chapter 13 is reprinted in Appendix C to this document which is
incorporated by reference.
The following discussion is a summary and not a complete statement of
the law relating to dissenters' rights. You should review Appendix C carefully
if you wish to exercise your dissenters' rights or you wish to preserve your
right to do so. Failure to comply with the procedures in Chapter 13 will result
in the loss of your dissenters' rights. Also, if you have a beneficial interest
in shares of Global Bancorp common stock held of record
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in the name of another person, like a broker or nominee, and you wish to
exercise your dissenter's rights, you should act promptly to cause the
shareholder of record to follow the steps summarized below.
If the merger is completed, Global Bancorp shareholders who elect to
exercise their dissenters' rights and who properly and timely perfect their
rights will be entitled to receive the "fair market value," in cash, of their
shares. Under California law fair market value will be determined as of June 23,
1999, the day before the first announcement of the terms of the merger, and will
exclude any appreciation in the shares caused by the merger. See "Market
Prices."
If the merger agreement is approved at the Global Bancorp Meeting,
Global Bancorp will within 10 days of the approval mail a notice to the holders
of record of shares of Global Bancorp common stock who did not vote in favor of
the merger or abstained from voting. A holder of Global Bancorp common stock who
votes in favor of the merger agreement or who executes and returns a proxy with
no voting instructions indicated will lose any dissenters' rights with respect
to those shares.
The notice will set forth the fair market value price of the dissenting
shares as determined by Global Bancorp. The notice constitutes an offer by
Global Bancorp to purchase any dissenting shares from the dissenting
shareholders at the price stated.
The notice will also briefly describe the procedures to be followed by
dissenting shareholders to pursue their dissenters' rights. Within 30 days after
the mailing date of the notice, shareholders who wish to assert dissenters'
rights must do the following:
- The dissenting shareholders must provide written demand upon
Global Bancorp to pay the price stated in the notice. The written
demand must state the number of Global Bancorp shares held and the
number of shares which the dissenting shareholder demands Global
Bancorp purchase for cash and a statement of the amount which the
dissenting shareholder claims to be the fair market value of the
dissenting shares as of the day before the announcement of the
proposed merger. That statement will constitute an offer by the
dissenting shareholder to sell the dissenting shares to Global
Bancorp at that price.
- The dissenting shareholder must submit share certificate(s)
representing the dissenting shares to Global Bancorp at Global
Bancorp's principal office. Global Bancorp will stamp or endorse
the certificate(s) with a statement that the shares are dissenting
shares or exchange the shareholder's certificates for certificates
of appropriate denomination so stamped or endorsed. If the price
contained in the notice is acceptable to the dissenting
shareholder, the dissenting shareholder may demand the same price.
This would constitute an acceptance of the offer by Global Bancorp
to purchase the dissenting shareholder's stock at the price stated
in the notice.
The demand by holders of Global Bancorp common stock and shares certificates
should be sent to Global Bancorp, 1424 Second Street, Napa, California 94559,
Attention: Mr. Robert F. Kelly, President.
If Global Bancorp and a dissenting shareholder agree on the price for
the dissenting shares, Global Bancorp must by law pay the agreed price, together
with interest at the legal rate on judgments from the date of the agreement
between Global Bancorp and the dissenting shareholder, to the dissenting
shareholder within the later of (i) 30 days after the agreement, or (ii) 30 days
after any completion of any conditions to the merger. However, California law
places some restrictions on Global Bancorp's ability to repurchase its
outstanding shares. Also, Humboldt Bancorp may withhold payment until the
dissenting shareholder surrenders the certificates for the dissenting shares.
If Global Bancorp and a dissenting shareholder fail to agree on the
price for the dissenting shares or disagree as to whether the dissenting
shareholder's shares are dissenting shares, the holder may, within 6 months
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after the notice is mailed, file a complaint in court to determine the price, or
may intervene in any pending action brought by any other dissenting shareholder.
In addition, a Global Bancorp shareholder may vote in favor of the
merger agreement as to part of his or her shares without jeopardizing the
dissenting status of those shares not voted in favor of the merger agreement.
However, a Global Bancorp shareholder should clearly specify the number of
Global Bancorp shares not voted in favor of the merger agreement.
Dissenting shares may lose their status as dissenting shares, and the
holders will lose any right to demand payment, if any of the following takes
place:
- the merger is abandoned. In this event, Global Bancorp will pay on
demand to any dissenting shareholder who began proceedings in good
faith under Chapter 13 all necessary expenses and reasonable
attorneys' fees incurred in those proceedings;
- the shares are transferred before being submitted for endorsement
or are surrendered for conversion into shares of another class;
- the dissenting shareholder and Global Bancorp do not agree upon
the status of the dissenting shares or on the price of the
dissenting shares, but the dissenting shareholder fails to file
suit against Global Bancorp, or to intervene in a pending action
within six months following the date on which the notice was
mailed to the shareholder; or
- the dissenting shareholder withdraws his or her demand for the
purchase of the dissenting shares with the consent of Global
Bancorp.
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP CAPITAL STOCK
The following is a summary of the material differences between the
current rights of shareholders of Global Bancorp and those of Humboldt Bancorp
shareholders following the merger and a description of Humboldt Bancorp's common
stock. This description is qualified in its entirety by reference to the
California General Corporation Law, Humboldt Bancorp's Articles of Incorporation
and Bylaws, and Global Bancorp's Articles of Incorporation and Bylaws. Copies of
Humboldt Bancorp's Articles and Bylaws will be sent to you upon a request made
to the corporate secretary. Please refer to "Where You Can Find More
Information" on page 136.
The Articles of Incorporation and Bylaws of Humboldt Bancorp will
continue as the Articles of Incorporation and Bylaws of Global Bancorp following
the merger. The authorized capital stock of Humboldt Bancorp following the
merger will consist of 50,000,000 shares of common stock. The rights,
preferences and privileges of Humboldt Bancorp common stock following the merger
will be the same as those described below for Humboldt Bancorp common stock.
Organization - Governing Law
Humboldt Bancorp and Global Bancorp are both corporations organized
under the laws of the State of California. Each is governed by the General
Corporation Law, its Articles of Incorporation filed with the California
Secretary of State, and by its Bylaws.
Authorized Stock
Global Bancorp's Articles of Incorporation authorize the issuance of
2,000,000 shares of common stock, no par value, and 600,000 shares of Global
Bancorp's preferred stock, no par value. At record date, 699,100 shares
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of Global Bancorp's common stock were issued and outstanding, and no shares of
Global Bancorp's preferred stock were outstanding.
Humboldt Bancorp's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value. As of December 31, 1999,
4,776,095 shares of Humboldt Bancorp's common stock are issued and outstanding.
Board of Directors; Number of Directors
Global Bancorp's Bylaws currently provide that the number of directors
of Global Bancorp will not be less than four nor more than seven. There are
currently five directors.
Humboldt Bancorp's Bylaws provide for a range of directors from a
stated minimum of 8 to a stated maximum of 15, with the exact number currently
fixed at 13.
Term of Directors
The Articles of Incorporation of both Global Bancorp and Humboldt
Bancorp provide for one year terms for all directors, with annual election.
Election of Directors; Nomination of Directors; Voting Rights
Holders of common stock of Global Bancorp and Humboldt Bancorp are
entitled to one vote, in person or by proxy, for each share of common stock held
of record in the shareholder's name, on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, the
shares may be voted cumulatively.
The bylaws of Humboldt Bancorp require a shareholder who intends to
nominate a candidate for election to the board of directors to give not less
than 21 business days' advance notice to the secretary of Humboldt Bancorp. A
shareholder wishing to nominate any person for election as a director must
provide Humboldt Bancorp with information concerning the nominee and the
proposing shareholder.
Amendment of Articles or Bylaws
An amendment to the Articles of Incorporation of Global Bancorp and
Humboldt Bancorp must be approved by a majority of the board of directors and by
the shareholders owning a majority of the outstanding shares of common stock.
The bylaws of either may be amended by a majority of the board of directors,
except that the number of directors specified in its Bylaws may be changed only
with the approval of the shareholders.
Majority Voting Requirements
For all actions requiring shareholder consent, such as a merger or sale
of the bank or an amendment to the Articles of Incorporation, both Global
Bancorp and Humboldt Bancorp require approval of a simple majority of
shareholders only.
Other Rights
Each share of Global Bancorp common stock has the same rights,
privileges and preferences as every other share and will share equally in Global
Bancorp's net assets upon liquidation or dissolution. Global Bancorp's common
stock has no conversion or redemption rights or sinking fund provisions. Holders
of Global Bancorp common stock do not have preemptive rights to subscribe to
additional stock issued by Global Bancorp.
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The holders of Humboldt Bancorp common stock have no preemptive or
other subscription rights and there are no redemption, sinking fund or
conversion privileges applicable thereto. Upon Humboldt Bancorp's liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities.
Indemnification
Under the General Corporation Law, a corporation has the power to
indemnify present and former directors, officers, employees and agents against
expenses, judgments, fines and settlements if that person acted in good faith
and in a manner the person reasonably believed to be in the best interests of
the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe the conduct of the person was unlawful. A corporation also has
the power to indemnify a person who is a party to any action by or in the right
of the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
The indemnification authorized by the General Corporation Law is not
exclusive, and a corporation may grant its directors, officers, employees or
other agents additional rights to indemnification. The Articles and Bylaws of
both Global Bancorp and Humboldt Bancorp provide that each shall indemnify its
officers and directors to the fullest extent permitted under California law.
Humboldt Bancorp Capital Stock Description
Holders of Humboldt Bancorp common stock are entitled to dividends
when, as and if declared by Humboldt Bancorp's board of directors out of funds
legally available therefor (and after satisfaction of any prior rights of
holders of outstanding preferred stock) subject to restrictions on payment of
dividends imposed by the California Corporations Code and other applicable
regulatory limitations. See "Dividend Policy." No preferred stock is authorized
in the Humboldt Bancorp Articles. Options for Humboldt Bancorp Stock are
outstanding. See "Humboldt Bancorp Executive Compensation -- Summary
Compensation."
MARKET PRICES
Subject to the close of our concurrent public offering, Humboldt
Bancorp's common stock has been approved for listing on the NASDAQ National
Market under the symbol HBEK. Currently, Humboldt Bancorp's common stock is
quoted on the OTC Bulletin Board as disclosed below.
We have been informed by market makers of the high and low bid price
for our common stock during the last two fiscal years and for the first nine
months of the current fiscal year as follows. No assurances can be given,
however, that these high and low bid prices reflected the actual market value of
our common stock. The high and low bids 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.
<TABLE>
<CAPTION>
NUMBER OF
YEAR QUARTER TRADES HIGH BID LOW BID
<S> <C> <C> <C> <C>
-1997- First Quarter 5 $ 8.35 $ 7.70
Second Quarter 8 $10.55 $ 8.35
Third Quarter 23 $11.25 $10.00
Fourth Quarter 15 $11.35 $10.55
-1998- First Quarter 15 $11.45 $10.20
Second Quarter 18 $11.80 $ 9.10
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Third Quarter 7 $11.35 $ 9.80
Fourth Quarter 16 $11.25 $ 8.75
-1999- First Quarter 16 $10.80 $ 8.75
Second Quarter 19 $11.60 $ 8.75
Third Quarter 29 $14.65 $10.90
Fourth Quarter 31 $14.90 $11.35
</TABLE>
As of December 31, 1999, our shares of common stock were held by
approximately 680 shareholders, not including those held in street name by
several brokerage firms. As of December 31, 1999, a total of 1,053,786 shares of
our common stock underlie outstanding options and warrants as adjusted to
reflect a 10% stock dividend on February 7, 2000.
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
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.
Market for Global Bancorp Common Stock; Stock Price and Dividend Information
No broker makes a market and there have been very few trades in Global
Bancorp common stock. The trades that have occurred cannot be characterized as
amounting to an established public trading market. Global Bancorp common stock
is traded by individuals on a personal basis and trades are not quoted on the
over-the-counter market. A small number of trades have been reported to Global
Bancorp which acts as its own transfer agent. Global Bancorp's management is
unaware of the prices of such trades.
As of December 31, 1999, there were approximately 96 shareholders of
record of Global Bancorp common stock.
Global Bancorp pays a quarterly dividend of $0.10 per share. Total
dividends in 1999, 1998, 1997, and 1996 were $0.37, $0.38, $0.40 and $0.21.
PRO FORMA FINANCIAL STATEMENTS
This 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 Global Bancorp on an individual and consolidated basis.
We will account for the merger using the purchase method of accounting.
The purchase method accounts for a business combination such as the merger as
the acquisition of one business by another. We will record at its cost the
acquired assets of Global Bancorp and Capital Thrift less the liabilities
assumed. The difference between the cost of the acquisition and the fair value
of the net assets acquired will be recorded as goodwill. The reported income of
Humboldt Bancorp will include the operations of Global Bancorp and Capitol
Thrift after acquisition, based on the cost to Humboldt Bancorp.
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The purchase price to acquire Global Bancorp will consist of a cash
payment of approximately $11.8 million due at the merger date and a contingent
payment in the form of a Humboldt Bancorp promissory note of approximately $4.7
million due on January 30, 2002, or 60 days from the occurrence of a material
adverse effect with respect to Humboldt Bancorp, but in no event earlier than
January 31, 2001. The amount of the note may be decreased or increased based on
events identified in the merger agreement. Since the amount to be paid is
contingent upon future events, the Humboldt Bancorp note will not be recorded as
part of the purchase price until the contingencies are resolved and the
consideration paid. As a result, the fair value of the net assets acquired
exceeds the recorded purchase price in the following pro forma financial
statements. Accordingly, the cost of non-current assets acquired are adjusted
downward to zero and the excess is recorded as a deferred credit for negative
goodwill. When the consideration is paid, the additional cost will first be
applied against the deferred credit for negative goodwill with the excess, if
any, used to restore premises and equipment to fair value. The remaining excess,
if any, will be recorded as goodwill.
The Statement of Income tables that follow contain information which is
calculated by using "weighted average shares." The weighted average shares
calculation takes into consideration both the number of shares outstanding and
common share equivalents and the length of time the shares and equivalents were
outstanding during the period. The weighted average shares calculation is then
used to calculate basic and diluted earnings per share. At the election of
Global Bancorp stockholders, up to $2,000,000 of the contingent payment under
the Humboldt Bancorp promissory note may be paid in Humboldt Bancorp common
stock. The number of shares issued under this provision, if any, will reduce
Humboldt Bancorp's basic and fully diluted earnings per share. However, because
Global Bancorp stockholders may not make this effective until January 30, 2002,
any shares that may be received by the election have not been included in the
calculation. Further, the following calculations take into consideration a 10%
stock dividend payable on February 7, 2000.
The following pro forma financial information combines the historical
financial information of Humboldt Bancorp and Global Bancorp as if the foregoing
merger and the CalFed branch acquisitions 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 following the foregoing transactions as of September 30, 1999, and pro
forma consolidated condensed income statements of Humboldt Bancorp following the
foregoing transactions for the nine-month period ended September 30, 1999 and
the year ended December 31, 1998.
The pro forma financial information further assumes the issuance of
320,000 shares at $12.50 per share as a result of the minimum subscription for
the public offering. Our pro forma financial information is not necessarily
indicative of the financial position or results of operations of Humboldt
Bancorp following the transactions as it may be in the future or as it might
have been had the transactions been affected on the assumed dates.
The pro forma financial information should be read in conjunction with
the historical financial statements of Humboldt Bancorp and Global Bancorp and
the notes related thereto, presented elsewhere in this document.
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PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical
Humboldt Global As Pro Forma Pro Forma
(Dollars in Thousands) Bancorp Bancorp Adjusted Adjustments As Adjusted
------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 25,421 $ 248 $ $ $ 25,669
Federal funds sold 56,145 8,001 4,000B (11,080)A(1) 63,176
6,110C
Investment securities available-
for-sale 106,210 6,448 112,658
Loans and leases, net of allowance
for loan and lease losses and
unearned income 203,098 98,284 3,500 A(3) 304,882
Premises and equipment, net 9,421 622 (622)A(4) 9,421
Accrued interest and other assets 18,872 4,057 45F (1,184)A(4) 21,790
-------- -------- ------- -------- --------
TOTAL ASSETS $419,167 $117,660 $10,155 $ (9,386) $537,596
======== ======== ======= ======== ========
LIABILITIES
Deposits
Non-interest-bearing $118,267 $ -- $ $ $118,267
Interest-bearing 257,548 105,287 362,835
-------- -------- --------
Total deposits 375,815 105,287 481,102
Accrued interest and other liabilities 5,898 593 45F 2,394 A(4) 8,930
Borrowed Funds 4,638 -- 6,110C 10,748
-------- -------- ------- -------- --------
Total liabilities 386,351 105,880 6,155 2,394 500,780
STOCKHOLDERS' EQUITY
Common Stock 28,066 8,090 4,000B (8,090)A(2) 32,066
Retained earnings 4,670 3,687 (3,687)A(2) 4,670
Accumulated other comprehensive
income 80 3 (3)A(2) 80
-------- -------- ------- -------- --------
Total stockholders' equity 32,816 11,780 4,000 (11,780) 36,816
-------- -------- ------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $419,167 $117,660 $10,155 $ (9,386) $537,596
======== ======== ======= ======== ========
</TABLE>
42
<PAGE> 44
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical
--------------------
(Dollars in Thousands Humboldt Global Pro Forma Pro Forma
except per share amounts) Bancorp Bancorp As Adjusted Adjustments As Adjusted
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and
leases $14,136 $8,001 $ (37)D $(375)A(4) $ 21,725
Interest on investments 3,708 722 2,270 E 6,700
------- ------ ------ ----- ---------
Total interest income 17,844 8,723 2,233 (375) 28,425
------- ------ ------ ----- ---------
INTEREST EXPENSE
Interest on deposits 5,410 4,293 2,287 E 11,990
Interest on long-term debt 225 -- 507 C 732
------- ------ ------ ----- ---------
Total interest expense 5,635 4,293 2,794 -- 12,722
------- ------ ------ ----- ---------
Net interest income 12,209 4,430 (561) (375) 15,703
PROVISION FOR LOAN AND LEASE LOSSES 697 479 -- 1,176
------- ------ ------ ----- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 11,512 3,951 (561) (375) 14,527
------- ------ ------ ----- ---------
NON-INTEREST INCOME
Service charges and fees 13,443 455 120 A(5) 14,018
Net gain on sale of loans 349 278 627
------- ------ ------ ----- ---------
Total non-interest income 13,792 733 -- 120 14,645
------- ------ ------ ----- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 8,659 1,522 10,181
Net occupancy and equipment 2,092 361 115 E (93)A(5) 2,475
Other expenses 9,826 1,486 293 E 11,605
17 F
------- ------ ------ ----- ---------
Total non-interest expense 20,577 3,369 425 (93) 24,261
------- ------ ------ ----- ---------
INCOME BEFORE INCOME TAXES 4,727 1,315 (986) (162) 4,911
PROVISION FOR INCOME TAXES 1,537 363 (406)G (116)E 1,378
------- ------ ------ ----- ---------
NET INCOME $ 3,190 $ 952 $ (580) $ (46) $ 3,533
======= ====== ====== ===== =========
NET INCOME PER SHARE OF
COMMON STOCK
Basic $ 0.67
=========
Diluted $ 0.61
=========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 5,311,000
=========
Diluted 5,794,000
=========
</TABLE>
43
<PAGE> 45
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
---------------------
(Dollars in Thousands Humboldt Global As Pro Forma Pro Forma
except per share amounts) Bancorp Bancorp Adjusted Adjustments As Adjusted
------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and lease $18,762 $11,721 $ (49)D $(500)A(3) $ 29,934
Interest on investments 4,742 1,232 3,466 E 9,440
------- ------- ------- ----- ----------
Total interest income 23,504 12,953 3,417 (500) 39,374
------- ------- ------- ----- ----------
INTEREST EXPENSE
Interest on deposits 7,565 6,843 3,492 E 17,900
Interest on long-term debt 177 -- 676 C 853
------- ------- ------- ----- ----------
Total interest expense 7,742 6,843 4,168 -- 18,753
------- ------- ------- ----- ----------
Net interest income 15,762 6,110 (751) (500) 20,621
PROVISION FOR LOAN AND LEASE LOSSES 2,124 226 2,350
------- ------- ------- ----- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 13,638 5,884 (751) (500) 18,271
------- ------- ------- ----- ----------
NON-INTEREST INCOME
Service charges and fees 11,828 826 160 A(4) 12,814
Net gain on sale of loans 645 476 1,121
------- ------- ------- ----- ----------
Total non-interest income 12,473 1,302 -- 160 13,935
------- ------- ------- ----- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 9,151 2,023 11,174
Net occupancy and equipment 2,711 440 176 E (124)A(4) 3,203
Loss on sale and provision for
losses on real property held for sale -- 1,224 1,224
Other expenses 7,716 1,786 447 E 9,971
22 F
------- ------- ------- ----- ----------
Total non-interest expense 19,578 5,473 645 (124) 25,572
------- ------- ------- ----- ----------
INCOME BEFORE INCOME TAXES 6,533 1,713 (1,396) (216) 6,634
PROVISION FOR INCOME TAXES 2,517 658 (574)G (155)E 2,446
------- ------- ------- ----- ----------
NET INCOME $ 4,016 $ 1,055 $ (822) $ (61) $ 4,188
======= ======= ======= ===== ==========
NET INCOME PER SHARE OF
COMMON STOCK
Basic $ 0.81
==========
Diluted $ 0.73
==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 5,197,000
==========
Diluted 5,699,000
==========
</TABLE>
Notes to Pro Forma Consolidated Financial Statements
A THE MERGER OF HUMBOLDT BANCORP AND GLOBAL BANCORP.
Humboldt Bancorp will acquire Global Bancorp's outstanding common stock for
approximately $16,500,000 payable in cash and a Humboldt Bancorp promissory
note. The merger is treated as a single transaction in the consolidated
financial statements. The promissory note is due January 30, 2002, and the
amount payable may be decreased or increased based on events identified in
the merger agreement. Since the amount to be paid is contingent upon future
events, generally accepted accounting principles require that this
promissory note be recorded when the contingencies are resolved and the
consideration is paid. Accordingly, the purchase accounting adjustments to
record the acquisition are summarized below (dollars in thousands):
44
<PAGE> 46
<TABLE>
<S> <C>
Purchase price to be 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 asset (1,184)(4)
Deferred credit for negative goodwill (2,394)(4)
--------
Allocated discount $ (700)
========
</TABLE>
(1) Cash portion of price to be paid for Global Bancorp as of September 30,
1999, as adjusted pursuant to the terms of the merger agreement.
(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 Proforma, 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.
B HUMBOLDT BANCORP STOCK OFFERING. In this Proforma, it is assumed the
acquisition of Global Bancorp will be consummated concurrent with the sale
of a minimum of 320,000 shares of Humboldt Bancorp common stock at a price
of $12.50 per share.
C BORROWINGS. Humboldt Bancorp intends on acquiring additional capital of
approximately $6.1 million if only the minimum offering has sold, or $2.1
million if the maximum offering has sold, through financings by the
issuance of trust preferred securities or other Tier 1-type securities at
an estimated rate of 11.07% per annum.
D ADJUSTMENT TO REFLECT ACQUISITION OF GLOBAL BANCORP. The Proforma
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%.
E HUMBOLDT BANK ACQUISITION OF CALFED BRANCHES. In August 1999, Humboldt Bank
acquired the deposits of two branch offices of CalFed Bank. The premium
paid to acquire the deposits of approximately $2,384,000 was allocated to
core deposit intangible asset. The estimated runoff of these deposits will
result in amortization of the balance of the core deposit intangible asset
on an accelerated basis over a period of ten years. Adjustments were also
made to the pro forma statements of income to estimate the additional
interest income, interest expense and depreciation expense that would
result from this transaction using an estimated average interest rate
earned on federal funds sold of approximately 5.0%, an average rate paid on
deposits of approximately 4.9% and depreciation computed using the
straight-line method over the estimated lives of the premises and equipment
acquired.
F HUMBOLDT BANCORP ACQUISITION OF SILVERADO MERGER CORPORATION. In September
1999, Humboldt Bancorp acquired all of the outstanding shares of Silverado
Merger Corporation for 45,002 shares (49,502 shares post-dividend) of
Humboldt Bancorp restricted common stock and warrants to purchase up to
90,000 shares (99,000 shares post-dividend) of Humboldt Bancorp stock for
$12.00 per share. Humboldt Bancorp has the right to repurchase the 45,002
shares (49,502 shares post-dividend) of common stock for $1.00 ($.91 post-
dividend) each, and the warrants to purchase up to 90,000 shares (99,000
shares post-dividend) of common stock for $12.00 ($10.91 post-dividend) per
share cannot become exercisable, in the event Capitol Valley Bank fails to
achieve certain business objectives by December 31, 2001. Until the
contingencies related to the issuance of the restricted stock and warrants
are resolved, the amount recorded for this transaction will be a liability
of $45,002 and the stock and warrants issued will not be included in per
share information. The fair value as of the merger date of the stock and
warrants issued to the Silverado Merger Corporation stockholders will be
recorded as an additional cost of the acquisition if all the requirements
of the acquisition agreement are achieved. Otherwise, the 45,002 shares
(49,502 shares post-dividend) of restricted stock will be repurchased for
$1.00 per share and the warrants will expire.
G INCOME TAX EFFECT. 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 A is not taxable.
45
<PAGE> 47
REGULATORY CAPITAL AND LEVERAGE RATIO
The following table illustrates the actual regulatory capital and leverage
ratios of Humboldt Bancorp and Global Bancorp and the pro forma regulatory
capital and leverage ratios of Humboldt Bancorp, as of September 30, 1999. The
pro forma ratios are stated after giving effect to the merger and the public
offering, assuming the minimum $4.0 million in net proceeds is raised in the
public offering, all of which is held in cash or cash equivalent investments,
and $6.1 million of trust preferred securities or other Tier 1-type securities
are issued at an estimated rate of 11.07%. Please refer to "Unaudited Pro Forma
Combined Financial Data" and the assumptions set forth therein.
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
-------- ------------- -------------
<S> <C> <C> <C>
Humboldt Bancorp 8.17% 11.11% 12.33%
Global Bancorp 9.66% 11.87% 13.12%
Pro forma for Humboldt Bancorp after the public offering and merger 8.18% 10.83% 12.08%
Minimum regulatory capital for a holding company(1) 4.00% 4.00% 8.00%
</TABLE>
(1) Pursuant to regulations of the Federal Reserve board. Please refer to
"Supervision and Regulation - Capital Standards."
HUMBOLDT BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Humboldt Bancorp
(on a consolidated basis) as of and for the years ended December 31, 1994, 1995,
1996, 1997 and 1998, and as of and for the nine months ended September 30, 1998
and 1999, and should be read in conjunction with Management's Discussion and
Analysis and with the financial statements presented elsewhere.
<TABLE>
<CAPTION>
As Of And For The
(Dollars In Thousands except per share As Of And For The Nine Months
data) Years Ended December 31, Ended September 30,
--------------------------------------------------------- --------------------
1994(1) 1995(1) 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 11,163 $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 17,789 $ 17,844
Interest expense 3,540 5,244 5,549 7,024 7,742 5,855 5,635
-------- -------- -------- -------- -------- -------- --------
Net interest income 7,623 9,997 11,013 13,029 15,762 11,934 12,209
Provision for loan and lease losses 783 792 533 773 2,124 1,541 697
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan and lease losses 6,840 9,205 10,480 12,256 13,638 10,393 11,512
Non-interest income 1,463 3,509 5,747 8,109 12,473 8,609 13,792
Non-interest expense 6,240 9,149 11,325 15,496 19,578 14,471 20,577
-------- -------- -------- -------- -------- -------- --------
Income before provision for income
taxes 2,063 3,565 4,902 4,869 6,533 4,531 4,727
Provision for income taxes 762 1,363 1,926 1,611 2,517 1,720 1,537
-------- -------- -------- -------- -------- -------- --------
Net income $ 1,301 $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 2,811 $ 3,190
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Investment securities $ 37,258 $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 79,347 $106,210
Total net loans and leases $ 92,462 $115,117 $142,824 $157,512 $186,038 $180,846 $203,098
Total assets $152,863 $193,912 $214,738 $284,087 $319,975 $312,944 $419,167
Total deposits $137,624 $174,526 $192,576 $255,186 $283,967 $277,285 $375,815
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
As Of And For The
(Dollars In Thousands except per share As Of And For The Nine Months
data) Years Ended December 31, Ended September 30,
--------------------------------------------------------- ------------------------
1994(1) 1995(1) 1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total shareholders' equity $ 13,569 $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 26,571 $ 32,816
PER SHARE DATA(2)
Net income
Basic $ 0.33 $ 0.48 $ 0.69 $ 0.69 $ 0.82 $ 0.58 $ 0.64
Diluted $ 0.31 $ 0.45 $ 0.58 $ 0.61 $ 0.75 $ 0.52 $ 0.58
Book value $ 2.94 $ 3.65 $ 4.18 $ 4.94 $ 5.66 $ 5.43 $ 6.32
Weighted average shares outstanding
Basic 3,971,000 4,624,000 4,637,000 4,756,000 4,876,000 4,863,000 4,992,000
Diluted 4,135,000 4,913,000 5,135,000 5,325,000 5,379,000 5,372,000 5,475,000
Actual 4,622,000 4,636,000 4,694,000 4,769,000 4,917,000 4,892,000 5,193,000
SELECTED RATIOS(3)
Return on average assets 0.93% 1.22% 1.48% 1.30% 1.32% 1.26% 1.24%
Return on average equity 12.08% 14.57% 16.96% 14.50% 16.02% 15.09% 14.26%
Total loans to deposits 67.18% 65.96% 74.17% 61.72% 65.51% 65.22% 54.04%
Net interest margin 6.01% 6.07% 5.98% 5.85% 5.94% 5.50% 6.07%
Efficiency ratio(4) 68.68% 67.74% 67.57% 73.31% 69.34% 70.44% 79.14%
ASSET QUALITY RATIOS
Reserve for loan and lease losses
to:
Ending total loans and leases 1.42% 1.60% 1.48% 1.48% 1.62% 1.51% 1.58%
Nonperforming assets 260.98% 195.60% 351.80% 128.02% 420.22% 336.85% 289.97%
Nonperforming assets to ending
total assets 0.33% 0.49% 0.28% 0.65% 0.23% 0.26% 0.27%
Net loan and lease charge-offs
(recoveries) to average loans
and leases 0.34% 0.25% 0.19% 0.36% 0.82% 0.66% 0.26%
Reserve/nonperforming loans 260.98% 195.60% 569.23% 139.14% 553.44% 336.85% 289.97%
CAPITAL RATIOS
Average stockholders' equity to
average assets 7.50% 8.40% 8.85% 8.48% 8.35% 8.34% 8.73%
Tier 1 capital ratio(5) 12.52% 11.37% 11.35% 10.79% 10.41% 10.82% 11.11%
Total risk-based capital ratio(6) 13.78% 12.62% 12.60% 12.02% 11.66% 12.04% 12.33%
Leverage ratio(7) 8.55% 7.64% 8.53% 7.38% 7.23% 7.97% 8.17%
OTHER
End of period ("EOP") common stock
outstanding 4,199,000 4,212,000 4,266,000 4,335,000 4,470,000 4,447,000 4,721,000
Average assets $ 139,982 $ 180,584 $ 201,780 $ 251,095 $ 304,515 $ 298,877 $ 342,679
Average earning assets $ 126,809 $ 164,844 $ 183,930 $ 222,555 $ 265,355 $ 262,924 $ 296,972
Number of branch offices(8) 4 7 8 9 8 9 11
Number of full-time equiv.
employees 101 130 175 209 250 257 319
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed its
reorganization as a holding company on January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends in
1994, 1995, 1996, 1997, 1998, and 2000, and a five-for-two stock split in
1999. The per share data does not reflect the 45,002 shares of Humboldt
Bancorp restricted common stock subject to contingencies. See "Pro Forma
Financial Statements - Footnote F."
(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.
47
<PAGE> 49
(6) Total capital divided by risk-weighted assets.
(7) Tier I capital divided by average assets.
(8) Including head office.
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of the factors
described in the section entitled "Risk Factors" and elsewhere in this document.
General
Humboldt Bancorp's results of operations are primarily dependent upon
the results of operations of Humboldt Bank and Capitol Valley Bank and, to a
lesser extent, Bancorp Financial Services. Humboldt Bank and Capitol Valley Bank
conduct general commercial banking business, such as gathering deposits from the
general public and applying those funds to the origination of loans for
commercial, consumer and residential purposes. Bancorp Financial Services makes
consumer automobile loans and commercial equipment leases of less than $100,000
to small businesses. Reference to Humboldt Bancorp in this section constitutes
reference to Humboldt Bank and Capitol Valley Bank. Reference to Humboldt Bank
is a reference to just Humboldt Bank and reference to Capitol Valley Bank is a
reference to just Capitol Valley Bank.
Humboldt Bancorp's profitability depends on net interest income, which
is the difference between (i) interest income generated by interest-earning
assets (i.e., loans and investments) and (ii) interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, as well as the relative amounts of
interest-earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spreads as
a measure of net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
Because of the limited loan growth in the Humboldt-Trinity, California
area, a substantial part of our revenues are also derived from non-interest
income. Non-interest income consists primarily of fees generated by the Merchant
Bankcard and Issuing Bankcard (Credit Card) Departments and lease residuals and
rentals generated by the Lease Finance Department. During the year ended
December 31, 1994, Humboldt Bank began to emphasize the growth in such fees and
other income. For the years ended December 31, 1998, 1997 and 1996, fees and
other income were $9.7 million, $6.9 million and $4.3 million, respectively. Of
this growth, most can be attributed to Humboldt Bank's Merchant Bankcard
processing fees. During the first nine months ended September 30, 1999, Humboldt
Bank continued to reduce its Issuing Bankcard (Credit Card) activities. This
planned reduction in credit card receivables was initiated in early 1997 due to
increased competition in all credit card issuing markets and a noticeable trend
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 intends to diversify its growth of
traditional banking through the establishment of Capitol Valley Bank and
acquisition of Capitol Thrift, 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
48
<PAGE> 50
loans and commercial equipment leases, of less than $100,000, to small
businesses. Humboldt Bank's Lease Finance Department operations, on the other
hand, consist principally of the leasing of point-of-sale terminals, printers
for credit card vouchers and related equipment. Humboldt Bancorp accounts for
its investment in Bancorp Financial Services using the equity method in which
only Humboldt Bancorp's net investment in Bancorp Financial Services is
accounted for on Humboldt Bancorp's financial statements rather than Bancorp
Financial Services' financial statements being consolidated with Humboldt
Bancorp's financial statements. Therefore, the following discussion does not
include a detailed description of Bancorp Financial Services' operations. See
"Business of Humboldt Bancorp - Bancorp Financial Services."
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 and Humboldt
Bank for the fiscal years ended December 31, 1998, 1997 and 1996, and of
Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank for the nine months
ended September 30, 1999. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes presented elsewhere
herein.
Summary of Operations
For the nine months ended September 30, 1999, net income was $3.2
million, an increase of 14.3% over net income of $2.8 million earned during the
nine months ended September 30, 1998. Diluted earnings per share were $0.58 and
$0.52 for the nine months ended September 30, 1999 and September 30, 1998,
respectively. Annualized return on average assets was 1.2% for the nine months
ended September 30, 1999, compared with 1.3% for the comparable nine months in
1998. For the first nine months of 1999 annualized return on average equity was
14.3%, compared with 15.1% during the first nine months of 1998. The increase in
earnings for the nine months ended September 30, 1999, versus the comparable
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
originated by Humboldt Bank, and an increase in charge-offs in the Issuing
Bankcard (Credit Card) Department and Lease Finance Department.
Humboldt Bancorp reported net income of $3.3 million for the year ended
December 31, 1997, compared to $3.0 million for the year ended December 31,
1996. The increase in net income is attributable to an increase of $2.0 million
or 18.2% in net interest income, and an increase in other non-interest income of
$2.4 million or 42.1%. These increases were offset by an increase in provision
for loan losses of $240,000 or 45.0% from 1996, an increase in other
non-interest expense of $4.2 million or 37.2%, and a decrease in provision for
income taxes of $315,000 or 16.4%. The increase in net interest income is
attributable to the substantial increase in earning assets offset by a
49
<PAGE> 51
slight decrease in net interest yield. The increase in non-interest income is
attributable to substantial increases in the Merchant Bankcard and Issuing
Bankcard (Credit Card) Departments' income, to increases in service charges on
deposit accounts, and increased lease residuals and rentals in the Lease Finance
Department. These increases were offset in part by a decrease in gains on sale
of loans and investments. The increase in other non-interest expense is
attributable to increases in salaries and employee benefits, fixed asset
expenses, professional service expense, Issuing Bankcard (Credit Card)
Department and Merchant Bankcard Department expenses. These increases were
offset in part by a decrease in Federal Deposit Insurance Corporation expense
and data processing expense. The increase in provision for loan losses is
attributable to an increase in loans originated, and a recognition of Humboldt
Bank's potential credit risk in the Issuing Bankcard (Credit Card) Department.
Although pre-tax income increased, the provision for income taxes decreased as a
result of Humboldt Bancorp taking advantage of some deferred tax benefits.
Results of Operations
Net Interest Income
Net interest income represents the excess of interest income and loan
fees earned by Humboldt Bancorp on its earning assets over the interest expense
paid on its interest bearing liabilities and other borrowed money. Net interest
income as a percentage of average interest-earning assets is referred to as net
interest margin. The levels of interest-earning assets and interest-bearing
liabilities as well as changes in interest rates affect the level of net
interest income. During periods of rapidly changing interest rates, Humboldt
Bancorp's earnings can be significantly affected because interest rates on a
substantial amount of the earning assets are tied to prime and therefore tend to
change immediately, whereas interest rates on liabilities have a tendency to
change more slowly, and normally only upon the maturity of the liability.
Average Balances and Average Rates Earned and Paid
The following table shows unaudited average balances and interest
income or interest expense, with the resulting average yield or rates by
category of earning assets or interest-bearing liabilities.
<TABLE>
<CAPTION>
(Dollars in Thousands) Nine Months Ended
Year Ended December 31, 1997 Year Ended December 31, 1998 September 30, 1999(1)
------------------------------- ------------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income Yields or Average Income Yields or Average Income Yields
(Unaudited) Balance or Expense Rate Balance or Expense Rate Balance or 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% $198,561 $14,136 9.52%
Investment securities:
Taxable securities 46,989 2,783 5.92 63,494 3,317 5.22 59,137 2,308 5.22
Nontaxable securities(2) 10,396 569 5.47 13,682 739 5.40 15,813 631 5.34
Interest-earning balances
due from banks 2,164 128 5.91 3,502 174 4.97 2,263 73 4.31
Federal funds sold 11,311 612 5.41 9,504 512 5.39 21,198 696 4.39
-------- ------- ----- -------- ------- ----- -------- ------- ----
Total interest-earning
assets(3) 222,555 20,053 9.01 265,355 23,504 8.86 296,972 17,844 8.03
Cash and due from banks 12,679 20,157 25,302
Premises and equipment, net 5,860 7,120 8,544
Loan and lease loss allowance (2,312) (2,626) (3,166)
Other assets 12,313 14,509 15,027
-------- -------- --------
Total assets $251,095 $304,515 $342,679
======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 66,153 1,516 2.29% $ 72,594 1,439 1.98% $ 75,546 955 1.69%
Time deposit and IRA accounts 100,072 5,457 5.45 114,633 6,126 5.34 123,112 4,445 4.83
Borrowed funds 828 51 6.16 3,003 177 5.89 4,487 235 7.00
-------- ------- ----- -------- ------- ----- -------- ------- ----
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
(Dollars in Thousands) Nine Months Ended
Year Ended December 31, 1997 Year Ended December 31, 1998 September 30, 1999(1)
------------------------------ ------------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income Yields or Average Income Yields or Average Income Yields
(Unaudited) Balance or Expense Rate Balance or Expense Rate Balance or Expense or Rate
------- ---------- -------- ------- ---------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing liabilities 167,053 7,024 4.20 190,230 7,742 4.07 203,145 5,635 3.71
Non-interest-bearing deposits 59,050 83,965 103,433
Other liabilities 3,694 4,883 6,196
-------- -------- --------
Total liabilities 229,797 279,078 312,774
Stockholders' equity 21,298 25,437 29,905
-------- -------- --------
Total liabilities and
stockholders' equity $251,095 $304,515 $342,679
======== ======== ========
Net interest income $13,029 $15,762 $12,209
======= ======= =======
Net interest spread 4.81% 4.79% 4.33%
==== ==== ====
Average yield on average earning
assets(2) 9.01% 8.86% 8.03%
==== ==== ====
Interest expense to average earning
assets(1) 3.16% 2.92% 2.54%
==== ==== ====
Net interest margin(4) 5.85% 5.94% 5.50%
==== ==== ====
</TABLE>
- --------------------------------
(1) Average yields and rates for the nine months ended September 30, 1999, have
been annualized.
(2) Tax-exempt income has not been adjusted to its tax-equivalent basis.
(3) Nonaccrual loans are included in the average balance.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
Analysis of Changes in Interest Differential
The following table shows the unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
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 Nine Months Ended
(Dollars in Thousands) December 31, 1997 December 31, 1998 September 30, 1999
over 1996 over 1997 over September 30, 1998
-------------------------- -------------------------- --------------------------
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 $1,842 $346 $2,188 $2,451 $ 350 $2,801 $2,171 $(2,035) $ 136
Investment securities 976 10 986 1,220 (516) 704 (103) (197) (300)
Balance due from banks 63 16 79 13 33 46 (47) (12) (59)
Federal funds sold 213 25 238 (98) (2) (100) 454 (176) 278
------ ---- ------ ------ ----- ------ ------ ------- -----
Total increase (decrease) 3,094 397 3,491 3,586 (135) 3,451 2,475 (2,420) 55
------ ---- ------ ------ ----- ------ ------ ------- -----
Interest Expense Attributable To:
Now and Super Now 29 (2) 27 28 (11) 17 13 (36) (23)
Savings 73 (29) 44 19 -- 19 14 (3) 11
Money Market 114 87 201 88 (201) (113) (8) (146) (154)
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
Year Ended Year Ended Nine Months Ended
(Dollars in Thousands) December 31, 1997 December 31, 1998 September 30, 1999
over 1996 over 1997 over September 30, 1998
-------------------------- -------------------------- --------------------------
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>
Time Deposits 1,106 95 1,201 795 (126) 669 335 (522) (187)
Borrowed funds 2 -- 2 174 (48) 126 85 48 133
------ ---- ------ ------ ----- ------ ------ ------- -----
Total increase (decrease) 1,324 151 1,475 1,104 (386) 718 439 (659) (220)
------ ---- ------ ------ ----- ------ ------ ------- -----
Total Change in Net Interest $1,770 $246 $2,016 $2,482 $ 251 $2,733 $2,036 $(1,761) $ 275
====== ==== ====== ====== ===== ====== ====== ======= =====
</TABLE>
Net interest income for the nine months ended September 30, 1999, was
$12.2 million, an increase of $275,000 over the corresponding period in 1998.
The increase in net interest income is attributable to a increase of $55,000 in
income earned from interest-earning assets and a decrease of $220,000 in expense
from interest-bearing liabilities. Interest expense decreased 5.1% to $5.6
million for the nine months ended September 30, 1999, compared to $5.9 million
for the corresponding period in 1998. The decrease in interest expense was
primarily a result of falling interest rates.
Total interest-earning assets averaged $297.0 million for the nine
months ended September 30, 1999, compared to $265.4 million at year end December
31, 1998. Most of the increase was due to an increase in loans. An increase in
federal funds was offset by a decrease in investment securities. The average
yield on interest-earning assets on certain types of investments decreased to
8.0% during the first nine months of 1999, compared to 8.9% at year end December
31, 1998.
Interest-bearing liabilities averaged $203.1 million during the first
nine months of 1999 compared to $190.2 million at year end December 31, 1998.
The average cost of these liabilities decreased in the first nine months of 1999
to 3.7% from 4.1% at year end December 31, 1998. The average cost of
interest-bearing liabilities decreased primarily as a result of declining
interest rates in 1999. Although further competitive pressure is expected in
expanding deposit relationships, management, as a matter of policy, does not
seek to attract high-priced, brokered deposits. In the near-term, management
does not anticipate Humboldt Bancorp's net interest margins will be
significantly impacted by competitive pressure for deposit accounts, although
there can be no assurance that this will not occur.
Net interest income for the year ended 1998 totaled $15.8 million
compared with $13.0 million for the year ended 1997. The increase in net
interest income was attributable to a significant increase in earning assets and
a slight increase in net interest yield. The yield on loans increased by 0.2%,
over the same period in 1997 and the cost of funds decreased 0.1%. The reference
rate used to price a significant portion of the loan portfolio was 7.75% at
December 31, 1998 and 8.25% at September 30, 1999, and 8.50% at December 31,
1997. Loans comprised 66.9% of average earning assets at September 30, 1999,
66.0% at December 31, 1998, and 68.2% at December 31, 1997.
Loan fees included in net interest income were $690,000 for the nine
months ended September 30, 1999, $1.4 million for the year ended December 31,
1998, and $729,000 for the year ended December 31, 1997.
Provision for Loan and Lease Losses
A reserve for loan and lease losses is maintained at a level that
management of Humboldt Bancorp considers adequate for losses that can be
reasonably anticipated. The reserve is increased by a charge to operating
expenses referred to as a provision for loan and lease losses, and is reduced by
the net loan that is charged-off. See "- Loan Losses and Recoveries" for a
discussion of reserves and net loan charge-offs and a table summarizing the
changes in the reserve for loan and lease losses. The provision for loan and
lease losses does not contain charges related to the activities of the Merchant
Bankcard Department since merchant bankcard accounts are not reflected as loans,
and Merchant Bankcard Department's reserves do not constitute loan reserves.
52
<PAGE> 54
For the nine months ended September 30, 1999, management charged
$697,000 to Humboldt Bancorp's provision for loan and lease losses compared to
$1.5 million for the nine months ended September 30, 1998. This was a 53.5%
decrease from the prior year. The decrease in the provision for loan and lease
losses was directly related to a decline in anticipated credit card charge-offs.
Credit card charge-offs for the nine months ended September 30, 1999, were
$402,000 compared to $768,000 for the same period ended September 30, 1998.
For the years ended December 31, 1998, 1997 and 1996, management
charged $2.1 million, $773,000, and $533,000, respectively, to Humboldt
Bancorp's provision for loan and lease losses. The ratio of the reserve for loan
and lease losses to total loans and leases at December 31, 1998, 1997, and 1996,
equaled 1.7%, 1.5%, and 1.5%, respectively. The increase in the provision from
1997 to 1998 is attributable to an increase in loans originated, an increase in
credit card charge-offs, and an increase in charge-offs in the Lease Finance
Department. The increase in the provision from 1996 to 1997 was due to an
increase in loans originated and to an increase in credit card charge-offs.
Non-Interest Income
The following table sets forth components of Humboldt Bancorp's
non-interest income:
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in Thousands) Year Ended December 31, September 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Fees and Other Income:
Merchant Bankcard services $2,508 $3,906 $ 6,177 $4,106 $9,175
Lease Finance Department (residuals and rentals) 752 1,306 1,575 1,379 1,177
Issuing Bankcard (Credit Card) services 169 778 1,019 793 317
Fees for customer services 287 291 346 96 244
Earnings on life insurance 142 195 106 80 114
Loan and lease servicing fees 370 346 87 82 216
Other 57 89 421 279 487
------ ------ ------- ------ ------
Total Fees and Other Income 4,285 6,911 9,731 6,815 11,730
Service charges on Deposit Accounts 709 1,300 2,097 1,543 1,806
Net Gain (Loss) on Sale of Loans 75 (204) 645 251 349
Net Investment Securities Gains (Losses) 678 102 -- -- (93)
------ ------ ------- ------ ------
Total Non-Interest Income $5,747 $8,109 $12,473 $8,609 $13,792
====== ====== ======= ====== =======
</TABLE>
Non-interest income is primarily derived from Merchant Bankcard fees,
services charges on deposit accounts, Lease Finance Department lease residuals
and rentals, and Issuing Bankcard (Credit Card) fees. During the past three
fiscal years, Humboldt Bank's Merchant Bankcard Department has increased in
importance to Humboldt Bank's revenues. Humboldt Bank offers merchant bankcard
services to 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 September 30, 1999, and as of December 31, 1998, 1997,
and 1996, Humboldt Bank held merchant reserves primarily in non-interest bearing
accounts of $56.8 million, $47.0 million, $33.0 million, and $21.3 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 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.
53
<PAGE> 55
Non-interest income increased $5.2 million, or 60.5% for the nine-month
period ended September 30, 1999, compared to the nine months ended September 30,
1998. The principal reason for this increase was income generated by Merchant
Bankcard operations. During the first nine months of 1999, Merchant Bankcard
operations generated $9.2 million in income compared to $4.1 million for the
same period in 1998. The increase was also the result of increasing deposit
volumes and related service charges. The remainder of the increase in
non-interest income for the nine months ended September 30, 1999, compared to
the same period in 1998, is primarily attributable to service charges and fees
for loan and lease servicing fees.
Non-interest income for 1998 totaled $12.5 million, an increase of $4.4
million or 54.3% from $8.1 million earned in 1997. The increases for the year
ended 1998, compared to the year ended 1997, are attributable primarily to the
activities of the Merchant Bankcard, and to a lesser extent, the activities of
the Lease Finance and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. The increase in gain on sale of
loans is attributable in part to selling some portfolio loans at a gain. The
decrease in gain on sale of investments is attributable to fact that no
investments were sold in 1998. Service charges on deposit accounts increased
$797,000 or 61.3%, fees and other income increased $2.8 million or 40.6%, and
all other non-interest income increased $747,000 or 732.4%.
Non-interest income for the year ended 1997 totaled $8.1 million, an
increase of $2.4 million or 42.1% from $5.7 million earned for the year ended
1996. The increases are attributable primarily to the activities of the Merchant
Bankcard, Lease Finance, and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. Service charges on deposit
accounts increased $591,000 or 83.4%, fees and other income increased $2.6
million or 60.5%, net investment securities gain/loss decreased by $576,000 or
85.0%, and gain on sale of loans decreased by $279,000 or 372.0% from the prior
year. The decrease in gain on sale of loans is attributable in part to selling
some portfolio loans at a loss. The decrease in gain on sale of investments is
attributable to selling more investments in 1996 to fund loans than in 1997.
Non-Interest Expense
Non-interest expenses consist principally of employees' salaries and
benefits, Merchant Bankcard expenses, and fixed asset (occupancy and equipment)
expenses. Non-interest expense increased $6.1 million, or 42.1%, to $20.6
million for the nine months ended September 30, 1999, compared to $14.5 million
in the corresponding period of 1998. This was due to an increase in Merchant
Bankcard operation expense of $2.0 million, as well as increases in other key
operating costs such as salary and benefits, primarily relating to the increase
in personnel. 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: $9.2 million or 46.7% in 1998 and $6.8 million or 43.9% in 1997. Full
time equivalent employees numbered 250, 209 and 175 on December 31, 1998, 1997,
and 1996, respectively. Non-interest expense for the year ended 1997 totaled
$15.5 million, an increase of $4.2 million or 37.2% from the year ended 1996.
Salaries and employee benefits represented the single largest component of
non-interest expense: $6.8 million or 43.9% in 1997, and $5.6 million or 49.4%
in 1996.
Fixed assets expense increased $245,000 or 9.9% to $2.7 million for the
year ended 1998. This increase can be attributed to increased maintenance and
repairs on older equipment, and increased rental expense, partially offset by
increased rental income. Fixed assets expense increased $674,000 or 37.6% to
$2.5 million in 1997. This increase can be in part attributable to depreciation
expense related to the purchase of an in-house computer system, a local area
network and a wide area network as well as the purchase of furniture and
fixtures and leasehold improvements at the Garberville Branch, the Merchant
Bankcard and Issuing Bankcard (Credit Card) Departments at 605 K Street, Eureka,
California, the Cashiers Department at 555 H Street, Eureka, California, and
increased
54
<PAGE> 56
maintenance and repairs on older equipment. Humboldt Bancorp's fixed assets
expense is anticipated to increase in 1999 and 2000 due to the planned opening
of a new headquarters; a new branch; the commencement of operations at the
Capitol Thrift branches; and the acquisition of the two former CalFed branches
located in Ukiah and Eureka.
Other expenses (excluding salaries and employee benefits and fixed
assets), increased $1.5 million or 24.2% in 1998 from 1997, and $2.3 million or
59.0% in 1997 from 1996, primarily due to the Merchant Bankcard program in 1998
and the Issuing Bankcard (Credit Card) program in 1997.
The following table summarizes the significant components and
percentages of non-interest expense for the years ended December 31, 1996, 1997,
1998 and the nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31, Nine Months Ended September 30,
--------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 5,592 49.38% $ 6,806 43.92% $ 9,151 46.74% $ 6,763 46.73% $ 8,764 42.59%
Net occupancy and
equipment expense 1,792 15.82 2,466 15.91 2,711 13.85 1,962 13.65 2,092 10.17
Merchant Bankcard expenses(1) 434 3.83 822 5.30 2,665 13.61 1,759 12.16 5,087 24.72
Professional services 693 6.12 1,342 8.66 1,123 5.74 951 6.57 984 4.78
Issuing Bankcard expenses(1) 170 1.50 1,021 6.59 346 1.77 263 1.82 202 0.98
Stationery, supplies & postage 542 4.79 887 5.72 884 4.52 755 5.22 788 3.83
Intangible expense 372 3.28 426 2.75 372 1.90 279 1.93 264 1.28
FDIC and other insurance 480 4.24 164 1.06 186 0.95 142 0.98 160 0.78
Advertising expenses 235 2.08 265 1.71 247 1.26 202 1.40 337 1.64
Business development 129 1.14 242 1.56 249 1.27 214 1.48 253 1.23
Telephone and travel 424 3.74 478 3.08 598 3.05 453 3.13 572 2.78
Data processing/ATM expense 199 1.76 170 1.10 324 1.65 164 1.13 198 0.96
Other expenses 263 2.32 407 2.64 722 3.69 564 3.90 876 4.26
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total expenses $11,325 100.00% $15,496 100.00% $19,578 100.00% $14,471 100.00% $20,577 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(1) Merchant Bankcard expenses include merchant and proprietary related
expenses only. Issuing Bankcard (Credit Card) expenses include proprietary
related expenses only. Salaries and employee benefits are included in
salary and employee benefits above.
Provision for Income Taxes
The provision for income taxes for the nine month period ended
September 30, 1999, was $1.5 million representing an effective tax rate of
34.1%, compared to $1.7 million, or 38.6% for the nine-month period ended
September 30, 1998.
The provision for income taxes totaled $2.5 million for the year ended
1998, an increase of $906,000 or 56.2% from the year ended 1997, and in 1997
totaled $1.6 million, a decrease of $315,000 or 16.4% from 1996. The increase in
1998 and the decrease in 1997 in provision for income taxes was the result of
increased pre-tax income partially offset by Humboldt Bancorp taking advantage
of some deferred tax benefits. The 1998 effective tax rate of 38.5% and the 1997
effective tax rate of 33.1% on reported income was below the expected statutory
federal rate of 34.0% and the state franchise tax rate of 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,
keyperson 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 CMOs, tax-
55
<PAGE> 57
exempt municipal bonds, corporate bonds, and Federal Home Loan Bank and Federal
National Mortgage Corporation stock.
At September 30, 1999, Humboldt Bancorp's portfolio of investment
securities market value totaled $106.2 million, an increase of $28.4 million
compared to its December 31, 1998 securities portfolio of $77.8 million,
representing an increase of 36.5% from the prior year-end.
The following table provides the book value of Humboldt Bancorp's
portfolio of investment securities as of December 31, 1996, 1997 and 1998 and
September 30, 1999:
<TABLE>
<CAPTION>
As of As of
(Dollars in Thousands) December 31, September 30,
----------------------------- -------------------
1996 1997 1998 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Investments available-for-sale:
U.S. Treasury and agencies $ 4,058 $ 2,996 $ 3,000 $ 2,566
CMOs issued by U.S. agencies 23,331 62,433 56,682 83,030
Obligations of political subdivisions 10,172 12,190 16,227 16,953
Corporate debt and other securities 1,755 1,286 1,062 3,505
------- ------- ------- --------
Total investment securities $39,316 $78,905 $76,971 $106,054
======= ======= ======= ========
</TABLE>
Investment securities at the dates indicated consisted of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) As of As of As of
December 31, 1997 December 31, 1998 September 30, 1999
----------------------------- ------------------------------ -------------------------------
Approx. Approx. Approx.
Amortized Market Amortized Market Amortized Market
Cost Value % Yield * Cost Value % Yield * Cost Value % Yield *
--------- ------ --------- --------- ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Three months or less $ -- $ -- --% $ 999 $ 1,000 6.04% $ 1,007 $ 1,006 4.63%
Three to twelve months -- -- -- 2,001 2,013 6.20 -- -- --
One to three years 2,996 3,007 6.15 -- -- -- 1,559 1,555 5.07
CMO issued by U.S. agencies:
Three months or less 769 771 9.00 1,398 1,348 9.08 624 624 6.69
Three to twelve months 8,960 9,048 8.08 11,384 11,384 4.16 13,609 13,660 7.30
One to three years 19,020 19,200 6.58 35,821 35,780 4.80 49,400 49,458 5.92
Three to five years 32,545 32,935 6.09 6,019 6,019 4.21 12,461 12,447 4.91
Five to fifteen years 1,140 1,160 6.14 2,060 2,083 4.60 6,936 6,850 5.62
Obligations of political
subdivisions:
Three months or less -- -- -- 280 286 7.50 -- -- --
Three to twelve months 102 104 7.99 -- -- -- -- -- --
One to three years 283 292 7.45 235 243 7.75 487 500 9.07
Three to five years 1,179 1,226 8.07 1,238 1,281 8.20 601 637 8.10
Five to fifteen years 6,016 6,381 7.82 8,324 8,920 7.75 11,181 11,302 7.31
Over fifteen years 4,610 4,768 7.67 6,150 6,380 7.06 4,684 4,645 7.02
Corporate debt and other securities
Three months or less 664 664 8.35 1,062 1,065 6.22 965 965 5.04
Three to twelve months 175 178 8.35 -- -- -- 627 627 5.96
Over fifteen years 446 446 6.00 -- -- -- 1,913 1,913 7.71
------- ------- ---- ------- ------- ---- -------- -------- ----
Total securities $78,905 $80,180 6.28% $76,971 $77,802 5.38% $106,054 $106,189 6.19%
======= ======= ==== ======= ======= ==== ======== ======== ====
</TABLE>
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<PAGE> 58
*Weighted average yield is stated on a federal tax-equivalent basis of 34%, and
has been annualized, where appropriate.
At September 30, 1999, the book value of the following issuers'
securities exceeded ten percent of Humboldt Bancorp's capital.
<TABLE>
<CAPTION>
(Dollars in Thousands) Issuer Book Value Market Value
------ ---------- ------------
<S> <C> <C>
FRMAC CMO's $22,565,172 $22,512,214
FNMA CMO's $28,305,153 $28,323,708
GNMA CMO's $10,386,214 $10,302,239
FHLMC CMO's $ 5,286,503 $ 5,370,873
SLMA CMO's $ 8,948,551 $ 8,971,884
</TABLE>
Humboldt Bancorp does not own securities of a single issuer whose
aggregate book value is in excess of its total equity.
Loans
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financed, credit card and consumer loans, made primarily to
individuals and businesses located in Northern California.
At September 30, 1999, Humboldt Bancorp had total net loans outstanding
of $203.1 million. This represented 54.0% of total consolidated deposits and
48.5% of total consolidated assets of Humboldt Bancorp. At December 31, 1998,
Humboldt Bancorp had total net loans outstanding of $186.0 million. This
represented 65.5% of total consolidated deposits and 58.1% of total consolidated
assets of Humboldt Bancorp. At December 31, 1997, Humboldt Bancorp had total net
loans outstanding of $157.5 million. This represented 61.7% of total
consolidated deposits and 55.4% of total consolidated assets.
Types of Loans. The table below shows the composition of loan or type
of borrower at the dates indicated:
<TABLE>
<CAPTION>
(Dollars in Thousands) As of As of As of
December 31, 1994 December 31, 1995 December 31, 1996
-------------------------- --------------------------- ---------------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage
- ------------ -------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 15,273 16.52% $ 15,874 13.79% $ 21,205 14.85%
Residential 16,514 17.86 23,036 20.01 31,519 22.07
Commercial & agricultural 42,314 45.76 54,879 47.67 61,030 42.73
-------- ------ --------- ------ --------- ------
Total real estate loans 74,101 80.14 93,789 81.47 113,754 79.65
Commercial 13,950 15.09 16,284 14.15 20,559 14.39
Lease financing 4,226 4.57 3,974 3.45 3,168 2.22
Credit card and related accounts 618 0.67 1,203 1.05 2,021 1.42
Consumer 1,389 1.50 2,192 1.90 2,508 1.76
Other 91 0.10 159 0.14 3,725 2.60
-------- ------ --------- ------ --------- ------
Total loans and leases 94,375 102.07 117,601 102.16 145,735 102.04
Less:
Deferred loan fees (582) (0.63) (616) (0.54) (765) (0.54)
Allowance for loan losses (1,331) (1.44) (1,868) (1.62) (2,146) (1.50)
-------- ------ --------- ------ --------- ------
Loans and lease receivable, net $ 92,462 100.00% $ 115,117 100.00% $ 142,824 100.00%
======== ====== ========= ====== ========= ======
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
(Dollars in Thousands) As of As of As of
December 31, 1997 December 31, 1998 September 30, 1999
--------------------------- --------------------------- ---------------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage
- ------------ --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 20,165 12.80% $ 20,667 11.11% $ 22,997 11.32%
Residential 27,253 17.30 35,226 18.93 42,518 20.93
Commercial & agricultural 65,772 41.76 80,197 43.11 91,842 45.23
--------- ------ --------- ------ --------- ------
Total real estate loans 113,190 71.86 136,090 73.15 157,357 77.48
Commercial 28,091 17.83 33,981 18.27 35,523 17.49
Lease financing 8,732 5.55 9,867 5.30 7,518 3.70
Credit card and related accounts 7,062 4.48 5,672 3.05 3,563 1.75
Consumer 2,440 1.55 2,110 1.13 1,930 0.95
Other 1,177 0.75 2,097 1.13 1,301 0.64
--------- ------ --------- ------ --------- ------
Total loans and leases 160,692 102.02% 189,817 102.03% 207,192 102.01%
Less:
Deferred loan fees (809) (0.51)% (724) (0.39)% (855) (0.42)%
Allowance for loan losses (2,371) (1.51)% (3,055) (1.64)% (3,239) (1.59)%
--------- ------ --------- ------ --------- ------
Loans and lease receivable, net $ 157,512 100.00% $ 186,038 100.00% $ 203,098 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
At September 30, 1999, and December 31, 1998, 1997, and 1996 Humboldt
Bancorp had no concentration of loans which exceeded 10% of total loans not
otherwise identified by the categories set forth above.
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential
and commercial properties and to finance land acquisition and development.
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.
As of September 30, 1999, the breakdown of construction loans was as
follows:
<TABLE>
<S> <C>
Owner-Occupied Single Family Construction $10,350,000
Owner-Occupied Commercial Construction $10,247,000
Speculation Construction $ 750,000
Acquisition/Development $ 1,650,000
</TABLE>
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.
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; 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 1% to 2% are
usually charged.
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<PAGE> 60
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 is 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 2 to 4 houses and requires the borrower or its
principals personally to guarantee repayment of the loan. Moreover, Humboldt
Bancorp controls certain of the risks associated with construction lending by
requiring builders to submit itemized bills to Humboldt Bancorp, whereupon
Humboldt Bancorp disburses the builder's loan funds directly to the contractor
and subcontractors, rather than to the builder. For a contractor meeting
specific criteria, loan funds may be disbursed directly to the contractor.
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp historically has been and continues to be an
originator of owner-occupied, single-family, residential real estate loans in
its market area. These residential loans as a percentage of total net loans
outstanding were 20.9% at September 30, 1999, 18.9% at December 31, 1998, 17.3%
at December 31, 1997, and 22.1% at December 31, 1996. The decrease in
residential real estate loans in 1998 and 1997 is attributable to the sale of
portfolio loans. The higher volume of residential real estate loans in 1999 is
attributable to lower rates at the beginning of 1999. Humboldt Bancorp also
offers FHA and VA mortgage loans in its market area, which are underwritten and
closed by a correspondent lender.
Humboldt Bancorp originates owner-occupied, single-family, residential
fixed-rate mortgage loans at competitive interest rates within its market area.
Generally, Humboldt Bancorp sells these loans in the secondary market. While
there were $.7 million of loans held for sale at September 30, 1999, there were
fixed-rate loans of $7.7 million for sale at December 31, 1998, $48,000 for sale
at December 31, 1997, and $63,000 for sale at December 31, 1996. These balances
are included in Real Estate - Residential totals in the table above.
Humboldt Bancorp also offers adjustable-rate residential mortgage
loans. The adjustable-rate loans currently offered by Humboldt Bancorp have
interest rates which adjust every one, three or five years from the closing date
of the loan or on an annual basis commencing after an initial fixed-rate period
of one, three or five years in accordance with a designated index.
The 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. However, 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.
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<PAGE> 61
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 September 30, 1999, Humboldt Bancorp had approximately $14.1 million
in owner-occupied home equity line of credit loans, representing approximately
6.94% 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 45.2% at September 30, 1999,
43.1% at December 31, 1998, 41.8% at December 31, 1997, and 42.7% at December
31, 1996. Commercial and agricultural loans are secured by both commercial and
nonowner occupied property. The breakdown by type of property securing these
loans is as follows:
<TABLE>
<S> <C>
79% Commercial property
4% Multi-family property
2% Single-family residential non-owner occupied property
15% Equity line of credit
</TABLE>
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 1- to 5-year intervals to specified spreads over the related
index. Commercial real estate loans are generally written in amounts up to 70%
of the appraised value of the property or sale price.
Commercial real estate loans generally present a higher level of risk
than loans secured by owner-occupied, single family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project.
Humboldt Bancorp entered into a number of SBA guaranteed loans and has
loans where SBA has a subordinate lien position. These loans are eligible for
sale on the secondary market. Humboldt Bancorp chose to sell SBA guaranteed
loans in 1998 but did not choose to sell these types of loans in 1997 or 1996.
Several SBA loans were sold in 1999.
60
<PAGE> 62
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 17.5% at September 30, 1999, 18.3% at December 31, 1998,
17.8% at December 31, 1997, and 14.4% at December 31, 1996. 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 generally made to finance
the purchase of inventory, new or used equipment or commercial vehicles and for
short-term working capital. Such loans generally are secured by equipment and
inventory, but unsecured loans may be granted. Business loans generally are made
for terms of 5 years or less, depending on the purpose of the loan and the
collateral, with loans to finance operating expenses made for one year or less.
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.
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
$7.5 million or 3.7% of total net loans outstanding at September 30, 1999, $9.9
million or 5.3% of total net loans outstanding at December 31, 1998, $8.7
million or 5.5% of total net loans outstanding at December 31, 1997, and $3.2
million or 2.2% of total net loans outstanding at December 31, 1996. 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 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.
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<PAGE> 63
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 $3.6 million at September 30, 1999, $5.7 million
at December 31, 1998, $7.1 million at December 31, 1997, and $2.0 million at
December 31, 1996. Credit card loans as a percentage of total net loans
outstanding were 1.8% at September 30, 1999, 3.1% at December 31, 1998, 4.5% at
December 31, 1997, and 1.4% at December 31, 1996. The rate currently charged by
Humboldt Bank on its credit card loans ranges from 13.9% to 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 September 30, 1999,
Humboldt Bank had a commitment to fund an aggregate of $9.5 million of credit
card loans, which represented the aggregate credit limit on credit cards, and
had $3.6 million of credit card loans outstanding representing 1.8% of its gross
loan portfolio. Humboldt Bancorp estimates that at current levels of credit card
receivables, it makes a modest monthly profit net of service expenses and
write-offs.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile
loans and miscellaneous other consumer loans, including unsecured loans.
Consumer loans as a percentage of total net loans outstanding were 1.0% at
September 30, 1999, 1.1% at December 31, 1998, 1.6% at December 31, 1997, and
1.7% at December 31, 1996. 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 Bank 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.
Humboldt Bank's servicing portfolio in which it has sold ownership but retains
the servicing was $158.0 million and $144.5 million at September 30, 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, (vi)
supervising foreclosures in the event of unremedied defaults, and (vii)
generally administering the loans for investors to whom they have been sold.
Humboldt Bank'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 Bank was .250% for the nine months
ended September 30, 1999, and .250% for the year ended December 31, 1998.
Servicing fees are collected and retained by Humboldt Bank out of monthly
mortgage payments. Humboldt Bank's servicing portfolio can be reduced by normal
amortization and prepayment or liquidation of outstanding loans. Approximately
90% of the loans serviced by Humboldt Bank have outstanding balances of greater
than $100,000, and approximately 10% are adjustable rate mortgages.
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<PAGE> 64
Humboldt Bank accounts for revenue from the sale of loans where
servicing is retained in conformity with the requirements of Statements of
Financial Accounting Standards No. 65 and the Financial Accounting Standards
Board Emerging Issues Task Force Issue No. 88-11. Gains and losses are
recognized at the time of sale by comparing sales price with carrying value. A
premium results when the interest rate on the loan, adjusted for a normal
service fee, exceeds the pass-through yield to the buyer.
In general, the value of Humboldt Bank's loan servicing portfolio may
be adversely affected as mortgage interest rates decline and loan prepayments
increase. This would also decrease income generated from Humboldt Bank's loan
servicing portfolio. This negative effect on Humboldt Bank's income attributable
to existing servicing may be offset somewhat by a rise in origination and
servicing income attributable to new loan originations, which historically have
increased in periods of low mortgage interest rates.
The following table sets forth the dollar amount of Humboldt Bank's
mortgage loan servicing portfolio. Although Humboldt Bank intends to continue to
increase its servicing portfolio, increases will depend on market conditions and
the availability of capital.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Mortgage Loan Servicing Portfolio:
Loans originated by Humboldt Bank and sold: $142.1 Million $158.0 Million
Loans originated by Humboldt Bank but awaiting funding: $ 7.7 Million $ .7 Million
</TABLE>
Humboldt Bank also services a portfolio of SBA loans which is
anticipated to increase during 1999. As of September 30, 1999, SBA Loans
originated and serviced by Humboldt Bank were $2.9 million, and as of December
31, 1998, were $2.4 million.
For the most part, the Small Business Administration loans are tied to
the prime rate and as a result there are no early payoffs as a result of
declining rates such as with real estate loans.
Maturities of Loans and Leases. The following table shows the maturity
distribution of Humboldt Bancorp's loan portfolio with principal balances of
loans indicated by both fixed and floating rate categories.
<TABLE>
<CAPTION>
(Dollars in As of As of
Thousands) December 31, 1998 September 30, 1999
------------------------------------------------------ -------------------------------------------------------
Due after one Due after one
Due in one year through Due after Due in one year through Due after
year or less five years five years Total loans year or less five years five years Total loans
------------ ------------ ---------- ----------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $14,114 $34,153 $31,795 $ 80,062 $11,261 $32,472 $34,420 $ 78,153
Variable rate 81,327 26,388 2,040 109,755 86,844 37,180 5,015 129,039
------- ------- ------- -------- ------- ------- ------- --------
Total loans $95,441 $60,541 $33,835 $189,817 $98,105 $69,652 $39,435 $207,192
======= ======= ======= ======== ======= ======= ======= ========
</TABLE>
Humboldt Bancorp's renewal policy is that all maturing loans are
reviewed on a case-by-case basis, new financial statements are requested from
the borrower and an in-depth credit analysis is performed after which the loan
may be extended, renewed, restructured or demand made for payment in full
depending upon the circumstances.
Loan Losses and Recoveries
Humboldt Bancorp maintains a reserve for loan and lease losses at a
level that management of Humboldt Bancorp considers adequate for losses that can
be reasonably anticipated. Humboldt Bancorp's reserve for loan and lease losses
was $3.2 million and $2.8 million at September 30, 1999 and 1998, respectively.
Humboldt Bancorp's
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<PAGE> 65
reserve for loan and lease losses was $3.1, $ 2.4, $2.1, $1.9, and $1.3 million
at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
The Issuing Bankcard (Credit Card) Department's reserve also
constitutes a portion of Humboldt Bancorp's reserves. The Issuing Bankcard
(Credit Card) Department was established in 1996. The Issuing Bankcard (Credit
Card) Department's reserve at September 30, 1999 was $200,000 or 6.3% of total
reserves, and at September 30, 1998 was $300,000 or 10.7%, of total reserves.
The Issuing Bankcard (Credit Card) Department's reserve at December 31, 1996 was
$100,000 or 4.8%, at December 31, 1997 was $300,000 or 12.5%, and at December
31, 1998 was $300,000 or 9.7%, of total reserves. The increase in Issuing
Bankcard (Credit Card) Department's reserves from 1996 to 1998 both as to amount
and as a percentage of total reserves is attributable to the Issuing
Bankcard(Credit Card) Department's increase in the number of credit card
accounts. Since early 1997, Humboldt Bank has focused on its customer base for
issuing Humboldt Bank credit cards. Accordingly, reserves for the Issuing
Bankcard (Credit Card) Department at September 30, 1999 have decreased from
reserves at September 30, 1998 and December 31, 1998.
The Merchant Bankcard's Department's reserves are separately accounted
for as a liability of Humboldt Bank on its financial statement since there are
no loans associated with such reserves. See "- Provision for Loan and Lease
Losses," and "Business of Humboldt Bancorp - Merchant Bankcard."
The adequacy of the reserve for loan losses is measured in the context
of several key ratios and factors discussed below. The reserve is increased by a
charge to operating expenses and is reduced by net charge-offs which are loans
actually removed from the consolidated balance sheet after netting out
recoveries on previously charged-off assets. Humboldt Bancorp's policy is to
charge-off loans when, in management's opinion, the loan or a portion thereof is
deemed uncollectible, although concerted efforts are made to maximize recovery.
Humboldt Bancorp's historical net loan losses or recoveries stem from Humboldt
Bancorp's underwriting and collection practices, and the quality of the loan
portfolio.
During the first nine months of 1999, loan charge-offs net of
recoveries were $513,000, compared to $1,133,000 during the nine months ended
September 30, 1998, a 54.7% decrease in loan charge-offs net of recoveries. This
decrease is directly related to the planned reduction in credit card receivables
through the sale of certain credit card portfolios and the cessation of new
credit card issuing programs. Charge-offs recorded for the nine months ended
September 30, 1999 were consistent with Humboldt Bancorp's historical experience
in view of the growth in its loan portfolio. Management expects its current loan
underwriting, oversight and collection policies to promote high quality loans
and limit loan losses. These policies include aggressive action to limit credit
losses by lowering lending authorities, when and if appropriate. As part of
these policies, Humboldt Bancorp has hired additional staff to support credit
administration functions. Therefore, management believes its charge-off and
recovery experience for the year 2000 will be comparable to that of prior years.
For the years ending December 31, 1998, 1997, 1996, 1995 and 1994, loan
charge-offs net of recoveries were $1.4 million, $548,000, $255,000, $255,000
and $310,000, respectively. These amounts represented 0.8%, 0.4%, 0.2%, 0.3%,
and 0.3%, respectively, of average loans outstanding. The increase from 1997 to
1998 is attributable to credit cards, lease and real estate. The increase from
1996 to 1997 is attributable to credit cards.
64
<PAGE> 66
The following table summarizes the changes in the reserve for loan and
lease losses for the periods shown:
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in Thousands) Year Ended December 31, September 30,
-------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for loan and lease losses balance,
beginning of period $ 858 $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 2,371 $ 3,055
-------- --------- --------- --------- --------- --------- ---------
Loans and leases charged off:
Real estate -- -- (46) -- (141) (130) (67)
Commercial -- (11) (122) (193) (191) (161) (216)
Consumer (20) (23) (29) (11) (25) (8) (29)
Lease financing (363) (254) (132) (124) (316) (211) (108)
Credit card and related accounts -- -- -- (475) (956) (768) (402)
Other -- (30) (45) (7) (5) -- --
-------- --------- --------- --------- --------- --------- ---------
Total loans and leases charged off (383) (318) (374) (810) (1,634) (1,278) (822)
Recoveries:
Real estate -- -- -- -- -- -- 98
Commercial 7 9 78 129 54 54 7
Consumer 4 4 5 9 8 6 5
Lease financing 62 49 34 34 24 12 9
Credit card and related accounts -- -- -- 87 105 73 190
Other -- 1 2 3 3 -- --
-------- --------- --------- --------- --------- --------- ---------
Total recoveries 73 63 119 262 194 145 309
-------- --------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries (310) (255) (255) (548) (1,440) (1,133) (513)
Provision charged to operations 783 792 533 773 2,124 1,541 697
-------- --------- --------- --------- --------- --------- ---------
Reserve for loan and lease losses balance,
end of period $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 2,779 $ 3,239
======== ========= ========= ========= ========= ========= =========
Loans and leases outstanding at end of
period, net of unearned interest income $ 93,793 $ 116,985 $ 144,970 $ 159,883 $ 189,093 $ 183,625 $ 206,337
======== ========= ========= ========= ========= ========= =========
Average loans and leases outstanding for
the period $ 89,977 $ 102,931 $ 134,617 $ 151,695 $ 175,173 $ 171,067 $ 197,779
======== ========= ========= ========= ========= ========= =========
Ratio of net loans and leases charged off
(recovered) to average loans and leases
outstanding 0.34% 0.25% 0.19% 0.36% 0.82% 0.89% 0.35%
Ratio of reserve for loan and lease losses
to loans and leases at end of period 1.42% 1.60% 1.48% 1.48% 1.62% 1.51% 1.57%
</TABLE>
The adequacy of the reserve for loan losses is measured in the context
of several key ratios and factors including: (1) the ratio of the reserve to
total outstanding loans; (2) the ratio of total nonperforming loans to total
loans; and, (3) the ratio of net charge-offs (recoveries) to average loans
outstanding. Additional factors considered in establishing an appropriate
reserve include a careful assessment of the financial condition of the borrower;
a realistic determination of the value and adequacy of underlying collateral;
the condition of the local economy and the condition of the specific industry of
the borrower; comprehensive analysis of the levels and trends of loan
categories; and a review of delinquent and classified loans. Management's
evaluation is based on a system whereby each loan is "graded" at the time of
origination, extension or renewal. Each grade is assessed a risk factor, which
is calculated to assess the adequacy of the allowance for loan losses. Further,
management considers other factors including changes in the nature and volume of
the loan portfolio, overall portfolio quality, loan concentrations, trends in
the level of delinquent and classified loans, specific problem loans and
commitments, and current and anticipated economic conditions.
65
<PAGE> 67
Since 1994, Humboldt Bancorp's ratio of the reserve for loan losses to
total loans has ranged from 1.4% to 1.6%. The amounts provided by these ratios
have been sufficient to fund Humboldt Bancorp's charge-offs, which have not been
historically significant, and to provide for potential losses as the loan
portfolio has grown. From 1994 through September 30, 1999, nonperforming loans
to total loans have ranged from a low of 0.3% to a high of 1.1%. For the five
years ended December 31, 1998, net charge-offs ranged from .2% to .8% of average
loans.
On a monthly basis, management considers the factors that follow in
establishing Humboldt Bancorp's Allowance for Loan and Lease Losses (ALLL). The
results are reported to the board of directors on a quarterly basis.
- 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.
- Management keeps abreast of the local economic and business
conditions through the board of directors and various
organizations.
- Management considers any major changes regarding the lending
officers and staff.
- Humboldt Bancorp obtains quarterly outside credit reviews for loan
write-ups and grade changes.
- 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.
- Management prepares concentration reports in which loans are
segregated to better manage the portfolios.
- 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.
- On a regular basis, management compares Humboldt Bancorp loan
portfolios to its peer group in various categories.
Non-Performing Assets
Humboldt Bancorp's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
Loans that are delinquent 90 days or more, unless well secured and in the
process of collection, are placed on nonaccrual status on a cash basis and
previously accrued but uncollected interest is reversed against income.
Thereafter, income is recognized only as it is collected in cash. Collectibility
is determined by considering the borrower's financial condition, cash flow,
quality of management, the existence of collateral or guarantees and the state
of the local economy.
66
<PAGE> 68
The following table provides information with respect to all
non-performing assets.
<TABLE>
<CAPTION>
As of As of
(Dollars in Thousands) December 31, September 30,
------------------------------------------------------ -------------
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Loans on nonaccrual status $ 74 $ 619 $ 218 $ 838 $ 311 $ 955
Loans - leases past due -
greater than 90 days 363 261 159 843 241 161
Restructured loans 73 75 -- 23 -- --
------ ------ ------ ------ ------ ------
Total nonperforming loans 510 955 377 1,704 552 1,116
Other real estate owned -- -- 233 148 175 --
------ ------ ------ ------ ------ ------
Total nonperforming assets $ 510 $ 955 $ 610 $1,852 $ 727 $1,116
====== ====== ====== ====== ====== ======
Allowance for loan losses $1,331 $1,868 $2,146 $2,371 $3,055 $3,239
Ratio of total nonperforming
assets to total assets 0.33% 0.49% 0.28% 0.65% 0.23% 0.27%
Ratio of total nonperforming
loans to total loans 0.54% 0.81% 0.26% 1.06% 0.29% 0.54%
Ratio of allowance for loan
losses to total non-
performing assets 260.98% 195.60% 351.80% 128.02% 420.22% 290.23%
</TABLE>
The increase in non-performing assets at September 30, 1999, compared
to December 31, 1998, is primarily due to an increase in loans on non-accrual
status and restructured loans offset by a decrease in loans and leases past due
90 days or more.
The decrease in non-performing assets at December 31, 1998, compared to
December 31, 1997, is primarily due to decreases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by a
small increase in other real estate owned.
The increase in non-performing assets at December 31, 1997, compared to
December 31, 1996, is primarily due to increases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by an
increase in other real estate owned.
The table below shows the gross interest income that would have been
recorded at September 30, 1999, and December 31, 1998, if these loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if new for part of the period; and
the amount of interest that was included in net income for the period. There
were no restructured loans 90 days past due at December 31, 1998, or at
September 30, 1999.
<TABLE>
<CAPTION>
(In Dollars) Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
------------------- --------------------
Gross Interest Gross Interest
Income Earned Income Earned
------- -------- ------- --------
<S> <C> <C> <C> <C>
Non-accrual loans $56,269 $19,789 $42,458 $8,026
Other real estate owned $15,300 $ -- $ 8,641 $ --
</TABLE>
67
<PAGE> 69
Potential Problem Loans
At September 30, 1999 and December 31, 1998, there were no loans or
other interest bearing assets classified for regulatory purposes as loss,
doubtful, substandard or special mention that (i) represent or resulted from
trends or uncertainties which management anticipates could have a material
impact on future operating results, liquidity or capital resources, or (ii)
represented material credits or assets about which management had information
that would cause serious doubt as to the ability of the borrower to comply with
the repayment terms.
Deposits
The following table sets forth the average balances of Humboldt
Bancorp's interest-bearing deposits, interest expense, and average rates paid
for the periods indicated:
<TABLE>
<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>
Non-interest-bearing
deposits $ 70,767 $ 59,050 $ -- --% $ 96,884 $ 83,965 $ -- 0.00%
Interest-bearing accounts:
Interest-bearing 52,003 46,177 1,157 2.51 49,615 51,609 1,061 2.06
checking
Savings 21,952 19,976 359 1.80 21,635 20,985 378 1.80
Time deposits 110,464 100,072 5,457 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) Nine Months Ended
September 30, 1999
----------------------------------------------
Average Interest Average
Actual Balance Expense Rate
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Non-interest-bearing
deposits $118,267 $103,433 $ -- --%
Interest-bearing accounts:
Interest-bearing
checking 58,822 53,563 663 1.65
Savings 33,256 21,983 292 1.78
Time deposits 165,470 123,112 4,445 4.83
-------- -------- ------ ----
Total interest-bearing
accounts 257,548 198,658 5,400 3.63
-------- -------- ------ ----
Total Deposits $375,815 $302,091 $5,400 2.39%
======== ======== ====== ====
</TABLE>
68
<PAGE> 70
Total deposits increased from the year ended December 31, 1998, to the
nine months ended September 30, 1999, by $91.8 million, or 32.3%. The primary
reason for this increase is 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 four deposit
categories: non-interest-bearing deposits increased by 22.1%, interest-bearing
demand deposits increased by 18.5%, savings accounts increased by 54.2%, and
time deposits increased by 42.9%.
At December 31, 1998, total deposits were $284.0 million, an increase
of $28.8 million or 11.3% from total deposits of $255.2 million at December 31,
1997. Total deposits were $255.2 million, an increase of $62.6 million or 32.5%
from total deposits of $192.6 million at December 31, 1996. Deposit growth in
1998 was due primarily to internal growth and not as a result of acquisitions.
The growth in 1997 was the result of both internal growth and the acquisition of
the Garberville office.
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
September 30, 1999, non-interest bearing demand deposits accounted for 31.5% of
total deposits, down slightly from 34.1% as of December 31, 1998. In general,
the growth in 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 September 30, 1999, total
interest-bearing deposit accounts were $257.5 million, an increase of $70.4
million, or 37.6%, from December 31, 1998. Interest-bearing demand accounts
increased $2.7 million, or 1.5%, from December 31, 1997 to 1998, and $42.3
million, or 29.7%, from 1996 to 1997.
At September 30, 1999, time certificates of deposits in excess of
$100,000 totaled $57.7.3 million, or 15.4% of total outstanding deposits,
compared to $ 46.4 million, or 16.3%, of total outstanding deposits at December
31, 1998, $40.6 million, or 15.9%, of total outstanding deposits at December 31,
1997, and $26.4 million, or 13.7%, of total outstanding deposits at December 31,
1996. Humboldt Bancorp has never had brokered deposits and does not intend to
seek these deposits. All public-entity time certificates of deposit are from
local government agencies located in Humboldt and Trinity Counties.
The majority of certificates of deposit in denominations of $100,000 or
more in the past have tended to mature in less than one year, however,
management can give no assurance that this trend will continue in the future.
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at September 30, 1999.
<TABLE>
<CAPTION>
As of
September 30,
(Dollars in Thousands) 1999
-------------
<S> <C>
Three months or less $ 57,469
Over three through twelve months 81,392
Over one year to three years 24,803
Over three years 1,806
--------
Total $165,470
========
</TABLE>
69
<PAGE> 71
Short-Term Borrowings
The following table sets forth certain information with respect to
Humboldt Bancorp's short-term borrowings as of December 31, 1996, 1997, and
1998, and September 30, 1999.
<TABLE>
<CAPTION>
As of As of
(Dollars in Thousands) December 31, September 30,
----------------------------- -------------
1996 1997 1998 1999
----- ------ ------ ------
<S> <C> <C> <C> <C>
Amount outstanding at end of period $ 775 $1,761 $3,402 $4,638
Weighted average interest rate at end of period 6.19% 6.18% 6.13% 6.80%
Maximum amount outstanding at any month-end and
during the year $ 786 $1,774 $3,457 $4,688
Average amount outstanding during the period $ 784 $ 845 $3,003 $4,487
Average weighted interest rate during the period 6.19% 6.19% 6.15% 7.00%
</TABLE>
Shareholders' Equity
Shareholders' equity increased $5.0 million during the first nine
months of 1999. Shareholders' equity at September 30, 1999, was $32.8 million
compared to $27.8 million at December 31, 1998. This is an increase of $4.2
million or 17.8% compared with $23.6 million at December 31, 1997, which was an
increase of $4.0 million or 20.4% compared with the $19.6 million at December
31, 1996.
The increase in the nine months ended September 30, 1999 reflects net
income and comprehensive income of $2.8 million, $300,000 in exercised stock
options, and $1.9 million in stock purchases.
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 opportunity to reprice assets in the same dollar amounts and at
the same time as liabilities would minimize interest rate risk in any interest
rate environment. The difference between the amount of assets and liabilities
repriced at the same time is referred to as the "gap." This gap represents the
risk, or opportunity, in repricing. In general, if more assets than liabilities
are repriced at a given time in a rising rate environment, net interest income
would improve, and in a declining rate environment, net interest income would
deteriorate. If more liabilities than assets were repriced under the same
conditions, the opposite results would prevail. Humboldt Bancorp is asset
sensitive and its near term performance could be enhanced by rising rates and
negatively affected by falling rates due mainly to the significant amount of
earning assets tied to prime.
70
<PAGE> 72
Interest Rate Risk. The table below shows the potential change in NIM
(before taxes) if rates change as of September 30, 1999. NIM is the "net
interest margin" which is the spread or difference between interest-earning
assets and interest-paying liabilities. Humboldt Bancorp's NIM tends to increase
if rates rise, and tends to decline if rates fall. The cause of this exposure is
due to Humboldt Bancorp's concentration of short-term and rate sensitive loans
as of September 30, 1999.
Economic Risk. Humboldt Bancorp also measures the potential change in
the net present value of Humboldt Bancorp's net existing assets and liabilities
if rates change (the "economic value of equity" or "EVE"). The table below also
shows the EVE. The EVE is determined by valuing Humboldt Bancorp assets and
liabilities as of September 30, 1999, using a present value cash flow
calculation as if Humboldt Bancorp is liquidated. The EVE declines when rates
increase because there are more fixed rate assets than liabilities. However,
Humboldt Bancorp's NIM earnings would also increase as rates increased (from the
interest rate risk) and this benefit would offset the decline in EVE.
<TABLE>
<CAPTION>
% Change in NIM
Change in NIM to Shareholder
Change in (In thousands Equity
Interest Rates pre-tax) (pre-tax) % of EVE
-------------- ------------- ---------------- --------
<S> <C> <C> <C> <C>
+2% $ 660 2.3 % (9)%
+1% $ 346 1.2 % (5)%
-1% $(375) (1.3)% 5%
-2% $(783) (2.7)% 9%
</TABLE>
The following table sets forth the repricing opportunities for the
assets and liabilities of Humboldt Bancorp at September 30, 1999. Assets and
liabilities are classified by the earliest possible repricing date or maturity,
whichever comes first.
<TABLE>
<CAPTION>
Repricing In
-----------------------------------------------------------------
Three One Five Years
Less Than Through Through Three Through Over Non-
Three Twelve Three Through Fifteen Fifteen Interest
(Dollars in Thousands) Months Months Years Five Years Years Years Bearing Total
--------- -------- -------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Net Loans $ 81,522 $ 15,642 $ 27,358 $42,292 $25,211 $ 14,312 $ -- $206,337
Investment Securities 1,630 14,287 51,513 13,083 20,065 4,645 -- 105,223
Federal Funds Sold 56,145 -- -- -- -- -- -- 56,145
FHLB Stock -- -- -- -- -- -- 987 987
Interest-bearing deposits with banks 20 -- -- -- -- -- -- 20
Non-interest earning assets -- -- -- -- -- -- 50,455 50,455
--------- -------- -------- ------- ------- -------- -------- --------
Total Assets $ 139,317 $ 29,929 $ 78,871 $55,375 $45,276 $ 18,957 $ 51,442 $419,167
========= ======== ======== ======= ======= ======== ======== ========
Liabilities:
Non-interest-bearing deposits $ -- $ -- $ -- $ -- $ -- $ -- $118,267 $118,267
Interest-bearing deposits 149,547 81,392 24,803 1,806 -- -- -- 257,548
Borrowings 22 69 1,502 3,045 -- -- -- 4,638
Other liabilities -- -- -- -- -- -- 5,898 5,898
Stockholders' equity -- -- -- -- -- -- 32,816 32,816
--------- -------- -------- ------- ------- -------- -------- --------
Total liabilities and stockholders'
equity $ 149,569 $ 81,461 $ 26,305 $ 4,851 $ -- $ -- $156,981 $419,167
Interest rate sensitivity gap $ (10,252) $(51,532) $ 52,566 $50,524 $45,276 $ 18,957
Cumulative interest rate sensitivity gap $ (10,252) $(61,784) $ (9,218) $41,306 $86,582 $105,539
</TABLE>
71
<PAGE> 73
The net cumulative Gap position is slightly negative in three years or
less since more liabilities than assets appear to reprice during that time
frame. However, this exposure to increasing rates is mitigated by deposit rates
which are not expected to reprice rapidly in an increasing rate environment and
a higher than normal level of short-term cash (not included in rate sensitive
assets). Historically, Humboldt Bancorp's asset rates change more quickly than
deposit rates, and management feels Humboldt Bancorp's asset yields will change
more than cost of funds when rates change.
Although the cumulative Gap position appears slightly negative as of
September 30, 1999, management believes that Humboldt Bancorp is somewhat asset
sensitive and has relatively low interest rate risk. The net interest margin
should increase slightly when rates increase, and shrink somewhat when rates
fall. This interest rate risk is driven by concentration of rate sensitive
variable rate and short-term commercial loans, one of Humboldt Bancorp's major
business lines. Humboldt Bancorp does have a significant amount of fixed rate
loans to offset the impact from repricing of short-term loans. However, there
can be no assurance that fluctuations in interest rates will not have a material
adverse impact on Humboldt Bancorp.
Liquidity
Humboldt Bancorp's liquidity is primarily a reflection of Humboldt
Bancorp's ability to acquire funds to meet loan demand and deposit withdrawals
and to service other liabilities as they come due. Humboldt Bancorp has adopted
policies to maintain a relatively liquid position to enable it to respond to
changes in the financial environment and ensure sufficient funds are available
to meet those needs. Generally, Humboldt Bancorp's major sources of liquidity
are customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale. To augment liquidity, Humboldt Bancorp has a Federal Funds
borrowing arrangement with two correspondent banks totaling $10.5 million.
Additionally, Humboldt Bancorp is a member of the Federal Home Loan
Bank and through membership has the ability to pledge qualifying collateral for
short term (up to six months) and long-term (up to five years) borrowings.
Management may use this facility to fund loan advances by pledging single-family
residential mortgages and/or commercial real estate loans as qualifying
collateral.
The following table sets forth certain information with respect to
Humboldt Bancorp's liquidity as of December 31, 1996, 1997 and 1998, and
September 30, 1999.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
(Dollars in Thousands) December 31, September 30,
---------------------------------- -------------
1996 1997 1998 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash and due from banks $10,247 $ 21,442 $28,626 $ 25,401
Federal funds sold 6,570 3,520 2,250 56,145
Interest earning deposits 20 3,020 3,020 20
Unpledged securities 39,933 80,180 57,994 78,403
------- -------- ------- --------
Total liquid assets $56,770 $108,162 $91,890 $159,969
======= ======== ======= ========
Liquid ratios(1)
Liquid assets to:
Ending assets 26.4% 38.1% 28.7% 38.2%
Ending deposits(2) 29.5% 42.4% 32.4% 42.6%
</TABLE>
72
<PAGE> 74
(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 increase in liquidity at September 30, 1999, compared to December
31, 1998, is mainly 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
increase in liquidity at December 31, 1997, compared to December 31, 1996, is
attributable to a substantial increase in deposits.
The analysis of liquidity also includes a review of the changes that
appear in the consolidated statements of cash flows for the first nine months of
1999. The statement of cash flows includes operating, investing, and financing
categories. Operating activities include net income of $3.2 million, which is
adjusted for noncash items and increases or decreases in cash due to changes in
certain assets and liabilities. Investing activities consist primarily of both
proceeds from and purchases of securities, and the impact of the net growth in
loans. Financing activities present the cash flows associated with deposit
accounts.
Part of Humboldt Bancorp's normal lending activity involves making
commitments to extend credit. One risk associated with the loan commitments is
the demand on Humboldt Bancorp's liquidity that would result if a significant
portion of the commitments were unexpectedly funded at one time. Humboldt
Bancorp assesses the likelihood of projected funding requirements by reviewing
historical patterns, current and forecasted economic conditions and individual
client funding needs. At September 30, 1999, Humboldt Bancorp had $65.4 million
in undisbursed commitments compared to $59.7 million at December 31, 1998, $47.2
million at December 31, 1997, and $38.5 million at December 31, 1996. Further,
management maintains unpledged U.S. Government securities that are available to
secure additional borrowings in the form of reverse repurchase agreements. At
September 30, 1999, no U.S. Government Treasuries or Agencies at market value
were available for reverse repurchase agreements. However, Humboldt Bancorp had
U.S. Government Agency CMO's at market value of approximately $57.8 million
which were unpledged. Management believes that this provides Humboldt Bancorp
with the necessary liquid assets to satisfy funding requirements in the unlikely
event of substantially higher than projected customer funding requirements.
Humboldt Bank Plaza
On June 30, 1998, Humboldt Bank purchased from an unaffiliated party
approximately 29 acres of property located at 2500 Fifth Street, Eureka, CA
95501. The property was purchased as a site for the future Humboldt Bank Plaza
at a cost of approximately $2.9 million. At December 31, 1999, the property
contained a building and a trailer park. The trailer park holds a lease which
expires December 31, 2000, and which obligates it to pay monthly rent of
$166.66, plus 12.5% of its gross rental income and 0.5% of its additional
revenues.
Humboldt Bank is working with an architect and a construction company
on plans to renovate the building and the parking lot so that all of Humboldt
Bancorp's and Humboldt Bank's administrative offices and departments will be
located at the facility. Further, 20,090 square feet of the Plaza will be leased
to the District Attorney's Family Support Division, a Humboldt County agency.
During the initial year of the lease to the agency, monthly lease income will be
$27,121.
Humboldt Bancorp is internally financing the cost of the acquisition
and the renovation. Although the final budget has not been completed or
approved, the estimated cost to renovate the building to house the
administrative offices and departments is between $3.3 million and $3.9 million.
Humboldt Bancorp believes it will save
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approximately $135,000 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.
Financial Condition
<TABLE>
<CAPTION>
Nine Months Increase
(Dollars in Thousands) Increase (Decrease) Ended (Decrease)
Year Ended December 31, --------------------- September 30, ----------
---------------------------------- 1997 over 1998 over ------------- 12/31/98-
1996 1997 1998 1996 1997 1999 9/30/99
-------- -------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets $214,738 $284,087 $319,975 $69,349 $35,888 $419,167 $99,192
Liabilities $195,138 $260,533 $292,127 $65,395 $31,594 $386,351 $94,224
Shareholders' Equity $ 19,600 $ 23,554 $ 27,848 $ 3,954 $ 4,294 $ 32,816 $ 4,968
</TABLE>
Capital Resources
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and member banks. The requirements address both risk-based capital and
leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a corporation has previously received special
attention or has a high susceptibility to interest rate risk.
The following reflects Humboldt Bancorp's various capital ratios at
September 30, 1999, and December 31, 1998, as compared to regulatory minimums:
<TABLE>
<CAPTION>
Minimum Minimum Well
September 30, Capital Capitalized
December 31, 1998 1999 Requirement Requirement
----------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Tier I capital 11.75% 11.11% 4.0% 6.0%
Total risk-based capital 13.00% 12.33% 8.0% 10.0%
Leverage ratio 8.12% 8.17% 4.0% 5.0%
</TABLE>
No regulatory agency has advised Humboldt Bancorp that it is deficient
with respect to the Tier 1 leverage-ratio. Management is unaware of any current
recommendations by regulatory authorities, which if implemented, would have a
material adverse impact on future operating results, liquidity or capital
resources.
Effects of Inflation
Assets and liabilities of financial institutions are principally
monetary in nature. Accordingly, interest rates, which generally move with the
rate of inflation, have a potentially significant effect on Humboldt Bancorp's
net interest income. Humboldt Bancorp attempts to limit inflation's impact of
rates and net income margins through a continuing asset/liability management
program.
Year 2000 Issue
The Year 2000 problem arises when computer programs have been written
having two digits rather than four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date having 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
other disruption of operations and impede normal business activities.
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The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to Humboldt Bancorp's financial
position. The estimated total cost of the Year 2000 project is approximately
$500,000. A minimal amount, other than time of the committee members, has been
expended on the Year 2000 project as of September 1999. Humboldt Bancorp is also
expensing and reserving $10,000 a month for possible loan losses caused by Year
2000 problems. This reserve was approximately $220,000 at December 31, 1999.
We have completed all phases of our Year 2000 compliance project and as
of the date of this prospectus, we have not encountered any material Year 2000
problems.
Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for 2000 and is not expected to have a material impact
on the financial statements of Humboldt Bancorp.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for selected activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on its ability and
intent to sell or hold these investments. This new standard is effective for
1999 and is not expected to have a material impact on the financial statements
of Humboldt Bancorp.
BUSINESS OF HUMBOLDT BANCORP
Introduction
Humboldt Bancorp is a multi-bank holding company with two bank
subsidiaries, Humboldt Bank and Capitol Valley Bank. In addition, Humboldt
Bancorp owns a 50% interest in Bancorp Financial Services, a leasing
corporation. Reference to Humboldt Bancorp in this section constitutes reference
to Humboldt Bank, and Capitol Valley Bank. Reference to Humboldt Bank is a
reference to just Humboldt Bank and reference to Capitol Valley Bank is a
reference to just Capitol Valley Bank.
Humboldt Bancorp was incorporated under the laws of the state of
California on January 23, 1995. Humboldt Bancorp initially was organized for the
purpose of becoming the holding company for Humboldt Bank. On January 2, 1996,
the plan of reorganization was effected and shares of Humboldt Bancorp common
stock were issued to the shareholders of Humboldt Bank in exchange for their
Humboldt Bank common stock. Humboldt Bank was incorporated as a California
state-licensed bank on March 13, 1989, and began its operations in the
Eureka/Humboldt area of California on September 13, 1989. Capitol Valley Bank
was incorporated as a California state-licensed bank on December 17, 1998, and
began its operations in Roseville, California on March 3, 1999.
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. 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 nationally.
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As of September 30, 1999, Humboldt Bancorp had total assets of $419.2
million, total deposits of $375.8 million, and shareholders' equity of $32.8
million. Humboldt Bancorp's net income for the nine months ended September 30,
1999, and the year ended December 31, 1998, was $3.2 million and $4.0 million
which was Humboldt Bancorp's ninth consecutive year of increasingly higher net
income. For the year ended December 31, 1998, Humboldt Bancorp's return on
average assets was 1.2% and return on average equity was 16.0%. Since the year
ended December 31, 1994, Humboldt Bancorp has increased annual earnings by an
average of 34.3% per year and increased return on average assets from 0.9% in
1994 to 1.2% in 1998. During the same period, Humboldt Bancorp has achieved a
return on average equity greater than 14.5% 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, 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 a new branch in Eureka in the
second 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's 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 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, and
now is staffed by 86 employees and has total revenue of $10.2 million for the
nine-month period ended September 30, 1999.
Business Strategy
Continue to Seek Strategic Acquisitions. We intend to explore the
acquisition of other community banks and branches of larger banks in the
California market, to develop a banking presence in high-growth areas of
Northern California. We believe that the consolidation in the banking industry,
along with increased regulatory burdens, and concerns about technology and
marketing, could likely lead the owners of community banks to explore the
possibility of sale or combination with a broader-based holding company such as
Humboldt Bancorp. We intend to operate acquired banks as separate subsidiaries
to retain their boards of directors and the goodwill of the communities they
serve. In addition, we intend to form community banks in areas of Northern
California that may have lost their independent community banks through
consolidation, merger, or acquisition. We believe that such opportunities are
available and our ability to consummate such acquisitions will be enhanced by
completion of the public offering and the creation of a more active public
market for Humboldt Bancorp's common stock.
Increase Efficiency of Operations. Humboldt Bancorp intends to commence
an in-depth, company-wide study of methods to reduce costs and increase revenues
as soon as feasible after the merger with Global Bancorp. Given our recent
acquisitions, and the introduction of several new products and services, we
believe there is an opportunity to reduce redundant costs within Humboldt
Bancorp, as well as introduce existing products and services into our recently
acquired operations. We intend to consolidate the operations of our acquired
banks, combining such functions as financial administration, data processing,
insurance, employee benefits and human resources support, and contracts for
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services. We are also in the process of renovating approximately 70,000 sq. ft.
of office space for the consolidation of a majority of the organization's
administrative offices and functions. Additional plans for this facility include
the creation of a call center, which will provide bookkeeping and service
support to our customers and various subsidiaries.
Increase Earning Assets. With the CalFed branch acquisitions, which
primarily include deposits with only a nominal amount of loans, Humboldt Bancorp
will have a 56.2% loan-to-deposit ratio. Our goal is to increase earning assets
in order to raise the loan-to-deposit ratio to approximately 80% by July 1,
2001. If this were to happen, we would expect our profitability to increase as
higher yielding loans replace investment securities on our balance sheet. No
assurance, however, can be given that we will meet this goal. One of our
strategies to increase earning assets is the acquisition of Capitol Thrift.
Capitol Thrift's branch network extends from central to southern California, and
its primary focus is on loan products, rather than deposit products. We expect
this emphasis to complement Humboldt Bancorp's current deposit products and
marketing focus. We will also develop and expand the leasing activities and
associated business lines through Bancorp Financial Services.
Aggressively and Prudently Increase Market Share in Greater
Sacramento/Roseville. Humboldt Bancorp's subsidiary, Capitol Valley Bank, opened
in March 1999 in the Sacramento suburb of Roseville, California. Roseville was
selected for our expansion into central California because it is one of the
fastest growing regions in California. Employers such as Hewlett Packard and
Oracle have created numerous jobs in the Roseville area over the past 10 years.
Subsequently, in September 1999 Humboldt Bancorp, through Capitol Valley Bank,
acquired Silverado Merger Corporation, which under the name of Silverado Bank
(In organization) had been raising capital in anticipation of opening a
community bank in Roseville. The acquisition of Silverado not only removes a
potential competitor from the marketplace, but more importantly, we believe it
significantly increases our market presence and depth in the
Sacramento/Roseville market.
Capitalize on Humboldt Bank's Market Position. Humboldt Bank currently
holds the largest share of FDIC- insured deposits in Humboldt County at 25.2%.
It also holds 28.2% of FDIC-insured deposits in Trinity County. Our goal is to
increase our market share position by opening new branches and increasing our
current operations in the region. Current plans are underway to open an
additional branch in the Henderson Center business area of Eureka. The
additional branch should increase market share and provide an additional
convenient location to serve Humboldt Bank's current customer base. Humboldt
Bank's new President, John Dalby, intends to continue Humboldt Bank's strong
sales culture in order to aggressively pursue new loan business and cross-sell
additional bank services while strictly adhering to our prudent and proven loan
approval process.
Expand non-lending, and fee-based activities. We will continue to
develop non-interest sources such as Merchant Bankcard activities, which has
developed into an area of financial and strategic importance for us. We intend
to expand the proprietary merchants portfolio, which produces greater profits
and allows us more control over merchant accounts than portfolios initiated by
independent servicing and marketing organizations. We also intend to expand our
Internet delivery system, allowing us to aggressively identify and market our
services to smaller merchants. We intend to continue our ATM funding programs,
which constitute another important source of fee-based income to the
organization. We will develop our insurance and investment programs as yet
another source of non-interest income, and expand our electronic banking
services to complement delivery of both traditional banking services and newer
offerings, such as online cash management, bill payment and stock quotes and
trading.
Proposed Private Placement - Trust Preferred Securities
In order to raise capital to assist in the acquisition of Global Bancorp
and to increase its regulatory capital, Humboldt Bancorp intends to raise up to
$5 million through the private placement of trust preferred securities.
Humboldt Bancorp intends to sell the trust preferred securities through a
placement agent to institutional investors. No assurances can be given that
Humboldt Bancorp will be successful in placing the trust preferred securities.
In the event Humboldt Bancorp is not successful in placing the trust preferred
securities, it will seek some other type of Tier 1 capital securities to
finance the Global Bancorp acquisition.
Trust preferred securities are a hybrid form of security which is
considered debt, with interest paid deductible for income tax purposes, but is
also considered Tier 1 capital for bank regulatory purposes. Humboldt Bancorp
intends to form a trust which will issue the preferred securities to
institutional investors. Proceeds received from the sale of the preferred
securities will be used by the trust to purchase subordinated debentures from
Humboldt Bancorp. In general, the interest paid on the preferred securities
will be equal to the interest paid on the subordinated debentures, and Humboldt
Bancorp will guarantee the repayment of the preferred securities by the trust.
Trust preferred securities do not convert into common stock and,
therefore, will not be dilutive to the shareholders of Humboldt Bancorp.
However, interest on the trust preferred securities must be paid ahead of
dividends, if any, to holders of Humboldt Bancorp common stock and may restrict
the ability of Humboldt Bancorp to declare dividends on its common stock.
Further, the trust preferred securities will have a liquidation preference to
the Humboldt Bancorp common stock.
Banking Services
To retain existing customers and attract new customers, Humboldt Bank
offers a broad range of services, including automated teller machines, credit
card and merchant bankcard services, ACH services, and daily courier services.
In addition, Humboldt Bank maintains close relationships with its customers by
providing direct access to senior management during and after normal business
hours, rapid response to customer requests, and specialized market area
knowledge of the communities in northern California.
Lending Activities
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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
September 30, 1999, and December 31, 1998, totaled $203.1 million and $186.0
million which represented 54.0% and 65.5% of total deposits and 48.5% and 58.1%
of total assets. Humboldt Bancorp also generates fee income by servicing
mortgage loans. See "Loan Servicing" below.
Real Estate Loans and Real Estate Banking Operations
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential
and commercial properties and to finance land acquisition and development. At
September 30, 1999 and December 31, 1998, Humboldt Bancorp had outstanding real
estate-secured construction loans totaling $23.0 and $20.7 million, representing
11.3% and 11.1% of Humboldt Bancorp's net loan portfolio. The concentration in
the construction loan portfolio has been on owner-occupied single family
construction loans.
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months and are secured by deeds of trust
and usually do not exceed 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 improved 1-to-4 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 requires the borrower or its principals personally to guarantee
repayment of the loan. To also reduce the risks inherent in construction
lending, Humboldt Bancorp limits the number of properties which can be
constructed on a "speculative" or unsold basis by a builder at any one time to 2
to 4 houses.
Commercial construction loans are underwritten using the actual or
estimated cash flow the secured real property would provide to an investor in
the event of a default by the borrower. A debt coverage ratio of 1.25:1 and a
maximum loan to value of 70% is required in most cases.
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp also originates owner-occupied, single-family,
residential real estate loans in its market area. At September 30, 1999 and
December 31, 1998, Humboldt Bancorp had outstanding owner-occupied,
single-family, residential real estate loans totaled $42.5 and $35.2 million.
Humboldt Bancorp originates fixed-rate mortgage loans and adjustable-rate
residential mortgage loans. Fixed-rate mortgages are at competitive rates and
adjustable-rate loans currently offered by Humboldt Bancorp have interest rates
which adjust every one, three or five years from the closing date of the loan or
on an annual basis commencing after an initial fixed-rate period of one, three
or five years in accordance with a designated index, plus a stipulated margin.
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 September 30, 1999,
Humboldt Bancorp had approximately $14.1 million in home equity line of credit
loans, representing approximately 6.9% of its gross loan portfolio. Humboldt
Bancorp's home equity lines of credit have adjustable interest rates tied to the
prime interest rate plus a margin.
Generally, Humboldt Bancorp sells its owner-occupied, single-family,
residential fixed-rate loans to institutional investors in the secondary market,
but retains the servicing of such loans. There were $.7 million real estate
loans pending sale at September 30, 1999.
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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
September 30, 1999 and December 31, 1998, Humboldt Bancorp had outstanding real
estate secured commercial and agricultural loans totaling $91.8 million and
$80.2 million.
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
September 30, 1999, and December 31, 1998, Humboldt Bancorp had business loans
totaling $35.5 million and $34.0 million, representing 17.5% and 18.3% of
Humboldt Bancorp's net loan portfolio.
Typically, business loans are floating rate obligations and are made
for terms of 5 years or less, depending on the purpose of the loan and the
collateral. No single business customer accounted for more than 2.3% of total
gross loans at September 30, 1999.
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 September 30, 1999, and December 31, 1998, Humboldt Bancorp
had outstanding lease financing loans totaling $7.5 and $9.9 million,
representing 3.7% and 5.3% 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 September 30, 1999,
and December 31, 1998, credit card loans totaled $3.6 and $5.7 million, or 1.8%
and 3.1% 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 September 30,
1999, and December 31, 1998, consumer loans totaled $1.9 and $2.1 million, or
.9% and 1.1% of Humboldt Bancorp's net loan portfolio.
Other Loans
At September 30, 1999 and December 31, 1998, Humboldt Bancorp had
outstanding other loans totaling $1.3 million and $2.1 million. These loans
consist mainly of overdrafts of less than 30 days' duration and state and
political loans.
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Loan Servicing
Humboldt Bank sells the majority of its mortgage and all of its Small
Business Administration loans it originates to institutional investors. However,
it retains the servicing on these loans in order to generate ongoing revenues.
Humboldt Bank's servicing portfolio in which it has sold ownership but retains
the servicing was $158.0 and $144.5 million at September 30, 1999 and December
31, 1998, respectively.
Savings and Deposit Activities
Humboldt Bancorp offers customary banking services including personal
and business checking, savings accounts, time certificates of deposit, IRA, and
Keogh accounts. Most of Humboldt Bancorp's deposits are obtained from commercial
businesses, professionals, and individuals with high income or net worth. In
addition, Merchant Bankcard reserves are held primarily in non-interest bearing
accounts. See "-Merchant Bankcard."
The following table sets forth certain information with respect to
Humboldt Bancorp's savings and deposit activities as of December 31, 1998, and
September 30, 1999.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998 September 30, 1999
-------------------- --------------------
Number of Average Number of Average
Accounts Balance Accounts Balance
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Demand deposit accounts 11,973 $ 10,022 15,510 $ 9,432
Savings and money market 17,508 2,795 16,949 3,779
Time certificates in excess of $100,000 252 180,803 371 155,424
Time certificates less than $100,000 3,566 19,483 5,550 19,425
------ -------- ------ --------
Totals 33,299 $ 8,528 38,380 $ 9,792
====== ======== ====== ========
</TABLE>
Humboldt Bancorp has not obtained any deposits through deposit brokers
and has no present intention of using brokered deposits as a source of funding.
Merchant Bankcard
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 that are often overlooked by
larger banks. For the nine months ended September 30, 1999, no one merchant
accounted for more than 2% of Merchant Bankcard's total gross processing volume.
At September 30, 1999, the Merchant Bankcard department provided processing
services to approximately 64,000 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 bank card industry.
Humboldt Bank markets its Merchant Bankcard services through
independent service and marketing organizations ("ISO"s). 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 September 30, 1999, the three ISOs engaged by
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Humboldt Bank, as described above, represented 59,315 merchant accounts.
Further, those three ISOs represented $2,040.0 million of total Merchant
Bankcard gross processing volume for the nine months ended September 30, 1999.
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.
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 nine months ended September 30, 1999, Proprietary accounts
represented $143.8 million of total Merchant Bankcard gross volume and 4,835
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 nine months ended September 30, 1999 net revenues
for the Proprietary account segment have grown 150.0% relative to the same time
period in 1998, while net revenues for the ISO segment have grown 9.5% relative
to the same time period in 1998.
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. In order to attract these Internet-based
merchants, as well as other merchants who have access to the Internet, Humboldt
Bank has hired an individual with extensive Internet-related marketing
experience to lead its efforts in this arena. In addition, 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. 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 are
primarily non-interest bearing and totaled $55.5 million at September 30, 1999.
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.
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the nine months ended September 30, 1999, and the years ended
December 31, 1996, 1997 and 1998 is set forth below:
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<PAGE> 83
<TABLE>
<CAPTION>
Nine Months
(Dollars in Thousands Ended
except for number Year Ended December 31, September 30,
of accounts) ---------------------------------------- -------------
1996 1997 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of Accounts:
ISO 23,806 32,694 59,595 59,315
Proprietary 15 412 2,754 4,835
---------- ---------- ---------- ----------
Total 23,821 33,106 62,349 64,150
========== ========== ========== ==========
Gross Processing Volume:
ISO $1,148,999 $1,419,355 $2,100,500 $2,041,227
Proprietary 1 8,645 71,500 143,773
---------- ---------- ---------- ----------
Total $1,149,000 $1,428,000 $2,172,000 $2,185,000
========== ========== ========== ==========
Net Processing Revenue:
ISO $ -- $ 3,229 $ 3,026 $ 2,172
Proprietary -- 9 178 2,084
---------- ---------- ---------- ----------
Total $ -- $ 3,238 $ 3,204 $ 4,256
========== ========== ========== ==========
</TABLE>
A summary of the Merchant Bankcard Department's reserves for the nine
months ended September 30, 1999, and the years ended December 31, 1996, 1997 and
1998, is set forth below:
<TABLE>
<CAPTION>
Nine Months
Ended
(Dollars in Thousands) Year Ended December 31, September 30,
------------------------------------- -------------
1996 1997 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Merchant's Reserves:
ISO $21,267 $32,957 $45,088 $50,210
Proprietary -- 82 1,881 5,244
------- ------- ------- -------
Total $21,267 $33,039 $46,969 $55,454
======= ======= ======= =======
Internal Reserves:
ISO $ 582 $ 680 $ 920 $ 1,030
Proprietary -- 3 34 308
------- ------- ------- -------
Total $ 582 $ 683 $ 954 $ 1,338
======= ======= ======= =======
</TABLE>
A summary of the Merchant Bankcard Department's losses for the nine
months ended September 30, 1999, and for the years ended December 31, 1996,
1997 and 1998, 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:
<TABLE>
<CAPTION>
Months
Ended
For Years Ended December 31, September 30,
------------------------------------- -------------
1996 1997 1998 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
ISO Servicing Loss $29,250 $14,682 $ -- $ --
Proprietary Loss $ -- $ -- $17,829 $1,315
</TABLE>
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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. During November 1999, VISA
adopted several rule changes to reduce risks in high risk merchant bankcard
programs and these rule changes affect Humboldt Bank's Merchant Bankcard
business. These changes include a requirement, enacted in December 1999, which
requires a processor's reported fraud ratios be no greater than three times the
national average. At September 30, 1999 (the most recent period available from
VISA) Humboldt Bank's overall fraud ratio was above the VISA requirement.
However, only one of Humboldt Bank's ISO portfolios is above this requirement,
and Humboldt Bank expects the entire portfolio to be in compliance with this
requirement by March of 2000. Humboldt Bank's fraud ratio in its Proprietary
account portfolio was 1.48 times the national average for VISA transactions at
September 30, 1999.
Other VISA changes announced in November of 1999 included the
requirement that total processing volume in certain high-risk categories (as
defined by VISA) be less than 20% of total processing volume. At June 30, 1999
(the most recent information available from VISA) Humboldt Bank's total VISA
transactions within these certain high-risk categories were 15.7% of VISA total
processing volume. Although these merchants are categorized as high-risk,
Humboldt Bank has taken precautions such as requiring higher deposits, daily
monitoring and aggressive fraud control, and to date has not seen extraordinary
losses in these categories.
Other changes VISA announced in November 1999 include a requirement
that weekly VISA volumes be less than 20% of an institution's tangible equity
capital, and a requirement that aggregate charge-backs for the previous six
months be less than 5% of the institution's tangible equity capital. At June 30,
1999, (the most recent information available from VISA) Humboldt Bank's weekly
VISA volume was 162% of tangible equity capital, and aggregate charge-backs for
the previous six months were 54% of tangible equity capital.
Merchant Bankcard participants, such as Humboldt Bank, must comply with
these new VISA rules by filing a compliance plan with VISA by February 12, 2000.
At this time, Humboldt Bank does not believe that it will be able to submit a
plan that is in full compliance with the VISA requirements. Humboldt Bank
intends to seek a waiver of these requirements from VISA. However, should VISA
not grant Humboldt Bank a waiver, Humboldt Bank would need to significantly
restructure the Merchant Bankcard Department which would adversely affect
Merchant Bankcard revenues. Initially, Humboldt Bank would focus on the higher
margin processing of its Proprietary portfolio. In addition, Humboldt Bank could
form a consortium of financial institutions in order to meet VISA's capital
requirement and continue to process for the higher volume ISOs.
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 require. Humboldt
Bank earns a fee for each sponsored transaction and a fee for the cash advanced.
For the nine months ended September 30, 1999, and for the years ended
December 31, 1998 and December 31, 1997, ATM funding was $11.1 million, $13.9
million and $10.2 million, respectively. Losses related to the ATM funding
activities for the nine months ended September 30, 1999, and for the years ended
December 31, 1998 and December 31, 1997 were $0, $3,340 and $0, respectively.
Capitol Valley Bank
In March, 1999, Humboldt Bancorp contributed capital totaling $4.5
million to form Capitol Valley Bank. Capitol Valley Bank is located in
Roseville, California, and opened for business March 3, 1999. Humboldt Bancorp
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<PAGE> 85
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 and middle-size businesses.
In September 1999, Humboldt Bancorp entered into an agreement to
acquire all the outstanding shares of Silverado Merger Corporation which was
Silverado Bank, a bank in organization, which had yet to raise the necessary
capital to open as a commercial banking institution, for 45,002 shares of
Humboldt Bancorp common stock and warrants to purchase up to 90,000 shares of
Humboldt Bancorp common stock at $12.00 per share. In the event Capitol Valley
Bank fails to achieve certain business objectives such as developing new
business accounts, (i) Humboldt Bancorp has the right to repurchase the 45,002
shares of common stock for $1.00 each, and (ii) the warrants to purchase up to
90,000 shares of common stock for $12.00 per share cannot be exercised. As part
of the acquisition, Capitol Valley Bank hired Silverado Merger Corporation's
president, and entered into non-competition agreements with the shareholders of
Silverado Merger Corporation prohibiting them from participating in any
financial institution within 30 miles of Capitol Valley Bank until December 31,
2002. In addition, Capitol Valley Bank's board was expanded to include three to
five new directors consisting of some of the prior directors of Silverado Merger
Corporation. Finally, as part of the acquisition agreement, some shareholders
and supporters of Silverado Merger Corporation purchased $1.6 million of
Humboldt Bancorp's restricted common stock at $12.00 per share pursuant to a
private placement.
Silverado Merger Corporation has no operations, and all of its
obligations and liabilities were extinguished prior to consummation of the
merger. Therefore, Silverado Merger Corporation's financial statements are
immaterial. Humboldt Bancorp acquired Silverado Merger Corporation to expand
Capitol Valley Bank's presence in the Sacramento-Roseville, California area
through business associates and contacts of the former directors and organizers
of Silverado Merger Corporation.
As of September 30, 1999, Capitol Valley Bank had total assets of $12.4
million, total loans of $3.9 million, and total deposits of $9.1 million.
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama
Bank, Red Bluff, California, to organize and share equally in a subsidiary
leasing company, Bancorp Financial Services. Bancorp Financial Services was
organized as a California corporation on November 25, 1996, and Humboldt Bank
and Tehama Bank each contributed $2.0 million towards its capitalization as of
January 2, 1997. Subsequently during 1998, Humboldt Bank and Tehama Bank each
contributed their interests in Bancorp Financial Services to their respective
holding companies, Humboldt Bancorp and Tehama Bancorp. Bancorp Financial
Services makes consumer automobile loans and commercial equipment leases, of
less than $100,000, to small businesses.
In addition to making leases and loans, Bancorp Financial Services buys
and services 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 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.
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<PAGE> 86
Previously, Humboldt Bank purchased leases from Bancorp Financial
Services. It is not anticipated that Humboldt Bank will acquire leases from
Bancorp Financial Services in the future. In addition, Humboldt Bank has
extended credit to Bancorp Financial Services. See "Certain Relationships and
Related Transactions."
The Bancorp Financial Services board of directors consists of seven
members including Bancorp Financial Services' Chief Executive Officer, Kevin D.
Cochrane, and three members representing each of Humboldt Bancorp and Tehama
Bancorp. Humboldt Bancorp has elected Theodore S. Mason, Lawrence Francesconi,
and Gary L. Evans to the board of directors of Bancorp Financial Services.
Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method. For the nine months ended September 30, 1999,
and the years ended December 31, 1998 and 1997, Humboldt Bancorp recognized
revenue of $300,000, $259,000, and $22,000, respectively.
Acquisition of California Federal Branches
On August 27, 1999, Humboldt Bank completed the acquisition of two
branches located at 959 Myrtle Avenue, Eureka, CA 95501, and 607 South State
Street, Ukiah, CA 95482, from CalFed. Under the terms of the purchase agreement,
Humboldt Bank acquired all of the 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.
Human Resources
At September 30, 1999, Humboldt Bancorp employed a total of 320
full-time equivalent employees, consisting of 103 salaried persons and 217
hourly persons, respectively. None of Humboldt Bancorp's employees are
represented by a collective bargaining group. Management considers its relations
with its employees to be excellent.
Competition
Humboldt Bancorp's primary market area consists of Humboldt and Trinity
counties and nearby communities of adjacent counties. Humboldt Bancorp has
recently entered into the Placer county market with the opening of Capitol
Valley Bank in Roseville, California.
Humboldt 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, and it is anticipated that this trend will continue.
Humboldt Bancorp's strategy for meeting competition has been to
maintain a sound capital base and liquidity position, employ experienced
management, and concentrate on particular segments of the market, particularly
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<PAGE> 87
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 will increase Humboldt Bancorp's
loan portfolio and the continuation of Capitol Thrift's industrial loan charter
will provide favorable lending terms so as to assist Humboldt Bancorp to compete
with institutions for more loans. No assurance can be given that Humboldt
Bancorp will be able to compete successfully for more loans. Also, no assurance
can be given that, because of customer loyalty, available products and services
or other reasons, customers in Humboldt Bancorp's branches will not withdraw
their business and establish a banking relationship with other competitors.
Historically, insurance companies, brokerage firms, credit unions and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. The Financial Services
Modernization Act of 1999 eliminates most of the separations between banks,
brokerage firms and insurance companies by permitting securities firms and
insurers to buy banks and for banks to underwrite securities and insurance.
Generally speaking, the Act is likely to increase competition for community
banks such as Humboldt Bank, Capitol Valley Bank and Capitol Thrift, but may
also cause consolidations and mergers with larger competitors and resources. The
Act may also increase cross-border consolidations and mergers.
Properties
The following table sets forth information about Humboldt Bancorp's
subsidiaries offices as of December 31, 1999.
<TABLE>
<CAPTION>
Occupied
Location Type of Office Owned/Lease Size Since
- -------- -------------- ----------- ---- -----
<S> <C> <C> <C> <C>
Humboldt Bank
701 Fifth Street, Eureka Administrative/Main Branch Owned 19,800 1989
1063 G Street, Arcata Branch Owned 4,660 1993
1360 Main Street, Fortuna Branch Owned 5,770 1991
2095 Central Avenue, Branch Owned 2,500 1993
McKinleyville
612 G Street, Eureka Administrative Owned 15,000 1994
358 Main Street, Loleta Branch Owned 2,400 1995
39171 Highway 299, Branch Owned 5,715 1995
Willow Creek
409 Main Street, Weaverville Branch Owned 2,112 1995
605 K Street, Eureka Administrative Lease 10,000 1996
915 Redwood Drive, Garberville Branch Lease 3,100 1997
555 H Street, Eureka Administrative Lease 1,945 1997
710 Fifth Street, Eureka Administrative Lease 1,100 1997
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
Occupied
Location Type of Office Owned/Lease Size Since
- -------- -------------- ----------- ---- -----
<S> <C> <C> <C> <C>
539 G Street, Eureka Administrative Lease 1,000 1998
2830 G Street, Eureka Administrative Lease 1,000 1998
2851/2861 E Street, Eureka Branch Purchase 2,500 1999 Owned
(Henderson Center) (Under
Construction)
2440 Fifth Street, Eureka Land for Humboldt Bancorp Owned 70,000 1999
Plaza
607 South State Street, Ukiah Branch Owned 4,500 1999
959 Myrtle Avenue, Eureka Branch Lease 3,500 1999
1001 Searles Street, Eureka Administrative Lease 3,450 1999
Capitol Valley Bank
1601 Douglas Boulevard, Main Branch Lease 3,955 1998
Roseville
</TABLE>
Rental expense for all leases of premises was for the nine months ended
September 30, 1999, $257,000, and for the years ended December 31, 1998, 1997,
and 1996, $269,000, $128,000, and $94,000, respectively. Rental income from all
properties owned and leased was for the nine months ended September 30, 1999,
and for the years ended December 31, 1998, 1997, and 1996, $228,000, $177,000,
$65,000, and $69,000, 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, 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; the plaintiff has moved to consolidate this action with others which
have been filed against VISA across the country. Neither motion has been heard
by the court to date.
Humboldt Bank is not a defendant in the Freeman case. However, Humboldt
Bank provides merchant processing for the Merchant Provider used by Mr. Freeman,
and on April 21, 1999, Citibank sent a letter to Humboldt Bank seeking indemnity
for the Freeman action pursuant to VISA regulations. Humboldt Bank and Citibank
have had preliminary discussions regarding this matter, but Humboldt Bank at
this time has neither acknowledged nor disputed
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<PAGE> 89
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 January 20, 1998, Shinergy Diversified, Inc. filed suit (Shinergy
Diversified, Inc. et al. v. Electronic Card Systems, Inc., Humboldt Bank, Inc.
et al., Los Angeles Superior Court Case No. BC 184 522) against Humboldt Bank
and creditcards.com, formerly known as Electronic Card Systems, Inc. The
complaint alleges fraud, conversion and intentional infliction of mental
distress. Shinergy alleged that its credit card processing by Electronic Card
Systems, Inc. and Humboldt Bank was not carried out as represented. In addition,
Shinergy alleged that a document that would have allowed Electronic Card
Systems, Inc. and Humboldt Bank to do certain things in connection with the
credit card processing for Shinergy was forged. The complaint seeks lost profits
of approximately $200,000 plus other damages, damages for emotional distress and
punitive damages.
We are also involved in other litigation, the outcome of which, we
believe, will not have a material effect on our operations or financial
condition.
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER
It is anticipated that following the merger, Humboldt Bancorp will
continue to operate the businesses of Humboldt Bancorp, Humboldt Bank, and
Capitol Valley Bank and Capitol Thrift, in substantially the same form as such
businesses were conducted prior to the merger. Humboldt Bancorp anticipates
operating Capitol Thrift as a subsidiary of Humboldt Bancorp and to maintain
substantially all of Capitol Thrift's current locations. See "Description of the
Merger - Background and Reasons for the Merger - Humboldt Bancorp's Analysis"
and "Management of Humboldt Bancorp."
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP,
HUMBOLDT BANK AND CAPITOL VALLEY BANK
Humboldt Bancorp and our subsidiaries, Humboldt Bank and Capitol Valley
Bank, are extensively regulated under both federal and state laws and
regulations. Reference to "we" or "Humboldt Bancorp" in this section constitutes
reference to Humboldt Bank, and Capitol Valley Bank which began operations March
3, 1999. Reference to Humboldt Bank is a reference solely to Humboldt Bank and
reference to Capitol Valley Bank is a reference solely to Capitol Valley Bank.
Also, as a result of the merger, Humboldt Bancorp will also operate Capitol
Thrift as a California industrial thrift and loan institution. See "Business of
Global Bancorp -- Regulation and Supervision -- California Industrial Loan Law."
These laws and regulations are primarily intended to protect depositors, not
shareholders. The following information describes statutory or regulatory
provisions affecting us; however, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions at issue.
We are a registered bank holding company under the Bank Holding Company
Act, regulated, supervised and examined by the Federal Reserve Bank. We must
file with the Federal Reserve Bank an annual report and additional reports as
the Federal Reserve Board may require. We are also periodically examined by the
Federal Reserve Board. Humboldt Bank and Capitol Valley Bank, as California
state-licensed banks, are also regulated, supervised, and periodically examined
by the California Department of Financial Institutions and the Federal Deposit
Insurance Corporation. Humboldt Bank's and Capitol Valley Bank's deposits are
each insured by the Federal Deposit Insurance Corporation to the maximum amount
permitted by law, which is currently $100,000 per depositor in most cases. For
this protection, Humboldt Bank and Capitol Valley Bank pay a semi-annual
assessment and the rules and regulations of the Federal Deposit Insurance
Corporation pertaining to deposit insurance and other matters apply.
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<PAGE> 90
The regulations of the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the California Department of Financial Institutions
govern most aspects of Humboldt Bancorp's, Humboldt Bank's and Capitol Valley
Bank's businesses and operations, including, but not limited to, the scope of
its business, investments, reserves against deposits, the nature and amount of
any collateral for loans, the time of availability of deposited funds, the
issuance of securities, the payment of dividends, bank expansion and bank
activities, including real estate development and insurance activities, and the
making of periodic reports. Various consumer laws and regulations also apply to
Humboldt Bank and Capitol Valley Bank. The Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the California Department of Financial
Institutions have broad enforcement powers over depository institutions,
including the power to prohibit a bank from engaging in business practices which
are considered to be unsafe or unsound, to impose substantial fines and other
civil and criminal penalties, to terminate deposit insurance, and to appoint a
conservator or receiver under a variety of circumstances. The Federal Reserve
Board also has broad enforcement powers over bank holding companies, including
the power to impose substantial fines and other civil and criminal penalties.
Humboldt Bank and Capitol Valley Bank are subject to detailed, complex
and sometimes overlapping federal and state statutes and regulations in their
routine banking operations. These statutes and regulations include but are not
limited to state usury and consumer credit laws, the Federal Truth-in-Lending
Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B,
the Fair Credit Reporting Act, the Truth in Savings Act and the Community
Reinvestment Act.
Humboldt Bank and Capitol Valley Bank are subject to Federal Reserve
Board regulations that require depository institutions to maintain reserves
against their transaction accounts (principally NOW and regular checking
accounts). Humboldt Bank and Capitol Valley Bank are in compliance with this
requirement. Because required reserves are commonly maintained in the form of
vault cash or in a non-interest-bearing account (or pass-through account) at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce an
institution's earning assets.
Regulation of Bank Holding Companies
Our activities are subject to extensive regulation by the Federal
Reserve Board. The Bank Holding Company Act requires us to obtain the prior
approval of the Federal Reserve Board before (i) directly or indirectly
acquiring ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, we would own or control more than 5%
of the shares of the other bank or bank holding company (unless the acquiring
company already owns or controls a majority of such shares); (ii) acquiring all
or substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve Board will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
Federal Reserve Board also considers capital adequacy and other financial and
managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us
from acquiring or retaining direct or indirect ownership or control of more than
5% of the voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities that, by statute or by Federal Reserve Board regulation or
order, have been determined to be activities closely related to the business of
banking or of managing or controlling banks. In making this determination, the
Federal Reserve Board considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency in resources,
that will outweigh the risks of possible adverse effects such as decreased or
unfair competition, conflicts of interest or unsound banking practices.
Some of the activities determined by Federal Reserve Board regulation
to be incidental to the business of banking are: making or servicing loans or
certain types of leases; engaging in certain insurance and discount brokerage
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activities; performing certain data processing services; acting in certain
circumstances as a fiduciary or investment or financial advisor; and making
investments in certain corporations or projects designed primarily to promote
community welfare.
It is Federal Reserve Board policy that bank holding companies serve as
a source of strength for their subsidiary banking institutions. The Federal
Reserve Board considers the adequacy of a bank holding company's capital on
essentially the same risk-adjusted basis as capital adequacy is determined by
the FDIC at the bank subsidiary level. In general, bank holding companies are
required to maintain a minimum ratio of total capital to risk-weighted assets of
8% and Tier 1 capital (consisting principally of shareholders' equity) of at
least 4%. Bank holding companies are also subject to a leverage ratio
requirement. The minimum required leverage ratio for the highest rated companies
is 3%. The minimum required leverage ratio for all other bank holding companies
is 4% or higher. See "Capital Adequacy Guidelines."
Subsidiary banks of ours are subject to restrictions imposed by the
Federal Reserve Act on extensions of credit to us or our subsidiaries, on
investments in their securities and on the use of their securities as collateral
for loans to any borrower. These regulations and restrictions could limit our
ability to obtain funds from Humboldt Bank and Capitol Valley Bank for our cash
needs, including funds for payment of dividends, interest and operating
expenses. Further, under the Bank Holding Company Act and regulations of the
Federal Reserve Board, we and our subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, Humboldt Bank and
Capitol Valley Bank generally may not require a customer to obtain other
services from the banks or us as a condition to an extension of credit to the
customer, and may not require that customer to promise not to obtain other
services from a competitor.
Prior approval of the Commissioner of the Department of Financial
Institutions is necessary to acquire control of a California-chartered bank.
Federal Deposit Insurance
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in savings associations are insured through the Savings
Association Insurance Fund. SAIF members may merger with a bank as long as the
bank continues to pay the SAIF insurance assessments on the deposits acquired.
Humboldt Bank continues to pay SAIF insurance assessments on deposits acquired
from CalFed and HomeFed branch acquisitions. The Economic Growth and Regulatory
Paperwork Reduction Act as part of the Omnibus Appropriations Bill provided for
the recapitalization of SAIF requiring a one time assessment, payable on
November 30, 1996, of approximately 65 basis points per $100 of deposits of SAIF
insured deposits and for years 1997 through 1999, payment of interest on
Financing Corporation ("FICO") bonds that were issued to help pay for the clean
up of the savings and loan industry. Banks will pay approximately 1.3 cents per
$100 of deposits for this special assessment from 1997 through 1999, and after
the Year 2000, banks will pay approximately 2.4 cents per $100 of deposits until
the FICO bonds mature in 2017 through 2019.
As FDIC member institutions, deposits in Humboldt Bank and Capitol
Valley Bank are insured to a maximum of $100,000 per depositor. The banks are
required to pay 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). Capitol Valley
Bank's current assessment rate is the statutory minimum of $2,000 annually.
Humboldt Bank's current assessment rate is 0.017% annually ($73,813).
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The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
Interstate Banking and Branching
On September 28, 1995, Assembly Bill 1482 (known as the Caldera, Weggel
and Killea California Interstate Banking and Branching Act of 1995 and referred
to herein as "CIBBA") was enacted which allows for early interstate branching in
California. Under the federally enacted Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), discussed in more detail below,
individual states could "opt-out" of the federal law that would allow banks on
an interstate basis to engage in interstate branching by merging out-of-state
banks with host state banks after June 1, 1997. In addition under IBBEA,
individual states could also "opt-in" and allow out-of-state banks to merge with
host state banks prior to June 1, 1997. The host state is allowed under IBBEA to
impose nondiscriminatory conditions on the resulting depository institution
until June 1, 1997. California, in enacting CIBBA, authorizes out-of-state banks
to enter California by the acquisitions of or mergers with California banks that
have been in existence for at least five years.
Section 3824 of the California Financial Code ("Section 3824") as added
by CIBBA provides for the election of California to "opt-in" under IBBEA
allowing interstate bank merger transactions prior to July 1, 1997, of an
out-of-state bank with a California bank that has been in existence for at least
five years. The early "opt in" has the reciprocal effect of allowing California
banks to merge with out-of-state banks where the states of out-of-state banks
have also "opted in" under IBBEA. The five year age limitation is not required
when the California bank is in danger of failing or in other emergency
situations.
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against interstate
branching through the acquisition of a branch in California without the
acquisition of the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through the
establishment of de novo or new branches by out-of-state banks. Section 3824
provides that California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of IBBEA. CIBBA also amends
the California Financial Code to include agency provisions to allow California
banks to establish affiliated insured depository institution agencies
out-of-state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern
the use of shared ATM's, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of various disparities, provision of California Department of
Financial Institutions' authority to implement changes in California banking law
to parallel changes in national banking law including closer conformance of
California's version of Regulation O to the Federal Reserve Board's version of
Regulation O, and provision of other changes including allowance to repurchase
stock with the prior written consent of the California Department of Financial
Institutions.
The laws governing interstate banking and interstate bank mergers
provide that transactions which result in the bank holding company or bank
controlling or holding in excess of 10% of total deposits nationwide or 30% of
total deposits statewide, will not be permitted except under specified
conditions. However, any state may waive the 30% provision for that state. In
addition, a state may impose a cap of less than 30% of the total amount of
deposits held by a bank holding company or bank provided the cap is not
discriminatory to out-of-state bank holding companies or banks.
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Impact of Economic Conditions and Monetary Policies
The earnings and growth of Humboldt Bank and Capitol Valley Bank are
and will be affected by general economic conditions, both domestic and
international, and by the monetary and fiscal policies of the United States
Government and its agencies, particularly the Federal Reserve Board. One
function of the Federal Reserve Board is to regulate the money supply and the
national supply of bank credit in order to mitigate recessionary and
inflationary pressures. Among the instruments of monetary policy used to
implement these objects are open market transactions in United States Government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements held by depository institutions. The monetary policies
of the Federal Reserve Board have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, the effect of these policies on the future business and
earnings of Humboldt Bank and Capitol Valley Bank cannot be accurately
predicted.
Risk Management
Beginning in 1996, Federal Reserve Board examiners were instructed to
assign a formal supervisory rating to the adequacy of an institution's risk
management processes, including its internal controls. The five ratios are
strong, satisfactory, fair, marginal, and unsatisfactory. The specific rating of
risk management and internal controls will be given significant weight when
evaluating management a bank (CAMELS) and bank holding company (BOPEC) rating
systems.
Capital Adequacy Guidelines
The Federal Reserve Board and the FDIC employ similar risk-based
capital guidelines in their examination and regulation of bank holding companies
and financial institutions. If capital falls below the minimum levels
established by the guidelines, the bank holding company, bank or savings bank
may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities. Failure to satisfy applicable capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal regulatory authorities, including the termination of deposit
insurance by the FDIC and a prohibition on the acceptance of "brokered
deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury or
United States Government agencies, which have a 0% risk-weight. Off-balance
sheet items are also taken into account in the calculation of risk-based
capital, with each class of off-balance sheet item being converted to a balance
sheet equivalent according to established "conversion factors." From these
computations, the total of risk-weighted assets is derived. Risk-based capital
ratios therefore state capital as a percentage of total risk-weighted assets and
off-balance sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require all bank holding
companies and banks to maintain a minimum risk-based total capital ratio equal
to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily
marketable mortgage servicing rights are generally deducted from capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock (within limits and subject to certain conditions, particularly if the
preferred stock is cumulative preferred stock), and minority interests in equity
accounts of consolidated subsidiaries, less intangibles. Tier 2 capital
includes: (i) the allowance for loan losses up to 1.25% of risk-weighted assets;
(ii) any qualifying perpetual preferred stock exceeding the amount includable in
Tier 1 capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v)
mandatory convertible securities and (vi) subordinated debt and intermediate
term preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of
Tier 1 and Tier 2 capital, less reciprocal holdings of other banking
organizations and capital instruments. At December 31, 1998, and September 30,
1999, Humboldt Bancorp's general loan loss reserve was 1.4% and 1.2%,
respectively, of risk-weighted assets and thus all of the general loan loss
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reserve was eligible for inclusion in Tier 2 capital subject to the 1.25%
restriction. At September 30, 1999, and December 31, 1998, Humboldt Bank's and
Capitol Valley Bank's general loss reserve was 1.3% and 1.4%, and 0.8% and 0.0%,
respectively.
Humboldt Bancorp's Tier 1 risk-based capital ratio at September 30,
1999, and December 31, 1998, was 11.11% and 11.75%, respectively. At September
30, 1999, and December 31, 1998, Humboldt Bank's and Capitol Valley Bank's Tier
1 risk-based capital ratio was 9.11% and 10.41%, and 63.29% and 0.0%,
respectively.
The FDIC has added a market risk component to the capital requirements
of nonmember banks. The market risk component could require additional capital
for general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC's evaluation of an
institution's capital adequacy takes account of a variety of the factors as
well, including interest rate risks to which the institution is subject, the
level and quality of an institution's earnings, loan and investment portfolio
characteristics and risks, risks arising from the conduct of nontraditional
activities and a variety of other factors. Accordingly, the FDIC's final
supervisory judgment concerning an institution's capital adequacy could differ
significantly from the conclusions that might be drawn from the absolute level
of an institution's risk-based capital ratios. Therefore, institutions generally
are expected to maintain risk-based capital ratios that exceed the minimum
ratios discussed above. This is particularly true for institutions contemplating
significant expansion plans and institutions that are subject to high or
inordinate levels of risk. Moreover, although the FDIC does not impose explicit
capital requirements on holding companies of institutions regulated by the
Federal Reserve Bank, the FDIC can take account of the degree of leverage and
risks at the holding company level. If the FDIC determines that the holding
company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may
require the subsidiary institution(s) to maintain additional capital or the FDIC
may impose limitations on the subsidiary institution's ability to support its
weaker affiliates or holding company. Humboldt Bancorp's risk-based capital
ratio at September 30, 1999, and at December 31, 1998, was 12.33% and 13.00%,
respectively. Humboldt Bank's and Capitol Valley Bank's risk- based capital
ratio at September 30, 1999, and at December 31, 1998, was 10.35% and 11.66%,
and 64.12% and 0.0%, respectively.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles.
Humboldt Bancorp's leverage ratio at September 30, 1999 and December 31, 1998,
was 8.17% and 8.12%. At September 30, 1999 and December 31, 1998, Humboldt
Bank's and Capitol Valley Bank's leverage ratios were 6.69% and 7.23%, and 40.9%
and 0.0%, respectively. At September 30, 1999, and at December 31, 1998, we and
our bank subsidiaries were in compliance with all regulatory capital
requirements.
In order to resolve the problems of undercapitalized institutions and
to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. For example, an institution that is not
"well capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized institution must
guarantee, in part, certain aspects of the institution's capital plan. Financial
institution regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit Insurance Corporation Improvement Act of
1991 also authorizes the regulatory agencies to reclassify an institution from
one category into a lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. Undercapitalized
institutions are
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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 and prompt corrective
action guidelines applicable to Humboldt Bank and Capitol Valley Bank, as well
as their total risk-based capital ratios, Tier 1 capital ratios and leverage
ratios as of September 30, 1999.
<TABLE>
<CAPTION>
At September 30, 1999
Minimum
Minimum Necessary to
Humboldt Capitol Valley Necessary to Be Be Adequately
Bank Bank Well Capitalized Capitalized
-------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Total Risk-Based Capital Ratio 10.35% 64.12% 10.0% 8.0%
Tier 1 Risk-Based Capital Ratio 9.11% 63.29% 6.0% 4.0%
Leverage Ratio 6.69% 40.85% 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
1999, Humboldt Bancorp contributed approximately $1.7 million to Humboldt Bank
and is expected to contribute an additional $1 million in the first quarter of
2000.
Limits on Dividends and Other Payments
Our ability to obtain funds for the payment of dividends and for other
cash requirements is dependent on the amount of dividends that may be declared
by Humboldt Bank and Capitol Valley Bank. California bank law provides that
dividends may be paid from the lesser of retained earnings or net income of the
bank for its last three years. Further, a California-chartered bank may not
declare a dividend without the approval of the California Department of
Financial Institutions if the total of dividends and distributions declared in a
calendar year does not exceed the greater of the bank's retained earnings or net
income for its last fiscal year or its current fiscal year. State-chartered
banks' ability to pay dividends may be affected by capital adequacy guidelines
of their primary federal bank regulatory agency as well. See "Capital Adequacy
Guidelines." Moreover, regulatory authorities are authorized to prohibit banks
and bank holding companies from paying dividends if payment of dividends would
constitute an unsafe and unsound banking practice.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that we should not pay cash dividends on common stock unless
(i) our net income for the past year is sufficient to fully fund the proposed
dividends and (ii) our prospective rate of earnings retention is consistent with
our capital needs, asset quality and overall financial condition.
Transactions with Affiliates
Humboldt Bank and Capitol Valley Bank are required to comply with
Sections 23A and 23B of the Federal Reserve Act (pertaining to transactions with
affiliates). An affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. Generally, Sections 23A
and 23B of the Federal Reserve Act (i) limit the extent to which a bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital and surplus, limiting the
aggregate of covered transactions with all affiliates to 20% of capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or
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at least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes making loans, purchasing
assets, issuing a guarantee and other similar types of transactions.
Humboldt Bank's and Capitol Valley Bank's authority to extend credit to
executive officers, directors and greater than 10% shareholders, as well as
entities such persons control, is subject to Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these laws require insider loans to be made on terms substantially
similar to those offered to unaffiliated individuals, place limits on the amount
of loans a bank may make to such persons based, in part, on the bank's capital
position, and require certain approval procedures to be followed. Under Section
22(h), loans to an executive officer, director, or greater than 10% shareholder
(a "principal shareholder") of a bank, and certain affiliated entities of
either, together with all other outstanding loans to such persons and affiliated
entities, may not exceed the bank's loans-to-one-borrower limit, which in
general terms is 15% of tangible capital but can be higher in certain
circumstances. Section 22(h) also prohibits loans in excess of the greater of 5%
of capital or $25,000 to directors, executive officers and principal
shareholders, and their respective affiliates, unless the loans are approved in
advance by a majority of the board of directors, with any "interested" director
not participating in the voting. A violation of these restrictions could result
in the assessment of substantial civil monetary penalties, the imposition of a
cease-and-desist order or other regulatory sanctions. Recent regulations now
permit executive officers and directors to receive the same terms through
benefit or compensation plans that are available to other employees, as long as
the director or executive officer is not given preferential treatment compared
to the other participating employees.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that the institution
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public. CRA performance evaluations
are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to
Improve and Substantial Noncompliance.
At the most recent CRA examination of Humboldt Bank, concluded July 27,
1998, Humboldt Bank received a CRA performance rating of "satisfactory."
Although CRA examinations occur on a regular basis, CRA performance evaluations
are used principally in the evaluation of regulatory applications submitted by
an institution. CRA performance evaluations are considered in evaluating
applications for such things as mergers, acquisitions and applications to open
branches. Over the twenty years that the CRA has existed, and particularly in
the last few years, institutions have faced increasingly difficult regulatory
obstacles and public interest group objections in connection with their
regulatory applications, including institutions that have received the highest
possible CRA ratings.
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.
Federal Home Loan Bank
The Federal Home Loan Bank of San Francisco serves as credit source for
Humboldt Bank and for Capitol Valley Bank. As members of the Federal Home Loan
Bank, Humboldt Bank and Capitol Valley Bank are required to maintain an
investment in the capital stock of the FHLB in an amount calculated by reference
to the member institution's assets and the amount of loans, or "advances," from
the FHLB. Humboldt Bank is in compliance with this
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requirement, with an investment in FHLB of stock of $953,000 at September 30,
1999. Capitol Valley Bank, while currently a member, was not a member at
September 30, 1999.
Humboldt Bank obtains funds from the Federal Home Loan Bank of San
Francisco pursuant to an "Agreement for Advances and Security Agreement." At
origination or renewal of a loan or advance, the Federal Home Loan Bank of San
Francisco is required to obtain and maintain a security interest in one or more
of the following kinds of collateral: fully disbursed, whole mortgage loans on
improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real
estate-related collateral (up to 30% of the member's capital) acceptable to the
FHLB, if the collateral has a readily ascertainable value and the FHLB can
perfect its security interest. As of September 30, 1999, Humboldt Bank had $3.7
million in investment securities and $2.3 million in loans which are
collectively pledged as collateral for the FHLB advances.
State Banking Regulation
As California-chartered institutions, Humboldt Bank and Capitol Valley
Bank are subject to regular examination by the California Department of
Financial Institutions. State banking regulation affects the internal
organization of Humboldt Bank and Capitol Valley Bank as well as their savings,
mortgage lending, investment and other activities. State banking regulation may
contain limitations on an institution's activities that are in addition to
limitations imposed under federal banking law. State banking regulation also
contains many provisions that are consistent with federal banking law, such as
provisions of California banking law limiting loans by either of Humboldt Bank
or Capitol Valley Bank to any one borrower to 15.0% of unimpaired capital and
surplus, plus 10.0% of unimpaired capital and surplus if the additional amount
is fully secured by certain forms of "readily marketable collateral."
The California Department of Financial Institutions may initiate
supervisory measures or formal enforcement actions, and if the grounds provided
by law exist, the California Department of Financial Institutions may place a
California-chartered financial institution in conservatorship or receivership.
Whenever the Superintendent of the Division considers it necessary or
appropriate, the Superintendent may also examine the affairs of any holding
company or any affiliate of a California-chartered financial institution.
FIRREA and Cross-Guarantees
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
FDIC-insured depository institution in danger of default (the "Cross
Guarantee"). "Default" is defined generally as the appointment of a conservator
or receiver, and "in danger of default" is defined generally as the existence of
certain conditions indicating either that there is no reasonable prospect that
the institution will be able to meet the demands of its depositors or pay its
obligations in the absence of regulatory assistance, or that its capital has
been depleted and there is no reasonable prospect that it will be replenished in
the absence of regulatory assistance. The Cross Guarantee thus enables the FDIC
to assess a holding company's healthy BIF members for the losses of any of such
holding company's failed BIF members. Cross Guarantee liabilities are generally
superior in priority to obligations of the depository institution to its
shareholders due solely to their status as shareholders and obligations to other
affiliates. This law applies to Humboldt Bank and Capitol Valley Bank.
Recent Legislation
Potentially significant changes have been enacted recently by Congress
are discussed below.
The Financial Services Modernization Act of 1999 substantially
eliminates most of the separations between banks, brokerage firms, and insurers
enacted by the Glass-Steagall Act of 1933. The reform legislation permits
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securities firms and insurers to buy banks and banks to underwrite insurance and
securities. States retain regulatory authority over insurers. The Treasury
Department's Office of the Comptroller of the Currency has authority to regulate
bank subsidiaries that underwrite securities and the Federal Reserve has
authority over bank affiliates for activities such as insurance underwriting and
real-estate development.
In 1997, California adopted the Environmental Responsibility Acceptance
Act (the "Act") (Cal. Civil Code Sections 850-855) to facilitate the
notification of government agencies and potentially responsible parties (for
example, for cleanup) of the existence of contamination and the cleanup or other
remediation of contamination by the potentially responsible parties. The Act
requires, among other things, that owners of sites who have actual awareness of
a release of a hazardous material that exceeds a specified notification
threshold to take all reasonable steps to identify the potentially responsible
parties and to send a notice of potential liability to the parties and the
appropriate oversight agency.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conservation and Recovery
Act to provide lenders and fiduciaries with greater protections from
environmental liability. In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the liability of lenders under
CERCLA as a result of the enactment of the Asset Conservation, Lender Liability
and Deposit Insurance Protection Act of 1996. Although numerous exceptions
exist, California law provides that a lender acting in the capacity of a lender
will not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property.
Future Legislation and Regulations
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature, and by various bank
regulatory agencies. No prediction can be made as to the likelihood of any major
changes or the impact legislative changes might have on Humboldt Bancorp.
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MANAGEMENT OF HUMBOLDT BANCORP
The board of directors of Humboldt Bancorp consists of 13 directors.
All of the directors of Humboldt Bancorp then in office immediately prior to the
completion of the merger will continue to serve as directors of Humboldt
Bancorp.
Board of Directors
Each of the directors has been elected to serve for the ensuing year
and until his or her successor is elected and qualified at the annual
stockholder meeting of Humboldt Bancorp for the year 2000. As of December 31,
1999, the directors, their ages, and their principal occupations during the past
five years are:
<TABLE>
<S> <C> <C>
Ronald F. Angell 57 Attorney and Partner with the firm of
Roberts, Hill, Bragg, Angell & Perlman.
Board member since 1989.
Marguerite Dalianes 56 Former owner, Dalianes Worldwide Travel
Service, since 1975. Board member since
1992.
Gary L. Evans 57 Certified Public Accountant associated with
the firm of Aalfs, Evans & Company since
1976. Board member since 1989.
Lawrence Francesconi 68 Retired. From 1952 to 1992, owner of Redwood
Bootery, retail shoe store. Board member
since 1991. Chairman of the Board since
March 1999.
Clayton R. Janssen 74 Attorney and Partner with the
firm of Janssen, Malloy, Needham, Morrison &
Koshkin LLP. Board member since 1993.
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 53 President, O & M Industries, mechanical
contractors, since 1964. Board member since
1991.
Jerry L. Thomas 54 President and Director of Special Projects,
Eureka Fisheries, Inc. Board member since
1998.
Edythe E. Vaissade 61 Retired. From 1989 to 1997, Vice President,
Humboldt Bank. Board member since 1998.
Thomas W. Weborg 57 President/Chief Executive Officer of Cucina
Holdings, Inc. Board member since November
1999.
John R. Winzler 69 Consulting Engineer and Chairman of the
Board of Winzler & Kelly. Board member since
1989.
Michael L. Renner 46 President, L&M Renner, Inc. Board member
since 1996.
</TABLE>
98
<PAGE> 100
Executive Officers
As of December 31, 1999, the following are the names of the executive
officers and significant employees of Humboldt Bancorp and its subsidiaries, and
information concerning each of them:
<TABLE>
<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/Bancorp since its inception in 1989.
Humboldt Bancorp From 1984 to 1989, he was an area manager for the Bank
of America in the North Coast area, headquartered in
Eureka. He also served as manager for Bank of
America's Eureka Main office for approx. five years and
has been in banking for over 30 years. Mr. Mason is a
graduate of the University of San Francisco.
Paul A. Ziegler 41 Executive Vice Mr. Ziegler joined Bank/Bancorp as the Vice President &
President of Humboldt Chief Administrative Officer in January 1994. Prior to
Bancorp joining Humboldt Bank Mr. Ziegler worked at U.S. Bank
of California in Eureka, California from 1988 to 1993 as
their Senior Vice President and Area Manager. Mr.
Ziegler started his banking career locally with Bank of
Loleta, last serving in 1988 as their Senior Vice
President/Chief Financial Officer. Mr. Ziegler is a
graduate of the University of Southern California.
Alan J. Smyth 66 Senior Vice President, Mr. Smyth has been the Senior Vice President/Cashier for
Cashier and Chief the Bank/Bancorp since September 1989. From 1981 to
Financial Officer of 1985, Mr. Smyth was the Vice President and Cashier for
Humboldt Bancorp Great Valley Bank and from 1985 to 1989 was the Senior
Vice President and Cashier for Redding Bank of
Commerce. Mr. Smyth graduated from California
Lutheran University in 1974.
Ronald V. Barkley 63 Senior Vice President Mr. Barkley has been the Senior Vice President/Chief
and Loan Credit Officer of the Bank/Bancorp since June 1989.
Administrator of From 1984 to 1989 he served as Vice President/Manager
Humboldt Bancorp of the Real Estate/SBA Departments of North Valley
Bank in Redding, California. From 1982 to 1984 Mr.
Barkley served as the President/CEO of Redding Savings
and Loan Association in Redding, California. Mr.
Barkley spent 15 years in various management positions
with Crocker National Bank. Mr. Barkley graduated from
Pacific Coast School of Banking in 1980.
</TABLE>
99
<PAGE> 101
<TABLE>
<S> <C> <C> <C>
John E. Dalby 41 President and Chief Mr. Dalby joined Humboldt Bank in October 1991 as
Executive Officer of Vice President and Manager of the Bank's Fortuna
Humboldt Bank Branch and served in that capacity until March of 1993
when he accepted the position of Vice President and
Manager of the Eureka Main Office. Mr. Dalby was
promoted to his current position as the President and
C.E.O. of Humboldt Bank in July of 1999. Prior to his
employment with Humboldt Bank Mr. Dalby worked for
Bank of America from November 1983 to January 1987
and again from July 1990 to October 1991; he was also
employed by Centennial Bank in Springfield, Oregon
from January 1987 to February 1989. Mr. Dalby attended
the University of Oregon and Northwest Christian
College, both in Eugene, Oregon and holds a B.S. Degree
in Business Administration-Finance (1982).
Richard L. Whitsell 54 President and Chief Prior to his appointment as the President & C.E.O. of
Executive Officer of Capitol Valley Bank, Mr. Whitsell served as the Vice
Capitol Valley Bank, President and Branch Administrator for Humboldt Bank since
Roseville, California 1997. From 1994 through May 1997 he was Vice President &
Branch Manager for the Bank's Arcata Office. From January
1992 through May 1996 he was Senior Vice President and
Branch Administrator for U.S. Bank in Reno, Nevada. Prior to
that he was Senior Vice President and Branch Administrator
for Bank of America in Reno, Nevada for approximately two
years and has been in banking for over 27 years. Mr.
Whitsell holds a Bachelor of Science degree from Sacramento
State and a Masters (equivalent) from University of
Virginia.
Kenneth J. Musante 34 Vice President and Vice President and Manager of Humboldt Bank's
Manager of the Merchant Bankcard Department since 1993. Mr. Musante
Merchant Bankcard was previously employed by Wells Fargo as a Technical
Department of Support Officer and Manager at their Business Banking
Humboldt Bank Division in Walnut Creek, California from August 1992
until his employment with Humboldt Bank. Additionally,
Mr. Musante holds a Bachelor of Science degree from the
University of California, Davis.
</TABLE>
Compensation of Directors
Directors of Humboldt Bancorp who are also employees of Humboldt
Bancorp or its subsidiaries do not receive compensation for their service on
Humboldt Bancorp's Board of Directors. During 1998, for the period January
through May, non-employee directors of Humboldt Bancorp received a fee of $400
per board meeting attended and $200 per board meeting not attended; Loan
Committee members received $150 per meeting attended; and all other committee
members received $100 per meeting attended. Since June 1998, non-employee
directors of Humboldt Bancorp received a fee of $700 per board meeting attended,
$200 per board meeting not attended, $450 per special board meeting attended,
and $200 per meeting for all committee meetings attended.
After the merger, the directors of Humboldt Bancorp will receive fees
in amounts which are substantially similar to those presently paid to the
directors.
100
<PAGE> 102
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide
for indemnification of agents including directors, officers and employees, to
the maximum extent allowed by California law including the use of an indemnity
agreement. Humboldt Bancorp Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the state of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if that person acted in good faith and in a manner
that person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of that person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if the agent acted in good faith, in a manner that person believed
to be in the best interests of the corporation and its shareholders; provided
that there will be no indemnification for:
- amounts paid in settling or otherwise disposing of a pending
action without court approval;
- expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval;
- 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
- 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 $100,000 in 1998 (the "named executive officers"), the
following table sets forth all cash and non-cash compensation (including
bonuses, other annual compensation, deferred compensation, and options granted)
received from Humboldt Bancorp and Humboldt Bank for services performed in all
capacities during the last three years.
101
<PAGE> 103
Summary Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------------ --------------------------
Other
Annual
Compensation Deferred Options
Name and Principal Position Year Salary Bonus(1) ($)(2) Compensation(3) Granted
- --------------------------- ---- -------- -------- ------------ --------------- -------
<S> <C> <C> <C> <C> <C> <C>
Theodore S. Mason 1998 $125,000 $ 58,809 $ 2,434 $150,000 5,500
President and Chief Executive 1997 $125,000 $ 45,990 $ 1,782 $125,000 6,050
Officer 1996 $105,000 $ 70,906 $ 1,658 $100,000 6,655
Alan J. Smyth 1998 $ 85,000 $ 12,932 $ 3,704 $ 90,000 0
Senior Vice President and 1997 $ 85,000 $ 1,865 $ 2,107 $ 75,000 5,775
Chief Financial Officer 1996 $ 70,000 $ 68,017 $ 2,331 $ 50,000 3,327
Ronald V. Barkley 1998 $ 85,000 $ 35,550 $ 2,279 $ 45,000 0
Senior Vice President and 1997 $ 85,000 $ 34,991 $ 1,882 $ 60,000 5,775
Loan Administrator 1996 $ 70,000 $ 12,926 $ 2,250 $ 45,000 3,327
Paul A. Ziegler 1998 $ 77,000 $ 51,340 $ 738 $ - 0
Executive Vice President 1997 $ 77,000 $ 25,825 $ 554 $ - 14,025
1996 $ 70,000 $ 24,600 $ 631 $ - 3,327
</TABLE>
(1) Includes amounts paid to Messrs. Mason, Smyth, Barkley, and Ziegler as
provided by Humboldt Bank's Incentive Bonus Plan.
(2) Includes amounts imputed to Messrs. Mason, Smyth, Barkley, and Ziegler
as income for tax purposes as provided by Humboldt Bank's automobile
program and Humboldt Bank's life insurance program.
(3) Includes amounts of salary or bonus deferred by Messrs. Mason, Smyth,
and Barkley as provided by Humboldt Bank's Deferred Compensation Plan.
The amounts in this column are not included in the Salary and Bonus
columns.
Employment Contracts
Humboldt Bank entered into an employment agreement with Mr. Mason on
May 1, 1989, whereby Mr. Mason agreed to serve as Humboldt Bank's President and
Chief Executive Officer. The term of this agreement was extended on December 10,
1996, to January 1, 2001. The agreement has been revised to refer to Humboldt
Bancorp effective July 15, 1999 and has been extended to January 1, 2002. Under
the terms of the agreement, Mr. Mason is entitled to receive a base salary of
$125,000 per year and an incentive bonus based on a percentage ranging from 4%
to 2.5% of Humboldt 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, Chief Financial Officer and Cashier. Mr. Smyth's employment
agreement was for an initial three years to be automatically renewed for
successive one-year terms. Mr. Smyth's current annual salary is $85,000 per
annum. In addition, Mr. Smyth is entitled to a percentage of Humboldt Bank's
pre-tax profits ranging from 2% to .5%.
102
<PAGE> 104
Humboldt Bank entered into an employment agreement with Mr. Barkley on
June 1, 1989, whereby Mr. Barkley agreed to serve as Humboldt Bank's Senior Vice
President and Senior Loan Officer. Mr. Barkley's employment agreement was for an
initial two years to be automatically renewed for successive one-year terms. Mr.
Barkley's current annual salary is $85,000 per annum. In addition, Mr. Barkley
is entitled to a percentage of Humboldt Bancorp's pre-tax profits ranging from
2% to .5%.
Benefit Plans
Retirement Plan: Currently, Humboldt Bank has a defined contribution
retirement plan covering substantially all of Humboldt Bank's employees.
Management is in the process of adopting the plan as a Humboldt Bancorp Plan for
which Humboldt Bank and Capitol Valley Bank will sign on as sponsors. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $189,000
during 1998, $134,000 during 1997 and $98,000 during 1996.
Director Fee Plan: Humboldt Bancorp has adopted the Humboldt Bank
Director Fee Plan (the "Fee Plan"). The Fee Plan permits each director of
Humboldt 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 creditors of Humboldt Bank and Humboldt
Bancorp with general claims may assert a right to the account. The Fee Plan
provides for the issuance of up to 40,000 shares of Humboldt Bancorp common
stock. The amount of director fees deferred in 1998 was $58,000, in 1997 was
$43,000, and in 1996 was $20,000. At December 31, 1998, the liability for
amounts due under this plan totaled $110,000 or approximately 4,800 shares of
stock.
Employee Stock Bonus Plan: Currently, Humboldt Bank has an Employee
Stock Bonus Plan, which is funded annually at the sole discretion of the Board
of Directors. Management is in the process of adopting the plan as a Humboldt
Bancorp Plan for which Humboldt Bank would be a sponsor. Capitol Valley Bank
would not initially become a sponsor. Funds are invested in Humboldt Bancorp
common stock, when available, which is purchased at the current market price on
behalf of all employees except the executive officers of Humboldt Bancorp. The
compensation cost recognized for 1998, 1997, and 1996 was $20,000 each year.
Post-Employment Benefit Plans and Life Insurance Policies: Humboldt
Bancorp and Humboldt Bank have entered into Officer Salary Continuation
Agreements and Deferred Compensation Agreements with key executive officers. The
Officer 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 and Humboldt Bank'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 the
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 - $50,000 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 - $75,481 for 15 years; Kenneth
J. Musante - $78,542 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 - $387,739, Alan J. Smyth - $252,237,
Ronald V. Barkley - $252,237, Paul A. Ziegler - $17,638 in a lump sum
103
<PAGE> 105
or as otherwise agreed to, and Kenneth J. Musante - $112,653 in a lump sum or as
otherwise agreed to. Salary continuation benefits may also be paid if
termination is without cause or due to a change in control of Humboldt Bancorp.
Otherwise, no benefits are paid upon termination.
The Officer Salary Continuation Agreements define a change in control
as:
as that event that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A under the 1934 Act or in
response to any other form or report to the regulatory agencies or
governmental authorities having jurisdiction over Humboldt Bank or any
stock exchange on which Humboldt Bank or Humboldt Bancorp shares are
listed which requires the reporting of a change in control;
any merger, consolidation or reorganization of Humboldt Bank or
Humboldt Bancorp in which Humboldt Bank or Humboldt Bancorp does not
survive;
any sale, lease exchange, mortgage, pledge, transfer or other
disposition of any assets of Humboldt Bank or Humboldt Bancorp having
an aggregate fair market value of 50% of the total value of the assets
of Humboldt Bank or Humboldt Bancorp, reflected in the most recent
balance sheet of Humboldt Bank or Humboldt Bancorp;
any person as defined in the 1934 Act is or becomes the beneficial
owner, directly or indirectly, of Humboldt Bancorp securities
representing 25% or more of the combined voting power of Humboldt
Bancorp's then outstanding securities;
in any one-year period, individuals who at the beginning of such period
constitute the Board of Directors of Humboldt Bank or Humboldt Bancorp
cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by Humboldt Bancorp's
shareholders, of each new director is approved by a vote of at least
3/4 of the directors then still in office who were directors at the
beginning of the period; or
a majority of the members of the Board of Directors of Humboldt Bank or
Humboldt Bancorp in office prior to the happening of any event
determines in their sole discretion that as a result of such event
there has been a change in control.
In the event of a change of control the executive 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 - $387,739, Alan J.
Smyth - $252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $17,638, and
Kenneth J. Musante - $146,665.
Humboldt Bank 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 Bank or Humboldt Bancorp is the owner and beneficiary. At
December 31, 1998, 1997, and 1996, the cash surrender value of these policies
totaled approximately $4,943,000, $4,810,000 and $4,583,000, respectively.
At December 31, 1998, 1997, and 1996, liabilities recorded for the
estimated present value of future salary continuation and deferred compensation
benefits totaled approximately $2,038,000, $1,451,000, and $932,000,
respectively. In the event of death or under other selected circumstances,
Humboldt Bank or Humboldt Bancorp is contingently liable to make future payments
greater than the amounts recorded as liabilities. Based on present
circumstances, Humboldt Bank does not consider it probable that this contingent
liability will be incurred or that in the event of death, a liability would be
material after consideration of life insurance benefits.
104
<PAGE> 106
Stock Option Plan: Humboldt Bancorp has a stock option plan under which
incentive and non-statutory stock options, as defined under the Internal Revenue
Code, may be granted. Options representing 414,777 shares of Humboldt Bancorp's
issued and outstanding no par value common stock may be granted under the
Humboldt Bancorp stock option plan by the Board of Directors or a committee of
the board, to directors, officers, and key, full-time employees at an exercise
price not less than the fair market value of the shares on the date of grant. As
of December 31, 1998, 183,862 options were outstanding under the Humboldt
Bancorp Stock Option Plan. Options cannot have an exercise period of longer than
ten years. Incentive stock options have vesting schedules of three years, and
non-statutory stock options vest immediately. In addition, as of December 31,
1998, 710,697 options are outstanding as a result of Humboldt Bancorp's
assumption of Humboldt Bank options granted prior to the reorganization.
The Stock Option Plan contains an antidilution provision in the event
of a private or public offering of Humboldt Bancorp common stock. Under the
current antidilution provision, certain holders of outstanding options will be
granted additional options to purchase shares of Humboldt Bancorp common stock
based on the number of shares issued in the public offering. Additional options
will be granted to a current employee, officer or director who holds options so
as to maintain an optionee's proportionate interest in Humboldt Bancorp by
reason of his or her unexercised portions of options as before the issuance.
However, the total number may not exceed that available for grant under the
Humboldt Bancorp Stock Option Plan and the former Humboldt Bank Stock Option
Plan.
The exercise for such additional options shall be the fair market value
of the Humboldt Bancorp common stock on the date of the additional grant, except
that in the event of an incentive stock option, the exercise price shall be 110%
if the optionee is an employee owning more than 10% of the total combined voting
power of all classes of stock of Humboldt Bancorp.
The following tables set forth the number of options granted to
Humboldt Bancorp's executive officers during 1998 and the number and value of
unexercised options held by these executive officers as of the end of 1998.
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1998
<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 1998 per Share Date Option Term 5% / 10%
---- ------- --------------- -------------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 5,500 100.0% $10.73 May 9, 2008 $96,129 / $153,069
</TABLE>
AGGREGATED OPTION EXERCISES IN 1998
<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 16,910 $99,938 139,441 / 5,684 $512,208 / $53,849
Alan J. Smyth 3,023 $16,234 68,218 / 2,841 $248,558 / $27,410
Ronald V. Barkley 3,000 $16,140 79,611 / 2,841 $273,053 / $27,410
Paul A. Ziegler ___ ___ 31,711 / 8,341 $209,538 / $87,910
</TABLE>
105
<PAGE> 107
Compensation Committee Interlocks and Insider Participation
The Personnel Committee is composed of Ronald F. Angell (Chairman),
Mike Renner, Marguerite Dalianes, Larry Francesconi, John R. Winzler and
Theodore Mason. Mr. Mason is president of Humboldt Bancorp and was president of
Humboldt Bank. Ms. Dalianes is a former owner of Dalianes Worldwide Travel
Service, which during 1998 provided travel services in the amount of $73,461 to
Humboldt Bancorp and its subsidiaries.
SECURITIES OWNERSHIP
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of December 31, 1999, 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 shareholder who owns more than 5% of the outstanding shares;
o each of Humboldt Bancorp's directors;
o Humboldt Bancorp's named executive officers; and
o all of Humboldt Bancorp's directors and executive officers as a
group.
The shares "beneficially owned" are determined under Securities and Exchange
Commission rules, and do not necessarily indicate ownership for any other
purpose. In general, beneficial ownership includes shares over which the
indicated person has sole or shared voting or investment power and shares which
he/she has the right to acquire within 60 days of December 31, 1999. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Management is not aware of any arrangements
which may, at a subsequent date, result in a change of control of Humboldt
Bancorp.
<TABLE>
<CAPTION>
Prior to the Offering After the Merger and Public Offering
----------------------------------------- -------------------------------------------------------------
Shares Shares Minimum Maximum
Beneficially Beneficially Offering Offering
Name Owned(1)(2) Options (3)(4) Percentage Owned(1)(2) Options (3)(4) Percentage(5) Percentage (6)
- ---- ------------ -------------- ---------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Francis and Dorothy Dutra 273,725 1,453 5.26% 273,725 1,453 4.94% 4.66%
1964 South Maru Road
Arcata, California 95521
Ronald F. Angell 106,412 37,011 2.04% 108,847 39,446 1.97% 1.89%
Marguerite Dalianes 58,424 36,857 1.12% 60,849 39,282 1.10% 1.07%
Gary L. Evans 112,580 67,407 2.16% 117,015 71,842 2.11% 2.06%
Lawrence Francesconi 84,751 31,382 1.63% 86,816 33,447 1.57% 1.51%
Clayton R. Janssen 68,028 14,390 1.31% 68,975 15,337 1.25% 1.19%
James O. Johnson 23,082 7,114 * 23,550 7,582 * *
John McBeth 124,596 7,114 2.39% 125,064 7,582 2.26% 2.14%
Michael Renner 54,965 10,579 1.06% 55,661 11,275 1.01% *
</TABLE>
106
<PAGE> 108
<TABLE>
<CAPTION>
Prior to the Offering After the Merger and Public Offering
----------------------------------------- -------------------------------------------------------------
Shares Shares Minimum Maximum
Beneficially Beneficially Offering Offering
Name Owned(1)(2) Options (3)(4) Percentage Owned(1)(2) Options (3)(4) Percentage(5) Percentage (6)
- ---- ------------ -------------- ---------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Winzler 134,028 52,164 2.58% 137,460 55,596 2.48% 2.39%
Jerry L. Thomas 14,476 4,250 * 14,756 4,530 * *
Edythe E. Vaissade 97,134 73,383 1.87% 101,962 78,211 1.84% 1.81%
Theodore S. Mason 192,440 157,646 3.70% 202,813 168,019 3.66% 3.61%
Alan J. Smyth 98,835 78,054 1.90% 103,971 83,190 1.88% 1.85%
Ronald V. Barkley 78,717 78,217 1.51% 83,863 83,363 1.51% 1.51%
Paul A. Ziegler 33,083 33,083 * 35,260 35,260 * *
Thomas W. Weborg 10,266 1,100 * 10,338 1,172 * *
All Directors and 1,565,542 691,204 30.08% 1,610,925 736,587 29.09% 28.12%
Executive
Officers (16 Persons)
</TABLE>
- ----------
* Less than 1%.
(1) We have determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of
that person, shares of common stock subject to options or warrants held
by that person that are currently exercisable within 60 days of
December 31, 1999, are deemed outstanding. Such shares, however, are
not deemed outstanding for the purpose of computing the percentage
ownership of each other person. Except as indicated in the footnote to
this table and pursuant to applicable community property laws, each
shareholder named in the table has sole voting power and investment
power with respect to the shares set forth opposite such shareholder's
name.
(2) Reflects an increase in the number of shares of common stock as a
result of the 10% stock dividend declared on January 11, 2000, payable
on February 7, 2000.
(3) Represents options that may be exercised within sixty days. The number
of shares of common stock subject to options are included in the Shares
Beneficially Owned column.
(4) Reflects an increase in the number of options as a result of the
antidilution provision in the Stock Option Plan and the 10% stock
dividend declared on January 11, 2000, payable on February 7, 2000.
(5) The percentage calculated is based on the minimum offering number of
shares and an increase in the number of options and a result of the
antidilution provision in the Stock Option Plan.
(6) The percentage calculated is based on the maximum offering number of
shares and reflects an increase in the number of options as a result of
the antidilution provision in the Stock Option Plan.
107
<PAGE> 109
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a $3.8 million line of credit with Bancorp
Financial Services, in which we own a 50% interest. The line of credit expires
May 2, 2000, and bears interest at the prime rate published in the Wall Street
Journal plus 0.25% (currently 8.50%) per annum. During the years ended December
31, 1998 and 1997, the maximum amount outstanding under the line of credit was
$3.0 million and $2.0 million. Further, during the year ended December 31, 1998
and 1997, Humboldt Bank purchased $2.0 million and $6.8 million in leases
generated by Bancorp Financial Services.
Some of the Humboldt Bancorp's directors and executive officers and
their immediate families, as well as the companies with which they may have
interest in, have had loans with Humboldt Bank in the ordinary course of the
Bank's business. In addition, Humboldt Bank expects to have loans with these
persons in the future. In management's opinion, all these loans and commitments
to lend were made in the ordinary course of business, were made in compliance
with applicable laws on substantially the same terms, including interest rates
and collateral, as those prevailing for comparable transactions with other
persons of similar creditworthiness and, in the opinion of management, did not
involve more than a normal risk of collectibility or present other unfavorable
features. The outstanding balance under extensions of credit by Humboldt Bank to
directors and executive officers of Humboldt Bancorp and Humboldt Bank and to
the companies that these directors and executive officers may have an interest
was $6,451,000, $6,218,000 and $3,624,000 as of December 31, 1998, 1997 and
1996, respectively.
We have, and in the future will, enter into transactions with our
directors or companies in which they may have an interest. During the year ended
December 31, 1998, 1997 and 1996 no transaction exceeded $60,000, except we
engaged the services of Dalianes Worldwide Travel Service, which was formerly
owned by Marguerite Dalianes, one of our directors. Fees paid by us to Dalianes
Worldwide Travel Service for the year ended December 31, 1998 amounted to
$73,461.
GLOBAL BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Global
Bancorp (on a consolidated basis) as of and for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, and as of and for the nine months ended
September 30, 1998 and 1999, and should be read in conjunction with Management's
Discussion and Analysis and with the financial statements presented elsewhere.
<TABLE>
<CAPTION>
As Of and For the
(Dollars in Thousands, As Of and For the Years Ended Nine Months Ended
except per share data) December 31, September 30,
------------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 8,776 $ 9,115 $10,793 $11,996 $12,953 $ 9,681 $ 8,723
Interest expense 3,119 4,592 5,628 6,469 6,843 5,178 4,293
------- ------- ------- ------- ------- ------- -------
Net interest income 5,657 4,523 5,165 5,527 6,110 4,503 4,430
Provision for credit losses (287) (63) 151 416 226 57 479
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 5,944 4,586 5,014 5,111 5,884 4,446 3,951
Non-interest income 538 478 464 494 1,302 633 733
Non-interest expense 4,787 5,042 4,158 4,624 5,473 3,860 3,369
------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes 1,695 22 1,320 981 1,713 1,219 1,315
Provision for income taxes 694 9 501 349 658 499 363
------- ------- ------- ------- ------- ------- -------
Net income $ 1,001 $ 13 $ 819 $ 632 $ 1,055 $ 720 $ 952
======= ======= ======= ======= ======= ======= =======
</TABLE>
108
<PAGE> 110
<TABLE>
<CAPTION>
As Of and For the
(Dollars in Thousands, As Of and For the Years Ended Nine Months Ended
except per share data) December 31, September 30,
------------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at period end):
Investment securities $ 2,368 $ 693 $ 4,537 $ 13,634 $ 15,153 $ 16,230 $ 6,013
Total assets $ 85,571 $ 98,517 $116,646 $129,964 $124,772 $135,752 $117,660
Total net loans and leases $ 73,727 $ 78,155 $ 92,897 $101,167 $ 97,480 $108,724 $ 98,284
Total deposits $ 75,933 $ 89,146 $106,395 $118,179 $112,639 $123,732 $105,287
Total stockholders' equity $ 8,905 $ 8,800 $ 9,482 $ 9,988 $ 10,828 $ 10,587 $ 11,780
PER SHARE DATA:
Net income
Basic $ 1.53 $ 0.02 $ 1.25 $ 0.96 $ 1.57 $ 1.07 $ 1.40
Diluted $ 1.47 $ 0.02 $ 1.19 $ 0.92 $ 1.52 $ 1.04 $ 1.37
Book value per share $ 13.56 $ 13.40 $ 14.44 $ 14.89 $ 16.14 $ 15.78 $ 16.85
Weighted average shares outstanding:
Basic 656,600 656,600 656,600 660,163 670,850 670,850 680,267
Diluted 681,212 684,784 686,749 688,994 693,428 693,129 694,872
Actual 656,600 656,600 656,600 670,850 670,850 670,850 694,100
Cash dividends per share $ 0.42 $ 0.18 $ 0.21 $ 0.40 $ 0.38 $ 0.29 $ 0.30
Dividend payout ratio 27.45% 90.00% 16.80% 41.67% 24.20% 27.10% 21.43%
SELECTED FINANCIAL RATIOS (1)
Return on average assets 1.12% 0.01% 0.76% 0.51% 0.79% 0.72% 1.03%
Return on average shareholders' equity 13.32% 0.18% 9.02% 6.40% 9.77% 8.97% 10.78%
Total loans to deposits 97.09% 87.67% 87.31% 85.60% 86.54% 87.87% 93.35%
Net interest margins 7.53% 4.85% 5.04% 4.67% 4.82% 4.89% 5.00%
Efficiency ratio (2) 77.27% 100.82% 73.87% 76.80% 73.84% 75.16% 65.25%
ASSET QUALITY RATIOS
Allowance for loans losses to:
Ending total loans 1.83% 1.43% 1.17% 1.02% 1.19% 1.09% 1.49%
Nonperforming assets 26.06% 17.23% 11.97% 10.47% 14.34% 17.96% 28.39%
Nonperforming assets to ending total
assets 6.17% 6.76% 7.97% 7.80% 6.61% 4.85% 4.50%
Net loan charge-offs (recoveries) to
average loans 0.05% 0.21% 0.20% 0.45% 0.10% 0.03% 0.16%
Reserve/nonperforming loans 22.01% 17.23% 11.97% 10.47% 19.34% 55.85% 52.14%
CAPITAL RATIOS
Average shareholders' equity to
average assets 8.39% 8.39% 8.39% 7.93% 8.06% 8.00% 9.56%
Tier 1 capital ratio(3) 11.56% 10.56% 9.81% 9.35% 10.96% 9.44% 11.87%
Total risk-based capital ratio(4) 12.81% 11.67% 10.96% 10.34% 12.16% 10.42% 13.12%
Leverage ratio(5) 10.87% 9.19% 8.35% 7.54% 8.04% 7.79% 9.66%
OTHER
End of period ("EOP") common stock
outstanding 656,600 656,600 656,600 670,850 670,850 670,850 699,100
Average assets $ 89,604 $ 98,466 $108,204 $124,467 $134,405 $133,769 $123,221
Average earning assets $ 84,889 $ 93,285 $102,511 $118,274 $126,721 $125,639 $118,050
Number of branch offices(6) 12 11 11 11 11 11 10
Number of full-time equiv. employees 70 55 55 57 55 56 49
</TABLE>
109
<PAGE> 111
(1) Annualized, when appropriate.
(2) Efficiency ratio is non-interest expense divided by the sum of net
interest income plus non-interest income.
(3) Tier I capital divided by risk-weighted assets.
(4) Total capital divided by risk-weighted assets.
(5) Tier I capital divided by average assets.
(6) Including head office.
GLOBAL BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. Global Bancorp's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the section entitled "Risk Factors" and
elsewhere in this document.
Overview
Global Bancorp and its wholly-owned subsidiary, Capitol Thrift & Loan
is an industrial loan company headquartered in Napa, California. Global
Bancorp's only asset is Capitol Thrift. Therefore, reference to Capitol Thrift
shall mean Global Bancorp unless otherwise indicated. Capitol Thrift was
incorporated under the laws of the State of California on May 15, 1947. Capitol
Thrift operates 10 branches in the state of California. Capitol Thrift's primary
source of revenue is providing single-family residential, commercial real
estate, and installment loans to customers who are predominantly small and
middle-market businesses and individuals. Capitol Thrift conducts a consumer and
commercial finance business under the California Industrial Loan Law and insures
its deposits through the Federal Deposit Insurance Corporation (FDIC).
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant changes in trends
related to the financial condition of Capitol Thrift and its results of
operations. It should be read in conjunction with Capitol Thrift's consolidated
financial statements and footnotes appearing elsewhere in this document. For a
discussion of important factors that could cause actual results to differ
materially from such forward- looking statements, see "Risk Factors."
Results of Operations
At September 30, 1999, Capitol Thrift's total assets were $117.7
million, net loans amounted to $98.3 million, stockholders' equity was $11.8
million and the allowance for loan losses was $1.5 million. This compares to
total assets of $124.8 million, net loans of $97.5 million, stockholders' equity
of $10.8 million and allowance for loan losses of $1.2 million as of December
31, 1998. Total assets decreased 5.7% which was primarily due to a decrease in
the securities portfolio of 60.3% and an increase in cash and cash equivalents
of approximately 47.5%. The loan portfolio increased 0.8%.
Net earnings for the nine months ended September 30, 1999 and 1998 were
$952,000 and $720,000, respectively. Net earnings per share for the nine months
ending September 30, 1999 and 1998 were $1.40 and $1.07, respectively. Net
earnings increased for the nine months ended September 30, 1999, primarily due
to officer life insurance proceeds received of $297,000. The $297,000 consists
of $598,000 officers' insurance proceeds, removal of a deferred compensation
accrual of $378,000, offset by a payment to heirs of $522,000 and removal of a
cash value accrual of $157,000. The payment and removal of cash value have been
reclassified to other income for the analysis covered later under "Other
Operating Income".
110
<PAGE> 112
For the year ended December 31, 1998, Capitol Thrift reported net
income of $1.1 million. This represents a 66.8% increase over 1997. Earnings per
share was $1.57 in 1998 as compared to $.96 in 1997. The increase in net income
is primarily attributable to an increase of $583,000 in net interest income, an
increase in non-interest income of $773,000, offset by an increase in
non-interest expense of $849,000. The increase in net interest income is
attributable to an increase in average outstanding loans of $6.1 million. The
increase in non-interest income is attributable to a gain on the sale of loans.
The increase in non-interest expense was attributable to higher provision for
loss on RPHFS (Real Property Held For Sale).
Capitol Thrift reported net income of $632,000 for the year ended
December 31, 1997, a 22.8% decrease compared to net income of $819,000 for 1996.
Earnings per share decreased to $.96 in 1997 from $1.25 in 1996. The decrease in
earnings in 1997 was primarily due to an increase in provision for losses on
loans of $265,000 and increase in loss on sale of real property held for sale of
$374,000.
Earnings as measured by return on assets increased to .79% in December,
1998, compared to .51% in the prior year. Return on equity approximated 9.77% in
1998, compared to 5.92% in 1997.
Distribution of Average Assets, Liabilities, and Stockholders' Equity: Interest
Rates and Interest Differential
The following table sets forth average daily balances of each principal
category of assets, liabilities and stockholder's equity, interest on
interest-earning assets, and interest on interest-bearing liabilities, and the
average yields earned or rates paid thereon for the nine months ended September
30, 1999 and 1998. The table also shows the net interest earnings and the net
yield on average earning assets. Averages were computed based upon daily
balances.
The following sets forth Capitol Thrift's daily average balance sheets,
components of net interest income and expense, and related yields and rates for
the nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
1998 1999
------------------------------------ --------------------------------
(Dollars in Thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans(1) $ 105,355 $ 8,786 11.12% $ 99,589 $ 8,001 10.71%
Investment Securities - taxable 15,544 650 5.58% 11,395 470 5.50%
Federal funds sold and reverse repos 4,740 245 6.86% 7,066 252 4.77%
Deposits in financial institutions - - -
--------- --------- ------- --------- --------- -------
Total interest-earning assets $ 125,639 $ 9,681 10.27% $ 118,050 $ 8,723 9.85%
========= ========= ======= ========= ========= =======
Allowance for loan losses (1,072) (1,293)
Non-interest-bearing assets:
Cash and due from banks 546 613
Premises and equipment, net 595 668
Accrued interest receivable 1,146 1,029
Other real estate owned 5,443 2,972
Other assets 1,472 1,182
--------- ---------
Total average assets $ 133,769 $ 123,221
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts 23,482 821 4.66% 26,796 911 4.53%
Time deposits 99,147 4,357 5.86% 83,817 3,382 5.38%
--------- --------- ------- --------- --------- -------
Total interest-bearing liabilities $ 122,629 $ 5,178 5.63% $ 110,613 $ 4,293 5.17%
========= ========= ======= ========= ========= =======
</TABLE>
111
<PAGE> 113
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
1998 1999
------------------------------------ --------------------------------
(Dollars in Thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing liabilities:
Non-interest-bearing checking
Accrued interest payable 10 5
Other liabilities 432 820
---------- ---------
Total liabilities 123,071 111,438
Total stockholders' equity 10,698 11,783
---------- ---------
Total average liabilities and
stockholders' equity $ 133,769 $ 123,221
========== =========
Interest income as a percentage of
average earning assets 10.27% 9.85%
Interest expense as a percentage of
average earning assets 5.50% 4.85%
------ --------
Net interest margin 4.77% 5.00%
====== ========
</TABLE>
NOTE: Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because they are not material to Capitol Thrift's results
of operations.
(1) Loan amounts include non-accrual loans, but the related interest income
has been included only if collected for the period prior to the loan
being placed on a nonaccrual basis. Loan interest income includes loan
fees of approximately $421,000 and $430,000 for the nine months ended
September 30, 1999 and 1998, respectively.
The following table sets forth average daily balances of each principal
category of assets, liabilities and stockholder's equity, interest on
interest-earning assets, and interest on interest-bearing liabilities, and the
average yields earned or rates paid thereon for the years ended December 31,
1998, 1997 and 1996. The table also shows the net interest earnings and the net
yield on average earning assets. Averages were computed based upon daily
balances, except for December 31, 1997 and 1996. 1997 and 1996 averages were
computed based on monthly averages.
112
<PAGE> 114
The following sets forth Capitol Thrift's daily average balance sheets,
components of net interest income and expense, and related yields and rates for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
---------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- ----------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ ------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans(1) $ 91,557 $10,202 11.14% $ 98,152 $10,849 11.05% $104,281 $11,721 11.24%
Investment Securities:
Taxable securities 1,727 79 4.57 9,513 514 5.40 15,645 872 5.57
Federal funds sold and reverse repos 6,480 354 5.46 8,439 498 5.90 5,915 308 5.21
Deposits in financial institutions 2,747 158 5.75 2,170 135 6.22 880 52 5.91
-------- -------- ----- -------- -------- ----- -------- -------- ------
Total interest-earning assets 102,511 10,793 10.53 118,274 11,996 10.14 126,721 12,953 10.22
Allowance for loan losses (1,208) (1,202) (1,093)
Non-interest-bearing assets:
Cash and due from banks 855 606 476
Premises and equipment, net 618 575 598
Accrued interest receivable 1,337 1,271 1,118
Other real estate owned 3,443 4,085 5,013
Other assets 648 858 1,572
-------- -------- --------
Total average assets $108,204 $124,467 $134,405
======== ======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts 16,386 680 4.15% 20,043 883 4.41% 24,295 1,141 4.70%
Time deposits 82,055 4,948 6.03 93,259 5,586 5.99 97,688 5,702 5.84
------- -------- ----- -------- -------- ----- ------- -------- ------
Total interest-bearing liabilities 98,441 5,628 5.72 113,302 6,469 5.71 121,983 6,843 5.61
Non-interest-bearing liabilities:
Non-interest-bearing checking - - -
------- -------- --------
Accrued interest payable 44 17 10
Other liabilities 644 1,272 1,618
------- -------- --------
Total liabilities 99,129 114,591 123,611
Total stockholders' equity 9,075 9,876 10,794
------- -------- --------
Total average liabilities and
stockholders' equity $108,204 $124,467 $134,405
======== ======== ========
Interest income as a percentage of
average earning assets 10.53% 10.14% 10.22%
------ ===== =====
Interest expense as a percentage of
average earning assets 5.49% 5.47% 5.40%
====== ===== =====
Net interest margin 5.04% 4.67% 4.82%
====== ===== =====
</TABLE>
NOTE: Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because they are not material to Capitol Thrift's results
of operations.
(1) Loan amounts include non-accrual loans, but the related interest income
has been included only if collected for the period prior to the loan
being placed on a nonaccrual basis. Loan interest income includes fees
of approximately $853,000 and $719,000 for the years ended December 31,
1998 and 1997, respectively.
113
<PAGE> 115
Net Interest Income
Capitol Thrift's primary source of revenue is net interest income,
which is the difference between interest income received on interest-earning
assets and the interest expense paid on interest-bearing liabilities. Net
interest income before the provision for loan losses decreased to $4.4 million
for the nine months ended September 30, 1999, from $4.5 million for the same
period in 1998. The net interest margin was 5.00% in 1999 compared to 4.77% for
the same period in 1998. The decrease in interest income is due primarily to a
decrease in loan volume.
Net interest income before the provision for loan losses was $6.1
million in 1998, an 10.5% increase over 1997, and $5.5 million in 1997, an
increase of 7% over 1996. Capitol Thrift's net interest margin increased to
4.82% in 1998, compared to 4.67% in 1997. The increase in interest income was
primarily due to an increase in interest income on loans and investment
securities. Interest expense increased 5.8% from 1997 to 1998 due to a 7.7%
increase in average interest bearing deposits and rates decreasing 1.8% from
1997. The increase in the net interest margin in 1998 was primarily due to an
increase in volume of loans and investments and an increase in the yield on
interest earning assets to 10.22% in 1998 from 10.14% in 1997.
Capitol Thrift's net interest income is affected by changes in the
amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as a "volume change." It is also affected by changes in yields
earned on interest-earning assets and rates paid on interest-bearing deposits
and other borrowed funds, referred to as a "rate change." The following table
sets forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities, and the
amount of change attributable to volume and rate changes for the years
indicated. The changes due to the combined impact of rate and volume changes
have been allocated to rate and volume in proportion to the relationship between
their absolute dollar amounts. The effects of tax-equivalent yields have not
been considered because they are not significant. Nonaccrual loans are included
in average loans used to compute this table.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
(Dollars in Thousands) 1997 over 1996 1998 over 1997
-------------------------------- ----------------------------------
Total Rate Volume Total Rate Volume
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans $ 647 (88) 735 $ 872 195 677
Investment securities 435 14 421 358 16 342
Federal funds sold & reverse repos 144 28 116 (190) (59) (131)
Deposits in other financial institutions (23) 13 (36) (83) (7) (76)
------- ------- ------- ------- ------- -------
Total interest income 1,203 (33) 1,236 957 145 812
Increase (decrease) in interest expense:
Investment and Savings Certificate:
Savings accounts 203 42 161 258 58 200
Time deposits 638 (33) 671 116 (143) 259
------- ------- ------- ------- ------- -------
Total interest expense 841 9 832 374 (85) 459
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 362 (42) 404 $ 583 230 353
======= ======= ======= ======= ======= =======
<CAPTION>
Nine Months Ended September 30,
----------------------------------
(Dollars in Thousands) 1999 over 1998
----------------------------------
Total Rate Volume
------- ------- -------
<S> <C> <C> <C>
Increase (decrease) in interest income:
Loans $ (787) 36 (823)
Investment securities (180) 124 (304)
Federal funds sold & reverse repos 9 (139) 148
Deposits in other financial institutions - - -
------- ------- -------
Total interest income (958) 21 (979)
Increase (decrease) in interest expense:
Investment and Savings Certificate:
Savings accounts 90 (110) 200
Time deposits (975) 125 (1,100)
------- ------- -------
Total interest expense (885) 15 (900)
------- ------- -------
Increase (decrease) in net interest income $ (73) 6 (79)
======= ======= =======
</TABLE>
For the nine months ended September 30, 1999, the decrease in total
interest income of $73,000 is comprised of a $979,000 volume decrease primarily
associated with the decline in average loans of $5.8 million from September 30,
1998. Although yields decreased in 1999, interest income decreased due to the
significant decrease in interest earning assets in the first quarter of 1999.
The decrease in total interest expense of $885,000 from September 30, 1998 to
September 30, 1999, is primarily comprised of a volume decrease of $900,000
related to the $12.0 million decrease in average interest-bearing liabilities
between the two periods.
The increase in total interest income of $957,000 in 1998 is comprised
of a $812,000 volume increase associated with the $8.5 million increase in
average earning assets between 1997 and 1998. The yield on total interest
earning assets increased in 1998 to 10.22% from 10.14% from 1997. The increase
in total interest expense of $374,000 is comprised of a volume increase of
$459,000 related to the $8.7 million increase in average interest-bearing
liabilities
114
<PAGE> 116
between 1998 and 1997 and a $85,000 rate decrease associated with a decrease in
the cost of funds to 5.61% in 1998 from 5.71% in 1997.
In 1997, the increase in total interest income of $1.2 million is
comprised of a $1.2 million volume increase associated with the $15.8 million
increase in average earning assets between 1997 and 1996 and a $33,000 rate
decrease associated with a decrease in the total yield on interest-earning
assets to 10.14% in 1997 from 10.53% in 1996. The increase in total interest
expense of $841,000 in 1997 is comprised of a volume increase of $832,000
related to the $14.9 million increase in average interest-bearing liabilities
between 1997 and 1996 and a $9,000 rate increase.
A changing interest rate environment can have a significant impact on
Capitol Thrift's net interest margin as measured against average earning assets
and its interest rate spread. Management monitors its net interest margin by
repricing its loans and deposit products after giving effect to such factors as
competition and expected maturities in the loan, investment securities and
deposit portfolios.
Provision for Loan Losses
Capitol Thrift maintains an allowance for loan losses at a level
management believes to be adequate to cover the inherent risks of loss
associated with its loan portfolio. See "Balance Sheet Analysis - Credit Risk
Management and Asset Quality." The provision for loan losses is charged against
income and is applied to the allowances for loan losses.
For the nine months ended September 30, 1999, $479,000 was charged to
the provision for loan losses. For the same period during 1998, $57,000 was
charged to the provision for loan losses. The primary reasons for increasing the
allowance were related to regulatory review of loans and to bring the allowance
to a level comparable to industry peers.
The provision for loan losses for the year ended December 31, 1998, was
$226,000 as compared to a $416,000 provision made in 1997 and a $151,000
provision made in 1996. Net charge-offs to average loans of 0.10% in 1998 is
slightly lower as compared to 0.45% in 1997. Net charge-offs to average loans in
1996 was 0.20%.
The provision for loan losses reflects management's on-going evaluation
of the risk inherent in the loan portfolio, which includes consideration of
numerous factors, such as economic conditions, relative risks in the loan
portfolio, loan loss experience and review and monitoring of individual loans
for identification and resolution of potential problems.
Other Operating Income
Other income consists primarily of late charges, gain on sale of loans
and miscellaneous income. Other income increased by $100,000 or 15.8% in the
first nine months of 1999 compared to the same period in 1998. This increase is
attributable to officer life insurance proceeds of $297,000 received in 1999.
Total other income for the year ended December 31, 1998 increased
$808,000 or 164% when compared to the same period in 1997. This increase is
attributable to gain of sale on loans for $476,000 and an increase in
miscellaneous income of $332,000 as compared to the previous year. Miscellaneous
income increased in 1998 because of increases in pass thru points of $103,000
and gain on sale real property held for sale of $68,000 from 1997. There was
also a legal settlement of $170,000 in 1998.
Other income increased $30,000 or 6% for the year ended December 31,
1997, compared to the same period in 1996. Late charges increased 33% over 1996
because of increase in loan volume compared to 1996.
115
<PAGE> 117
The following table summarizes significant components of other income
for the nine months ended September 30, 1998, and 1999 and for the years ended
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands) Nine Months
Years Ended December 31, Ended September 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Other Income:
Service charges and other income $ 85 $ 113 $ 102 $ 78 $ 62
Miscellaneous Income 379 381 724 555 374
Officer life insurance proceeds - - - - 297
Gain on sale of loans - - 476 - -
------ ------ ------ ------ ------
$ 464 $ 494 $1,302 $ 633 $ 733
====== ====== ====== ====== ======
</TABLE>
Non-interest Expense
The following tables summarize changes in non-interest expense for the
years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1998 and 1999:
<TABLE>
<CAPTION>
(Dollars in Thousands) Years Ended December 31, Nine Months Ended September 30,
---------------------------------------------------- ----------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $2,033 1.98% $2,078 1.76% $2,023 1.60% $1,487 1.18% $1,522 1.29%
Occupancy expense 425 0.41 427 0.36 440 0.35 326 0.26 361 0.30
Equipment expense 212 0.21 221 0.19 213 0.17 162 0.13 134 0.11
Payroll taxes 168 0.16 171 0.14 167 0.13 130 0.10 125 0.11
Professional fees 63 0.06 72 0.06 126 0.10 131 0.10 125 0.11
FDIC insurance 27 0.03 46 0.04 51 0.04 38 0.03 36 0.03
Expenses on RPHFS 190 0.19 141 0.12 272 0.21 191 0.15 215 0.18
Stationery and supplies 83 0.08 85 0.07 76 0.06 53 0.04 59 0.05
Loss/gain on sale and 190 0.19 564 0.48 1,224 0.96 734 0.59 185 0.16
provision for losses
on RPHFS Insurance 244 0.24 238 0.20 223 0.18 169 0.14 154 0.13
Other 523 0.51 581 0.49 658 0.52 439 0.35 453 0.38
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $4,158 4.06% $4,624 3.91% $5,473 4.32% $3,860 3.07% $3,369 2.85%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Average Earning Assets $102,511 $118,274 $126,721 $125,639 $118,050
======== ======== ======== ======== ========
</TABLE>
Note: Percent of average earning assets not annualized for September 1999 and
1998.
Other expense, excluding the provision for loan losses and income tax
expense, decreased by $491,000 to $3.4 million for the nine months ended
September 30, 1999, from $3.9 million for the nine months ended September 30,
1998. This decrease is attributable to losses on sale and provision for losses
on real property held for sale. For the nine months ended September 30, 1999,
there were net losses on real property held for sale of $185,000 as compared to
net losses of $734,000 for the same nine month period ending September 30, 1998.
116
<PAGE> 118
Other expense, excluding the provision for loan losses and income tax
expense, totaled $5.5 million in 1998 representing an increase of $849,000, or
18.4%, over 1997. The increase was primarily due to the increase in loss on real
property held for sale (RPHFS) and expenses related to RPHFS. The increase in
the expenses associated with RPHFS led to an agreement with the regulatory
agencies discussed under the caption, "Capital Resources." These increases were
primarily related to loans originated prior to June 1992, at which time credit
underwriting policies were strengthened. Historical data on RPHFS related
expenses indicate that losses generally are not incurred until approximately
four years after origination. Loan policy and underwriting procedures were
significantly improved to present levels during the 1992-1995 period. The
primary improvement was a greater reliance on borrower debt and income ratios.
While RPHFS related expenses have significantly increased from $705,000 for the
year ending December 31, 1997 to $1.5 million for the year ending December 31,
1998, they have declined to $400,000 for the nine months ending September 30,
1999. In addition, as shown under the caption "Nonperforming Assets",
nonperforming loans have declined from $5.1 million at December 31, 1998, to
$2.9 million at September 30, 1999, while RPHFS has declined from $3.1 million
to $2.4 million during this same period of time. Total nonperforming assets
continue to decline from $10.1 million at December 31, 1997 to $8.2 million at
December 31, 1998 and $5.3 million at September 30, 1999. Expenses other than
those related to RPHFS increased by 1.5% for the year ending December 31, 1998
compared to the year ending December 31, 1997 and 1.2% for the nine months
period ending September 30, 1999 compared to September 30, 1998.
Other expense increased $466,000 in 1997, as compared to 1996. The
increase was primarily due to an increase in the provision made for losses on
real property held for sale. The provision was made to allow for a probable
decline in the fair market value of the assets involved.
Financial Condition
At September 30, 1999, average assets decreased 7.9% and average
deposits decreased approximately 1.8% compared to the same period in 1998.
Average loans decreased by 5.5% since September 30, 1998. These decreases in
average loans are primarily due to a bulk loan sale in October, 1998.
At December 31, 1998, average assets and average deposits increased by
approximately 8.0% and 7.7%, respectively, compared to 1997. Average loans
increased 6.2% reflecting a continued increase in loan demand caused primarily
by a strengthening economy and a stable prime rate in 1998 and 1997. Increases
in deposits during 1998 were used to fund a mix of loans, investment securities
and federal funds.
Earning assets averaged approximately $118.1 million during the nine
month period ended September 30, 1999, as compared to $125.6 million for the
same period in 1998. This represents a 6.0% decrease from September 30, 1998.
Earning assets averaged approximately $126.7 million during the year
ended December 31, 1998, as compared to $118.3 million and $102.5 million for
the years ended December 31, 1997 and 1996, respectively.
Loan Portfolio
Capitol Thrift's primary business is that of acquiring deposits and
making loans. Capitol Thrift concentrates its lending activities in three
principal areas: commercial real estate loans, single family loans, and
installment loans. Capitol Thrift does not make commercial loans other than
those secured by real estate. Interest rates charged for loans made by Capitol
Thrift vary with the degree of risk, the size and maturity of the loans, and
prevailing market rates.
At September 30, 1999, gross loans totaled $100.9 million which
represents a 1.1% increase over December 31, 1998. The increase in loans was
primarily in the commercial real estate category. Installment loans remained
relatively constant.
117
<PAGE> 119
Net loans totaled $97.5 million at December 31, 1998, as compared to
$101.2 million at December 31, 1997, and $92.9 million at December 31, 1996.
Average loans rose 6.2% between December 1997 and December 1998, and 7.2%
between December 31, 1996 and December 31, 1997, with loans averaging
approximately $104.3 million for the twelve months ended December 31, 1998, and
compared to $98.1 million and $91.6 million for the comparative twelve month
period of 1997 and 1996, respectively.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------------------------------------------------------------------------------------------
1994 1995 1996 1997
------------------- --------------------- --------------------- ---------------------
Dollar % Dollar % Dollar % Dollar %
Amount of Loans Amount of Loans Amount of Loans Amount of Loans
------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Real Estate $ 51,405 69.73% $ 58,253 74.53% $ 73,683 79.32% $ 82,123 81.18%
Single Family
Residential(1) 21,989 29.82 20,575 26.33 20,635 22.21 20,518 20.28
Installment 2,678 3.63 1,314 1.68 741 0.80 895 0.88
-------- ------ --------- ------ --------- ------ --------- ------
Total Gross Loans 76,072 103.18% 80,142 102.54% 95,059 102.33% 103,536 102.34%
------ ------ ------ ------
Less allowance for
loan losses (1,375) (1.32) (1,147) (1.07) (1,112) (1.20) (1,061) (1.05)
------ ------ ------ ------
Less deferred fees
and costs (970) (1.86) (840) (1.47) (1,050) (1.13) (1,308) (1.29)
-------- ------ --------- ------ --------- ------ --------- ------
Net loans $ 73,727 100.00% $ 78,155 100.00% $ 92,897 100.00% $ 101,167 100.00%
======== ====== ========= ====== ========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) September 30,
-----------------------------------------------
1998 1999
--------------------- ---------------------
Dollar % Dollar %
Amount of Loans Amount of Loans
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Commercial Real Estate $ 77,833 79.84% $ 80,289 81.69%
Single Family
Residential(1) 21,372 21.92 20,169 20.52
Installment 590 0.61 420 0.43
--------- ------ --------- ------
Total Gross Loans 99,795 102.37% 100,878 102.04%
------ ------
Less allowance for
loan losses (1,183) (1.16) (1,500) (1.53)
------ ------
Less deferred fees
and costs (1,132) (1.21) (1,094) (1.11)
--------- ------ --------- ------
Net loans $ 97,480 100.00% $ 98,284 100.00%
========= ====== ========= ======
</TABLE>
(1) At September 30, 1999, there were no real estate construction loans.
The only real estate construction loan open at December 31, 1998 was
paid off in 1999.
As of December 31, 1998 Capitol Thrift's real estate-construction loans
totaled $667,000 or 0.07% of its total loans and consisted of only one
loan. This loan is included in "Single Family Residential" for this
table. There were no real estate construction loans as of December 31,
1997. This loan is collateralized by property located in Rancho Santa
Fe which matures in October 1999 pending completion of the project.
Commercial real estate loans secured by deeds of trust on church
facilities approximate 13.6% of total loans at September 30, 1999. These loans
totaled $13.7 million, $14.1 million, and $12.0 million at September 30, 1999,
December 31, 1998, and December 31, 1997, respectively. Management does not
consider these loans a concentration as they are primarily multi-use properties
and are geographically dispersed throughout California to varying religious
orders. The Board of Directors have set a limit of $16.0 million for these types
of loans. Capitol Thrift is not currently originating these types of loans.
There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table. Unsecured
loans are not a significant portion of the loan portfolio depicted in the above
table.
Capitol Thrift has collateral management polices in place so that
collateral lending of all types is on a basis which it believes is consistent
with regulatory lending standards. Valuation analyses are utilized to take into
consideration the potentially adverse economic conditions under which
liquidation of collateral could occur. It is generally Capitol Thrift's policy
to fully collateralize all loans with loan-to-value ratios determined on an
individual loan basis taking into account the financial stability of each
borrower and the value and type of the collateral. In addition to real estate,
other collateral accepted as security against loans includes deposits, business
or personal assets.
Commercial Real Estate Loans
At September 30, 1999, commercial real estate loans, including
multi-family real estate loans, totaled $80.3 million or 81.7% of total loans.
There was an increase in commercial real estate loans of $2.5 million or 3.2%
over December 31, 1998. This increase in commercial real estate loans was
primarily due to continued strategic growth.
118
<PAGE> 120
As of December 31, 1998 and 1997, Capitol Thrift's commercial real
estate loans, including multi-family real estate loans, totaled $77.8 million or
79.9% and $82.1 million or 81.2%, respectively, of its total loans. These loans
are collateralized by properties located primarily in California. Nonresidential
loans are primarily "mini-term" (medium-term) commercial real estate-mortgages,
with maturities generally ranging from 5 to 15 years. Such loans generally range
in size from $200,000 to $1.5 million. These loans are made to varying types of
businesses, including but not limited to small office buildings, retail
businesses, restaurants, warehouses, and churches.
Commercial real estate lending contains potential risks which are not
inherent in other types of loans. These potential risks include declines in
commercial real estate values, general economic conditions surrounding the
commercial real estate properties, and vacancy rates. A decline in the general
economic conditions or real estate values within Capitol Thrift's market area
could have a negative impact on the performance of the loan portfolio or value
of the collateral. Because Capitol Thrift lends primarily within its market
area, the real property collateral for its loans is similarly dispersed, rather
than concentrated within a narrow geographic area. Capitol Thrift could
therefore be adversely affected by a decline in real estate values in its
California target market, even if real estate values elsewhere in the USA
generally remained stable or increased.
Installment Loans
At September 30, 1999, installment loans totaled $420,000 or 0.4% of
total loans. There have been no significant changes in the composition of
installment loans since December 31, 1998.
At December 31, 1998 and 1997, installment loans aggregated
approximately $590,000 or 0.6% and $895,000 or 0.9%, respectively, of total
loans. Included in this loan category are unsecured Title I, 100% secured thrift
loans and hypothecated loans. Hypothecation loans are secured by an assignment
of the note and deed of trust on real property, which in turn have up to 75%
loan to appraised value, if there is a foreclosure on the deed of trust.
The following table shows the maturity distribution of Capitol Thrift's
loans outstanding as of September 30, 1999. Amounts presented are shown by
maturity dates rather than repricing periods:
Maturity Schedule
<TABLE>
<CAPTION>
(Dollars in Thousands) September 30, 1999
--------------------------------------------------------------
Due after one
Due in one year through five Due after
year or less years five years Total
------------ ----------------- ---------- --------
<S> <C> <C> <C> <C>
Single Family Residential(1) $ 1,800 $ 2,325 $ 16,044 $ 20,169
Commercial Real Estate 7,671 21,378 51,240 80,289
Installment Loans 4 285 131 420
-------- -------- -------- --------
$ 9,475 $ 23,988 $ 67,415 $100,878
======== ======== ======== ========
Accruing loans:
Fixed rate loans $ 6,544 $ 11,833 $ 37,677 $ 56,054
Floating rate loans 1,840 10,732 29,625 42,197
-------- -------- -------- --------
Total accruing loans 8,384 22,565 67,302 98,251
-------- -------- -------- --------
Nonaccrual loans:
Fixed rate loans 1,091 1,423 113 2,627
Floating rate loans - - - -
Total nonaccrual loans 1,091 1,423 113 2,627
-------- -------- -------- --------
Total loans $ 9,475 $ 23,988 $ 67,415 $100,878
======== ======== ======== ========
</TABLE>
119
<PAGE> 121
(1) At September 30, 1999, there were no single family residential real
estate construction loans in Capitol Thrift's loan portfolio.
The following table shows the maturity distribution of Capitol Thrift's
loans outstanding as of December 31, 1998. Amounts presented are shown by
maturity dates rather than repricing periods:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998
------------------------------------------------------
Due after one
Due in one year through Due after
year or less five years five years Total
------------ ------------- ---------- -------
<S> <C> <C> <C> <C>
Single Family Residential(1) $ 2,520 $ 3,017 $15,835 $21,372
Commercial Real Estate 10,339 22,851 44,643 77,833
Installment Loans 126 313 151 590
------- ------- ------- -------
Total loans $12,985 $26,181 $60,629 $99,795
======= ======= ======= =======
Accruing loans:
Fixed rate loans $10,218 $12,143 $31,360 $53,721
Floating rate loans 779 13,123 27,029 40,931
------- ------- ------- -------
Total accruing loans 10,997 25,266 58,389 94,652
------- ------- ------- -------
Nonaccrual loans:
Fixed rate loans 1,988 163 1,493 3,644
Floating rate loans - 752 747 1,499
------- ------- ------- -------
Total nonaccrual loans 1,988 915 2,240 5,143
------- ------- ------- -------
Total loans $12,985 $26,181 $60,629 $99,795
======= ======= ======= =======
</TABLE>
(1) At December 31, 1998, single family residential loans included one
construction loan for $667,000 which was an accruing, fixed rate loan
due in one year or less.
Credit Risk Management and Asset Quality
Management believes that the objective of a sound credit policy is to
establish a sound asset portfolio while maintaining sufficient earnings to
control capital to asset ratios at established levels. The Loan Committee is
made up of experienced executive personnel with Board oversight and review. The
Board of Directors and loan committee review quality and ensure compliance with
credit policy. Capitol Thrift maintains a loan review staff which examines the
loan portfolio of Capitol Thrift for compliance with established standards.
Executive management, senior lending officers and senior credit officers also
perform reviews of loan quality and monitor on a periodic basis the progress of
watch list loans requiring an action plan for rehabilitation or refinancing. In
addition, credit underwriting guidelines are periodically reviewed and adjusted
to reflect current economic conditions.
Management is constantly aware of the need for maintaining high credit
standards. Capitol Thrift is not involved in foreign lending and is not engaged
in high yield, high risk loans. A loan is placed on nonaccrual status when the
principal and interest is in default for 90 days or more, or when external
factors indicate that payment in full of principal and interest appears unlikely
unless the loan is well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued but uncollected
shall be reversed against the appropriate income account. In most cases, if the
loan is rated substandard or better, payments shall be applied to interest first
and then principal provided no loss is anticipated. When one loan of a customer
is placed on nonaccrual status, related borrowings will be evaluated as to
whether they should also be placed on nonaccrual status. Nonaccrual loans will
be restored to an accruing status when principal and interest is no longer past
due and unpaid, or the loan otherwise becomes well secured and in the process of
collection.
120
<PAGE> 122
A troubled debt restructuring occurs when Capitol Thrift, for economic
or legal reasons related to the debtor's financial difficulties, grants a
concession to the debtor that it would not ordinarily consider. Troubled debt
restructuring can occur in a variety of forms, such as transferring assets in a
full or partial settlement of the debt, issuing debt, or modifying terms
including reducing the stated interest rate, extending maturity dates, reducing
the face amount or maturity of the debt, or reducing accrued interest.
Loans on which collateral has been repossessed are classified either as
real property held for sale (RPHFS) or "other assets" (for personal property
collateral) in Capitol Thrift's financial statements. Capitol Thrift values its
RPHFS properties upon acquisition at fair value less estimated costs to sell
based on appraisals generally performed at the time the property is acquired.
Subsequently, RPHFS is carried at the lower of acquired value or fair value less
estimated costs to sell. Management's objective is to dispose of those
properties in an expeditious time frame in an effort to minimize holding costs,
which may result in Capitol Thrift realizing less than book value. Due to
possible variations in real estate values, management can give no assurance that
the carrying values of properties will ultimately be realized upon disposition.
Interest income would have increased by approximately $98,000 for the
nine months ended September 30, 1999, had nonaccrual loans performed in
accordance with their original terms.
Interest income would have increased by approximately $170,000 in 1998,
$232,000 in 1997 and $209,000 in 1996 had nonaccrual loans performed in
accordance with their original terms.
Nonperforming Assets
The table below sets forth information about nonperforming assets:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, September 30
--------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans(1) $ 2,152 $ 2,463 $ 5,264 $ 3,872 $ 5,143 $ 2,627
Restructured loans 1,732 795 488 631 - 250
------- ------- ------- ------- ------- -------
Total nonperforming loans 3,884 3,258 5,752 4,503 5,143 2,877
RPHFS(2) 2,362 3,400 3,541 5,628 3,104 2,407
------- ------- ------- ------- ------- -------
Total nonperforming assets $ 6,246 $ 6,658 $ 9,293 $10,131 $ 8,247 $ 5,284
======= ======= ======= ======= ======= =======
Nonperforming loans to total gross loans 5.11% 4.07% 6.05% 4.35% 5.15% 2.85%
Nonperforming assets to total gross loans 8.21% 8.31% 9.78% 9.79% 8.26% 5.24%
Nonperforming assets to total assets 7.30% 6.76% 7.97% 7.80% 6.61% 4.50%
</TABLE>
(1) There were restructured loans included in nonaccrual loans at $219,000,
$254,000, $216,000 and $691,000 at September 30, 1999, December 31,
1998, 1997 and 1995, respectively.
(2) RPHFS is net of the allowance for loss on RPHFS.
At September 30, 1999, nonaccrual loans were $2.6 million and
constituted 2.6% of total loans. There were $2.7 million of restructured loans
or RPHFS properties at September 30, 1999. There was a $3.0 million decrease in
nonaccrual loans and nonperforming assets from December 31, 1998.
At December 31, 1998, nonperforming assets consisted primarily of
nonaccrual loans aggregating approximately $5.1 million. There were $3.1 million
restructured loans or RPHFS properties at December 31, 1998. The nonaccrual
loans are primarily related to credits which Capitol Thrift believes are
adequately collateralized, guaranteed or to borrowers with whom Capitol Thrift
is currently negotiating a liquidation of the account.
121
<PAGE> 123
Nonperforming assets decreased at December 31, 1998, compared to
December 31, 1997, by approximately $1.9 million or 18.7%.
Although the volume of nonperforming assets will depend, in part, on
the future economic environment, it is the opinion of the management of Capitol
Thrift that there are no additional problem loans at September 30, 1999, other
than the assets described above, as to which it has serious doubts as to the
ability of the borrowers to comply with the present repayment terms and which
may become nonperforming assets, based on known information about possible
credit problems of its borrowers.
Allowance for Loan Losses
Management's determination of the allowance for loan losses requires
the use of estimates and assumptions related to the risks inherent in the loan
portfolio which management believes are reasonable. Actual results could,
however, differ significantly from those estimates. Estimates that are
particularly susceptible to significant fluctuation relate to the valuation of
real estate acquired in connection with foreclosures or in satisfaction of loans
because in those circumstances management revalues the asset to the lower of
cost or fair value less selling expenses. In connection with the determination
of the allowance for loan losses and the valuation of RPHFS, management obtains
appraisals for properties. Management believes its current appraisal policies
generally conform to federal regulatory guidelines.
A quarterly evaluation of the overall quality of the portfolio is
performed to determine the necessary level of the allowance for loan losses.
This evaluation takes into consideration the classification of loans and the
application of loss estimates to these classifications. Capitol Thrift
classifies loans as pass, watch, special mention, substandard, doubtful, or loss
based on classification criteria believed by management to be consistent with
the criteria applied by Capitol Thrift's examiners. These classifications and
loss estimates take into consideration all sources of repayment, underlying
collateral, the value of such collateral, and current and anticipated economic
conditions, trends, and uncertainties. These processes provide management with
data that help to identify and estimate the credit risk inherent in the
portfolio so that management may identify potential problem loans on a timely
basis. The allowance for loan losses reflects the results of these estimates. At
September 30, 1999, the allowance for loan losses was $1.5 million and
constituted 1.5% of total loans. Management continues to review the adequacy of
the allowance for loan losses, keeping in mind economic factors, loan portfolio
composition, the general level of real estate values, the California recession
and other factors considered to be relevant by management. Management considered
the allowance for loan losses at September 30, 1999 to be adequate.
Based on information available at December 31, 1998, management
considered the allowance for loan losses of $1.2 million, which constituted 1.2%
of total loans, an adequate allowance for loan losses.
While Capitol Thrift's policy is to charge off in the current period,
those loans on which a loss is considered probable, there also exists the risk
of future losses which cannot be precisely quantified or attributed to
particular loans or classes of loans. Because this risk is continually changing
in response to factors beyond the control of Capitol Thrift, such as the state
of the economy, management's judgment as to the adequacy of the allowance for
loan losses in future periods is based on estimates. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Capitol Thrift's allowance for losses on loans and RPHFS.
Such agencies may require Capitol Thrift to recognize additions to the allowance
based on their judgments of information available to them at the time of their
examination.
Loan losses have primarily occurred in the single-family residential
category that contains Title I loans. Charge-offs primarily related to Title I
loans have declined from $430,000 for the year ended December 31, 1997 to
$167,000 and $189,000 for the year ended December 31, 1998, and nine months
ended September 30, 1999, respectively. Capitol Thrift discontinued originating
Title I loans in the first quarter of 1999.
Title I loans approximated $2.0 million, $2.6 million and $3.7 million
at September 30, 1999, December 31, 1998 and 1997, respectively.
122
<PAGE> 124
Provision for loan losses has increased to $479,000 for the nine months
ended September 30, 1999 from $57,000 for the nine months ended September 30,
1998, and $226,000 for all of the year ended December 31, 1998. The primary
reasons for increasing the allowance were related to regulatory review of loans
and to bring the allowance to a level comparable to industry peers.
The following table provides a summary of Capitol Thrift's allowance
for loan losses and charge-off and recovery activity.
<TABLE>
<CAPTION>
Nine Months
Ended
(Dollars in Thousands) Year Ended December 31, September 30,
----------------------------------------------------------------- -------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding at end of period before
deducting allowances for loan losses(1) $ 76,072 $ 80,142 $ 95,058 $103,536 $ 99,795 $100,878
======== ======== ======== ======== ======== ========
Average loans outstanding during period $ 68,829 $ 77,029 $ 91,557 $ 98,152 $104,281 $ 99,589
======== ======== ======== ======== ======== ========
Balance of allowance at beginning of period $ 1,626 $ 1,375 $ 1,147 $ 1,112 $ 1,061 $ 1,183
Loans charged off:
Single Family Residential(2) - (31) (40) (430) (167) (58)
Commercial Real Estate (83) - (158) - - (118)
Installment - (206) (16) (51) - (13)
-------- -------- -------- -------- -------- --------
Total loans charged off: (83) (237) (214) (481) (167) (189)
Recoveries of loans previously charged off:
Single Family Residential(2) 119 - - - 50 24
Commercial Real Estate - - - - - -
Installment - 72 28 14 13 3
-------- -------- -------- -------- -------- --------
Total loan recoveries 119 72 28 14 63 27
-------- -------- -------- -------- -------- --------
Net loans (charged off) recovered 36 (165) (186) (467) (104) (162)
Provision charged to operating expense (287) (63) 151 416 226 479
-------- -------- -------- -------- -------- --------
Balance of allowance for loan losses at
end of period $ 1,375 $ 1,147 $ 1,112 $ 1,061 $ 1,183 $ 1,500
======== ======== ======== ======== ======== ========
Net loan charge-offs to total average loans (0.05)% 0.21% 0.20% 0.48% 0.10 % 0.16%
Net loan charge-offs to loans at end of period (0.05)% 0.21% 0.20% 0.45% 0.10 % 0.16%
Allowance for loan losses to total loans at
end of period 1.97% 1.43% 1.17% 1.02% 1.19 % 1.49%
Net loan charge-offs to allowance for loan losses (2.62)% 14.39 16.73% 44.02% 8.79 % 10.80%
Net loan charge-offs to provision for loan losses (12.54)% (261.90)% 123.18% 112.26% 46.02 % 33.82%
</TABLE>
- -------------
(1) Loans are stated at gross amount.
(2) There were no construction real estate loan charge-offs or recoveries
for any of the above time periods.
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<PAGE> 125
The following table shows the allocation of Capitol Thrift's allowance
for loan losses and the percent of loans in each category to total loans at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
(Dollars in Thousands) 1994 1995 1996
-----------------------------------------------------------------------
% % %
Allowance of Loans Allowance of Loans Allowance of Loans
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Loan Categories:
Single Family Residential(1) $ 187 28.91% $ 124 25.67% $ 130 21.71%
Commercial Real Estate 437 67.57% 352 72.69% 463 77.51%
Installment 22 3.52% 8 1.64% 4 0.78%
Not allocated 729 -% 663 - 515 -
------ ------ ------ ------- ------ -------
Total $1,375 100% $1,147 100.00% $1,112 100.00%
====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
December 31, September 30,
(Dollars in Thousands) 1997 1998 1999
--------------------------------------------- ---------------------
% % % of
Allowance of Loans Allowance of Loans Allowance Loans
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Loan Categories:
Single Family Residential(1) $ 102 19.55% $ 173 21.42% $ 241 19.99%
Commercial Real Estate 414 79.60% 631 77.99% 960 79.59%
Installment 4 0.85% 5 0.59% 5 0.42%
Not allocated 541 - 374 - 294 -
------ ------- ------ ------- ------ -------
Total $1,061 100.00% $1,183 100.00% $1,500 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
______________
(1) Single family residential allowance includes $5,000 at December 31,
1998, allocated to construction real estate loans. This represents
0.9%. There was no allowance allocated to construction real estate
loans at September 30, 1999 and for all other years as there were not
any construction real estate loans.
Total loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention (including nonaccrual loans and troubled debt
restructuring) at September 30, 1999, were $5.1 million. There were no loans
classified as doubtful.
Total loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention (including nonaccrual loans and troubled debt
restructuring) at December 31, 1998 and 1997 were $8.3 million and $10.1
million, respectively. There were no loans classified as doubtful.
Management is not aware of any other material credit which there is
serious doubt regarding the ability to repay other than those reflected in
classified loans and in the allowance for loan losses.
Investment Securities
The following tables set forth the amortized cost, estimated fair
value, maturity schedule and weighted average yields of securities at the dates
indicated:
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<PAGE> 126
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Fair
September 30, 1999 Cost Gains/Loss Value
--------- ---------- ---------
<S> <C> <C> <C>
Available for sale -
U.S. Government Securities $ 6,008 $ 5 $ 6,013
======= ======= =======
December 31, 1998
Available for sale -
U.S. Treasuries $15,054 $ 99 $15,153
======= ======= =======
December 31, 1997
Available for sale -
U.S. Treasuries $12,117 $ 32 $12,149
======= ======= =======
Held to maturity -
Certificates of Deposit $ 1,485 $ 3 $ 1,488
======= ======= =======
December 31, 1996
Available for sale -
U.S. Treasuries $ 2,953 - $ 2,953
======= ======= =======
Held to maturity -
Certificates of Deposit $ 1,584 $ 2 $ 1,586
======= ======= =======
Estimated Weighted
Amortized Fair Average
September 30, 1999 Cost Value Yield
----------- ----------- --------
Due in one year or less $ 6,008 $ 6,013 5.71%
======= ======= ======
December 31, 1998
Due in one year or less $12,059 $12,128 5.76%
After one year through five years $ 2,995 $ 3,025 5.80%
------- ------- ------
$15,054 $15,153 5.68%
======= ======= ======
December 31, 1997
Due in one year or less $ 5,492 $ 5,496 5.80%
After one year through five years $ 8,110 $ 8,141 5.87%
------- ------- -------
$13,602 $13,637 5.84%
======= ======= ======
December 31, 1996
Due in one year or less $ 4,240 $ 4,242 5.49%
After one year through five years 297 297 6.48%
------- -------- ------
$ 4,537 $ 4,539 5.55%
======= ======== ======
</TABLE>
Deposits
Capitol Thrift primarily attracts deposits from individuals. Capitol
Thrift has no known foreign or brokered deposits. Capitol Thrift's deposit base
is summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, September 30,
------------------------------------ -------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ -- $ -- $ -- $ --
Interest bearing deposits:
Savings accounts 17,871 21,364 26,895 25,029
Time deposits:
Under $100,000 81,864 89,917 77,079 71,416
$100,000 and over 6,660 6,898 8,665 8,842
-------- -------- -------- --------
Total interest bearing deposits 106,395 118,179 112,639 105,287
-------- -------- -------- --------
Total deposits $106,395 $118,179 $112,639 $105,287
======== ======== ======== ========
</TABLE>
125
<PAGE> 127
The average daily amount of deposits and rates paid on deposits is
summarized below:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------------------------- -------------------
1996 1997 1998 1999
------------------- ------------------- ------------------- -------------------
Average Average Average Average
Balance Rate % Balance Rate % Balance Rate % Balance Rate %
------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits:
Savings accounts $16,386 4.15% $20,043 4.41% $24,295 4.70% $26,796 4.53%
Time deposits(1)(2) $82,055 6.03% $93,259 5.99% $97,688 5.84% $83,817 5.38%
</TABLE>
(1) Included at September 30, 1999, are $8.8 million in time certificates
of deposit of $100,000 or more, of which $2.0 million matures within
three months or less, $2.4 million matures in 3 to 6 months, $1.6
million matures in 6 to 12 months, and $2.8 million matures in more
than 12 months.
(2) Included at December 31, 1998, are $8.7 million in time certificates of
deposit of $100,000 or more, of which $3.2 million matures within three
months or less, $1.0 million matures in 3 to 6 months, $2.3 million
matures in 6 to 12 months, and $2.2 million matures in more than 12
months.
Interest paid on deposits fluctuates according to current market rates
and the liquidity needs of Capitol Thrift. For the nine months ended September
30 1999 and 1998, cost of funds decreased to 5.17% from 5.63%. Although cost of
funds increased over the same period in 1998, there was a decrease from December
31, 1998, due to a reduction in rates paid on time deposits.
Although average interest bearing deposits increased in 1998, Capitol
Thrift was able to keep rates competitive and decrease cost of funds. Cost of
funds decreased from 5.71% in 1997 to 5.61% in 1998.
Time deposits of $100,000 or more are generally received from Capitol
Thrift's growing retirement customer base, as well as local businesses and
professionals, although Capitol Thrift does not aggressively seek these types of
time deposits.
Capital Resources
The following table presents Capitol Thrift's capital position under
the regulatory guidelines at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
-------------------------------------- --------------------------------------
Actual Minimum Actual Minimum
Capital Capital Capital Capital
Ratios Ratios Ratios Ratios
--------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Total risk based capital ratio 12.13% 8.00% 13.12% 8.00%
Tier I capital to risk weighted assets 10.93% 4.00% 11.87% 4.00%
Leverage ratio 8.01% 4.00% 9.66% 4.00%
</TABLE>
Capitol Thrift is required to maintain minimum capital ratios defined
by various federal government regulatory agencies. These regulatory agencies
have established risk-based capital guidelines, which include minimum capital
requirements. On August 23, 1998, Capitol Thrift entered into an agreement with
the FDIC and the California Department of Financial Institutions (CDFI).
Management and the Board of Directors agreed to reduce the level of classified
assets as outlined in the agreement, develop and implement a plan with specific
strategies for reducing RPHFS, classified and non-performing loans and revise
the methodology for calculating the allowance for losses on loans. The FDIC and
CDFI have required that within 90 and 150 days of the agreement, Capitol Thrift
maintain a Leverage Ratio of 7.75% and 8.0%, respectively. Management believes
that they have complied in most material
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<PAGE> 128
respects with the provisions of the agreement and are actively working on
completing the process of complying with all other aspects.
At September 30, 1999, and December 31, 1998, Capitol Thrift exceeded
all applicable federal capital standards.
The Board of Directors authorized dividends of $.38 and $.40 per share
during 1998 and 1997.
Asset-Liability Management and Liquidity
The primary function of asset/liability management is to assure
adequate liquidity and maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities. Capitol Thrift's
policy has been to maintain an adequate liquidity position which, in addition to
cash and cash equivalents, relies on cash inflows principally from earned
interest, repayments of principal on loans and investments, and increases in
deposits. Capitol Thrift's principal cash outflows are from loan originations,
purchases of investment securities, decreases in deposits and payment of
operating expenses.
The following table sets forth the interest-rate sensitivity of Capitol
Thrift's interest-earning assets and interest-bearing liabilities as of
September 30, 1999. The cumulative interest sensitivity gap as reflected in the
table represents the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing, whichever is earlier, at a
given point in time and is not necessarily indicative of the position on other
dates.
<TABLE>
<CAPTION>
(Dollars in Thousands) September 30, 1999
------------------------------------------------------------------------------
After After Three After One
Next Day But Months But Year
Within Three Within 12 But Within After Five
Immediately Months Months 5 Years Years Total
----------- ------------ ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans(1) $ - $ 17,692 $ 18,508 $ 21,993 $ 40,058 $ 98,251
Investment Securities(2) - 3,000 3,000 - - 6,000
Federal Funds Sold 8,000 - - - - 8,000
Deposits with other finc'l inst - - - - 0
-------- -------- -------- -------- -------- --------
Total Earning Assets $ 8,000 $ 20,692 $ 21,508 $ 21,993 $ 40,058 $112,251
======== ======== ======== ======== ======== ========
Interest Bearing transaction accounts:
Savings and IRA accounts $ - $ 26,214 $ 2,530 $ 5,664 $ 588 $ 34,996
Time Deposits - 15,661 42,319 12,177 134 70,291
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities - $ 41,875 $ 44,849 $ 17,841 $ 722 $105,287
======== ======== ======== ======== ======== ========
Interest Rate Sensitivity Gap: $ 8,000 $(21,183) $(23,341) $ 4,152 $ 39,336
Cumulative gap $ 8,000 $(13,183) $(36,524) $(32,372) $ 6,964
Cumulative gap percentage to total
earning assets 6.33% (10.43)% (28.91)% (25.62)% 5.51%
</TABLE>
___________
(1) Loan balance does not include nonaccrual loans of $2.6 million.
(2) Investment securities are stated at amortized costs.
The gap is considered positive when the amount of interest rate
sensitive assets which reprice over a given time period exceeds the amount of
interest rate sensitive liabilities which reprice over the same time period and
is considered negative when the reverse is true. During a period of rising
interest rates, a positive gap tends to result in increased net interest income
while a negative gap would have an adverse affect on net interest income. As
illustrated
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<PAGE> 129
by the table, Capitol Thrift was "liability sensitive" with respect to
interest-earning assets and interest-bearing liabilities repricing within one
year. However, management does not consider regular passbook accounts to be
interest rate sensitive. Management also includes assumptions for loan
prepayment in its GAP analysis. This results in cumulative one year GAP
percentages to total earning assets of less than 1.0%. Within one year,
management expects that, in an increasing rate environment, Capitol Thrift's net
interest margin would be expected to slightly decline as liabilities would
generally reprice more quickly than assets, and in a decreasing rate
environment, Capitol Thrift's net interest margin would tend to increase.
Management and the Board of Directors have established limits of interest rate
risk deemed acceptable and measure Capitol Thrift's current exposure against
those limits. At September 30, 1999, management believed that the exposure to
interest rate risk was within established limits.
The following table sets forth the interest-rate sensitivity of Capitol
Thrift's interest-earning assets and interest-bearing liabilities as of December
31, 1998.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998
----------------------------------------------------------------------------------------
After After Three
Next Day But Months But After One Year
Within Three Within 12 But Within 5 After Five
Immediately Months Months Years Years Total
----------- ------------ ----------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) $ - $ 21,496 $ 21,066 $ 17,983 $ 34,107 $ 94,652
Investment Securities (2) - 8,500 9,000 3,000 - 20,500
Federal Funds Sold 5,500 - - - - 5,500
Deposits with other finc'l inst - - - - - -
-------- -------- -------- -------- -------- --------
Total Earning Assets $ 5,500 $ 29,996 $ 30,066 $ 20,983 $ 34,107 $120,652
======== ======== ======== ======== ======== ========
Interest Bearing transaction accounts:
Savings and IRA accounts $ - $ 29,060 $ 21,845 $ 7,722 $ 168 $ 58,795
Time Deposits - 27,926 13,821 10,673 1,424 53,844
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities - $ 56,986 $ 35,666 $ 18,395 $ 1,592 $112,639
======== ======== ======== ======== ======== ========
Interest Rate Sensitivity Gap: $ 5,500 $(26,990) $ (5,600) $ 2,588 $ 32,515
Cumulative gap $ 5,500 $(21,490) $(27,090) $(24,502) $ 8,013
Cumulative gap percentage to total
earning assets 4.56% (17.81)% (22.45)% (20.31)% 6.64%
</TABLE>
________________
(1) Loan balance does not include nonaccrual loans of $5.1 million.
(2) Investment securities are stated at amortized costs.
Effect of Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the thrift industry and the resulting need to increase equity
capital in order to maintain an appropriate equity-to-assets ratio. An important
effect of this has been the reduction of the proportion of earnings paid out as
dividends by some banking organizations. Another significant effect of inflation
is on other expenses, which tend to rise during periods of general inflation.
Year 2000 Issues
Capitol Thrift & Loan Association and its parent corporation Global
Bancorp (collectively "the Company") have been working on becoming year 2000
compliant since late 1997. In the first quarter of 1998, the Company
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<PAGE> 130
developed a formal plan relating to the assessment and remediation of any year
2000 compliance problems and the development of contingency plans. By mid-1998,
the Company had:
- identified and prioritized all internal, mission critical
hardware and software systems;
- developed its own year 2000 testing plan for all internal,
mission critical systems;
- developed a budget for all year 2000-related costs;
- developed a risk assessment for all systems, both internal and
external (i.e. vendors);
- contacted all large borrowers and depositors to better
understand their year 2000 risks; and
- begun implementing renovation and enhancement efforts to
correct year 2000 problems or eliminate exposures to year 2000
problems.
During the last half of 1998, the Company, in accordance with FDIC
requirements, tested most of its mission critical systems to confirm their date
change viability. As necessary, the Company installed system upgrades and
replaced hardware. During this period, the Company sought and received
assurances from all significant vendors that their own systems were year 2000
compliant and developed contingency plans to address failures of vendors'
systems in spite of their assurances. By the end of 1998, the Company
successfully completed the testing of mission critical internal systems. This
process included incremental changes to the hardware and software components.
During the remainder of 1999, the Company intends to test and validate
its previously-developed contingency plans and perform additional customer
outreach and education.
The Company estimates that the total costs related to its year 2000
compliance program will not be material.
In order to prevent a liquidity crunch caused by the public's
perception of the year 2000 problem, the Company has been active in customer
education by sending letters to its customers advising them of the Company's
year 2000 compliance efforts and providing them with FDIC year 2000 awareness
material. Additionally, the Company is prepared to increase its liquidity and
has confirmed that FHLB borrowing will be available if necessary.
BUSINESS OF GLOBAL BANCORP
Introduction
Global Bancorp is a California corporation organized on September 18,
1980, to act as a holding company for thrift and loan companies and to engage in
other financial activities.
Thrift and loan companies raise lendable funds primarily by issuing
passbook investment (which resemble passbook savings accounts) and certificate
of deposit investment certificates (which resemble bank's certificates of
deposit). Thrift and loan companies use such funds to make loans and to purchase
conditional sales contracts and other consumer finance instruments.
Global Bancorp conducts business through its wholly-owned thrift and
loan company subsidiary, Capitol Thrift, a California corporation licensed under
the California Industrial Loan Law. See " - Regulation and Supervision -
Regulation of Capitol Thrift." Capitol Thrift was formed by the July, 1982
merger of Global Bancorp's two-office thrift and loan company subsidiary of that
name (which had commenced operations in January 1982) with Atlas Thrift Company
("Atlas"), a 12-office California thrift and loan company formed in 1947.
Capitol Thrift's deposits are insured up to $100,000 by the Federal Deposit
Insurance Corporation. Unless the context otherwise requires, the term "Global
Bancorp" refers to Global Bancorp and Capitol Thrift.
Global Bancorp and Capitol Thrift have their head offices located at
1424 Second Street, Napa, California 94559. Capitol Thrift has 10 branches all
in the State of California.
129
<PAGE> 131
As of September 30, 1999, Global Bancorp had total assets of $117.7
million, total deposits of $105.3 million and shareholders' equity of $11.8
million. Global Bancorp's net income for the nine months ended September 30,
1999, and the year ended December 31, 1998, was $952,000 and $1.1 million. Net
income for the nine months ended September 30, 1999, included $297,000 from the
proceeds of a life insurance policy insuring the life of a former officer. For
the year ended December 31, 1998, Global Bancorp's return on average assets was
.78% and return on average equity was 9.96% per year.
Business Strategy
Increase loan assets. Since 1995, Capitol Thrift has had a primary goal
of increasing loans without significantly increasing operating expenses. Capitol
Thrift has increased loans by $14.7 million or 18.9% for the year ended December
31, 1996, and $8.3 million or 8.9% for the year ended December 31, 1997. Loans
decreased by $3.7 million or 3.6% for the year ended December 31, 1998. During
the year, $9.5 million of loans were sold. These loans were sold as a strategy
to reduce assets and thereby increase the leverage ratio to a level in
compliance with a regulatory agreement as discussed above under "Capital
Resources." This sale of loans also produced a $476,000 gain on sale of loans
for the year ended December 31, 1998.
Other non-interest expenses exclusive of those related to RPHFS were
$3.98 million for the year ended December 31, 1998, compared to $3.92 million
for the year ended December 31, 1997, or 1.5% higher compared to the growth
increase for loans above of 6.3% (adjusted for loans sold). They were $3.96
million annualized for the nine months ended September 30, 1999 compared to
$3.98 million for the year ended December 31, 1998, or 1.16% higher compared to
the growth decrease for loans annualized at 8.1%. Now that the leverage ratio is
above the required level, Capitol Thrift continues to seek higher loan assets.
The primary thrust of its lending is directed at small commercial "A" and "B"
product real estate loans in the $200,000 to $1,000,000 range. It offers both
fixed and variable rates, with calls primarily ranging from two years to 10
years and amortization schedules up to 30 years.
Increase non-interest income. In addition to its commercial real estate
loan products, the Company also offers conforming and non-conforming residential
loans, although not as its primary loan products. It also has a wide variety of
correspondent lending relationships that enable it to effectively offer almost
any type of real estate loan product, "passing through" to other lenders those
loans, that for whatever reason, do not fit its target market.
Due to its high average cost of money, approximately 5.15%, which is a
result of its large portfolio of higher costing certificate of deposit accounts,
with no demand deposit accounts, the Company does not retain the majority of
lower yielding residential loans, or higher loan-to-value originations. These
are "passed through" to the other lenders with whom it maintains a correspondent
relationship.
Reduce RPHFS related expenses. As mentioned above under the caption
"Allowance for Loan Losses", Capitol Thrift has strengthened its credit and
underwriting requirements. This has resulted in declining non-performing loans.
This in turn should result in declining RPHFS related expenses as lower amounts
of loans are foreclosed and become RPHFS.
Banking Services
Capitol Thrift conducts a general consumer and commercial finance
business from 10 branches located throughout the State of California. Capitol
Thrift's primary source of revenue is providing commercial and single-family,
residential real estate loans to customers who are predominantly small and
middle-market businesses and individuals. Capitol Thrift does not provide
general commercial banking services such as demand checking accounts, lines of
credit, safe deposit boxes and wire transfer. Capitol Thrift funds its lending
activities by issuing thrift certificates and investment certificates.
130
<PAGE> 132
Lending Activities
Capitol Thrift concentrates its lending activities on commercial real
estate and single-family residential loans. Capitol Thrift also makes consumer
installment loans. As of September 30, 1999, commercial loans, single-family
loans and installment loans were 81.7%, 20.5%, and .4%, respectively, of total
loans. Capitol Thrift did not have any real estate construction loans as of
September 30, 1999. Non-residential loans are primarily medium term commercial
real estate loans with maturities ranging from 5 to 15 years. All of Capitol
Thrift's commercial loans are secured by real estate. Such loans generally range
in size from $200,000 to $1.0 million and are made to varying types of
businesses, including but not limited to small office buildings, retail
businesses, restaurants, warehouses and churches.
Commercial real estate loans to churches totaled approximately 13.6% of
total loans at September 30, 1999. The properties securing these loans are
primarily multi-use properties and are geographically dispersed throughout
California to varying religious denominations. Capitol Thrift is not currently
originating these types of loans.
Human Resources
At September 30, 1999, Global had 47 full-time employees and 4
part-time employees. No employees are represented by a collective bargaining
agreement. The Company believes that it enjoys good relations with its
personnel.
Competition
Since Capitol Thrift's activities are conducted on a statewide basis,
it faces strong competition, both in attracting deposits and originating loans,
from numerous national, regional and community banks, savings and loan
associations, mutual savings banks, credit unions and other financial
institutions that serve California. Capitol Thrift's principal competition in
originating loans are the local community banks in the communities where the
company's branch offices are located. Capitol Thrift's principal competition in
attracting deposits are other thrifts. Capitol Thrift's competition include
Southern Pacific Thrift & Loan, First Fidelity Bank, Affinity Bank, Novato
Community Bank and Imperial Thrift. These and many other competitors are larger
and better capitalized than Capitol Thrift.
The primary factors affecting competition for deposits are interest
rates and the quality and range of deposit and lending services offered. The
primary factors affecting competition for loans are interest rates, loan
origination fees, and the quality and range of lending services offered. Capitol
Thrift relies on its close proximity to numerous local small and medium-sized
businesses, personal contacts and referrals by its officers, directors,
employees, shareholders and customers, other local promotional activities and
its reputation in the community to compete effectively. It also uses an
extensive network of loan brokers to generate loans.
131
<PAGE> 133
Premises
The following table sets forth information about Global Bancorp's and
Capitol Thrift's offices.
<TABLE>
<CAPTION>
Location Type of Office Owned/Leased Size Since
- -------- -------------- ------------ ---- -----
<S> <C> <C> <C> <C>
San Jose Branch Leased 1,000 1993
Riverside Branch Leased 1,848 1987
Fresno Branch Leased 1,670 1994
Roseville Branch Leased 1,376 1996
Sacramento Branch Leased 2,148 1995
Lancaster Branch Leased 2,500 1996
Lodi Branch Leased 2,100 1994
San Diego Branch Leased 1,200 1990
Covina Branch Leased 1,410 1997
Napa Collections Dept. Leased 1,955 1997
Napa Administration/Branch Owned 5,600 1986
</TABLE>
Legal Proceedings
Global Bancorp's management believes that there is no threatened or
pending legal proceedings against Global Bancorp or Capitol Thrift which if
determined adversely, would have a material adverse effect on the business or
financial position Global Bancorp or Capitol Thrift.
Management and Directors of Global
The following table presents certain information with respect to the
directors and executive officers of Global Bancorp, including their respective
ages and positions with Global Bancorp and Capitol Thrift:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Sherwood J. Tarlow 75 Chairman of the Board of Global Bancorp
and Capitol Thrift
Robert F. Kelly 55 President and Director of Global Bancorp
and Capitol Thrift
James Kemp 78 Vice Chairman of the Board and Director
of Global Bancorp and Director of Capitol
Thrift
Leighton Monroe, Jr. 55 Vice President, Chief Financial Officer,
and Secretary of Global Bancorp and
Capitol Thrift
Richard E. Moore 54 Director of Global Bancorp and Capitol
Thrift
Helen L. Tarlow 75 Director of Global Bancorp and Capitol
Thrift
</TABLE>
During the past five years, the business experience of each director
and executive officer is as follows:
Sherwood J. Tarlow. Mr. Tarlow has been a director of Global Bancorp
and Capitol Thrift since 1982. Mr. Tarlow is a private investor and is retired.
Robert F. Kelly. Since 1997 Mr. Robert F. Kelly has been President of
Global Bancorp and President and Chief Executive Officer. Prior thereto he was
Vice President of Capitol Thrift.
132
<PAGE> 134
James Kemp. Since 1997 Mr. Kemp has been a director of Global Bancorp
and Capitol Thrift. Mr. Kemp is a retired savings and loan industry executive.
Richard E. Moore. Since 1999, Mr. Moore has been a director of Global
Bancorp and Capitol Thrift. Mr. Moore is a retired savings and loan executive.
Helen L. Tarlow. Mrs. Tarlow has been a director of Global Bancorp
since 1982. She is a private investor and housewife and is married to Sherwood
J. Tarlow.
Leighton Monroe, Jr. Mr. Leighton Monroe, Jr. has been Vice President,
Chief Financial Officer, and Secretary of Capitol Thrift since 1989.
There are no arrangements or understandings among any of the directors,
officers or any other persons pursuant to which any of the above directors or
officers have been selected as directors or officers.
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of November 30, 1999, the number and
percentage of Global Bancorp's common stock which are beneficially owned,
directly or indirectly, by:
- each shareholder who owns more than 5% of the outstanding
shares;
- each of Global Bancorp's directors;
- Global Bancorp's named executive officers; and
- all of Global's directors and executive officers as a group.
The shares "beneficially owned" are determined under Securities and
Exchange Commission rules, and do not necessarily indicate ownership for any
other purpose. In general, beneficial ownership includes shares over which the
indicated person has sole or shares voting or investment power and share which
he/she has the right to acquire within 60 days of November 30, 1999. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Management is not aware of any arrangements
which may at a subsequent date, result in a change of control of Global Bancorp.
<TABLE>
<CAPTION>
Shares Beneficially Owned
----------------------------------------
Name of Beneficial Owner Total Number Percent
- ------------------------ ------------ -------
<S> <C> <C>
Helen L. Tarlow 229,590 32.5%
Michael and Carole Friedman 39,200 5.6%
Sherwood J. Tarlow 16,500 2.3%
Robert F. Kelly 1,500(1) *
Leighton F. Monroe, Jr. 2,500(2) *
James Kemp - -
All Directors and Executive Officers and a Group 289,290 40.9%
</TABLE>
- ----------
(1) Represents 1,500 shares issuable upon exercise of options.
(2) Represents 1,500 shares issuable upon exercise of options and 1,000 shares
beneficially owned.
* Denotes less than 1%.
Regulation and Supervision
General. Capitol Thrift is an industrial loan company licensed under
the California Industrial Loan Law and is regulated, supervised and periodically
examined by the California Department of Financial Institutions (CDFI) and the
Federal Deposit Insurance Corporation (FDIC). Capitol Thrift's investment
certificates are insured by the FDIC to
133
<PAGE> 135
the maximum amount permitted by law, which is currently $100,000 per depositor
in most cases. For this protection, Capitol Thrift pays a semi-annual assessment
and the rules and regulations of the FDIC pertaining to deposit insurance and
other matters apply.
The regulations of the FDIC and CDFI govern most aspects of Capitol
Thrift's business and operations, including, but not limited to, the scope of
its business, investments, reserves against deposits, the nature and amount of
any collateral for loans, the time of availability of deposited funds, the
issuance of securities, the payment of dividends, branch expansion and bank
activities and the making of periodic reports. Various consumer laws and
regulations also apply to Capitol Thrift. The FDIC and the CDFI have broad
enforcement powers over depository institutions, including the power to prohibit
a regulated institution from engaging in business practices which are considered
to be unsafe or unsound, to impose substantial fines and other civil and
criminal penalties, to terminate deposit insurance, and to appoint a conservator
or receiver under a variety of circumstances.
Capitol Thrift is subject to detailed, complex and sometimes
overlapping federal and state statutes and regulations in their routine banking
operations. These statutes include but are not limited to state usury and
consumer credit laws, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Truth in Savings Act and the Community Reinvestment Act.
California Industrial Loan Law. California law defines an industrial
loan company as a company that in the regular course of business lends money and
issues investment certificates. As a California industrial loan company, Capitol
Thrift is regulated under California's Industrial Loan Law, also known as
California's Industrial Banking Law or California's Thrift and Loan Law, and is
supervised by the CDFI. The sale, merger or conversion of an industrial loan
company and another industrial loan company, bank or savings association is
subject to California law.
California industrial loan companies must maintain a minimum amount of
capital stock and prescribed amounts of additional stock for each branch office.
In addition, the Department of Financial Institutions may require reasonable
reserves as deemed necessary in accordance with sound business practices. No
person may acquire in the aggregate 10% or more of the capital stock of an
industrial loan company through any means without the written consent of the
commissioner. An industrial loan company must be a participating member of the
FDIC.
Industrial loan companies may issue investment certificates and
securities, subject to certain qualifications and approvals. The total amount of
investment certificates issued and outstanding at any time by an industrial loan
company is subject to limitations based on the amount of its unimpaired capital
and surplus. Real estate holdings are limited to the purchase and construction
of a building to carry on business, property taken to satisfy a debt, and
property acquired through foreclosure. An industrial loan company may invest
funds in any investments that are permissible for commercial banks.
California law authorizes industrial loan companies to make closed-end
and open-end loans, with limits or restrictions on aggregate loans to one
borrower, loan-to-value ratios, maximum loan charges and loan terms, loan fees,
advertising, foreclosure procedures and other loan features. California law also
authorizes insurance premium finance agencies, and sets forth regulations for
insurance premium finance loans. Each industrial loan company must maintain
books and records, subject to audit, and file an annual audit report. All
changes in officers, directors and managing personnel must be reported. Foreign
industrial loan companies that maintain a facility or branch in California are
subject to separate filing and reporting requirements.
Global Bancorp, as a holding company, is also governed by certain
provisions of the Industrial Loan Law. Specifically, certain transactions
between an industrial loan company and its holding company are prohibited. An
industrial loan company may not, directly or indirectly, make any loan to, or
purchase a contract, loan or chose in action from, or hold a lease obligation
of, or purchase a lease contract from (i) a person in which an officer or
director of any holding company, directly or indirectly, is financially
interested, directly or indirectly; (ii) a person in which the holder of record
or beneficiary of is in excess of ten percent (10%) of the shares of any holding
company, directly or indirectly, is financially interested, directly or
indirectly; and (iii) a person who acquires those contracts, directly or
134
<PAGE> 136
indirectly, or through intervening assignments from a person described in (i) or
(ii). California law provides that a holding company cannot be used for the
purpose of evading or avoiding any provisions of the Industrial Loan Law. A
holding company is defined as an entity that, directly or through one or more
intervening subsidiaries, whether or not wholly owned, controls or has power to
control a majority of the shares of an industrial loan company.
The CDFI has supervisory and enforcement powers over industrial loan
companies. The CDFI can enter into agreements with other state and federal
agencies regulating financial institutions and can turn over information on
industrial loan companies as part of an investigation by other agencies. The
CDFI can investigate and examine books and records, audit financial reports and
financial statements, take possession of and retain property or the business
until the business is resumed or liquidated, or order suspension or limitation
of payment of liabilities if the CDFI determines such action necessary to
protect the company, its investors or creditors, or if in the public interest.
Enforcement powers include the power to invoke judicial remedies, both civil and
criminal, and impose fines.
In 1996 and 1997, Capitol Thrift experienced an increase in loss on
real property held for sale (RPHFS) and expenses related thereto. A majority of
the losses related to loans made prior to June 1992, at which time credit
underwriting policies were strengthened. As a result of these increases, in
August 1998, Capitol Thrift entered into an agreement with the FDIC and the CDFI
pursuant to which management and the Board of Directors agreed to reduce the
level of classified assets as outlined in the agreement, develop and implement a
plan with specific strategies for reducing RPHFS, classified and non-performing
loans, and revise the methodology for calculating the allowance for losses on
loans. In addition, Capitol Thrift is required to maintain certain leverage
ratios. Capitol Thrift management believes that Capitol Thrift has complied in
most material respects with the provisions of the agreement and are actively
working on completing the process of complying with all other aspects.
EXPERTS
The financial statements of Humboldt Bancorp and subsidiary as at
December 31, 1998, and for each of the three years in the period then ended
included in this 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 consolidated balance sheet of Global Bancorp and subsidiary as at
December 31, 1998, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the year then ended included in this
document have been audited by Grant Thornton 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.
The consolidated financial statements of Global Bancorp and Subsidiary
as of December 31, 1997, and for each of the two years in the period ended
December 31, 1997, included in this document have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In 1998, Global Bancorp retained Grant Thornton LLP as its independent
accountants. PricewaterhouseCoopers LLP was Global Bancorp's previous
independent accountants. The decision to change independent accountants was
ratified and approved by Global Bancorp's Board of Directors in October 1998.
During the relationship between Global Bancorp and PricewaterhouseCoopers LLP,
there were no disagreements regarding any matters with respect to accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which disagreements, if not resolved to the satisfaction of the
former accountants, would have caused PricewaterhouseCoopers LLP to make
reference to the subject matter of the disagreement in connection with its
report. The former accountants' report is a part of the financial statements of
Global Bancorp included in this document. Such reports did not contain an
adverse opinion or disclaimer of opinion or
135
<PAGE> 137
qualification of modifications as to uncertainty, audit scope or accounting
principles. Prior to retaining Grant Thornton LLP, Global Bancorp had not
consulted with Grant Thornton LLP regarding accounting principles.
LEGAL MATTERS
The validity of the certificates of interest and common stock to be
issued by Humboldt Bancorp in this offering is being passed upon by Bartel Eng
Linn & Schroder, a Law Corporation, Sacramento, California. Tax matters in
connection with this offering will be passed upon by Covington and Burling,
Washington, D.C. Legal matters in connection with the merger will be passed upon
for Humboldt Bancorp and Humboldt Bank by Gary Steven Findley & Associates,
Anaheim, California, and for Global Bancorp and Capitol Thrift by Allen,
Matkins, Leck, Gamble & Mallory LLP, San Francisco, California.
WHERE YOU CAN FIND MORE INFORMATION
Humboldt Bancorp has filed a registration statement on Form S-4 to
register with the Commission the common stock to be issued to shareholders of
Global Bancorp in the merger. This document is a part of that Registration
Statement and constitutes a prospectus of Humboldt Bancorp in addition to being
a proxy statement for the annual meeting of Global Bancorp. As allowed by the
Commission's rules, this document does not contain all of the information you
can find in the registration statement or the documents provided as in the
exhibits to the registration statement.
Humboldt Bancorp files annual, quarterly and special reports, proxy
statements and other information with the Commission. You may read and copy any
reports, statements and other information filed by Humboldt Bancorp at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. You will also be able to obtain the
Commission filings from commercial document retrieval services and at the
Commission's web site at http://www.sec.gov.
Global Bancorp's 1998 audited financial statements appear in this
document beginning on page F-37. Global Bancorp has also prepared an Annual
Disclosure Statement in accordance with the Federal Deposit Insurance
Corporation's regulations. You may obtain a copy on request from Global Bancorp,
1424 Second Street, Napa, California 94559, Attention: Mr. Robert F. Kelly,
President.
136
<PAGE> 138
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HUMBOLDT BANCORP AND SUBSIDIARY
Independent Auditor's Report .................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998, and
September 30, 1999 (unaudited) ................................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998, and for the Nine Month
Periods Ended September 30, 1998 and 1999 (unaudited) ......... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998, and
for the Nine Month Period Ended September 30, 1999
(unaudited) ................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998, and for the Nine Month
Periods Ended September 30, 1998 and 1999 (unaudited) ......... F-7
Notes to Consolidated Financial Statements ...................... F-9
GLOBAL BANCORP AND SUBSIDIARY
Independent Auditors' Reports ................................... F-37
Consolidated Balance Sheets, December 31, 1997 and 1998, and
September 30, 1999 (unaudited) ................................ F-39
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1997 and 1998, and for the Nine Month
Periods Ended September 30, 1998 and 1999 (unaudited) ......... F-40
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998, and for the Nine
Month Period Ended September 30, 1999 (unaudited) ............. F-41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998, and for the Nine Month
Periods Ended September 30, 1998 and 1999 (unaudited) ......... F-42
Notes to Financial Statements ................................... F-44
</TABLE>
F-1
<PAGE> 139
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiary
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp) and Subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1996, 1997 and 1998. These financial
statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Humboldt Bancorp
and Subsidiary at December 31, 1997 and 1998, and the consolidated results of
their operations and their consolidated cash flows for the years ended December
31, 1996, 1997 and 1998, in conformity with generally accepted accounting
principles.
Richardson & Company
January 15, 1999, except
for Note Y, as to which
the date is January 14, 2000
F-2
<PAGE> 140
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 21,442 $ 28,626 $ 25,401
Interest-bearing deposits in other banks 3,020 3,020 20
Federal funds sold 3,520 2,250 56,145
Investment securities, at fair value 80,180 77,802 106,210
Loans held for sale 48 7,677 719
Loans and lease financing receivables, net of allowance
for loan and lease losses and deferred loan fees 157,464 178,361 202,379
Premises and equipment, net 5,635 7,950 9,421
Accrued interest receivable and other assets 12,778 14,289 18,872
-------- -------- --------
TOTAL ASSETS $284,087 $319,975 $419,167
======== ======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 70,767 $ 96,884 $118,267
Interest-bearing 184,419 187,083 257,548
-------- -------- --------
Total Deposits 255,186 283,967 375,815
Accrued interest payable and other liabilities 3,586 4,758 5,898
Long-term debt 1,761 3,402 4,638
-------- -------- --------
TOTAL LIABILITIES 260,533 292,127 386,351
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized with 1,576,542, 1,787,954 and 4,721,361
(unaudited) shares issued and outstanding in 1997,
1998 and 1999, respectively 20,495 25,580 27,768
Additional paid-in capital 114 297 297
Retained earnings 2,200 1,485 4,671
Accumulated other comprehensive income 745 486 80
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 23,554 27,848 32,816
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $284,087 $319,975 $419,167
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 141
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $13,773 $15,961 $18,762 $13,998 $14,136
Interest and dividends on investment
securities:
Taxable 1,687 2,700 3,239 2,665 2,271
Exempt from Federal income tax 577 569 739 525 631
Dividends 102 83 78 48 37
Interest on federal funds sold 374 612 512 421 696
Interest on deposits in other banks 49 128 174 132 73
------- ------- ------- ------- -------
Total Interest Income 16,562 20,053 23,504 17,789 17,844
INTEREST EXPENSE
Interest on deposits 5,501 6,973 7,565 5,735 5,410
Interest on long-term debt and other
borrowings 48 51 177 120 225
------- ------- ------- ------- -------
Total Interest Expense 5,549 7,024 7,742 5,855 5,635
------- ------- ------- ------- -------
NET INTEREST INCOME 11,013 13,029 15,762 11,934 12,209
Provision for loan and lease losses 533 773 2,124 1,541 697
------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES 10,480 12,256 13,638 10,393 11,512
OTHER INCOME
Fees and other income 4,285 6,911 9,731 6,815 11,731
Service charges on deposit accounts 709 1,300 2,097 1,543 1,805
Net gain (loss) on sale of loans 75 (204) 645 251 349
Net investment securities gains (losses) 678 102 (93)
------- ------- ------- ------- -------
Total Other Income 5,747 8,109 12,473 8,609 13,792
OTHER EXPENSES
Salaries and employee benefits 5,592 6,806 9,151 6,763 8,659
Net occupancy and equipment expense 1,792 2,466 2,711 1,962 2,092
Other expenses 3,941 6,224 7,716 5,746 9,826
------- ------- ------- ------- -------
Total Other Expenses 11,325 15,496 19,578 14,471 20,577
------- ------- ------- ------- -------
Income Before Income Taxes 4,902 4,869 6,533 4,531 4,727
Provision for income taxes 1,926 1,611 2,517 1,720 1,537
------- ------- ------- ------- -------
NET INCOME $ 2,976 $ 3,258 $ 4,016 $ 2,811 $ 3,190
======= ======= ======= ======= =======
NET INCOME PER SHARE $ 0.65 $ 0.68 $ 0.83 $ 0.58 $ 0.64
======= ======= ======= ======= =======
NET INCOME PER SHARE -- ASSUMING DILUTION $ 0.58 $ 0.61 $ 0.75 $ 0.53 $ 0.58
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 142
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Comprehensive ------------------- Paid-in Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
------------- --------- ------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,266,509 $14,852 $ 1,268 $ 815 $16,935
10% stock dividend 126,346 2,179 (2,179)
Fractional shares purchased (5) (5)
Stock options exercised 17,912 148 148
Comprehensive income:
Net income $2,976 2,976 2,976
Other comprehensive loss, net of
tax:
Unrealized holding losses on
securities available-for-sale
arising during the year, net of
taxes of $323 (454) (454) (454)
------ --------- ------- ---------- ------- ----- -------
Total comprehensive income $2,522
======
BALANCE AT DECEMBER 31, 1996 1,410,767 17,179 2,060 361 19,600
10% stock dividend 143,110 3,113 (3,113)
Fractional shares purchased (5) (5)
Stock options exercised and related
tax benefit 22,665 203 $ 114 317
Comprehensive income:
Net income $3,258 3,258 3,258
Other comprehensive income, net of
tax:
Unrealized holding gains on
securities available-for-sale
arising during the year, net of
taxes of $274 384 384 384
------ --------- ------- ---------- ------- ----- -------
Total comprehensive income $3,642
======
BALANCE AT DECEMBER 31, 1997 1,576,542 20,495 114 2,200 745 23,554
</TABLE>
(Continued)
F-5
<PAGE> 143
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Comprehensive ------------------- Paid-in Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
------------- --------- ------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
10% stock dividend 160,110 4,723 (4,723)
Fractional shares purchased (8) (8)
Stock options exercised and related
tax benefit 51,302 362 183 545
Comprehensive income:
Net income $4,016 4,016 4,016
Other comprehensive loss, net of
tax:
Unrealized holding losses on
securities available-for-sale
arising during the year, net of
taxes of $185 (259) (259) (259)
------ --------- ------- ---------- ------- ----- -------
Total comprehensive income $3,757
======
BALANCE AT DECEMBER 31, 1998 1,787,954 25,580 297 1,485 486 27,848
5 for 2 stock split (unaudited) 2,681,817
Fractional shares purchased
(unaudited) (4) (4)
Sale of common stock (unaudited) 153,652 1,844 1,844
Stock options exercised
(unaudited) 97,938 344 344
Comprehensive income:
Net income (unaudited) $3,190 3,190 3,190
Other comprehensive loss, net of
tax:
Unrealized holding losses on
securities available-for-sale
arising during the year, net of
taxes of $290 (unaudited) (406) (406) (406)
------ --------- ------- ---------- ------- ----- -------
Total comprehensive income
(unaudited) $2,784
======
BALANCE AT SEPTEMBER 30, 1999
(UNAUDITED) 4,721,361 $27,768 $ 297 $ 4,671 $ 80 $32,816
========= ======= ========== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 144
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,976 $ 3,258 $ 4,016 $ 2,811 $ 3,190
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and lease losses 533 773 2,124 1,541 697
Depreciation 1,041 1,565 1,586 1,131 1,115
(Gain) loss on sale of investments (678) (102) 93
Amortization and other 916 1,390 1,517 1,182 977
Equity in income of subsidiary (22) (259) (160) (300)
Decrease (increase) in loans held for sale 1,817 15 (7,629) (3,190) 6,958
Increase in interest receivable and other assets (520) (1,422) (734) (906) (728)
Increase in interest payable and other liabilities 122 1,913 1,355 2,079 1,142
-------- -------- -------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,207 7,368 1,976 4,488 13,144
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits with
banks 1,100 (3,000) 3,000
Net (increase) decrease in federal funds sold (1,100) 3,050 1,270 (5,860) (53,895)
Proceeds from maturities and sales of investment
securities
available-for-sale 33,235 22,261 28,169 20,968 27,920
Purchases of investment securities
available-for-sale (19,935) (62,711) (27,967) (21,501) (57,939)
Net increase in loans and leases (30,289) (15,491) (23,370) (21,860) (24,715)
Purchases of premises and equipment (2,096) (1,100) (3,901) (3,762) (2,586)
Investment in partnership/subsidiary (2,000) (91) (92) (1,242)
Proceeds from the sale of OREO 139 322 148 175
Premium paid on deposits purchased (1,040) (2,355)
Purchases of life insurance policies (2,337)
-------- -------- -------- -------- ---------
NET CASH USED BY INVESTING ACTIVITIES (21,422) (59,892) (25,568) (31,959) (111,637)
</TABLE>
(Continued)
F-7
<PAGE> 145
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
(Unaudited)
FINANCING ACTIVITIES
Net increase in deposit accounts $ 18,050 $ 62,535 $ 28,781 $ 22,099 $ 91,848
Net proceeds from long-term debt and notes payable 22 1,000 1,700 1,700 1,300
Payments on long-term debt and notes payable (34) (14) (59) (38) (64)
Proceeds from issuance of common stock 148 203 362 297 2,188
Fractional shares purchased (5) (5) (8) (8) (4)
-------- -------- -------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,181 63,719 30,776 24,050 95,268
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 2,966 11,195 7,184 (3,421) (3,225)
Cash and due from banks at beginning of period 7,281 10,247 21,442 21,442 28,626
-------- -------- -------- -------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 10,247 $ 21,442 $ 28,626 $ 18,021 $ 25,401
======== ======== ======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 5,535 $ 6,940 $ 7,755 $ 5,937 $ 5,435
Income taxes $ 2,666 $ 1,809 $ 2,830 $ 1,905 $ 1,835
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 2,179 $ 3,113 $ 4,723 $ 4,723
Net change in unrealized gains on securities
available-for-sale $ (777) $ 658 $ (444) $ (141) $ (696)
Net change in deferred income taxes on unrealized gains on
securities available-for-sale $ 323 $ (274) $ 185 $ 59 $ 290
Deposit liabilities assumed in exchange for assets
acquired in connection with purchase of branches $ 75 $ 72,105
Loans transferred to OREO $ 233 $ 54 $ 349 $ 175
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 146
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Business: Humboldt Bancorp, formed in 1995, is a bank holding company whose
principal activity iFs the ownership and management of its wholly-owned
subsidiary, Humboldt Bank. The Bank was incorporated on March 13, 1989 and
opened for business on September 13, 1989. The Bank operates under a California
state charter and is subject to regulation, supervision and regular examination
by the Department of Financial Institutions and the Federal Deposit Insurance
Corporation. The regulations of these agencies govern most aspects of the Bank's
business. The accounting and reporting policies of the Bank conform with
generally accepted accounting principles and general practices within the
banking industry.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Bancorp and its wholly-owned subsidiary, the Bank. All material
intercompany accounts and transactions have been eliminated.
Nature of Operations: The Bank is locally owned and operated and its primary
service area is the communities of Northern California. The Bank's business is
primarily focused on servicing the banking needs of individuals living and
working in the Bank's primary service areas and local businesses, including
retail, professional and real estate related enterprises in those service areas.
The Bank offers a broad range of services to individuals and businesses with an
emphasis upon efficiency and personalized attention. The Bank provides a full
line of consumer services, and also offers specialized services to small
businesses, middle market companies, and professional firms, such as courier
services and appointment banking. The Bank offers personal and business checking
and savings accounts (including individual interest-bearing negotiable orders of
withdrawal ("NOW") accounts and/or accounts combining checking and savings
accounts with automatic transfers), IRA and Keogh accounts, time certificates of
deposit and direct deposit of social security, pension and payroll checks. It
also makes available commercial, construction, accounts receivable, inventory,
automobile, home improvement, real estate, office equipment, leasehold
improvement, lease receivable financing and other consumer loans (including
overdraft protection lines of credit), drafts and standby letters of credit,
credit card activities to both individuals (including both secured and unsecured
credit cards) and merchants and travelers' checks (issued by an independent
entity).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities: Securities are classified as held-to-maturity if the Bank
has both the intent and ability to hold those debt securities to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Securities are classified as available-for-sale if the Bank intends to hold
those debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized holding gains or losses
are reported as increases or decreases in stockholders' equity, net of the
related deferred tax effect. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in earnings.
F-9
<PAGE> 147
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases Held for Sale: The Bank sells mortgage loans, the guaranteed
portion of Small Business Administration (SBA)-guaranteed loans and loan
participations (with servicing retained) for cash proceeds equal to the
principal amount of loans, participation or leases with yield rates to the
investor based upon the current market rate. In accordance with Statement of
Financial Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, the Bank records an asset
representing the right to service loans for others when it sells a loan and
retains the servicing rights. The total cost of originating or purchasing the
loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.
SFAS No. 125 also required the assessment of all capitalized servicing rights
for impairment based on current fair value of those rights. For purposes of
evaluating and measuring impairment, the Bank stratifies servicing rights based
on the type and interest rates of the underlying loans. Impairment is measured
as the amount by which the servicing rights for a stratum exceed their fair
value.
A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. The Bank's investment in an SBA loan is
allocated among the sold and retained portions of the loan based on the relative
fair value of each portion at the time of loan origination, adjusted for
payments and other activities. Because the portion retained does not carry an
SBA guarantee, part of the gain recognized on the sold portion of the loan may
be deferred and amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.
Loans and leases held for sale are recorded at the lower of cost or market
determined on an aggregate basis.
Loans and Lease Financing Receivables: Loans and leases are stated at the amount
of unpaid principal, less the allowance for losses, net deferred loan fees and
costs and unearned income. Interest on loans is accrued and credited to income
based on the principal amount outstanding. Unearned income on installment loans
is recognized as income over the term of the loans using a method that
approximates the interest method.
The Bank's leasing operations consist principally of the leasing of
point-of-sale terminals, printers for credit card vouchers and related
equipment. The Bank also has purchased small equipment leases from Bancorp
Financial Services, a subsidiary of the Bancorp. All of the Bank's leases are
classified and accounted for as direct financing leases. Under the direct
financing method of accounting for leases, the total net rentals receivable
under the lease contracts, net of unearned income, are recorded as a net
investment in direct financing leases, and the unearned income is recognized
each month as it is earned so as to produce a constant periodic rate of return
on the unrecovered investment.
Loan origination fees and certain direct origination and acquisition costs are
capitalized and recognized as an adjustment of the yield on the related loan or
lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.
Beginning in 1997, credit card origination costs were deferred and netted
against the related credit card fee, if any, and the net amount was amortized on
a straight-line basis over the initial privilege period. Fees received and
marketing costs incurred in connection with unsuccessful efforts to create
credit card relationships were recorded as revenue and expense when the
refundable period expired. Amounts paid
F-10
<PAGE> 148
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
to third-party direct marketing specialists related to successful efforts to
create credit card relationships were deferred and netted against related fees
and all other amounts are recorded as expenses in the period the services were
performed. Annual service fees are deferred and amortized over the credit card
privilege period.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan, including credit card receivables, and lease portfolios.
Credit losses related to off-balance-sheet instruments are included in the
allowance for loan and lease losses except if the loss meets the criteria for
accrual under Statement of Financial Accounting Standard No. 5, in which case
the amount is accrued and reported separately as a liability. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and leases and other pertinent factors. The
allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed quarterly and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known. Loans and leases deemed uncollectible are charged to the allowance.
Credit card receivables are charged to the allowance when they become 120 days
past due. Provisions for losses and recoveries on loans and leases previously
charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Allowances on impaired loans are established based on the
present value of expected future cash flows discounted at the loans effective
interest rate or for collateral-dependent loans, on the fair value of the
collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and
leases, including impaired loans and leases, are generally classified as
nonaccrual if they are past due as to maturity or payment of principal or
interest for a period of more than 90 days, unless such loans and leases are
well-secured and in the process of collection. If a loan or lease or a portion
of a loan or lease is classified as doubtful or is partially charged off, the
loan or lease is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis.
In the case where a nonaccrual loan or lease had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan and lease losses until prior charge-offs have been fully
recovered.
F-11
<PAGE> 149
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Foreclosed Real Estate: Foreclosed real estate includes both formally foreclosed
property and in-substance foreclosed property. In-substance foreclosed
properties are those properties for which the Bank has taken physical
possession, regardless of whether formal foreclosure proceedings have taken
place. At the time of foreclosure, foreclosed real estate is recorded at the
lower of the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of their new cost basis or fair value minus estimated costs
to sell. Revenue and expenses from operations and subsequent adjustments to the
carrying amount of the property are included in income (loss) on foreclosed real
estate.
Intangible Assets: The premiums paid to acquire the deposits of the
McKinleyville, Arcata, Weaverville, Willow Creek, Loleta and Garberville
branches were allocated to core deposit intangibles based on the results of
valuation studies performed to determine the fair value of the deposit base
acquired. Core deposit intangibles are being amortized over the estimated
remaining life of the related deposits.
Investment in Unconsolidated Subsidiary: The Bank, along with another bank,
formed a California corporation, Bancorp Financial Services, Inc. for the
purpose of operating an equipment leasing company. In January 1997, the Bank
contributed capital totaling $2,000,000 for a 50% interest in this corporation.
The investment is accounted for using the equity method. During 1998, this
investment was transferred to the Bancorp.
Income Taxes: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal loans and securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred taxes are computed using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized for
deductible temporary differences and tax credit carryforwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Advertising: Advertising costs are charged to operations in the year incurred.
Net Income Per Share: Net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
after giving retroactive effect to stock dividends. Net income per share --
assuming dilution is computed similar to net income per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Included in the denominator is the dilutive effect of stock options
computed under the treasury method.
F-12
<PAGE> 150
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Off-Balance-Sheet Financial Instruments: In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash and Cash Equivalents: For the purpose of presentation in the Statement of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."
Unaudited Interim Financial Data: The interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments, including
normal recurring accruals necessary for fair presentation of results of
operations for the interim periods included herein, have been made. The results
of operations for the six months ended June 30, 1999, are not necessarily
indicative of results to be anticipated for the year ending December 31, 1999.
Recently Issued Accounting Standards: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133), was issued. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for
financial statements issued for all quarters of all fiscal years beginning after
June 15, 2000. The Bancorp has not made an assessment of the potential impact of
adopting Statement No. 133 at this time.
NOTE B -- RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS
IN OTHER BANKS
Cash and due from banks include amounts the Bank is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirements at December 31, 1997 and 1998 were $6,060,000
and $10,936,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1997 and 1998 to secure the full
performance of all of the Bank's payment obligations to MasterCard in connection
with the Bank's MasterCard membership.
F-13
<PAGE> 151
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE C -- INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1997:
Available-for-Sale
U.S. Government and agency securities $ 2,996 $ 11 $ 3,007
Municipal securities 12,190 581 12,771
Collateralized mortgage obligations issued
by U.S. government agencies 62,433 698 $ 17 63,114
Equity securities 1,286 2 1,288
------- ------ ---- -------
Total available-for-sale $78,905 $1,292 $ 17 $80,180
======= ====== ==== =======
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
------- ------ ---- -------
Total available-for-sale $76,971 $1,191 $360 $77,802
======= ====== ==== =======
</TABLE>
The maturities of investment securities at December 31, 1998 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
<S> <C> <C>
Amounts maturing in:
3 months or less $ 2,677 $ 2,444
Over three months through twelve months 13,385 12,835
After one year through three years 36,056 36,822
After three years through five years 7,257 7,299
After five years through fifteen years 10,384 10,958
After fifteen years 6,150 6,380
Equity securities 1,062 1,064
------- -------
$76,971 $77,802
======= =======
</TABLE>
The amortized cost and fair value of collateralized mortgage obligations are
presented by average life in the preceding table. Expected maturities differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
F-14
<PAGE> 152
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE C -- INVESTMENT SECURITIES (Continued)
Proceeds from sales of investment securities available-for-sale during 1996,
1997 and 1998 were $27,766,000, $12,418,000, and $445,550, respectively. Gross
gains and losses on those sales were $683,000 and $5,000 in 1996 and $108,000
and $6,000 in 1997, respectively. There were no gains or losses on the
investment securities sold in 1998.
Investment securities with an amortized cost of approximately $2,002,000 and
$3,000,000 and an approximate market value of $2,009,000 and $3,013,000 at
December 31, 1997 and 1998, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $5,084,000 and
$4,878,000 and an approximate market value of $5,173,000 and $4,804,000 at
December 31, 1997 and 1998, respectively, were pledged to secure public funds
and other deposits. Furthermore, investment securities with an amortized cost of
approximately $5,289,000 and an approximate market value of $5,224,000 at
December 31, 1998 were pledged as collateral for an advance from the Federal
Home Loan Bank. In addition, investment securities with an amortized cost of
approximately $2,179,000 and $10,188,000 and an approximate market value of
$2,182,000 and $10,229,000 at December 31, 1997 and 1998, respectively, were
pledged to Visa and Mastercard to secure the full performance of all of the
Bank's payment obligations to Visa and Mastercard in connection with the Bank's
Visa and Mastercard membership.
NOTE D -- LOANS AND LEASE FINANCING RECEIVABLES, NET
The components of loans and lease financing receivables in the balance sheets
were as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Real estate -- construction and land development $ 20,165 $ 20,667
Real estate -- commercial and agricultural 65,772 80,197
Real estate -- family and multifamily residential 27,205 27,549
Commercial, industrial and agricultural 28,766 35,493
Lease financing receivables, net of unearned income of
$1,395,000 and $1,896,000 in 1997 and 1998,
respectively 8,732 9,867
Credit card receivables 7,062 5,672
Consumer loans, net of unearned income of $15,000 and
$1,000 in 1997 and 1998, respectively 2,440 2,110
Other 502 585
-------- --------
160,644 182,140
Deferred loan fees (809) (724)
Allowance for loan and lease losses (2,371) (3,055)
-------- --------
$157,464 $178,361
======== ========
</TABLE>
F-15
<PAGE> 153
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE D -- LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1997 and 1998, follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Three months or less $ 76,777 $ 71,990
Over three months to twelve months 10,904 15,463
Over one year to three years 24,119 28,428
Over three years to five years 16,517 32,113
Over five years to fifteen years 22,186 21,979
Over fifteen years 9,303 11,856
-------- --------
159,806 181,829
Nonaccrual loans 838 311
-------- --------
$160,644 $182,140
======== ========
</TABLE>
At December 31, 1997 and 1998 approximately $2,449,000 and $1,348,000,
respectively, of the Bank's credit card receivables were secured by savings
accounts.
At December 31, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with Statement No. 114 totaled $748,000, with a
corresponding valuation allowance of $166,000. At December 31, 1998, the
recorded investment in loans for which impairment has been recognized totaled
$338,000, with a corresponding valuation allowance of $126,000. For the years
ended December 31, 1996, 1997 and 1998, the average recorded investment in
impaired loans was approximately $247,000, $156,000 and $515,000, respectively.
In 1996 and 1997, the Bank recognized $2,000 and $5,000, respectively of
interest on impaired loans (during the portion of the year that they were
impaired), all of which was recognized on the cash basis. In 1998 the Bank
recognized $41,000 of interest on impaired loans (during the portion of the year
that they were impaired), of which $21,000 was related to impaired loans for
which interest income was recognized on the cash basis.
In addition, at December 31, 1996, 1997 and 1998, the Bank had other nonaccrual
loans of approximately $218,000, $97,000 and $246,000 for which impairment had
not been recognized. If interest on these loans had been recognized at the
original interest rates, interest income would have increased approximately
$12,000 in 1996, $5,000 in 1997 and $16,000 in 1998. The Bank has no commitments
to loan additional funds to the borrowers of impaired or nonaccrual loans.
The Bank receives fees for servicing retained on loans and leases sold. Loans
and leases being serviced by the Bank for others were as follows at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Loans $101,355 $123,232 $144,531
Lease financing receivables 3,078 701 2
Credit cards 904
-------- -------- --------
$104,433 $124,837 $144,533
======== ======== ========
</TABLE>
F-16
<PAGE> 154
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE D -- LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Beginning balance $1,868 $2,146 $2,371
Provision for loan and lease losses 533 773 2,124
Credit cards charged off (475) (956)
Leases charged off (132) (124) (316)
Loans charged off (242) (211) (362)
Credit card recoveries 87 105
Lease recoveries 34 34 24
Loan recoveries 85 141 65
------ ------ ------
Ending balance $2,146 $2,371 $3,055
====== ====== ======
</TABLE>
Components of premises and equipment included the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Land $ 1,042 $ 1,962
Buildings and improvements 3,269 5,168
Furniture, fixtures and equipment 3,656 3,007
Leasehold improvements 9 203
------- -------
7,976 10,340
Accumulated depreciation (2,341) (2,390)
------- -------
$ 5,635 $ 7,950
======= =======
</TABLE>
F-17
<PAGE> 155
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE F -- INVESTMENT IN UNCONSOLIDATED EQUIPMENT LEASING SUBSIDIARY
The following information summarizes the activity of the unconsolidated
equipment leasing subsidiary from inception in January 1997 through November 30,
1997 and for the twelve months ended November 30, 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Balance sheet
Assets $11,794 $21,323
======= =======
Liabilities $ 7,750 $16,761
Equity 4,044 4,562
------- -------
$11,794 $21,323
======= =======
Income statement
Revenues $ 1,018 $ 3,055
Expenses 974 2,537
------- -------
Net income 44 518
X 50% X 50%
------- -------
Bancorp's share of net income $ 22 $ 259
======= =======
</TABLE>
NOTE G -- TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1998, the Bank recorded $739,000 of servicing
rights related to loans originated and sold. Amortization of the servicing
rights was $141,000 for the year ended December 31, 1998. The estimated fair
value of the servicing assets aggregated $598,000 at December 31, 1998. A
valuation allowance is recorded where the fair value is below the carrying
amount of the servicing assets. No valuation allowance was needed at December
31, 1998.
NOTE H -- INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Negotiable order of withdrawal (NOW) $ 21,575 $ 22,314
Savings and money market 52,380 48,936
Time, $100,000 and over 40,643 46,355
Other time 69,821 69,478
-------- --------
$184,419 $187,083
======== ========
</TABLE>
F-18
<PAGE> 156
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE H -- INTEREST-BEARING DEPOSITS (Continued)
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
NOW $ 162 $ 190 $ 207
Savings and money market 1,082 1,327 1,232
Time, $100,000 and over 1,245 1,803 2,412
Other time 3,012 3,653 3,714
------ ------ ------
$5,501 $6,973 $7,565
====== ====== ======
</TABLE>
The maturities of time deposits at December 31, 1998 are as follows (dollars in
thousands):
<TABLE>
<S> <C>
Three months or less $ 47,015
Over three months through twelve months 57,522
Over one year through three years 9,491
Over three years 1,805
--------
$115,833
========
</TABLE>
NOTE I -- LINE OF CREDIT
The Bank has uncommitted federal funds lines of credit agreements with two
financial institutions. The maximum borrowings available under the lines totaled
$10,500,000. Availability of this line is subject to federal funds balances
available for loan and continued borrower eligibility. The line is intended to
support short-term liquidity, and cannot be used for more than ten consecutive
business days or more than twelve times during a given thirty day period. At
December 31, 1998 there were no borrowings outstanding under the agreements.
NOTE J -- LONG-TERM DEBT
The Bank has three advances totaling $3,402,000 from the Federal Home Loan Bank
(FHLB) at December 31, 1998. The first advance totaling $747,000 is due in
monthly installments of principal and interest, at 6.19%, of approximately
$5,000 through February 15, 2004. The second advance of $1,000,000 is due at
maturity on December 31, 2007. Interest is due semi-annually at 6.18%. The third
advance totaling $1,655,000 is due in monthly installments of principal and
interest, at 6.08%, of approximately $14,000 through April 8, 2013. Investment
securities with an amortized cost of $5,289,000 and approximate fair value of
$5,224,000 at December 31, 1998, were held as collateral for these three
advances. The Bank also had loans with an approximate principal balance of
$1,991,000 at December 31, 1998 pledged as collateral for these advances.
F-19
<PAGE> 157
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE J -- LONG-TERM DEBT (Continued)
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2003 are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1999 $ 86
2000 93
2001 99
2002 107
2003 114
</TABLE>
NOTE K -- FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Merchant credit card processing fees $2,508 $3,906 $6,177
Lease residuals and rentals 752 1,306 1,575
Credit card program fees 169 778 1,019
Fees for customer services 287 291 346
Earnings on life insurance 142 195 106
Loan and lease servicing fees 370 346 87
Other (none exceeding 1% of revenues) 57 89 421
------ ------ ------
$4,285 $6,911 $9,731
====== ====== ======
</TABLE>
NOTE L -- OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Merchant credit card program $ 434 $ 822 $2,665
Professional and other outside services 693 1,342 1,122
Stationery, supplies and postage 542 887 884
Telephone and travel 424 478 598
Amortization of core deposit intangible 372 426 372
Credit card program 170 1,021 346
Data processing and ATM fees 199 170 324
Development 129 242 249
Advertising 235 265 247
FDIC and other insurance 480 164 186
Other (none exceeding 1% of revenues) 263 407 723
------ ------ ------
$3,941 $6,224 $7,716
====== ====== ======
</TABLE>
F-20
<PAGE> 158
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE M -- INCOME TAXES
The components of income tax expense included in the statements of operations
were as follows for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Currently payable
Federal $1,757 $1,707 $2,104
State 624 602 735
------ ------ ------
2,381 2,309 2,839
Deferred tax benefit
Federal (324) (606) (394)
State (131) (206) (111)
------ ------ ------
(455) (812) (505)
Tax benefit of exercised stock options recorded as
additional paid in capital 114 183
------ ------ ------
Net provision for income taxes $1,926 $1,611 $2,517
====== ====== ======
</TABLE>
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Income tax at Federal statutory rate $1,667 $1,655 $2,221
State franchise tax, less federal income tax
benefit 366 348 467
Interest on municipal obligations exempt from
Federal tax (193) (176) (227)
Nonstatutory stock option expense (91)
Interest on enterprise zone loans exempt from State
tax (58) (52) (38)
Life insurance earnings and expenses (20) (93) (55)
Deferred tax asset valuation allowance change 252 (99) 122
Other differences 3 28 27
------ ------ ------
Provision for income taxes $1,926 $1,611 $2,517
====== ====== ======
</TABLE>
F-21
<PAGE> 159
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE M -- INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 795 $ 944
Nonqualified benefit plans 681 984
Deferred loan fees 333 295
State franchise taxes 205 249
Depreciation 397 525
Merchant Bankcard program 280 379
Core deposit intangible amortization 115 186
Deferred credit card fees 110 84
Other 53 88
------ ------
Total deferred tax assets 2,969 3,734
Valuation allowance for deferred tax assets (319) (441)
------ ------
Deferred tax assets recognized 2,650 3,293
Deferred tax liabilities:
Unrealized securities holding gains 530 346
Equity in income of subsidiaries 8 116
FHLB stock dividends 33 49
Other 25 40
------ ------
Total deferred tax liabilities 596 551
------ ------
Net deferred tax asset $2,054 $2,742
====== ======
</TABLE>
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
the Bank's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.
Income taxes payable were $199,000 and $207,000 at December 31, 1997 and 1998,
respectively. The income tax expense related to net investment securities gains
was $281,000 and $42,000 during 1996 and 1997, respectively. There were no net
investment gains during 1998.
F-22
<PAGE> 160
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE N -- EARNINGS PER SHARE
The following is a computation of basic and diluted earnings per share for the
years ended December 31 (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net income $ 2,976 $ 3,258 $ 4,016
========== ========== ==========
Weighted-average common shares outstanding 4,636,858 4,755,971 4,876,531
========== ========== ==========
Earnings per share $ 0.65 $ 0.68 $ 0.83
========== ========== ==========
Diluted:
Net income $ 2,976 $ 3,258 $ 4,016
========== ========== ==========
Weighted-average common shares outstanding 4,636,858 4,755,971 4,876,531
Net effect of dilutive stock options -- based on
the treasury stock method using average market
price 498,275 568,882 502,038
---------- ---------- ----------
Weighted-average common shares outstanding and
common stock equivalents 5,135,133 5,324,853 5,378,569
========== ========== ==========
Earnings per share -- assuming dilution $ 0.58 $ 0.61 $ 0.75
========== ========== ==========
</TABLE>
Options to purchase 30,250 shares of common stock at $10.25 per share were
outstanding at December 31, 1997 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. All options outstanding at December 31, 1996
and 1998 were included in the computation of diluted EPS.
NOTE O -- BENEFIT PLANS
Retirement Plan: The Bank has a defined contribution retirement plan covering
substantially all of the Bank's employees. Bank contributions to the plan are
made at the discretion of the Board of Directors in an amount not to exceed the
maximum amount deductible under the profit sharing plan rules of the Internal
Revenue Service. Employees may elect to have a portion of their compensation
contributed to the plan in conformity with the requirements of Section 401(k) of
the Internal Revenue Code. Salaries and employee benefits expense includes Bank
contributions to the plan of $98,000 during 1996, $134,000 during 1997 and
$189,000 during 1998.
F-23
<PAGE> 161
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE O -- BENEFIT PLANS (Continued)
Director Fee Plan: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each Bank director to elect to receive
his/her director's fees in the form of Bancorp common stock, cash, or a
combination of Bancorp common stock and cash, and to elect to defer the receipt
of any of the foregoing until the end of his/her term as a Bank director. If
deferral is elected, the amount of the director's fees shall be credited to an
account on behalf of the director, however, such crediting shall constitute a
mere promise on the part of the Bank and Bancorp to pay/distribute on this
account. The account is otherwise unsecured, unfunded and subject to the general
claims of creditors of the Bank and Bancorp. The Fee Plan provides for the
issuance of up to 110,000 shares of Bancorp common stock. The amount of such
fees deferred in 1997 and 1998 totaled $43,000 and $58,000, respectively. At
December 31, 1997 and 1998, the liability for amounts due under this plan
totaled $63,000 and $110,000, respectively, or approximately 7,500 and 12,000
shares of stock.
Employee Stock Bonus Plan: The Bancorp has an Employee Stock Bonus Plan which is
funded annually at the sole discretion of the Board of Directors. Funds are
invested in Bancorp stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bank. The compensation cost recognized for 1996, 1997 and 1998 was $20,000 each
year.
NOTE P -- STOCK OPTION PLAN
At December 31, 1998, the Bancorp has a stock-based compensation plan consisting
of a fixed stock option plan which is described below. The Bancorp applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its stock option plan. Had compensation cost for the Bancorp's stock option
plan been determined based on the fair value at the grant dates for awards under
this plan consistent with the method of SFAS No. 123, the Bancorp's net income
and net income per share would have been adjusted to the pro forma amounts
indicated below (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net income
As reported $2,976 $3,258 $4,016
Pro forma 2,946 3,194 3,716
Net income per share
As reported 0.65 0.68 0.83
Pro forma 0.64 0.67 0.76
Net income per share -- assuming dilution
As reported 0.58 0.61 0.75
Pro forma 0.57 0.60 0.69
</TABLE>
The Bancorp has a stock option plan under which incentive and nonstatutory stock
options, as defined under the Internal Revenue Code, may be granted. Options
representing 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, 781,767 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.
F-24
<PAGE> 162
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE P -- STOCK OPTION PLAN (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996, 1997 and 1998, respectively; dividend yield
of zero for all years; expected volatility of 9.40 percent for 1996, 10.69 for
1997 and 1998; risk-free interest rates of 5.54 percent and 6.29 percent for
1996, 5.85 percent and 6.48 percent for 1997 and 5.95 percent for 1998 for the
incentive options; risk-free interest rates of 5.85 percent and 6.65 percent for
1996, 5.86 percent and 6.87 percent for 1997 and 5.94 percent and 5.02 percent
for 1998 for the nonstatutory options; and expected lives of 10 years for the
incentive options for all years and 5 years for the nonstatutory options granted
in 1996 and 10 years for nonstatutory options granted in 1997 and 1998.
A summary of stock option activity, adjusted to give effect to stock dividends
and the 1999 stock split (unaudited) follows:
<TABLE>
<CAPTION>
Incentive Stock Options
------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
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 $2.65 478,024 $2.79 519,301 $3.75 612,328
Options granted 4.37 42,086 8.68 100,278 9.75 6,050
Options exercised 3.40 (4,276) 2.01 (85,624)
Options expired 3.47 (809) 4.08 (2,975) 8.31 (1,322)
------- ------- -------
Shares under option at
end of year 2.79 519,301 3.75 612,328 4.08 531,432
======= ======= =======
Options exercisable at
end of year 444,433 479,677 446,815
Weighted-average fair
value of options
granted during the
year 2.56 4.45 4.36
</TABLE>
F-25
<PAGE> 163
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE P -- STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
Nonstatutory Stock Options
------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
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 $2.92 514,553 $ 3.27 521,177 $3.84 483,320
Options granted 5.31 66,217 10.15 33,275 9.29 30,800
Options exercised 2.49 (59,593) 2.65 (71,132) 2.91 (61,536)
------- ------- -------
Shares under option at
end of year 3.27 521,177 3.84 483,320 4.34 452,584
======= ======= =======
Options exercisable at
end of year 376,318 416,966 452,584
Weighted-average fair
value of options
granted during the
year 1.76 4.99 3.80
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Weighted-average
Number Remaining Weighted-average
Range of Exercise Prices Outstanding Contractual Life Exercise Price
------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$1.95 to $3.23 430,441 3.4 years $2.52
$3.47 to $6.54 422,197 6.2 years 4.15
$9.09 to $10.25 131,378 9.2 years 9.83
-------
$1.95 to $10.25 984,016 6.4 years 4.20
=======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
------------------------------
Number Weighted-average
Range of Exercise Prices Exercisable Exercise Price
- ------------------------ ----------- ----------------
<S> <C> <C>
$1.95 to $3.23 430,441 $2.52
$3.47 to $6.54 384,450 3.98
$9.09 to $10.25 84,508 9.80
-------
$1.95 to $10.25 899,399 3.83
=======
</TABLE>
F-26
<PAGE> 164
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE Q -- RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive officers
and their affiliates and a subsidiary of the Bank (related parties). The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 1997 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Loans outstanding at beginning of year $ 3,624 $ 6,218
Loan disbursements 4,693 2,095
Loan repayments (2,099) (1,862)
------- -------
Loans outstanding at end of year $ 6,218 $ 6,451
======= =======
</TABLE>
At December 31, 1997 and 1998, commitments to related parties of approximately
$1,245,000 and $605,000 were undisbursed.
Deposits received from directors and officers totaled $2,013,000 and
$1,531,000 at December 31, 1997 and 1998, respectively.
The Bank made payments totaling $23,000 in 1996, $50,000 in 1997 and
$73,000 in 1998 to a travel business owned by a director. Payments under
contracts with directors' companies for premises remodeling, repair and
engineering services totaled $17,000 in 1996, $14,800 in 1997 and $32,000 in
1998. The Bank purchased computer equipment and office furniture from businesses
owned by members of executive officers' immediate families totaling $5,700 in
1996, $17,000 in 1997 and $20,000 in 1998. The Bank paid fees for payroll
services and other miscellaneous expenses totaling $7,000 in 1996, $11,000 in
1997 and $4,000 in 1998 to a business with which a director is associated. In
1997, the Bank entered into a long term lease for a branch office with a company
owned by a director. Payments on the lease during 1997 and 1998 totaled $13,000
and $31,000.
During 1997, the Bancorp purchased leases that were originated by its
subsidiary, Bancorp Financial Services. These outstanding lease receivable
balances, net of unearned interest, totaled $5,588,000 and $5,403,000 at
December 31, 1997 and 1998, respectively.
NOTE R -- COMMITMENTS AND CONTINGENT LIABILITIES
Postemployment Benefit Plans and Life Insurance Policies: The Bank has purchased
single premium life insurance policies in connection with the implementation of
salary continuation and deferred compensation plans for certain key employees.
The policies provide protection against the adverse financial effects from the
death of a key employee and provide income to offset expenses associated with
the plans. The specified employees are insured under the policies, but the Bank
is the owner and beneficiary. At December 31, 1997 and 1998, the cash surrender
value of these policies totaled approximately $4,810,000 and $4,943,000,
respectively.
The plans are unfunded and provide for the Bank to pay the employees specified
amounts for specified periods after retirement and allow the employees to defer
a portion of current compensation in exchange for the Bank's commitment to pay a
deferred benefit at retirement. If death occurs prior to or during retirement,
the Bank will pay the employee's beneficiary or estate the benefits set forth in
the plans.
F-27
<PAGE> 165
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE R -- COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
At December 31, 1997 and 1998, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $1,451,000 and $2,038,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of the Bank. Otherwise no benefits are paid upon termination. Deferred
compensation is vested as to the amounts deferred. In the event of death or
under certain other circumstances, the Bank is contingently liable to make
future payments greater than the amounts recorded as liabilities. Based on
present circumstances, the Bank does not consider it probable that such a
contingent liability will be incurred or that in the event of death, such a
liability would be material after consideration of life insurance benefits.
Lease Commitments: The Bank leases five sites under noncancelable operating
leases expiring in August 1999, September 1999, February 2006, September 2007
and October 2008. The lease expiring August 1999 includes an option to extend
the lease for an additional term of one year. The lease expiring in February
2006 requires adjustments to the base rent after two years for changing price
indices with a maximum annual increase of five percent and includes an option to
renew for two consecutive five-year terms. The lease expiring September 2007 is
renewable for two consecutive five-year periods and requires adjustment every
September 1 based on changing price indices but not less than 2% nor more than
10%. The lease expiring October 2008 requires annual adjustments to the base
rent every November 3 of the greater of 2% or the percentage increases in the
Consumer Price Index and includes an option to extend the term of the lease for
three consecutive five-year terms.
As of December 31, 1998, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Lease
Commitment
----------
<S> <C>
Year ended December 31:
1999 $ 182
2000 171
2001 173
2002 176
2003 178
Thereafter 710
------
Total minimum lease commitments $1,590
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled
$94,000, $128,000 and $269,000, respectively. Sublease rental income was $14,000
in 1996 and $4,000 in 1997.
Financial Instruments with Off-Balance-Sheet Risk: The Bank's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are
F-28
<PAGE> 166
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE R -- COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
commitments to extend credit, credit card arrangements and standby letters of
credit. A summary of the Bank's commitments and contingent liabilities at
December 31, is as follows (dollar in thousands):
<TABLE>
<CAPTION>
Contractual Amounts
1997 1998
-------- --------
<S> <C> <C>
Commitments to extend credit $32,616 $42,200
Credit card arrangements 10,695 12,299
Standby letters of credit 3,927 5,240
</TABLE>
Commitments to extend credit, credit card arrangements and standby letters of
credit all include exposure to some credit loss in the event of nonperformance
of the customer. The Bank's credit policies and procedures for credit
commitments and financial guarantees are the same as those for extension of
credit that are recorded on the balance sheet. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, certificates of deposits and
income-producing commercial properties. At December 31, 1997 and 1998,
approximately $1,484,000 and $1,300,000, respectively, of the Bank's undisbursed
credit card commitments were secured by deposit accounts.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees extending more
than two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers. The
Bank holds assigned deposit accounts as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 1997 and 1998 varies from zero to 100%; the
average amount collateralized is approximately 37% in 1997 and 92% in 1998. None
of these letters of credit were utilized during 1997 or 1998.
The Bank has not incurred any losses on its commitments in 1996, 1997 or 1998.
Merchant Credit and Debit Card Sales Processing: The Bank processes the
settlement of credit and debit card sales for merchants located throughout the
continental United States, Alaska, Hawaii and Puerto Rico. The process involves
collecting funds from the card issuing bank and crediting the merchant accounts
in exchange for a merchant discount and other processing fees. The more
significant areas of risk associated with this process includes the risk that
funds due from the card issuing bank will be uncollectible, that significant
fines may be assessed for violations of VISA or MasterCard rules or that the
merchant will be unable to absorb chargebacks, deliver products due to
insolvency or may commit fraud. To protect the Bank from losses, merchant
deposits of $46,935,000 at December 31, 1998 have been established by
withholding a percentage of merchant processing volume. In addition, the Bank
has accrued a liability to cover losses,
F-29
<PAGE> 167
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE R -- COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
if any, in excess of the merchant reserves of $680,000 and $954,000 at December
31, 1997 and 1998, respectively. No losses were incurred in 1996 or 1997. The
Bank has incurred approximately $28,000 in losses during 1998. The Bank
processed approximately $1.5 billion and $2.5 billion of credit and debit card
sales for merchants during 1997 and 1998, respectively.
Legal Proceedings: The Bancorp is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by legal counsel to the Bancorp as to the current status
of various claims and proceedings to which the Bancorp is a party, management is
of the opinion that the ultimate aggregate liability represented thereby, if
any, will not have a material adverse effect on the financial position or
results of operations of the Bancorp.
NOTE S -- CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the State
of California, primarily in Northern California except for the merchant credit
card debit card sales processing as discussed in Note R. The economy of the
Bank's primary service area is heavily dependent on the area's major industries
which are timber, commercial fishing, agriculture and tourism. General economic
conditions or natural disasters affecting the primary service area or its major
industries could affect the ability of customers to repay loans and the value of
real property used as collateral.
In addition to the types of loans as set forth in Note D, the Bank has
concentrations in out-of-area participation loans, motel loans and construction
loans. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers on a secured
basis in excess of 25% of its unimpaired capital (shareholders' equity plus the
allowance for loan and lease losses) and on an unsecured basis in excess of 15%
of its unimpaired capital.
The Bank places its cash investments primarily in financial instruments backed
by the U.S. Government and its agencies or by high quality financial
institutions or corporations. At December 31, 1997 and 1998, approximately 15%
and 9%, respectively, of the Bank's net worth was invested in federal funds sold
to a New York bank. In addition, at December 31, 1998, the Bank had deposits in
federally insured banks in excess of federally insured limits by $3,851,000.
NOTE T -- REGULATORY MATTERS
Banking regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's regulatory agency. Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three years,
net of the amount of any other distributions made to shareholders during such
periods. As of December 31, 1998, $8,043,000 was available for cash dividend
distribution without prior approval.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minium capital requirements can
initiate certain mandatory -- and possible additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's
F-30
<PAGE> 168
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE T -- REGULATORY MATTERS (Continued)
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<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, 1997:
Total Capital (to Risk Weighted
Assets) $23,118 12.02% *$15,381 *8.0% *$19,226 *10.0%
Tier I Capital (to Risk Weighted
Assets) $20,747 10.79% *$ 7,690 *4.0% *$11,536 *6.0%
Tier I Capital (to Average
Assets) $20,747 7.38% *$11,238 *4.0% *$14,047 *5.0%
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets) $25,683 11.66% *$17,617 *8.0% *$22,022 *10.0%
Tier I Capital (to Risk Weighted
Assets) $22,931 10.41% *$ 8,809 *4.0% *$13,213 *6.0%
Tier I Capital (to Average
Assets) $22,931 7.23% *$12,690 *4.0% *$15,863 *5.0%
</TABLE>
* Should be greater than or equal to
F-31
<PAGE> 169
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE U -- CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1997 and 1998 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 1998 for Humboldt Bancorp (parent company only) are
presented as follows (dollars in thousands):
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
------- -------
<S> <C> <C>
Assets
Cash $ 504 $ 805
Other assets 13 197
Investment in subsidiaries 22,292 26,443
------- -------
$22,809 $27,445
======= =======
Liabilities
Other liabilities $ 83
Stockholders' Equity
Common stock $20,495 25,580
Additional paid-in capital 114 297
Retained earnings 2,200 1,485
------- -------
$22,809 $27,445
======= =======
</TABLE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Dividends from subsidiaries $2,085
Other income $ 1 $ 2 3
Expenses (20) (24) (87)
------ ------ ------
(Loss) income before taxes (19) (22) 2,001
Tax (expense) benefit (3) 106 (51)
------ ------ ------
(Loss) income before equity in income of
subsidiaries (22) 84 1,950
Equity in undistributed income of subsidiaries 2,998 3,174 2,066
------ ------ ------
Net income $2,976 $3,258 $4,016
====== ====== ======
</TABLE>
F-32
<PAGE> 170
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE U -- CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,976 $ 3,258 $ 4,016
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Dividends from subsidiaries (2,085)
Equity in undistributed income of subsidiaries (2,998) (3,174) (2,066)
Amortization 4 4 4
Increase in other assets (21) (188)
Increase in other liabilities 83
------- ------- -------
Net cash (used) provided by operating activities (39) 88 (236)
Investing activities:
Reimbursement from subsidiary 114 183
------- ------- -------
Net cash provided by investing activities 114 183
Financing activities:
Proceeds from note payable 22
Payments on note payable (22)
Cash paid for fractional shares (5) (5) (8)
Proceeds from issuance of common stock 148 203 362
------- ------- -------
Net cash provided by financing activities 143 198 354
------- ------- -------
Net increase in cash 104 400 301
Cash at beginning of year 104 504
------- ------- -------
Cash at end of year $ 104 $ 504 $ 805
======= ======= =======
</TABLE>
NOTE V -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bancorp as
a whole.
F-33
<PAGE> 171
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE V -- FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 21,442 $ 21,442 $ 28,626 $ 28,626
Interest-bearing deposits in other
banks 3,020 3,020 3,020 3,020
Federal funds sold 3,520 3,520 2,250 2,250
Investment securities 80,180 80,180 77,802 77,802
Loans and leases held for sale 48 48 7,677 7,731
Loans and lease financing receivables,
net 157,464 157,085 178,361 178,386
Accrued interest receivable 1,699 1,699 1,779 1,779
Cash surrender value of life insurance 4,810 4,810 4,943 4,943
Financial liabilities:
Deposits 255,186 255,204 283,967 283,997
Accrued interest payable 319 319 306 306
Long-term debt 1,761 1,761 3,402 3,402
</TABLE>
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating its
fair value disclosures for financial instruments:
Cash and due from banks, interest-bearing deposits in other banks and
federal funds sold: The carrying amount is a reasonable estimate of fair
value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable
approximates its fair value.
Loans and leases held for sale: Fair values for loans and leases held for
sale are based on quoted market prices or dealer quotes. If a quoted price
is not available, fair value is estimated using quoted market prices for
similar loans or leases.
Loans and lease financing receivables, net: For variable-rate loans that
reprice frequently and fixed rate loans that mature in the near future,
with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other fixed rate loans are estimated
using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The Bank's lease portfolio has relatively high fixed rates that
usually do not fluctuate with market changes and, therefore, the carrying
amount is a reasonable estimate of the fair value. Loan and lease fair
value estimates include judgments regarding future expected loss experience
and risk characteristics and are adjusted for the allowance for loan and
lease losses. The carrying amount of accrued interest receivable
approximates its fair value.
F-34
<PAGE> 172
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE V -- FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Cash surrender value of life insurance: The carrying amount approximates
its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The carrying
amount of accrued interest payable approximates fair value.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar debt instruments.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit, credit card arrangements and standby letters
of credit. The contract or notional amounts of the Bank's financial
instruments with off-balance-sheet risk are disclosed in Note R. Estimating
the fair value of these financial instruments is not considered practicable
due to the immateriality of the amounts of fees collected, which are used
as a basis for calculating the fair value, on such instruments.
NOTE W -- SUBSEQUENT EVENTS
The Bancorp has filed an application with its regulators to obtain approval to
form a wholly-owned subsidiary bank in Roseville, California and expects to
provide $4.5 million of initial capital. Organization costs related to the
formation of this subsidiary totaled $188,251 through December 31, 1998.
The Bank is in the process of negotiating the sale of approximately $1,047,000
of its secured credit card portfolio.
NOTE X -- OPERATING SEGMENTS
Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose
operating results are regularly reviewed by the organization's decision makers
and whose revenue from external customers is 10 percent or more of total
revenue. The Bancorp has two reportable segments under this definition, retail
banking and credit card operations. The retail banking segment provides
traditional banking services such as checking, savings, IRA and Keogh accounts,
time certificates of deposit, loans, and lease financings. The credit card
segment processes the settlement of credit and debit card sales for merchants
and issues and maintains credit card accounts for its customers. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each segment receives an allocation of
administrative expenses. The Bancorp evaluates performance based on profit or
loss from operations before income taxes. The Bancorp's reportable segments are
strategic business units that provide different services that are carried out by
separate departments. Included in the retail banking segment are all other
operations of the Bancorp, which include an investment in an equipment leasing
company.
F-35
<PAGE> 173
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE X -- OPERATING SEGMENTS (Continued)
The following table includes segment profit, including certain revenues and
expenses, and segment assets as of and for the year ended December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Retail Credit Card
Banking Operations Total
-------- ----------- -------
<S> <C> <C> <C>
Revenue from external customers $ 3,524 $8,304 $11,828
Interest revenue 22,339 1,165 23,504
Interest expense 7,593 149 7,742
Depreciation and amortization 2,886 217 3,103
Segment profit, before taxes 4,444 2,089 6,533
Other significant non-cash items:
Additions to reserves for potential losses 1,240 1,183 2,423
Segment assets 262,301 57,674 319,975
Investment in equity method investees 2,281 2,281
</TABLE>
The segment information for prior fiscal years is not available.
NOTE Y -- SUBSEQUENT STOCK SPLIT AND STOCK DIVIDEND TRANSACTIONS (UNAUDITED)
The Bancorp approved and completed a 5 for 2 stock split during 1999 and
approved a 10% stock dividend during January 2000. All per share amounts
contained herein reflect the effect of these transactions.
F-36
<PAGE> 174
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Global Bancorp and Subsidiary
In our opinion, the consolidated balance sheet as of December 31, 1997 and
the related consolidated statements of earnings, of cash flows and of changes in
stockholders' equity for each of the two years in the period ended December 31,
1997 present fairly, in all material respects, the financial position, results
of operations and cash flows of Global Bancorp and Subsidiary at December 31,
1997 and for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Global
Bancorp and Subsidiary for any period subsequent to December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 6, 1998
F-37
<PAGE> 175
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Global Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Global
Bancorp and Subsidiary (the Company) as of December 31, 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global Bancorp
and Subsidiary as of December 31, 1998, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Sacramento, California
February 12, 1999
F-38
<PAGE> 176
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................... $ 1,841 $ 93 $ 248
Short-term certificates of deposit.................... 297 -- --
Federal funds sold.................................... 4,000 5,500 8,001
-------- -------- --------
Cash and cash equivalents........................... 6,138 5,593 8,249
Securities available-for-sale......................... 12,149 15,153 6,013
Securities held-to-maturity........................... 1,485 -- --
Federal Home Loan Bank stock.......................... 400 418 435
Loans, net............................................ 101,167 97,480 98,284
Property and equipment, net........................... 519 593 622
Real property held for sale, net...................... 5,628 3,104 2,407
Other assets.......................................... 2,477 2,431 1,650
-------- -------- --------
$129,963 $124,772 $117,660
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Investment and savings certificates................... $118,179 $112,639 $105,287
Other liabilities..................................... 1,796 1,305 593
-------- -------- --------
Total liabilities................................ 119,975 113,944 105,880
-------- -------- --------
Stockholders' equity:
Preferred stock -- no par value; authorized 600,000
shares, no shares issued......................... -- -- --
Common stock -- no par value; 1,200,000 shares
authorized; issued and outstanding: 670,850 at
December 31, 1997 and 1998 and 699,100 at
September 30, 1999............................... 7,831 7,831 8,090
Accumulated other comprehensive income, net of
tax.............................................. 18 58 3
Retained earnings................................... 2,139 2,939 3,687
-------- -------- --------
Total stockholders' equity....................... 9,988 10,828 11,780
-------- -------- --------
$129,963 $124,772 $117,660
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 177
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans....................................... $10,202 $10,849 $11,721 $8,786 $8,001
Investment securities..................... 237 649 925 650 470
Federal funds sold........................ 354 498 307 245 252
------- ------- ------- ------ ------
Total interest income................ 10,793 11,996 12,953 9,681 8,723
Interest expense on investment and savings
certificates.............................. 5,628 6,469 6,843 5,178 4,293
------- ------- ------- ------ ------
Net interest income..................... 5,165 5,527 6,110 4,503 4,430
Provision for losses on loans............... 151 416 226 57 479
------- ------- ------- ------ ------
Net interest income after provision for
losses on loans...................... 5,014 5,111 5,884 4,446 3,951
------- ------- ------- ------ ------
OTHER OPERATING INCOME:
Late charges.............................. 85 113 102 78 62
Gain on sales of loans.................... -- -- 476 -- --
Pass through points....................... 109 178 281 167 278
Loan documentation and underwriting
expense................................. (181) (173) (146) (123) (132)
Officers' life insurance proceeds......... -- -- -- -- 297
Rental income............................. 153 39 72 56 24
Proceeds from legal settlement............ -- -- 170 -- --
Miscellaneous income, net................. 298 337 347 455 204
------- ------- ------- ------ ------
464 494 1,302 633 733
------- ------- ------- ------ ------
OTHER OPERATING EXPENSES:
Salaries and employee benefits............ 2,034 2,078 2,023 1,487 1,522
Occupancy................................. 425 427 440 326 361
Loss/(gain) on sale and provision for
losses on real property held for sale... 190 564 1,224 734 185
Expenses on real property held for sale... 190 141 272 191 214
Federal and state payroll taxes........... 168 171 167 130 125
Telephone expense......................... 153 138 139 104 102
Repairs and maintenance................... 136 138 152 117 97
Group insurance........................... 138 143 130 98 97
Other..................................... 724 824 926 673 666
------- ------- ------- ------ ------
4,158 4,624 5,473 3,860 3,369
------- ------- ------- ------ ------
Income before income taxes.................. 1,320 981 1,713 1,219 1,315
Provision for income taxes.................. 501 349 658 499 363
------- ------- ------- ------ ------
Net income.............................. $ 819 $ 632 $ 1,055 $ 720 $ 952
======= ======= ======= ====== ======
PER COMMON SHARE:
Net income per common share............... $ 1.25 $ 0.96 $ 1.57 $ 1.07 $ 1.40
======= ======= ======= ====== ======
Net income per common share assuming
dilution................................ $ 1.19 $ 0.92 $ 1.52 $ 1.04 $ 1.37
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 178
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------- RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME INCOME TOTAL
------ ------ -------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996....... 657 $7,712 $1,089 $ -- $ 8,801
Dividends paid ($0.21 per
share)......................... -- -- (138) -- (138)
Net income..................... -- -- 819 -- 819
--- ------ ------ ---- -------
Balance at December 31, 1996..... 657 7,712 1,770 -- 9,482
Proceeds from exercise of stock
options........................ 14 119 -- -- 119
Dividends paid ($0.40 per
share)......................... -- -- (263) -- (263)
Comprehensive income.............
Other comprehensive income, net
of tax of $13,200...........
Unrealized gain on
securities................ -- -- -- $ 18 18 18
Net income..................... -- -- 632 632 -- 632
--- ------ ------ ------ ---- -------
Comprehensive income............. $ 650
======
Balance at December 31, 1997..... 671 7,831 2,139 18 9,988
Dividends paid ($0.38 per
share)......................... -- -- (255) -- (255)
Comprehensive income.............
Other comprehensive income, net
of tax of $27,700...........
Unrealized gain on
securities................ -- -- -- $ 40 40 40
Net income..................... -- -- 1,055 1,055 -- 1,055
--- ------ ------ ------ ---- -------
Comprehensive income............. $1,095
======
Balance at December 31, 1998..... 671 7,831 2,939 58 10,828
Dividends paid ($0.30 per
share)......................... -- -- (204) -- (204)
Proceeds from stock issuance..... 28 259 -- -- 259
Comprehensive income.............
Other comprehensive income, net
of tax of $38,300...........
Unrealized loss on
securities................ -- -- -- $ (55) (55) (55)
Net income..................... -- -- 952 952 -- 952
--- ------ ------ ------ ---- -------
Comprehensive income............. $ 897
======
Balance at September 30, 1999.... 699 $8,090 $3,687 $ 3 $11,780
=== ====== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-41
<PAGE> 179
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------------
1996 1997 1998 1998 1999
-------- -------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 819 $ 632 $1,055 $ 720 $ 952
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes........................ (4) (406) (59) (17) 440
Depreciation and amortization................ 146 139 128 136 152
Deferred loan fees, net...................... 269 297 (176) 90 (272)
Provision for loan losses.................... 151 416 226 57 479
Proceeds from sales of loans................. -- -- 10,052 -- --
Gain on sales of loans....................... -- -- (476) -- --
Loss/(gain) on sale and provision for losses
on real property held for sale............ 190 564 1,224 734 185
Change in:
Other assets.............................. 277 (252) 76 (15) 380
Other liabilities......................... 198 1,025 (491) (363) (712)
-------- -------- ------ -------- -------
Net cash provided by operating
activities............................ 2,046 2,415 11,559 1,342 1,604
-------- -------- ------ -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of repayments........... (16,380) (12,041) (5,643) (7,696) (1,097)
Expenditures for property and equipment, net... (86) (78) (202) (190) (134)
Maturities of investment securities:
Held-to-maturity, net of purchases........... (891) 99 1,485 297 --
Available-for-sale, net of purchases......... (2,954) (9,176) (2,937) (3,062) 9,000
Purchase of Federal Home Loan Bank stock..... -- (400) (18) (12) (17)
Proceeds from sales of real property held for
sale...................................... 889 407 1,006 564 597
-------- -------- ------ -------- -------
Net cash (used in) provided by investing
activities............................ (19,422) (21,189) (6,309) (10,099) 8,349
-------- -------- ------ -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in investment and
savings certificates......................... 17,249 11,785 (5,540) 5,552 (7,352)
Proceeds from exercise of stock options........ -- 119 -- -- 259
Dividends paid................................. (138) (264) (255) (195) (204)
-------- -------- ------ -------- -------
Net cash (used in) provided by financing
activities............................ 17,111 11,640 (5,795) 5,357 (7,297)
-------- -------- ------ -------- -------
Net change in cash and cash equivalents.......... (265) (7,134) (545) (3,400) 2,656
Cash and cash equivalents at beginning of
period......................................... 13,537 13,272 6,138 6,138 5,593
-------- -------- ------ -------- -------
Cash and cash equivalents at end of period....... $ 13,272 $ 6,138 $5,593 $ 2,738 $ 8,249
======== ======== ====== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.................................. $ 5,631 $ 6,459 $6,865 $ 5,179 $ 4,293
Income taxes paid.............................. $ 292 $ 882 $ 595 $ 325 $ --
</TABLE>
NON-CASH INVESTING ACTIVITIES:
During 1996, 1997 and 1998, the Company converted loans in the amount of
$2,892,000, $4,287,000 and $1,650,000, respectively, to real property
held-for-sale.
During 1996, 1997 and 1998, the Company issued loans in the amount of
$3,137,000, $1,131,000 and $1,945,000, respectively, to facilitate the sale
of real property held-for-sale.
During 1997, the Company recognized an increase in the unrealized gain on
available-for-sale securities of $32,000. As a result, the deferred tax
asset was reduced by $13,000 and equity was increased by $19,000.
During 1998, the Company recognized an increase in the unrealized gain on
available-for-sale securities of $67,400. As a result, the deferred tax
asset was reduced by $27,700 and equity was increased by $40,000.
The accompanying notes are an integral part of these statements.
F-42
<PAGE> 180
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
NOTE A -- ORGANIZATION
The consolidated financial statements of Global Bancorp (the Company)
include the accounts of its wholly owned subsidiary, Capitol Thrift and Loan
Association (Capitol). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Capitol primarily operates 11 branches in the state of California.
Capitol's primary source of revenue is providing commercial and multifamily real
estate loans to customers, who are predominantly small and middle-market
businesses and individuals. Capitol conducts a consumer and commercial finance
business under the California Industrial Loan Law and insures its deposits
through the Federal Deposit Insurance Corporation (FDIC).
NOTE B -- SUMMARY OF ACCOUNTING POLICIES
1. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Cash and cash equivalents
Cash and cash equivalents consist of cash and due from banks, certificates
of deposit, and federal funds sold with original maturities of three months or
less. Substantially all cash, due from banks, and federal funds sold are held in
one financial institution, First USA Bank, which exceeds existing deposit
insurance coverage. The Company complies with Regulation F, Interbank
Liabilities, which requires that the Company monitor several financial ratios of
any financial institution with which it has more than a 25% exposure of its
cash, due from banks, and federal funds sold deposited in one financial
institution.
3. Securities
The Company classifies securities as either trading, held-to-maturity or
available-for-sale as follows:
Held-to-Maturity: Debt securities that management has the positive intent
and ability to hold until maturity are classified as held-to-maturity and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the level interest yield method over the estimated remaining term of the
underlying security.
Trading Securities: Debt and equity securities that are bought and held
principally for the purposes of selling them in the near term are classified as
trading securities and reported at market value, with unrealized gains and
losses included in earnings.
F-43
<PAGE> 181
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Available-for-Sale: Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in response to
changes in market interest or prepayment rates, needs for liquidity and changes
in the availability of and the yield of alternative investments are classified
as available-for-sale. These assets are carried at estimated fair value. Fair
value is determined using published quotes as of the close of business.
Unrealized gains and losses are excluded from earnings and reported in other
comprehensive income, net of income taxes.
4. Loans
Loans are stated at the principal amount outstanding less unearned income.
Interest on loans, other than discounted loans, is computed on the loan balance
outstanding. Interest on discounted loans is recognized as income over the terms
of the loans by a method that approximates the interest method.
Interest accruals on loans are generally reversed and discontinued when the
payment of interest or principal is 90 days past due. Interest on loans well
secured and in the process of collection are not reversed.
Nonrefundable loan origination fees, net of related costs, are deferred and
amortized using the interest method over the term of the loan.
5. Allowance for losses on loans
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled payments
of principal and interest when due according to the contractual terms of the
loan agreement. The allowance for losses on impaired loans is to be measured
under one of three methods. Because almost all of the Company's loans are
collateral dependent, the calculation of the allowance on impaired loans is
generally based on fair value of collateral.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known. When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is based on estimates and is maintained at a
level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to income and
reduced by net charge-offs. In evaluating the adequacy of the allowance, the
Company performs credit reviews of the loan portfolio which consider the
borrower's ability to repay, the value of any underlying collateral, the
seriousness of the loan's delinquency status and other factors which affect the
collectibility of the loan. A specific amount of loss is then determined as a
result of this evaluation process. For those loans that are not subject to this
loan by loan analyses, management provides additional allowances for the
inherent risk in the portfolio based on the criteria of Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies.
F-44
<PAGE> 182
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6. Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the lesser of the lease terms or estimated useful
lives of the assets. Estimated useful lives of assets are as follows:
<TABLE>
<S> <C>
Building.................................................... 35 years
Equipment................................................... 3 - 5 years
Leasehold improvements...................................... 4 - 5 years
</TABLE>
7. Real property held for sale (RPHFS)
Real property held for sale is comprised of real estate acquired in
settlement of loans and is recorded at fair value at the time of foreclosure
which becomes its new cost basis. Subsequently, real property held for sale is
carried at the lower of cost or fair value minus estimated selling costs.
Operating results from real property held for sale including rental income,
expenses incurred to maintain property are included in operating income and
expense. Included in real property held for sale is an allowance for losses.
The Company in some instances makes loans to facilitate the sales of real
property held for sale. Management reviews all sales for which it is the lending
institution for compliance with sales treatment under provisions established by
Statement of Financial Accounting Standards (SFAS) No. 66 "Accounting for Sales
of Real Estate".
8. Income taxes
The Company and its subsidiary file a consolidated federal income tax
return and a combined California franchise tax return. Deferred income taxes
reflect the estimated future tax effects of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
9. Income per common share
Net income per common share is stated in accordance with SFAS No. 128
"Earnings per Share." Net income per common share is computed by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding during the year. Net income per common share assuming
dilution is computed by dividing net income available to common shareholders by
the weighted average number of common shares and common equivalent shares
outstanding including dilutive stock options. The computation of common stock
equivalent shares is based on the weighted average market price of the Company's
common stock throughout the period.
In 1996, the numerator and denominator were $819,489 and 656,600 for the
net income per share calculation and $819,489 and 686,749 for the net income per
share assuming dilution
F-45
<PAGE> 183
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
calculation. There were 30,149 common equivalent shares from the assumed
conversion of stock options in 1996.
In 1997, the numerator and denominator were $632,358 and 660,163 for the
net income per share calculation and $632,358 and 688,994 for the net income per
share assuming dilution calculation. There were 28,832 common equivalent shares
from the assumed conversion of stock options in 1997.
In 1998, the numerator and denominator were $1,054,971 and 670,850 for the
net income per common share and were $1,054,971 and 693,428 for net income per
common share assuming dilution calculations for 1998. There were 22,578 common
equivalent shares from the assumed conversion of stock options in 1998.
10. Statement of Financial Accounting Standards No. 130
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as "the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners."
11. Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that
any entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. In June 1999, the FASB issued
SFAS No. 137, which defers the effective date of SFAS No. 133. The Company will
adopt SFAS No. 133 as of July 1, 2000 and has made no assessment of the
potential impact of adopting SFAS No. 133 at this time.
12. Reclassifications
Certain 1997 balances have been reclassified to conform with the 1998
presentation.
13. Unaudited interim financial data
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management all adjustments, including normal recurring
accruals necessary for fair presentation of results of operations for the
interim periods included herein, have
F-46
<PAGE> 184
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
been made. The results of operations for the nine months ended September 30,
1999, are not necessarily indicative of results to be anticipated for the year
ending December 31, 1999.
NOTE C -- INVESTMENT SECURITIES
At December 31, 1997 and 1998, the amortized cost and estimated fair values
of investment securities by type are shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Available-for-sale securities:
U.S. Treasury securities....................... $12,117 $32 $-- $12,149
======= === == =======
Held-to-maturity securities:
Certificates of deposit........................ $ 1,485 $ 2 $-- $ 1,487
======= === == =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Available-for-sale securities:
U.S. Treasury securities....................... $15,054 $99 $-- $15,153
======= === == =======
</TABLE>
Scheduled maturities of securities as of December 31, 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Within one year............................................. $12,059 $12,128
After one year through five years........................... 2,995 3,025
------- -------
Total..................................................... $15,054 $15,153
======= =======
</TABLE>
F-47
<PAGE> 185
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE D -- LOANS AND ALLOWANCE FOR LOSSES ON LOANS
Loans consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Commercial real estate..................................... $ 82,123 $78,149
Real estate 1 - 4 family first mortgage.................... 13,009 15,819
Real estate 1 - 4 junior lien mortgage..................... 7,509 5,236
Consumer................................................... 895 590
-------- -------
103,536 99,794
Less:
Discounts on loans....................................... (15) --
Deferred loan fees....................................... (1,293) (1,132)
Allowance for losses on loans............................ (1,061) (1,182)
-------- -------
$101,167 $97,480
======== =======
</TABLE>
During 1998, the Company sold a block of mortgage loans and the related
servicing rights. The principal balance and related accrued interest totaled
$9,576,000 at date of sale. The Company recognized a gain on the sale of
$476,000.
The recorded investments in loans for which impairment has been recognized
totaled $3,872,000 and $5,143,000 with corresponding valuation allowances of
$-0- and $100,000 at December 31, 1997 and 1998, respectively. The average
recorded investment in impaired loans was approximately $4,568,000 and
$4,507,000 for the years ended December 31, 1997 and 1998, respectively. The
Company did not recognize any interest on impaired loans during the portion of
the year that they were impaired.
Loans on non-accrual status totaled $3,872,000 and $5,143,000 at December
31, 1997 and 1998, respectively. If interest on non-accrual loans had been
accrued, such income would have approximated $232,000 for 1997 and $170,000 for
1998. Loans over ninety days past due on which interest continues to be accrued
totaled $281,000 and $-0- at December 31, 1997 and 1998, respectively, as such
loans are well secured and in the process of collection. Interest accrued on
such loans was $25,000 and $-0- at December 31, 1997 and 1998, respectively.
Loans restructured to reflect the current rate of interest charged by the
Company totaled $932,000 and $744,000 as of December 31, 1997 and 1998,
respectively. Interest income that would have been received under the
contractual agreements for restructured loans is as follows for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- ----
<S> <C> <C> <C>
Estimated interest that would have been recognized
under original terms................................. $ 255 $ 133 $ 95
Actual interest recognized............................. (188) (103) (68)
----- ----- ----
Net interest foregone.................................. $ 67 $ 30 $ 27
===== ===== ====
</TABLE>
F-48
<PAGE> 186
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE D -- LOANS AND ALLOWANCE FOR LOSSES ON LOANS (CONTINUED)
Most of the Company's business activity is with customers located within
California. Real estate loans are generally secured by first or second deeds of
trust on real property. Credit evaluation of lending is based on an evaluation
of collateral, the borrower's financial strength, and other pertinent factors.
A summary of activity in the allowance for losses on loans is as follows
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year......................... $1,147 $1,112 $1,061
Provision for losses on loans........................ 151 416 226
Charge-offs.......................................... (214) (480) (167)
Recoveries........................................... 28 13 63
------ ------ ------
Balance at end of year............................... $1,112 $1,061 $1,183
====== ====== ======
</TABLE>
NOTE E -- ALLOWANCE FOR LOSSES ON REAL PROPERTY HELD FOR SALE (RPHFS)
The following summarizes the activity in the allowance for losses on real
property held for sale for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Real property held for sale at end of the year...... $4,140 $6,788 $ 4,152
------ ------ -------
Allowance at beginning of the year.................. 1,061 599 1,160
Provision for loss on RPHFS......................... -- 695 1,313
Charge-offs......................................... (462) (134) (1,425)
------ ------ -------
Allowance at end of year............................ 599 1,160 1,048
------ ------ -------
Real property held for sale at end of the year,
net............................................... $3,541 $5,628 $ 3,104
====== ====== =======
</TABLE>
NOTE F -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Land........................................................ $ 85 $ 85
Building.................................................... 376 376
Equipment................................................... 496 663
Leasehold improvements...................................... 244 244
------ ------
1,201 1,368
Less accumulated depreciation............................... (682) (775)
------ ------
$ 519 $ 593
====== ======
</TABLE>
F-49
<PAGE> 187
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE F -- PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation charged to occupancy and general and administrative expense
was $146,000, $139,000 and $128,000 in 1996, 1997 and 1998, respectively. In
1997, fully depreciated assets of $2,297,788 were written off.
NOTE G -- INVESTMENT AND SAVINGS CERTIFICATES
The following summarizes investment and savings certificates outstanding by
interest rate at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Investment certificates
Below 4.00%............................................. $ 234 $ 1,997
4.00 - 5.00............................................. 774 9,731
5.01 - 6.00............................................. 77,657 59,246
6.01 - 7.00............................................. 15,954 13,609
7.01 - 8.00............................................. 1,321 1,063
8.01 - 9.00............................................. 423 99
Over 9.00%.............................................. 452 --
-------- --------
96,815 85,745
-------- --------
Savings certificates
Below 4.00%............................................. 6,098 5,003
4.00 - 5.00............................................. 5,575 7,662
5.01 - 6.00............................................. 9,234 13,710
Over 6.00%.............................................. 457 519
-------- --------
21,364 26,894
-------- --------
Total investment and savings certificates............ $118,179 $112,639
======== ========
</TABLE>
Investment certificates are issued for terms which range from 30 days to 60
months.
The maturity of investment certificates at December 31, 1998 is as follows
(in thousands):
<TABLE>
<S> <C>
1999................................................... $65,758
2000................................................... 8,669
2001................................................... 5,409
2002................................................... 2,001
2003 and thereafter.................................... 3,908
-------
$85,745
=======
</TABLE>
NOTE H -- LEASE COMMITMENTS
The Company leases premises and equipment used in the operations of the
business. The leases have remaining terms ranging from one to four years and
expire at various dates through 2002. The leases usually require the Company to
pay maintenance, insurance, taxes, and certain other expenses in addition to
stated rentals. Certain of the leases contain renewal options and rent
escalation clauses.
F-50
<PAGE> 188
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE H -- LEASE COMMITMENTS (CONTINUED)
Future minimum rental payments for noncancelable operating leases with
initial or remaining terms of one year or more consist of the following as of
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999..................................................... $195
2000..................................................... 173
2001..................................................... 84
2002..................................................... 33
----
$485
====
</TABLE>
Total rental expense for all operating leases amounted to $299,000,
$242,000 and $258,000 in 1996, 1997 and 1998, respectively.
NOTE I -- INCOME TAXES
The following is a summary of the components of the provision for income
taxes (in thousands):
<TABLE>
<CAPTION>
1996
-------------------------
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Current................................................. $386 $119 $505
Deferred................................................ (17) 13 (4)
---- ---- ----
Total................................................. $369 $132 $501
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Current................................................ $ 576 $179 $ 755
Deferred............................................... (309) (97) (406)
----- ---- -----
Total................................................ $ 267 $ 82 $ 349
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Current................................................. $542 $175 $717
Deferred................................................ (56) (3) (59)
---- ---- ----
Total................................................. $486 $172 $658
==== ==== ====
</TABLE>
F-51
<PAGE> 189
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE I -- INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Book provision for losses in excess of tax.................. $ 351 $ 391
Book allowance for real property held for sale in excess
of tax................................................. 477 432
Book depreciation in excess of tax........................ 55 60
Deferred compensation..................................... 232 282
State franchise taxes..................................... 61 66
------ ------
Deferred tax asset..................................... 1,176 1,231
Deferred tax liabilities:
Book deferred loan costs in excess of tax................. (270) (266)
Other comprehensive income................................ -- (41)
------ ------
Net deferred tax asset................................. $ 906 $ 924
====== ======
</TABLE>
Management believes a valuation allowance is not needed to reduce the
deferred tax asset because there is no material portion of the deferred tax
asset that will not be realized through sufficient taxable income within the
carryback and carryforward periods.
The actual income tax expense for 1996, 1997 and 1998 differs from the
"expected" tax expense for those years (computed by applying the U.S. Federal
corporate income tax rate of 34% to taxable income) as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected tax at statutory rate........................... $449 $334 $583
State taxes, net of Federal benefit...................... 98 73 123
Officers life insurance premiums......................... 3 (1) (3)
Other.................................................... (49) (57) (45)
---- ---- ----
$501 $349 $658
==== ==== ====
</TABLE>
NOTE J -- STOCK OPTION PLAN
In May 1991, the Company adopted a stock option plan which reserved 50,000
shares of common stock to be granted at an exercise price of greater than or
equal to the market value of the shares on the date of grant. Stock options vest
when granted and expire ten years from the date of
F-52
<PAGE> 190
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE J -- STOCK OPTION PLAN (CONTINUED)
grant. Changes in stock options for the years ended December 31, 1996, 1997 and
1998, are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE RANGE
OPTIONS PER OPTION
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1996....................... 50,000 $8.00 - $10.00
Granted.............................................. -- --
Exercised (50,000 exercisable)..................... -- $8.00 - $10.00
------ --------------
Outstanding at January 1, 1997....................... 50,000 $8.00 - $10.00
Granted............................................ -- --
Exercised (35,750 exercisable)..................... 14,250 $8.00 - $10.00
------ --------------
Outstanding at December 31, 1997..................... 35,750 $8.00 - $10.00
Granted............................................ -- --
Exercised (35,750 exercisable)..................... -- --
------ --------------
Outstanding at December 31, 1998..................... 35,750 $8.00 - $11.00
====== ==============
</TABLE>
NOTE K -- REGULATORY MATTERS
The Company and Capitol are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material affect on Capitol's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Capitol must meet specific capital guidelines that involve
quantitative measures of Capitol's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
F-53
<PAGE> 191
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE K -- REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Capitol to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that Capitol meets all capital adequacy requirements to which it is
subject.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------ ------------------ -------------------
AMOUNT AMOUNT AMOUNT
(IN 000'S) RATIO (IN 000'S) RATIO (IN 000'S) RATIO
---------- ----- ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
THE COMPANY:
Total capital (to Risk Weighted
Assets)....................... $11,031 10.34% $8,533 * 8.0%
Tier I capital (to Risk Weighted
Assets)....................... $ 9,970 9.35% $4,266 * 4.0%
Tier I capital (to Average
Assets)....................... $ 9,970 7.54% $5,291 * 4.0%
CAPITOL:
Total capital (to Risk Weighted
Assets)....................... $11,030 10.34% $8,531 * 8.0% $10,663 * 10.0%
Tier I capital (to Risk Weighted
Assets)....................... $ 9,969 9.35% $4,265 * 4.0% $ 6,398 * 6.0%
Tier I capital (to Average
Assets)....................... $ 9,969 7.54% $5,290 * 4.0% $ 6,613 * 5.0%
As of December 31, 1998
THE COMPANY:
Total capital (to Risk Weighted
Assets)....................... $11,953 12.16% $7,865 * 8.0%
Tier I capital (to Risk Weighted
Assets)....................... $10,770 10.96% $3,932 * 4.0%
Tier I capital (to Average
Assets)....................... $10,770 8.04% $5,361 * 4.0%
CAPITOL:
Total capital (to Risk Weighted
Assets)....................... $11,919 12.13% $7,862 * 8.0% $ 9,827 * 10.0%
Tier I capital (to Risk Weighted
Assets)....................... $10,736 10.93% $3,931 * 4.0% $ 5,896 * 6.0%
Tier I capital (to Average
Assets)....................... $10,736 8.01% $5,306 * 4.0% $ 6,632 * 5.0%
</TABLE>
- ------------
* equals greater than or equal to
As of December 31, 1998, Capitol was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, Capitol must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratio as set forth in the above table, and not
subject to a capital directive. On August 23,1998 Capitol entered into an
agreement with the FDIC and the California Department of Financial Institutions
(CDFI). Management and the Board
F-54
<PAGE> 192
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE K -- REGULATORY MATTERS (CONTINUED)
of Directors agreed to reduce the level of classified assets as outlined in the
agreement, develop and implement a plan with specific strategies for reducing
RPHFS, classified and non performing loans and revise the methodology for
calculating an adequate allowance for losses on loans. The FDIC and CDFI has
required that within 90 and 150 days of the agreement, Capitol maintain a Tier I
capital (to Average Assets) of 7.75% and 8.0%, respectively. Management believes
that they have complied with the provisions of the agreement.
In addition to the FDIC guidelines above, Capitol is subject to the
provisions of the California Industrial Loan Law. Regulatory requirements
include limits on the size and type of loans which may be made, the amount of
thrift balances which may be raised, and the amount of dividends that may be
paid. Under the California Industrial Loan Law, Capitol may issue thrift
certificates of up to a maximum of eighteen times stockholder's equity. At
December 31, 1998, based on the amount of thrift certificates outstanding,
Capitol had a ratio of thrift certificates to stockholder's equity of
approximately 11 to 1.
NOTE L -- DEFERRED COMPENSATION
In 1991, the Company implemented a deferred compensation plan for a select
group of officers. The officers have elected to defer a portion of their
compensation until they reach normal retirement age, at which time they will
become eligible for benefits under the plan. Deferred compensation plan expense
was approximately $47,000 in 1998, $44,000 in 1997 and $41,000 in 1996.
In 1991, the Company implemented a retirement plan for the former President
which provides for ten annual payments of $60,000. The President vested in the
retirement plan upon completion of service in September 1997. Retirement plan
expense was approximately $29,000 in 1998, $66,000 in 1997, and $69,000 in 1996.
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are determined as of a specific date in time utilizing
quoted market prices, where available, or various assumptions and estimates. As
the assumptions underlying these estimates change, the fair value of the
financial instruments will change. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. Additionally, the Company has not disclosed
highly subjective values of other nonfinancial instruments. Accordingly, the
aggregate fair value amounts presented do not represent and should not be
construed to represent the full underlying value of the Company.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are as follows:
Cash and Cash Equivalents:
The carrying value of cash and cash equivalents approximates fair
value due to the relatively short-term nature of these instruments.
F-55
<PAGE> 193
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Securities:
Fair value of investment securities is based on quoted market prices.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans:
In order to determine the fair values for loans, the loan portfolio
was segmented based on loan type, credit quality, and repricing
characteristics. For certain variable rate loans with no significant credit
concerns and frequent repricings, estimated fair values are based on the
carrying values. The fair values of other loans are estimated using
discounted cash flow analyses. The discount rates used in these analyses
are generally based on origination rates for similar loans of comparable
credit quality.
Investment and Savings Certificates:
The fair values for investment and savings certificates, subject to
immediate withdrawal are equal to the amount payable on demand at the
reporting date (i.e., their carrying amount on the balance sheet). Fair
values for fixed rate investment and savings certificates are estimated by
discounting future cash flows using interest rates currently offered on
time deposits with similar remaining maturities.
Accrued Interest:
The carrying value of accrued interest receivable and accrued interest
payable approximates fair value due to the relatively short-term nature of these
instruments.
The following table provides summary information on the fair value of
financial instruments at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
--------- ---------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents............................. $ 6,138 $ 6,138
Securities available-for-sale......................... 12,117 12,149
Securities held-to-maturity........................... 1,485 1,487
Loans................................................. 101,167 102,824
Accrued interest receivable........................... 834 834
FINANCIAL LIABILITIES:
Investment and savings certificates................... (118,179) (118,820)
Accrued interest payable.............................. (22) (22)
</TABLE>
F-56
<PAGE> 194
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table provides summary information on the fair value of
financial instruments at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
--------- ---------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents............................. $ 5,593 $ 5,593
Securities available-for-sale......................... 15,153 15,153
Loans................................................. 99,794 101,660
Accrued interest receivable........................... 930 930
FINANCIAL LIABILITIES:
Investment and savings certificates................... (112,639) (113,575)
Accrued interest payable.............................. -- --
</TABLE>
NOTE N -- PARENT COMPANY ONLY CONDENSED FINANCIAL DATA
The condensed financial statements of Global Bancorp (parent company only)
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998 are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 27 $ 41
Investment in subsidiary.................................... 9,970 10,736
------ -------
$9,997 $10,777
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities.................... $ 27 $ 7
Stockholders' equity........................................ 9,970 10,770
------ -------
$9,997 $10,777
====== =======
</TABLE>
F-57
<PAGE> 195
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE N -- PARENT COMPANY ONLY CONDENSED FINANCIAL DATA (CONTINUED)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income
Miscellaneous income...................................... $ 21 $ 25 $ 10
Expenses
General and administrative............................. 16 19 91
---- ---- ------
Earnings (loss) before income taxes and equity in
earnings of subsidiary.............................. 5 6 (81)
Income tax (expense) benefit.............................. (2) (4) 33
---- ---- ------
3 2 (48)
Equity in earnings of Capitol Thrift and Loan
Association............................................ 816 630 1,103
---- ---- ------
Net Earnings.............................................. $819 $632 $1,055
==== ==== ======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 819 $ 632 $ 1,055
Adjustment to reconcile net earnings to net cash provided
by operating activities
Increase (decrease) in accrued expenses and other
liabilities.......................................... 1 (5) (20)
Cash dividends from subsidiary......................... 138 251 337
Undistributed earnings of subsidiary................... (816) (630) (1,103)
----- ----- -------
Net cash provided by operating activities.............. 142 248 269
----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary.................................. -- (100) --
----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (138) (263) (255)
Proceeds from exercise of stock options................... -- 119 --
----- ----- -------
Net cash used in financing activities.................. (138) (144) (255)
----- ----- -------
Net increase in cash and cash equivalents................... 4 4 14
Cash and cash equivalents at beginning of year.............. 19 23 27
----- ----- -------
Cash and cash equivalents at end of year.................... $ 23 $ 27 $ 41
===== ===== =======
</TABLE>
F-58
<PAGE> 196
APPENDIX A
RESTATED AGREEMENT AND PLAN OR REORGANIZATION
SECOND RESTATEMENT
OF
AGREEMENT AND PLAN
OF
REORGANIZATION AND MERGER
DATED: NOVEMBER 12, 1999
BY AND AMONG
HUMBOLDT BANCORP
HUMBOLDT BANK
GLOBAL BANCORP
AND
CAPITOL THRIFT & LOAN ASSOCIATION
<PAGE> 197
SECOND RESTATEMENT
OF
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Second Restatement of AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER (the "Agreement") is entered into as of June 22, 1999 (as amended on
September 3, 1999 and November 12, 1999) by and among GLOBAL BANCORP, a
California corporation ("GLOBAL"), CAPITOL THRIFT & LOAN ASSOCIATION, a
California industrial loan corporation ("CAPITOL") which is a wholly-owned
subsidiary of GLOBAL, HUMBOLDT BANCORP, a California corporation ("BANCORP"),
and HUMBOLDT BANK, a California state-chartered bank ("BANK"), which is a
wholly-owned subsidiary of BANCORP.
RECITALS:
WHEREAS, the respective Boards of Directors of GLOBAL, CAPITOL, BANCORP
and BANK have determined that it is in the best interests of GLOBAL and BANCORP
and their respective shareholders for GLOBAL to be merged with and into BANCORP,
upon the terms and subject to the conditions set forth in this Agreement and in
accordance with the California Corporations Code and other applicable laws;
WHEREAS, in order to facilitate the merger of GLOBAL with and into
BANCORP, BANCORP shall create HB Merger Company ("HBMC") which shall be merged
with and into GLOBAL, with GLOBAL as the surviving corporation (the "Interim
Merger"), which shall be immediately followed by the adoption of a plan of
liquidation by BANCORP of its subsidiary GLOBAL to be effected by means of a
merger of GLOBAL into BANCORP (the "BANCORP Merger").
WHEREAS, each of the Boards of Directors of GLOBAL, CAPITOL, BANCORP and
BANK have approved this Agreement and the transactions contemplated hereby;
WHEREAS, GLOBAL's Board of Directors has resolved to recommend approval
of the merger of HBMC with and into GLOBAL followed by the adoption of a plan of
liquidation of GLOBAL to be effected by means of a merger of GLOBAL into
BANCORP;
WHEREAS, in conjunction with execution of this Agreement by the parties,
CAPITOL and BANK have entered into a Purchase of Assets and Assumption of
Liabilities Agreement whereunder CAPITOL will sell to BANK and BANK will
purchase from CAPITOL, immediately prior to the Interim Merger, one branch
office of CAPITOL and the assets and liabilities identified with such branch
offices (the "Branch Purchase Agreement") attached to this Agreement as Exhibit
A.
WHEREAS, BANCORP's Board of Directors has approved a resolution to
increase the capital accounts of BANCORP and BANK through a public offering of
BANCORP common stock in order to consummate the transactions contemplated by
this Agreement;
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<PAGE> 198
WHEREAS, the Interim Merger and the BANCORP Merger require certain
shareholder and regulatory approvals and may be effected only after the
necessary approvals have been obtained;
WHEREAS, for federal income tax purposes, it is intended that the
Interim Merger will qualify as a "qualified stock purchase" under Section 338(d)
of the Internal Revenue Code of 1986, as amended (the "IRC") and the BANCORP
Merger will qualify as tax free liquidations under Section 332 of the IRC, as
set forth in Revenue Ruling 90-95, 1990-2 C.B.67;
WHEREAS, upon the consummation of the BANCORP Merger, CAPITOL shall be
as a wholly-owned subsidiary of BANCORP; and
WHEREAS, BANCORP's Board of Directors has resolved to recommend approval
after the Interim Merger, the adoption of a plan of liquidation of GLOBAL to be
effected by means of a merger of GLOBAL with and into BANCORP with BANCORP as
the surviving corporation.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, GLOBAL, CAPITOL,
BANCORP and BANK hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, GLOBAL shall have
authorized, recommended, publicly proposed or publicly announced
an intention to authorize, recommend or propose, or shall have
entered or announced an intention to enter into a letter of
intent, an agreement-in-principle or a definitive agreement with
any Person (other than BANCORP or any of its Subsidiaries) to
effect, an Acquisition Transaction. As used herein, the term
"Acquisition Transaction" shall mean (i) a merger, consolidation
or similar transaction involving GLOBAL or any of its
Subsidiaries (other than internal mergers, reorganizations,
consolidations or dissolutions involving only existing
Subsidiaries), (ii) the disposition, by sale, lease, exchange,
dissolution or liquidation, or otherwise, of all or substantially
all of the assets of GLOBAL or any asset or assets of GLOBAL the
disposition or lease of which would result in a material change
in the business or business operations of GLOBAL; or (iii) the
issuance, other than pursuant to outstanding stock options, sale
or other disposition by GLOBAL (including, without limitation, by
way of merger, consolidation, share exchange or any similar
transaction) of shares of GLOBAL Common Stock or other Equity
Securities, or the grant of any option, warrant or other right to
acquire shares of GLOBAL Common Stock or other Equity Securities,
representing directly, or on an as-exercised, as-exchanged or
as-converted basis (in the case of options, warrants, rights or
exchangeable or convertible Equity Securities), 15% or more of
the voting securities of GLOBAL;
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<PAGE> 199
(b) The approval by GLOBAL shareholders, or the consummation by
GLOBAL, of any Acquisition Transaction as described in Subsection
(a) of this Paragraph within a period of one hundred eighty (180)
days following: (i) the termination of this Agreement by BANCORP
pursuant to Sections 8.1.3, 8.1.5, 8.1.7, or 8.1.8.
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5.
"Affected Party" shall have the meaning given to it in Section 5.7.
"Affiliate" or "affiliate" shall mean, with respect to any other Person,
any Person that, directly or indirectly, controls or is controlled by or
is under common control with such Person.
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3. "BANCORP" shall mean Humboldt Bancorp.
"BANCORP Common Stock" shall mean the common stock, no par value per
share, of BANCORP.
"BANCORP Filings" shall have the meanings given such term in Section
4.6.1.
"BANCORP Financial Statements" shall mean the financial statements of
BANCORP for the year ended December 31, 1998.
"BANCORP Market Value Per Share" shall mean the price of the last trade
of BANCORP Common Stock prior to the Effective Time.
"BANCORP Merger" shall have the meaning given such term in Section 2.1.
"BANCORP Merger Agreement" shall have the meaning given such term in
Section 2.1.
"BANCORP Note" shall have the meaning given such term in Section 2.8.
"BANCORP Public Offering" shall mean the public offering of BANCORP
Common Stock.
"BANCORP Stock Plans" shall have the meaning set forth in Section 4.5.
"BANK" shall mean Humboldt Bank.
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Branch Purchase" shall mean the purchase of one branch and related
assets and assumption of certain liabilities of Capitol by Bank.
A-3
<PAGE> 200
"Branch Purchase Agreement" shall mean the Purchase of Assets and
Assumption of Liabilities Agreement between Bank and Capitol whereby
Bank shall purchase one branch office and related assets and assume
certain liabilities of Capitol immediately prior to the Interim Merger.
"Branch Purchase Effective Time" shall mean the time of consummation of
the Branch Purchase which shall be immediately prior to the Effective
Time.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law of
the State of California.
"CAPITOL" shall mean Capitol Thrift & Loan Association.
"California Financial Code" shall mean the Financial Code of the State
of California.
"Cash Merger Price" shall mean the total shareholders' equity for GLOBAL
as of the Determination Date (after expensing or accruing of GLOBAL'S
Costs Associated With the Transaction), provided however, if at least
$6,000,000 of BANCORP Common Stock has not been subscribed in the
BANCORP Public Offering by March 7, 2000, then the Cash Merger Price
shall mean the total shareholders' equity for GLOBAL as of the
Determination Date (after expensing or accruing of GLOBAL'S Costs
Associated With the Transaction) plus $200,000.
"Cash Per Share Merger Price" shall mean the Cash Merger Price divided
by the total number of shares of GLOBAL Common Stock outstanding at the
Closing Date.
"CDFI" shall mean the California Department of Financial Institutions.
"Classified Assets" shall have the meaning given to such term in Section
6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section 2.1.
"Closing Schedules" shall have the meaning given to such term in Section
5.7.
"Commissioner" shall mean the Commissioner of Financial Institutions of
the State of California.
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements or
covenants of such party contained in Articles 5 or 6.
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<PAGE> 201
"Determination Date" shall mean the last business day of the calendar
month immediately preceding the calendar month in which the Effective
Time occurs.
"Director Shareholder Agreement" shall have the meaning given such term
in Section 7.2.10.
"Dissenting Shares" shall mean shares of GLOBAL Common Stock which come
within all of the descriptions set forth in Subparagraphs (1), (2), (3)
and (4) of Paragraph (a) of Section 1300 of the California Corporations
Code.
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Paragraph (a)
of Section 1301 of the California Corporations Code.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any
Governmental Entity pertaining to health or to the environment,
including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Federal Water Pollution Control Act Amendments,
the Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), the
Hazardous Materials Transportation Act of 1975, as amended, the Safe
Drinking Water Act, as amended, and the Toxic Substances Control Act, as
amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Adjusted Value" shall have the meaning given such term in
Section 2.6.2 (iv).
"Escrow Merger Price" shall mean the Merger Price less the Cash Merger
Price.
"Escrow Payment Date" shall mean the earlier of January 30, 2002 or
sixty days from the occurrence of a Material Adverse Effect with respect
to BANCORP and its subsidiaries taken as a whole, but in no case shall
the Escrow Payment Date be earlier than January 31, 2001.
"Escrow Per Share Merger Price" shall mean the Escrow Adjusted Value
divided by the total number of Shares of GLOBAL Common Stock outstanding
at the Closing Date.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean Illinois Stock Transfer Company, or such
other Person as BANCORP shall have appointed to perform the duties set
forth in Section 2.8.
A-5
<PAGE> 202
"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.
"GLOBAL" shall mean Global Bancorp.
"GLOBAL Certificates" shall have the meaning given such term in Section
2.8.1.
"GLOBAL Collateralizing Real Estate" shall have the meaning given to
such term in Section 3.23.1.
"GLOBAL Common Stock" shall mean the common stock, no par value, of
GLOBAL.
"GLOBAL's Costs Associated With the Transaction" shall mean all legal,
accounting and professional costs incurred or to be incurred by GLOBAL
for the merger transactions contemplated by this Agreement up to the
Closing Date (including investment banking fees) which have not been
paid or accrued by GLOBAL by the Determination Date, provided further
that GLOBAL shall not be required to expense or accrue up to $150,000 of
legal and/or accounting costs incurred by GLOBAL and associated with the
transaction and identified with preparation of the Proxy
Statement/Prospectus for GLOBAL or the BANCORP Public Offering.
"GLOBAL Fairness Opinion" shall have the meaning given to such term in
Section 7.3.5.
"GLOBAL Filings" shall have the meaning given such term in Section
3.6.1.
"GLOBAL Financial Statements" shall have the meaning given to such term
in Section 3.7.3.
"GLOBAL Material Adverse Event" shall have the meaning given to such
term in Section 8.1.8.
"GLOBAL Properties" shall have the meaning given to such term in Section
3.23.1.
"GLOBAL Shareholder Committee" shall have the meaning given such term in
Section 9.1.
"GLOBAL State Documents" shall have the meaning given to such term in
Section 3.6.2.
"GLOBAL Stock Options" shall mean any options to purchase any shares of
GLOBAL Common Stock or any other Equity Securities of GLOBAL granted on
or prior to the Effective Time, whether pursuant to the GLOBAL Stock
Option Plan or otherwise.
"GLOBAL Stock Option Plan" shall mean GLOBAL's written Stock Option Plan
as described in Schedule 3.5 and 3.24 hereto.
A-6
<PAGE> 203
"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.
"HBMC" shall mean HB Merger Company.
"Interim Merger" shall have the meaning given such term in Section 2.1.
"Interim Merger Agreement" shall have the meaning given such term in
Section 2.1.
"Interim Surviving Corporation" shall have the meaning given such term
in Section 2.1.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement; the actual knowledge, after reasonable
inquiry, of any director or executive officer of GLOBAL or BANCORP.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable federal
laws of the United States and laws of any state having jurisdiction over
the Merger, to permit the parties to consummate the Merger.
"Loan Loss" as set forth in Section 2.6.2 shall mean (i) a writedown of
an existing loan or the establishment of a specific reserve for an
existing loan required by either the CDFI or the FDIC, (ii) a writedown
of an existing loan or the establishment of a specific reserve for an
existing loan required by outside third party loan review, (iii) the net
loss from the sale, which sale must be conducted in a reasonable manner
and with 15 days prior notice to the GLOBAL Shareholder Committee, of an
existing loan at a price less than book value, (iv) the net loss from
the conversion of an existing loan, that is or becomes a nonperforming
loan, to other real estate owned which requires a writedown of the value
of the property below the carrying value of such loan, or (v) the net
loss from the sale of other real estate owned which was a loan of
CAPITOL as of the Effective Time. For the purposes of this definition
the outside third party loan review shall be performed no more than once
per year by such outside party reasonably acceptable to the parties.
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or
prospects of a Person and its subsidiaries, if any, taken as a whole
(unless specifically indicated otherwise); or (ii) on the ability of a
Person that is a party to this Agreement to perform its obligations
under this Agreement or to consummate the transactions contemplated by
this Agreement.
"Mergers" shall have the meaning set forth in Section 2.1.
"Merger Agreements" shall have the meaning given to such term in Section
2.1.
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<PAGE> 204
"Merger Price" shall mean $16,500,000.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OREO" shall have the meaning given to such term in Section 3.13.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on GLOBAL in accordance with Paragraph
(b) of Section 1301 of the California Corporations Code and has not
withdrawn such demand prior to the Effective Time.
"Per Share Merger Price" shall mean the sum of the Cash Per Share Merger
Price and the Escrow Per Share Merger Price.
"Persons" or "persons" shall mean an individual, corporation,
partnership, limited liability company, joint venture, trust or
unincorporated organization, Governmental Entity or any other legal
entity whatsoever.
"Proxy Statement/Prospectus" shall have the meaning given to such term
in Section 3.7.2.
"Registration Statements" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements,
declarations of estimate taxes, claims or refunds, and other documents
required to be filed with respect to federal, state, local and foreign
Taxes including any schedule or attachment thereto and any amendment
thereof, and the term "Return" means any one of the foregoing Returns.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiary" shall mean, with respect to any corporation (the "parent"),
any other corporation, association or other business entity of which
more than 50% of the shares of the Voting Stock are owned or controlled,
directly or indirectly, by the parent or by one or more Subsidiaries of
the parent, or by the parent and one or more of its Subsidiaries.
"Superior Proposal" shall have the meaning given to such term in Section
6.2.5.
"Surviving Corporation" shall have the meaning given to such term in
Section 2.1.
"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use,
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<PAGE> 205
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties, or other taxes,
together with any interest and any penalties, additions to tax, or
additional amounts with respect thereto, and the term "Tax" means any
one of the foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal
Governmental Entity before the Mergers may become effective, including,
but not limited to, any filing required to be made with the California
Franchise Tax Board to obtain a Tax Clearance Certificate for the
Mergers.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote
in the election of the directors, trustees or Persons performing similar
functions of the Person in question, including, without limitation,
nonvoting securities that are convertible or exchangeable into voting
securities, but shall not include any stock or other interest so
entitling the holders thereof to vote only upon the happening of a
contingency (other than a conversion or exchange thereof into voting
securities), whether or not such contingency has occurred.
ARTICLE 2. THE MERGERS
Section 2.1 The Mergers. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, HBMC
shall be merged with and into GLOBAL with GLOBAL as the Interim Surviving
Corporation pursuant to the agreement of merger attached to the Agreement as
Exhibit 2.1 (A) (the "Interim Merger Agreement") and in accordance with the
applicable provisions of the California Corporations Code (the "Interim
Merger"). Immediately following the Interim Merger, BANCORP will adopt a plan of
liquidation whereby GLOBAL will be merged with and into BANCORP with BANCORP
being the Surviving Corporation, all pursuant to the agreement of merger
attached to this Agreement as Exhibit 2.1 (B) (the "BANCORP Merger Agreement")
and in accordance with the applicable provisions of the California Corporations
Code (the "BANCORP Merger"). When used in this Agreement, the term "Mergers"
shall mean the Interim Merger and BANCORP Merger, and "Merger Agreements" shall
mean the Interim Merger Agreement and BANCORP Merger Agreement. The closing of
the Mergers (the "Closing") shall take place at a location and time and Business
Day to be designated by BANCORP and reasonably concurred to by GLOBAL (the
"Closing Date") which shall not, however, be later than ten (10) Business Days
after receipt of the Last Regulatory Approval, expiration of all applicable
waiting periods and the completion of BANCORP Public Offering. The Mergers shall
be effective when the last of the Merger Agreements (together with any other
documents required by law to effectuate the Mergers) shall have been filed with
the Secretary of State of the State of California. When used in this Agreement,
the term "Effective Time" shall mean the time of filing of the last of the
Merger Agreements with the Secretary of State, "Interim Surviving Corporation"
shall mean GLOBAL, and "Surviving Corporation" shall mean BANCORP.
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Section 2.2 Effect of Mergers. By virtue of the Mergers and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of GLOBAL shall be vested in
and be held and enjoyed by the Surviving Corporation, without further act or
deed, and all the estates and interests of every kind of GLOBAL, including all
debts due, shall be as effectively the property of the Surviving Corporation as
they were of GLOBAL immediately prior to the Effective Time, and the title to
any real estate vested by deed or otherwise in GLOBAL shall not revert or be in
any way impaired by reason of the Mergers; and all rights of creditors and liens
upon any property of GLOBAL shall be preserved unimpaired and all debts,
liabilities and duties of GLOBAL shall be debts, liabilities and duties of the
Surviving Corporation and may be enforced against it to the same extent as if
such debts, liabilities and duties had been incurred or contracted by it, and
none of such debts, liabilities or duties shall be expanded, increased,
broadened or enlarged by reason of the Mergers.
Section 2.3 Articles of Incorporation. The Articles of Incorporation of
BANCORP in effect immediately prior to the Effective Time shall be the Articles
of Incorporation of the Surviving Corporation until amended and the name of the
Surviving Corporation shall be "Humboldt Bancorp."
Section 2.4 (Reserved).
Section 2.5 Cancellation of GLOBAL Stock Options. At the Effective Time,
all outstanding rights with respect to GLOBAL Common Stock pursuant to stock
options under the GLOBAL Stock Option Plan which have not been exercised shall
be canceled. BANCORP will not assume any stock options under the GLOBAL Stock
Option Plan.
Section 2.6 Conversion of GLOBAL Common Stock.
2.6.1 Each share of GLOBAL Common Stock shall be converted at the
Effective Time into and become the right to receive cash equal to the Cash Per
Share Merger Price and an interest in the BANCORP Note with the right to receive
at the Escrow Payment Date, in cash and/or BANCORP Common Stock, the Escrow Per
Share Merger Price, subject to adjustment as provided in any other section of
this Agreement; provided, however, that the shares held by any shareholder who
properly exercises dissenters' rights provided under the California Corporations
Code, shall not be so converted and in lieu of such conversion shall be treated
in accordance with the provisions of the California Corporations Code. The total
consideration to be delivered by BANCORP to the Exchange Agent, at the Effective
Time, shall not exceed the Merger Price.
2.6.2 Escrow Merger Price. The Escrow Merger Price to be paid
under the provisions of Section 2.6.1 shall be subject to the following terms
and conditions:
(i) The Escrow Merger Price shall be entitled to interest
commencing as of the Determination Date and until the Escrow Payment
Date at the rate of eight percent (8%) of the Escrow Merger Price, as
adjusted pursuant to Section 2.6.2 per annum, payable in cash to the
Exchange Agent on a semi-annual basis on April 15 and October 15.
(ii) The Escrow Merger Price shall be adjusted downward on
a quarterly basis at the end of each quarter to the extent an adjustment
is required to reflect the effect of: (a) any Loan Loss on the Church
Loan portfolio identified on Schedule 2.6.2(a) up to a
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maximum of $1,024,000; (b) any Loan Loss on the Residential Loan
portfolio identified on Schedule 2.6.2(b) up to a maximum of $1,420,000;
(c) any Loan Loss on the FHA Title I Loan portfolio identified on
Schedule 2.6.2(c) up to a maximum of $500,000; (d) any Loan Loss on the
Miscellaneous Loan portfolio identified on Schedule 2.6.2(d) up to a
maximum of $109,000; (e) ninety percent (90%) of any Loan Loss on any of
the Commercial Loans identified on Schedule 2.6.2(e) up a maximum of
$5,520,000; (f) costs of litigation of any type, inclusive of attorneys'
fees and settlements, resulting from GLOBAL's and or CAPITOL's actions
or those of its directors, officers, employees or agents, which
litigation was in existence prior to the Effective Time; (g) writedowns
for any accounting adjustments required by BANCORP's certified public
accountants for the December 31, 1999 audited financial statements of
BANCORP which shall be issued no later than April 30, 2000 to bring the
financial statements of GLOBAL and or CAPITOL as of the Determination
Date into conformity with generally accepted accounting principles; (h)
any losses on sale of other real estate owned on the books of CAPITOL at
the Branch Purchase Effective Time; (i) costs of the Mergers incurred by
GLOBAL and or CAPITOL and not expended or properly accrued by GLOBAL and
or CAPITOL prior to the Determination Date; (j) any of the above-
described losses, net of any recoveries, incurred by GLOBAL and or
CAPITOL from the Determination Date to the Effective Time; and (k) any
and all expenses of the Global Shareholders Committee as provided by
Section 9.1.
(iii) The Escrow Merger Price shall be adjusted upward on a
quarterly basis at the end of each quarter to the extent an adjustment
is required hereby to reflect the effect of (a) any recoveries on any
loans of CAPITOL, up to 30 days prior to the Escrow Payment Date for
which there has been a Loan Loss under Sections 2.6.2(ii)(a-d), (b)
ninety percent (90%) of any recoveries on any loans of CAPITOL, up to 30
days prior to the Escrow Payment Date, for which there has been a Loan
Loss under Section 2.6.2(ii)(e), (c) any interest due on the Escrow
Merger Price that has not been paid in cash prior to the Escrow Payment
Date and (d) writeups for any accounting adjustments required by
Bancorp's certified public accountants for the December 31, 1999 audited
financial statements of Bancorp which shall be issued no later than
April 30, 2000 to bring the financial statements of GLOBAL and CAPITOL
as of the Determination Date into conformity with generally accepted
accounting principles.
(iv) The Escrow Adjusted Value shall mean the Escrow Merger
Price adjusted pursuant to Section 2.6.2(ii) and Section 2.6.2(iii).
(v) The Escrow Adjusted Value shall be paid by BANCORP on
Escrow Payment Date which shall be distributed to the former GLOBAL
shareholder in the form of the Escrow Per Share Merger Price. The Escrow
Per Share Merger Price shall be paid in cash and BANCORP Common Stock
through the Exchange Agent provided, however, that BANCORP shall not be
required to deliver to the Exchange Agent more than two million dollars
($2,000,000) of the Escrow Merger Price in shares of BANCORP Common
Stock which shall be valued at the BANCORP Market Value Per Share plus
seven percent (7%) and adjusted for stock splits and stock dividends
that occur after November 1, 1999.
(vi) In the event that BANCORP and the GLOBAL Shareholders
Committee as provided for in Section 9.1 cannot agree on the Escrow
Adjusted Value, BANCORP and the representative of GLOBAL shall each
select an outside third party expert who shall select
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an additional third party expert to determine the Escrow Adjusted Value.
The decision of the additional outside third party expert shall be final
and binding upon the parties.
(vii) Except as provided in this section, BANCORP and BANK
shall have no rights of any kind whatsoever whether by offset of
otherwise in or to the Escrow Merger Price for any claim, loss or damage
asserted against GLOBAL or CAPITOL or their respective shareholders,
directors, officers, and agents.
(viii) BANCORP, to the extent possible, will provide a
minimum of fifteen days notice to the Global Shareholders Committee, as
provided for in Section 9.1, of any adjustments to the Escrow Merger
Price under Section 2.6.2 (ii).
Section 2.7 Fractional Shares. No fractional shares of BANCORP Common
Stock shall be issued as part of the Escrow Per Share Merger Price. Shareholders
will be entitled to cash equal to the fractional share multiplied by the BANCORP
Market Value Per Share.
Section 2.8 Exchange Procedures. On or as soon as practicable after the
Effective Time BANCORP will deliver to the Exchange Agent, (i) cash equal to the
Cash Merger Price and (ii) a promissory note issued by BANCORP equal to the
Escrow Merger Price ("BANCORP Note").
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of GLOBAL Common Stock ("GLOBAL
Certificates"), accompanied by a duly executed letter of transmittal in proper
form, the Exchange Agent shall, as promptly as practicable thereafter, deliver
to each holder of such surrendered GLOBAL Certificates, check(s) for payment of
the Cash Per Share Merger Price and certificate(s) of interest representing such
holder's interest in the BANCORP Note. In no event shall the holders of GLOBAL
Certificates be entitled to receive interest on cash amounts due them hereunder.
2.8.2 Until a GLOBAL Certificate has been surrendered and
exchanged as herein provided, each share of GLOBAL Common Stock represented by
such GLOBAL Certificate shall represent, on and after the Effective Time, the
right to receive the Per Share Merger Price.
2.8.3 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 hereof, if any holder of GLOBAL Common Stock shall be unable to
surrender such holder's GLOBAL Certificates because such GLOBAL Certificates
have been lost or destroyed, such holder may deliver in lieu thereof an
affidavit and indemnity bond in form and substance and with surety satisfactory
to the Exchange Agent and BANCORP.
2.8.4 After the Effective Time, there shall be no further
registration of transfers of the shares of GLOBAL Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, GLOBAL Certificates representing such shares of GLOBAL Common Stock are
presented to BANCORP, they shall be canceled and exchanged for the Per Share
Merger Price as provided in this Article 2.
2.8.5 After the Effective Time, BANCORP shall pay in cash to a
paying agent for the benefit of former GLOBAL Shareholders or pay directly to
such former GLOBAL Shareholders, the interest required on the Escrow Merger
Price under Section 2.6.2(i).
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Section 2.9 Exchange Procedures for Escrow Adjusted Value.
2.9.1 Prior to the Escrow Payment Date there will be forwarded to
all former GLOBAL shareholders a letter of transmittal and election form whereby
each former GLOBAL shareholder shall elect to exchange the interest in the
BANCORP Note in the form of cash or BANCORP Common Stock at the BANCORP Market
Value Per Share plus seven percent (7%) adjusted for stock splits and stock
dividends. If no election is made then such former GLOBAL shareholder shall
receive only cash. BANCORP shall not be required to deliver more than two
million dollars ($2,000,000) of the Escrow Merger Price in shares of BANCORP
Common Stock which shall be valued at the BANCORP Market Value Per Share plus
seven percent (7%) adjusted for stock splits and stock dividends. If required,
there shall be pro-rated the amount of cash and BANCORP Common Stock to each
former GLOBAL shareholder as provided herein, except that no former GLOBAL
shareholder will be required to take any consideration for the interest in the
BANCORP Note except cash.
2.9.2 On or as soon as practicable after the Escrow Payment Date,
BANCORP will deliver to the Exchange Agent in exchange for the BANCORP Note,
cash and BANCORP Common Stock equal to the Escrow Adjusted Value. Any cash
delivered to the Exchange Agent pursuant to this Section 2.9 and not distributed
as of September 30, 2002 shall be returned to BANCORP. No interest will be paid
to former GLOBAL shareholders from cash deposited with the Exchange Agent
pursuant to this Section 2.9.
Section 2.10 Board of Directors of BANCORP and CAPITOL following the
Effective Time. At the Effective Time, the Board of Directors and officers of
BANCORP shall be directors and officers of BANCORP after the Effective Time. At
the Effective Time, the Board of Directors of CAPITOL shall be comprised of the
Board of Directors of BANCORP. At the Effective Time, the officers of CAPITOL
shall be officers of CAPITOL.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
OF GLOBAL AND CAPITOL
GLOBAL and CAPITOL represent and warrant to BANCORP and BANK as follows:
Section 3.1 Organization; Corporate Power; Etc. GLOBAL is a California
corporation duly organized validly existing and in good standing under the laws
of the State of California and have all requisite corporate power and authority
to own, lease and operate its respective properties and assets and to carry on
its respective business substantially as it is being conducted on the date of
this Agreement. CAPITOL is a California state-chartered industrial loan company
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. GLOBAL and
CAPITOL have all requisite corporate power and authority to enter into this
Agreement and, subject to obtaining all Requisite Regulatory Approvals and
GLOBAL's shareholder approval, GLOBAL and CAPITOL will have the requisite
corporate power and authority to perform its obligations hereunder with respect
to the consummation of the transactions contemplated hereby. CAPITOL is
authorized by the CDFI to conduct a general industrial loan business. CAPITOL is
not a member
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of the Federal Reserve System. CAPITOL's deposits are insured by the FDIC in the
manner and to the full extent provided by law. CAPITOL maintains and operates
branch offices only in the State of California. Neither the scope of the
business of GLOBAL, or any Subsidiary of GLOBAL, nor the location of any of
their respective properties, requires that GLOBAL or any of its respective
Subsidiaries be licensed or qualified to conduct business in any jurisdiction
other than the State of California, where the failure to be so licensed and
qualified would have a Material Adverse Effect on GLOBAL taken as a whole.
Section 3.2 Licenses and Permits. Except as disclosed on Schedule 3.2,
GLOBAL and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on GLOBAL or CAPITOL or on the
ability of GLOBAL or CAPITOL to consummate the transactions contemplated by this
Agreement. The properties, assets, operations and businesses of GLOBAL and those
of its Subsidiaries, are and have been maintained and conducted, in all material
respects, in compliance with all applicable licenses, certificates, franchises,
rights and permits.
Section 3.3 Subsidiaries. Other than as set forth on Schedule 3.3, there
is no corporation, partnership, joint venture or other entity in which GLOBAL or
CAPITOL owns, directly or indirectly (except as pledgee pursuant to loans or
stock or other interest held as the result of or in lieu of foreclosure pursuant
to pledge or other security arrangement) any equity or other voting interest or
position.
Section 3.4 Authorization of Agreement; No Conflicts.
3.4.1 The execution and delivery of this Agreement and the Merger
Agreements by GLOBAL and CAPITOL, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of GLOBAL and CAPITOL, subject only to the approval
of this Agreement, the Merger Agreements and the Merger by GLOBAL's
shareholders. This Agreement has been duly executed and delivered by GLOBAL and
CAPITOL and constitutes a legal, valid and binding obligation of GLOBAL and
CAPITOL, enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the rights of creditors generally and by general equitable
principles. The Merger Agreements, upon the receipt of all Requisite Regulatory
Approvals and the due execution and filing of such Merger Agreements in
accordance with the applicable provisions of the California Corporations Code,
will constitute a legal, valid and binding obligation of GLOBAL and CAPITOL,
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreements, and the consummation of
the transactions contemplated hereby and thereby, do not and will not conflict
with, or result in any violation of or default or loss of a material benefit
under, any provision of the Articles of Incorporation or Bylaws of GLOBAL and
CAPITOL, or except for the necessity of obtaining Requisite Regulatory Approvals
and approval of a majority vote of the shareholders of GLOBAL, any material
mortgage, indenture, lease,
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agreement or other material instrument or any permit, concession, grant,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to GLOBAL and CAPITOL or any of its assets or properties,
other than any such conflict, violation, default or loss which (i) will not have
a Material Adverse Effect on GLOBAL, CAPITOL or BANCORP following consummation
of the Mergers; or (ii) will be cured or waived prior to the Effective Time. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required in connection with the
execution and delivery of this Agreement or the Merger Agreements by GLOBAL and
CAPITOL or the performance by GLOBAL and CAPITOL of its obligations hereunder
and thereunder, except for (a) filings required in order to obtain the Requisite
Regulatory Approvals; (b) the filing and approval of the Merger Agreements with
the Secretary of the State of California; (c) consummation of the Branch
Purchase; (d) Tax Filings; and (e) as set forth in Schedule 3.4.
Section 3.5 Capital Structure. The authorized capital stock of GLOBAL
consists of 1,200,000 shares of GLOBAL Common Stock, no par value per share and
600,000 shares of GLOBAL Preferred Stock, no par value. No GLOBAL Preferred
Stock has been issued. On the date of this Agreement, 670,850 shares of GLOBAL
Common Stock were outstanding, and 35,750 shares of GLOBAL Common Stock were
reserved for issuance pursuant to outstanding GLOBAL Stock Options under the
GLOBAL Stock Option Plan. On the Effective Date GLOBAL shall have no more than
706,600 shares of GLOBAL Common Stock outstanding and all stock options under
the GLOBAL Stock Option Plan that have not been exercised will be canceled. All
outstanding shares of GLOBAL Common Stock are validly issued, fully paid and
nonassessable and do not possess any preemptive rights and were not issued in
violation of any preemptive rights or any similar rights of any Person. CAPITOL
has 175,000 shares of common stock, no par value per share, outstanding, all of
which are owned by GLOBAL. Except for outstanding GLOBAL Stock Options under the
GLOBAL Stock Option Plan, GLOBAL and CAPITOL do not have outstanding any
options, warrants, calls, rights, commitments, securities or agreements of any
character to which GLOBAL and CAPITOL is a party or by which it is bound
obligating GLOBAL and CAPITOL to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of GLOBAL and CAPITOL or
obligating GLOBAL and CAPITOL to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 3.6 GLOBAL Filings.
3.6.1 Since January 1, 1996, GLOBAL and its Subsidiaries have
timely filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (a) the Federal Reserve Board or any Federal Reserve Bank; (b) the
Commissioner or Commissioner of the Department of Corporations; (c) the FDIC;
and (d) any other applicable federal, state or local governmental or regulatory
authority. All such reports, registrations and filings, and all reports sent to
GLOBAL's shareholders during the three-year period ended December 31, 1998
(whether or not filed with any Regulatory Authority), are collectively referred
to as the "GLOBAL Filings. Except to the extent prohibited by law, copies of the
GLOBAL Filings have been made available to BANCORP. As of their respective
filing or mailing dates, each of the past GLOBAL Filings (a) was true and
complete in all material respects (or was amended so as to be so promptly
following discovery of any discrepancy); and (b) complied in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the governmental or regulatory authority with which it was filed (or was
amended so as to be so promptly following
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discovery of any such noncompliance) and none contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The GLOBAL Financial
Statements, together with the financial statements contained in the GLOBAL
Filings have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present (subject,
in the case of the unaudited statements, to recurring adjustments normal in
nature and amount) the financial position of GLOBAL as of the dates thereof and
the results of its operations, cash flows and changes in shareholders' equity
for the periods then ended.
3.6.2 GLOBAL and its subsidiaries have timely filed each report,
schedule and amendments to each of the foregoing since January 1, 1996 that
GLOBAL and CAPITOL were required to file with the Commissioner or Commissioner
of the Department of Corporations and the FDIC (the "GLOBAL State Documents"),
all of which have been made available to BANCORP. As of their respective dates,
the GLOBAL State Documents complied in all material respects with the applicable
requirements of the California Financial Code and the Federal Deposit Insurance
Act, as the case may be, and the rules and regulations of the Commissioner or
Commissioner of the Department of Corporations and the FDIC thereunder
applicable to such GLOBAL State Documents, and none of the GLOBAL State
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of GLOBAL included in the GLOBAL
Filings comply in all material respects with applicable regulatory accounting
requirements and with the published rules and regulations of the Commissioner
(as applicable) with respect thereto, and have been prepared in accordance with
GAAP, or applicable regulatory accounting principles, applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by regulations
of the Commissioner) and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the financial
position of GLOBAL as of the dates thereof and the results of its operations and
cash flows for the periods then ended.
Section 3.7 Accuracy of Information Supplied.
3.7.1 No representation or warranty of GLOBAL and CAPITOL
contained herein or any statement, schedule, exhibit or certificate given or to
be given by or on behalf of GLOBAL or any of its Subsidiaries, to BANCORP in
connection herewith and none of the information supplied or to be supplied by
GLOBAL or its Subsidiaries to BANCORP hereunder contains or will contain any
untrue statement of material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
3.7.2 None of the information supplied or to be supplied by
GLOBAL or relating to GLOBAL which is included or incorporation by reference in
(i) the Registration Statement on Form S-1 to be filed with the SEC by BANCORP
in connection with the BANCORP Public Offering of common stock and the
Registration Statement on Form S-4 to be filed with the SEC by BANCORP in
connection with the issuance of shares of BANCORP Common Stock in the merger of
GLOBAL with and into BANCORP (including the Proxy Statement of GLOBAL and the
Prospectus of
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BANCORP ("Proxy Statement/Prospectus") constituting a part thereof), (the
Registration Statement on Form S-1 and the Registration Statement on Form S-4
are collectively referred to herein as the "Registration Statements") will, at
the time that each of the Registration Statements become effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) the Proxy Statement/Prospectus and any amendment or
supplement thereto will, at all times from the date of mailing to shareholders
of GLOBAL through the date of the meeting of shareholders of GLOBAL to be held
in connection with the Mergers, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the merger, the issuance of any shares of
BANCORP Common Stock in connection with the merger of GLOBAL with and into
BANCORP, or any Requisite Regulatory Approvals will in connection with the
Mergers, at the time filed or at the time they become effective, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus (except for such portions thereof that relate only to
BANCORP and its Subsidiaries) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
3.7.3 GLOBAL has or will deliver to BANCORP copies of the audited
balance sheets of GLOBAL and its Subsidiaries as of December 31, 1998, 1997 and
1996 and the related statements of income, changes in shareholders' equity and
cash flows for the years then ended and the related notes to such financial
statements, all as audited by Grant Thornton & Co., independent public
accountants (the "GLOBAL Financial Statements"), and GLOBAL will hereafter until
the Closing Date deliver to BANCORP copies of additional financial statements of
GLOBAL as provided in Sections 5.1.1(iii) and 6.1.11(iii). The GLOBAL Financial
Statements have been prepared (and all of said additional financial statements
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of GLOBAL and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
GLOBAL has delivered to BANCORP copies of all management or other letters
delivered to GLOBAL by its independent accountants in connection with any of the
GLOBAL Financial Statements or by such accountants or any consultant regarding
the internal controls or internal compliance procedures and systems of GLOBAL
issued at any time since January 1, 1996, and will make available for inspection
by BANCORP or its representatives, at such times and places as BANCORP may
reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 3.7.4 Notwithstanding anything set forth elsewhere in this
Agreement no due diligence examination of GLOBAL or CAPITOL conducted by or on
behalf of BANCORP and the BANK either prior or subsequent to execution of this
Agreement, shall have any effect whatsoever
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on the representations of GLOBAL or CAPITOL in this Section 3 or in any other
section of this Agreement.
Section 3.8 Compliance with Applicable Laws. Except as disclosed on
Schedule 3.8, to the best of GLOBAL's or CAPITOL's Knowledge, the respective
businesses of GLOBAL and its Subsidiaries are not being conducted in violation
of any law, ordinance or regulation, except for violations which individually or
in the aggregate would not have a Material Adverse Effect on GLOBAL or CAPITOL,
or BANCORP at or following the Effective Time. Except as set forth in Schedule
3.8, no investigation or review by any Governmental Entity with respect to
GLOBAL or CAPITOL is pending or, to the Knowledge of GLOBAL or CAPITOL
threatened, nor has any Governmental Entity indicated to GLOBAL or CAPITOL an
intention to conduct the same.
Section 3.9 Litigation. Except as set forth in Schedule 3.9, there is no
suit, action or proceeding or investigation pending, or to the Knowledge of
GLOBAL or CAPITOL threatened against or affecting GLOBAL or any of its
Subsidiaries which, if adversely determined, would have a Material Adverse
Effect on GLOBAL or its Subsidiaries; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against GLOBAL or any of its Subsidiaries that has, or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect. Schedule 3.9 contains a true, correct and complete list, including
identification of the applicable insurance policy covering such litigation, if
any, subject to reservation of rights, if any, the applicable deductible and the
amount of any reserve therefor, of all pending litigation in which GLOBAL or any
of its Subsidiaries is a named party, and except as disclosed on Schedule 3.9,
all of the litigation shown on such Schedule is adequately covered by insurance
in force, except for applicable deductibles, or has been adequately reserved for
in accordance with GLOBAL's prior business practices.
Section 3.10 Agreements with Banking Authorities. Except as disclosed on
Schedule 3.10,. neither GLOBAL nor any Subsidiary of GLOBAL is a party to any
written agreement or memorandum of understanding with, or order or directive
from, any Governmental Entity.
Section 3.11 Insurance. GLOBAL and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 3.11 contains a list of all policies of insurance and bonds
carried and owned by GLOBAL or any Subsidiary. None of GLOBAL or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material claims thereunder have been filed in timely
fashion. GLOBAL and its Subsidiaries have filed claims with, or given notice of
claim to, their insurers or bonding companies in timely fashion with respect to
all material matters and occurrences for which they believe they have coverage.
Section 3.12 Title to Assets other than Real Property. GLOBAL and its
Subsidiaries have good and marketable title to all their properties and assets
(other than real property which is the subject to Section 3.13), owned or leased
by GLOBAL or any of its Subsidiaries, free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature except as disclosed on
Schedule 3.12 and except for: (a) encumbrances as set forth in the GLOBAL
Financial Statements; (b) liens for current Taxes not yet due which have been
fully reserved for; and (c) encumbrances, if any, that are not substantial in
character, amount or extent and do not detract materially from the
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value, or interfere with present use or the sale or other disposition of the
property subject thereto or affected thereby. All such properties and assets
are, and require only routine maintenance to keep them, in good working
condition, normal wear and tear excepted.
Section 3.13 Real Property. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by GLOBAL or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Except as disclosed on
Schedule 3.13, each of GLOBAL and its respective Subsidiaries has good and
marketable title to the real properties that it owns, as described in such
Schedule, free and clear of all mortgages, covenants, conditions, restrictions,
easements, liens, security interests, charges, claims, assessments and
encumbrances, except for (a) rights of lessors, lessees or sublessees in such
matters as are reflected in a written lease; (b) current Taxes (including
assessments collected with Taxes) not yet due and payable; (c) encumbrances, if
any, that are not substantial in character, amount or extent and do not
materially detract from the value, or interfere with present use, or the ability
of GLOBAL CAPITOL to dispose, of the property subject thereto or affected
thereby; and (d) other matters as described in Schedule 3.13. GLOBAL and its
Subsidiaries have valid leasehold interests in the leaseholds they respectively
hold, free and clear of all mortgages, liens, security interest, charges,
claims, assessments and encumbrances, except for (a) claims of lessors,
co-lessees or sublessees in such matters as are reflected in a written lease;
(b) title exceptions affecting the fee estate of the lessor under such leases;
and (c) other matters as described in Schedule 3.13. To the best of GLOBAL's or
CAPITOL's Knowledge, the activities of GLOBAL and its Subsidiaries with respect
to all real property owned or leased by them for use in connection with their
operations are in all material respects permitted and authorized by applicable
zoning laws, ordinances and regulations and all laws and regulations of any
Governmental Entity. Except as set forth in Schedule 3.13, GLOBAL and its
Subsidiaries enjoy quiet possession under all material leases to which they are
the lessees and all of such leases are valid and in full force and effect,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles. The buildings and improvements on real
properties owned or leased by GLOBAL or any of its Subsidiaries are in good
condition and repair, and do not require more than normal and routine
maintenance, to keep them in such condition, normal wear and tear excepted.
Section 3.14 Taxes.
3.14.1 Filing of Returns. Except as set forth on Schedule 3.14.1,
GLOBAL and its Subsidiaries have duly prepared and filed federal, state, and
local Returns (for Tax or informational purposes) which were required to be
filed by or in respect of GLOBAL and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. No extension of time within
which GLOBAL or any of its Subsidiaries may file any Return is currently in
force.
3.14.2 Payment of Taxes. Except as disclosed on Schedule 3.14.2
with respect to all amounts in respect of Taxes imposed on GLOBAL or any
Subsidiary or for which GLOBAL or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements
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have been or will be fully complied with in all material respects, and all such
amounts required to be paid by or on behalf of GLOBAL or any Subsidiary to
taxing authorities or others on or before the date hereof have been paid.
3.14.3 Audit History. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of
GLOBAL or any Subsidiary currently in progress. Except as disclosed on Schedule
3.14.3, GLOBAL and its Subsidiaries have not received any written notices within
the three years preceding the Closing Date of any pending or threatened audit,
by the Internal Revenue Service or any state, local or foreign agency, for any
Returns or Tax liability of GLOBAL or any Subsidiary for any period. GLOBAL and
its Subsidiaries currently have no unpaid deficiencies assessed by the Internal
Revenue Service or any state, local or foreign taxing authority arising out of
any examination of any of the Returns of GLOBAL or any Subsidiaries filed for
fiscal years ended on or after December 31, 1994 through the Closing Date, nor
to the Knowledge of GLOBAL is there reason to believe that any material
deficiency will be assessed.
3.14.4 Statute of Limitations. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of GLOBAL or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of GLOBAL or any
Subsidiaries are currently pending.
3.14.5 Withholding Obligations. GLOBAL and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions, unemployment contributions,
backup withholding and other deductions required to be withheld therefrom by any
Tax law and have paid the same to the proper taxing authorities within the time
required under any applicable Tax law.
3.14.6 Tax Liens. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by GLOBAL or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
3.14.7 Tax Reserves. GLOBAL and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The GLOBAL Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
GLOBAL Financial Statements and all periods prior thereto.
3.14.8 Tax Elections. No new elections with respect to Taxes or
any changes in current elections with respect to Taxes affecting the assets
owned by GLOBAL or its Subsidiaries shall be made after the date of this
Agreement without the prior written consent of BANCORP, which shall not be
unreasonably withheld. BANCORP shall be deemed to have consented in writing to
any election GLOBAL or its Subsidiaries shall desire to make if: (i) the
electing Person shall have notified the Chief Executive Officer of BANCORP in
writing of its desire to make such election, including in such notice a
reasonably complete summary of the election it desires to make and the reasons
it desires to make such election at least 20 Business Days prior to the due date
(including extensions thereof) for filing such election; and (ii) BANCORP shall
not have responded in writing
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to such notice by the fifth Business Day prior to the due date (including
extensions thereof) for filing such election.
3.14.9 IRC Section 382 Applicability. None of GLOBAL or any of
its Subsidiaries, including any party joining in any consolidated return to
which GLOBAL is a member, underwent an "ownership change" as defined in IRC
Section 382(GLOBAL) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
3.14.10 Disclosure Information. GLOBAL has delivered to BANCORP a
schedule setting forth the following information with respect to GLOBAL and
CAPITOL and as of the most recent practicable date (as well as on an estimated
pro forma basis as of the Closing giving effect to the consummation of the
transactions contemplated hereby): (a) GLOBAL's and CAPITOL's basis in its
assets; (b) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to GLOBAL and CAPITOL; and (c) the amount of any deferred
gain or loss allocable to GLOBAL and CAPITOL and arising out of any deferred
intercompany transactions.
Section 3.15 Performance of Obligations. GLOBAL and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of GLOBAL or any of its Subsidiaries is in default under or in breach
of any term or provision of any covenant, contract, lease, indenture or any
other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on GLOBAL or its Subsidiaries. To GLOBAL's and CAPITOL's Knowledge, and
except as disclosed on Schedule 3.15 or in the portion of Schedule 3.16 that
identifies 90-day past due or classified or nonaccrual loans, no party with whom
GLOBAL or any of its Subsidiaries has an agreement that is of material
importance to the businesses of GLOBAL or its Subsidiaries is in default
thereunder.
Section 3.16 Loans and Investments. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of GLOBAL or their Subsidiaries are, and constitute, in all material
respects, the legal, valid and binding obligations of the parties thereto and
are enforceable against such parties in accordance with their terms, except as
the enforceability thereof may be limited by applicable law and otherwise by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. Except as described on
Schedule 3.16, as of June 1, 1999, no loans or investments held by GLOBAL or any
Subsidiary are: (i) more than ninety days past due with respect to any scheduled
payment of principal or interest, other than loans on a nonaccrual status; (ii)
classified as "loss," "doubtful," "substandard" or "specially mentioned" by
GLOBAL and CAPITOL or any banking regulators; or (iii) on a nonaccrual status in
accordance with GLOBAL's loan review procedures. Except as set forth on Schedule
3.16, none of such assets (other than loans) are subject to any restrictions,
contractual, statutory or other, that would materially impair the ability of the
entity holding such investment to dispose freely of any such assets at any time,
except restrictions on the public distribution or transfer of any such
investments under the Securities Act and the regulations thereunder or state
securities laws and pledges or security interests given in connection with
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government deposits. All loans, leases or other extensions of credit
outstanding, or commitments to make any loans, leases or other extensions of
credit to any Affiliates of GLOBAL or CAPITOL are disclosed on Schedule 3.16.
For outstanding loans or extensions of credit or commitments to make loans or
extensions of credit where the original principal amounts are in excess of
$25,000 and which by their terms are either secured by collateral or supported
by a guaranty or similar obligation, the security interests have been duly
perfected in all material respects and have the priority they purport to have in
all material respects, other than by operation of law, and, in the case of each
guaranty or similar obligation, each has been duly executed and delivered to
GLOBAL or any Subsidiary, and to GLOBAL's or CAPITOL's Knowledge, is still in
full force and effect.
Section 3.17 Brokers and Finders. Except as set forth on Schedule 3.17,
none of GLOBAL or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreements, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. GLOBAL or CAPITOL agrees to indemnify
and hold harmless BANCORP and its affiliates, and to defend with counsel
selected by BANCORP and reasonably satisfactory to GLOBAL, from and against any
liability, cost or expense, including attorneys' fees, incurred in connection
with a breach of this Section 3.17.
Section 3.18 Material Contracts. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which GLOBAL or any
Subsidiary is a party as of the date of this Agreement, except for loans and
other extensions of credit made by GLOBAL or CAPITOL in the ordinary course of
its business and those items specifically disclosed in the GLOBAL Financial
Statements.
Section 3.19 Absence of Material Adverse Effect. Since January 1, 1999,
the respective businesses of GLOBAL and its Subsidiaries have been conducted
only in the ordinary course, in the same manner as theretofore conducted, and no
event or circumstance has occurred or is expected to occur which has had or
which, with the passage of time or otherwise, could reasonably be expected to
have a Material Adverse Effect on GLOBAL or CAPITOL.
Section 3.20 Undisclosed Liabilities. Except as disclosed on Schedule
3.20, none of GLOBAL or any of its Subsidiaries has any liabilities or
obligations, either accrued, contingent or otherwise, that are material to
GLOBAL and its Subsidiaries and that have not been: (a) reflected or disclosed
in the GLOBAL Financial Statements; or (b) incurred subsequent to December 31,
1998 in the ordinary course of business. GLOBAL or CAPITOL has no Knowledge of
any basis for the assertion against GLOBAL or any of its Subsidiaries, of any
liability, obligation or claim (including without limitation that of any
Governmental Entity) that will have or cause, or could reasonably be expected to
have or cause, a Material Adverse Effect on GLOBAL or CAPITOL that is not fully
and fairly reflected and disclosed in the GLOBAL Financial Statements or on
Schedule 3.20.
Section 3.21 Employees; Employee Benefit Plans; ERISA.
3.21.1 All material obligations of GLOBAL or its Subsidiaries for
payment to trusts or other funds or to any Governmental Entity or to any
individual, director, officer, employee or agent (or his or her heirs, legatees
or legal representatives) with respect to unemployment compensation benefits,
profit-sharing, pension or retirement benefits or social security benefits,
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whether arising by operation of law, by contract or by past custom, have been
properly accrued for the periods covered thereby on the GLOBAL Financial
Statements and paid when due. All material obligations of GLOBAL or its
Subsidiaries, whether arising by operation of law, by contract or by past custom
for vacation or holiday pay, bonuses and other forms of compensation which are
payable to their respective directors, officers, employees or agents have been
properly accrued on the GLOBAL Financial Statements for the periods covered
thereby and paid when due. Except as set forth on Schedule 3.21.1, there are no
unfair labor practice complaints, strikes, slowdowns, stoppages or other
controversies pending or, to the Knowledge of GLOBAL or CAPITOL, attempts to
unionize or controversies threatened between GLOBAL or any Subsidiary or
Affiliate and or relating to, any of their employees that are likely to have a
Material Adverse Effect on GLOBAL and its Subsidiaries, taken as a whole. None
of GLOBAL or any Subsidiary is a party to any collective bargaining agreement
with respect to any of their employees and, except as set forth on Schedule
3.21.1, none of GLOBAL or any Subsidiary is a party to a written employment
contract with any of their respective employees and there are no understandings
with respect to the employment of any officer or employee of GLOBAL or any
Subsidiary which are not terminable by GLOBAL or such Subsidiary without
liability on not more than thirty (30) days' notice. Except as disclosed in the
GLOBAL Financial Statements for the periods covered thereby, all material sums
due for employee compensation have been paid and all employer contributions for
employee benefits, including deferred compensation obligations, and all material
benefit obligations under any Employee Plan (as defined in Section 3.21.3
hereof) or any Benefit Arrangement (as defined in Section 3.21.4 hereof) have
been duly and adequately paid or provided for in accordance with plan documents.
Except as set forth on Schedule 3.21.1, no director, officer or employee of
GLOBAL or any Subsidiary is entitled to receive any payment of any amount under
any existing agreement, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement or the Merger
Agreement. To GLOBAL's or CAPITOL's Knowledge, it has materially complied with
all applicable federal and state statutes and regulations which govern workers'
compensation, equal employment opportunity and equal pay, including, but not
limited to, all civil rights laws, Presidential Executive Order 1124, the Fair
Labor Standards Act of 1938, as amended, and the Americans with Disabilities
Act.
3.21.2 GLOBAL has delivered as Schedule 3.21.2 a complete list
of:
(a) All current employees of GLOBAL or any of its
Subsidiaries together with each employee's tenure with GLOBAL or such
Subsidiary, title or job classification, and the current annual rate of
compensation anticipated to be paid to each such employee; and
(b) All Employee Plans and Benefit Arrangements, including
all plans or practices providing for current compensation or accruals for active
Employees, including, but not limited to, all employee benefit plans, all
pension, profit-sharing, retirement, bonus, stock option, incentive, deferred
compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
3.21.3 Except as disclosed on Schedule 3.21.3, none of GLOBAL or
any of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of GLOBAL or any of its Subsidiaries (any such plan being herein referred to as
an "Employee Plan"). True and complete copies of each such Employee Plan,
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including amendments thereto, have been previously delivered to BANCORP,
together with (i) all agreements regarding plan assets with respect to such
Employee Plans, (ii) a true and complete copy of the annual reports for the most
recent three years (Form 5500 Series including, if applicable, Schedules A and B
thereto) prepared in connection with any such Employee Plan, (iii) a true and
complete copy of the actuarial valuation reports for the most recent three
years, if any, prepared in connection with any such Employee Plan covering any
active employee of GLOBAL or its Subsidiaries, (iv) a copy of the most recent
summary plan description of each such Employee Plan, together with any
modifications thereto, and (v) a copy of the most recent favorable determination
letter (if applicable) from the Internal Revenue Service for each Employee Plan.
None of the Employee Plans is a "multi-employer plan" as defined in Section
3(37) of ERISA or a "multiple employer plan" as covered in Section 412 of the
IRC, and none of GLOBAL or any of its Subsidiaries has been obligated to make a
contribution to any such multi-employer or multiple employer plan within the
past five years. None of the Employee Plans of GLOBAL or any of its Subsidiaries
is, or for the last five years has been, subject to Title IV of ERISA. Each
Employee Plan which is intended to be qualified under Section 401(a) of the IRC
is so qualified and each trust maintained pursuant thereto is exempt from income
tax under Section 501(a) of the IRC, and none of GLOBAL or any of its
Subsidiaries is aware of any fact which has occurred which would cause the loss
of such qualification or exemption.
3.21.4 Except as disclosed in Schedule 3.21.2, none of GLOBAL or
any of its Subsidiaries maintains (other than base salary and base wages) any
form of current or deferred compensation, bonus, stock option, stock
appreciation right, severance pay, salary continuation, retirement or incentive
plan or arrangement for the benefit of any director, officer or employee,
whether active or retired, of GLOBAL or any of its Subsidiaries or for any class
or classes of such directors, officers or employees. Except as disclosed in
Schedule 3.21.2, none of GLOBAL or any of its Subsidiaries maintains any group
or individual health insurance, welfare or similar plan or arrangement for the
benefit of any director, officer or employee of GLOBAL or any of its
Subsidiaries, whether active or retired, or for any class or classes of such
directors, officers or employees. Any such plan or arrangement described in this
Section 3.21.4, copies of which have been delivered to BANCORP, shall be herein
referred to as a "Benefit Arrangement."
3.21.5 To GLOBAL's or CAPITOL's Knowledge, all Employee Plans and
Benefit Arrangements are operated in material compliance with the requirements
prescribed by any and all statutes, governmental or court orders, or
governmental rules or regulations currently in effect, including but not limited
to ERISA and the IRC, applicable to such plans or arrangements, and plan
documents relating to any such plans or arrangements, comply with or will be
amended to comply with applicable legal requirements. To GLOBAL's or CAPITOL's
Knowledge, none of GLOBAL or any of its Subsidiaries, nor any Employee Plan, nor
any trusts created thereunder, nor any trustee, administrator nor any other
fiduciary thereof, has engaged in a "prohibited transaction," as defined in
Section 406 of ERISA and Section 4975 of the IRC, that could subject GLOBAL or
any of its Subsidiaries or BANCORP to liability under Section 409 or 502(i) of
ERISA or Section 4975 of the IRC or that would adversely affect the qualified
status of such plans; each "plan official" within the meaning of Section 412 of
ERISA of each Employee Plan is bonded to the extent required by such Section
412; with respect to each Employee Plan, to GLOBAL's Knowledge, no employee of
GLOBAL's or CAPITOL's or any Subsidiary, nor any fiduciary of any Employee Plan,
has engaged in any breach of fiduciary duty as defined in Part 4 of Subtitle B
of Title I of ERISA which could subject GLOBAL or any of its Subsidiaries to
liability if GLOBAL or any such Subsidiary is
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obligated to indemnify such Person against liability. Except as disclosed in
Schedule 3.21.5, GLOBAL and its Subsidiaries have not failed to make any
material contribution or pay any amount due and owing as required by law or the
terms of any Employee Plan or Benefit Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee Plan
or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, there is no pending, or to GLOBAL's or CAPITOL's Knowledge
threatened, legal action, proceeding or investigation against any Employee Plan
which could result in material liability to such Employee Plan, other than
routine claims for benefits, and there is no basis for any such legal action,
proceeding or investigation.
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(2)) materially complies
and has materially complied with the requirements of Section 601 through 608 of
ERISA or Section 4980B of the IRC governing continuation coverage requirements
for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of GLOBAL or
any of its Subsidiaries maintains any Employee Plan or Benefit Arrangement
pursuant to which any benefit or other payment will be required to be made by
GLOBAL or any of its Subsidiaries or Affiliates or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of GLOBAL or
any Subsidiary or Affiliate thereof, in either case as a result of the
consummation of the transactions contemplated by this Agreement or the Merger
Agreements.
Section 3.22 Powers of Attorney. No power of attorney or similar
authorization given by GLOBAL or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 3.23 Hazardous Materials. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
GLOBAL and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in and de
minimis quantities discharged from motor vehicles in their ordinary operation on
any of the GLOBAL Properties (as defined below), GLOBAL and its Subsidiaries
have not engaged in the generation, use, manufacture, treatment, transportation,
storage (in tanks or otherwise), or the disposal, of Hazardous Substances other
than as permitted by and only in compliance with applicable law. To GLOBAL's or
CAPITOL's Knowledge, no Hazardous Substances have been released, emitted or
disposed of, or otherwise deposited, on, in or from any real property which is
now or has been previously owned since January 1, 1995, or which is currently or
during the past three years was leased, by GLOBAL or any of its Subsidiaries,
including OREO (collectively, the "GLOBAL Properties"), or to GLOBAL's or
CAPITOL's Knowledge, on or in any real property in which GLOBAL or any of its
Subsidiaries now holds any security interest, mortgage or other lien or interest
with an underlying obligation in excess of $25,000 ("GLOBAL Collateralizing Real
Estate"), except for (i) matters
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disclosed on Schedule 3.23; (ii) ordinary and necessary quantities of cleaning,
pest control and office supplies used and stored in compliance with applicable
Environmental Laws, or ordinary rubbish, debris and nonhazardous solid waste
stored in garbage cans or bins for regular disposal off-site, or petroleum
contained in, and de minimis quantities discharged from, motor vehicles in their
ordinary operation on such GLOBAL Properties; and (iii) such releases,
emissions, disposals or deposits which constituted a violation of an
Environmental Law but did not have a Material Adverse Effect on the GLOBAL
Property involved and would not result in the incurrence or imposition of any
liability, expense, penalty or fine against GLOBAL or any of its Subsidiaries in
excess of $25,000 individually or in the aggregate. To GLOBAL's of CAPITOL's
Knowledge, no activity has been undertaken on any of the GLOBAL Properties since
January l, 1995, and to the Knowledge of GLOBAL or CAPITOL no activities have
been or are being undertaken on any of the GLOBAL Collateralizing Real Estate,
that would cause or contribute to:
(a) any of the GLOBAL Properties or GLOBAL Collateralizing
Real Estate becoming a treatment, storage or disposal facility within the
meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. Section 1251 et seq., the Clean Air Act,
as amended, 42 U.S.C. Section 7401 et seq., or any similar federal or state law
or local ordinance; the cumulative effect of which would have a material adverse
effect on the GLOBAL Property or GLOBAL Collateralizing Real Estate involved.
3.23.2 To the Knowledge of GLOBAL or CAPITOL, there are not, and
never have been, any underground storage tanks located in or under any of the
GLOBAL Properties.
3.23.3 None of GLOBAL or any of its Subsidiaries has received any
written notice of, and to the Knowledge of GLOBAL or CAPITOL none has received
any verbal notice of, any pending or threatened claims, investigations,
administrative proceedings, litigation, regulatory hearings or requests or
demands for remedial or responsive actions or for compensation, with respect to
any of the GLOBAL Properties or GLOBAL Collateralizing Real Estate, alleging
noncompliance with or violation of any Environmental Law or seeking relief under
any Environmental Law and none of the GLOBAL Properties or GLOBAL
Collateralizing Real Estate is listed on the United States Environmental
Protection Agency's National Priorities List of Hazardous Waste Sites, or, to
the Knowledge of GLOBAL, any other list, schedule, log, inventory or record of
hazardous waste sites maintained by any federal, state or local agency.
3.23.4 As used throughout this Agreement "Hazardous Substances"
shall mean any material or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste" or "restricted hazardous waste" under
Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the
California Health and Safety Code Division 20, Chapter 6.5 (Hazardous Waste
Control Law); (ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.8
(Carpenter-Presley-Tanner Hazardous Substance Account
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Act); (iii) defined as a "hazardous material," "hazardous substance" or
"hazardous waste" under Section 25501 of the California Health and Safety Code,
Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and
Inventory); (iv) defined as a "hazardous substance" under Section 25281 of the
California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage
of Hazardous Substances); (v) petroleum or any fraction thereof, any petroleum
product and by-product, gasoline or crude oil; (vi) asbestos or asbestos
containing materials; (vii) listed under Article 9 or defined as hazardous or
extremely hazardous pursuant to Article 11 of Title 22 of the California
Administrative Code, Division 4, Chapter 20; (viii) designated as a "hazardous
substance" pursuant to Section 311 of the Federal Water Pollution Control Act
(33 U.S.C. 1317); (ix) defined as a "hazardous waste" pursuant to Section 1004
of the RCRA; (x) defined as a "hazardous substance" pursuant to Section 101 of
CERCLA; (ix) defined under all other existing and/or currently proposed federal,
state and local laws, ordinances, rules, regulations, orders, requirements, and
decrees (in each case having the force of law) regulating, relating to, or
imposing liability or standards of conduct concerning any hazardous, toxic or
dangerous waste, substance or material; or (xii) any substance, product, waste
or other material of any nature whatsoever which may give rise to liability (A)
under any of the statutes or regulations described in clauses (i) through (ix)
above; or (B) under any reported decisions of any state or federal court having
jurisdiction over GLOBAL, CAPITOL or any portion of the GLOBAL Properties or
GLOBAL Collateralizing Real Estate.
Section 3.24 Stock Options. Schedule 3.24 to this Agreement contains a
description of the GLOBAL Stock Option Plan and list of all GLOBAL Stock Options
outstanding, indicating for each: (a) the grant date; (b) whether vested or
unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 Regulatory Approvals. To the best Knowledge of GLOBAL and
CAPITOL there are no facts, events or conditions applicable to GLOBAL or CAPITOL
which will or reasonably could adversely affect the likelihood of securing the
regulators approvals or consents of any Governmental Entity to the Mergers and
transactions completed by this Agreement.
Section 3.26 Year 2000 Compliance. All of GLOBAL's and CAPITOL's
internal systems and all products and services marked by either of them are
fully Year 2000 Compliant. To be "Year 2000 compliant," a system or product or
service must at all times before, during and after January 1, 2000 accurately
process and handle data and time data (including, but not limited to
calculating, comparing and sequencing) from, into and between the twentieth and
twenty-first centuries, in the years 1999 and 2000, including leap year
calculations, to the extent that other information technology used in
combination with such internal systems and such products properly exchange
date/time with it. To the extent any such internal systems and such products and
services must perform as a system, such internal systems and such products and
services used in combination with other such internal systems and such products
and services, respectively, must properly exchange date/time data with them in
accordance with the foregoing warranty. There are no pending, and neither GLOBAL
or CAPITOL has any knowledge of any threatened, claims against GLOBAL or CAPITOL
relating to whether the products and services of GLOBAL and CAPITOL are Year
2000 Compliant.
Section 3.27 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of GLOBAL
and CAPITOL set forth in this Agreement shall be deemed to be made on and as of
the date hereof and as of the Effective Time.
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ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BANCORP
BANCORP and BANK represent and warrant to GLOBAL and CAPITOL that:
Section 4.1 Organization; Corporate Power; Etc. BANCORP is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and have all requisite corporate power and authority
to own, lease and operate its respective properties and assets and to carry on
its respective business substantially as it is being conducted on the date of
this Agreement. BANCORP is a bank holding company registered under the BHCA.
Each of BANCORP's Subsidiaries has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business
substantially as it is being conducted on the date of this Agreement, except
where the failure to have such power or authority would not have a Material
Adverse Effect on BANCORP taken as a whole or the ability of BANCORP to
consummate the transactions contemplated by this Agreement. BANCORP has all
requisite corporate power and authority to enter into this Agreement and,
subject to obtaining all Requisite Regulatory Approvals, BANCORP will have the
requisite corporate power and authority to perform its respective obligations
hereunder with respect to the consummation of the transactions contemplated
hereby. BANCORP is the sole shareholder of BANK. BANK is a California
state-chartered banking authorized by the CDFI to conduct a general banking
business in California. BANK is not a member of the Federal Reserve System.
BANK's deposits are insured by the FDIC in the manner and to the full extent
provided by law. Neither the scope of business of BANCORP or any Subsidiary,
including BANK, nor the location of any of their respective properties, requires
that BANCORP or any of its respective Subsidiaries be licensed to conduct
business in any jurisdiction other than those jurisdictions in which they are
licensed or qualified to do business as a foreign corporation, where the failure
to be so licensed or qualified would, individually or in the aggregate, have a
Material Adverse Effect on BANCORP taken as a whole.
Section 4.2 Licenses and Permits. Except as disclosed on Schedule 4.2,
BANCORP and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on BANCORP taken as a whole, or
on the ability of BANCORP and/or BANK to consummate the transactions
contemplated by this Agreement. The properties, assets, operations and
businesses of BANCORP and those of its Subsidiaries, including BANK, are and
have been maintained and conducted, in all material respects, in compliance with
all applicable licenses, certificates, franchises, rights and permits.
Section 4.3 Subsidiaries. Other than as set forth on Schedule 4.3, there
is no corporation, partnership, joint venture or other entity in which BANCORP
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 4.4 Authorization of Agreement; No Conflicts.
4.4.1 The execution and delivery of this Agreement and the Merger
Agreements and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the parts
of BANCORP and BANK. This Agreement has been
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duly executed and delivered by BANCORP and BANK and constitutes a legal, valid
and binding obligation of BANCORP and BANK, enforceable in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles. The Merger Agreements, upon the
receipt of all Requisite Regulatory Approvals and the due execution and filing
of such Merger Agreements in accordance with the applicable provisions of the
California Corporations Code, will constitute a legal, valid and binding
obligation of BANK and BANCORP, enforceable in accordance with its terms, except
as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally or
by general equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and will not conflict with, or result in any violation of or
default or loss of a material benefit under, any provision of the Articles of
Incorporation or Bylaws of BANCORP and BANK, or except for the necessity of
obtaining the Requisite Regulatory Approvals and successful completion of the
BANCORP Public Offering, any material mortgage, indenture, lease, agreement or
other material instrument, or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to BANCORP or BANK or any of their assets or properties or any of their
respective Subsidiaries, other than any such conflict, violation, default or
loss which (i) will not have a Material Adverse Effect on BANCORP and BANK taken
as a whole; or (ii) will be cured or waived prior to the Effective Time. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required in connection with the
execution and delivery of this Agreement by BANCORP and BANK or the performance
by BANCORP and BANK of their obligations hereunder, except for (a) filings
required in order to obtain Requisite Regulatory Approvals; (b) the filing of
the Form S-1 Registration Statement with the SEC relative to the BANCORP Public
Offering and the declaration of the effectiveness of the Form S-1 Registration
Statement by the SEC and any applicable state securities law regulatory
authorities; (c) the filing of the Form S-4 Registration Statement (including
the Proxy Statement/Prospectus constituting a part thereof) with the SEC
relating to the Mergers and the declaration of effectiveness of the Form S-4
Registration Statement by the SEC and any applicable state securities law
regulatory authorities; (d) the filing and approval of the Merger Agreements
with the Secretary of the State of California; (e) consummation of the Branch
Purchase; (f) any approvals required to be obtained pursuant to the BHCA or the
Federal Deposit Insurance Act or any other required governmental approval for
the execution and delivery of this Agreement by BANCORP and BANK or the
consummation of the Mergers; (g) any consents, authorizations, approvals,
filings or exemptions required to be made or obtained under the securities or
"blue sky" laws of various jurisdictions in connection with the issuance of
shares of BANCORP Common Stock contemplated by this Agreement; and (h) as set
forth in Schedule 4.4.
Section 4.5 Capital Structure of BANCORP. As of the Effective Time, the
authorized capital stock of BANCORP shall consist of 50,000,000 shares of
BANCORP Common Stock, no par value per share. As of November 1, 1999, 4,726,786
shares of BANCORP Common Stock were outstanding, and as of September 30, 1999,
1,211,337 shares of BANCORP Common Stock were reserved for issuance pursuant to
BANCORP stock option plans and former BANK stock option agreements (the "BANCORP
Stock Plans"). All outstanding shares of BANCORP Common Stock are validly
issued, fully paid and nonassessable and do not possess any preemptive rights
and were
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not issued in violation of any preemptive rights or any similar rights of any
Person. The issuance of the shares of BANCORP Common Stock proposed to be issued
pursuant to this Agreement at the Effective Time will have been duly authorized
by all requisite corporate action of BANCORP, and such shares, when issued as
contemplated by this Agreement, will constitute duly authorized, validly issued
and shares of BANCORP Common Stock, and will not have been issued in violation
of any preemptive or similar rights of any Person. As of the date of this
Agreement, and except for this Agreement and the BANCORP Stock Plans or as set
forth in Schedule 4.5, BANCORP does not have outstanding any options, warrants,
calls, rights, commitments, securities or agreements of any character to which
BANCORP is a party or by which it is bound obligating BANCORP to issue, deliver
or sell, or cause to be issued, delivered or sold, additional shares of capital
stock of BANCORP or obligating BANCORP to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement.
Section 4.6 BANCORP Filings.
4.6.1 Since January 1, 1996, BANCORP and its Subsidiaries have
timely filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (a) the Federal Reserve Board or any Federal Reserve Bank; (b) the
FDIC; (c) the SEC; and (d) any other applicable federal, state or local
governmental or regulatory authority. All such reports, registrations and
filings including the BANCORP Financial Statements are collectively referred to
as the "BANCORP Filings". Except to the extent prohibited by law, copies of the
BANCORP Filings have been made available to GLOBAL. As of their respective
filing or mailing dates, each of the past BANCORP Filings complied in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the governmental or regulatory authority with which it was filed
(or was amended so as to be so promptly following discovery of any such
noncompliance) and none contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
4.6.2 BANCORP, or BANK, as the case may be, have timely filed
each report, schedule, and amendments to each of the foregoing since January 1,
1996 that BANCORP, or BANK, was required to file with the Federal Reserve Bank,
FDIC or CDFI, all of which have been made available to GLOBAL. The financial
statements of BANCORP included in the BANCORP Filings comply in all material
respects with applicable accounting requirements and have been prepared in
accordance with GAAP, or applicable regulatory accounting principles, applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto, and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the
consolidated financial position of BANCORP as of the dates thereof and the
consolidated results of its operations and cash flows or changes in financial
position for the periods then ended.
Section 4.7 Accuracy of Information Supplied.
4.7.1 No representation or warranty of BANCORP contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of BANCORP or any of its Subsidiaries, including BANK, to GLOBAL in
connection herewith and none of the information supplied or to be supplied by
BANCORP or any of its Subsidiaries, including BANK, to GLOBAL
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hereunder contains or will contain any untrue statement of material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
4.7.2 None of the information supplied or to be supplied by
BANCORP or relating to BANCORP and BANK which is included or incorporated by
reference in (i) the Registration Statements to be filed with the SEC by BANCORP
in connection with the BANCORP Public Offering of common stock by BANCORP and
the issuance of shares of BANCORP Common Stock in the Mergers will, at the time
the Registration Statements become effective under the Securities Act, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; (ii) the
Proxy Statement/Prospectus and any amendment or supplement thereto will, at all
times from the date of mailing to shareholders of GLOBAL through the date of the
meeting of shareholders of GLOBAL to be held in connection with the Mergers,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and (iii)
the applications and forms to be filed with securities or "blue sky"
authorities, self regulatory authorities, or any Governmental Entity in
connection with the Mergers, the issuance of any shares of BANCORP Common Stock
in connection with the Mergers, or any Requisite Regulatory Approvals in
connection with the Mergers will, at the time filed or at the time they become
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.7.3 BANCORP has or will deliver to GLOBAL copies of: (a) the
audited balance sheets of BANCORP and its Subsidiaries as of December 31, 1998,
1997 and 1996 and the related statements of income, changes in shareholders'
equity and cash flows for the years then ended and the related notes to such
financial statements, all as audited by Richardson & Company, independent public
accountants (the "BANCORP Financial Statements"), and BANCORP will hereafter
until the Closing Date deliver to GLOBAL copies of additional financial
statements of BANCORP as provided in Section 5.1.1(iii). The BANCORP Financial
Statements have been prepared (and all of said additional financial statements
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of BANCORP and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
BANCORP has delivered to GLOBAL copies of all management or other letters
delivered to BANCORP by its independent accountants in connection with any of
the BANCORP Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
BANCORP issued at any time since January 1, 1995, and will make available for
inspection by GLOBAL or its representatives, at such times and places as GLOBAL
may reasonably request, reports and working papers produced or developed by such
accountants or consultants.
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4.7.4 Notwithstanding anything set forth elsewhere in the
Agreement no due diligence examination of BANCORP or BANK conducted by or on
behalf of GLOBAL and CAPITOL either prior or subsequent to execution of this
Agreement, shall have any effect whatsoever on the representations of BANCORP or
BANK in this Section 4 or in any other section of this Agreement.
Section 4.8 Compliance With Applicable Laws. Except as disclosed on
Schedule 4.8, , to the best of BANCORP's Knowledge, the respective businesses of
BANCORP and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to BANCORP is pending or, to the Knowledge of BANCORP
threatened, nor has any Governmental Entity indicated to BANCORP an intention to
conduct the same, other than those the outcome of which, as far as can be
reasonably foreseen, will not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole.
Section 4.9 Performance of Obligations. BANCORP and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of BANCORP or any of its Subsidiaries is in default under or in breach
of any term or provision of any covenant, contract, lease, indenture or any
other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on BANCORP and its Subsidiaries, taken as a whole. To BANCORP's
Knowledge, and except as disclosed on Schedule 4.9, no party with whom BANCORP
or any of its Subsidiaries has an agreement that is of material importance to
the business of BANCORP and its Subsidiaries, taken as a whole, is in default
thereunder.
Section 4.10 Regulatory Approval. Neither BANCORP nor BANK is subject to
any regulatory enforcement agreement. To the best knowledge of BANCORP there is
no fact, event or condition applicable to BANCORP or BANK which will, or
reasonably could be expected to, adversely affect the likelihood of securing the
required approval or consent of any Governmental Entity to the Mergers and
transaction contemplated by this Agreement.
Section 4.11 Capital Offering. To the best knowledge of BANCORP there is
no fact, event or condition applicable to BANCORP or BANK which will, or
reasonably could be expected to, adversely affect BANCORP's ability to raise the
capital, through the BANCORP Public Offering, necessary to complete the Mergers
and the transaction contemplated by this Agreement; provided, however, that
BANCORP makes and shall be deemed to have made no representation and warranty
concerning the effect stock market conditions or the market for financial
institution securities generally, or the market for BANCORP's securities in
particular, may have on BANCORP's ability to raise capital, and this
representation and warranty shall not be deemed to have been breached by BANCORP
if stock market conditions or the market for financial institution securities
generally, or the market for BANCORP's securities in particular, are such that
BANCORP is unable to raise additional equity capital in a sufficient amount or,
in BANCORP's sole judgment, on acceptable terms.
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Section 4.12 Undisclosed Liabilities. Except as disclosed on Schedule
4.12, none of BANCORP or BANK has any liabilities or obligations, either
accrued, contingent or otherwise, that are material to BANCORP or BANK and that
have not been: (a) reflected or disclosed in the BANCORP Financial Statements;
or (b) incurred subsequent to December 31, 1998 in the ordinary course of
business. BANCORP or BANK has no Knowledge of any basis for the assertion
against BANCORP or BANK, of any liability, obligation or claim (including
without limitation that of any Governmental Entity) that will have or cause, or
could reasonably be expected to have or cause, a Material Adverse Effect on
BANCORP or BANK that is not fully and fairly reflected and disclosed in the
BANCORP Financial Statements or on Schedule 4.12.
Section 4.13 Litigation. Except as set forth in Schedule 4.13, there is
no suit, action or proceeding or investigation pending, or to the Knowledge of
BANCORP and BANK threatened against or affecting BANCORP or BANK which, if
adversely determined, would have a Material Adverse Effect on BANCORP or BANK;
nor is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against BANCORP or BANK that has, or which,
insofar as reasonably can be foreseen, in the future would have, any such
Material Adverse Effect.
Section 4.14 Taxes.
4.14.1 Filing of Returns. Except as set forth on Schedule
4.14.1(a), BANCORP and its Subsidiaries have duly prepared and filed federal,
state, and local Returns (for Tax or informational purposes) which were required
to be filed by or in respect of BANCORP and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. Except as set forth in
Schedule 4.14.1(b), no extension of time within which BANCORP or any of its
Subsidiaries may file any Return is currently in force.
4.14.2 Payment of Taxes. Except as disclosed on Schedule 4.14.2
with respect to all amounts in respect of Taxes imposed on BANCORP or any
Subsidiary or for which BANCORP or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of BANCORP or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
Section 4.15 Year 2000 Compliance. All of BANCORP's and BANK's internal
systems and all products and services marked by either of them are fully Year
2000 Compliant. To be "Year 2000 compliant," a system or product or service must
at all times before, during and after January 1, 2000 accurately process and
handle data and time data (including, but not limited to calculating, comparing
and sequencing) from, into and between the twentieth and twenty-first centuries,
in the years 1999 and 2000, including leap year calculations, to the extent that
other information technology used in combination with such internal systems and
such products properly exchange date/time with it. To the extent any such
internal systems and such products and services must perform as a system, such
internal systems and such products and services used in combination with other
such internal
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systems and such products and services, respectively, must properly exchange
date/time data with them in accordance with the foregoing warranty. There are no
pending, and neither BANCORP or BANK has any knowledge of any threatened, claims
against BANCORP or BANK relating to whether the products and services of BANCORP
and BANK are Year 2000 Compliant.
Section 4.16 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of BANCORP
and BANK set forth in this Agreement shall be deemed to be made on and as of the
date hereof and as of the Effective Time.
ARTICLE 5. COVENANTS
Section 5.1 Access to Information, Due Diligence, etc.
5.1.1 Upon reasonable notice, each party shall permit the other
party and their accountants, counsel and other representatives reasonable access
to their officers, employees, properties, books, contracts, commitments and
records and from the date hereof through the Effective Time, and shall furnish
or provide access to each other as soon as practicable, (i) a copy of each of
GLOBAL's Filings or BANCORP's Filings filed subsequent to the date of this
Agreement promptly after such document has been filed with the appropriate
Governmental Entity, provided, however, that copies of any Returns relating to
Taxes of any of GLOBAL or any of its Subsidiaries shall be furnished to BANCORP
at least 15 Business Days prior to the proposed date of filing thereof and shall
not be filed without the prior approval of BANCORP, which approval shall not be
unreasonably withheld or delayed; (ii) unless otherwise prohibited by law, a
copy of each report, schedule and other documents filed or received by it during
such period with any Regulatory Authority or the Internal Revenue Service or
other taxing authority, as to documents other than related to employees or
customers and other than those distributed to banks generally; (iii) as promptly
as practicable following the end of each calendar month after the date hereof, a
balance sheet of GLOBAL or BANCORP as of the end of such month; and (iv) all
other information concerning its business, properties, assets, financial
condition, results of operations, liabilities, personnel and otherwise as GLOBAL
or BANCORP may reasonably request. In furtherance of the foregoing BANCORP or
BANK shall have the right to examine CAPITOL's loan portfolio on a monthly
basis.
5.1.2 Until the Effective Time, a representative of BANCORP shall
be entitled and shall be invited to attend meetings of the Board of Directors of
GLOBAL and CAPITOL, and at least five (5) days' prior written notice of the
dates, times and places of such meetings shall be given to BANCORP except that
in the case of special meetings BANCORP shall receive the same number of days'
prior notice as GLOBAL's or CAPITOL's directors receive for such meetings;
provided, however, that such representative shall excuse himself or herself from
any portion of any such meetings that (i) relate to approval of, or the exercise
of any rights under, this Agreement by GLOBAL or CAPITOL, and (ii) involve
discussions between such Board of Directors or such Loan Committee and legal
counsel for GLOBAL or CAPITOL that are entitled to be protected from disclosure
under an attorney-client privilege which would be lost due to the presence of
such representative of BANCORP.
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5.1.3 BANCORP, BANK, GLOBAL and CAPITOL each agrees to keep
confidential and not divulge to any other party or Person (other than to the
employees, attorneys, accountants and consultants of each who have a need to
receive such information and other than as may be required by law) any
information received from the other, unless and until such documents and other
information otherwise becomes publicly available or unless the disclosure of
such information is required by this Agreement or authorized by each party. In
the event of termination of this Agreement for any reason, the parties shall
promptly return, or at the election of the other party destroy, all nonpublic
documents obtained from the other and any copies or notes of such documents
(except as otherwise required by law) and, upon the request of the other party,
confirm such destruction to the other in writing.
Section 5.2 Shareholder Approval.
5.2.1 GLOBAL shall promptly call a meeting of its shareholders to
be held at the earliest practicable date after the date on which the
Registration Statements are filed with the SEC for the purpose of approving this
Agreement and authorizing the Merger Agreements and the Mergers. GLOBAL's Board
of Directors will recommend to GLOBAL shareholders, approval of this Agreement,
the Merger Agreements and the Mergers; provided, however, that the GLOBAL Board
of Directors may withdraw its recommendation if such Board of Directors believes
in good faith (based on a written opinion of a financial advisor that is
experienced in evaluating the fairness of Acquisition Proposals) that a Superior
Proposal (defined below) has been made and shall have determined in good faith,
after consultation with and based on written advice of its outside legal
counsel, that the withdrawal of such recommendation is necessary for such Board
of Directors to comply with its fiduciary duties under applicable law.
5.2.2 If the merger of GLOBAL with and into BANCORP approved by
vote of the shareholders of GLOBAL, then, within ten (10) days thereafter GLOBAL
shall send a Dissenting Shareholder Notice to each recordholder of any
Dissenting Shares.
5.2.3 Prior to the Effective Time of the Mergers, GLOBAL, as the
sole shareholder of CAPITOL, and BANCORP as sole shareholder of BANK, shall take
all action necessary for the consummation of the Mergers and the Branch
Purchase.
Section 5.3 Taking of Necessary Action.
5.3.1 Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees, subject to applicable laws and the fiduciary
duties of GLOBAL's, CAPITOL's, BANCORP's or BANK's Boards of Directors, as
advised in writing by their respective counsel, to use all reasonable efforts
promptly to take or cause to be taken all action and promptly to do or cause to
be done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, the Merger Agreements and Branch Purchase Agreement, including,
without limitation, the delivery of any certificate or other document reasonably
requested by counsel to a party to this Agreement. Without limiting the
foregoing, BANCORP, BANK, GLOBAL and CAPITOL will use their reasonable efforts
to obtain all consents of third parties and Government Entities necessary or, in
the reasonable opinion of BANCORP or GLOBAL advisable for the consummation of
the transactions contemplated by this Agreement. Without limiting the foregoing,
BANCORP and BANK take all
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actions necessary to execute and file the Merger Agreements and to effect all
transactions contemplated of BANCORP and BANK by this Agreement, the Merger
Agreements, and Branch Purchase Agreement and GLOBAL and CAPITOL shall take all
actions necessary to effect all transactions contemplated by this Agreement, the
Merger Agreements and Branch Purchase Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the Merger Agreements and Branch Purchase Agreement
or to vest the Surviving Corporation with full title to all properties, assets,
rights, approvals, immunities and franchises of GLOBAL, the proper officers or
directors of BANCORP, BANK, GLOBAL or CAPITOL, as the case may be, shall take
all such necessary action.
5.3.2 The obligations of GLOBAL and CAPITOL contained in Section
6.2.5 of this Agreement shall continue to be in full force and effect despite
any Default thereof by reason of receipt of a Superior Proposal (defined below)
and any Default thereof by the defaulting party shall entitle BANCORP to such
legal or equitable remedies as may be provided in this Agreement or by law
notwithstanding that any action or inaction of the Board of Directors or
officers of GLOBAL or CAPITOL which is required to enable such party to fulfill
such obligations may be excused based on the continuing fiduciary obligations of
GLOBAL's Board of Directors and officers to its shareholders. Notwithstanding
the foregoing, however, in the event of a termination of this Agreement by
BANCORP and the actual payment of the liquidated damages as provided for in
Section 8.5 of this Agreement, neither GLOBAL or CAPITOL or their respective
directors or officers shall have any obligations or liabilities of any kind
under this Agreement by reason of any such Default, and BANCORP shall have no
further obligations of any kind under this Agreement.
5.3.3 GLOBAL shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of GLOBAL (for purposes
of Rule 145 under the Securities Act) to deliver to BANCORP, on the date of this
Agreement, a written agreement in the form attached hereto as Exhibit 5.3 (the
"Affiliate Agreements") which shall include a 180 day lockup provision.
Section 5.4 Registration Statements and Applications.
5.4.1 BANCORP and GLOBAL will cooperate and jointly prepare and
file as promptly as practicable the Registration Statements, the statements,
applications, correspondence or forms to be filed with appropriate State
securities law regulatory authorities, and the statements, correspondence or
applications to be filed to obtain the Requisite Regulatory Approvals to
consummate the transactions contemplated by this Agreement. Each of BANCORP and
GLOBAL shall use all reasonable efforts to have the Registration Statements
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Proxy Statement/Prospectus to the
shareholders of GLOBAL. Each party will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents and opinions of counsel concerning it and its
Subsidiaries received by such party.
5.4.2 Each party shall provide to the other at the request of the
other party: (i) immediately prior to the filing thereof, copies of all material
statements, applications, correspondence or forms to be filed with state
securities law regulatory authorities, the SEC and other appropriate regulatory
authorities to obtain the Requisite Regulatory Approvals to consummate the
transactions contemplated by this Agreement; and (ii) promptly after delivery
to, or receipt from,
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such regulatory authorities all written communications, letters, reports or
other documents relating to the transactions contemplated by this Agreement.
Section 5.5 Expenses.
5.5.1 Subject to the provisions of this Agreement relating to the
payment by BANCORP of certain of GLOBAL's expenses incurred in the preparation
of the Proxy Statement/Prospectus and BANCORP Public Offering, whether or not
the Mergers are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring the same.
5.5.2 GLOBAL and CAPITOL shall use their best efforts to ensure
that their attorneys, accountants, financial advisors, investment bankers and
other consultants engaged by it in connection with the transaction contemplated
by this Agreement submit full and final bills on or before the Determination
Date and that all such expenses are paid or properly accrued prior to the
Determination Date.
Section 5.6 Notification of Certain Events.
5.6.1 GLOBAL shall provide to BANCORP, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Sections 6.1 and 6.2, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.2 BANCORP shall provide to GLOBAL, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Section 6.3 and 6.4, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in writing of
any change or event which could reasonably be expected to have a Material
Adverse Effect on the business, properties, assets, financial condition, results
of operations, liabilities or personnel of such party or on its ability to
consummate the transactions contemplated by this Agreement or the Merger
Agreements.
5.6.4 GLOBAL and BANCORP shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statements at any time contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in order to
make the statement therein, in light of the circumstances under which they were
made, not misleading or that the Registration Statements otherwise are required
to be amended and supplemented, which notice shall specify, in reasonable
detail, the circumstances thereof. BANCORP shall promptly amend and supplement
such materials and disseminate the new or modified information so as to fully
comply with the Securities Act. If the amendment or supplement so required
relates to information concerning GLOBAL, the out-of-pocket costs and expenses
of preparing, filing and disseminating such amendment or supplement shall be
borne by GLOBAL.
Section 5.7 Closing Schedules. Subject to the provisions of Section
5.10, GLOBAL and CAPITOL has delivered to BANCORP on or before the date of this
Agreement all of the Schedules
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to this Agreement which GLOBAL and CAPITOL are required to deliver to BANCORP
hereunder (the "GLOBAL Schedules"). BANCORP has delivered to GLOBAL on or before
the date of this Agreement all of the Schedules to this Agreement which BANCORP
is required to deliver to GLOBAL hereunder ( the "BANCORP Schedules").
Immediately prior to the Closing Date, GLOBAL and CAPITOL shall have prepared
updates of the GLOBAL Schedules provided for in this Agreement and shall deliver
to BANCORP revised schedules containing the updated information (or a
certificate signed by GLOBAL's or CAPITOL's Chief Executive Officer stating that
there have been no changes on the applicable schedules); and BANCORP shall have
prepared updates of the BANCORP Schedules provided for in this Agreement and
shall deliver to GLOBAL revised Schedules containing updated information (or a
certificate signed by BANCORP's Chief Executive Officer stating that there has
been no change on the applicable schedules.) Such updated schedules shall
sometimes be referred to collectively, as the "Closing Schedules." The Closing
Schedules shall be dated as of the day prior to the Closing Date and shall
contain information as of the day prior to the Closing Date or as of such
earlier date as is practicable under the circumstances. In the event the Closing
Schedules disclose an event, occurrence or circumstance that has had or could
reasonably be expected to have a Material Adverse Effect on GLOBAL, on the one
hand, or on BANCORP, on the other hand, or on consummation of the transactions
contemplated by this Agreement, that was not disclosed in the previously
delivered Schedules hereto, the party delivering such Closing Schedules (the
"Affected Party") shall so notify the other party in the letter of transmittal
for such Closing Schedules, the Closing Date shall be delayed for seven (7)
Business Days and such other party shall be entitled to terminate this Agreement
within five (5) Business Days after receiving such Closing Schedules that
disclose such event, occurrence or circumstance. In the event of any such
termination, the terminating party shall have no liability for such termination.
The Affected Party shall have no liability to the terminating party in such an
event unless (i) as a result of the existence of such event, occurrence or
circumstance so disclosed in the Closing Schedules any of the representations or
warranties of the Affected Party contained in this Agreement are found to have
been untrue in any material respect as of the date of this Agreement, or (ii)
the event, occurrence or circumstance could have been prevented in the exercise
of reasonable diligence by any officers or directors of the Affected Party, in
either of which cases the Affected Party shall be liable to the terminating
party for Liquidated Damages as provided in Section 8.5 hereof.
Section 5.8 Additional Accruals/Appraisals. Prior to the Closing Date,
but after the Determination Date, at BANCORP's request, GLOBAL or CAPITOL shall,
consistent with GAAP and applicable banking regulations, establish such
additional accruals and reserves immediately prior to the Closing Date as may be
necessary to conform GLOBAL's or CAPITOL's accounting and credit and OREO loss
reserve practices and methods to those of BANCORP or BANK, provided, however,
that no accrual or reserve made by GLOBAL or CAPITOL pursuant to this Section
5.8, or any litigation or regulatory proceeding arising out of any such accrual
or reserve, or any other effect on GLOBAL or CAPITOL resulting from GLOBAL's or
CAPITOL's compliance with this Section 5.8, shall constitute or be deemed to be
a breach, violation of or failure to satisfy any representation, warranty,
covenant, condition or other provision of this Agreement or otherwise be
considered in determining whether any such breach, violation or failure to
satisfy shall have occurred. Additionally, no such accrual or reserve made by
GLOBAL or CAPITOL pursuant to this Section 5.8 shall be used by the parties in
the calculation of the Cash Merger Price.
Section 5.9 Updated Schedules and Exhibits. The parties acknowledge that
the Schedules and Exhibits attached to this Agreement are incomplete as of the
date hereof. The parties shall
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update and complete all Schedules and Exhibits required by this Agreement and
shall deliver to the other parties such updated and completed Schedules and
Exhibits within 30 days of the execution of this Agreement.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 Affirmative Conduct of GLOBAL and CAPITOL. During the
period from the date of execution of this Agreement through the Effective Time,
GLOBAL and CAPITOL shall carry on their business, and in the ordinary course in
substantially the manner in which heretofore conducted, subject to changes in
law applicable to all California state-chartered industrial loan corporations or
all nonmember financial entities insured by the FDIC and directives from
regulators, and use all commercially reasonable efforts to preserve intact its
business organization, keep available the services of its officers and
employees, (other than terminations in the ordinary course of business) and
preserve its relationships with customers, depositors, suppliers and others
having business dealings with it; and, to these ends, shall fulfill each of the
following:
6.1.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.1.2 Advise BANCORP promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, financial condition,
assets, results of operations, business or prospects or of any matter which
would make the representations and warranties set forth in Article 3 hereof not
true and correct in any material respect as of the effective date of the
Registration Statement and at the Effective Time;
6.1.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify BANCORP in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.1.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any material
contract, agreement, understanding, commitment, or offer, whether written or
oral, (collectively referred to as an "Understanding") or materially default in
the performance of any of its obligations under any Understanding where such
default would have a Material Adverse Effect on GLOBAL or CAPITOL;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on GLOBAL or CAPITOL;
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6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.1.8 Maintain its assets and properties in good condition and
repair, normal wear and tear excepted;
6.1.9 Promptly advise BANCORP in writing of any event or any
other transaction within the Knowledge of GLOBAL and CAPITOL, whereby any Person
or related group of Persons acquires, after the date of this Agreement, directly
or indirectly, record or beneficial ownership (as defined in Rule 13d-3
promulgated by the SEC pursuant to the Exchange Act) or control of 5% or more of
the outstanding shares of GLOBAL Common Stock either prior to or after the
record date fixed for the GLOBAL shareholders' meeting or any adjourned meeting
thereof to approve the transactions contemplated herein;
6.1.10 (a) Prior to the Determination Date maintain a reserve for
loan and lease losses ("Loan Loss Reserve") at a level which is adequate to
provide for all known and reasonably expected losses on loans, leases and other
extensions of credit outstanding and other inherent risks in GLOBAL's portfolio
of loans and leases, in accordance with GAAP and applicable regulatory
accounting principles and banking laws and regulations but in no exception shall
such account be less than two million dollars ($2,000,000);
(b) Charge off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by GLOBAL and
CAPITOL, GLOBAL and CAPITOL has submitted in writing to such regulatory
authority the basis upon which it has so disregarded such classification or
direction, and such regulatory authority retracts its direction requiring such
charge-off;
6.1.11 Furnish to BANCORP, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of GLOBAL and CAPITOL and access to the
working papers related thereto, provided, however, that GLOBAL and CAPITOL need
not furnish BANCORP any materials relating to deliberations of GLOBAL's and
CAPITOL's Board of Directors with respect to its approval of this Agreement,
communications of GLOBAL's and CAPITOL's legal counsel with the Board of
Directors or officers of GLOBAL and CAPITOL regarding GLOBAL's and CAPITOL's
rights against or obligations to BANCORP or its Subsidiaries under this
Agreement, or books, records and documents covered by the attorney-client
privilege or which are attorneys' work product; (ii) copies of all material
reports, renewals, filings, certificates, statements, correspondence and other
documents specific to GLOBAL and CAPITOL or filed with or received from any
Federal Reserve Bank, the FDIC, the Commissioner or any Governmental Entity;
(iii) monthly unaudited balance sheets, statements of income and changes in
shareholders' equity for GLOBAL and CAPITOL and its Subsidiaries and quarterly
unaudited balance sheets, statements of income and changes in shareholders'
equity for GLOBAL and CAPITOL, in each case prepared on a basis consistent with
past practice; and (iv) such other reports as BANCORP may reasonably request
(which are otherwise deliverable under this Section 6.1.11) relating to GLOBAL
and CAPITOL. Each of the financial statements of GLOBAL and CAPITOL delivered
pursuant to this Section 6.1.11 shall be accompanied by a certificate of the
Chief Financial
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Officer of GLOBAL and CAPITOL to the effect that such financial statements
fairly present the financial information presented therein of GLOBAL and
CAPITOL, for the periods covered, subject to recurring adjustments normal in
nature and amount, necessary for a fair presentation and are prepared on a basis
consistent with past practice;
6.1.12 GLOBAL and CAPITOL agree that through the Effective Time,
as of their respect dates, (i) each GLOBAL Filing will be true and complete in
all material respects; and (ii) each GLOBAL Filing will comply in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Governmental Entity with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such GLOBAL Filings that is intended to present
the financial position of GLOBAL and CAPITOL during the periods involved to
which it relates will fairly present in all material respects the financial
position of GLOBAL and CAPITOL and will be prepared in accordance with GAAP or
consistent with applicable regulatory accounting principles and banking law and
banking regulations, except as stated therein;
6.1.13 Maintain reserves for contingent liabilities in accordance
with GAAP or applicable regulatory accounting principles, and consistent with
past practices;
6.1.14 Promptly notify BANCORP of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against GLOBAL and CAPITOL
or any of their assets;
6.1.15 Inform BANCORP of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any unit of GLOBAL and CAPITOL as
"Specially Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or any
comparable classification ("Classified Assets"). GLOBAL and CAPITOL will furnish
to BANCORP, as soon as practicable, and in any event within fifteen days after
the end of each calendar month, schedules including the following: (i)
Classified Assets by type (including each credit or other asset in an amount
equal to or greater than $10,000), and its classification category; (ii)
nonaccrual credits by type (including each credit in an amount equal to or
greater than $10,000); (iii) renegotiated loans by type (loans on which interest
has been renegotiated to lower than market rates because of the financial
condition of the borrowers); (iv) delinquent credits by type (including each
delinquent credit in an amount equal to or greater than $10,000), including an
aging into 30-89 and 90+ day categories; (v) loans or leases or other assets
charged off, in whole or in part, during the previous month by type (including
each such loan or lease or other asset in an amount equal to or greater than
$10,000); and (vi) OREO or assets owned stating with respect to each its type;
6.1.16 Furnish to BANCORP, upon BANCORP's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by GLOBAL and CAPITOL to any
director or officer (at or above the Vice President level) of GLOBAL or any of
its Subsidiaries, or to any Person holding 5% or more of the capital stock of
GLOBAL, including, with
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respect to each such loan or lease, the identity and, to the best Knowledge of
GLOBAL and CAPITOL, the relation of the borrower to GLOBAL and CAPITOL, the loan
or lease type and the outstanding and undrawn amounts; and (iii) standby letters
of credit, by type, (including each letter of credit in a face amount equal to
or greater than $10,000); and
6.1.17 Make available to BANCORP copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit of
$25,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $10,000 in the case of unsecured loans or unsecured
extensions of credit, which are approved by GLOBAL and CAPITOL after the date of
this Agreement, within ten Business Days of preparation of such packages.
Section 6.2 Negative Covenants of GLOBAL and CAPITOL. During the period
from the date of execution of this Agreement through the Effective Time, GLOBAL
and CAPITOL agree that without BANCORP's prior written consent or as
contemplated by this Agreement, they shall not:
6.2.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.2.2 Take any action that would or might result in any of the
representations and warranties of GLOBAL and CAPITOL set forth in the Agreement
becoming untrue in any material respect or any of the conditions to the Merger
set forth in Article 7 not being satisfied, except to the extent such actions
are required to be undertaken by applicable law, regulation or at the direction
of any Regulatory Authority;
6.2.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
GLOBAL and CAPITOL or any securities convertible or exercisable into or
exchangeable for such capital stock, or any rights, warrants or options, except
for the exercise of existing stock options under existing stock option plans or
enter into any agreements to do any of the foregoing;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
6.2.5 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
BANCORP, and its representatives) concerning any such solicited Acquisition
Proposal. GLOBAL and CAPITOL shall notify BANCORP immediately if any inquiry
regarding an Acquisition Proposal is received by GLOBAL and CAPITOL, including
the terms thereof. For purposes of this Section 6.2.5, "Acquisition Proposal"
shall mean any (a) proposal pursuant to which any Person other than BANCORP
would acquire or participate in a merger or other business combination or
reorganization involving GLOBAL and CAPITOL; (b) proposal by which any Person or
group, other than BANCORP, would acquire the right to vote ten percent (10%) or
more of the
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capital stock of GLOBAL entitled to vote for the election of directors; (c)
acquisition of the assets of GLOBAL and CAPITOL other than in the ordinary
course of business; or (d) acquisition in excess of ten percent (10%) of the
outstanding capital stock of GLOBAL, other than as contemplated by this
Agreement. Notwithstanding the foregoing, nothing contained in this Agreement
shall prevent GLOBAL and CAPITOL or GLOBAL's and CAPITOL's Board of Directors
from (i) furnishing nonpublic information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity, or recommending an
unsolicited bona fide written Acquisition Proposal to the shareholders of
GLOBAL, if and only to the extent that (A) the Board of Directors of GLOBAL and
CAPITOL has determined and believes in good faith (after consultation with and
the concurrence of its financial advisor) that such Acquisition Proposal would,
if consummated, result in a transaction materially more favorable, from a
financial point of view, to GLOBAL's shareholders than the transaction
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal") and GLOBAL's and
CAPITOL's Board of Directors have determined in good faith, after consultation
with and based on written advice from its outside legal counsel, that such
action is necessary for GLOBAL and CAPITOL to comply with its fiduciary duties
to shareholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such person
or entity, GLOBAL's and CAPITOL's Board of Directors has received from such
person or entity an executed confidentiality agreement, with terms no more
favorable to such party than those contained in the Confidentiality Agreement
between GLOBAL, CAPITOL, BANCORP and BANK, or (ii) complying with Rule 14e- 2
promulgated under the Exchange Act with regard to an Acquisition Proposal, if
such Rule is applicable thereto;
6.2.6 Acquire or agree to acquire by merging, consolidating with,
or by purchasing all or a substantial portion of the assets of, or in any other
manner, any business or any Person or otherwise acquire or agree to acquire any
assets which are material to GLOBAL and CAPITOL, other than in the ordinary
course of business consistent with prior practice;
6.2.7 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to GLOBAL and CAPITOL, except in
the ordinary course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of GLOBAL or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one year)
issued, in its ordinary course of business consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement; (b) commitments to make loans or other
extensions of credit in the ordinary course of business consistent with prior
practice; and (c) loan sales in the ordinary course of business, without any
recourse, provided that no commitment to sell loans shall extend beyond the
Effective Time;
6.2.10 Make or enter into a commitment to make any loan or other
extension of credit to any director, officer or employee of GLOBAL or any of its
Subsidiaries, except in
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accordance with practice or policy in existence on the date of this Agreement
and in compliance with all applicable laws and all applicable regulations and
directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent with
prior practice or as required by an existing contract, and provided prior
disclosure thereof has been made in Schedule 6.2.11, grant any general or
uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any Person;
6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1998 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.2.14 Make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$5,000 individually or $15,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract or
agreement, enter into any new employment contract or agreement or make any bonus
or any special or extraordinary payments to any Person;
6.2.16 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
BANCORP, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
report or proposed Tax election or change in any method or period of accounting,
to BANCORP for its approval, which it shall not unreasonably withhold or delay;
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
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6.2.19 Change its fiscal year or methods of accounting in effect
at December 31, 1998, except as required by changes in GAAP or regulatory
accounting principles as concurred to by GLOBAL's independent public
accountants;
6.2.20 Take or cause to be taken into OREO any property without
(a) a Phase I environmental report, reporting no adverse environmental condition
on such property, with a copy of such report delivered to BANCORP prior to
taking such property into OREO; and (b) the written consent of BANCORP, which
shall not be unreasonably withheld.
Section 6.3 Conduct of BANCORP. During the period from the date of
execution of this Agreement through the Effective Time, BANCORP agrees (except
to the extent GLOBAL shall otherwise consent in writing) to do the following:
6.3.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise GLOBAL promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 Use its best efforts to accomplish the BANCORP Public
Offering necessary to complete the Mergers, and if at least $6,000,000 of
BANCORP Common Stock has not been subscribed in the BANCORP Public Offering by
March 7, 2000, BANCORP agrees to pay to GLOBAL within five business days the sum
of $200,000 in cash as liquidated damages.
6.3.4 Use its best efforts to file all required applications with
the Commissioner, FRB and FDIC on or before November 15, 1999.
6.3.5 Furnish to GLOBAL, as soon as practicable, and in any event
within fifteen days after it is prepared: (i) copies of all material reports,
renewals, filings, certificates, statements, correspondence and other documents
specific to BANCORP and BANK or filed with or received from any Federal Reserve
Bank, the FDIC, the Commissioner or any Governmental Entity; (ii) monthly
unaudited balance sheets, statements of income and changes in shareholders'
equity for BANCORP and quarterly unaudited balance sheets, statements of income
and changes in shareholders' equity for BANCORP and BANK, in each case prepared
on a basis consistent with past practice; and (ii) such other reports as GLOBAL
may reasonably request (which are otherwise deliverable under this Section
6.3.5) relating to BANCORP and BANK.
6.3.6 BANK will furnish to GLOBAL, as soon as practicable, and in
any event within fifteen days after the end of each calendar quarter, schedules
including the following: (i) Classified Assets by type (including each credit or
other asset in an amount equal to or greater than $100,000), and its
classification category; (ii) nonaccrual credits by type (including each credit
in an amount equal to or greater than $100,000); (iii) renegotiated loans by
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
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$100,000), including an aging into 30-89 and 90+ day categories; (v) loans or
leases or other assets charged off, in whole or in part, during the previous
month by type (including each such loan or lease or other asset in an amount
equal to or greater than $100,000); and (vi) OREO or assets owned stating with
respect to each its type;
Section 6.4 Negative Covenants of BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, BANCORP agrees
that without GLOBAL's prior written consent, it shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.4.2 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority or are contemplated by this Agreement;
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 Conditions to the Parties' Obligations. The obligations of
all the parties to this Agreement to effect the Mergers shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreements and the Mergers shall
have been validly approved by the holders of a majority of the outstanding
shares of GLOBAL Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Branch Purchase and the Mergers under applicable federal laws of the
United States or applicable laws of any state having jurisdiction over the
transactions contemplated by this Agreement, the Merger Agreements and the
Branch Purchase Agreement shall have been obtained or expired, as the case may
be (all such permits, approvals and consents and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals"), without the
imposition of any condition which in the reasonable judgment of any party to be
affected by such condition is materially burdensome upon such party or its
respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Branch Purchase and the Mergers, by any Government Entity which: (i) makes the
consummation of the Branch Purchase or any of the Mergers illegal; (ii) requires
the divestiture by BANCORP of any material asset or of a material portion of the
business of BANCORP; or (iii) imposes any condition upon BANCORP or its
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Subsidiaries (other than general provisions of law applicable to all banks and
bank holding companies) which in the judgment of BANCORP would be materially
burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 BANCORP and GLOBAL shall have received opinions of counsel
for the other party in substantially the forms previously agreed to by the
parties as set forth in Exhibits 7.1.5A and 7.1.5B, respectively, dated as of
the Closing Date;
7.1.6 No action, suit or proceeding shall have been instituted or
threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger
Agreements which presents a substantial risk that such transactions will be
restrained or that either party hereto may suffer material damages or other
relief as a result of consummating such transactions; and
7.1.7 The Branch Purchase shall have been consummated.
Section 7.2 Conditions to BANCORP's Obligations. The obligations of
BANCORP to effect either of the Mergers shall be subject to the fulfillment (or
waiver, in writing, by BANCORP) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of GLOBAL and CAPITOL contained in Article 3
shall be true in all material respects as of the Effective Time as though made
at the Effective Time, except to the extent they expressly refer to an earlier
time and except where the failure to be true, individually or in the aggregate,
would not have or would not be reasonably likely to have, a Material Adverse
Effect on GLOBAL, CAPITOL or the Surviving Corporation, or upon the consummation
of the transactions contemplated hereby; (b) GLOBAL and CAPITOL shall have duly
performed and complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
prior to or at the Effective Time, except where the failure to so perform and
comply, individually or in the aggregate, would not have or would not be
reasonably likely to have a Material Adverse Effect on GLOBAL and CAPITOL or the
Surviving Corporation, or upon the consummation of the transactions contemplated
hereby; (c) none of the events or conditions entitling BANCORP to terminate this
Agreement under Article 8 shall have occurred and be continuing; and (d) GLOBAL
and CAPITOL shall have delivered to BANCORP certificates dated the date of the
Effective Time and signed by the President and Chief Executive Officer to the
effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition of
any material burden or restriction on any of the parties hereto not in existence
on the date hereof, each consent to the consummation of the Mergers required to
be obtained from any Person under any agreement, contract or license to which
GLOBAL and CAPITOL is a party or by or under which it is bound or
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licensed, the withholding of which might have a Material Adverse Effect on
GLOBAL, CAPITOL, the Surviving Corporation or BANCORP at or following the
Effective Time, or on the transactions contemplated by this Agreement;
7.2.3 GLOBAL and CAPITOL shall have delivered its Closing
Schedules to BANCORP on the day immediately preceding the Closing Date and none
of such Closing Schedules shall reflect any item that was not on the GLOBAL
Schedules (or in the GLOBAL Financial Statements) delivered on the date of
execution of this Agreement that has had, would have, or could be reasonably
likely to have, a Material Adverse Effect on GLOBAL, CAPITOL, the Surviving
Corporation or BANCORP at or after the Effective Time, or on the consummation of
the transactions contemplated hereby;
7.2.4 Between the date of this Agreement and the Effective Time,
no event or circumstance shall have occurred which has had or could reasonably
be expected to have a Material Adverse Effect on GLOBAL, or its Subsidiaries,
and BANCORP shall have received a certificate signed on behalf of GLOBAL and
CAPITOL by the President and Chief Executive Officer of GLOBAL and CAPITOL to
such effect;
7.2.5 Counsel for BANCORP shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to BANCORP hereunder
or that are reasonably requested by such counsel;
7.2.6 The issuance of the BANCORP Common Stock in the merger of
HBMC with and into GLOBAL shall have been qualified or registered with the
appropriate State securities law or "blue sky" regulatory authorities of all
States in which qualification or registration is required under the State
securities laws, and such qualifications or registration shall not have been
suspended or revoked;
7.2.7 Neither GLOBAL or CAPITOL shall be subject to any
memorandum of understanding, cease and desist order, or other agreement with any
Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect on
BANCORP or BANK after the Effective Time;
7.2.8 GLOBAL shall have provided to BANCORP satisfactory evidence
that GLOBAL Stock Options have either been exercised or canceled.
7.2.9 BANCORP shall have completed the BANCORP Public Offering
and shall have received the amount of cash necessary to complete the Mergers.
7.2.10 All of GLOBAL's and CAPITOL's director-shareholders shall
have delivered to BANCORP on the date of this Agreement the Director-Shareholder
Agreements in the form attached hereto as Exhibit 7.2.10;
Section 7.3 Conditions to GLOBAL's Obligations. The obligations of
GLOBAL to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by GLOBAL) of the following conditions:
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7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of BANCORP contained in Article 4 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
BANCORP and BANK, taken as a whole, or upon consummation of the transactions
contemplated hereby; (b) BANCORP shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on BANCORP and BANK, taken as a whole, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
GLOBAL to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) BANCORP shall have delivered to GLOBAL certificates dated
the date of the Effective Time and signed by a duly authorized officer to the
effect set forth in Subsections 7.3.1(a), (b) and (c);
7.3.2 Counsel for GLOBAL shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to GLOBAL hereunder
or that are reasonably requested by such counsel;
7.3.3 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of BANCORP and its Subsidiaries,
taken as a whole, from December 31, 1998 to the Effective Time that results in a
Material Adverse Effect as to BANCORP and its Subsidiaries, taken as a whole;
7.3.4 BANCORP shall have delivered its Closing Schedules to
GLOBAL on the day immediately preceding the Closing Date and none of such
Closing Schedules shall reflect any item that was not on the BANCORP Schedules
(or in the BANCORP Financial Statements) delivered on the date of execution of
this Agreement that has had, or would have a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole, at or after the Effective Time, or on
the consummation of the transactions contemplated hereby;
7.3.5 GLOBAL's Board of Directors shall have received an opinion
to the effect that the terms of the Mergers, from a financial standpoint, are
fair to the shareholders of GLOBAL ("Global Fairness Opinion") and such opinion
shall not have been revoked at any time prior to the Effective Time;
7.3.6 BANCORP shall have delivered written evidence to GLOBAL's
Board of Directors of the continuation of directors and officers liability
insurance for the Boards of Directors of GLOBAL and CAPITOL for a period of
three years after the Effective Time, which is at least equal to the directors
and officers liability insurance coverage in existence at GLOBAL and CAPITOL at
the date of this Agreement.
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ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time;
8.1.1 By mutual consent of the Boards of Directors of BANCORP and
GLOBAL;
8.1.2 By BANCORP or GLOBAL upon the failure to satisfy any
conditions specified in Section 7.1 if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
8.1.3 By BANCORP or GLOBAL if an Acquisition Event involving
GLOBAL or CAPITOL shall have occurred;
8.1.4 By GLOBAL if there shall have been a material breach of any
of the representations or warranties of BANCORP set forth in this Agreement,
which breach, in the reasonable opinion of GLOBAL, by its nature cannot be cured
or is not cured prior to the Closing and which breach would, in the reasonable
opinion of GLOBAL, individually or in the aggregate, have, or be reasonably
likely to have, a Material Adverse Effect on BANCORP and its Subsidiaries, taken
as a whole, or upon the consummation of the transactions contemplated hereby;
8.1.5 By BANCORP if there shall have been a material breach of
any of the representations or warranties of GLOBAL or CAPITOL set forth in this
Agreement, which breach, in the reasonable opinion of BANCORP, by its nature
cannot be cured or is not cured prior to the Closing and which breach would, in
the reasonable opinion of BANCORP, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on GLOBAL or CAPITOL or
upon the consummation of the transactions contemplated hereby;
8.1.6 By GLOBAL after the occurrence of a Default by BANCORP and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of GLOBAL,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.7 By BANCORP after the occurrence of a Default by GLOBAL or
CAPITOL and the continuance of such Default for a period of 20 Business Days
after written notice of such Default, if such Default, in the reasonable opinion
of BANCORP, cannot be cured prior to the Closing or, even though curable by the
Closing, it is not cured prior to the Closing;
8.1.8 By BANCORP if the Closing Schedules delivered by GLOBAL
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the GLOBAL Financial Statements
delivered to BANCORP on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on GLOBAL or CAPITOL,
or after the Effective Time, on BANCORP, or on the consummation of the
transactions contemplated hereby (an "GLOBAL Material Adverse Event");
8.1.9 By GLOBAL upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to March 31, 2000; or
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8.1.10 By BANCORP upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to March 31, 2000; or
8.1.11 By GLOBAL if BANCORP shall not have completed the BANCORP
Public Offering by March 31, 2000.
Section 8.2 Effect of Termination; Survival. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.3, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of
GLOBAL; provided, however, that after any such approval by GLOBAL shareholders,
no amendments shall be made which by law require further approval by GLOBAL
shareholders without such further approval.
Section 8.4 Waiver. Any term or provision of this Agreement other than
regulatory approval or any other provision required by law, may be waived in
writing at any time by the party which is, or whose shareholders are, entitled
to the benefits thereof.
Section 8.5 Liquidated Damages; Cancellation Fee.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving GLOBAL or CAPITOL, then GLOBAL or CAPITOL shall pay to BANCORP the sum
of Three Hundred Fifty Thousand Dollars ($350,000) in cash.
8.5.2 In the event of termination of this Agreement by GLOBAL
pursuant to Section 8.1.9 as a result of the revocation of the GLOBAL Fairness
Opinion; or a termination of this Agreement by BANCORP pursuant to (i) Section
8.1.2 (no approval by GLOBAL shareholders), or (ii) pursuant to Section 8.1.5
(breach of representations or warranties of GLOBAL) or Section 8.1.7 (Default)
or Section 8.1.8 (disclosure in the Closing Schedules of an GLOBAL Material
Adverse Event), where such breach of representation or warranty, Default or
GLOBAL Material Adverse Event shall have been caused in whole or in material
part by any action or inaction within the control of GLOBAL or any of its
Subsidiaries, or any of their directors or executive officers (it being
understood that any breach or Default or GLOBAL Material Adverse Event that
occurred after the date of this Agreement and was outside of the control of
GLOBAL and its Subsidiaries, and the directors and executive officers thereof,
such as, by way of example only, the filing of a lawsuit against GLOBAL or
CAPITOL, shall not come within this Section 8.5.2), then, GLOBAL or CAPITOL
shall pay to BANCORP the sum of Two Hundred Fifty Thousand Dollars ($250,000),
in cash; provided, however, that if an Acquisition Transaction occurs involving
GLOBAL or CAPITOL within one hundred eighty (180) days following any termination
by BANCORP to which this Section 8.5.2 applies, GLOBAL or CAPITOL shall pay to
BANCORP an additional One Hundred Thousand Dollars ($100,000) in cash.
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8.5.3 In the event of the termination of this Agreement by GLOBAL
pursuant to 8.1.4 (breach of representations and warranties of BANCORP), Section
8.1.11 (failure to complete BANCORP Public Offering), or Section 8.1.6
(Default), where such breach of representation or warranty, or such Default or
BANCORP Material Adverse Event shall have been caused in whole or in material
part by any action or inaction within the control of BANCORP or any of its
Subsidiaries, or any of their directors or executive officers (it being
understood that any action or inaction outside of the control of BANCORP, its
Subsidiaries and their directors and executive officers, such as, by way of
example only, the filing of a lawsuit against BANCORP, shall not come within
this Section 8.5.3), then, BANCORP shall pay to GLOBAL in cash the sum of Two
Hundred Fifty Thousand Dollars ($250,000) less the amount, if any paid by
BANCORP to GLOBAL for the failure of BANCORP to have at least $6,000,000 in
subscriptions in the BANCORP Public Offering by March 7, 2000.
8.5.4 The parties have determined that the occurrence of any of
the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3 would
cause a substantial damage and loss and lost business opportunities to the party
terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.3, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
BANCORP or GLOBAL and for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties hereto, nor any Affiliates of any such
parties, inclusive of officers and directors, shall have any further obligation
or liability of any kind to the other party, except pursuant to Sections 5.1.3,
5.5 and 9.5.
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. Except as
provided in Section 8.2 none of the representations, warranties, covenants and
agreements made by GLOBAL and CAPITOL in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time, except
for those covenants and agreements contained in this Section 9.1, Section 2.6.2
(Escrow Merger Price), Section 2.8 (Certain Exchange Procedures), Section 2.9
(Exchange Procedures for Escrow Adjusted Value), and Section 2.10 (BANCORP Board
of Directors), each of which shall survive in accordance with its terms. The
Board of Directors of BANCORP shall delegate to a shareholder committee made up
of a majority of the last Board of Directors of GLOBAL (which shall act by
majority vote) the authority to enforce the provisions of and resolve any
disputes regarding Section 2.6.2 from and after the Effective Date. The expenses
of the committee, including fees paid to accountants, attorneys, appraisers and
other consultants, shall be paid by BANCORP and will be charged against the
Escrow Merger Price to the extent such funds
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remain. All representations, warranties, covenants, and agreements made by
BANCORP and BANK shall survive the Effective Date.
Section 9.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so delivered, mailed or sent, as the case may be, to the parties
at the following addresses (or any such other address for a party as shall be
specified by like notice):
If to GLOBAL or CAPITOL at:
Global Bancorp
1424 Second Street
Napa, California 94559
Fax No. (707) 252-4950
Attention: Sherwood Tarlow, Chairman
Capitol Thrift & Loan Association
1424 Second Street
Napa, California 94559
Fax No. (707) 252-4950
Attention: Robert F. Kelly, President/CEO
with a copy to:
Allen, Matkins, Leck, Gamble & Mallory
333 Bush Street, 17th Floor
San Francisco, California 94104
Fax No. (415) 837-1516
Attention: Roger S. Mertz, Esq.
with a copy to:
Mr. Sherwood Tarlow
P. O. Box 5274
38 Brailey Way
(Extension Please Point Way)
Edgartown, Massachusetts 02539
If to BANCORP or BANK:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Fax No. (707) 441-0214
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Attention: Ted Mason, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
Section 9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.4 Entire Agreement/No Third Party Rights/Assignment. This
Agreement (including the documents and instruments referred to herein): (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) except as expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 Nondisclosure of Agreement. BANCORP and GLOBAL agree, except
as required by law or the rules of the NASDAQ, so long as this Agreement is in
effect, not to issue any public notice, disclosure or press release with respect
to the transactions contemplated by this Agreement without seeking the consent
of the other party, which consent shall not be unreasonably withheld.
Section 9.6 Assignment. None of the parties may assign their rights
under this Agreement without prior written consent of the other parties hereto.
Section 9.7 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law.
Section 9.8 Headings/Table of Contents. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.9 Enforcement of Agreement. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Merger Agreement are not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the State of California or any state having jurisdiction, this
being in addition to any remedy to which they are entitled at law or in equity.
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Section 9.10 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, BANCORP, BANK, GLOBAL and CAPITOL have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first above written.
HUMBOLDT BANK GLOBAL BANCORP
By: /s/ JOHN E. DALBY By: /s/ ROBERT F. KELLY
-------------------------------- ----------------------------------
President President
By: /s/ ALAN J. SMYTH
--------------------------------
Senior Vice President
HUMBOLDT BANCORP CAPITOL THRIFT & LOAN ASSOCIATION
By: /s/ THEODORE S. MASON By: /s/ ROBERT F. KELLY
-------------------------------- ----------------------------------
President President
By: /s/ PAUL A. ZIEGLER
--------------------------------
Executive Vice President
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FIRST AMENDMENT TO SECOND RESTATEMENT OF AGREEMENT
AND PLAN OF REORGANIZATION AND MERGER
This First Amendment to Second Restatement of Agreement and Plan of
Reorganization and Merger dated as of February 3, 2000 (the "Amendment") is
entered into by and among GLOBAL BANCORP, a California corporation ("GLOBAL"),
CAPITOL THRIFT & LOAN ASSOCIATION, a California industrial loan corporation
("CAPITOL") which is a wholly-owned subsidiary of GLOBAL, HUMBOLDT BANCORP, a
California corporation ("BANCORP"), and HUMBOLDT BANK, a California
state-chartered bank ("BANK"), which is a wholly-owned subsidiary of BANCORP.
RECITALS
WHEREAS, GLOBAL, BANCORP, CAPITOL and BANK have entered into that
certain Second Restatement of Agreement and Plan of Reorganization and Merger
dated as of November 12, 1999 (the "Agreement"); and
WHEREAS, GLOBAL, BANCORP, CAPITOL and BANK each agree that it is in the
best interests of the corporations to amend certain provisions of the Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, GLOBAL, BANCORP, CAPITOL and BANK
hereby agree as follows:
1. Amendment of RECITALS. The following Recital shall be omitted in its
entirety:
"WHEREAS, in conjunction with execution of this Agreement by the
parties, CAPITOL and BANK have entered into a Purchase of Assets
and Assumption of Liabilities Agreement whereunder CAPITOL will
sell to BANK and BANK will purchase from CAPITOL, immediately
prior to the Interim Merger, one branch office of CAPITOL and the
assets and liabilities identified with such branch offices (the
"Branch Purchase Agreement") attached to this Agreement as
Exhibit A."
2. Amendment of Article 1. Definitions. Article 1 shall be amended to
omit the definitions of the term "Branch Purchase," "Branch Purchase Agreement"
and "Branch Purchase Effective Time."
3. Amendment of Article 1. Definitions. "Cash Merger Price". The
definition of "Cash Merger Price contained in Article 1 shall be amended to read
as follows:
"Cash Merger Price" shall mean the total shareholders' equity for
GLOBAL as of the Determination Date (after expensing or accruing
of GLOBAL'S Costs Associated With the Transaction), provided
however, if at least $6,000,000 of BANCORP Common Stock has not
been subscribed in the BANCORP Public Offering by March 31, 2000,
then the Cash Merger Price shall mean the total shareholders'
<PAGE> 253
equity for GLOBAL as of the Determination Date (after expensing
or accruing of GLOBAL'S Costs Associated With the Transaction)
plus $200,000.
4. Amendment of Section 2.6.2(ii). Section 2.6.2 of the Agreement shall
be amended to read as follows:
(ii) The Escrow Merger Price shall be adjusted downward on a
quarterly basis at the end of each quarter to the extent an
adjustment is required to reflect the effect of: (a) any Loan
Loss on the Church Loan portfolio identified on Schedule 2.6.2(a)
up to a maximum of $1,024,000; (b) any Loan Loss on the
Residential Loan portfolio identified on Schedule 2.6.2(b) up to
a maximum of $1,420,000; (c) any Loan Loss on the FHA Title I
Loan portfolio identified on Schedule 2.6.2(c) up to a maximum of
$500,000; (d) any Loan Loss on the Miscellaneous Loan portfolio
identified on Schedule 2.6.2(d) up to a maximum of $109,000; (e)
ninety percent (90%) of any Loan Loss on any of the Commercial
Loans identified on Schedule 2.6.2(e) up to a maximum of
$5,520,000; (f) costs of litigation of any type, inclusive of
attorneys' fees and settlements, resulting from GLOBAL's and or
CAPITOL's actions or those of its directors, officers, employees
or agents, which litigation was in existence prior to the
Effective Time; (g) writedowns for any accounting adjustments
required by BANCORP's certified public accountants for the
December 31, 1999 audited financial statements of BANCORP which
shall be issued no later than April 30, 2000 to bring the
financial statements of GLOBAL and or CAPITOL as of the
Determination Date into conformity with generally accepted
accounting principles; (h) any losses on sale of other real
estate owned on the books of CAPITOL at the Effective Time; (i)
costs of the Mergers incurred by GLOBAL and or CAPITOL and not
expended or properly accrued by GLOBAL and or CAPITOL prior to
the Determination Date; (j) any of the above-described losses,
net of any recoveries, incurred by GLOBAL and or CAPITOL from the
Determination Date to the Effective Time; and (k) any and all
expenses of the Global Shareholders Committee as provided by
Section 9.1.
5. Amendment of Section 3.4.2 of the Agreement. Section 3.4.2 of the
Agreement shall be amended to read as follows:
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreements, and the
consummation of the transactions contemplated hereby and thereby,
do not and will not conflict with, or result in any violation of
or default or loss of a material benefit under, any provision of
the Articles of Incorporation or Bylaws of GLOBAL and CAPITOL, or
except for the necessity of obtaining Requisite Regulatory
Approvals
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<PAGE> 254
and approval of a majority vote of the shareholders of GLOBAL,
any material mortgage, indenture, lease, agreement or other
material instrument or any permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to GLOBAL and CAPITOL or any of its
assets or properties, other than any such conflict, violation,
default or loss which (i) will not have a Material Adverse Effect
on GLOBAL, CAPITOL or BANCORP following consummation of the
Mergers; or (ii) will be cured or waived prior to the Effective
Time. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity
is required in connection with the execution and delivery of this
Agreement or the Merger Agreements by GLOBAL and CAPITOL or the
performance by GLOBAL and CAPITOL of its obligations hereunder
and thereunder, except for (a) filings required in order to
obtain the Requisite Regulatory Approvals; (b) the filing and
approval of the Merger Agreements with the Secretary of the State
of California; (c) Tax Filings; and (d) as set forth in Schedule
3.4.
6. Amendment of Section 4.4.2 of the Agreement. Section 4.4.2 of the
Agreement shall be amended to read as follows:
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby does not and will not conflict
with, or result in any violation of or default or loss of a
material benefit under, any provision of the Articles of
Incorporation or Bylaws of BANCORP and BANK, or except for the
necessity of obtaining the Requisite Regulatory Approvals and
successful completion of the BANCORP Public Offering, any
material mortgage, indenture, lease, agreement or other material
instrument, or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to BANCORP or BANK or any of their assets
or properties or any of their respective Subsidiaries, other than
any such conflict, violation, default or loss which (i) will not
have a Material Adverse Effect on BANCORP and BANK taken as a
whole; or (ii) will be cured or waived prior to the Effective
Time. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity
is required in connection with the execution and delivery of this
Agreement by BANCORP and BANK or the performance by BANCORP and
BANK of their obligations hereunder, except for (a) filings
required in order to obtain Requisite Regulatory Approvals; (b)
the filing of the Form S-1 Registration Statement with the SEC
relative to the BANCORP Public Offering and the declaration of
the effectiveness of the Form S-1 Registration Statement by the
SEC and any applicable state securities law regulatory
authorities; (c) the filing of
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the Form S-4 Registration Statement (including the Proxy
Statement/Prospectus constituting a part thereof) with the SEC
relating to the Mergers and the declaration of effectiveness of
the Form S-4 Registration Statement by the SEC and any applicable
state securities law regulatory authorities; (d) the filing and
approval of the Merger Agreements with the Secretary of the State
of California; (e) any approvals required to be obtained pursuant
to the BHCA or the Federal Deposit Insurance Act or any other
required governmental approval for the execution and delivery of
this Agreement by BANCORP and BANK or the consummation of the
Mergers; (f) any consents, authorizations, approvals, filings or
exemptions required to be made or obtained under the securities
or "blue sky" laws of various jurisdictions in connection with
the issuance of shares of BANCORP Common Stock contemplated by
this Agreement; and (g) as set forth in Schedule 4.4.
7. Amendment of Section 5.2.3 of the Agreement. Section 5.2.3 of the
Agreement shall be amended to read as follows:
5.2.3 Prior to the Effective Time of the Mergers, GLOBAL, as the
sole shareholder of CAPITOL, and BANCORP as sole shareholder of
BANK, shall take all action necessary for the consummation of the
Mergers.
8. Amendment of Section 5.3.1 of the Agreement. Section 5.3.1 of the
Agreement shall be amended to read as follows:
5.3.1 Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees, subject to applicable laws and the
fiduciary duties of GLOBAL's, CAPITOL's, BANCORP's or BANK's
Boards of Directors, as advised in writing by their respective
counsel, to use all reasonable efforts promptly to take or cause
to be taken all action and promptly to do or cause to be done all
things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions
contemplated by this Agreement and the Merger Agreements,
including, without limitation, the delivery of any certificate or
other document reasonably requested by counsel to a party to this
Agreement. Without limiting the foregoing, BANCORP, BANK, GLOBAL
and CAPITOL will use their reasonable efforts to obtain all
consents of third parties and Government Entities necessary or,
in the reasonable opinion of BANCORP or GLOBAL advisable for the
consummation of the transactions contemplated by this Agreement.
Without limiting the foregoing, BANCORP and BANK take all actions
necessary to execute and file the Merger Agreements and to effect
all transactions contemplated of BANCORP and BANK by this
Agreement and the Merger Agreements and GLOBAL and CAPITOL shall
take all
4
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actions necessary to effect all transactions contemplated by this
Agreement and the Merger Agreements. In case at any time after
the Effective Time any further action is necessary or desirable
to carry out the purposes of this Agreement and the Merger
Agreements or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and
franchises of GLOBAL, the proper officers or directors of
BANCORP, BANK, GLOBAL or CAPITOL, as the case may be, shall take
all such necessary action.
9. Amendment of Section 7.1.2 of the Agreement. Section 7.1.2 of the
Agreement shall be amended to read as follows:
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 Mergers 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 Agreements 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;
10. Amendment of Section 7.1.3 of the Agreement. Section 7.1.3 of the
Agreement shall be amended to read as follows:
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 Mergers, by any Government Entity which: (i)
makes the consummation of the Mergers illegal; (ii) requires the
divestiture by BANCORP of any material asset or of a material
portion of the business of BANCORP; or (iii) imposes any
condition upon BANCORP or its Subsidiaries (other than general
provisions of law applicable to all banks and bank holding
companies) which in the judgment of BANCORP would be materially
burdensome;
11. Amendment of Section 7.1.7 of the Agreement. Section 7.1.7 of the
Agreement shall be deleted in its entirety.
12. Amendment of Sections 8.1.9 through 8.1.11 of the Agreement.
Sections 8.1.9 through 8.1.11 of the Agreement shall be amended to read as
follows:
8.1.9 By GLOBAL upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to April
30, 2000; or
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<PAGE> 257
8.1.10 By BANCORP upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to April
30, 2000; or
8.1.11 By GLOBAL if BANCORP shall not have completed the BANCORP
Public Offering by April 30, 2000.
13. Amendment of Index of Exhibits and Schedules. The Index of Exhibits
and Schedules Previously Delivered by the Parties shall be amended to delete the
reference to "Exhibit A Branch Purchase Agreement."
14. References. Upon execution and delivery of this Amendment, all
references in the Agreement to the "Agreement," and the provisions thereof,
shall be deemed to refer to the Agreement, as amended by this Amendment.
15. No other Amendments or Changes. Except as expressly amended or
modified by this Agreement, all of the terms and conditions of the Agreement
shall remain unchanged and in full force and effect.
16. Definitions. All capitalized terms used herein and not otherwise
defined or amended shall have the meanings given to them in the Agreement.
6
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IN WITNESS WHEREOF, BANCORP, BANK, GLOBAL and CAPITOL have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first above written.
HUMBOLDT BANK GLOBAL BANCORP
By: John E. Dalby By: Robert F. Kelly
------------------------------ -----------------------------
President and CEO President
------------------------------ -----------------------------
HUMBOLDT BANCORP CAPITOL THRIFT & LOAN ASSOCIATION
By: Theodore S. Mason By: Robert F. Kelly
------------------------------ -----------------------------
President and CEO President
------------------------------ -----------------------------
By: Paul A. Ziegler
------------------------------
Executive Vice President
------------------------------
7
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APPENDIX B
OPINION OF FIRST CAPITAL GROUP, LLC
FIRST CAPITAL GROUP, L.L.C.
INVESTMENT BANKERS & FINANCIAL ADVISORS
July 8, 1999
Board of Directors
Global Bancorp
1424 Second Street
Napa, California 94559
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of common stock of Global Bancorp
("Global"), of the consideration (the "Merger Consideration") to be received by
such holders pursuant to the Agreement and Plan of Reorganization and Merger
dated as of June 22, 1999 (the "Reorganization Agreement"), which provides for
the merger (the "Merger") of Global with and into Humboldt Bancorp, Inc.
("Humboldt"). Pursuant to Section 2.6.1 of the Reorganization Agreement, subject
to certain conditions, each shareholder of the outstanding common stock of
Global (the "Global Common Stock") has a right to receive consideration equal to
approximately $23.35 per share, comprised of a combination, subject to
adjustment pursuant to certain conditions set forth in the Reorganization
Agreement, of cash and at the election of individual Global shareholders, shares
of the common stock of Humboldt (the "Humboldt Common Stock") for each share of
Global Common Stock tendered. The terms and guidelines of the transaction are
more fully set forth in the Reorganization Agreement.
In connection with our opinion, we have: (i) analyzed certain internal financial
statements and other financial and operating data concerning Global prepared by
the management of Global; (ii) analyzed certain publicly available financial
statements, both audited and unaudited, and other information of Global and
Humboldt, including those included in Global's financial statements for the
period ended December 31, 1998, Humboldt's Annual Reports for the three years
ended December 31, 1998, Humboldt's Quarterly Reports for the periods ended June
30, 1998, September 30, 1998, and March 31, 1999, and Global's financial
statements for the quarters ended June 30, 1998, September 30, 1998, and March
31, 1999; (iii) analyzed certain financial data of Global prepared by the
management of Global; (iv) discussed the past and current operations and
financial condition of Global with senior executives of Global; (v) reviewed the
reported stock prices and trading activity for Humboldt Common Stock; (vi)
compared the financial performance of Humboldt Common Stock and trading activity
with that of certain other comparable publicly-traded companies and their
securities; (vii) reviewed the financial terms, to the extent publicly
available, of certain comparable precedent transactions; (viii) reviewed the
Reorganization Agreement; and (ix) performed such other analyses as deemed
appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. We have not made an independent evaluation of the assets or liabilities
of Global, nor have we been furnished with any such appraisals. With respect to
financial data, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgments or management of
Global as to the future financial performance of Global. We have assumed such
data and projections will be realized in the amounts and at the times
contemplated thereby. With respect to Humboldt, we relied solely upon publicly
available data and certain discussions with the management of Humboldt regarding
Humboldt's financial condition, performance and prospects. We did not conduct
any independent evaluation or appraisal of the assets, liabilities or business
prospects of Humboldt, we
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Board of Directors
Global Bancorp
July 8, 1999
Page 2
were not furnished with any evaluations or appraisals, and we did not review any
individual credit files of Humboldt. We are not experts in the evaluation of
loan portfolios for the purpose of assessing the adequacy of the allowance for
losses with respect thereto and have assumed that such allowances for each of
the companies are in the aggregate, adequate to cover such losses.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion.
Our opinion is limited to the fairness, from a financial point of view, to the
holders of Global Common Stock of the Merger Consideration to be received by the
holders of the Global Common Stock as stated in the Reorganization Agreement and
Plan of Merger and does not address Global's underlying business decision to
undertake the Merger. Moreover, this letter, and the opinion expressed herein,
does not constitute a recommendation to any shareholder as to any approval of
the Merger or the Reorganization Agreement or the Plan of Merger. It is
understood that this letter is for the information of the Board of Directors of
Global and may not be used for any other purpose without our prior written
consent, except that this opinion may be included in its entirety in any filing
made by Global with the Securities and Exchange Commission with respect to the
Merger.
Based on the foregoing and such other matters we have deemed relevant, we are of
the opinion, as of the date hereof, that the Merger Consideration is fair, from
a financial point of view, to the holders of Global Common Stock.
Respectfully submitted,
First Capital Group, L.L.C.
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APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision does not apply
to any shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
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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.
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
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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 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.
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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.
(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
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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
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.
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PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide
for indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreement. Humboldt Bancorp's Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the State of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of such person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there will be no indemnification for: (i) amounts paid in settling
or otherwise disposing of a pending action without court approval; (ii) expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval; (iii) matters in which such person will have been
adjudged to be liable to the corporation unless and only to the extent that the
court in which the proceeding is or was pending will determine that such person
is entitled to be indemnified; or (iv) other matters specified in the California
General Corporation Law.
Humboldt Bancorp's Bylaws provide that Humboldt Bancorp will to the
maximum extent permitted by law have the power to indemnify its directors,
officers and employees. Humboldt Bancorp's Bylaws also provide that Humboldt
Bancorp will have the power to purchase and maintain insurance covering its
directors, officers and employees against any liability asserted against any of
them and incurred by any of them, whether or not Humboldt Bancorp would have the
power to indemnify them against such liability under the provisions of
applicable law or the provisions of Humboldt Bancorp's Bylaws. Certain directors
and executive officers of Humboldt Bancorp's subsidiary, Humboldt Bank, have an
indemnification agreement with Humboldt Bank that provides that Humboldt Bank
will indemnify such person to the full extent authorized by the applicable
provisions of California law, subject to federal banking law.
ITEM 21. EXHIBITS
(a) Exhibits
2.1 Second Restatement of Agreement and Plan of Reorganization and
Merger by and among Humboldt Bancorp, Humboldt Bank, Global
Bancorp and Capitol Thrift & Loan Association dated as of November
5, 1999, as amended, is attached as Exhibit I 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 re: legality of counsel.
8.1 Opinion re: tax matters as to the merger of Global Bancorp with
and into Humboldt Bank.
10.1 Amended Employment Agreement with Theodore S. Mason(2)
10.2 Director Fee Plan(3)
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10.3 Amended Humboldt Bancorp Stock Option Plan(3)
10.4 Salary Continuation Agreement with Theodore S. Mason(3)
10.5 Salary Continuation Agreement with Alan J. Smyth(3)
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(4)
10.10 Trust Indenture(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 Loan Purchase Agreement
11.1 Statement re: computation of per share earnings is included in
Note N to the financial statements to the proxy
statement/prospectus included in Part I of this Registration
Statement.
21.1 Subsidiaries of Humboldt Bancorp are Humboldt Bank, a California
state chartered bank, Capitol Valley Bank, a California state
chartered bank, and Bancorp Financial Services, a California
corporation.
23.1 Consent of Bartel Eng Linn & Schroder is included with the opinion
re: legality as Exhibit 5.1 to this Registration Statement.
23.2 Consent of Richardson & Company, independent accountants for
Humboldt Bancorp.
23.3 Consent of Grant Thornton, independent accountants for Global
Bancorp.
23.4 Consent of PricewaterhouseCoopers LLP, accountants for Global
Bancorp.
23.5 Consent of First Capital Group, LLC as financial advisor to Global
Bancorp.
23.6 Consent of Covington & Burling is included in Exhibit 8.1.
99.1 Fairness Opinion of First Capital Group, LLC is attached as
Appendix B to the proxy statement/prospectus included in Part I to
the Registration Statement.
99.2 Proxy Card(4)
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(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 with the Company's initial filing on Form S-4 on
November 12, 1999.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more that a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the Registration Statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus with is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by
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persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment Number 1 to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Eureka,
California, on January 27, 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,
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full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he may do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or any of them, or of his substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C> <C>
/s/ Theodore S. Mason 1/27/00 /s/ Alan J. Smyth 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
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 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
Ronald F. Angell, Date Marguerite Dalianes, Director Date
Director
/s/ Gary L. Evans 1/27/00 /s/ Lawrence Francesconi 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
Gary L. Evans, Director Date Lawrence Francesconi, Date
Chairman of the Board
/s/ Clayton R. Janssen 1/27/00 /s/ James O. Johnson 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
Clayton R. Janssen, Director Date James O. Johnson, Director Date
/s/ John McBeth 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
John McBeth, Director Date Michael Renner, Director Date
/s/ Jerry L. Thomas 1/27/00 /s/ Edythe E. Vaissade 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
Jerry L. Thomas, Director Date Edythe E. Vaissade, Director Date
/s/ John R. Winzler 1/27/00 /s/ Thomas Weborg 1/27/00
- --------------------------------- ----------------- ------------------------------------ -----------------
John R. Winzler, Director Date Thomas Weborg, Director Date
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5.1
February 2, 2000
Board of Directors
Humboldt Bancorp
701 Fifth Street
Eureka, CA 95501
Re: Certificates of Interest in Promissory Note;
Common Stock
Registration Statement on Form S-4
Gentlemen:
We act as counsel to Humboldt Bancorp (the "Company"), a California
corporation, in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of $5,500,000 of Certificates of
Interest in Humboldt Bancorp Promissory Note ("Certificates of Interest") and
approximately 160,000 shares of the Company's Common Stock (the "Shares"),
which may be exchanged for up to $2,000,000 of the Humboldt Bancorp Promissory
Note as further described in a registration statement on Form S-4 filed under
the Securities Act (the "Registration Statement").
For the purpose of rendering this opinion, we examined originals or
photostatic copies of such documents as we deemed to be relevant. In conducting
our examination, we assumed, without investigation, the genuineness of all
signatures, the correctness of all certificates, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies, and the accuracy and completeness
of all records made available to us by the Company. In addition, in rendering
this opinion, we assumed that the Shares will be offered in the manner and on
the terms identified or referred to in the prospectus, including all amendments
thereto.
<PAGE> 2
February 2, 2000
Page 2
Our opinion is limited solely to matters set forth herein. Attorneys
practicing in this firm are admitted to practice in the State of California and
we express no opinion as to the laws of any other jurisdiction other than the
laws of the State of California and the laws of the United States.
Based upon and subject to the foregoing, after giving due regard to
such issues of law as we deemed relevant, and assuming that (i) the Registration
Statement becomes and remains effective, and the prospectus which is part
thereof (the "Prospectus"), and the Prospectus delivery procedures with respect
thereto, fulfill all of the requirements of the Securities Act, throughout all
periods relevant to the opinion, and (ii) all offers and sales of the
Certificates of Interest and Shares have been and will be made in compliance
with the securities laws of the states, having jurisdiction thereof, we are of
the opinion that the Certificates of Interest will be binding obligations of the
Company and that the Certificates of Interest have been, and the Shares which
may be exchanged for up to $2,000,000 of Humboldt Bancorp Promissory Note will
be, legally issued, fully paid, and non-assessable.
Sincerely yours,
BARTEL ENG LINN & SCHRODER
DBE/cnh
<PAGE> 1
Exhibit 8.1
FEBRUARY 3, 2000
Humboldt Bancorp
701 Fifth Street
Eureka, CA 95501
Global Bancorp
1424 Second Street
Napa, CA 94559
Ladies and Gentlemen:
You have requested our opinion with respect to the principal U.S.
federal income tax consequences of the proposed merger of HB Merger Company
("HBMC") into Global Bancorp ("Global"), with Global as the surviving
corporation (hereafter the "Merger"), and the subsequent liquidation of Global
into Humboldt Bancorp ("Bancorp") (collectively referred to as the
"Transaction"). Immediately prior to the Merger, Humboldt Bank ("Bank") will
purchase from Capitol Thrift and Loan Association ("Capitol") a portfolio of
loans for fair market value (the "Loan Purchase"). You have not asked us to
opine on the federal income tax aspects of the Loan Purchase, except to the
extent that the Loan Purchase will affect the Transaction.
In preparing this opinion, we have examined and relied upon the facts
stated and representations made in the Second Restatement of Agreement and Plan
of Reorganization and Merger dated November 12, 1999, as amended by the First
Amendment thereto dated February 3, 2000 (the "Agreement") and in the
Pre-Effective Amendment No. 1 to Form S-4 to which this opinion is appended as
an exhibit (the "Form S-4"). Except as otherwise indicated herein, all
capitalized terms used in this letter have the meaning assigned to them in the
Agreement. We have also relied upon certain representations made to us by
Bancorp and Global for purposes of this opinion, which are listed below.
Our opinion is expressly conditioned upon the facts and representations
set out below. Our opinion is based on the Internal Revenue Code of 1986, as
amended to date (the "Code"), regulations promulgated thereunder by the U.S.
Treasury Department (the "Regulations"), court cases, and Internal Revenue
Service ("IRS") rulings, all of which can be changed, perhaps retroactively, to
affect adversely the tax consequences of the Transaction. Although the opinions
expressed in this letter are based on our best interpretations of existing
sources of law, no assurance can be given that such interpretations would be
followed if they become the subject of judicial or administrative proceedings.
<PAGE> 2
February 3, 2000
Page 2
I. DESCRIPTION OF THE CORPORATIONS
Global is a California corporation with authorized capital stock
consisting of 1,200,000 shares of Global Common Stock, no par value per share,
and 600,000 shares of Global Preferred Stock, no par value. As of the Agreement
date, approximately 700,000 shares of Global Common Stock were outstanding. On
the Effective Date, no more than 706,600 shares of Global Common Stock will be
outstanding, and all stock options under the Global Stock Option Plan that have
not been exercised will be cancelled. No Global Preferred Stock has been or will
be issued.
Capitol is a California state-chartered industrial loan company that
maintains and operates branch offices only in the state of California. Capitol
is not a member of the Federal Reserve System. Capitol has outstanding 175,000
shares of common stock, no par value per share, all of which are owned by
Global.
Bancorp is a registered bank holding company incorporated in California.
At the Effective Time, the authorized capital stock of Bancorp will consist of
50,000,000 shares of Bancorp Common Stock, no par value per share. Bancorp is
the sole shareholder of Bank, a California state-chartered banking corporation
authorized to conduct general banking business in California. Bank is not a
member of the Federal Reserve System. Bancorp is also the sole shareholder of
HBMC, a corporation organized solely to merge with Global as part of the
Transaction.
II. THE PROPOSED TRANSACTION
The parties to the Transaction believe that the combination of Global
with Bancorp will enhance the economic interests of the shareholders of both
Global and Bancorp. As provided in the Agreement, the principal features of the
Transaction are as follows:
A. HBMC Merger
At the Effective Time, pursuant to the Merger, the separate existence of
HBMC will cease, and Global will be the surviving corporation. By operation of
law, Global will succeed to all of the assets of HBMC and will assume all of its
liabilities. Global will retain all of its own assets and liabilities, and its
existence will continue unaffected and unimpaired by the Merger.
At the Effective Time, each share of Global Common Stock then issued and
outstanding will, by virtue of the Merger and without further action, be
cancelled, and, except for dissenting shares, will be converted into the right
to receive an amount of cash equal to the Cash Per Share Merger Price and a
certificate representing an interest in a Bancorp note. This certificate of
interest will entitle the holder to receive, on the Escrow Payment Date, in cash
<PAGE> 3
February 3, 2000
Page 3
and/or common stock of Bancorp, the Escrow Per Share Merger Price.(1) The Cash
Per Share Merger Price and the Escrow Per Share Merger Price are hereafter
collectively referred to as the "Consideration".
Global shareholders who dissent from the Merger will be entitled to the
rights and privileges provided by California law.
B. Corporate Liquidation
Immediately following the Merger, the Boards of Directors of Bancorp and
Global will adopt a plan of liquidation (the "Plan of Liquidation") pursuant to
which Global will be merged with and into Bancorp under the laws of California
in a transaction intended to qualify as a liquidation of a subsidiary under
section 332 of the Code (the "Global Liquidation"). In the Global Liquidation,
all of Global's assets will be transferred to Bancorp by operation of law and
Bancorp will succeed to all of Global's liabilities. Global will cease being a
going concern.
C. Representations
In addition to the foregoing, Bancorp and Global have made the following
representations to us with regard to the Transaction:
1. Prior to the Merger, no shareholder or group of shareholders of
Global will, through actual or constructive ownership, be in
control of Bancorp as the term "control" is used in Code section
304(c).
2. Prior to the Merger, neither Bancorp nor a subsidiary of Bancorp
will own any stock of Global, either actually or constructively
within the meaning of Code section 318(a).
3. The Agreement is the result of arm's-length negotiations between
unrelated parties. The Consideration to be received by the
pre-Merger shareholders of Global will be approximately equal to
the fair market value of the stock to be exchanged therefor.
4. Each of the parties to the Transaction will pay its own expenses
incurred in the transaction.
5. Bancorp will acquire by purchase at least 80 percent of the stock
(within the meaning of Code section 1504(a)(2)) of Global within
the 12-month period beginning on the first date on which Bancorp
acquires stock of Global.
6. Neither Bancorp nor any of its affiliates will make a Code
section 338 election with respect to Global or any subsidiary of
Global.
- ------------
(1) On or soon after the Effective Time, Bancorp will deliver to the Exchange
Agent, (i) cash equal to the Cash Per Share Merger Price and (ii) a
promissory note issued by Bancorp in an amount equal to the Escrow Merger
Price.
<PAGE> 4
February 3, 2000
Page 4
7. Global will not have redeemed any shares of Global Common Stock
during the three-year period immediately preceding the adoption
of the Plan of Liquidation.
8. No assets of Global (or subsidiaries of Global) will have been
distributed in kind, transferred, or sold to Bancorp or a
subsidiary thereof within three years prior to the adoption of
the Plan of Liquidation, except in the ordinary course of
business or pursuant to the Loan Purchase.
9. On the date of the adoption of the Plan of Liquidation, and at
all times thereafter until the Global Liquidation is completed,
Bancorp will own at least 80 percent of the total combined voting
power and value of all stock of Global within the meaning of Code
section 1504(a)(2).
10. There is no plan or intention to liquidate Bancorp at any time
prior to or subsequent to the proposed Transaction.
11. The fair market value of the assets of Global will exceed its
liabilities both on the date of the adoption of the Plan of
Liquidation and at the time the liquidating distribution is made.
12. Prior to the Merger, HBMC will have conducted no business and
will have had no income or operating assets, and its separate
corporate existence will cease upon completion of the Merger.
13. Bancorp will not have acquired any assets from Global in a
nontaxable transaction during the three-year period immediately
preceding the adoption of the Plan of Liquidation.
14. Global will not have acquired any assets in a nontaxable
transaction during the three-year period immediately preceding
the adoption of the Plan of Liquidation.
15. Global will report all earned income attributable to its assets
that were distributed to Bancorp in the Global Liquidation.
16. Global will cease being a going concern and will retain no assets
following its liquidating distribution. After the Global
Liquidation, all outstanding stock of Global will be cancelled.
17. Global shareholders immediately prior to the Transaction will
receive the Consideration solely in their capacity as
shareholders of Global.
18. Bancorp does not intend to dispose of any assets of Global other
than in the ordinary course of business.
19. The Global Liquidation will not be preceded or followed by the
reincorporation in, or transfer or sale to, a recipient
corporation ("Recipient") of any of the businesses or assets of
Global if persons holding, directly or indirectly, more than
<PAGE> 5
February 3, 2000
Page 5
20 percent in value of the stock of Global hold, directly or
indirectly, more than 20 percent in value of the stock of
Recipient. For purposes of this representation, ownership will be
determined by application of the constructive ownership rules of
Code section 318(a) as modified by Code section 304(c)(3).
20. No indebtedness between Global and Bancorp or the subsidiaries of
either will exist at the time of the Global Liquidation, and none
will have been issued, acquired, cancelled, forgiven, or
discounted within three years prior to the adoption of the Plan
of Liquidation or in connection with the Transaction.
21. Global Common Stock has never been traded on an established
securities market within the meaning of Code section 453(k) or
considered property of a kind regularly traded on an established
market within the meaning of that section.
22. The certificate of interest received by the Global shareholders
will not be payable on demand within the meaning of Code section
453(f)(4)(A) and will not be readily tradable within the meaning
of Code section 453(f)(4)(B).
III. ANALYSIS
A. The Merger
In Revenue Ruling 90-95, 1990-2 C.B. 67, the IRS discussed the tax
consequences of a transaction similar to the Merger. In this ruling, a
corporation organized a wholly-owned subsidiary solely for the purpose of
acquiring all of the stock of an unrelated target corporation. Pursuant to the
plan of merger, the subsidiary merged into the target with the target surviving.
The shareholders of the target exchanged all of their stock for cash from the
subsidiary. A portion of the subsidiary's cash was contributed by its parent,
while the remaining cash was borrowed by the subsidiary. Following the merger,
the parent owned all of the outstanding target stock. The IRS applied the
"step-transaction doctrine," which treats actions that in form are separate and
independent as a single transaction, to disregard the existence of the
subsidiary for federal tax purposes because the subsidiary had "no significance
apart from [parent's] acquisition of the [target] and the subsidiary was
organized solely to facilitate the parent's acquisition of the target's stock."
The IRS concluded that the parent should be treated as having acquired the stock
of the target.
An earlier revenue ruling also disregarded the existence of a
newly-organized transitory subsidiary created to enable a parent corporation to
acquire the stock of a target corporation. In Revenue Ruling 73-427, 1973-2 C.B.
301, the parent corporation contributed cash and shares of its stock to a
newly-organized subsidiary, which then merged into the target, with the target
surviving. Pursuant to the merger, the subsidiary stock automatically converted
to target stock, and the target's minority shareholders received parent stock in
exchange for their target stock. Revenue Ruling 73-427 applied the
step-transaction doctrine and concluded that that the net effect of the steps
for federal income tax purposes was the purchase of target stock from the target
shareholders in exchange for parent stock.
The treatment of a merger of a transitory subsidiary into a target as a
purchase of the stock of the target is not impaired by a subsequent liquidation
of the target, at least where the
<PAGE> 6
February 3, 2000
Page 6
purchase constitutes a "qualified stock purchase" under Code section 338(d)(3).
Revenue Ruling 90-95 expressly discussed whether the step-transaction doctrine
should apply to treat a deemed stock purchase followed immediately by the
adoption and execution of a plan of liquidation of the target under Code section
332 as an acquisition of the target's assets. The IRS concluded that the
step-transaction doctrine should not apply because a "qualified stock purchase
of target stock is accorded independent significance from a subsequent
liquidation of the target." The deemed acquisition at issue in the ruling was a
qualified stock purchase because the parent acquired more than 80 percent of the
total voting power and 80 percent of the total value of the target's stock from
persons unrelated to the parent (within the meaning of Code section
338(h)(3)(A)(iii)) in a transaction in which the parent acquired a cost basis in
the target's stock and the target shareholders recognized gain or loss. (2)
Applying the foregoing principles, the organization of HBMC and its
merger with Global should be disregarded for federal income tax purposes, and
the Merger should be treated as a purchase by Bancorp of the stock of Global in
exchange for the Consideration. Since the purchase will constitute a qualified
stock purchase as defined in Code section 338(d)(3), this result will not be
affected by the subsequent liquidation of Global under Code section 332.
Nor will this result be affected by the fact that Capitol, a subsidiary
of Global, will have sold some of its assets to Bank in the Loan Purchase
immediately prior to the Merger. Sections 338(e) and (f) of the Code contain
certain "consistency rules" designed to prevent a purchaser (or an affiliate of
a purchaser) from obtaining a "stepped-up" basis in only certain assets of a
target (or an affiliate of a target) by making a qualified stock purchase,
forgoing a Code section 338 election to treat the stock purchase as an asset
purchase, and purchasing some of the target's (or target's affiliate's) assets
in a taxable transaction. However, under the current Regulations implementing
these provisions, the IRS is no longer able to impose an involuntary Code
section 338 election (to treat the entire stock acquisition as an asset
acquisition) for a violation of these consistency rules. See Treas. Reg. Section
1.338(i)-1(d). Accordingly, even though Bank will purchase assets of Capitol
immediately prior to the Merger, the Merger will be treated as a qualified stock
purchase and not as an asset purchase.
B. Global Liquidation
In order for a liquidation to qualify under Code section 332, a
corporate distributee must own at least 80 percent of the total voting power and
80 percent of the total value of the liquidating corporation's stock on the date
the plan of liquidation is adopted and until the time the corporation's assets
are distributed in liquidation. Code Section 332(b)(1). Furthermore, the
liquidating distribution must be in complete cancellation or redemption of all
of the liquidating corporation's stock. Code section 332(b)(2). In general, the
transfer of all property of the liquidating corporation must take place within
the taxable year in which the first liquidating distribution is made. Code
section 332(b)(2); Rev. Rul. 71-326, 1971-2 C.B. 177. If a
- ------------
(2) See also Treas. Reg. Section 1.338-2(b)(2)(ii), Ex. (2) (where existence of
newly-organized transitory subsidiary of parent that merged into target was
disregarded for tax purposes and subsidiary's parent was considered to
purchase the target's stock).
<PAGE> 7
February 3, 2000
Page 7
transaction constitutes a complete liquidation within the meaning of Code
Section 332, it is immaterial that the transaction is otherwise described under
local law. Treas. Reg. Section 1.332-2(d).
If a liquidation qualifies under Code section 332, a liquidating
corporation does not recognize gain or loss on the distribution of property to
its 80-percent (or greater) shareholder, and this shareholder distributee
recognizes neither gain nor loss upon receipt of the distributed property. Code
sections 336(d)(3), 337(a), 337(c). Also, the distributee's basis in the
property received from the liquidating corporation is the same as it was in the
hands of the liquidating corporation. Code section 334(b)(1). The 80-percent
distributee's holding period for the property includes the period during which
the property was held by the liquidating corporation. Code section 1223(2).
Based on these principles and the facts and representations recited
above, Code section 332 will apply to the Global Liquidation. Bancorp will own
all of the Global stock on the date the Plan of Liquidation is adopted and on
the date it receives Global's assets, thus satisfying the "control" requirements
of Code section 332(b)(1). The distribution to Bancorp of all of Global's assets
in complete redemption of all of Global's outstanding stock will satisfy the
"complete cancellation or redemption" requirements of Code section 332(b)(2).
The complete transfer of Global's property will take place within the taxable
year, thus satisfying the timing requirements of Code section 332(b)(2).
Accordingly, the contemplated merger of Global into Bancorp will be treated for
federal income tax purposes as a tax-free liquidation of Global pursuant to Code
section 332.
Because the Global Liquidation will satisfy the requirements of Code
section 332, no gain or loss will be recognized by either Bancorp or Global by
reason of the Global Liquidation. Bancorp's basis in the assets it receives from
Global will be the same as Global's basis in those assets immediately prior to
the Transaction, and Bancorp's holding period will include the period the assets
were held by Global.
The fact that the Global Liquidation occurs pursuant to a plan of
liquidation adopted and executed immediately after the Merger will not affect
the tax-free nature of the liquidation. See Rev. Rul. 90-95, 1990-2 C.B. 67
(discussed above). Nor will the Loan Purchase immediately prior to the Merger
prevent the Global Liquidation from qualifying under Code section 332 because,
as discussed above, the Loan Purchase will not alter the characterization of the
Merger as a stock purchase.(3)
C. Taxability of the Merger for the Global Shareholders
The material federal income tax consequences of the Merger to the Global
shareholders have been described, and are as stated, in the Form S-4. In
general, this description relies on Code sections 453, 483, 1001, 1274 and the
Regulations promulgated thereunder.
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(3) Under certain circumstances, a bifurcated sale of both the stock and assets
of a target (or a target affiliate) will affect the purchaser's basis in
the purchased assets. See Treas. Reg. Section 1.338-4(a)(2).
<PAGE> 8
February 3, 2000
Page 8
IV. CONCLUSIONS
Based on the foregoing, it is our opinion that the proposed Transaction
will have the following federal tax consequences:
1. The formation of HBMC and its merger with Global will be disregarded
for federal tax purposes, and the Merger will be treated as a sale by each
Global shareholder of Global Common Stock to Bancorp for the Consideration. (See
Treas. Reg. Section 1.338-2(b)(2)(ii), Ex. (2); Rev. Rul. 90-95, 1990-2 C.B. 67;
Rev. Rul. 73-427, 1973-2 C.B. 301.)
2. No gain or loss will be recognized by Bancorp or Global as a result
of the Merger. (See Rev. Rul. 90-95, 1990-2 C.B. 67; Rev. Rul. 73-427, 1973-2
C.B. 301.)
3. The Global Liquidation, characterized as a merger under California
law, will be treated for federal tax purposes as a complete liquidation of
Global within the meaning of Code section 332. (Treas. Reg. Section 1.332-2(d).)
4. Bancorp will recognize no gain or loss on its receipt of all of the
assets and liabilities of Global that will be distributed to it in complete
liquidation. (Code Section 332(a).)
5. The basis of the assets of Global received by Bancorp will be the
same as the basis of such assets in the hands of Global immediately prior to the
liquidation of Global. (Code Section 334(b)(1).)
6. The holding period of the assets of Global received by Bancorp upon
complete liquidation of Global will include the period during which such assets
were held by Global. (Code Section 1223(2).)
7. No gain or loss will be recognized by Global on the distribution of
its assets and liabilities to Bancorp in complete liquidation. (Code Sections
336(d)(3), 337(a).)
8. The purchase of the Global Common Stock from the Global shareholders
will be a taxable sale or exchange for which such shareholders must report gain
or loss on the installment method unless a Global shareholder elects out of the
installment method or does not qualify to use that method. (Sections 453(a) and
(d).)
9. The purchase of the Global Common Stock from the Global shareholders
will be considered a contingent payment sale for federal tax purposes because
the aggregate selling price of the Global Common Stock cannot be determined as
of the close of 2000. (Temp. Treas. Reg. Section 15A.453-1(c).)
This opinion is being furnished to you in connection with the Agreement
and the Form S-4, and we hereby consent to its inclusion as an exhibit to the
Form S-4. However, this opinion is not otherwise to be quoted, in whole or in
part, referred to in any other transaction, or
<PAGE> 9
February 3, 2000
Page 9
filed with any governmental agency or any other person without our prior and
express written consent.
The opinions expressed herein are as of the date hereof, and we assume
no obligation to update or supplement such opinions to reflect any facts or
circumstances that may hereafter come to our attention or any changes in the law
that may hereafter occur.
No opinion is expressed as to the federal income tax consequences of any
aspects of the proposed transaction other than those aspects specifically
addressed above.
Yours truly,
Covington & Burling
<PAGE> 1
EXHIBIT 10.15
LOAN PURCHASE AGREEMENT
This Loan Purchase Agreement dated as of January __, 2000, (the "Agreement") is
made and entered into by and between Humboldt Bank, a California state-chartered
bank ("Purchaser"), and Capitol Thrift & Loan Association, a California
industrial loan corporation ("Seller").
RECITALS
A. Humboldt Bancorp, Purchaser, Global Bancorp and Seller have entered
into the Second Restatement of the Agreement and Plan of Reorganization
dated November 12, 1999 as amended (the "Merger Agreement") which
provides that Purchaser and Seller will enter into this Agreement.
B. Seller desires to sell and Purchaser desires to purchase up to $60
million in loans, all on the terms and subject to the conditions of
this Agreement.
NOW THEREFORE, the parties to this Agreement hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have
the meanings given below:
"Agreement" means this loan purchase agreement.
"Business Day" means a day, other than a Saturday or Sunday, when
Purchaser is open to the public for business.
"Closing Date" means the date to be chosen by the parties pursuant
to the Second Restatement of the Agreement and Plan of Reorganization dated
November 12, 1999 by and among Humboldt Bancorp, Purchaser, Global Bancorp and
Seller as amended (the "Merger Agreement"), or any other date and time the
closing of the purchase is consummated as contemplated in Articles II and III
and shall be effective as of the close of business on the date of closing.
"Commissioner" shall mean the California Commissioner of Financial
Institutions.
"FDIC" means the Federal Deposit Insurance Corporation.
"Purchased Assets" means (i) the Purchased Loans, and (ii) all
business records relating to the purchased loans and all accounting or financial
information concerning the Purchased Loans to be transferred.
<PAGE> 2
"Purchased Loans" means all of Seller's interest, including the
outstanding principal balance due and accrued and unpaid interest and/or late
charges thereon as of the Closing Date, in all loans listed on Schedule 1.1(c),
to be provided within 10 days of the execution hereof, including a two percent
loan loss reserve for each such loan.
"Regulatory Approvals" means all approvals, permits,
authorizations, waivers, or consents of state and federal governmental agencies
or authorities necessary or appropriate to permit consummation of the
transactions contemplated in this Agreement.
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 Closing Date. The closing of the transactions contemplated by this
Agreement shall occur immediately preceding the closing of the merger
transaction contemplated in the Merger Agreement. On the Closing Date, the
closing of the transactions contemplated by this Agreement shall take place at
the head offices of Purchaser in Eureka, California. Notwithstanding anything
herein to the contrary, the effective time for the closing of the transactions
contemplated by this Agreement shall be as of the close of business on the
Closing Date.
2.2 Purchase and Sale. On the Closing Date, subject to satisfaction or
waiver of the conditions precedent set forth in this Agreement, Seller shall
sell and Purchaser shall buy all the Purchased Assets.
2.3 Payment for Purchase. As consideration for the Purchased Assets,
Purchaser shall pay Seller the purchase price specified in Section 2.4.
2.4 Purchase Price. The purchase price for the Purchased Assets shall
be the sum of the following:
(a) An amount equal to the outstanding principal balance due and
accrued and unpaid interest thereon as of the Closing Date, of the Purchased
Loans; less
(b) Two percent loan loss reserve for the gross amount of such
loans.
2.5 Prorations. Seller and Purchaser shall prorate the following items
as of the Closing Date so that all items applicable to all periods through the
Closing Date shall be for the account of Seller and all items applicable to any
period subsequent to the Closing Date shall be for the account of Purchaser:
(a) Any real or personal taxes, intangibles taxes, or other similar
taxes on the Purchased Assets, in each case prorated on the basis of the taxing
year of each taxing body involved
2
<PAGE> 3
(and if the amount of any tax is not ascertainable as of the Closing Date,
proration of the tax shall be based upon the most recent ascertainable tax bill
subject to adjustment when the actual amount becomes known);
2.6 Taxes, Fees. Taxes and fees shall be allocated and paid as set
forth
(a) Seller shall be responsible for payment of all taxes attributed
to or associated with the Purchased Assets prior to and on the Closing Date,
including but not limited to, business and occupation taxes;
(b) Purchaser shall be responsible for taxes and fees attributable
to the operation of the Purchased Assets after the Closing Date;
(c) On the Closing Date, Purchaser shall pay to Seller sales and
use tax payable by reason of the transaction contemplated by this Agreement;
(d) Seller shall be responsible for recording fees for recording of
documents to remove liens or encumbrances against any of the Purchased Assets;
(e) Purchaser shall be responsible for filing and recording fees
and any other expenses incurred in connection with transferring or assigning to
Purchaser the collateral which secures the Purchased Loans; and
(f) Any other taxes and fees shall be prorated according to the
accepted practice in California for allocation of such items in similar
transactions.
ARTICLE III
CLOSING OF TRANSACTIONS
3.1 Estimate of Consideration: Payment of Estimated Amount. Four
Business Days prior to the Closing Date, Seller shall prepare a reasonably
detailed calculation of estimated amounts of the purchase price to be paid for
the Purchased Assets and the amount to be paid pursuant to Section 2.4. Upon
completion, Seller shall deliver to Purchaser such statement of the estimated
consideration to be paid, certified by the chief financial officer of Seller to
have been prepared under his supervision and to be as accurate an estimate as is
reasonably practicable. On the Closing Date, Purchaser shall, as shown thereon,
pay the estimated net amount due to Seller, if any, in immediately available
funds or in acceptable securities.
3.2 Determination of Final Amount of Consideration, Payment of Adjusted
Amount.
(a) Following the Closing Date, Purchaser and Seller shall, as
promptly as reasonably practicable, consult with one another to determine and
agree upon the final calculation of the purchase price for the Purchased Assets
in each case calculated as specified in Article II.
(b) Within five Business Days of the final determination of the
amount of the Purchase Price, Purchaser shall pay Seller such amount as is
necessary to adjust the estimated
3
<PAGE> 4
amount paid on the Closing Date to the actual amount due. Such payment shall be
made in immediately available funds or in acceptable securities, together with
interest thereon at the average daily federal funds rate from the Closing Date
until paid.
3.3 Other Actions at Closing. Subject to satisfaction or waiver of the
conditions to the respective parties' obligations, the following actions shall
be taken on the Closing Date:
(a) Consents. Seller shall deliver to Purchaser such executed
consents and approvals of third parties in form and substance reasonably
satisfactory to counsel for Purchaser, as may be required to consummate the
transactions contemplated hereby; provided that Seller shall have no liability
to Purchaser if Seller is unable to procure such consents.
(b) Bill of Sale. Seller shall deliver to Purchaser an executed
bill or bills of sale, substantially in the form of Exhibit A attached hereto,
transferring and warranting to Purchaser all right, title, and interest in and
to all Purchased Assets.
(c) Assignment of Contracts and Accounts. Seller shall deliver an
executed assignment or assignments, in a form to be agreed upon by the parties,
transferring and assigning to Purchaser Seller's interest, Contracts, Accounts,
and any other Purchased Assets not otherwise covered by an instrument of
transfer, in each case free and clear of all claims, liens, and encumbrances.
(d) Possession. Seller shall deliver possession of the Purchased
Assets to Purchaser or its representatives at the close of business on the
Closing Date.
(e) Other Documents. Purchaser and Seller shall each deliver such
other documents as this Agreement contemplates will be delivered by Purchaser or
Seller, as the case may be, on or before the Closing Date, or as may be
reasonably requested by the other party prior to the Closing Date to consummate
the transactions contemplated hereby, to evidence compliance with such party's
covenants or the accuracy of such party's representations and warranties, or the
satisfaction or waiver of conditions to the other party's obligations hereunder.
3.4 Further Assurances. From time to time on and after the Closing
Date, as and when requested by Purchaser or Seller, or by their respective
successors and assigns, the parties shall execute and deliver such other
instruments of transfer, assignment, and assumption and shall take or cause to
be taken such further actions as shall be necessary to effect this Agreement.
4
<PAGE> 5
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Conditions Precedent to Obligations of Both Parties. The
obligations of the parties to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction or waiver of each of the
following conditions on or before the Closing Date:
(a) Regulatory Approvals, in form and substance reasonably
satisfactory to the parties and their counsel, shall have been received from all
federal and state regulatory authorities having jurisdiction over the parties
and the transactions contemplated hereby.
(b) No action, suit, or proceeding shall have been instituted by
any public authority to restrain, enjoin, or prohibit the transactions
contemplated by this Agreement.
4.2 Conditions Precedent to Obligations of Purchaser. The obligation of
Purchaser to effect the transactions contemplated by this Agreement is subject
to the satisfaction or waiver of each of the following conditions on or before
the Closing Date:
(a) All representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date with the same effect as if such representations and warranties had been
made or given on and as of the Closing Date; all covenants and conditions to be
performed or met by Seller on or prior to the Closing Date shall have been so
performed or met in all material respects; and on the Closing Date, Purchaser
shall have received an officers' certificate, dated as of the Closing Date,
signed by the chief financial officer or another senior executive officer of
Seller, attesting to such facts to the best knowledge of that officer after
reasonable inquiry.
(b) Except as otherwise provided herein Seller shall have obtained
all consents and approvals which are necessary or advisable in connection with
its consummation of the transactions contemplated hereby and shall have
delivered executed copies thereof to Purchaser.
4.3 Conditions Precedent to Obligations of Seller. The obligation of
Seller to effect the transactions contemplated by this Agreement is subject to
the satisfaction or waiver of the following condition on or prior to the Closing
Date:
All representations and warranties of Purchaser contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date with the same effect as if such representations and warranties had been
made or given on and as of the Closing Date; all covenants and conditions to be
performed or met by Purchaser on or prior to the Closing Date shall have been so
performed or met in all material respects; and on the Closing Date, Seller shall
have received an officers' certificate, dated as of the Closing Date, signed by
a senior executive officer of Purchaser, attesting to such facts to the best
knowledge of that officer after reasonable inquiry.
5
<PAGE> 6
ARTICLE V
WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
5.1 Organization, Powers, and Qualifications. Purchaser is a
state-chartered bank duly organized, validly existing, and in good standing
under the laws of California. Purchaser has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as now conducted.
5.2 Execution and Performance of Agreement. Purchaser has all requisite
corporate power and authority to execute, deliver, and perform this Agreement.
The execution, delivery, and performance of this Agreement by Purchaser will not
conflict with any provision of its articles of incorporation or bylaws or with
any undertaking, agreement, decree, order, or judgment by which it is bound.
This Agreement constitutes the valid, legal, and binding obligation of
Purchaser, enforceable against it in accordance with its terms. The execution,
delivery, and performance of this Agreement have been duly and validly
authorized by the board of directors of Purchaser and by Purchaser's sole
shareholder, Humboldt Bancorp. No other corporate proceedings on the part of
Purchaser are necessary to authorize this Agreement on its behalf or the
consummation by it of the transactions contemplated by this Agreement.
ARTICLE VI
WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
6.1 Organization, Powers, and Qualifications. Seller 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, to lease the leased properties used in its business, and to carry on its
business substantially as it is being conducted on the date of this Agreement.
6.2 Execution and Performance of Agreement. Seller has all requisite
corporate power and authority to execute, deliver, and perform this Agreement.
The execution, delivery, and performance of this Agreement by Seller will not
conflict with any provision of Seller's articles of incorporation or bylaws or
with any undertaking, agreement, decree, order, or judgment by which it is
bound. This Agreement constitutes the valid, legal, and binding obligation of
Seller, enforceable against it in accordance with its terms. The execution,
delivery, and performance of this Agreement have been duly and validly
authorized by the board of directors of Seller and by Seller's sole shareholder,
Global Bancorp. No other corporate proceedings on the part of Seller are
necessary to authorize this Agreement on its behalf or the consummation by it of
the transactions contemplated by this Agreement.
6.3 Contracts. Seller is not in default of any material term of any
Contract, and there is no event which, with the lapse of time or giving of
notice or otherwise, would constitute such a default.
6
<PAGE> 7
6.4 Disclosure. No representation or warranty of Seller hereunder and
no certificate, statement, or other document delivered by Seller or any officer
thereof hereunder or in connection with this Agreement or any of the
transactions contemplated hereunder contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading. Copies of all documents referred to in this Agreement
which Seller has furnished to or made available for inspection by Purchaser and
its affiliates are true, correct, and complete copies thereof and include all
amendments, supplements, and modifications thereto and all waivers thereunder.
ARTICLE VII
COVENANTS
7.1 Best Efforts. Each party (a) shall use its best efforts to cause
the transactions contemplated hereby to be consummated immediately prior to the
merger pursuant to the Merger Agreement, and to prepare, file, and prosecute
promptly and diligently all federal and state regulatory filings and requests
for approval as shall be necessary to effect the transactions contemplated by
this Agreement; (b) represents that at the date hereof, it does not know of any
facts which would reasonably cause it to believe that all Regulatory Approvals
could not be obtained; and (c) agrees not to take any action or enter into any
agreement or arrangement that reasonably would be expected to jeopardize its
ability to obtain all Regulatory Approvals necessary for it to consummate the
transactions contemplated hereby; provided, however, that nothing in this
Agreement shall require either party or any of its affiliates to agree to any
conditions to the consummation of the transactions contemplated by this
Agreement imposed by any federal or state regulatory authority with jurisdiction
over such transaction which in that party's reasonable judgment would be unduly
burdensome.
7.2 Confidentiality. Each party shall use all nonpublic information
that it obtains from the other pursuant to this Agreement, including information
obtained pursuant to Section 8.2 from the companies used by Seller for data
processing or pursuant to Section 8.7, solely to effect the transactions
contemplated by this Agreement or for other purposes consistent with the intent
of this Agreement and shall not use any of such information for any other
purpose, including, without limitation, the competitive detriment of any party.
Each party shall maintain as strictly confidential all nonpublic information it
learns from the other party, including information obtained pursuant to Section
8.2 from the companies used by Seller for data processing, and shall, upon
expiration or termination of this Agreement, return promptly to the other party
all confidential documents it received from the other party in connection with
this Agreement and the transactions contemplated hereby. Each party may make
available such information to its respective affiliates, counsel, accountants,
tax advisers, and consultants, provided such persons agree to be bound by this
Section 7.2. This section shall not prohibit the use or disclosure of
information that is required by law to be disclosed, information which is
available to the recipient on a nonconfidential basis, or information which
becomes public without the fault of the recipient.
7.3 Rights of Access. Between the date of this Agreement and the
Closing Date, Seller shall afford to Purchaser and its officers and authorized
agents and representatives reasonable access to the properties, books, records,
contracts, documents, files, and other information relating to the Purchased
Assets.
7
<PAGE> 8
7.4 Certain Transactions. Without the prior written consent of
Purchaser, Seller shall not, on or after the date of this Agreement:
(a) Subject any of the Purchased Assets to any lien, claim, or
encumbrance, except incurred in the ordinary course of its business consistent
with past practice;
(b) Except as permitted in this Agreement, take any action outside
of the normal course of business which Seller knows will have a material adverse
effect on the transactions contemplated hereunder or which Seller knows will
impair Purchaser's rights in any Purchased Assets, or Purchaser's ability to
collect upon any Purchased Asset; or
(c) Agree to do any of the foregoing.
7.5 Preservation of Business. Pending the Closing Date, Seller shall:
(a) Use, manage, repair, and maintain the Purchased Assets with the
same care and diligence as Seller applies to its other assets;
(b) Not do anything or fail to do anything which will cause a
breach of or a default in any Contract except for the transactions hereby
contemplated.
7.6 Continuing Accuracy of Representations and Warranties. Pending the
Closing Date, neither Purchaser nor Seller will take any action or omit to take
any action which would cause or constitute a material breach of any of their
respective representations and warranties contained in this Agreement or which
would cause any such representations or warranties, if made on or as of the date
of such event or the Closing Date, to be untrue or inaccurate in any material
respect. In the event of and promptly upon becoming aware of the occurrence of
any event which would constitute or cause such a material breach or inaccuracy
or a material breach of any covenant hereunder, the party in breach will give
detailed written notice thereof to the other party and will use its best efforts
to prevent or promptly remedy such breach or inaccuracy.
ARTICLE VIII
CONVERSION PROCEDURES
8.1 Generally. Seller and Purchaser shall, before and after the Closing
Date, cooperate in good faith to ensure the orderly and efficient transfer and
conversion of the Purchased Assets.
8.2 File Packages. Seller will provide Purchaser with copies of the
paper record of the Purchased Loans as it exists and all original loan files and
loan documents. The paper record, loan files and loan documents shall be
provided within thirty (30) days of the execution of this Agreement. On the
Closing Date, Seller agrees to provide a second set of these files as the final
record of Purchased Loans. On the Closing Date, Seller will show all Purchased
Loans as closed and perform no further processing on the Purchased Loans from
inception to the Closing Date.
8.3 Histories: Checks. Within 10 Business Days after the Closing Date,
Seller shall provide Purchaser with a copy of all account histories, both in
paper and magnetic tape form. Seller
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shall perform and provide all research, including microfilm copies of activity
prior to the Closing Date, to Purchaser at cost. For the purpose of this
Agreement, the term "Account histories" means a copy of the last statement
Seller cuts on the Closing Date as stated in Section 8.2 and a complete history
of Purchased Loans.
8.4 Notification of Customers. Prior to the Closing Date, (i) Seller
and Purchaser, after obtaining Regulatory Approvals, will jointly notify the
Purchased Loan customers (and shall equally share the cost of any joint notices)
that, subject to closing of the transactions contemplated by this Agreement,
Purchaser will be purchasing the Purchased Assets, (ii) Seller and Purchaser
shall each provide, or join in providing where appropriate, all notices that
Seller or Purchaser, as the case may be, is required to give by any regulatory
authority having jurisdiction or under applicable law or the terms of any other
agreement between Seller and any customer in connection with the transactions
contemplated hereby or as otherwise may be prudent or reasonably necessary in
connection with the transactions contemplated hereby, and (iii) following or
concurrently with the notice referred to in clause (i) above, Purchaser may
communicate with and deliver information, brochures, bulletins, and other
communications to customers concerning the transactions contemplated by this
Agreement and concerning the business and operations of Purchaser. A party
proposing to send any notice or communication pursuant to any paragraph of this
Section 8.5 shall furnish to the other party a copy of the proposed form of such
notice or communication at least 10 Business Days in advance of the proposed
date of the first mailing, posting, or other dissemination thereof to customers
and shall not unreasonably refuse to amend such notice to incorporate any
changes that the other such party proposes for any business purpose or as
necessary to comply with applicable statutes, rules, regulations, or
requirements of any regulatory authority having jurisdiction. All costs and
expenses of any notice or communication sent by Purchaser or Seller shall be the
responsibility of the party sending such notice or communication and all costs
and expenses of any joint notice or communication shall be shared equally by
Seller and Purchaser.
8.5 Customer Names and Addresses. Prior to any notification in Section
8.4, and upon Purchaser's request, Seller shall provide Purchaser with mailing
labels, containing the name and complete mailing address for each of the
Purchased Loans as of a recent date.
8.6 Purchased Loans Interest Reporting. Seller will timely report to
applicable taxing authorities, Purchaser and to Purchased Loan customers, with
respect to the period from January 1 of the year of the Closing Date, through
the Closing Date, all interest paid on the Purchased Loans.
8.7 Purchased Loans. As soon as practicable, but not later than 10 days
from the date of this Agreement, Seller shall provide to Purchaser a written
schedule of Purchased Loans to be transferred to Purchaser pursuant to the terms
of this Agreement. Notwithstanding anything in this Agreement to the contrary,
from and after the date on which Purchaser receives such schedule until ten (10)
days prior to the Closing Date, Purchaser shall have the right to exclude from
the transaction any loan and such excluded loan shall not be transferred to
Purchaser pursuant to the terms of this Agreement on the Closing Date.
Purchaser's right to exclude such loans shall be exercisable by Purchaser giving
written notice to Seller at any time until ten (10) days before the Closing
Date. In the event that an Excluded Loan should inadvertently be transferred to
Purchaser on the Closing Date, Seller shall repurchase such loan at book value.
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8.8 Further Documents. After the Closing Date, Seller and Purchaser
shall each permit the other reasonable access to and the right to inspect and
copy, the books and records of such party with respect to the transactions
contemplated hereby as may be reasonably necessary or appropriate to enable the
other party to prepare any additional documents, instrument, reports, or tax
returns as it or its counsel determines to be necessary or appropriate under the
circumstances.
8.9 Cooperation on Certain Tax Matters. After the Closing Date, Seller
and Purchaser shall each (i) assist (and cause their respective affiliates to
assist) the other party in preparing any tax returns that party is responsible
for preparing and filing in accordance with this Agreement, (ii) cooperate fully
in preparing any audits of or disputes with taxing authorities regarding any tax
returns with respect to the Purchased Assets or income therefrom, (iii) make
available to the other and to any taxing authority as reasonably requested all
relevant information, records, and documents relating to taxes with respect to
the Purchased Assets or income therefrom, (iv) provide timely written notice to
the other of any pending or proposed tax audits or assessments with respect to
the Purchased Assets or income therefrom, for taxable periods for which the
other may have liability under this Agreement, and (v) furnish the other with
copies of all relevant correspondence received from any taxing authority in
connection with any tax audit or information request with respect to any taxable
period referred to in clause (iv) above. The party requesting assistance or
cooperation shall pay the other party's out-of-pocket expenses in complying with
such request to the extent that such expenses are attributable to fees and other
costs of unaffiliated third party service providers.
ARTICLE IX
TERMINATION
9.1 Automatic Termination. This Agreement shall terminate, without
action by the parties or either of them on March 31, 2000, at 11:59 p.m.
9.2 Grounds for Termination. This Agreement may be terminated by
written notice of termination at any time before the Closing Date only as
follows:
(a) By mutual consent of Purchaser and Seller;
(b) By Purchaser, upon written notice to Seller given at any time
if any of the representations and warranties of Seller contained in this
Agreement were untrue or incorrect in any material respect when made or become
untrue or incorrect in any material respect on or prior to the Closing Date in a
manner that cannot reasonably be expected to be corrected or cured prior to the
Closing Date or if Seller, within 10 Business Days after notice thereof from
Purchaser, fails to comply in any material respect with any of its covenants
contained in this Agreement;
(c) By Seller, upon written notice to Purchaser at any time if any
of the representations and warranties of Purchaser contained in this Agreement
were incorrect in any material respect when made or become incorrect in any
material respect on or prior to the Closing Date in a manner that cannot
reasonably be expected to be corrected or cured prior to the Closing Date or if
Purchaser, within 10 Business Days notice thereof from Seller, fails to comply
in any material respect with any of its covenants contained in this Agreement;
or
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(d) By Purchaser or Seller, upon written notice to the other at any
time if (i) Regulatory Approvals are not obtained prior to March 31, 2000, or
(ii) the transactions contemplated by this Agreement are disapproved by any
regulatory authority whose approval is necessary.
9.3 Effect of Termination. In the event of the termination and
abandonment hereof pursuant to the provisions of Section 9.1 or Section 9.2,
this Agreement shall become void and have no force or effect, except that
provisions of Sections 7.2 and 10.1 and this Section 9.3 shall survive
termination. Such termination shall not relieve any party of liability for any
default or breach prior to such termination, but absent any such default or
breach by it, no party nor any of its officers, directors, or shareholders shall
have any liability to the other party for costs, expenses (including, without
limitation, legal and accounting fees and expenses), loss of anticipated
profits, or otherwise.
ARTICLE X
MISCELLANEOUS
10.1 Costs and Expenses. Each party hereto shall pay its own expenses,
including, without limitation, the expenses of its own counsel, accountants, and
tax and financial advisers incurred in connection with this Agreement and the
transactions contemplated hereby. Purchaser and Seller shall each pay one-half
of the application fees for Regulatory Approvals.
10.2 Mutual Cooperation. Subject to the terms and conditions herein
provided, each party shall cooperate with the other in carrying out the
provisions of this Agreement and in making all filings and obtaining all
necessary Regulatory Approvals and shall execute and deliver, or cause to be
executed and delivered, such regulatory notifications and additional documents
and instruments and do or cause to be done all additional things necessary,
proper, or advisable under applicable law to consummate and make effective the
transactions contemplated hereby.
10.3 Entire Agreement. With respect to the subject matter hereof, this
Agreement, the schedules and exhibits hereto (which are incorporated herein),
and the documents delivered pursuant hereto constitute the entire Agreement and
understanding between the parties hereto and supersede any prior agreement or
understanding with respect to such subject matter.
10.4 Notices. Any notice required or permitted under this Agreement
shall be given in writing (except as otherwise provided in this Agreement) and
shall be deemed effectively given upon personal delivery, facsimile
transmission, or similar method of communication, or on the second business day
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid, addressed as follows:
If to Purchaser, to:
Humboldt Bank
Post Office Box 1007
Eureka, California 95502
Attention: R. V. Barkley
Telephone: (707) 269-3100
Facsimile: (707) 445-0950
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with a copy to:
Gary Steven Findley, Esq.
1470 North Hundley Street
Anaheim, California 92806
Telephone: (714) 630-7136
Facsimile: (714) 630-7910
If to Seller, to:
Capitol Thrift & Loan Association
1424 Second Street
Napa, California 94559
Facsimile: (707) 252-4950
Attention: Robert F. Kelly, President/CEO
with a copy to:
Allen, Matkins, Leck, Gamble & Mallory
333 Bush Street, 17th Floor
San Francisco, California 94104
Facsimile: (415) 837-1516
Attention: Roger S. Mertz, Esq.
or at such other address as a party may designate by notice given in the manner
provided herein.
10.5 Governing Law: Venue. The validity, interpretation, and
enforcement of this Agreement shall be governed by the laws of the state of
California (without regard to principles of conflicts of law thereof), except to
the extent preempted by federal law. Legal action or proceedings with respect to
this Agreement and the transactions contemplated hereunder shall be brought in
the courts of the state of California or, if applicable, the courts of the
United States of America, located in San Francisco County, California.
10.6 Modification and Waiver. No change or modification of this
Agreement shall be valid or binding upon the parties hereto, nor shall any
waiver of any term or condition thereof be deemed a waiver of such term or
condition in the future, unless such change or modification or waiver shall be
in writing signed by both parties.
10.7 Severability. If any provision of this Agreement or the
application of any such provision shall be held invalid, illegal, or
unenforceable, the remainder of this Agreement shall not be affected thereby.
10.8 Assignment: Binding Effect. Neither this Agreement nor any right
or obligation hereunder may be assigned by any party without the prior written
consent of the other party. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns.
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10.9 Form of Public Disclosures. No party shall make any public
disclosures concerning this Agreement or the transactions contemplated hereby
unless all the parties have approved in advance the form and substance thereof,
except as required by applicable law. No party shall unreasonably withhold such
approval.
10.10 Captions: Counterparts. The article and section headings and the
table of contents in this Agreement are for convenience of reference only and
shall not affect the meaning or construction of this Agreement. This Agreement
may be executed in one or more counterparts, each of which shall be deemed to
constitute an original and shall become effective when one or more counterparts
have been signed by each party hereto and delivered to the parties.
10.11 Manner of Payment. All payments due under this Agreement shall be
in lawful money of the United States of America.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
acknowledged by their duly authorized representatives as of the date first set
forth above.
HUMBOLDT BANK
By______________________________________
CAPITOL THRIFT & LOAN ASSOCIATION
By______________________________________
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EXHIBIT A
BILL OF SALE
This Bill of Sale ("Bill of Sale") is made as of _____________________
from Capitol Thrift & Loan Association, a California industrial loan corporation
("Seller") to Humboldt Bank, a California state-chartered bank ("Purchaser").
WHEREAS, pursuant to the Loan Purchase Agreement, dates as of
_________________ (the "Agreement"), by and between Seller and Purchaser,
Purchaser has agreed to purchase from Seller all of its right, title and
interest in and to certain assets;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged by Seller, Seller does hereby sell, convey, assign, transfer and
deliver to Purchaser, and its successors and assigns, all of Seller's right,
title and interest in and to the Purchased Assets (such capitalized term and,
except as otherwise defined herein, all other capitalized terms used herein
shall have the meaning ascribed to such terms in the Agreement) as of the date
hereof.
Seller covenants and agrees with Purchaser that Seller will execute,
acknowledge and deliver such other and further instruments and will take such
other action as may be necessary or desirable to carry out more effectively the
transfer of assets provided for herein.
Nothing in this instrument, express or implied, is intended or shall be
construed to confer upon, or give to, any person other than Purchaser and its
successors and assigns, and remedy or claim under or by reason of this
instrument or any agreements, covenants or terms hereof, and all the agreements,
covenants and terms contained in this instrument shall be for the sole and
exclusive benefit of Purchaser and its successors and permitted assigns.
This Bill of Sale shall inure to the benefit of Purchaser and its
successors and permitted assigns and be binding upon and enforceable against
Seller and its successors and permitted assigns.
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IN WITNESS WHEREOF, this Bill of Sale has been duly executed and
delivered by the duly authorized officer of Seller as of the date first written
above.
CAPITOL THRIFT & LOAN ASSOCIATION
By: ____________________________________
Name:
Title:
AGREED AND ACCEPTED.
HUMBOLDT BANK
By: ____________________________________
Name:
Title:
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-4 of
Humboldt Bancorp of our report dated January 15, 1999, except for Note Y, as to
which the date is November 11, 1999, relating to the financial statements of
Humboldt Bancorp and subsidiary, which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
RICHARDSON & COMPANY
Sacramento, California
February 4, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have issued our report dated February 12, 1999, accompanying the consolidated
statements of Global Bancorp and Subsidiary contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
GRANT THORNTON LLP
San Francisco, California
February 4, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Pre-Effective
Amendment No. 1 to Form S-4 of Humboldt Bancorp of our report dated March 6,
1998, relating to the financial statements of Global Bancorp and Subsidiary,
which appear in such Registration Statement. We also consent to the reference to
us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Francisco, CA
February 3, 2000
<PAGE> 1
Exhibit 23.5
FIRST CAPITAL GROUP, L.L.C.
INVESTMENT BANKERS & FINANCIAL ADVISORS
CONSENT OF FIRST CAPITAL GROUP, LLC
We hereby consent to the use of our firm's name in the Pre-Effective
Amendment to the Humboldt Bancorp Form S-4 Registration Statement (Registration
No. 333-90925, the "Registration Statement") relating to the proposed merger of
Global Bancorp with and into Humboldt Bancorp. We also consent to the inclusion
of our opinion letter as an Appendix to the Registration Statement and to the
references to our opinion included in the Registration Statement.
FIRST CAPITAL GROUP, L.L.C.
By: /s/ GARY A. SIMANSON
------------------------
Gary A. Simanson
Managing Director
