<PAGE> 1
As filed with the Commission on January 16, 2001 File No. 333-49866
================================================================================
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>
2440 Sixth Street
Eureka, California 95501
707/445-3233
(Address and telephone number of principal executive offices)
Theodore S. Mason
President
2440 Sixth 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. John W. Carr, Esq.
Regina Schroder, Esq. Gary Steven Findley & Associates Shapiro Buchman Provine & Patton LLP
Bartel Eng & Schroder 1470 North Hundley Street 1333 North California Boulevard,
300 Capitol Mall, Suite 1100 Anaheim, California 92806 Suite 350
Sacramento, California 95814 Telephone: 714/630-7136 Walnut Creek, California 94596
Telephone: 916/442-0400 Telephone: 925/944-9700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered per share offering price registration fee
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 3,365,649 $10.562(1) $35,549,667 $9,385
---------------------------------------------------------------------------------------------------------------
TOTAL FEE $9,385(2)
===============================================================================================================
</TABLE>
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act.
Estimated for the sole purpose of calculating the registration fee and
based upon the closing price of the registrant's common stock of
$10.5625 as listed on the Nasdaq National Market on November 7, 2000.
(2) Fee 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> 3
JOINT PROXY STATEMENT OF
HUMBOLDT BANCORP AND TEHAMA BANCORP
AND PROSPECTUS OF HUMBOLDT BANCORP
We, Humboldt Bancorp, are proposing to merge Tehama Bancorp.
- To Humboldt Bancorp Shareholders: The board of directors of
Humboldt Bancorp is asking you to vote on the merger between
Humboldt Bancorp and Tehama Bancorp. We will issue shares of our
common stock only to shareholders of Tehama Bancorp in the
merger. We expect that we will issue approximately 3,365,649
shares of our common stock in the merger. More information on
this matter is included in this document.
- TO TEHAMA BANCORP SHAREHOLDERS: The board of directors of Tehama
Bancorp is asking you to vote on the merger between Humboldt
Bancorp and Tehama Bancorp. IF THE MERGER IS COMPLETED, TEHAMA
BANCORP SHAREHOLDERS WHO DO NOT EXERCISE THEIR DISSENTERS' RIGHTS
WILL RECEIVE 1.775 SHARES OF HUMBOLDT BANCORP COMMON STOCK FOR
EACH SHARE OF TEHAMA BANCORP COMMON STOCK. Based on a closing
price of $11.25 For a share of Humboldt Bancorp on September 20,
2000, and a conversion rate of 1.775, A holder of one share of
Tehama Bancorp common stock would have received $19.97 Of
Humboldt Bancorp common stock. As of January ___, 2001, the
closing price of a share of Humboldt Bancorp common stock was
$____ resulting in an exchange value of $____ for a share of
Tehama Bancorp common stock. The proposed merger will be,
generally, tax free to Tehama Bancorp shareholders. While there
is no floor on the exchange value, if the average trading price
for a share of Humboldt Bancorp common stock is less than $9.75,
resulting in an exchange value of less than $17.31 Per share of
Tehama Bancorp common stock, and Humboldt Bancorp and Tehama
Bancorp do not renegotiate the conversion rate, either Humboldt
Bancorp or Tehama Bancorp may terminate the merger agreement.
Humboldt Bancorp common stock is traded on the Nasdaq National
Market under the symbol HBEK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved Humboldt Bancorp common stock, or
determined if this document is truthful or complete. Any representation to the
contrary is a criminal offense.
Shares of Humboldt Bancorp common stock are not savings or deposit
accounts or other obligations of any bank or nonbank subsidiary of any of the
parties, and they are not insured by the Federal Deposit Insurance Corporation,
or any other governmental agency.
An investment in Humboldt Bancorp common stock has risks. For a
discussion of factors important to the decision to approve the merger, see "Risk
Factors" on page 13.
The date of this proxy statement/prospectus is January ___, 2001, and is
first being mailed to shareholders on or about February __, 2001.
<PAGE> 4
HUMBOLDT BANCORP
2440 SIXTH STREET
EUREKA, CALIFORNIA 95501
(707) 445-3233
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH __, 2001
TO THE SHAREHOLDERS OF HUMBOLDT BANCORP:
A special meeting of shareholders of Humboldt Bancorp will be held at ___ p.m.
on March ___, 2001, at Humboldt Bancorp's office, 2440 Sixth Street, Eureka,
California 95501, for the purpose of considering and voting upon the following
matters:
1. Approval of the Agreement with Tehama Bancorp. To consider and vote upon
the approval and adoption of the principal terms of the Plan of
Reorganization and Merger Agreement dated as of September 20, 2000,
between Humboldt Bancorp and Tehama Bancorp, and the transactions
contemplated by the agreement, including the merger of Tehama Bancorp
with Humboldt Bancorp and the conversion of each outstanding share of
Tehama Bancorp common stock into 1.775 shares of Humboldt Bancorp common
stock, as further described in the accompanying document and in the
agreement, which is included as Appendix A to the document.
2. Other Business. To consider and transact such procedural business as may
properly be brought before the Humboldt Bancorp meeting and any
adjournment or postponement thereof.
The board of directors has fixed the close of business on February __, 2001, as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Humboldt Bancorp meeting.
APPROVAL OF PROPOSAL 1 REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OWNING A
MAJORITY OF THE OUTSTANDING SHARES OF HUMBOLDT BANCORP COMMON STOCK. IT IS VERY
IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE HUMBOLDT BANCORP MEETING IN PERSON. THE ENCLOSED PROXY IS SOLICITED
BY HUMBOLDT BANCORP'S BOARD OF DIRECTORS. YOU MAY REVOKE YOUR PROXY PRIOR TO THE
TIME IT IS VOTED BY FILING WITH THE SECRETARY OF HUMBOLDT BANCORP AN INSTRUMENT
REVOKING IT OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ATTENDING THE
HUMBOLDT BANCORP MEETING AND VOTING IN PERSON. PLEASE INDICATE ON THE PROXY
WHETHER YOU INTEND TO ATTEND THE HUMBOLDT BANCORP MEETING IN PERSON SO THAT WE
CAN MAKE ADEQUATE ACCOMMODATIONS.
By Order of the Board of Directors,
Date: February __, 2001 Alan J. Smyth, Secretary
<PAGE> 5
TEHAMA BANCORP
239 SOUTH MAIN STREET
RED BLUFF, CALIFORNIA 96080
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH __, 2001
TO THE SHAREHOLDERS OF TEHAMA BANCORP
The special meeting of shareholders of Tehama Bancorp will be held at ______ on
March __, 2001, at the Red Bluff Senior & Community Center, 1500 S. Jackson
Street, Red Bluff, California 96080, for the purpose of considering and voting
upon the following matters:
1. Approval of the Agreement with Humboldt Bancorp. To consider and vote
upon the approval and adoption of the principal terms of the Plan of
Reorganization and Merger Agreement dated as of September 20, 2000,
between Humboldt Bancorp and Tehama Bancorp, and the transactions
contemplated by the agreement, including the merger of Tehama Bancorp
with Humboldt Bancorp and the conversion of each outstanding share of
Tehama Bancorp common stock into 1.775 shares of Humboldt Bancorp common
stock, as further described in the accompanying document and in the
agreement, which is included as Appendix A to the document.
2. Other Business. To consider and transact such procedural business as may
properly be brought before the Tehama Bancorp meeting and any
adjournment or postponement thereof.
The board of directors has fixed the close of business on February __, 2001, as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Tehama Bancorp meeting.
APPROVAL OF THE PROPOSALS REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OWNING A
MAJORITY OF THE OUTSTANDING SHARES OF TEHAMA BANCORP COMMON STOCK. IT IS VERY
IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE TEHAMA BANCORP MEETING IN PERSON. THE ENCLOSED PROXY IS SOLICITED BY
TEHAMA BANCORP'S BOARD OF DIRECTORS. YOU MAY REVOKE YOUR PROXY PRIOR TO THE TIME
IT IS VOTED BY FILING WITH THE SECRETARY OF TEHAMA BANCORP AN INSTRUMENT
REVOKING IT OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ATTENDING THE
TEHAMA BANCORP MEETING AND VOTING IN PERSON. PLEASE INDICATE ON THE PROXY
WHETHER YOU INTEND TO ATTEND THE TEHAMA BANCORP MEETING IN PERSON SO THAT WE CAN
MAKE ADEQUATE ACCOMMODATIONS.
By Order of the Board of Directors,
Dated: February __, 2001 Raymond C. Lieberenz, Secretary
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................................... 8
SUMMARY..................................................................... 9
RISK FACTORS................................................................ 13
INTRODUCTION................................................................ 15
DESCRIPTION OF THE MERGER................................................... 18
OPINION OF TEHAMA BANCORP FINANCIAL ADVISOR................................. 27
OPINION OF HUMBOLDT BANCORP FINANCIAL ADVISOR............................... 34
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS............................. 42
RIGHTS OF DISSENTING TEHAMA BANCORP AND HUMBOLDT BANCORP SHAREHOLDERS....... 44
MARKET PRICES............................................................... 46
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP COMMON STOCK............................................... 48
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER........................ 50
HUMBOLDT BANCORP SELECTED FINANCIAL DATA.................................... 50
TEHAMA BANCORP SELECTED FINANCIAL DATA...................................... 53
HUMBOLDT BANCORP PROFORMA SELECTED FINANCIAL................................ 55
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF HUMBOLDT BANCORP AND TEHAMA BANCORP...................................... 56
REGULATORY CAPITAL AND LEVERAGE RATIO....................................... 66
HUMBOLDT BANCORP QUARTERLY FINANCIAL DATA................................... 66
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................... 68
BUSINESS OF HUMBOLDT BANCORP ............................................... 95
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP.............................. 107
MANAGEMENT OF HUMBOLDT BANCORP.............................................. 114
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION...................................................... 116
SECURITIES OWNERSHIP........................................................ 121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 122
TEHAMA BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................... 123
BUSINESS OF TEHAMA BANCORP.................................................. 142
SUPERVISION AND REGULATION OF TEHAMA BANCORP................................ 146
MANAGEMENT OF TEHAMA BANCORP................................................ 147
TEHAMA BANCORP EXECUTIVE COMPENSATION....................................... 149
SECURITIES OWNERSHIP........................................................ 152
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 154
EXPERTS..................................................................... 154
LEGAL MATTERS............................................................... 154
WHERE YOU CAN FIND MORE INFORMATION......................................... 154
FINANCIAL STATEMENTS........................................................ F-1
PLAN OF REORGANIZATION AND
MERGER AGREEMENT BETWEEN HUMBOLDT BANCORP
AND TEHAMA BANCORP................................................... APPENDIX A
DAIN RAUSCHER WESSELS FAIRNESS OPINION............................... APPENDIX B
D. A. DAVIDSON FAIRNESS OPINION...................................... APPENDIX C
DISSENTERS' RIGHTS................................................... APPENDIX D
</TABLE>
7
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why have you sent me this document?
A: This document is sent to provide you important information about the
proposed merger of Tehama Bancorp with and into Humboldt Bancorp and to
solicit your vote regarding the merger.
Q: What will a Tehama Bancorp shareholder receive in exchange for Tehama
Bancorp shares?
A: Tehama Bancorp shareholders will receive 1.775 shares of Humboldt Bancorp
common stock in exchange for each share of Tehama Bancorp common stock that
they hold. Based on a closing price of $____ for a share of Humboldt
Bancorp common stock on January __, 2001, the exchange value for a share of
Tehama Bancorp common stock would be $____. On September 20, 2000, the date
that the merger agreement was signed, the closing price for a share of
common stock of Humboldt Bancorp and Tehama Bancorp was $11.25. While there
is no floor on the exchange value, if the average trading price for a share
of Humboldt Bancorp common stock is less than $9.75 on the closing date
resulting in an exchange value of less than $17.31 for each share of Tehama
Bancorp common stock , and Humboldt Bancorp and Tehama Bancorp do not
renegotiate the conversion rate, either Humboldt Bancorp or Tehama Bancorp
may terminate the merger agreement.
Tehama Bancorp shareholders will also receive cash for fractional shares of
Humboldt Bancorp common stock to be issued in the merger based upon the
average trading price of a share of Humboldt Bancorp common stock, on the
closing date. For example, if you own 100 shares of Tehama Bancorp common
stock, then after the merger you will receive 177 shares of Humboldt
Bancorp common stock and a check for 0.50 x $[price on recent date], or
$_____, assuming that the average trading price of a share of Humboldt
Bancorp was $___ per share as of the closing date.
Assuming completion of the merger, shareholders of Tehama Bancorp will own
approximately 37.5% of Humboldt Bancorp.
Q: Will the receipt of Humboldt Bancorp shares for Tehama Bancorp shares be
taxable?
A: Bartel Eng & Schroder, a Law Corporation, has issued an opinion that states
the Tehama Bancorp shareholders will not recognize gain or loss for federal
income tax purposes unless they receive cash for fractional shares or
dissenting shares.
Q: What will I receive if I do not vote for the merger?
A: If you do not vote in favor of the merger or you abstain from voting, you
will be paid cash if you follow certain procedures called dissenters'
rights. If you are a dissenting Tehama Bancorp shareholder, Tehama Bancorp
will mail you a notice that will set forth the fair market value price of
your dissenting Tehama Bancorp shares. If you are a dissenting Humboldt
Bancorp shareholder, and holders of more than 5% of the outstanding common
stock of Humboldt Bancorp deliver written demands for payment in accordance
with their dissenters' rights, Humboldt Bancorp will mail you a notice that
will set forth the fair market value of your dissenting Humboldt Bancorp
shares. The notice will also briefly describe the procedures to be followed
by dissenting shareholders to pursue their dissenters' rights. The notice
constitutes an offer by Tehama Bancorp, or Humboldt Bancorp, as the case
may be, to purchase any dissenting shares from the dissenting shareholders
at the price stated. You will recognize gain or loss on the receipt of cash
for your dissenting shares.
8
<PAGE> 9
Q: What is Humboldt Bancorp's dividend policy?
A: Humboldt Bancorp has never paid any cash dividends and does not have any
present intention to do so in the near future. However, Humboldt Bancorp
has paid stock dividends in the past and does anticipate continuing to do
so in the future. If the merger is completed, Tehama Bancorp shareholders
will become shareholders of Humboldt Bancorp and will be subject to its
dividend policy.
Q: How will my shares of Humboldt Bancorp common stock be traded after the
merger?
A: Humboldt Bancorp shares of common stock are listed on the Nasdaq National
Market under the symbol "HBEK."
Q: What are some recent prices for Humboldt Bancorp common stock?
A: For the quarter ended December 31, 2000, $11.13 was the high price and
$9.25 was the low price for a share of Humboldt Bancorp common stock.
Q: What do I need to do now?
A: You need to read this document and then sign your proxy card and mail it to
Tehama Bancorp or Humboldt Bancorp, as the case may be, in the enclosed
return envelope as soon as possible.
Q: Should I send in my Tehama Bancorp stock certificates now?
A: No. When the merger is completed, you will receive written instructions for
exchanging your shares of Tehama Bancorp common stock.
Q: When is the merger expected to be completed?
A: The merger is expected to be completed by March 31, 2001.
Q: Whom should I call with questions?
A: If you have any questions about the merger or other matters to be
considered at the meeting, please call William P. Ellison, President of
Tehama Bancorp, at (530) 528-3000, or, if you are a Humboldt Bancorp
shareholder, Theodore S. Mason, President of Humboldt Bancorp, at (707)
445-3233.
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that is important. To understand the merger
fully and for a more complete description of the legal terms of the merger, you
should read this entire document and the documents to which we refer you.
THE COMPANIES (PAGES 95 AND 142)
HUMBOLDT BANCORP
2440 Sixth Street
Eureka, California 95501
(707) 445-3233
Humboldt Bancorp is a California bank holding company that owns two
banks, an industrial loan company, and part of a leasing company. One of our
banks is Humboldt Bank, a California community bank headquartered in
9
<PAGE> 10
Eureka, California, with nine branch offices located in Humboldt, Trinity and
Mendocino, California counties. Our other bank is Capitol Valley Bank, a
California community bank with one main branch in Roseville, California, which
opened for business on March 3, 1999. We own Capitol Thrift & Loan Association,
which we acquired on April 7, 2000, and which has nine branches located
throughout California. We also own 50% of Bancorp Financial Services, Inc.,
located in Sacramento, California. The other 50% of Bancorp Financial Services
is owned by Tehama Bancorp. Bancorp Financial Services makes consumer automobile
loans and commercial equipment leases of generally less than $100,000 to small
businesses.
For the nine months ended September 30, 2000, Humboldt Bancorp had net
income of $5.0 million, and at September 30, 2000, had total assets of $592.2
million, net loans of $383.0 million, and deposits of $516.9 million. For the
year ended December 31, 1999, our net income was $4.6 million, our assets were
$423.6 million, our net loans were $225.1 million, and our deposits were $378.6
million.
TEHAMA BANCORP
239 South Main Street
Red Bluff, California 96080
(530) 528-3000
Tehama Bancorp is a California bank holding company that owns one bank.
Tehama Bank is headquartered in Red Bluff, California, and has six branch
offices in Tehama, Butte, Glenn and Shasta, California counties. As discussed
above, Tehama Bancorp also owns a 50% interest in Bancorp Financial Services.
For the nine months ended September 30, 2000, Tehama Bancorp had net
income of $2.3 million, and at September 30, 2000, had total assets of $243.1
million, net loans of $166.9 million, and deposits of $209.8 million. For the
year ended December 31, 1999, Tehama Bancorp's net income was $2.2 million,
total assets were $211.8 million, net loans were $143.0 million and deposits
were $188.5 million.
FINANCIAL ADVISORS ISSUE OPINIONS THAT THE MERGER CONSIDERATION IS FAIR (PAGES
27 AND 34 AND APPENDICES B AND C)
Dain Rauscher Wessels has issued a fairness opinion that states that the
conversion rate of 1.775 Humboldt Bancorp shares into which each Tehama Bancorp
share will be converted is fair, from a financial standpoint, to the
shareholders of Tehama Bancorp. This opinion has been updated as of the date of
this document. In addition to reimbursement of expenses, Tehama Bancorp has
agreed to pay Dain Rauscher $75,000 on the date the merger was publicly
announced and a cash fee equal to 1.5% of the market value of the aggregate
consideration paid in the exchange by Humboldt Bancorp upon consummation of the
merger. Based upon a closing price of Humboldt Bancorp common stock on January
__, 2001, Dain Rauscher will be paid a fee of approximately _______.
D.A. Davidson has issued a fairness opinion that states that the terms
of the merger are fair, from a financial standpoint, to the shareholders of
Humboldt Bancorp. This opinion has been updated as of the date of this document.
In addition to the reimbursement of expenses, Humboldt Bancorp has agreed to pay
D.A. Davidson $35,000 upon its engagement and an additional $50,000 upon the
issuance of its fairness opinion.
We encourage you to read these opinions carefully.
10
<PAGE> 11
THE MERGER, PROPOSED PLAN OF OPERATIONS, AND WHERE YOU CAN READ ABOUT THE MERGER
AGREEMENT (PAGE 18 AND APPENDIX A)
The merger will combine the business of Tehama Bancorp with Humboldt
Bancorp. Assuming the consummation of the merger, Humboldt Bancorp will operate
as a multi-bank holding company and will continue to operate the businesses of
Humboldt Bank, Capitol Valley Bank, Capitol Thrift, and Tehama Bank in
substantially the same form as such businesses were conducted prior to the
merger. Humboldt Bancorp anticipates operating Tehama Bank as a subsidiary of
Humboldt Bancorp and to maintain Tehama Bank's current locations, president and
board members subject to the addition of two new directors selected by Humboldt
Bancorp.
You will find a complete copy of the Agreement and Plan of
Reorganization and Merger attached at the back of this document as Appendix A.
We encourage you to read the merger agreement carefully. It is the legal
document that governs the merger.
THE MEETINGS (PAGE 15)
Tehama Bancorp's shareholders' meeting will be held at the Red Bluff
Senior & Community Center, 1500 South Jackson, Red Bluff, California, at ____
a.m. (local time), on March __, 2001.
Humboldt Bancorp's shareholders' meeting will be held at its executive
offices located at 2440 Sixth Street, Eureka, California at _____ a.m. (local
time), on March ___, 2001.
RECORD DATE, VOTING POWER AND VOTE REQUIRED (PAGE 16)
On February __, 2001, the record date for the Tehama Bancorp meeting,
there were _____ shares of Tehama Bancorp common stock outstanding. Approval of
the merger requires the affirmative vote of the holders owning a majority of the
outstanding shares of Tehama Bancorp common stock.
On February __, 2001, the record date for the Humboldt Bancorp meeting,
there were ___ shares of Humboldt Bancorp common stock outstanding. Approval of
the merger requires the affirmative vote of the holders owning a majority of
outstanding shares of Humboldt Bancorp common stock.
RECOMMENDATIONS TO TEHAMA BANCORP AND HUMBOLDT BANCORP SHAREHOLDERS (PAGE 17)
TEHAMA BANCORP'S AND HUMBOLDT BANCORP'S BOARDS OF DIRECTORS UNANIMOUSLY
RECOMMEND A VOTE "FOR" APPROVAL OF THE MERGER.
DIRECTORS AND THEIR AFFILIATES OF TEHAMA BANCORP WHO OWN IN THE
AGGREGATE 20.1% OF THE OUTSTANDING SHARES OF TEHAMA BANCORP, AND DIRECTORS AND
THEIR AFFILIATES OF HUMBOLDT BANCORP WHO OWN IN THE AGGREGATE 9.2% OF THE
OUTSTANDING SHARES OF HUMBOLDT BANCORP, HAVE AGREED TO VOTE THEIR SHARES FOR THE
MERGER.
REQUIREMENTS TO BE MET IN THE MERGER (PAGE 25)
There are a number of requirements which must be met before the merger
is completed. Among these requirements are the following:
- Approval by Tehama Bancorp shareholders and Humboldt Bancorp
shareholders of the merger agreement and the merger;
- Approval of the merger by the Federal Reserve Bank and the
California Department of Financial Institutions; and
11
<PAGE> 12
- Receipt of updated fairness opinions by Tehama Bancorp and by
Humboldt Bancorp.
If the merger does not occur, Tehama Bancorp or Humboldt Bancorp may owe
termination fees to one another.
INTERESTS OF TEHAMA BANCORP EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER (PAGE
24)
Upon completion of the merger, it is anticipated that Mr. William P.
Ellison will continue as President of Tehama Bank as a subsidiary of Humboldt
Bancorp. Further, as part of the merger agreement, Messrs. Koeberer, Fish, Katz,
and Napier will become directors of Humboldt Bancorp. Tehama Bancorp directors
and executive officers hold approximately 20.1% of the outstanding shares of
Tehama Bancorp .
ACCOUNTING TREATMENT (PAGE 56)
Humboldt Bancorp and Tehama Bancorp will account for the merger as a
pooling of interests. Pooling of interests accounting treatment avoids the
creation of goodwill in the merger and allows Humboldt Bancorp to avoid charges
against future earnings from amortizing goodwill. This accounting method also
means that after the merger, Humboldt Bancorp will report financial results as
if Tehama Bancorp had always been combined with Humboldt Bancorp.
12
<PAGE> 13
RISK FACTORS
In addition to the other information we provide in this document, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could impair our business,
operating results or financial condition. In evaluating the risks of investing
in us, you should also evaluate the other information set forth in this
document, including our and Tehama Bancorp's financial statements.
WE ARE UNABLE TO PREDICT THE VALUE OF HUMBOLDT BANCORP COMMON STOCK TO BE
RECEIVED IN THE MERGER
If the merger is completed, Tehama Bancorp shareholders who do not
exercise their dissenters' rights will receive 1.775 shares of Humboldt Bancorp
common stock for each share of Tehama Bancorp common stock. Based on the closing
price of $11.25 on September 20, 2000, and conversion rate, the date the merger
agreement was signed, the exchange value of a share of Tehama Bancorp common
stock was $19.97. However, because the market price of Humboldt Bancorp common
stock will vary, Tehama Bancorp shareholders cannot be sure of the value of the
Humboldt Bancorp common stock to be received in the merger. The market price for
Humboldt Bancorp common stock is likely to vary between the date of this
document and the date of the merger. There is no floor on the exchange value.
If, however, the average trading price for a share of Humboldt Bancorp common
stock is less than $9.75 on the closing date resulting in an exchange value less
than $17.31, and Humboldt Bancorp and Tehama Bancorp do not renegotiate the
exchange ratio, either Humboldt Bancorp or Tehama Bancorp may terminate the
merger agreement.
DIFFICULTIES OF INTEGRATING TEHAMA BANK COULD HURT HUMBOLDT BANCORP'S FUTURE
PERFORMANCE
The earnings, financial condition and prospects of Humboldt Bancorp
after the merger depend in large part on Humboldt Bancorp's ability to
successfully integrate the operations and management of Tehama Bank with
Humboldt Bancorp. Although we believe that we have experience in managing growth
through branch acquisitions, since we have initiated or acquired three financial
institutions within two years, we cannot guarantee that Humboldt Bancorp will be
able to effectively and profitably integrate the operations and management of
Tehama Bank. In addition, we cannot guarantee that we will be able to realize
any revenue improvement or cost savings as a result of the merger.
HUMBOLDT BANCORP IS DEPENDENT ON NON-TRADITIONAL BANKING INCOME FOR GROWTH
Because of limited growth in the Humboldt-Eureka area, a substantial
portion of our revenue is derived from non-traditional banking, especially
merchant bankcard processing. Noninterest income comprised 53.5%, 53.6% and
44.2% of total revenues for the nine months ended September 30, 2000, and years
ended December 31, 1999 and December 31, 1998. We have focused our merchant
bankcard processing on first-time merchants and small- to medium-sized merchants
in the retail, telephone, mail order and Internet commerce industries. Because
these merchants do not have an established business record and are located
outside our geographic location, they are a greater business risk and they
require more effort to monitor in the event the merchant experiences a problem.
A reduction in revenues from merchant bankcard processing would have an adverse
effect on our income.
DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT OUR PROFITABILITY
Our operations are located in California, and, in particular, Northern
California. As a result of this geographic concentration, our financial results
depend largely upon economic conditions in these areas. Adverse local economic
conditions in California, and, in particular, Northern California, may have a
greater adverse effect on our financial condition and results of operations than
if we were a larger, more geographically diverse bank holding company.
13
<PAGE> 14
CAPITOL THRIFT AND LOAN IS UNDER AN AGREEMENT WITH THE FDIC AND CALIFORNIA
DEPARTMENT OF FINANCIAL INSTITUTIONS
Capitol Thrift and Loan is subject to an agreement with the FDIC and
California Department of Financial Institutions dated August 23, 1998. The
agreement requires that Capitol Thrift and Loan:
- develop a plan for the reduction of all classified assets;
- develop specific strategies for the reduction of other real
estate owned; and
- maintain its Tier 1 capital in excess of 8% of adjusted total
assets.
We believe that Capitol Thrift is in compliance with the
agreement with the FDIC and California Department of Financial Institution .
However, if Capitol Thrift is not found to be in compliance with the agreement,
the regulatory agencies could further restrict Capitol Thrift's activities and
investments thereby adversely affecting its earnings. At September 30, 2000,
Capitol Thrift and Loan's Tier 1 capital was 9.7%.
DILUTION FROM OUTSTANDING OPTIONS AND WARRANTS AND OUR STOCK OPTION PLAN
CONTAINS AN ANTIDILUTION PROVISION
As of December 31, 2000, Humboldt Bancorp had outstanding options and
warrants to purchase an aggregate of 1,006,074 common shares at a weighted
average exercise price of $6.23 per share, with a range of exercise prices of
$1.95 to $14.32 per share. Based on our current market price, holders of
approximately 421,929 outstanding options and warrants will be able to purchase
common stock at a price less than the current market price of a share of
Humboldt Bancorp common stock that will dilute the ownership of an existing
shareholder. Further, these outstanding options and warrants may have the effect
of limiting our market price and may adversely affect our ability to raise
additional capital at a higher market price.
Our stock option plan for directors, officers and employees contains a
provision which grants additional options to an option holder in the event we
issue additional shares. The additional options would have an exercise price
equal to the fair market value of the Humboldt Bancorp shares at the time of
grant of the additional options. The granting of options to current option
holders pursuant to this provision increases the number of potentially dilutive
options.
Our directors have waived their antidilution rights under the stock
options. Those directors had options representing approximately 42% of the
outstanding options under the stock option plans.
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;
14
<PAGE> 15
- 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.
Other existing single or multi-branch community banks, or new community
bank start-ups, have marketing strategies similar to ours. These other community
banks can open new branches in the communities we serve and compete directly for
customers who want the high level of service community banks offer. Other
community banks also compete for the same management personnel and the same
potential acquisition and merger candidates in Northern California.
Historically, insurance companies, brokerage firms, credit unions and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. Under the recently enacted
Financial Services Modernization Act of 1999, most separations between banks,
brokerage firms and insurance companies are eliminated, which is likely to
increase competition. See "Supervision and Regulation of Humboldt Bancorp --
Recent Legislation."
LOSS OF KEY EMPLOYEES COULD HURT OUR PERFORMANCE
The loss of the services of a key employee, or the failure to attract
and retain other qualified persons, could have a material adverse effect on our
business, financial condition and results of operations. We are heavily
dependent on the services of Theodore S. Mason, Humboldt Bancorp's President and
Chief Executive Officer. The operation and performance of Tehama Bank is heavily
dependent on the services of William P. Ellison, President and Chief Executive
Officer. Mr. Mason's employment contract expires on January 1, 2002, and he has
preliminarily indicated that he intends to retire at that time. Humboldt Bancorp
intends to seek a replacement for Mr. Mason prior to the expiration of his
contract. We intend to enter into employment arrangements with Mr. William P.
Ellison for the continuation of his services for Tehama Bank's operations. The
loss of either Mr. Mason or Mr. Ellison could adversely affect our operations
and our ability to integrate Tehama Bank into our operations.
LIMITED TRADING MARKET FOR HUMBOLDT BANCORP COMMON STOCK AND PRICE VOLATILITY
COULD MAKE IT DIFFICULT TO SELL YOUR SHARES AFTER THE MERGER
Our common stock has been listed on the Nasdaq National Market under the
symbol "HBEK" since March 29, 2000. Because there is limited trading in our
common stock, the price of our common stock may be adversely affected. As a
result, you may encounter delays in selling your Humboldt Bancorp shares and you
may be unable to sell the shares at your desired price.
INTRODUCTION
We have made forward-looking statements in this document, including
statements containing the words "believes," "anticipates," "intends," "expects,"
"considers" and words of similar import. Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results of Humboldt Bancorp or Tehama Bancorp or the merger to be
materially different from the future results expressed or implied by
forward-looking statements. These factors include, among others, the factors
discussed in the section entitled "Risk Factors" on page 13 of this document.
Shareholders should not rely heavily on the forward-looking statements.
Humboldt Bancorp and Tehama Bancorp do not have a duty to update any of the
forward-looking statements or to publicly announce the result of any changes to
any of the forward-looking statements included in this document.
15
<PAGE> 16
We are sending you this document for the solicitation of proxies by the
boards of directors of Humboldt Bancorp and Tehama Bancorp for use at their
respective meetings of shareholders for the purpose of considering and voting
upon the matters set forth in their respective notices of meeting.
The information contained in this document concerning Humboldt Bancorp
has been furnished by Humboldt Bancorp and is its responsibility. The
information contained in this document concerning Tehama Bancorp has been
furnished by Tehama Bancorp and is its responsibility.
The mailing of this document commenced on or about February ___, 2001.
Matters to be considered at the shareholders' meetings
The Humboldt Bancorp meeting has been called so its shareholders can
vote upon the merger agreement. The Tehama Bancorp meeting has been called so
its shareholders can vote upon the merger agreement. The merger will be
accomplished by the merger of Tehama Bancorp with Humboldt Bancorp. After the
merger, Tehama Bancorp will cease to exist, and Tehama Bank will become a
subsidiary of Humboldt Bancorp.
Record dates
Humboldt Bancorp. The close of business on February ___, 2001, has been
fixed as the Humboldt Bancorp record date for the determination of Humboldt
Bancorp shareholders entitled to notice of, and to vote at, the Humboldt Bancorp
meeting.
Tehama Bancorp. The close of business on February ___, 2001, has been
fixed as the Tehama Bancorp record date for the determination of Tehama Bancorp
shareholders entitled to notice of, and to vote at, the Tehama Bancorp meeting.
Outstanding Securities and Voting Rights
Humboldt Bancorp. There were _________ shares of Humboldt Bancorp common
stock outstanding as of the Humboldt Bancorp record date held by approximately
___ record holders. Each holder of Humboldt Bancorp common stock can cast one
vote for each share of Humboldt Bancorp common stock held as of the Humboldt
Bancorp record date on any matter presented for a vote of the shareholders at
the Humboldt Bancorp meeting.
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Humboldt Bancorp common stock.
The effect of broker nonvotes is that these votes are not counted as
being voted for or against the matter; however, these votes are counted for
purposes of determining a quorum. The effect of a vote of abstention on any
matter is that the vote is not counted as a vote for or against the matter, but
is counted as an abstention.
Tehama Bancorp. There were _________ shares of Tehama Bancorp common
stock outstanding as of the Tehama Bancorp record date held by approximately ___
record holders. Each holder of Tehama Bancorp common stock can cast one vote for
each share of Tehama Bancorp common stock held as of the Tehama Bancorp record
date on any matter presented for a vote of the shareholders at the Tehama
Bancorp meeting.
Approval of the merger requires the affirmative vote of a majority of
the outstanding shares of Tehama Bancorp common stock.
The effect of broker nonvotes is that these votes are not counted as
being voted for or against the matter; however, these votes are counted for
purposes of determining a quorum. The effect of a vote of abstention on any
matter is that the vote is not counted as a vote for or against the matter, but
is counted as an abstention.
16
<PAGE> 17
Recommendations of the boards of directors
Both the boards of directors of Humboldt Bancorp and Tehama Bancorp
recommend that their respective shareholders also vote "FOR" approval of the
merger agreement. In coming to their conclusions, the board of directors of
Humboldt Bancorp and Tehama Bancorp considered and relied upon the opinions of
their respective investment bankers, and considered that such opinions are a
condition of closing.
Humboldt Bancorp's directors and affiliates own approximately 9.2% of
the outstanding shares and have entered into director's agreements providing
that they will each vote "FOR" approval of the merger agreement. As a result,
holders owning 40.9% of shares of Humboldt Bancorp common stock are needed to
approve the merger agreement.
Tehama Bancorp directors and affiliates holding approximately 20.1% of
the outstanding shares have entered into director's agreements providing that
they will each vote "FOR" approval of the merger agreement. As a result, holders
owning 30.0% of the outstanding shares of Tehama Bancorp common stock are needed
to approve the merger agreement.
Revocability of proxies
A proxy for use at the Humboldt Bancorp meeting or the Tehama Bancorp
meeting, as the case may be, is enclosed. A shareholder executing and returning
a proxy may revoke it at any time before the vote is taken by filing with the
Secretary of Humboldt Bancorp or the Secretary of Tehama Bancorp, as the case
may be, an instrument revoking it or a duly executed proxy bearing a later date.
In addition, the powers of the proxyholders will be suspended if the person
executing the proxy is present at the Humboldt Bancorp meeting or the Tehama
Bancorp meeting, as the case may be, and elects to vote in person by advising
the chairman of the Humboldt Bancorp meeting or the Tehama Bancorp meeting, as
the case may be, of his or her election to vote in person, and voting in person
at the Humboldt Bancorp meeting or the Tehama Bancorp meeting, as the case may
be. Subject to revocation or suspension, all shares represented by a properly
executed proxy received in time for the Humboldt Bancorp meeting or the Tehama
Bancorp meeting, as the case may be, will be voted by the proxyholders in
accordance with the instructions specified on the proxy. If no directions are
given to the contrary on the proxy, the shares of Humboldt Bancorp common stock
or Tehama Bancorp common stock represented by each proxy will be voted at the
Humboldt Bancorp meeting or the Tehama Bancorp meeting, as the case may be,
"FOR" approval of the merger agreement. It is not anticipated that any matters
will be presented at the Humboldt Bancorp meeting or the Tehama Bancorp meeting
other than as set forth in the respective notices of the meetings. If, however,
other matters are properly presented at any of the meetings, the proxy will be
voted in accordance with the best judgment and discretion of the proxyholders.
Cost of Solicitation of Proxies
Humboldt Bancorp will pay two-thirds and Tehama Bancorp will pay
one-third of the expenses of preparing and printing this document. It is
contemplated that proxies will be solicited through the mail, but officers,
directors and regular employees of Humboldt Bancorp and Tehama Bancorp may
solicit proxies for their respective meetings personally. Although there is no
formal agreement to do so, Humboldt Bancorp and Tehama Bancorp may reimburse
banks, brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding these proxy materials to their principals. In
addition, Humboldt Bancorp and Tehama Bancorp may pay for and utilize the
services of individuals or companies not regularly employed by any of them in
the solicitation of proxies for their respective meetings if the board of
directors of Humboldt Bancorp or Tehama Bancorp determines that this is
advisable.
17
<PAGE> 18
DESCRIPTION OF THE MERGER
General
This section contains information furnished by the board of directors of
Humboldt Bancorp in its solicitation of proxies for the Humboldt Bancorp meeting
to approve the merger agreement and the board of directors of Tehama Bancorp in
its solicitation of proxies for the Tehama Bancorp meeting to approve the merger
agreement. The merger agreement sets out the terms of the merger.
Humboldt Bancorp will be the surviving corporation of the merger and
Tehama Bancorp will cease to exist. As a result of the merger, Humboldt Bancorp
will own all the shares of Tehama Bank, and Tehama Bank will become a subsidiary
of Humboldt Bancorp. Upon completion of the merger, each share of Tehama
Bancorp, other than shares held by shareholders who properly exercise
dissenters' rights, will convert into the right to receive shares of Humboldt
Bancorp's common stock.
No fractional shares of Humboldt Bancorp common stock will be issued in
the merger. Tehama Bancorp shareholders will be entitled to cash equal to the
fractional share multiplied by the price of the last trade of Humboldt Bancorp
common stock prior to the effective date of the merger.
A copy of the merger agreement is attached to this document as Appendix
A and is incorporated in this document by this reference.
Background and Reasons for the Merger
Humboldt Bancorp's Analysis. During the past four years, Humboldt
Bancorp has been expanding its services to the businesses and residents in
Northern California, including the surrounding counties of Humboldt, Mendocino
and Trinity, and more recently, in Placer County, home of the main office of
Capitol Valley Bank.
One of the methods to expand Humboldt Bancorp's services in Northern
California is through the merger of Tehama Bancorp. This possibility was due, to
a great extent, to the familiarity and past cooperative efforts of the two
organizations. For example, Humboldt Bancorp and Tehama Bancorp both own a 50%
interest in Bancorp Financial Services, Inc. In addition, Tehama Bank introduced
Humboldt Bank to Merchant Bankcard services. Further, the two organizations have
considered investment in other businesses including a proposed investment in a
mortgage company. Finally, the acquisition of Tehama Bancorp will provide
Humboldt Bancorp with a physical presence in central Northern California through
Tehama Bank and will unite Humboldt Bancorp's operations from the Northern
California coast to the Central Valley of California. In light of these common
interests, in March 2000, Mr. John Koeberer and Mr. William Ellison formally
contacted Mr. Theodore S. Mason to determine if the parties would be interested
in a transaction. As a result of these brief discussions, the parties executed a
confidentiality agreement on March 31, 2000, and during early April 2000,
Humboldt Bancorp held preliminary discussions with Tehama Bancorp regarding a
potential merger of Humboldt Bancorp and Tehama Bancorp. These informal
discussions were held between Theodore Mason, Humboldt Bancorp's president and
chief executive officer, and William Ellison, Tehama Bancorp's president and
chief executive officer. On April 18, 2000, D.A. Davidson was engaged by
Humboldt Bancorp to serve as its financial advisor. During the course of
negotiations, Humboldt Bancorp's board of directors consulted with respective
senior management and its financial advisor, D.A. Davidson, as well as its legal
counsel. Continuing considerations were retaining employees, ensuring that each
organization's subsidiaries maintained their identities and competitive
advantages in their local marketplaces, and that the transaction be neutral to
accretive for Humboldt Bancorp shareholders in 2001.
Over the course of these negotiations and discussions, Humboldt
Bancorp's board of directors and senior management determined that the merger
might provide the following opportunities:
- Expansion of Humboldt Bancorp's lending and deposit gathering
activities by acquiring Tehama Bank;
18
<PAGE> 19
- Improved earnings through operating efficiencies and economies of
scale;
- Further diversity of Humboldt Bancorp's asset base;
- Expansion into new areas of Northern California, including
Tehama, Butte, Glenn, and Shasta Counties;
- Enhancement of services and benefits to the customer base;
- Expertise and strength represented on the Tehama Bancorp board of
directors;
- Retention, to the greatest degree possible, of qualified,
dedicated staff and management; and
- That the merger will be accounted for as a pooling of interests
for accounting and financial reporting purposes which accounting
treatment is anticipated to disappear.
The Humboldt board of directors also considered the following potential
risks associated with the proposed merger:
- Complications of converting the Tehama Bancorp data processing
systems to those of Humboldt Bancorp;
- Inability to achieve expected cost savings necessary for the
merger to be accretive to the earnings per share of Humboldt
Bancorp;
- The potential loss of Tehama customers due to the perception that
it is no longer a "local" financial institution; and
- Difficulty in managing/oversight of a subsidiary that is a
distance from Humboldt Bancorp's main base of operations.
At the board of directors' meeting approving the merger on August 17,
2000, Humboldt Bancorp's financial advisor orally presented its analysis. The
following material factors were considered at the meeting:
- 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 Tehama Bancorp;
- Information concerning the business, results of operations, asset
quality and financial condition of Humboldt Bancorp on a
stand-alone basis and on a combined basis with Tehama Bancorp, as
well as the future growth prospects following the merger;
- The cost savings in operations, which the management of Humboldt
Bancorp believes may be achieved as a result of the merger;
- An assessment that the investment community would react favorably
to the acquisition, and that, in the current economic
environment, a Humboldt Bancorp common stock acquisition is most
economically advantageous to Humboldt Bancorp's shareholders when
compared to other alternatives, like formation of a new bank or
additional branch acquisitions;
19
<PAGE> 20
- The terms and conditions of the merger agreement and related
agreements;
- The makeup and responsibilities of the combined board of
directors;
- The potential downside of the merger. This was principally the
challenge of merging two different entities into one well-managed
institution; and
- Humboldt Bancorp's financial advisor's analysis of the financial
condition, results of operations, business prospects and stock
prices, and a comparison of Tehama Bank and Tehama Bancorp with
other California banks and bank holding companies in Northern
California.
Humboldt Bancorp's board of directors and management believe that the
potential issuance of additional shares of Humboldt Bancorp common stock will
increase the liquidity of Humboldt Bancorp common stock. Humboldt Bancorp's
board of directors and management also believe the merger will be beneficial to
shareholders because of cost savings resulting from the combination of data
processing, reduction of professional fees, reduction in personnel costs, and
other non-interest expenses.
The above discussion of the factors considered by the Humboldt Bancorp
board of directors is not intended to be exhaustive. In view of the variety and
nature of the factors considered, the Humboldt Bancorp board of directors did
not find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
Tehama Bancorp's Analysis. At various times during 1999, the board of
directors of Tehama Bancorp had discussions regarding the state of the financial
services industry and the ongoing consolidation of the banking industry. The
board of directors discussed at length Tehama Bank's future, including its
previous position of remaining independent, its ability to grow, its ability to
attract and retain personnel, the potential changes in the manner of providing
and delivering services to its customers and the usage of and investment in
technology to do so, and the ability to continue to increase shareholder value.
While some of these discussions were quite general, they evolved into an
exploration of the alternatives available to Tehama Bancorp and, in certain
instances, informal discussions about the possibility of a business combination
took place. At its fall retreat in October 1999, the board of directors held
general discussions regarding various strategic options, including remaining
independent, forming a strategic partnership with a similar financial
institution, merging with another financial institution or selling the company.
The board of directors authorized William P. Ellison, the President and Chief
Executive Officer of Tehama Bancorp, to explore these options and develop
recommendations to be presented to the board.
During this time, several alternatives were informally evaluated,
including a merger with one or more area banks and/or the acquisition of one or
more banks. This process included informal discussions between William Ellison
and Theodore Mason, President and Chief Executive Officer of Humboldt Bancorp,
regarding a potential merger of the two companies in light of the familiarity of
each entity with the operations, management philosophy and strategic vision of
the other. This familiarity was based in part on the two companies' joint
investment in 1997 in Bancorp Financial Services.
In March 2000, Tehama Bancorp invited Dain Rauscher to attend the March
16, 2000, Tehama Bancorp board of directors meeting and make a presentation to
the Tehama Bancorp board of directors regarding a potential merger with Humboldt
Bancorp and how such a merger might be structured. At that meeting, the Tehama
Bancorp board authorized Mr. Ellison to sign an engagement letter with Dain
Rauscher, which was formally executed on April 4, 2000.
During April through July 2000, Humboldt Bancorp and Tehama Bancorp's
respective investment advisors held preliminary discussions regarding the
structure and price of the proposed merger. On July 24, 2000, Mr. Mason made a
presentation to Tehama Bancorp's board of directors on the activities and
strategy of Humboldt Bancorp. At
20
<PAGE> 21
this meeting, Mr. Mason presented a term sheet outlining the basic terms of a
proposed merger agreement. Tehama Bancorp authorized Mr. Ellison and legal
counsel to cooperate with Humboldt Bancorp in producing a definitive agreement
embodying the proposed terms for Tehama Bancorp to consider. Commencing on
August 15, 2000, Tehama Bancorp and its financial and legal advisors commenced a
due diligence review of Humboldt Bancorp.
On September 6, 2000, Tehama Bancorp's board of directors met with its
financial and legal advisors and had a detailed discussion of the results of the
due diligence review of Humboldt Bancorp and a proposed definitive merger
agreement which had been prepared by Humboldt Bancorp's counsel in consultation
with Tehama Bancorp's executive officers and legal counsel, based upon the term
sheet presented at the July 24, 2000, meeting. Representatives of Dain Rauscher
presented an analysis of the proposed merger consideration in relation to other
bank merger transactions and in relation to the potential value of Tehama
Bancorp as an independent entity and orally advised the board that, in Dain
Rauscher's opinion, the merger consideration offered by Humboldt Bancorp was
fair from a financial point of view to the shareholders of Tehama Bancorp. The
Tehama Bancorp board of directors authorized execution of the definitive merger
agreement at the conclusion of that meeting.
Reasons for the Merger. The Tehama Bancorp board of directors believes
the merger is fair from a financial point of view to its shareholders and is
also in the best interests of its shareholders. Therefore, the Tehama Bancorp
board of directors unanimously approved the merger and unanimously recommends
that its shareholders approve the merger. In reaching its decision, the Tehama
Bancorp board of directors considered the following factors:
- the business, operations, condition and earnings of Humboldt
Bancorp on a historical and prospective basis and of the combined
company on a pro forma basis;
- the potential cost savings, operating efficiencies and
opportunities for revenue enhancement available to the combined
company following the merger;
- the compatibility of the respective businesses, operating
philosophies and strategic objectives of Tehama Bancorp and
Humboldt Bancorp, including their decentralized management
structures and the growth of their respective fee-based
businesses;
- the terms of the merger agreement, including the conversion ratio
as a function of Tehama Bancorp's earnings and book value per
share;
- the current and prospective economic and competitive environment
facing the financial services industry generally and Tehama
Bancorp in particular, and the probable importance of economies
of scale in enhancing efficiency and profitability;
- Humboldt Bancorp's success in completing and implementing
previous acquisitions of financial institutions;
- the necessity for Tehama Bancorp to increase its spending on
technology were it to remain independent in the future;
- the presentation of Dain Rauscher to the Tehama Bancorp board of
directors on March 16, 2000, and its opinion that the merger
consideration is fair from a financial point of view to the
shareholders of Tehama Bancorp;
- the expectation that the merger will be tax-free (except as to
cash paid in lieu of fractional interests and for dissenting
shares) for federal income tax purposes to Tehama Bancorp
shareholders and will qualify as a pooling of interests for
accounting and financial reporting purposes;
21
<PAGE> 22
- the generally favorable impact that the Tehama Bancorp board of
directors expects the merger to have on Tehama Bancorp's
customers, employees and the communities in its service area,
through the expanded financial services and increased lending
capabilities Tehama Bancorp will be able to offer; and
- the comparative benefit of other potential candidates for a
combination transaction and the cost and benefits of continuing
as an independent bank.
The Tehama Bancorp board of directors also considered the following
potential risks associated with the proposed merger:
- complications of converting the Tehama Bancorp data processing
systems to those of Humboldt Bancorp;
- inability to achieve expected cost savings necessary for the
merger to be accretive to the earnings per share of Humboldt
Bancorp;
- the potential loss of Tehama Bancorp customers due to the
perception that it is no longer a "local" financial institution;
- the potential loss of Tehama Bancorp employees necessary to carry
on the mission of Tehama Bank; and
- difficulty in managing/oversight of a subsidiary of a multi-bank
holding company whose main base of operations is located at a
distance from the subsidiary.
The Tehama Bancorp board of directors did not assign relative weight to
any of the foregoing factors, and different directors may have assigned
different weights to different factors. The foregoing discussion of the
information and factors considered by the Tehama Bancorp board of directors is
not intended to be exhaustive but is believed to include all material factors
that the Tehama Bancorp board of directors considered.
The Tehama Bancorp board of directors believes that the merger,
including the conversion rate, is fair to and in the best interests of Tehama
Bancorp and you as the Tehama Bancorp shareholders and has unanimously approved
and adopted the merger agreement and recommends that you vote for approval of
the merger agreement.
Tehama Bancorp Conversion Rate
The boards of directors of Humboldt Bancorp and Tehama Bancorp
determined the conversion rate in an arm's length negotiation.
Each share of Tehama Bancorp common stock that is outstanding
immediately prior to the merger, other than shares to which its holders have
properly exercised dissenters' rights, will be converted into 1.775 shares of
Humboldt Bancorp common stock.
You are urged to obtain current market quotations for Humboldt Bancorp
common stock and Tehama Bancorp common stock. The exchange value of a Humboldt
Bancorp share based on the closing price of $11.50 on September 19, 2000, the
day prior to announcement of the merger, was $20.41, and based on the closing
price of $____ on January __, 2001, the exchange value was $____. It is expected
that the market price of Humboldt Bancorp common stock will fluctuate between
the date of this document and the date on which the merger is completed and
thereafter. Because the number of shares of Humboldt Bancorp common stock to be
received by you in the merger will be determined based on the average closing
price and the market price of Humboldt Bancorp common stock which is subject to
fluctuation, the value of the shares of Humboldt Bancorp common stock that you
will receive in the merger may increase or decrease before and after the merger.
If the
22
<PAGE> 23
average trading price of Humboldt Bancorp common stock is less than $9.75 on the
closing date and the parties do not renegotiate the conversion rate, either
Humboldt Bancorp or Tehama Bancorp may terminate the merger agreement.
This risk is further explained under "Risk Factors" since the market
price of Humboldt Bancorp common stock will vary, Tehama Bancorp shareholders
cannot be sure of the value of the Humboldt Bancorp common stock to be received
in the merger.
Fractional Shares. No fractional shares of Humboldt Bancorp common stock
will be issued in the merger. Instead, if you would otherwise be entitled to
receive a fractional share, Humboldt Bancorp will pay you an amount in cash
equal to the product obtained by multiplying (1) the closing sale price of
Humboldt Bancorp common stock as reported on the Nasdaq National Market on the
day immediately preceding the merger closing date, by (2) the fraction of the
share of Humboldt Bancorp common stock to which you would otherwise be entitled.
You will not be entitled to dividends or other rights in respect of any
fractional share.
Exchange Procedure
Humboldt Bancorp has contracted with Illinois Stock Transfer Company to
effect the exchange and issuance of its securities in the merger. On or as soon
as practicable after the merger, Humboldt Bancorp will deliver to Illinois Stock
Transfer Company (i) certificates of Humboldt Bancorp common stock and (ii) cash
equal to the amount of any fractional shares.
Upon surrender to Illinois Stock Transfer Company of one or more Tehama
Bancorp stock certificates for cancellation, accompanied by the transmittal
letter that will be sent to the Tehama Bancorp shareholders, Illinois Stock
Transfer Company will promptly deliver, to each holder of surrendered Tehama
Bancorp stock certificates, certificates for shares of Humboldt common stock and
a check for payment of any fractional shares.
Until Tehama Bancorp stock certificates have been surrendered and
exchanged, each outstanding Tehama Bancorp stock certificate will constitute,
for all corporate purposes, the right to receive shares of Humboldt Bancorp
common stock. Until Tehama Bancorp certificates are surrendered, dividends
accrued on Humboldt Bancorp stock after the merger will not be payable on the
Humboldt Bancorp shares into which the Tehama Bancorp shares are converted, and
the holders entitled to Humboldt Bancorp shares will not be entitled to vote.
If any holder of Tehama Bancorp common stock is unable to surrender his
or her Tehama Bancorp stock certificates because the stock certificates have
been lost or destroyed, the holder may instead deliver an affidavit and
indemnity undertaking in form and substance and, if required, with surety
satisfactory to Illinois Stock Transfer Company and Humboldt Bancorp.
All outstanding stock options to acquire Tehama Bancorp common stock
will be assumed by Humboldt Bancorp upon completion of the merger, and Humboldt
Bancorp common stock, adjusted as to price and number of shares to take account
of the conversion ratio, will be substituted for Tehama Bancorp shares when such
options are exercised.
23
<PAGE> 24
Interests of Certain Persons in the Merger and Material Contracts
In considering the recommendations of the boards of directors of
Humboldt Bancorp and Tehama Bancorp for approval of the merger, the shareholders
of Humboldt Bancorp and Tehama Bancorp should be aware that certain members of
the boards of directors of Humboldt Bancorp and Tehama Bancorp may have
substantial interest in the merger as described below.
At the effective time of the merger, there will be 11 members of the
board of directors of Humboldt Bancorp consisting of seven of the existing 12
members of the current board of directors of Humboldt Bancorp and four new
members from the board of directors of Tehama Bancorp. At the effective time of
the merger, there shall also be 16 members of the board of directors of Tehama
Bank, consisting of the then existing 14 members of the current board of
directors of Tehama Bank, and two new members from the board of directors of
Humboldt Bancorp.
It is presently anticipated that current Tehama Bancorp directors John
Koeberer, Garry Fish, Gary Katz and Gary Napier will be appointed directors of
Humboldt Bancorp, and Messrs. Mason, Angell, Evans, Francesconi, McBeth, Winzler
and Weborg shall remain directors of Humboldt Bancorp. Further, it is expected
that Humboldt Bancorp director Theodore S. Mason and one other current Humboldt
Bancorp board member will be appointed as directors of Tehama Bank.
In addition, each director of Humboldt Bancorp has entered into an
agreement with Tehama Bancorp, and each director of Tehama Bancorp has entered
into an agreement with Humboldt Bancorp, which provides that the director
agrees:
- to recommend that the shareholders of Humboldt Bancorp or Tehama
Bancorp, as the case may be, approve the agreement, and to advise
Humboldt Bancorp's or Tehama Bancorp's shareholders to reject any
subsequent proposal or offer received by Humboldt Bancorp or
Tehama Bancorp, as the case may be, relating to any purchase,
sale, acquisition, merger, or other form of business combination
involving Humboldt Bancorp or Tehama Bancorp or any of its
assets, equity securities or debt securities, and to proceed with
the merger between Humboldt Bancorp and Tehama Bancorp, unless
the directors of Humboldt Bancorp or Tehama Bancorp, as the case
may be, has been advised by outside financial advisors and legal
counsel that he should not take that action;
- not to take any action that will alter or affect in any way the
right to vote the shares of Humboldt Bancorp or Tehama Bancorp
common stock, except with the prior written consent of Humboldt
Bancorp or Tehama Bancorp, as the case may be, or to change the
right from that of a shared right of the director to vote the
shares Humboldt Bancorp or Tehama Bancorp common stock to a sole
right of the director to vote the shares of Humboldt Bancorp or
Tehama Bancorp common stock as the case may be; and
- to vote all shares of Humboldt Bancorp or Tehama Bancorp common
stock that the director has power to vote in favor of the merger.
Further, it is the intent of Humboldt Bancorp that Tehama Bank enter
into a contract with Mr. William Ellison, President and Chief Executive Officer
of Tehama Bank, to serve in the same capacity for Tehama Bank as a subsidiary of
Humboldt Bancorp following the merger. It is anticipated that most other present
officers and employees of Tehama Bank will initially continue in the same or
similar capacities with Tehama Bank.
24
<PAGE> 25
Regulatory Approval and Completion of the Merger
The merger must be approved by the California Department of Financial
Institutions and by the Board of Governors of the Federal Reserve System. The
approval of the merger by the California Department of Financial Institutions
and the Federal Reserve Board is not a recommendation or endorsement of the
merger by any of those agencies.
Closing Date
The closing of the merger will take place no more than 30 days after the
receipt of the last required regulatory approval and expiration of all
applicable waiting periods.
Also, the conditions precedent to the obligations of Humboldt Bancorp
and Tehama Bancorp must be satisfied, or written waiver of the conditions by
Humboldt Bancorp and Tehama Bancorp, as the case may be, must be received.
It is presently anticipated that the merger will be completed by March
31, 2001.
Conditions to the Merger
This section contains information regarding all the material conditions
that 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
shares of Tehama Bancorp and Humboldt 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;
- 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 that, in the
judgment of Humboldt Bancorp, would be materially
burdensome;
- Humboldt Bancorp and Tehama Bancorp receive a letter from
Richardson & Co. that the merger may be accounted for as a
pooling-of-interests;
- The representations and warranties of Humboldt Bancorp and Tehama
Bancorp set forth in the merger agreement must be true in all
material respects as of the date of completion of the merger;
Humboldt Bancorp and Tehama Bancorp must perform and comply in
all material respects with the merger agreement; and no event or
condition entitling a party to terminate the merger agreement
shall have occurred without a waiving of the condition by the
party entitled to waive the condition;
- An opinion shall have been received from Bartel Eng & Schroder
that the merger will be a tax-free exchange for federal income
tax purposes;
25
<PAGE> 26
- No change shall have occurred in the consolidated financial
condition, consolidated net assets, shareholders' equity,
business, or consolidated operating results of Humboldt Bancorp
from December 31, 1999, to the date of completion of the merger
that results in a material adverse effect as to Humboldt Bancorp
and its subsidiaries taken as a whole;
- Neither Tehama Bancorp's fairness opinion from Dain Rauscher, nor
Humboldt Bancorp's fairness opinion from D. A. Davidson, may be
revoked prior to the meetings of shareholders.
Waiver, Amendment, and Termination
This section contains information regarding all the material provisions
in the merger agreement regarding waiver or amendment to the provisions of, or
the termination of, the merger agreement.
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 Tehama Bancorp;
- By either party if the merger is not accounted for as a pooling
of interests;
- By either party if holders owning more than 10% of the
outstanding shares of Tehama Bancorp common stock and Humboldt
Bancorp common stock have exercised their dissenter's rights;
- By Humboldt Bancorp or Tehama Bancorp upon the failure to satisfy
any conditions specified in the merger agreement if the failure
is not caused by any action or inaction of the party requesting
termination;
- By Humboldt Bancorp or Tehama Bancorp if an Acquisition Event, as
defined in the merger agreement, occurs involving the other
party;
- By Humboldt Bancorp or Tehama Bancorp if there is a material
breach of any of the representations or warranties of the other,
which breach, in the reasonable opinion of the terminating party,
cannot be cured prior to the merger and, in the reasonable
opinion of the terminating party, is likely to have a material
adverse effect on the breaching party or upon the completion of
the merger; or
- By Humboldt Bancorp or Tehama Bancorp if the average trading
price, as defined in the merger agreement, is below $9.75 per
share on the closing date resulting in an exchange value of less
than $17.31 based on the conversion rate, and the parties do not
renegotiate the conversion rate.
Liquidated Damages
If an Acquisition Event, as defined in the merger agreement, occurs
involving Tehama Bancorp, then Tehama Bancorp shall pay to Humboldt Bancorp the
sum of $1,500,000 in cash and Humboldt Bancorp shall have an option to acquire
up to 19.9% of the outstanding shares of Tehama Bancorp at $16.50 per share. If
an acquisition event occurs involving Humboldt Bancorp, then Humboldt Bancorp
shall pay to Tehama Bancorp the sum of $1,500,000 in cash, and Tehama Bancorp
shall have the option to acquire up to 19.9% of the outstanding shares of
Humboldt Bancorp at $11.75 per share.
26
<PAGE> 27
If the merger agreement is terminated by Tehama Bancorp as a result of
the revocation of the Tehama Bancorp fairness opinion; or if the agreement is
terminated by Humboldt Bancorp because of a breach of Tehama Bancorp's
representations or warranties, a default by Tehama Bancorp, or disclosure in the
updated schedules to the merger agreement of a material adverse event, where
such breach, default or material adverse event is within the control of Tehama
Bancorp or its directors or executive officers, then Tehama Bancorp shall pay to
Humboldt Bancorp the sum of $500,000 in cash. If Tehama Bancorp enters into an
acquisition agreement within 180 days following termination by Humboldt Bancorp,
Tehama Bancorp shall pay to Humboldt Bancorp an additional $250,000.
If the merger agreement is terminated by Humboldt Bancorp as a result of
the revocation of the Humboldt Bancorp fairness opinion; or if the agreement is
terminated by Tehama Bancorp because of a breach of Humboldt Bancorp's
representations or warranties, a default by Humboldt Bancorp, or disclosure in
the updated schedules to the merger agreement of a material adverse event, where
such breach, default or material adverse event is within the control of Humboldt
Bancorp or its directors or executive officers, then Humboldt Bancorp shall pay
to Tehama Bancorp the sum of $500,000 in cash. If Humboldt Bancorp enters into
an acquisition agreement within 180 days following termination by Tehama
Bancorp, Humboldt Bancorp shall pay to Tehama Bancorp an additional $250,000.
OPINION OF TEHAMA BANCORP FINANCIAL ADVISOR
Tehama Bancorp retained Dain Rauscher to act as its financial advisor in
connection with the merger and related matters based upon its qualifications,
expertise and reputation. On September 6, 2000, Dain Rauscher rendered its oral
opinion to the board of directors of Tehama Bancorp that the consideration to be
received pursuant to the merger agreement is fair from a financial point of view
to the holders of Tehama Bancorp common stock. THE FULL TEXT OF THE WRITTEN
OPINION DELIVERED AS OF THE DATE OF THIS DOCUMENT, SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS
DOCUMENT. TEHAMA BANCORP'S SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY
AND IN ITS ENTIRETY. THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF TEHAMA BANCORP AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
SPECIAL MEETING.
Tehama Bancorp engaged Dain Rauscher in March 2000, to act as its
exclusive financial advisor in connection with the merger. Dain Rauscher agreed
to assist Tehama Bancorp in analyzing, structuring, negotiating and effecting a
transaction with Humboldt Bancorp. Tehama Bancorp selected Dain Rauscher because
Dain Rauscher is a nationally recognized investment-banking firm with
substantial experience in transactions similar to the merger and is familiar
with Tehama Bancorp and its business. As part of its investment banking
business, Dain Rauscher is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions.
A representative of Dain Rauscher attended the meeting of the Tehama
Bancorp board of directors held on September 6, 2000, at which the Tehama
Bancorp board of directors considered and approved the merger agreement. At the
September 6 meeting, Dain Rauscher rendered an oral opinion that, as of that
date, the conversion rate was fair to Tehama Bancorp and its shareholders from a
financial point of view. That opinion was reconfirmed in writing as of the date
of this document.
Dain Rauscher's opinion is directed to the Tehama Bancorp board of
directors and addresses only the conversion rate of 1.775 shares of Humboldt
Bancorp common stock for each share of Tehama Bancorp common stock. It does not
address the underlying business decision to proceed with the merger and does not
constitute a recommendation to any shareholder as to how the shareholder should
vote at the Meeting with respect to the merger or any matter related thereto.
In rendering its opinion, Dain Rauscher reviewed:
27
<PAGE> 28
- the merger agreement,
- annual reports to shareholders and annual reports on Form
10-K of Humboldt Bancorp,
- annual reports to shareholders and annual reports on Form
10-K of Tehama Bancorp,
- quarterly reports on Form 10-Q of Humboldt Bancorp,
- quarterly reports on Form 10-Q of Tehama Bancorp, and
- certain internal financial analyses and forecasts for
Tehama Bancorp and Humboldt Bancorp prepared by their
respective managements.
Dain Rauscher also held discussions with members of senior management of
Tehama Bancorp and Humboldt Bancorp regarding their respective:
- past and current business operations,
- regulatory relationships,
- financial condition, and
- future prospects of the respective companies.
Dain Rauscher compared certain financial and stock market information
for Humboldt Bancorp and Tehama Bancorp with similar information for certain
other companies with publicly traded securities, reviewed the financial terms of
certain recent business combinations in the banking industry, and performed
other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, Dain Rauscher
relied upon and assumed the accuracy and completeness of all of the financial
and other information provided to it or publicly available. Dain Rauscher did
not attempt to verify such information independently. Dain Rauscher relied upon
the management of Humboldt Bancorp and Tehama Bancorp as to the reasonableness
and achievability of the financial and operating forecasts and projections (and
assumptions and bases therefor) provided to Dain Rauscher. Dain Rauscher assumed
that those forecasts and projections reflected the best available estimates and
judgments of the respective managements of Humboldt Bancorp and Tehama Bancorp.
Dain Rauscher also assumed, without independent verification, that the aggregate
allowances for loan losses for Humboldt Bancorp and Tehama Bancorp are adequate
to cover those losses. Dain Rauscher did not make or obtain any evaluations or
appraisals of the property of Humboldt Bancorp or Tehama Bancorp, and Dain
Rauscher did not examine any individual credit files.
The projections furnished to Dain Rauscher and used by it in certain of
its analyses were prepared by the senior managements of Tehama Bancorp and
Humboldt Bancorp. Neither Tehama Bancorp nor Humboldt Bancorp publicly discloses
internal management projections of the type provided to Dain Rauscher in
connection with its review of the merger. As a result, such projections were not
prepared with a view toward public disclosure. The projections were based on
numerous variables and assumptions that are inherently uncertain, including
factors related to general economic and competitive conditions. ACCORDINGLY,
ACTUAL RESULTS COULD VARY SIGNIFICANTLY FROM THOSE SET FORTH IN THE PROJECTIONS.
The following is a summary of the material analyses performed by Dain
Rauscher related to the oral opinion rendered to Tehama Bancorp's board of
directors on September 6, 2000.
Transaction Summary
28
<PAGE> 29
Dain Rauscher calculated the merger consideration to be paid pursuant to
the exchange ratio as a multiple of Tehama Bancorp's book value at June 30,
2000, earnings for the twelve months ended June 30, 2000, and 2000 estimated
earnings. This computation was based on Tehama Bancorp's June 30, 2000, tangible
book value of $10.39 per share, Tehama Bancorp's earnings for the twelve months
ended June 30, 2000, of $1.42 per share, and Tehama Bancorp's estimated earnings
in 2000 of $1.60 per share. The computation was also based upon a conversion
rate of 1.775 Humboldt Bancorp shares for each Tehama Bancorp share and the
closing price of Humboldt Bancorp's common stock on September 19, 2000, of
$11.50. Based on those assumptions, this analysis indicated that Tehama Bancorp
shareholders would receive shares of Humboldt Bancorp common stock worth $20.41
for each share of Tehama Bancorp common stock held and that this amount would
represent a multiple of 1.96 times tangible book value per share, 14.37 times
earnings for the twelve months ended June 30, 2000, and 12.76 times estimated
2000 earnings per share.
The following table summarizes the material valuation methodologies and
range of values used to support the fairness conclusion as of September 20,
2000, the date that the merger agreement was signed and a recent date of January
2, 2001:
<TABLE>
<CAPTION>
September 20, January 2,
Transaction Summary 2000 2001
---------------- ----------
<S> <C> <C>
Exchange Ratio 1.775 1.775
Humboldt Bancorp Stock Price $11.50 $ 10.25
Per share value of each Tehama Common Stock $20.41 $ 18.19
Price-to-Tangible Book Value 1.96x 1.75x
Price-to-Earnings for 12 Months Ended June 30, 2000 14.37x 12.80x
Dain Rauscher Methodologies for Determination of Fairness
Discounted present value of Tehama common stock $15.09 to $30.85
Selected Transaction Analysis
Price to latest available 12 months earnings
Comparable Group One - Range 9.16x to 42.32x
- Average 19.77x
Comparable Group Two - Range 11.61x to 27.08x
- Average 18.90x
Price to Book Value
Comparable Group One - Range 1.20x to 4.76x
- Average 2.58x
Comparable Group Two - Range 1.32 to 4.41x
- Average 2.51x
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Humboldt
Selected Peer Group Analysis Bancorp Peer Group
---------------------------- -------- ----------
<S> <C> <C>
Price to latest available 12 month earnings 12.37x 11.59x
Price to 2000 Estimated Earnings 10.36x 10.91x
Price to Book Value 1.54x 1.71x
Contribution Analysis
Tehama Bancorp Pro Forma Ownership 37.50%
Tehama Bancorp Contribution to:
Combined Common Equity 31.30%
Combined 2000 estimated net income 31.27%
Combined Total Assets 28.90%
</TABLE>
Discounted Cash Flow Analysis
Dain Rauscher estimated the present value of future cash flows that
would accrue to a holder of a share of Tehama Bancorp common stock assuming that
the shareholder held the stock for five years and then sold it. The analysis was
based on earnings forecasts prepared by management on a stand-alone, independent
basis for the year 2000 and annual net income growth rates from 8.0% to 12.0%
for the years 2001 through 2004. A 30% dividend payout ratio was assumed for
Tehama Bancorp through the year 2004. An estimated year 2004 year end stock
price was estimated by multiplying the projected annual earnings by earnings
multiples ranging from 10 to 20 times. The estimated stock price for each year
and the estimated dividends were discounted at rates from 14% to 18%. These
rates were selected because, in Dain Rauscher's experience, they represent the
risk-adjusted rates of return that investors in securities such as the common
stock of Tehama Bancorp would require. On the basis of these assumptions, Dain
Rauscher calculated a range of present values ranging from $15.09 to $30.85.
These values were compared to the merger consideration of $20.41 based on a
conversion ratio of 1.775 and a Humboldt Bancorp closing price of $11.50. These
values may also be compared to the January 2, 2001, value of merger
consideration of $18.19 based upon a conversion ratio of 1.775 and a Humboldt
closing price of $10.25.
The discounted cash flow present value analysis is a widely used
valuation methodology that relies on numerous assumptions, including asset and
earnings growth rates, terminal values and discount rates. The analysis did not
purport to be indicative of the actual values or expected values of Tehama
Bancorp common stock.
Selected Transaction Analysis
Using publicly available information, Dain Rauscher reviewed certain
terms and financial characteristics, including historical price-to-earnings
ratio, the price-to-tangible book ratio, and the tangible book value premium to
core deposits paid in prior commercial banking institution merger or acquisition
transactions. The first comparable group ("Comparable Group One") included
nationwide transactions announced since January 1, 1999, with sellers with
assets between $100 million and $300 million that earned greater than 0.75% on
total assets. Comparable Group One included 89 transactions. The average
price-to-last available twelve month earnings for Comparable Group One was
19.77x, and ranged from 9.16x to 42.32x. The average price-to-tangible book
value for Comparable Group One was 2.58x, and ranged from 1.20x to 4.76x. These
values were compared to the merger transaction values of 1.96 times Tehama
Bancorp's tangible book value per share, and 14.37 times Tehama Bancorp's
earnings for the twelve months ended June 30, 2000, based on a conversion ratio
of 1.775 and a Humboldt Bancorp closing price of $11.50. These values may also
be compared to the merger transaction values of 1.75 times Tehama Bancorp's
tangible book value per share, and 12.80 times Tehama Bancorp's earnings for the
twelve months ended June 30, 2000, based on a conversion ratio of 1.775 and a
Humboldt Bancorp closing price of $10.25 on January 2, 2001.
30
<PAGE> 31
<TABLE>
<CAPTION>
Comparable Group One Average Range
------- ---------------
<S> <C> <C>
Price-to-last available 12 month earnings 19.77x 9.16x to 42.32x
Price-to-tangible book value 2.58x 1.20x to 4.76x
</TABLE>
The second comparable group ("Comparable Group Two") included
transactions announced since January 1, 1999, with sellers located in California
with assets between $100 million and $300 million that earned greater than 0.75%
on total assets. Comparable Group Two included 22 transactions. The average
price-to-last twelve month earnings for Comparable Group Two was 18.90x, and
ranged from 11.61x to 27.08x. The average price-to-tangible book value for
Comparable Group Two was 2.51x, and ranged from 1.32x to 4.41x. These values
were compared to the merger transaction values of 1.96 times Tehama Bancorp's
tangible book value per share, and 14.37 times Tehama Bancorp's earnings for the
twelve months ended June 30, 2000. The merger transaction values are based on a
conversion ratio of 1.775 and a Humboldt Bancorp closing price of $11.50. These
values may also be compared to the merger transaction values of 1.75 times
Tehama Bancorp's tangible book value per share, and 12.80 times Tehama Bancorp's
earnings for the twelve months ended June 30, 2000. The merger transaction
values are based on a conversion ratio of 1.775 and a Humboldt Bancorp closing
price of $10.25 on January 2, 2001.
<TABLE>
<CAPTION>
Comparable Group Two Average Range
------- ----------------
<S> <C> <C>
Price-to- last 12 month earnings 18.90x 11.61x to 27.08x
Price-to-tangible book value 2.51x 1.32x to 4.41x
</TABLE>
No company or transaction used as a comparison in the above analysis is
identical to Humboldt Bancorp, Tehama Bancorp or the merger. Accordingly, an
analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
Selected Peer Group Analysis
Dain Rauscher compared the financial performance and market performance
of Humboldt Bancorp with selected banking institutions with assets between $500
million and $1 billion earning over 1.00% return on assets (the "Comparable Bank
Group") deemed relevant by Dain Rauscher.
The comparisons were based on:
- various financial measures,
- earnings performance,
- operating efficiency,
- capital adequacy,
- asset quality, and
- various measures of market performance including
- market/book values,
- price to earnings, and
31
<PAGE> 32
- dividend yields.
To perform this analysis, Dain Rauscher used the financial information
as of and for the latest available twelve months (LTM) and market price
information as of September 6, 2000.
Dain Rauscher's analysis showed the following concerning Humboldt
Bancorp's financial performance:
<TABLE>
<CAPTION>
Humboldt Comparable Bank
Performance Measure Bancorp Group Average
------------------- -------- ---------------
<S> <C> <C>
Return on average common equity 14.66% 14.50%
Return on assets 1.24% 1.40%
Net interest margin 5.49% 5.14%
Efficiency ratio 77.27% 57.23%
Leverage ratio 8.55% 9.68%
Non-performing assets to total assets 0.60% 0.42%
Loan loss reserve to non-performing assets 179.24% 318.93%
</TABLE>
Dain Rauscher compared the financial performance measures of Humboldt
Bancorp with the financial performance measures of the Comparable Bank Group.
Dain Rauscher's analysis showed the following concerning Humboldt
Bancorp's market performance:
<TABLE>
<CAPTION>
Humboldt Comparable Bank
Performance Measure Bancorp Group Average
------------------- -------- ---------------
<S> <C> <C>
Price earnings multiple, based on LTM earnings 12.37x 11.59x
Price earnings multiple, based on 2000 estimated earnings 10.36x 10.91x
Price to tangible book multiples 1.54x 1.71x
</TABLE>
Dain Rauscher compared the market performance measures for Humboldt
Bancorp with those of the Comparable Bank Group to determine, in light of the
relative financial performance measures, the value of Humboldt Bancorp shares
relative to the value of the Comparable Bank Group. Dain Rauscher concluded that
the Humboldt Bancorp shares to be received by the Tehama Bancorp shareholders
were fairly valued relative to the Comparable Bank Group.
For purposes of the above calculations, all earnings estimates are based
upon the estimates for Humboldt Bancorp provided by Humboldt Bancorp management.
Because of the inherent differences in the businesses, operations, financial
conditions and prospects of Humboldt Bancorp and the companies included in the
Comparable Bank Group, Dain Rauscher believed that a purely quantitative
comparable company analysis would not be particularly meaningful in the context
of the merger. Dain Rauscher believed that the appropriate use of a comparable
company analysis in this instance would involve qualitative judgments concerning
the differences between Humboldt Bancorp and the companies included in the
Comparable Bank Group which would affect the trading values of the comparable
companies.
32
<PAGE> 33
Contribution Analysis
Dain Rauscher analyzed the relative contribution of each of Humboldt
Bancorp and Tehama Bancorp to certain pro forma balance sheet and income
statement items of the combined entity. The contribution analysis showed:
<TABLE>
<S> <C>
Tehama Bancorp contribution to:
Combined common equity ...................................... 31.30%
Combined 2000 estimated net income without cost savings ..... 31.27%
Combined total assets ....................................... 28.90%
Tehama Bancorp estimated pro forma ownership ................ 37.50%
</TABLE>
Dain Rauscher compared the relative contribution of the balance sheet
and income statement items with the estimated pro forma ownership for Tehama
Bancorp shareholders based on a conversion rate of 1.775. Dain Rauscher
concluded that, using a 1.775 conversion rate, Tehama Bancorp shareholders would
receive a pro forma ownership interest greater than the Tehama Bancorp pro forma
contribution of equity, earnings and assets to the combined company. The pro
forma contribution and ownership is determined by the exchange ratio and is
independent of the market price of the common shares of Humboldt Bancorp.
Other Analyses
Dain Rauscher compared the relative financial and market performance of
Tehama Bancorp and Humboldt Bancorp to a variety of relevant industry peer
groups and indices. Dain Rauscher also reviewed earnings estimates, balance
sheet composition, historical stock performance and other financial data for
Humboldt Bancorp.
Under the terms of its engagement with Tehama Bancorp, Dain Rauscher is
required to deliver its opinion to the board of directors of Tehama Bancorp in
connection with the execution of the Agreement and is required to update its
opinion for any application for regulatory approval and for inclusion in any
proxy materials sent to Tehama Bancorp shareholders in connection with the
merger. In connection with its opinion dated as of the date of this document,
Dain Rauscher performed procedures to update, as necessary, certain of the
analyses described above. Dain Rauscher reviewed the assumptions on which the
analyses described above were based and the factors considered in connection
therewith. Dain Rauscher did not perform any analyses in addition to those
described above in updating its September 6, 2000, oral opinion.
The summary set forth above is not a complete description of the
presentation by Dain Rauscher to Tehama Bancorp's board of directors or of the
analysis performed by Dain Rauscher. Dain Rauscher believes that its analyses
and the summary set forth above must be considered as a whole. In addition, Dain
Rauscher may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Dain Rauscher's
view of the actual value of Tehama Bancorp or the combined companies. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given greater weight than any other
analysis.
In performing its analyses, Dain Rauscher made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Tehama Bancorp and
Humboldt Bancorp. The analyses performed by Dain Rauscher are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Dain Rauscher's analysis of the fairness of the
consideration to be received by Tehama Bancorp shareholders in the merger and
were provided to Tehama Bancorp's board of directors in connection with the
delivery of Dain Rauscher's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. The forecasts used by Dain Rauscher in certain of its analyses
are based upon numerous variables and assumptions, which are inherently
unpredictable and must be considered not certain of
33
<PAGE> 34
occurrence as projected. Accordingly, actual results could vary significantly
from those contemplated in such forecasts.
As described under "Description of the Merger--Background and Reasons
for the Merger," Dain Rauscher's opinion and presentation to the board of
directors were among the many factors taken into consideration by Tehama
Bancorp's board of directors in making its determination to approve the merger
agreement.
Dain Rauscher Wessels
The Tehama Bancorp board of directors has retained Dain Rauscher as an
independent contractor to act as financial adviser to Tehama Bancorp regarding
the merger. In the ordinary course of its business as a broker-dealer, Dain
Rauscher may, from time to time, purchase securities from, and sell securities
to, Tehama Bancorp and Humboldt Bancorp. As a market maker in securities, Dain
Rauscher may from time to time have a long or short position in, and buy or
sell, debt or equity securities of Tehama Bancorp and Humboldt Bancorp for Dain
Rauscher's own account and for the accounts of its customers. Dain Rauscher has
not previously provided investment banking services to Tehama Bancorp or to
Humboldt Bancorp.
Tehama Bancorp and Dain Rauscher have entered into an agreement relating
to the services to be provided by Dain Rauscher in connection with the merger.
Tehama Bancorp has agreed to pay Dain Rauscher $75,000 on the date the merger
was publicly announced and, at the time of closing, a cash fee equal to 1.50% of
the market value of the aggregate consideration paid in exchange for the
outstanding shares of common stock of Tehama Bancorp in the merger. Pursuant to
the Dain Rauscher engagement agreement, Tehama Bancorp also agreed to reimburse
Dain Rauscher for reasonable out-of-pocket expenses and disbursements incurred
in connection with its retention and to indemnify Dain Rauscher against certain
liabilities, including liabilities under the federal securities laws.
OPINION OF HUMBOLDT BANCORP FINANCIAL ADVISOR
Humboldt Bancorp's board retained D.A. Davidson in April 2000, on an
exclusive basis, to provide limited financial advisory services and a fairness
opinion in connection with the proposed merger. D.A. Davidson, as part of its
investment banking business, is engaged in the valuation of banking and other
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Humboldt Bancorp's board of directors retained
D.A. Davidson based upon its experience as a financial advisor in mergers and
acquisitions of financial institutions and its knowledge of financial
institutions. Humboldt Bancorp has retained D.A. Davidson in the past for other
investment banking assignments. D.A. Davidson makes a market in Humboldt
Bancorp's common stock on the Nasdaq National Market.
On August 17, 2000, a representative of D.A. Davidson attended the
Humboldt Bancorp board of directors' meeting at which Humboldt Bancorp's board
of directors considered and approved the merger agreement. The representative
presented orally to the board of directors the D.A. Davidson fairness opinion
that, as of the date of the board meeting, the merger consideration to be paid
pursuant to the merger agreement is fair from a financial point of view to the
holders of Humboldt Bancorp common stock. That opinion was reconfirmed in
writing as of the date of this document. The full text of D.A. Davidson's
opinion, including review procedures, valuation methods and assumptions and
results of its analyses, is attached as Appendix C to this document.
Under the terms of its engagement with Humboldt Bancorp, D.A. Davidson
is required to deliver its opinion to the Humboldt Bancorp board of directors in
connection with the execution of the Agreement and is required to update its
opinion at the time of any filing with the Securities and Exchange Commission
and at the closing of the transaction if requested by Humboldt Bancorp. In
connection with its opinion dated as of the date of this document, D.A. Davidson
performed procedures to update, as necessary, certain of the analyses described
below. D.A. Davidson reviewed the assumptions on which the analyses described
below were based and the factors considered in connection with the analysis.
D.A. Davidson did not perform any analyses in addition to those described below
in updating its August 17, 2000, oral opinion.
34
<PAGE> 35
D.A. Davidson's opinion is directed to the Humboldt Bancorp's board of
directors and addresses only the merger consideration of exchanging 1.775 shares
of Humboldt Bancorp common stock for each share of Tehama Bancorp common stock.
It does not address the underlying business decision to proceed with the merger
and does not constitute a recommendation to any shareholder as to how the
shareholder should vote at the meeting with respect to the merger or any other
matter related thereto.
Review Procedures
In connection with providing the opinion, D.A. Davidson:
- reviewed the merger agreement;
- reviewed certain publicly available financial statements and
regulatory information concerning Humboldt Bancorp and Tehama
Bancorp;
- reviewed certain internal financial statements and other
financial and operating data of Humboldt Bancorp and Tehama
Bancorp provided by managements of Humboldt Bancorp and Tehama
Bancorp;
- discussed the past and current operations, financial condition,
and future prospects of Humboldt Bancorp and Tehama Bancorp with
their executive managements;
- compared the relative contributions of assets, liabilities,
income and expenses to the combined corporation by Humboldt
Bancorp and Tehama Bancorp;
- compared similar transactions to the merger of Humboldt Bancorp
and Tehama Bancorp;
- analyzed the pro forma results that the combined corporation
could produce through the end of 2002 based upon forecasts
prepared by managements of Humboldt Bancorp and Tehama Bancorp;
and,
- performed other analyses and reviews, as D.A. Davidson deemed
appropriate.
In connection with its review, D.A. Davidson relied upon and assumed the
accuracy and completeness of all of the information provided to it. D.A.
Davidson does not assume any responsibility for independent verification of the
information. D.A. Davidson assumed that the internal confidential financial
projections prepared by both managements were reasonably prepared, reflecting
the best currently available estimates and judgments of the future financial
performance of the combined operation, and did not independently verify the
validity of their assumptions.
D.A. Davidson did not make any independent evaluation or appraisal of
the assets and liabilities of Humboldt Bancorp or Tehama Bancorp, nor was it
furnished with any appraisals. D.A. Davidson did not examine individual loan
files of Humboldt Bancorp or Tehama Bancorp. D.A. Davidson is not an expert in
the evaluation of loan portfolios for the purpose of assessing the adequacy of
the allowance for loan losses and assumed that these allowances are, in the
aggregate, adequate to cover the losses.
D.A. Davidson's opinion is predicated on the merger receiving the tax
and accounting treatment contemplated in the merger agreement.
D.A. Davidson provides its opinion without regard to the necessity for,
or level of, any restrictions, obligations, undertakings or other actions, which
may be imposed or required in the course of obtaining regulatory approval for
the merger.
35
<PAGE> 36
D.A. Davidson's opinion is necessarily based upon economic, market and
other conditions in effect on and the information made available to D.A.
Davidson as of the date of this document.
No limitations were imposed on D.A. Davidson regarding the scope of its
investigation or otherwise by Humboldt Bancorp or Tehama Bancorp.
Valuation Methods
In connection with providing its opinion, D.A. Davidson performed a
variety of financial analyses, including those summarized in the following
sections. The information provided in these sections is not a complete
description of the analyses that D.A. Davidson used in reaching its opinion.
Preparation of a fairness opinion involves various determinations and judgments
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances.
While D.A. Davidson provided the Humboldt Bancorp board of directors
with results of the various analyses that follow, D.A. Davidson believes that
all of its analysis must be considered as a whole and that selecting portions of
its analysis and factors considered by it, without considering all analyses and
factors, or attempting to ascribe relative weights to some or all such analyses
and factors, or including other discrete analyses or factors, could create an
incomplete view of the evaluation process underlying its opinion.
In performing its analyses, D.A. Davidson made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Humboldt Bancorp, Tehama
Bancorp, the combined company and D.A. Davidson.
The following lists the summary analyses presented in the following
sections by D.A. Davidson to Humboldt Bancorp's board of directors on August 17,
2000:
- comparable company analysis and historical stock data analysis
- analysis of relative contributions of Humboldt Bancorp and Tehama
Bancorp
- comparable exchange ratio analysis and transaction analysis
- discounted cash flow analysis
- pro forma merger analysis and accretion/dilution analysis
36
<PAGE> 37
The following table summarizes the material valuation methodologies and
range of values used to support the updated fairness conclusion:
<TABLE>
<CAPTION>
At Delivery
of Opinion At Announcement As of
August 17, September 20, January 2,
Transaction Summary 2000 2000 2001
------------------- ----------- ------------- ----------
<S> <C> <C> <C>
Tehama Bancorp Closing Price $ 14.88 $ 17.00 $ 16.44
Humboldt Bancorp Closing Price $ 11.63 $ 11.50 $ 10.25
Exchange Ratio 1.775 1.775 1.775
Implied Purchase Price/Share $ 20.63 $ 20.41 $ 18.19
Price/Book Value 1.93x 1.91x 1.70x
Price/LTM Earnings ended June 30, 2000 14.5x 14.4x 12.8x
</TABLE>
D.A. Davidson Methodologies for Determination of Fairness
<TABLE>
<CAPTION>
Comparable
Humboldt Tehama Company
Comparable Company Analysis Bancorp Bancorp Average
--------------------------- -------- -------- ----------
<S> <C> <C> <C>
Price/2000 Estimated Earnings 10.5x 8.5x 10.1x
Price/2001 Estimated Earnings 8.6x 7.0x 8.8x
Price/Book Value 1.55x 1.39x 1.52x
</TABLE>
Contribution Analysis (As of and for The Six Months Ended June 30, 2000)
<TABLE>
<CAPTION>
Humboldt Tehama
Bancorp Bancorp
-------- --------
<S> <C> <C>
Assets 71.1% 28.9%
Net Loans 69.8% 30.2%
Deposits 71.3% 28.7%
Equity 68.7% 31.3%
Net Interest Income 70.1% 29.9%
Non-Interest Income 87.9% 12.1%
Non-Interest Expense 82.4% 17.6%
Earnings 67.2% 32.8%
Pro Forma Ownership 64.0% 36.0%
</TABLE>
<TABLE>
<CAPTION>
Implied
Comparable Transactions Value/Share
----------------------- ----------------
<S> <C>
Recent US Bank Mergers
Median Price/LTM EPS (24.3x) $34.51
Average Price/Book Value (2.17x) $23.15
Western US Bank Mergers
Median Price/LTM EPS (27.7x) $39.33
Average Price/Book Value (2.34x) $24.97
California and Oregon Bank Mergers
Median Price/LTM EPS (20.8x) $29.54
Average Price/Book Value (2.44x) $26.03
Discounted Cash Flow Analysis
Discounted Present Value of Tehama shares $19.22 to $28.41
</TABLE>
37
<PAGE> 38
Comparable Company Analysis
D.A. Davidson compared the financial performance and market performance
of Humboldt Bancorp and Tehama Bancorp based on various financial measures of
earnings performance, operating efficiency, capital adequacy and asset quality
and various measures of market performance, including but not limited to, price
to book values, price to earnings, and dividend yields to selected bank holding
companies.
For the purpose of such analysis, the financial information used by D.A.
Davidson is as of and for the six months ended June 30, 2000. Market price
information is as of August 16, 2000. D.A. Davidson selected publicly traded
banking companies in the northern California and southern Oregon markets with
assets between $200 million and $1 billion. D.A. Davidson excluded any bank that
is in the process of being acquired.
D.A. Davidson's analysis showed the following concerning Humboldt's
Bancorp financial performance:
<TABLE>
<CAPTION>
Comparable Company
Humboldt Bancorp ---------------------
Performance Average Median
---------------- ------- ------
<S> <C> <C> <C>
Return on average assets 1.17% 1.21% 1.42%
Return on average equity 14.30% 15.10% 14.70%
Net Interest Margin 5.36% 5.67% 5.40%
Efficiency 78.30% 63.30% 59.80%
Ratio of total equity to total assets 7.70% 8.40% 8.00%
Ratio of non-performing assets to total
loans plus other real estate owned 0.97% 0.79% 0.18%
Ratio of loan loss reserve to total loans 1.64% 1.85% 1.45%
</TABLE>
D.A. Davidson's analysis further showed the following concerning
Humboldt Bancorp's market performance:
- that Humboldt Bancorp's price to earnings per share multiple
based on 2000 projected earnings was 10.5 times, compared to an
average of 10.1 and median of 10.6;
- that its price to earnings per share multiple based on 2001
projected earnings was 8.6 times, compared to an average of 8.8
and median of 9.3;
- that its price to book value per share was 1.55 times, compared
to an average of 1.52 and median of 1.56; and
- that its dividend yield was 0.00% compared to an average of 1.99%
and median of 2.07%.
D.A. Davidson's analysis showed the following concerning Tehama
Bancorp's financial performance:
<TABLE>
<CAPTION>
Comparable Company
Tehama Bancorp ---------------------
Performance Average Median
-------------- ------ ------
<S> <C> <C> <C>
Return on average assets 1.25% 1.21% 1.42%
Return on average equity 15.30% 15.10% 14.70%
Net Interest Margin 4.70% 5.67% 5.40%
Efficiency 62.30% 63.30% 59.80%
Ratio of total equity to total assets 8.60% 8.40% 8.00%
Ratio of non-performing assets to total
loans plus other real estate owned 0.47% 0.79% 0.18%
Ratio of loan loss reserve to total loans 1.48% 1.85% 1.45%
</TABLE>
38
<PAGE> 39
D.A. Davidson's analysis further showed the following concerning Tehama
Bancorp's market performance:
- that Tehama Bancorp's price to earnings per share multiple based
on 2000 projected earnings was 8.5 times, compared to an average
of 10.1 and median of 10.6;
- that its price to earnings per share multiple based on 2001
projected earnings was 7.0 times, compared to an average of 8.8
and median of 9.3;
- that its price to book value per share was 1.39 times, compared
to an average of 1.52 and median of 1.56; and
- that its dividend yield was 0.00% compared to an average of 1.99%
and median of 2.07%.
Historical Stock Data Analysis
D.A. Davidson reviewed weekly stock price data for Humboldt Bancorp
common stock and Tehama Bancorp common stock compared to the Nasdaq Bank Index
and S&P Banking Index for the period from January 1999 through August 16, 2000.
This analysis showed that on a relative performance basis, Humboldt Bancorp's
and Tehama Bancorp's stock prices went up 27% and 23%, respectively, compared
with a reduction of 11% for the Nasdaq Bank Index and 12% for the S&P Banking
Index. During this same time frame, the Dow Jones Industrial Average and S&P 500
Index were both up 20%.
Analysis of Relative Contributions of Parties
In preparing its opinion, D.A. Davidson also reviewed the relative
financial contributions of Humboldt Bancorp and Tehama Bancorp to certain pro
forma balance sheet and income statement items of the combined company. The
chart below shows these percentage contributions.
Relative Contributions as of and for the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Humboldt Tehama
Bancorp Bancorp
-------- -------
<S> <C> <C>
Assets 71.1% 28.9%
Net Loans 69.8% 30.2%
Deposits 71.3% 28.7%
Equity 68.7% 31.3%
Net Interest Income 70.1% 29.9%
NonInterest Income 87.9% 12.1%
NonInterest Expense 82.4% 17.6%
Earnings 67.2% 32.8%
</TABLE>
Applying the exchange ratio to Tehama Bancorp's common stock results in
Humboldt Bancorp shareholders owning approximately 64% of the combined company.
39
<PAGE> 40
Exchange Ratio Analysis
D.A. Davidson calculated the multiple which the merger consideration
represents based on the exchange ratio in the merger agreement of 1.775 shares
of Humboldt Bancorp common stock for each share of Tehama Bancorp common stock
and the closing price of Humboldt Bancorp common stock as of August 16, 2000.
Based on the $11.625 closing price of Humboldt Bancorp on August 16, 2000, the
merger consideration represented a per share value of $20.63 per share for each
share of Tehama Bancorp. The multiples were calculated based on Tehama Bancorp's
June 30, 2000, book value per share of $10.67 and its last twelve month earnings
per share of $1.42. The transaction price to book value was 193% and the
transaction price to last twelve month earnings per share was 14.5 times.
Comparison to Selected Transactions
After completing its analysis of the exchange ratio based on the
relative contributions of the parties, D.A. Davidson reviewed comparable
transactions to validate its analysis. D.A. Davidson performed an analysis of
selected mergers of banking organizations in California and Oregon, the western
United States and nationwide that have been announced year-to-date as of August
16, 2000. Generally, the comparable transactions reinforced D.A. Davidson's
opinion that the exchange ratio was fair. The information that we reviewed
included, but was not limited to, the following:
Size of acquired company
Total transaction value, in aggregate and on a per share basis
Resulting price-to-book ratios and price-to-earnings multiples
D.A. Davidson's initial selection of a guideline group yielded 14
mergers of banks in California and Oregon announced in 2000 as of August 16,
2000. Within that group of 14, D.A. Davidson excluded two transactions because
of a lack of financial information or the transaction being a merger of equals.
These remaining 12 transactions, which were used in D.A. Davidson's
analysis, are summarized in the data presented below.
D.A. Davidson also looked at bank merger multiples for the second
quarter of 2000 on both a national level and in the western United States
consisting of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, Washington and Wyoming.
All Recent Bank Acquisitions in the U.S.
There were 35 bank merger or acquisition transactions announced during
the second quarter of 2000. The valuation multiples involved with these
transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
<TABLE>
<CAPTION>
National Tehama Implied
Multiple Bancorp Value/Share
-------- -------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 24.3x $ 1.42 $ 34.51
Average Price to Book 217% $ 10.67 $ 23.15
</TABLE>
Western U.S. Bank Acquisitions
There were six bank merger or acquisition transactions announced during
the second quarter of 2000. The valuation multiples involved with these
transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
40
<PAGE> 41
<TABLE>
<CAPTION>
Western US Tehama Implied
Multiple Bancorp Value/Share
---------- --------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 27.7x $ 1.42 $ 39.33
Average Price to Book 234% $ 10.67 $ 24.97
</TABLE>
California and Oregon Bank Acquisitions
There were 12 bank merger or acquisition transactions announced between
January 1, 2000, and August 16, 2000, in California and Oregon, excluding the
previously mentioned two transactions. The valuation multiples involved with
these transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
<TABLE>
<CAPTION>
California/Oregon Tehama Implied
Multiples Bancorp Value/Share
----------------- --------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 20.8x $ 1.42 $ 29.54
Average Price to Book 244% $ 10.67 $ 26.03
</TABLE>
The proposed purchase multiples compare favorably to the California and
Oregon multiples for similar transactions announced in 2000 for Humboldt Bancorp
shareholders.
<TABLE>
<CAPTION>
Comparable Comparable Comparable Humboldt/Tehama
Group Low Group Median Group High Multiples
---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Price/LTM EPS 19.4x 20.8x 32.9x 13.3x
Price to Book 111% 257% 361% 193%
</TABLE>
Discounted Cash Flow Analysis
Using a discounted cash flow analysis, D.A. Davidson estimated the
future stream of cash flows that Tehama Bancorp could produce over the next five
years, under various circumstances, assuming Tehama Bancorp performed in
accordance with the earnings forecasts of Tehama Bancorp's management. D.A.
Davidson then estimated the terminal values for Tehama Bancorp common stock at
the end of the period by applying multiples ranging from 8.0 times to 11.0 times
earnings projected in year five. The cash flow streams and terminal values were
then discounted to present values using different discount rates (ranging from
13.0% to 15.0%) chosen to reflect different assumptions regarding the required
rates of return to holders or prospective buyers of Tehama Bancorp common stock.
The discounted cash flow analysis indicated reference ranges of between $19.22
and $28.41 per share for Tehama Bancorp's common stock. These values compare to
the merger consideration of $20.63 based on a conversion ratio of 1.775 and a
Humboldt Bancorp closing price of $11.625 as of August 16, 2000.
Pro Forma Merger Analysis
D.A. Davidson reviewed projections prepared by Humboldt Bancorp
management for year-end 2000 and 2001. D.A. Davidson performed an arithmetic
adjustment to year-end 2001 results to forecast 2002 results. This adjustment
consisted of applying the same percentage increase or decrease between 2000 and
2001 to the change between 2001 and 2002.
While D.A. Davidson did not heavily weigh the projections for the
purpose of reaching its opinion, or in analyzing the exchange ratio, the
projections were provided to the board of directors to illustrate a possible
outcome for the proposed combined corporation.
41
<PAGE> 42
The projections assume that there will be no substantial shift in future
economic, financial market, competitive and regulatory conditions, all of which
are difficult or impossible to predict and largely beyond the control of both
parties to the merger.
Actual results achieved by the combined company following the merger may
vary from this and other forecasts, and the variations may be material. Like all
forward-looking statements, this analysis produces results that are inherently
uncertain.
Accretion/Dilution Analysis
Another analytic method that D.A. Davidson considered in reaching its
opinion is derived directly from the forecast of combined company performance
following the merger completion. This review examines whether and by how much
the proposed transaction is expected to be accretive to Humboldt Bancorp
stockholders in fiscal year 2001, the first year of the combined company's
operations. The critical part of this analysis is the set of assumptions which
drive the earnings per share estimate.
D.A. Davidson concluded that Humboldt Bancorp management's assertion
that the proposed merger will be neutral to slightly accretive to Humboldt
Bancorp shareholders in 2001 is reasonable. D.A. Davidson noted that the
analysis did not take into consideration any possible revenue growth coming from
the wider variety of commercial products being offered to customers. It also
does not anticipate any buyback of stock.
D.A. Davidson's opinion is directed only to the Humboldt Bancorp board
of directors and the question of whether the exchange ratio is fair from a
financial perspective and does not constitute a recommendation to any Humboldt
Bancorp stockholder to vote in favor of the merger.
D.A. Davidson acts as a market maker in Humboldt Bancorp common stock.
In the ordinary course of D.A. Davidson's business, D.A. Davidson and its
affiliates may actively trade securities of Humboldt Bancorp and Tehama Bancorp
for their own and for the accounts of customers, and may, therefore, at any time
hold a long or short position in such securities.
Humboldt Bancorp retained D.A. Davidson to deliver a fairness opinion in
connection with the merger. Humboldt Bancorp agreed to pay D.A. Davidson a total
fee of $85,000, plus expenses. Humboldt Bancorp also agreed to indemnify D.A.
Davidson and its officers and employees against certain liabilities in
connection with its services under the engagement letter.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion describes the material U.S. federal income tax
consequences of the merger to shareholders of Tehama Bancorp and Humboldt
Bancorp. This discussion is based on the Internal Revenue Code of 1986, as
amended ("Code"), Treasury Department Regulations, published positions of the
Internal Revenue Service ("IRS"), rulings, and court decisions now in effect,
all of which are subject to change, possibly with retroactive effect.
Additionally, this discussion is based on factual representations made by
Humboldt Bancorp and Tehama Bancorp.
This discussion is general in nature, and it may not apply to some
Tehama Bancorp shareholders. In particular, this discussion pertains only to
those Tehama Bancorp shareholders who hold Tehama Bancorp common stock as a
"capital asset" (generally property held for investment) and who report income
and deductions for U.S. federal income tax purposes on the cash (as opposed to
an accrual) basis. Also, this discussion does not explain all aspects of U.S.
federal income taxation that may be relevant because of your personal investment
circumstances or because you are subject to special provisions of U.S. federal
income tax law, such as those applicable to foreign
42
<PAGE> 43
persons, life insurance companies, or tax-exempt organizations. Furthermore,
this discussion does not address the following topics that may be of concern to
you:
- State, local or foreign tax laws;
- Estate and gift tax considerations;
- Tax consequences to Tehama Bancorp shareholders who received
their Tehama Bancorp common stock through stock options or
otherwise as compensation.
Since this discussion may not apply to all Tehama Bancorp shareholders
and may not address all topics that are relevant to any particular shareholder,
each of you should consult your own tax advisor as to the specific tax
consequences of the merger to you because of your particular circumstances.
An opinion of Bartel Eng & Schroder, a Law Corporation, has been
delivered to Humboldt Bancorp and Tehama Bancorp which states that for federal
income tax purposes, under current law, assuming that the merger and related
transactions will take place as described in the merger agreement, the merger
will constitute a reorganization under Section 368 of the Code. Assuming the
opinion is not withdrawn or changed due to changes in laws, or otherwise, prior
to the date of the merger, the material federal income tax consequences of the
merger, in the opinion of Bartel Eng & Schroder, will be as follows:
- No gain or loss will be recognized by Tehama Bancorp or Humboldt
Bancorp in the merger;
- The basis and holding periods of the assets of Tehama Bancorp
will carry over to Humboldt Bancorp;
- No gain or loss will be recognized by the holders of Tehama
Bancorp common stock upon their receipt of Humboldt Bancorp
common stock upon conversion of their Tehama Bancorp common
stock;
- The receipt of cash in lieu of fractional share interests of
Humboldt Bancorp common stock by holders of Tehama Bancorp common
stock will result in gain or loss equal to the difference between
the payment and the tax basis allocated to their fractional share
interests. Whether the gain or loss will constitute capital gain
or loss for a particular shareholder will depend upon whether
that shareholder's Tehama Bancorp common stock is held as a
capital asset at the date of the merger;
- The receipt of cash upon exercise of dissenters' rights by
holders of Humboldt Bancorp common stock or Tehama Bancorp common
stock will result in gain or loss equal to the difference between
the payment and the tax basis of their shares. Whether the gain
or loss shall constitute capital gain or loss for a particular
shareholder will depend upon whether that shareholder's Humboldt
Bancorp common stock or Tehama Bancorp common stock is held as a
capital asset at the date of the merger, and whether the
requirements of Section 302(b) of the Code are met in the
shareholder's exchange;
- The tax basis of Humboldt Bancorp common stock received by the
holders of Tehama Bancorp common stock will be the same as the
tax basis of the Tehama Bancorp common stock converted in the
merger; and
- The holding period of Humboldt Bancorp common stock in the hands
of the shareholders of Tehama Bancorp will include the period
during which the Tehama Bancorp common stock converted in the
merger was held, provided the Tehama Bancorp common stock was
held as a capital asset on the date of the merger.
43
<PAGE> 44
In developing its opinion, Bartel Eng & Schroder relied upon facts and
presentations provided to it by Humboldt Bancorp's management and Tehama
Bancorp's management and made no independent determination of the facts and
representations. The representations that Humboldt Bancorp's management and
Tehama Bancorp's management made were factual in nature. In addition, Bartel Eng
& Schroder's opinion was based upon the analysis of the current Code, the
Treasury Department Regulations, IRS rulings, and current case law. The
foregoing are subject to change, and any change may be retroactively effective.
If so, Bartel Eng & Schroder's opinion may be affected and may not be relied
upon. Bartel Eng & Schroder assumes no responsibility to update its opinion
after the date of the merger because of such change. Further, any variations or
differences in the facts of representations, for any reason, may affect Bartel
Eng & Schroder's opinion, perhaps in an adverse manner, and make it
inapplicable.
RIGHTS OF DISSENTING TEHAMA BANCORP AND HUMBOLDT BANCORP SHAREHOLDERS
If a shareholder of Tehama Bancorp votes against the merger or abstains
from voting, he or she is entitled to dissenters' rights under Chapter 13 of the
California General Corporation Law ("Chapter 13"). Because Humboldt Bancorp
common stock is listed on the Nasdaq National Market, dissenters' rights will be
available to the shareholders of Humboldt Bancorp only if the holders of five
percent (5%) or more of Humboldt Bancorp common stock make a written demand upon
Humboldt Bancorp for the purchase of dissenting shares in accordance with
Chapter 13. With respect to Humboldt Bancorp, if this condition is satisfied and
the merger is consummated, shareholders of Humboldt Bancorp who dissent from the
merger, and with respect to Tehama Bancorp, shareholders of Tehama Bancorp who
dissent from the merger by complying with the procedures set forth in Chapter
13, would be entitled to receive an amount equal to the fair market value of
their shares as of September 19, 2000, the day before the public announcement of
the merger. Chapter 13 is reprinted in Appendix D to this document, and is
incorporated by this reference.
The following discussion is a summary and not a complete statement of
the law relating to dissenters' rights. A dissenting shareholder of either
Tehama Bancorp or Humboldt Bancorp should review Appendix D carefully if he or
she wishes to exercise dissenter's rights or if he or she wishes to preserve the
right to do so. Failure to comply with the procedures in Chapter 13 will result
in the loss of dissenter's rights. Also, if you have a beneficial interest in
shares of Tehama Bancorp common stock, or Humboldt Bancorp common stock, as the
case may be, held of record in the name of another person, like a broker or
nominee, and you wish to exercise your dissenter's rights, you should act
promptly to cause the shareholder of record to follow the steps summarized
below.
If the merger is completed, a Tehama Bancorp or Humboldt Bancorp
shareholder who elects to exercise dissenters' rights and who properly and
timely perfects his or her rights will be entitled to receive the "fair market
value," in cash, of his or her shares. Under California law fair market value
will be determined as of September 19, 2000, the day before the first
announcement of the terms of the merger, and will exclude any appreciation or
depreciation in the shares caused by the merger. See "Market Prices."
If the merger agreement is approved at the Tehama Bancorp meeting and at
the Humboldt Bancorp meeting, Tehama Bancorp, in the case of a Tehama Bancorp
shareholder, or Humboldt Bancorp, in the case of a Humboldt Bancorp shareholder,
will within ten days of the approval mail a notice to the holders of record of
shares of Tehama Bancorp common stock, or Humboldt Bancorp common stock, as the
case may be, who did not vote in favor of the merger or who abstained from
voting. A holder of Tehama Bancorp common stock or Humboldt Bancorp common stock
who votes in favor of the merger agreement or who executes and returns a proxy
with no voting instructions indicated will lose any dissenters' rights with
respect to those shares.
The notice will set forth the fair market value price of the dissenting
shares as determined by Tehama Bancorp in the case of a Tehama Bancorp
shareholder and by Humboldt Bancorp in the case of a Humboldt Bancorp
shareholder. The notice constitutes an offer by Tehama Bancorp, or Humboldt
Bancorp, as the case may be, to purchase any dissenting shares from the
dissenting shareholders at the price stated.
44
<PAGE> 45
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 provided written demand upon
Tehama Bancorp, or Humboldt Bancorp as the case may be, to pay
the price stated in the notice. The written demand must state the
number of Tehama Bancorp shares or Humboldt Bancorp shares held
and the number of shares which the dissenting shareholder demands
Tehama Bancorp, or Humboldt Bancorp as the case may be, purchase
for cash and a statement of the amount which the dissenting
shareholder claims to be the fair market value of the dissenting
shares as of the day before the announcement of the proposed
merger. That statement will constitute an offer by the dissenting
shareholder to sell the dissenting shares to Tehama Bancorp, or
Humboldt Bancorp as the case may be, at that price.
- The dissenting shareholder must submit share certificate(s)
representing the dissenting shares to Tehama Bancorp at Tehama
Bancorp's principal office or, in the case of a dissenting
Humboldt Bancorp shareholder, Humboldt Bancorp at its principal
office. Tehama Bancorp, or Humboldt Bancorp as the case may be,
will stamp or endorse the certificate(s) with a statement that
the shares are dissenting shares or exchange the shareholder's
certificates for certificates of appropriate denomination so
stamped or endorsed. If the price contained in the notice is
acceptable to the dissenting shareholder, the dissenting
shareholder may demand the same price. This would constitute an
acceptance by the dissenting shareholder of the offer by Tehama
Bancorp, or Humboldt Bancorp as the case may be, to purchase the
dissenting shareholder's stock at the price stated in the notice.
The demand by holders of Tehama Bancorp common stock and shares
certificates should be sent to Tehama Bancorp, 239 South Main Street, Red Bluff,
California 96080, Attention: Mr. William P. Ellison, President. The demand by
holders of Humboldt Bancorp common stock and shares certificates should be sent
to Humboldt Bancorp, 2440 Sixth Street, Eureka, California 95501, Attention: Mr.
Theodore S. Mason, President.
If Tehama Bancorp, or Humboldt Bancorp as the case may be, and a
dissenting shareholder agree on the price for the dissenting shares, Tehama
Bancorp, or Humboldt Bancorp as the case may be, must by law pay to the
dissenting shareholder the agreed price, together with interest at the legal
rate on judgments from the date of the agreement between Tehama Bancorp, or
Humboldt Bancorp as the case may be, and the dissenting shareholder, within the
later of (i) 30 days after the date of the agreement, or (ii) 30 days after
completion of all conditions to the merger. Also, Tehama Bancorp, or Humboldt
Bancorp as the case may be, may withhold payment until the dissenting
shareholder surrenders the certificates for the dissenting shares.
If Tehama Bancorp, or Humboldt Bancorp as the case may be, and a
dissenting shareholder fail to agree on the price for the dissenting shares or
disagree as to whether the dissenting shareholder's shares are dissenting
shares, the holder may, within six months after the notice is mailed, file a
complaint in court to determine the price, or may intervene in any pending
action brought by any other dissenting shareholder.
In addition, a Tehama Bancorp shareholder or Humboldt Bancorp
shareholder may vote in favor of the merger agreement as to part of his or her
shares without jeopardizing the dissenting status of those shares not voted in
favor of the merger agreement. However, a Tehama Bancorp shareholder, or
Humboldt Bancorp shareholder as the case may be, should clearly specify the
number of shares of Tehama Bancorp, or Humboldt Bancorp as the case may be, not
voted in favor of the merger agreement.
Dissenting shares may lose their status as dissenting shares, and the
holders will lose any right to demand payment, if any of the following takes
place:
45
<PAGE> 46
- the merger is abandoned. In this event, Tehama Bancorp, or
Humboldt Bancorp as the case may be, will pay on demand to any
dissenting shareholder who began proceedings in good faith under
Chapter 13 all necessary expenses and reasonable attorneys' fees
incurred in those proceedings;
- the shares are transferred before being submitted for endorsement
or are surrendered for conversion into shares of another class;
- the dissenting shareholder and Tehama Bancorp, or Humboldt
Bancorp as the case may be, do not agree upon the status of the
dissenting shares or on the price of the dissenting shares, but
the dissenting shareholder fails to file suit against Tehama
Bancorp, or Humboldt Bancorp as the case may be, or to intervene
in a pending action within six months following the date on which
the notice was mailed to the shareholder; or
- the dissenting shareholder withdraws his or her demand for the
purchase of the dissenting shares with the consent of Tehama
Bancorp, or Humboldt Bancorp as the case may be.
Under the terms of the merger agreement, in the event that holders
owning more than 10% of the outstanding common stock of Tehama Bancorp exercise
their dissenter's rights, including any shares of common stock of Humboldt
Bancorp held by a Humboldt Bancorp stockholder exercising his or her dissenter's
rights, then either Tehama Bancorp or Humboldt Bancorp may terminate the
agreement.
MARKET PRICES
Market for Humboldt Bancorp Common Stock; Stock Price and Dividend Information
Since March 29, 2000, Humboldt Bancorp's common stock has been listed on
the Nasdaq National Market under the symbol HBEK. Previously, Humboldt Bancorp's
common stock was quoted on the OTC Bulletin Board. The following table discloses
the high and low prices of Humboldt Bancorp common stock as listed on the Nasdaq
National Market since March 29, 2000, and prior to that time, the high and low
bid prices as quoted on the OTC Bulletin Board.
No assurances can be given, however, that these high and low prices
reflected the actual market value of our common stock. The high and low prices
have been adjusted to give effect to all stock dividends and splits. In
addition, the prices indicated reflect inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ ------
<S> <C> <C>
March 31, 1998 $11.45 $10.20
June 30, 1998 $11.80 $ 9.10
September 30, 1998 $11.35 $ 9.80
December 31, 1998 $11.25 $ 8.75
March 31, 1999 $10.80 $ 8.75
June 30, 1999 $11.60 $ 8.75
September 30, 1999 $14.65 $10.90
December 31, 1999 $14.90 $11.35
March 31, 2000 $15.00 $10.00
June 30, 2000 $13.69 $11.00
September 30, 2000 $12.25 $10.63
December 31, 2000 $11.13 $ 9.25
</TABLE>
46
<PAGE> 47
As of December 31, 2000, our shares of common stock were held by
approximately 1,084 shareholders, not including those held in street name by
several brokerage firms. As of December 31, 2000, a total of 1,127,920 shares of
our common stock underlie outstanding options and warrants. The number of shares
outstanding also excludes any shares that may be acquired upon the exchange of
certificates of interest in a promissory note issued in connection with our
acquisition of Capitol Thrift & Loan.
We distributed a 10% stock dividend on the common stock on May 30, 1996,
1997, 1998, and February 7, 2000. In addition, effective June 30, 1999, we
completed a 5-for-2 stock split. We have never declared a cash dividend on the
common stock. Payment of future dividends is at the discretion of our board of
directors, subject to a number of factors, including our results of operations,
general business conditions, capital requirements, general financial condition,
and other factors deemed relevant by our board of directors. Further, our
ability to issue cash dividends is subject to meeting certain regulatory
requirements. See "Supervision and Regulation of Humboldt Bancorp."
Market for Tehama Bancorp Common Stock; Stock Price and Dividend Information
There is limited trading in shares of the common stock of Tehama
Bancorp, which is not listed on a major exchange, but trading information is
available on a delayed basis on the OTC Bulletin Board under the symbol THMB.
There were approximately 659 shareholders of record as of December 31, 2000.
The following table summarizes those trades of which Tehama Bancorp has
knowledge, setting forth the approximate high and low bid prices for the periods
indicated. The high and low bid prices have been adjusted to give effect to all
stock dividends. The high and low bid prices are based upon trades of which
Tehama Bancorp was aware, and do not include purchases of common stock pursuant
to the exercise of stock options or repurchases of common stock by Tehama
Bancorp. There may be high and low bid prices of which Tehama Bancorp is
unaware.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ ------
<S> <C> <C>
March 31, 1998 $15.35 $15.00
June 30, 1998 $13.64 $13.18
September 30, 1998 $13.64 $13.18
December 31, 1998 $12.73 $11.82
March 31, 1999 $12.05 $11.14
June 30, 1999 $12.05 $10.00
September 30, 1999 $10.45 $ 8.86
December 31, 1999 $10.91 $ 9.09
March 31, 2000 $13.64 $10.57
June 30, 2000 $14.25 $11.02
September 30, 2000 $18.38 $16.50
December 31, 2000 $17.88 $16.44
</TABLE>
In 1997, 1998 and 1999, Tehama Bancorp declared cash dividends of $0.36,
$0.36 and $0.45 per share, respectively, as adjusted. In March 2000, Tehama
Bancorp declared a 10% stock dividend.
47
<PAGE> 48
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP COMMON STOCK
The following is a summary of the material differences between the
current rights of shareholders of Tehama Bancorp and those of Humboldt Bancorp
shareholders , and a description of Humboldt Bancorp's common stock. Following
the merger, the shareholder rights of former Tehama Bancorp shareholders who
exchanged their shares for Humboldt Bancorp, will be governed by the Articles of
Incorporation and Bylaws of Humboldt Bancorp. This description is qualified in
its entirety by reference to the California General Corporation Law, Humboldt
Bancorp's Articles of Incorporation and Bylaws, and Tehama Bancorp's Articles of
Incorporation and Bylaws. Copies of Humboldt Bancorp's Articles and Bylaws will
be sent to you upon a request made to the corporate secretary. Humboldt Bancorp
may, in the future, consider amending its Articles of Incorporation and Bylaws
to provide for certain anti-takeover provisions. However, any proposed
amendments to Humboldt Bancorp Articles of Incorporation will be subject to
shareholder approval.
Organization - Governing Law
Humboldt Bancorp and Tehama Bancorp are both corporations organized
under the laws of the State of California. Each is governed by the General
Corporation Law, its Articles of Incorporation filed with the California
Secretary of State, and by its Bylaws.
Authorized Stock
Tehama Bancorp's Articles of Incorporation authorize the issuance of
4,000,000 shares of common stock, no par value, and 2,000,000 shares of Tehama
Bancorp's preferred stock, no par value. At the record date, _____ shares of
Tehama Bancorp's common stock were issued and outstanding, and no shares of
Tehama Bancorp's preferred stock were outstanding. All the outstanding shares of
Tehama Bancorp common stock are fully paid and nonassessable and each
participates equally in dividends, which are payable when and as declared by
Tehama Bancorp's board of directors out of funds legally available therefor.
Humboldt Bancorp's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value. At the record date of
___________, ____ shares of Humboldt Bancorp's common stock were issued and
outstanding. Humboldt Bancorp has no preferred stock authorized. All of the
outstanding shares of Humboldt Bancorp common stock are fully paid and
nonassessable and each participates equally in dividends, which are payable when
and as declared by Humboldt Bancorp's board of directors out of funds legally
available therefor.
Board of Directors; Number of Directors
Tehama Bancorp's bylaws currently provide that the number of directors
of Tehama Bancorp will not be less than nine nor more than 17, with the number
currently fixed at 14 by resolution of the board of directors.
Humboldt Bancorp's bylaws provide for a range of directors from a
minimum of eight to a maximum of 15, with the exact number currently fixed at
12. After the merger, there will be 11 directors of Humboldt Bancorp of which
four will be former directors of Tehama Bancorp.
Term of Directors
The Articles of Incorporation of both Tehama Bancorp and Humboldt
Bancorp provide for one year terms for all directors, with annual election.
48
<PAGE> 49
Election of Directors; Nomination of Directors; Voting Rights
Holders of common stock of Tehama Bancorp and Humboldt Bancorp are
entitled to one vote, in person or by proxy, for each share of common stock held
of record in the shareholder's name, on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, the
shares may be voted cumulatively.
The bylaws of Humboldt Bancorp require a shareholder who intends to
nominate a candidate for election to the board of directors to give not less
than 21 business days' advance notice to the secretary of Humboldt Bancorp. A
shareholder wishing to nominate any person for election as a director must
provide Humboldt Bancorp with information concerning the nominee and the
proposing shareholder. Tehama Bancorp's bylaws has a similar provision regarding
nominations for directors, except Tehama Bancorp only requires 21 calendar days'
advance notice.
Amendment of Articles or Bylaws
An amendment to the Articles of Incorporation of Tehama Bancorp and
Humboldt Bancorp must be approved by a majority of the board of directors and by
the shareholders owning a majority of the outstanding shares of common stock.
The bylaws of either Tehama Bancorp or Humboldt Bancorp may be amended by a
majority of the board of directors, except that the maximum and minimum number
of directors specified in its bylaws may be changed only with the approval of
the shareholders.
Majority Voting Requirements
For all actions requiring shareholder approval or consent, such as a
merger, sale of substantially all of the assets or an amendment to the Articles
of Incorporation, both Tehama Bancorp and Humboldt Bancorp require approval of
holders owning a majority of the outstanding shares of common stock.
Other Rights
Each share of Tehama Bancorp common stock has the same rights,
privileges and preferences as every other share, and shareholders will share
equally in Tehama Bancorp's net assets upon liquidation or dissolution. Tehama
Bancorp's common stock has no conversion or redemption rights or sinking fund
provisions. Holders of Tehama Bancorp common stock do not have preemptive rights
to subscribe to additional stock issued by Tehama Bancorp.
The holders of Humboldt Bancorp common stock have no preemptive or other
subscription rights and there are no redemption, sinking fund or conversion
privileges applicable thereto. Upon Humboldt Bancorp's liquidation, dissolution
or winding up, holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities.
Indemnification
Under the California General Corporation Law, a corporation has the
power to indemnify present and former directors, officers, employees and agents
against expenses, judgments, fines and settlements if that person acted in good
faith and in a manner the person reasonably believed to be in the best interests
of the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe the conduct of the person was unlawful. A corporation also has
the power to indemnify a person who is a party to any action by or in the right
of the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
49
<PAGE> 50
The indemnification authorized by the General Corporation Law is not
exclusive, and a corporation may grant its directors, officers, employees or
other agents additional rights to indemnification. The Articles and Bylaws of
both Tehama Bancorp and Humboldt Bancorp provide that each shall indemnify its
officers and directors to the fullest extent permitted under California law. For
a discussion regarding indemnification of officers and directors of Humboldt
Bancorp, see "Management of Humboldt Bancorp - Limited Liability and
Indemnification."
Capital Stock Description
Holders of Humboldt Bancorp and Tehama Bancorp common stock are entitled
to dividends when, as and if declared by Humboldt Bancorp's or Tehama Bancorp's
board of directors out of funds legally available therefor subject to
restrictions on payment of dividends imposed by the California Corporations Code
and other applicable regulatory limitations. No preferred stock is authorized in
the Humboldt Bancorp Articles. Preferred stock is authorized in the Tehama
Bancorp Articles, but no preferred stock is outstanding.
Shareholder Protection Rights Plan
Tehama Bancorp has adopted a shareholders rights protection plan under
which Tehama Bancorp shareholders have the right to purchase shares of Tehama
Bancorp preferred stock in the event of a hostile acquisition or tender offer
for Tehama Bancorp shares. The plan is designed to discourage potential
acquirers from attempting to gain control of Tehama Bancorp without negotiating
with the board of directors. Each right entitles the holder, when and if certain
specified takeover activity occurs, to purchase from Tehama Bancorp
one-hundredth of a share of Series A Junior Participating preferred stock at a
price of $55 per share. The proposed merger will not trigger these rights and
the rights will terminate upon completion of the merger. Humboldt Bancorp does
not have a similar plan.
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER
The Articles of Incorporation and Bylaws of Humboldt Bancorp will
continue as the Articles of Incorporation and Bylaws of Humboldt Bancorp
following the merger. The rights, preferences and privileges of Humboldt Bancorp
common stock following the merger will be the same as those described above for
Humboldt Bancorp common stock. Further, it is anticipated that following the
merger, Humboldt Bancorp will continue to operate the businesses of Humboldt
Bancorp, Humboldt Bank, Capitol Valley Bank, Capitol Thrift, and Tehama Bank in
substantially the same form as such businesses were conducted prior to the
merger. Humboldt Bancorp anticipates operating Tehama Bank as a subsidiary of
Humboldt Bancorp and to maintain Tehama Bank's current locations, president and
board members subject to the addition of two new directors selected by Humboldt
Bancorp.
HUMBOLDT BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Humboldt
Bancorp (on a consolidated basis) as of and for the years ended December 31,
1995, 1996, 1997, 1998 and 1999, and as of and for the nine months ended
September 30, 1999 and 2000. On April 7, 2000, Humboldt Bancorp completed the
acquisition of Capitol Thrift and Loan, therefore the selected financial data
includes the results of operation and other financial data subsequent to its
acquisition on April 7, 2000. The selected financial data should be read in
conjunction with Management's Discussion and Analysis and with the financial
statements and pro forma financial statements presented elsewhere herein.
50
<PAGE> 51
<TABLE>
<CAPTION>
As Of And For The
As Of And For The Nine Months
(dollars in thousands except per share data) Years Ended December 31, Ended September 30,
-------------------------------------------------------------- -----------------------
1995 (1) 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 25,240 $ 17,844 $ 30,694
Interest expense 5,244 5,549 7,024 7,742 8,345 5,635 12,442
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 9,997 11,013 13,029 15,762 16,895 12,209 18,252
Provision for loan and lease losses 792 533 773 2,124 1,046 697 1,602
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan and lease losses 9,205 10,480 12,256 13,638 15,849 11,512 16,650
Non-interest income 3,509 5,747 8,109 12,473 19,523 13,792 20,971
Non-interest expense 9,149 11,325 15,496 19,578 28,494 20,577 30,120
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes 3,565 4,902 4,869 6,533 6,878 4,727 7,501
Provision for income taxes 1,363 1,926 1,611 2,517 2,271 1,537 2,481
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 4,607 $ 3,190 $ 5,020
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA
Investment securities $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 115,360 $ 106,210 $ 100,421
Total net loans and leases $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 225,122 $ 203,098 $ 382,982
Total assets $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 423,649 $ 419,167 $ 592,225
Total deposits $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 378,630 $ 375,815 $ 516,925
Total shareholders' equity $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 34,139 $ 32,816 $ 46,985
PER SHARE DATA (2)
Net income
Basic $ 0.48 $ 0.64 $ 0.69 $ 0.82 $ 0.91 $ 0.64 $ 0.88
Diluted $ 0.45 $ 0.58 $ 0.61 $ 0.75 $ 0.83 $ 0.58 $ 0.82
Book value $ 3.65 $ 4.18 $ 4.94 $ 5.66 $ 6.56 $ 6.32 $ 7.94
Weighted average shares outstanding
Basic 4,624,562 4,637,539 4,755,846 4,876,404 5,048,547 4,992,488 5,701,720
Diluted 4,913,343 5,135,469 5,324,632 5,378,441 5,556,821 5,467,763 6,139,131
Actual outstanding 4,636,000 4,694,000 4,769,000 4,917,000 5,204,000 5,193,497 5,916,343
SELECTED RATIOS (3)
Return on average assets 1.22% 1.48% 1.30% 1.32% 1.27% 1.24% 1.29%
Return on average equity 14.57% 16.96% 14.50% 16.02% 15.10% 14.26% 15.98%
Total loans to deposits 65.96% 74.17% 61.72% 65.51% 59.46% 54.04% 74.09%
Net interest margin 6.07% 5.98% 5.85% 5.94% 5.39% 5.50% 5.34%
Efficiency ratio(4) 67.74% 67.57% 73.31% 69.34% 78.24% 79.14% 76.79%
ASSET QUALITY RATIOS
Allowance for loan and lease losses to:
Ending total loans and leases 1.60% 1.48% 1.48% 1.62% 1.47% 1.58% 1.59%
Nonperforming assets 195.60% 351.80% 128.02% 420.22% 286.91% 289.97% 142.50%
Nonperforming assets to ending total
assets 0.49% 0.28% 0.65% 0.23% 0.28% 0.27% 0.73%
Net loan and lease charge-offs to
average loans and leases 0.25% 0.19% 0.36% 0.82% 0.37% 0.26% 0.24%
Allowance/nonperforming loans 195.60% 569.23% 139.14% 553.44% 319.73% 289.97% 175.09%
CAPITAL RATIOS
Average stockholders' equity to
average assets 8.40% 8.85% 8.48% 8.35% 8.42% 8.73% 8.09%
Tier 1 capital ratio (5) 11.37% 11.35% 10.79% 11.75% 10.90% 11.11% 10.56%
Total risk-based capital ratio (6) 12.62% 12.60% 12.30% 13.00% 12.07% 12.33% 11.81%
Leverage ratio (7) 7.64% 8.53% 7.60% 8.12% 7.50% 8.17% 8.58%
OTHER
Average assets $ 180,584 $ 201,780 $ 251,095 $ 304,515 $ 362,427 $ 342,679 $ 518,548
Average earning assets $ 164,844 $ 183,930 $ 222,555 $ 265,355 $ 314,038 $ 296,972 $ 456,310
Number of branch offices (8) 7 8 9 8 11 11 20
Number of full-time equiv. employees 130 175 209 250 318 319 399
</TABLE>
51
<PAGE> 52
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed
its reorganization as a holding company on January 2, 1996.
(2) Per share data reflects retroactive adjustment for 10% stock dividends
in 1994, 1995, 1996, 1997, 1998, and 2000, and a five-for-two stock
split in 1999. The per share data does not reflect the 42,539 shares of
Humboldt Bancorp restricted common stock subject to contingencies, which
have not yet been issued due to administrative delays.
(3) Annualized, when appropriate.
(4) Efficiency ratio is non-interest expense divided by the sum of net
interest income plus non-interest income.
(5) Tier I capital divided by risk-weighted assets.
(6) Total capital divided by risk-weighted assets.
(7) Tier I capital divided by quarterly average assets.
(8) Including head office.
52
<PAGE> 53
TEHAMA BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Tehama Bancorp
(on a consolidated basis) as of and for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and as of and for the nine months ended September 30, 1999
and 2000, and should be read in conjunction with Management's Discussion and
Analysis and with the financial statements presented elsewhere. Effective July
1, 1997, Tehama Bank became a subsidiary of Tehama Bancorp. Therefore, data for
the years ended December 31, 1995, 1996, reflect selected financial data of
Tehama Bank only.
<TABLE>
<CAPTION>
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,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 9,424 $ 10,274 $ 12,614 $ 13,850 $ 14,011 $ 10,289 $ 12,231
Interest expense 3,879 4,357 5,225 5,615 5,110 3,800 4,980
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 5,545 5,917 7,389 8,235 8,901 6,489 7,251
Provision for loan and lease losses 330 570 1,705 1,113 1,325 1,025 700
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan and lease losses 5,215 5,347 5,684 7,122 7,576 5,464 6,551
Non-interest income 1,775 1,860 2,191 2,801 3,740 2,710 3,021
Non-interest expense 4,102 4,309 5,961 7,062 8,260 6,123 6,253
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 2,888 2,898 1,914 2,861 3,056 2,051 3,319
Provision for income taxes 1,039 959 613 852 809 567 1,026
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,849 $ 1,939 $ 1,301 $ 2,009 $ 2,247 $ 1,484 $ 2,293
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (at period end):
Investment securities $ 22,367 $ 31,590 $ 28,427 $ 47,093 $ 38,514 $ 40,718 $ 38,010
Total assets $ 127,826 $ 138,122 $ 169,722 $ 199,782 $ 211,794 $ 203,124 $ 243,070
Total net loans and leases $ 80,582 $ 91,687 $ 118,732 $ 119,010 $ 143,026 $ 135,643 $ 166,933
Total deposits $ 113,587 $ 121,603 $ 152,671 $ 180,511 $ 188,467 $ 182,945 $ 209,791
Total shareholders' equity $ 13,086 $ 15,113 $ 15,910 $ 17,711 $ 18,638 $ 17,866 $ 21,335
PER SHARE DATA:(1)
Net income
Basic $ 1.06 $ 1.10 $ 0.73 $ 1.10 $ 1.20 $ 0.79 $ 1.21
Diluted $ 1.02 $ 1.07 $ 0.71 $ 1.06 $ 1.20 $ 0.79 $ 1.18
Book value per share $ 7.46 $ 8.53 $ 8.88 $ 9.63 $ 9.89 $ 9.48 $ 11.25
Weighted average shares outstanding:
Basic 1,741,918 1,760,832 1,776,634 1,830,352 1,871,707 1,867,549 1,887,465
Diluted 1,817,842 1,808,365 1,842,123 1,886,770 1,878,282 1,867,549 1,944,553
Actual outstanding 1,755,251 1,772,034 1,791,120 1,839,342 1,875,063 1,885,063 1,896,140
Cash dividends per share -- -- $ 0.36 $ 0.36 $ 0.45 $ 0.45 --
Dividend payout ratio -- -- 49.4% 33.1% 37.9% -- --
SELECTED FINANCIAL RATIOS (2)
Return on average assets 1.58% 1.47% 0.80% 1.10% 1.11% 1.00% 1.35%
Return on average shareholders' equity 15.44% 13.93% 8.39% 11.91% 12.52% 11.20% 15.29%
Total loans to deposits 71.7% 76.1% 78.9% 67.1% 77.0% 75.2% 80.7%
Net interest margins 5.03% 4.73% 4.86% 4.84% 4.89% 4.80% 4.89%
Efficiency ratio (3) 56.0% 55.4% 62.2% 64.0% 65.3% 66.6% 60.9%
</TABLE>
53
<PAGE> 54
<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,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS
Allowance for loan and lease losses to:
Ending total loans 0.99% 0.96% 1.40% 1.70% 1.48% 1.37% 1.41%
Nonperforming loans 264 600 1,277 931 1,368 730 3,181
Nonperforming assets to ending total
assets 0.60% 0.77% 0.95% 0.49% 0.66% 0.38% 1.38%
Net loan charge-offs (recoveries) to
average loans(2) 0.30% 0.55% 0.82% 0.61% 0.96% 1.29% 0.39%
Allowance/nonperforming loans 306.8% 149.5% 133.5% 223.5% 157.0% 257.4% 74.9%
CAPITAL RATIOS
Average shareholders' equity to average
assets 10.3% 10.6% 9.5% 9.2% 8.9% 8.9% 8.8%
Tier 1 capital ratio (4) 15.5% 16.8% 12.7% 13.6% 12.6% 12.8% 11.9%
Total risk-based capital ratio (5) 16.4% 17.7% 13.9% 14.9% 13.9% 14.0% 13.1%
Leverage ratio (6) 10.2% 11.5% 9.4% 9.4% 9.4% 9.1% 9.4%
OTHER
Average assets 116,723 131,798 163,107 182,545 202,637 198,760 226,315
Average earning assets 110,160 125,014 151,956 170,128 181,979 180,860 198,399
Number of branch offices (7) 3 3 5 6 6 6 6
Number of full-time equiv. employees 54 70 89 105 116 117 108
</TABLE>
(1) Per share data reflect retroactive adjustment for 10% stock dividends in
1996 and 2000.
(2) Annualized, when appropriate.
(3) Efficiency ratio is non-interest expense divided by the sum of net
interest income plus non-interest income.
(4) Tier I capital divided by risk-weighted assets.
(5) Total capital divided by risk-weighted assets.
(6) Tier I capital divided by quarterly average assets.
(7) Including head office.
54
<PAGE> 55
HUMBOLDT BANCORP PROFORMA SELECTED FINANCIAL DATA
The following table sets forth the pro forma selected financial data for
Humboldt Bancorp, on a consolidated basis, as of and for the years ended
December 31, 1995, 1996, 1997, 1998, and 1999, and as of and for the nine months
ended September 30, 1999 and 2000. The pro forma selected financial data take
into effect the merger of Global Bancorp which was consummated on April 7, 2000,
and proposed merger of Tehama Bancorp. The pro forma selected financial data
should be read in conjunction with the pro forma consolidated financial
statements of Humboldt Bancorp and Tehama Bancorp presented following this
table.
<TABLE>
<CAPTION>
As Of And For The
As Of And For The Nine Months
(dollars in thousands except per share data) Years Ended December 31, Ended September 30,
---------------------------------------------------------- ----------------------
1995 (1) 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 36,972 $ 40,786 $ 48,418 $ 55,256 $ 56,454 $ 40,155 $ 49,059
Interest expense 17,775 19,603 23,035 25,082 24,315 16,571 20,549
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 19,197 21,183 25,383 30,174 32,139 23,584 28,510
Provision for loan and lease losses 1,059 1,254 2,937 3,618 3,074 2,325 3,290
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan and lease losses 18,138 19,929 22,446 26,556 29,065 21,259 25,220
Non-interest income 5,875 8,186 11,381 17,510 26,635 18,570 26,201
Non-interest expense 18,756 20,270 27,334 33,880 44,656 31,915 40,400
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes 5,257 7,845 6,493 10,186 11,044 7,914 11,021
Provision for income taxes 1,910 2,861 2,075 3,896 3,746 2,604 3,993
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 3,347 $ 4,984 $ 4,418 $ 6,290 $ 7,298 $ 5,310 $ 7,028
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA
Investment securities $ 76,935 $ 76,061 $ 122,641 $ 140,466 $ 157,312 $ 153,376 $ 138,431
Total net loans and leases $ 277,354 $ 330,908 $ 387,527 $ 423,330 $ 492,870 $ 459,488 $ 591,068
Total assets $ 424,030 $ 472,719 $ 590,727 $ 663,700 $ 776,616 $ 758,521 $ 879,882
Total deposits $ 377,259 $ 420,574 $ 526,036 $ 577,117 $ 670,883 $ 664,047 $ 726,716
Borrowed funds $ 6,097 $ 6,085 $ 10,087 $ 22,168 $ 31,327 $ 26,313 $ 66,805
Total Shareholder's equity $ 37,285 $ 41,978 $ 46,729 $ 52,824 $ 60,042 $ 54,682 $ 67,585
PER SHARE DATA (2)
Net income
Basic $ 0.40 $ 0.59 $ 0.52 $ 0.72 $ 0.81 $ 0.60 $ 0.78
Diluted $ 0.38 $ 0.55 $ 0.48 $ 0.67 $ 0.77 $ 0.56 $ 0.73
Book value $ 4.44 $ 4.95 $ 5.44 $ 5.99 $ 6.55 $ 5.96 $ 7.28
Weighted average shares outstanding
Basic 8,355,903 8,402,476 8,549,371 8,765,278 9,010,827 8,903,340 9,051,970
Diluted 8,779,670 8,984,848 9,234,400 9,367,455 9,530,721 9,436,032 9,590,713
Actual shares outstanding 8,391,571 8,479,360 8,588,238 8,821,832 9,172,237 9,179,484 9,281,992
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed
its reorganization as a holding company as of January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends
in 1995, 1996, 1997, 1998, and 2000, and a five-for-two stock split in
1999 for Humboldt Bancorp and 10% stock dividends for Tehama Bancorp in
1995, 1996 and 2000.
55
<PAGE> 56
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF HUMBOLDT BANCORP AND TEHAMA BANCORP
This document contains, in addition to historical information,
"forward-looking statements." These statements are based on management's beliefs
and assumptions, and on information currently available to management.
Forward-looking statements include statements in which words such as "expect,""
anticipate," "intend," "plan," "believe," "estimate," "consider," or similar
expressions are used. Forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions, including those
described below. Many of the factors that will determine results are beyond our
ability to control or predict. You are cautioned not to put undue reliance on
any forward-looking statements. Therefore, the information set forth in this
document should be carefully considered when evaluating the business prospects
of Humboldt Bancorp and Tehama Bancorp on an individual and a consolidated
basis.
We will account for the merger using the pooling of interests method of
accounting. Under this method of accounting, the recorded assets, liabilities,
shareholders' equity, income and expenses of Humboldt Bancorp and Tehama Bancorp
are combined and reflected at their historical amounts. Further, the pooling of
interests accounting treatment avoids the creation of goodwill in the merger and
allows us to avoid charges against future earnings from amortizing goodwill. If
we are unable to use the pooling of interests method of accounting in the
merger, either party has the right to terminate the merger.
The Statement of Income tables that follow contain information which is
calculated by using "weighted average shares." The weighted average shares
calculation takes into consideration both the number of shares outstanding and
common share equivalents, and the length of time the shares and equivalents were
outstanding during the period. The weighted average shares calculation is then
used to calculate basic and diluted earnings per share.
The following pro forma financial information combines the historical
financial information of Humboldt Bancorp and Tehama Bancorp as if the merger
had occurred at the beginning of each period presented under the assumptions and
adjustments in the accompanying notes to the pro forma financial information.
The pro forma financial information does not take into consideration operational
efficiencies or additional expenses that might have occurred as a result of
combining the institutions. The following tables show the pro forma consolidated
condensed balance sheets of Humboldt Bancorp as if the merger had occurred as of
September 30, 2000, and pro forma consolidated condensed income statements of
Humboldt Bancorp as if the merger had occurred at the beginning of the
nine-month periods ended September 30, 2000 and 1999, and the years ended
December 31, 1999, 1998 and 1997.
Our pro forma financial information is not necessarily indicative of the
financial position or results of operations of Humboldt Bancorp following the
merger as it may be in the future or as it might have been had the merger been
effected on the assumed dates.
The pro forma financial information should be read in conjunction with
the historical financial statements of Humboldt Bancorp and Tehama Bancorp and
the notes related thereto, presented elsewhere in this document.
56
<PAGE> 57
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Humboldt Tehama Pro Forma
(dollars in thousands) Bancorp Bancorp Adjustments As Adjusted
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 29,232 $ 21,175 $ 532(b) $ 50,939
Federal funds sold 35,395 0 (735)(a) 34,660
Investment securities 100,421 38,010 138,431
Loans and leases, net 382,982 166,933 41,153(b) 591,068
Premises and equipment, net 14,854 2,575 267(b) 17,696
Accrued interest and other assets 29,341 14,377 3,370(b) 47,088
--------- --------- --------- ---------
TOTAL ASSETS $ 592,225 $ 243,070 $ 44,587 $ 879,882
========= ========= ========= =========
LIABILITIES
Deposits
Non-interest-bearing $ 132,724 $ 51,322 $ $184,046
Interest-bearing 384,201 158,469 542,670
--------- --------- --------- ---------
Total deposits 516,925 209,791 726,716
Accrued interest and other liabilities 11,651 2,404 4,721(b) 18,776
Borrowed funds 16,664 9,540 40,601(b) 66,805
--------- --------- --------- ---------
TOTAL LIABILITIES 545,240 221,735 45,322 812,297
STOCKHOLDERS' EQUITY
Common Stock 41,934 15,543 57,477
Retained earnings 5,083 6,367 (735)(a) 10,715
Accumulated other comprehensive loss (32) (575) (607)
--------- --------- --------- ---------
Total stockholders' equity 46,985 21,335 (735) 67,585
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 592,225 $ 243,070 $ 44,587 $ 879,882
========= ========= ========= =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
57
<PAGE> 58
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Humboldt
Global
Humboldt Global Tehama Tehama Tehama
(dollars in thousands Bancorp Bancorp (c) Pro Forma Bancorp Pro Forma Pro Forma
except per share amounts) (historical) (historical) Total (historical) Adjustments As Adjusted
------------ ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 24,178 $ 2,975 $ 27,153 $ 10,435 $ 3,031(b) $ 40,619
Interest on investments 6,516 128 6,644 1,796 8,440
----------- ----------- ----------- ----------- ----------- -----------
Total interest income 30,694 3,103 33,797 12,231 3,031 49,059
INTEREST EXPENSE
Interest on deposits 11,697 1,446 13,143 4,599 17,742
Interest on debt 745 12 757 381 1,669(b) 2,807
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense 12,442 1,458 13,900 4,980 1,669 20,549
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 18,252 1,645 19,897 7,251 1,362 28,510
PROVISION FOR LOAN AND LEASE LOSSES 1,602 518 2,120 700 470(b) 3,290
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES 16,650 1,127 17,777 6,551 892 25,220
NON-INTEREST INCOME
Service charges and fees 20,395 164 20,559 2,542 798(b) 23,899
Undistributed income of leasing company 323 323 323 (646)(b) 0
Net gain on sale and securitization of
loans and leases 342 342 156 1,878(b) 2,376
Net investment securities losses (89) (89) (89)
----------- ----------- ----------- ----------- ----------- -----------
Total non-interest income 20,971 164 21,135 3,021 2,030 26,201
----------- ----------- ----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 12,138 874 13,012 3,098 1,387(b) 17,497
Occupancy and equipment 2,747 199 2,946 898 137(b) 3,981
Other noninterest expense 15,235 481 15,716 2,257 949(b) 18,922
----------- ----------- ----------- ----------- ----------- -----------
Total non-interest expense 30,120 1,554 31,674 6,253 2,473 40,400
----------- ----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 7,501 (263) 7,238 3,319 449 11,021
PROVISION FOR INCOME TAXES 2,481 37 2,518 1,026 449(b) 3,993
----------- ----------- ----------- ----------- ----------- -----------
Net Income $ 5,020 $ (300) $ 4,720 $ 2,293 $ 0 $ 7,028
=========== =========== =========== =========== =========== ===========
NET INCOME PER SHARE OF COMMON STOCK
Basic earnings per share $ 0.88 $ 1.21 $ 0.78
===========
Diluted earnings per share $ 0.82 $ 1.18 $ 0.73
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,701,720 1,887,465 1,462,785(d) 9,051,970
===========
Diluted 6,139,131 1,944,553 1,507,029(d) 9,590,713
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
58
<PAGE> 59
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Global Global Humboldt Tehama
Humboldt Bancorp Bancorp Global Tehama Bancorp
(dollars in thousands Bancorp (historical) Pro Forma Pro Forma Bancorp Pro Forma
except per share amounts) (historical) (c) Adjustments Total (historical) Adjustments
------------ ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 14,136 $ 8,001 $ (375)(f-3) $ 21,762 $ 8,080 $ 1,767(b)
Interest on investments 3,708 722 73(f-1) 4,503 2,209
----------- ----------- ----------- ----------- ----------- -----------
Total interest income 17,844 8,723 (302) 26,265 10,289 1,767
INTEREST EXPENSE
Interest expense on deposits 5,410 4,293 9,703 3,795
Interest on debt 225 5 808(b)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense 5,635 4,293 0 9,928 3,800 808
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 12,209 4,430 (302) 16,337 6,489 959
PROVISION FOR LOAN AND LEASE LOSSES 697 479 1,176 1,025 124(b)
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES 11,512 3,951 (302) 15,161 5,464 835
NON-INTEREST INCOME
Service charges and fees 13,250 455 83(f-4) 13,788 2,254 558(b)
Undistributed income of leasing company 288 288 288 (576)(b)
Net gain on sale and securitization of
loans and leases 349 278 627 168 1,296(b)
Net investment securities losses (93) (93)
----------- ----------- ----------- ----------- ----------- -----------
Total non-interest income 13,794 733 83 14,610 2,710 1,278
NON-INTEREST EXPENSE
Salaries and employee benefits 8,659 1,522 10,181 3,143 1,085(b)
Occupancy and equipment 2,093 361 (111)(f-4) 2,343 760 98(b)
70(b)
Other noninterest expense 9,826 1,486 11,312 2,220 442(b)
----------- ----------- ----------- ----------- ----------- -----------
Total non-interest expense 20,578 3,369 (111) 23,836 6,123 1,695
----------- ----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,728 1,315 (108) 5,935 2,051 418
PROVISION FOR INCOME TAXES 1,538 363 1,901 567 418(b)
----------- ----------- ----------- ----------- ----------- -----------
Net Income $ 3,190 $ 952 $ (108) $ 4,034 $ 1,484 $ --
=========== =========== =========== =========== =========== ===========
NET INCOME PER SHARE OF COMMON STOCK
Basic earnings per share $ 0.64 $ 0.79
=========== ===========
Diluted earnings per share $ 0.58 $ 0.79
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 4,992,488 1,867,549
Diluted 5,467,763 1,867,549
</TABLE>
<TABLE>
<CAPTION>
Humboldt
Global
Tehama
(dollars in thousands Pro Forma
except per share amounts) Adjustments As Adjusted
----------- -----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 31,609
Interest on investments 1,733(g) 8,445
----------- -----------
Total interest income 1,733 40,054
INTEREST EXPENSE
Interest expense on deposits 1,746(g) 15,244
Interest on debt 289(h) 1,327
----------- -----------
Total interest expense 2,035 16,571
----------- -----------
Net interest income (302) 23,483
PROVISION FOR LOAN AND LEASE LOSSES 2,325
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES (302) 21,158
NON-INTEREST INCOME
Service charges and fees 16,600
Undistributed income of leasing company --
Net gain on sale and securitization of
loans and leases 2,091
Net investment securities losses (93)
----------- -----------
Total non-interest income -- 18,598
NON-INTEREST EXPENSE
Salaries and employee benefits 14,409
Occupancy and equipment
3,271
Other noninterest expense 224(g) 14,198
----------- -----------
Total non-interest expense 224 31,878
----------- -----------
INCOME BEFORE INCOME TAXES (526) 7,878
PROVISION FOR INCOME TAXES (282)(j) 2,604
----------- -----------
Net Income $ (944) $ 5,274
=========== ===========
NET INCOME PER SHARE OF COMMON STOCK
Basic earnings per share $ 0.59
===========
Diluted earnings per share $ 0.56
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 2,087,350(d) 8,947,387
===========
Diluted 2,087,350(d) 9,422,662
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
59
<PAGE> 60
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Global Global Humboldt
Humboldt Bancorp Bancorp Global Tehama
(dollars in thousands Bancorp (historical) Pro Forma Pro Forma Bancorp
except per share amounts) (historical) (c) Adjustments Total (historical)
------------------------- ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $ 19,186 $ 10,755 $ (500)(f-3) $ 29,441 $ 11,171
Interest on investments 6,054 925 63 (f-1) 7,042 2,840
---------- -------- -------- ---------- ----------
Total interest income 25,240 11,680 (437) 36,483 14,011
---------- -------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 8,024 5,661 13,685 5,094
Interest on debt 321 11 332 16
---------- -------- -------- ---------- ----------
Total interest expense 8,345 5,672 -- 14,017 5,110
---------- -------- -------- ---------- ----------
Net interest income 16,895 6,008 (437) 22,466 8,901
PROVISION FOR LOAN AND LEASE LOSSES 1,046 506 1,552 1,325
---------- -------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 15,849 5,502 (437) 20,914 7,576
NON-INTEREST INCOME
Service charges and fees 18,619 1,459 114(f-4) 20,192 3,105
Undistributed income
of leasing company 444 444 444
Net gain on sale and
securitization
of loans and leases 695 695 182
Net investment securities
gains (losses) (235) (235) 10
---------- -------- -------- ---------- ----------
Total non-interest income 19,523 1,459 114 21,096 3,741
NON-INTEREST EXPENSE
Salaries and employee benefits 11,866 2,209 14,075 4,290
Net occupancy and equipment 3,023 748 (147)(f-4) 3,624 1,078
Other expenses 13,605 2,154 15,759 2,893
---------- -------- -------- ---------- ----------
Total non-interest expense 28,494 5,111 (147) 33,458 8,261
---------- -------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 6,878 1,850 (176) 8,552 3,056
PROVISION FOR INCOME TAXES 2,271 580 2,851 809
---------- -------- -------- ---------- ----------
NET INCOME $ 4,607 $ 1,270 $ (176) $ 5,701 $ 2,247
========== ======== ======== ========== ==========
NET INCOME PER SHARE OF COMMON
STOCK
Basic earnings per share $ 0.91 $ 1.85 $ 1.00 $ 1.20
========== ======== ========== ==========
Diluted $ 0.83 $ 1.83 $ 0.92 $ 1.20
========== ======== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 5,048,547 685,091 640,000(d) 5,688,547 1,871,707
Diluted 5,556,821 692,164 640,000(d) 6,196,821 1,878,282
</TABLE>
<TABLE>
<CAPTION>
Humboldt
Tehama Global
Bancorp Tehama
(dollars in thousands Pro Forma Pro Forma
except per share amounts) Adjustments Adjustments As Adjusted
------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $2,494 (b) $ $ 43,106
Interest on investments 3,466 (g) 13,348
------ ---------- ----------
Total interest income 2,494 3,466 56,454
------ ---------- ----------
INTEREST EXPENSE
Interest on deposits 3,492 (g) 22,271
Interest on debt 1,119 (b) 577 (h) 2,044
------ ---------- ----------
Total interest expense 1,119 4,069 24,315
------ ---------- ----------
Net interest income 1,375 (603) 32,139
PROVISION FOR LOAN AND LEASE LOSSES 197 (b) 3,074
------ ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 1,178 (603) 29,065
NON-INTEREST INCOME
Service charges and fees 640 (b) 23,937
Undistributed income
of leasing company (888)(b) --
Net gain on sale and
securitization
of loans and leases 2,046 (b) 2,923
Net investment securities
gains (losses) (225)
------ ---------- ----------
Total non-interest income 1,798 -- 26,635
NON-INTEREST EXPENSE
Salaries and employee benefits 1,375 (b) 19,740
Net occupancy and equipment 230 (b) 176 (g) 5,108
Other expenses 709 (b) 447 (g) 19,808
------ ---------- ----------
Total non-interest expense 2,314 623 44,656
------ ---------- ----------
INCOME BEFORE INCOME TAXES 662 (1,226) 11,044
PROVISION FOR INCOME TAXES 662 (b) (576)(j) 3,746
------ ---------- ----------
NET INCOME $ -- $ (650) $7,298
====== ========== ==========
NET INCOME PER SHARE OF COMMON
STOCK
Basic earnings per share $ 0.81
==========
Diluted $ 0.77
==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 1,450,573 (b) 9,010,827
==========
Diluted 1,455,668 (b) 9,530,721
==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
60
<PAGE> 61
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Global Global Humboldt
Humboldt Bancorp Bancorp Global
(dollars in thousands Bancorp (historical) Pro Forma Pro Forma
except per share amounts) (historical) (c) Adjustments Total
------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $ 18,762 $ 11,721 $ (500)(f-3) $ 29,983
Interest on investments 4,742 1,232 124 (f-1) 6,098
---------- -------- -------- ----------
Total interest income 23,504 12,953 (376) 36,081
---------- -------- -------- ----------
INTEREST EXPENSE
Interest on deposits 7,565 6,843 14,408
Interest on debt 177 177
---------- -------- -------- ----------
Total interest expense 7,742 6,843 -- 14,585
---------- -------- -------- ----------
Net interest income 15,762 6,110 (376) 21,496
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 (376) 19,146
NON-INTEREST INCOME
Service charges and fees 11,527 826 114 (f-4) 12,467
Undistributed income of
leasing company 301 301
Net gain on sale and
securitization of
loans and leases 645 476 1,121
Net investment securities
gains -- --
---------- -------- -------- ----------
Total non-interest income 12,473 1,302 114 13,889
---------- -------- -------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 9,151 2,023 11,174
Net occupancy and equipment 2,711 440 (148)(f-4) 3,003
Loss on foreclosed real estate 1,224 1,224
Other expenses 7,716 1,786 9,502
---------- -------- -------- ----------
Total non-interest expense 19,578 5,473 (148) 24,903
---------- -------- -------- ----------
INCOME BEFORE INCOME TAXES 6,533 1,713 (114) 8,132
PROVISION FOR INCOME TAXES 2,517 658 3,175
---------- -------- -------- ----------
NET INCOME $ 4,016 $ 1,055 $ (114) $ 4,957
========== ======== ======== ==========
NET INCOME PER SHARE OF COMMON
STOCK
Basic earnings per share $ 0.82 $ 1.57 $ 0.90
========== ======== ==========
Diluted earnings per share $ 0.75 $ 1.52 $ 0.82
========== ======== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 4,876,404 670,850 640,000 (d) 5,516,404
Diluted 5,378,441 693,428 640,000 (d) 6,018,441
</TABLE>
<TABLE>
<CAPTION>
Humboldt
Tehama Global
Tehama Bancorp Tehama
(dollars in thousands Bancorp Pro Forma Pro Forma
except per share amounts) (historical) Adjustments Adjustments As Adjusted
------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $ 11,214 $ 1,859(b) $ $ 43,056
Interest on investments 2,636 3,466 (g) 12,200
---------- ------- ---------- ----------
Total interest income 13,850 1,859 3,466 55,256
---------- ------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 5,605 3,492 (g) 23,505
Interest on debt 10 813 (b) 577 (b) 1,577
---------- ------- ---------- ----------
Total interest expense 5,615 4,069 4,069 25,082
---------- ------- ---------- ----------
Net interest income 8,235 (2,210) (603) 30,174
PROVISION FOR LOAN AND
LEASE LOSSES 1,113 155 (b) 3,618
---------- ------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN
AND LEASE LOSSES 7,122 (2,365) (758) 26,556
NON-INTEREST INCOME
Service charges and fees 2,363 454 (b) 15,284
Undistributed income of
leasing company 301 (602)(b) 0
Net gain on sale and
securitization of
loans and leases 108 968 (b) 2,197
Net investment securities
gains 29 29
---------- ------- ---------- ----------
Total non-interest income 2,801 820 17,510
---------- ------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,791 906 (b) 15,871
Net occupancy and equipment 946 81 (b) 176 (g) 4,206
Loss on foreclosed real estate 1,224
Other expenses 2,325 305 (b) 447 (g) 12,579
---------- ------- ---------- ----------
Total non-interest expense 7,062 1,292 623 33,880
---------- ------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,861 (2,837) (1,381) 10,186
PROVISION FOR INCOME TAXES 852 419(b) (550)(j) 3,896
---------- ------- ---------- ----------
NET INCOME $ 2,009 $(3,256) $ (1,250) $ 6,290
========== ======= ========== ==========
NET INCOME PER SHARE OF COMMON
STOCK
Basic earnings per share $ 1.10 $ 0.72
========== ==========
Diluted earnings per share $ 1.06 $ 0.67
========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 1,830,352 1,418,522 (b) 8,765,278
==========
Diluted 1,886,770 1,462,246 (b) 9,367,457
==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
61
<PAGE> 62
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Global Global Humboldt
Humboldt Bancorp Bancorp Global Tehama
(dollars in thousands Bancorp (historical) Pro Forma Pro Forma Bancorp
except per share amounts) (historical) (c) Adjustments Total (historical)
------------------------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans and leases $ 15,961 $ 10,849 $ (500)(f-3) $ 26,310 $ 10,135
Interest on investments 4,092 1,147 166 (f-1) 5,405 2,479
---------- -------- -------- ---------- ----------
Total interest income 20,053 11,996 (334) 31,715 12,614
---------- -------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 6,973 6,469 13,442 5,225
Interest on debt 51 51 --
---------- -------- -------- ---------- ----------
Total interest expense 7,024 6,469 -- 13,493 5,225
---------- -------- -------- ---------- ----------
Net interest income 13,029 5,527 (334) 18,222 7,389
PROVISION FOR LOAN AND
LEASE LOSSES 773 416 1,189 1,705
---------- -------- -------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR
LOAN AND LEASE LOSSES 12,256 5,111 (334) 17,033 5,684
NON-INTEREST INCOME
Service charges and fees 8,176 494 117 (f-4) 8,787 2,107
Undistributed income of
leasing company 35 35 35
Net gain (loss) on sale and
securitization of loans
and leases (204) (204) 49
Net investment securities gains 102 102
---------- -------- -------- ---------- ----------
Total non-interest income 8,109 494 117 8,720 2,191
NON-INTEREST EXPENSE
Salaries and employee benefits 6,806 2,078 8,884 2,797
Net occupancy and equipment 2,466 427 (130)(f-4) 2,763 831
Other expenses 6,224 2,119 8,343 2,333
---------- -------- -------- ---------- ----------
Total non-interest
expense 15,496 4,624 (130) 19,990 5,961
---------- -------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,869 981 (87) 5,763 1,914
PROVISION FOR INCOME TAXES 1,611 349 1,960 613
---------- -------- -------- ---------- ----------
NET INCOME $ 3,258 $ 632 $ (87) $ 3,803 $ 1,301
========== ======== ======== ========== ==========
NET INCOME PER SHARE OF
COMMON STOCK
Basic $ 0.69 $ 0.96 $ 0.70 $ 0.73
========== ======== ========== ==========
Diluted $ 0.61 $ 0.92 $ 0.64 $ 0.71
========== ======== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 4,755,846 660,163 640,000(d) 5,395,846 1,776,634
Diluted 5,324,632 688,994 640,000(d) 5,964,632 1,842,123
</TABLE>
<TABLE>
<CAPTION>
Humboldt
Tehama Global
Bancorp Tehama
(dollars in thousands Pro Forma Pro Forma
except per share amounts) Adjustments Adjustments As Adjusted
------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans and leases $623(b) $ $ 37,068
Interest on investments 3,466 (g) 11,350
---- ---------- ----------
Total interest income 623 3,466 48,418
---- ---------- ----------
INTEREST EXPENSE
Interest on deposits 3,492 (g) 22,159
Interest on debt 248 (b) 577 (h) 876
---- ---------- ----------
Total interest expense 248 4,069 23,035
---- ---------- ----------
Net interest income 375 (603) 25,383
PROVISION FOR LOAN AND
LEASE LOSSES 43 (b) 2,937
---- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR
LOAN AND LEASE LOSSES 332 (603) 22,446
NON-INTEREST INCOME
Service charges and fees 540 (b) 11,434
Undistributed income of
leasing company (70)(b) --
Net gain (loss) on sale and
securitization of loans
and leases (155)
Net investment securities gains 102
---- ---------- ----------
Total non-interest income 470 -- 11,381
NON-INTEREST EXPENSE
Salaries and employee benefits 542(b) 12,223
Net occupancy and equipment 48(b) 176 (g) 3,818
Other expenses 170(b) 447 (g) 11,293
---- ---------- ----------
Total non-interest
expense 760 623 27,334
---- ---------- ----------
INCOME BEFORE INCOME TAXES 42 (1,226) 6,493
PROVISION FOR INCOME TAXES 42(b) (540)(j) 2,075
---- ---------- ----------
NET INCOME $ 0 $ (686) $ 4,418
==== ========== ==========
NET INCOME PER SHARE OF
COMMON STOCK
Basic $0.52
==========
Diluted $0.48
==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 1,376,891(b) 8,549,371
==========
Diluted 1,427,645(b) 9,234,400
==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
62
<PAGE> 63
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) The nonrecurring Humboldt Bancorp and Tehama Bancorp estimated
merger-related costs are not included in the unaudited pro forma
condensed combined statement of operations but are included in the
unaudited pro forma condensed combined balance sheet as a reduction to
shareholders' equity, net of a $515,000 tax benefit. These costs will be
charged to expense immediately following the consummation of the merger.
These estimated merger-related costs as of June 30, 2000, are summarized
below, in thousands:
<TABLE>
<CAPTION>
Estimated Merger Costs
---------------------------------------
Humboldt Tehama
Bancorp Bancorp Combined
-------- ------- --------
<S> <C> <C> <C>
Financial advisory $125 $ 600 $ 725
Professional fees 200 259 459
Printing and other 25 41 66
---- ------ ------
$350 $ 900 $1,250
==== ====== ======
</TABLE>
(b) Reflects consolidation of Bancorp Financial Services, an equipment
leasing company, jointly owned by Humboldt Bancorp and Tehama Bancorp.
Bancorp Financial Services is currently accounted for by Humboldt
Bancorp and Tehama Bancorp using the equity method of accounting.
(c) Humboldt Bancorp acquired Global Bancorp on April 7, 2000. The
acquisition was recorded using the purchase method of accounting. Since
this acquisition is considered significant, the pro forma statement of
income has been adjusted to reflect the acquisition as if it occurred at
the beginning of the period presented.
(d) Humboldt Bancorp and Tehama Bancorp combined earnings per share and
average outstanding stock and common stock equivalents are calculated
using the historical Humboldt Bancorp weighted average shares plus the
historical Tehama Bancorp weighted average shares adjusted by the
conversion ratio of 1.775. Includes 640,000 shares of common stock
issued in connection with the Humboldt Bancorp stock offering, the
proceeds of which were used to acquire Global Bancorp.
(e) The pro forma statements of income are adjusted to recognize the
estimated decrease in earnings from the net funds used to acquire Global
Bancorp at an estimated average rate earned on federal funds sold of
5.0%.
(f) Humboldt Bancorp acquired Global Bancorp on April 7, 2000, for
$16,500,000 payable in cash and a Humboldt Bancorp promissory note. The
promissory note is due January 30, 2002, and the amount payable may be
decreased or increased based on events identified in the merger
agreement. Since the amount to be paid is contingent upon future events,
generally accepted accounting principles require that this promissory
note be recorded when the contingencies are resolved and the
consideration is paid. Accordingly, the purchase accounting adjustments
to record the Global Bancorp acquisition are summarized below (dollars
in thousands):
63
<PAGE> 64
<TABLE>
<S> <C>
Purchase price paid in cash at merger date $ 11,080 (1)
Less historical net assets acquired (11,780)(2)
--------
Discount to allocate $ (700)
========
Adjustments to the historical net assets acquired
Loans and leases $ 3,500 (3)
Premises and equipment (622)(4)
Accrued interest and other assets (1,184)(4)
Deferred credit for negative goodwill (2,394)(4)
--------
Allocated discount $ (700)
========
</TABLE>
(1) Cash portion of price paid for Global Bancorp.
(2) Acquisition of all of the outstanding shares of Global Bancorp's
common stock results in recording Global Bancorp's assets and
liabilities on the books of Humboldt Bancorp and subsidiaries
and the elimination of Global Bancorp's stockholders' equity.
(3) To adjust the carrying value of loans at Global Bancorp to
estimated fair value. This amount will be recognized as an
adjustment to yield over the estimated life of the related
loans. The carrying value of all other assets and liabilities
approximates estimated fair value.
(4) In this note the fair value of the net assets acquired exceeds
the purchase price. Accordingly, the cost of noncurrent assets
acquired, in the case of premises and equipment, are adjusted
downward to zero and the excess is recorded as a deferred credit
for negative goodwill. A deferred tax liability of $1,184,000 is
recorded and netted against deferred tax assets as a result of
the tax effect of the reduction in premises and equipment and
other adjustments. Depreciation expense related to the reduction
of premises and equipment to zero has been eliminated from the
pro forma statements. The deferred credit for negative goodwill
will be amortized using the straight-line method over 15 years.
When the contingencies related to the promissory note are
resolved and the additional consideration is paid, the
additional cost will first be applied against the deferred
credit for negative goodwill with the excess, if any, used to
restore premises and equipment to fair value. The remaining
excess, if any, will be recorded as goodwill and amortized using
the straight-line method over 15 years.
(g) In August 1999, Humboldt Bank acquired the deposits of two branch
offices of CalFed Bank. The premium paid to acquire the deposits of
approximately $2,384,000 was allocated to core deposit intangible asset.
The estimated runoff of these deposits will result in amortization of
the balance of the core deposit intangible asset on an accelerated basis
over a period of ten years. Adjustments were also made to the pro forma
statements of income to estimate the additional interest income,
interest expense and depreciation expense that would result from this
transaction using an estimated average interest rate earned on federal
funds sold of approximately 5.0%, an average rate paid on deposits of
approximately 4.9% and depreciation computed using the straight-line
method over the estimated lives of the premises and equipment acquired.
(h) Humboldt Bancorp issued during February 2000 $5,310,000 of trust
preferred securities at an interest rate of 10.875%.
(i) The acquisition of Global Bancorp was consummated concurrent with the
sale of 640,000 shares of Humboldt Bancorp common stock at a price of
$12.50 per share.
64
<PAGE> 65
(j) These amounts represent the estimated tax effect of the transactions
described in preceding notes computed at an incremental combined federal
and state tax rate of 41.15%. Amortization of the deferred credit for
negative goodwill described in note (f) is not taxable.
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table shows the selected historical per share data for
Humboldt Bancorp and Tehama Bancorp, and pro forma consolidated financial
information of the merger. The table assumes that the merger was completed at
the beginning of the periods presented, and that each outstanding share of
Tehama Bancorp common stock is converted into 1.775 shares of Humboldt Bancorp
common stock. All amounts have been restated for the effect of stock splits and
stock dividends previously made by both Humboldt Bancorp and Tehama Bancorp as
appropriate, and the consolidation of Bancorp Financial Services' operations
with Humboldt Bancorp. Also Humboldt Bancorp acquired Capitol Thrift and Loan on
April 7, 2000. Per share data for Humboldt Bancorp has been restated to give
effect to Capitol Thrift and Loan's and Bancorp Financial Services' operations
as if they had occurred at the beginning of the period indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amounts per common stock
Humboldt Bancorp historical:
Net income(1)(2) $ 0.61 $ 0.75 $ 0.83 $ 0.58 $ 0.82
Book value(3) $ 4.94 $ 5.66 $ 6.56 $ 6.32 $ 7.94
Tehama Bancorp historical:
Net income(1)(2) $ 0.71 $ 1.06 $ 1.20 $ 0.79 $ 1.18
Book Value(3) $ 8.88 $ 9.63 $ 9.89 $ 9.48 $11.25
Dividends declared $ 0.36 $ 0.36 $ 0.45 $ 0.45 --
Pro forma amounts per share of common stock
of Humboldt Bancorp:
Net income(1)(4) $ 0.46 $ 0.63 $ 0.72 $ 0.55 $ 0.62
Book value(5) $ 5.01 $ 5.54 $ 6.21 $ 6.02 $ 6.26
Pro forma amounts per share of common stock
of Tehama Bancorp:
Net income(1)(6) $ 0.40 $ 0.60 $ 0.67 $ 0.45 $ 0.66
Book value(6) $ 5.00 $ 5.42 $ 5.57 $ 5.34 $ 6.34
Humboldt Bancorp and Tehama Bancorp pro forma
combined net income $ 0.48 $ 0.67 $ 0.77 $ 0.56 $ 0.73
Tehama Bancorp pro forma equivalent $ 0.27 $ 0.38 $ 0.43 $ 0.32 $ 0.41
</TABLE>
(1) All net income per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common
stock and common stock equivalent shares outstanding for each period for
Humboldt Bancorp and Tehama Bancorp.
(3) Book value per share is based on the actual number of shares outstanding
at the end of the period.
(4) Pro forma net income per share is determined in the same manner as
footnote (2) above except the Tehama Bancorp common stock is multiplied
by the conversion rate of 1.775.
(5) Pro forma book value per share is determined in the same manner as
footnote (3) above except Tehama Bancorp common stock is multiplied by
the conversion rate of 1.775.
(6) Tehama Bancorp pro forma equivalents are computed by multiplying the pro
forma per share data of the consolidated entity by the conversion rate
of 1.775.
65
<PAGE> 66
REGULATORY CAPITAL AND LEVERAGE RATIO
The following table illustrates the actual regulatory capital and
leverage ratios of Humboldt Bancorp and Tehama Bancorp and the pro forma
regulatory capital and leverage ratios of Humboldt Bancorp, as of September 30,
2000. The pro forma ratios are stated after giving effect to the merger.
<TABLE>
<CAPTION>
As of September 30, 2000
-------------------------------------------
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
-------- ------------- -------------
<S> <C> <C> <C>
Humboldt Bancorp 8.58% 10.56% 11.81%
Tehama Bancorp 9.42% 11.85% 13.10%
Pro forma for Humboldt Bancorp after the merger(1) 8.40% 10.22% 11.39%
Minimum regulatory capital for a bank holding company(2) 4.00% 4.00% 8.00%
</TABLE>
(1) Reflects the consolidation of Bancorp Financial Services financial
statements with Humboldt Bancorp and Tehama Bancorp giving effect to the
merger. As a result, approximately $34 million of Bancorp Financial
Services' assets, consisting primarily of loans and leases, are assigned
a 100% risk-weight for determining Humboldt Bancorp's risk-based
capital.
(2) Pursuant to regulations of the Federal Reserve Board.
HUMBOLDT BANCORP QUARTERLY FINANCIAL DATA
The following sets forth Humboldt Bancorp's unaudited quarterly
financial data for the past two fiscal years, and for the first three quarters
of 2000. The results of operations for the six months ended June 30 and nine
months ended September 30, 2000, include the results of operations of Capitol
Thrift and Loan subsequent to its acquisition on April 7, 2000.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
(dollars in thousands except for per share data) 1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Interest Income $5,817 $11,733 $17,789 $23,504
Interest Expense 1,971 3,907 5,855 7,742
Net Interest Income 3,846 7,826 11,934 15,762
Provision for Loan Losses 509 1,024 1,541 2,124
Non-Interest Income 2,401 5,237 8,609 12,473
Non-Interest Expense 4,314 9,281 14,471 19,578
Income before Taxes 1,424 2,758 4,531 6,533
Income Taxes 549 1,055 1,720 2,517
Net Income 875 1,703 2,811 4,016
Basic Earnings per Share 0.18 0.35 0.58 0.82
Diluted Earnings per Share $ 0.16 $ 0.32 $ 0.52 $ 0.75
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
(dollars in thousands except for per share data) 1999 1999 1999 1999
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Interest Income $5,723 $11,506 $17,844 $25,240
Interest Expense 1,792 3,581 5,635 8,345
Net Interest Income 3,931 7,925 12,209 16,895
Provision for Loan Losses 318 506 697 1,046
Non-Interest Income 3,905 8,662 13,792 19,523
Non-Interest Expense 5,985 12,962 20,577 28,494
Income before Taxes 1,533 3,119 4,727 6,878
Income Taxes 536 1,025 1,537 2,271
Net Income 997 2,094 3,190 4,607
Basic Earnings per Share 0.20 0.42 0.64 0.91
Diluted Earnings per Share $ 0.19 $ 0.39 $ 0.58 $ 0.83
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30,
(dollars in thousands except for per share data) 2000 2000 2000
--------- -------- -------------
<S> <C> <C> <C>
Interest Income $7,804 $18,681 $30,694
Interest Expense 2,793 7,309 12,442
Net Interest Income 5,011 11,372 18,252
Provision for Loan Losses 557 1,250 1,602
Non-Interest Income 6,625 13,777 20,971
Non-Interest Expense 9,362 19,701 30,120
Income before Taxes 1,717 4,198 7,501
Income Taxes 553 1,359 2,481
Net Income 1,164 2,839 5,020
Basic Earnings per Share 0.22 0.51 0.88
Diluted Earnings per Share $ 0.20 $ 0.47 $ 0.82
</TABLE>
67
<PAGE> 68
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of the factors
described in the section entitled "Risk Factors" and elsewhere in this document.
General
Humboldt Bancorp's results of operation are primarily dependent upon the
results of operations of Humboldt Bank, Capitol Valley Bank, Capitol Thrift and
Loan and, to a lesser extent, Bancorp Financial Services. Humboldt Bank and
Capitol Valley Bank conduct general commercial banking business, such as
gathering deposits from the general public and applying those funds to the
origination of loans for commercial, consumer and residential purposes. Capitol
Thrift and Loan is a California industrial loan company and primarily derives
its revenues from the making of loans. Bancorp Financial Services makes consumer
automobile loans and commercial equipment leases of generally less than $100,000
to small businesses.
Humboldt Bancorp's profitability depends on net interest income, which
is the difference between interest income generated by interest-earning assets,
and interest expense incurred on interest-bearing liabilities. Net interest
income is affected by the difference ("interest rate spread") between rates of
interest earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities, as well as the relative amounts of
interest-earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spread as a
measure of net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is annualized net interest income divided by average
interest-earning assets.
Because of the limited loan growth in the Humboldt, Trinity and
Mendocino, California area, a substantial part of our revenues are also derived
from non-interest income. Non-interest income consists primarily of fees
generated by the Merchant Bankcard and Issuing Bankcard (Credit Card)
Departments and lease residuals and rentals generated by the Lease Finance
Department. During the year ended December 31, 1994, Humboldt Bank began to
emphasize the growth in such fees and other income. For the nine months ended
September 30, 2000, and years ended December 31, 1999, 1998 and 1997, fees and
other income were $18.4 million, $16.7 million, $9.7 million and $6.9 million,
respectively. Of this growth, most can be attributed to Humboldt Bank's Merchant
Bankcard processing fees. During the nine months ended September 30, 1999,
Humboldt Bank continued to reduce its Issuing Bankcard (Credit Card) activities.
This strategic reduction in credit card receivables was initiated in early 1997
due to increased competition in all credit card issuing markets and a noticeable
trend of increased charge-offs in connection with credit card receivables. The
focus of the Issuing Bankcard (Credit Card) Department is now issuance of credit
cards to Humboldt Bank customers.
Although Humboldt Bancorp has planned to diversify its growth of
traditional banking through the establishment of Capitol Valley Bank, the
acquisition of Capitol Thrift and Loan, and the proposed acquisition of Tehama
Bancorp, Humboldt Bancorp will continue to emphasize revenues from non-interest
income sources. For example, during 1997 Humboldt Bancorp, along with Tehama
Bancorp, formed Bancorp Financial Services. Bancorp Financial Services makes
consumer automobile loans and commercial equipment leases of generally less than
$100,000 to small businesses. Humboldt Bank's Lease Finance Department
operations, on the other hand, consist principally of the leasing of
point-of-sale terminals, printers for credit card vouchers and related
equipment. Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method, in which only Humboldt Bancorp's net
investment in Bancorp Financial Services is accounted for on Humboldt Bancorp's
financial statements, rather than Bancorp Financial Services' financial
statements being consolidated with Humboldt Bancorp's financial statements.
Therefore, the following discussion does not include a detailed description of
68
<PAGE> 69
Bancorp Financial Services' operations. Assuming the completion of the merger,
Bancorp Financial Services financial statements will be consolidated with
Humboldt Bancorp. See "Business of Humboldt Bancorp - Bancorp Financial
Services."
Humboldt Bancorp's profitability is also affected by such factors as the
level of non-interest expenses, the provision for loan losses, and the effective
tax rate. Non-interest expenses consist of salaries and benefits, fixed assets
(occupancy related expenses), and Merchant Bankcard expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of Humboldt Bancorp, Humboldt
Bank, and Capitol Valley Bank for the fiscal years ended December 31, 1999, 1998
and 1997, and of Humboldt Bancorp, Humboldt Bank, Capitol Valley Bank and
Capitol Thrift and Loan for the nine months ended September 30, 2000. In April
2000, Humboldt Bancorp completed the acquisition of Capitol Thrift and Loan, and
also completed the issuance of $8 million of common stock and $5.3 million in
trust preferred securities. Information related to historical operations of
Capitol Thrift and Loan prior to its acquisition, and the effect of the issuance
of the common stock and trust preferred securities are not reflected in the
following discussion. This discussion should be read in conjunction with the
consolidated and pro forma financial statements and related footnotes presented
elsewhere herein.
Summary of Operations
For the nine months ended September 30, 2000, net income was $5.0
million, an increase of 56.3% over net income of $3.2 million earned during the
nine months ended September 30, 1999. Diluted earnings per share were $0.82 and
$0.58 for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Annualized return on average assets was 1.29% for the nine months
ended September 30, 2000, compared with 1.24% for the comparable nine months in
1999. For the first nine months of 2000, annualized return on average equity was
15.98%, compared with 14.26% during the first nine months of 1999. The increase
in earnings for the nine months ended September 30, 2000, versus the comparable
period in 1999, can be attributed to growth in earning assets, fee income
growth, and increased customer activity in our Merchant Bankcard product.
For the year ended December 31, 1999, net income was $4.6 million, an
increase of 15.0% over net income of $4.0 million earned during the same period
in 1998. Diluted earnings per share were $0.83 and $0.75 for the years ended
December 31, 1999 and 1998, respectively. The return on average assets for the
years ended December 31, 1999 and 1998, was 1.27% and 1.32%, respectively. The
return on average equity for the years ended December 31, 1999 and 1998 was
15.10% and 16.02%, respectively. The increase in earnings for the year ended
December 31, 1999, versus the prior period in 1998, can be attributed to growth
in earning assets, fee income growth, and increased customer activity in our
Merchant Bankcard product.
Humboldt Bancorp reported net income of $4.0 million for the year ended
December 31, 1998, compared to $3.3 million for the year ended December 31,
1997. The increase in net income is attributable to an increase of $2.8 million,
or 21.5% in net interest income, and an increase in other non-interest income of
$4.4 million, or 54.3%. These increases were offset by an increase in provision
for loan losses of $1.3 million, or 162.5%, an increase in other non interest
expense of $4.1 million, or 26.5% and an increase in provision for income taxes
of $906,000 or 56.2%. The increase in net interest income is attributable to the
substantial increase in earning assets and a slight increase in the net interest
yield. The increase in non-interest income is primarily attributable to
substantial increases in the Lease Finance, Merchant Bankcard, and Issuing
Bankcard (Credit Card) Departments' income and to increases in service charges
on deposit accounts. These increases were offset in part by a decrease in gains
on sale of loans and investments. The increase in non-interest expense is
primarily attributable to increases in salaries and employee benefits and
Merchant Bankcard expenses. These increases can be attributed to the continued
growth of Humboldt Bank and Humboldt Bancorp. These increases were offset in
part by a decrease in Issuing Bankcard (Credit Card) Department expenses. The
increase in provision for loan losses is attributable to an increase in loans
originated by
69
<PAGE> 70
Humboldt Bank and an increase in charge-offs in the Issuing Bankcard (Credit
Card) Department and Lease Finance Department.
Results of Operations
Net Interest Income
Net interest income represents the excess of interest income and loan
fees earned by Humboldt Bancorp on its earning assets over the interest expense
paid on its interest bearing liabilities and other borrowed money. Net interest
income as a percentage of average interest-earning assets is referred to as net
interest margin. The levels of interest-earning assets and interest-bearing
liabilities, as well as changes in interest rates affect the level of net
interest income. During periods of rapidly changing interest rates, Humboldt
Bancorp's earnings can be significantly affected because interest rates on a
substantial amount of the earning assets are tied to prime rate as reported in
the Wall Street Journal and therefore tend to change immediately, whereas
interest rates on liabilities have a tendency to change more slowly, and
normally only upon the maturity of the liability.
Average Balances and Average Rates Earned and Paid
The following table shows unaudited average balances and interest
income or interest expense, with the resulting average yield or rates by
category of earning assets or interest-bearing liabilities.
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, Year Ended December 31, Year Ended December 31,
1997 1998 1999
-------------------------------- ------------------------------ ------------------------------
Interest Interest Interest
Income Average Income Average Income Average
Average or Yield or Average or Yield or Average or Yield or
(Unaudited) Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- -------- -------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases $151,695 $15,961 10.52% $175,173 $18,762 10.71% $200,986 $19,186 9.55%
Investment securities:
Taxable securities 46,989 2,783 5.92 63,494 3,317 5.22 67,950 3,773 5.55
Nontaxable securities(2) 10,396 569 5.47 13,682 739 5.40 16,292 875 5.37
Interest-earning balances
due from banks 2,164 128 5.91 3,502 174 4.97 2,089 90 4.31
Federal funds sold 11,311 612 5.41 9,504 512 5.39 26,202 1,316 5.02
-------- ------- ------- -------- ------- ------- -------- ------- ----
Total interest-earning
assets 222,555 20,053(3) 9.01 265,355 23,504 8.86 313,519 25,240 8.05
Cash and due from banks 12,679 20,157 26,168
Premises and equipment,
net 5,860 7,120 8,745
Loan and lease loss
allowance (2,312) (2,626) (3,191)
Other assets 12,313 14,509 17,186
-------- -------- --------
Total assets $251,095 $304,515 $362,427
======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking
and savings accounts 66,153 1,516 2.29 72,594 1,439 1.98 79,955 1,423 1.78
Time deposit and IRA
accounts 100,072 5,457 5.45 114,633 6,126 5.34 134,608 6,601 4.90
Borrowed funds 828 51 6.16 3,003 177 5.89 4,487 321 7.15
-------- ------- ------- -------- ------- ------- -------- ------- ----
Total interest-bearing
liabilities 167,053 7,024 4.20 190,230 7,742 4.07% 219,050 8,345 3.81%
Non-interest-bearing
deposits 59,050 83,965 106,829
Other liabilities 3,694 4,883 6,030
-------- -------- --------
Total liabilities 229,797 279,078 331,909
Stockholders' equity 21,298 25,437 30,518
-------- -------- --------
Total liabilities and
stockholders' equity $251,095 $304,515 $362,427
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended Nine Months Ended
September 30, 1999(1) September 30, 2000(1)
---------------------------------- ---------------------------------
Interest Interest
Income Average Income Average
Average or Yield or Average or Yield or
(Unaudited) Balance Expense Rate Balance Expense Rate
--------- ------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases $ 198,561 $14,136 9.52% $ 321,900 $ 24,178 10.03%
Investment securities:
Taxable securities 59,137 2,308 5.22 85,749 4,355 6.78
Nontaxable securities(2) 15,813 631 5.34 19,623 806 5.49
Interest-earning balances
due from banks 2,263 73 4.31 873 42 6.43
Federal funds sold 21,198 696 4.39 30,365 1,313 5.78
--------- ------- ---- --------- -------- -----
Total interest-earning
assets 296,972 17,844 8.03 458,510 30,694 8.94
Cash and due from banks 25,302 28,428
Premises and equipment,
net 8,544 9,660
Loan and lease loss
allowance (3,166) (5,106)
Other assets 15,027 29,173
--------- ---------
Total assets $ 342,679 $ 520,665
========= =========
Interest-bearing liabilities:
Interest-bearing checking
and savings accounts 75,546 954 1.69 103,517 1,876 2.42
Time deposit and IRA
accounts 123,112 4,445 4.83 233,769 9,821 5.61
Borrowed funds 4,487 235 7.00 14,228 745 6.99
--------- ------- ---- --------- -------- -----
Total interest-bearing
liabilities 203,145 5,634 3.71% 351,514 12,442 4.73%
Non-interest-bearing
deposits 103,433 119,611
Other liabilities 6,196 7,587
--------- ---------
Total liabilities 312,744 478,712
Stockholders' equity 29,905 41,954
--------- ---------
Total liabilities and
stockholders' equity $ 342,679 $520,666
========= ========
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, Year Ended December 31, Year Ended December 31,
1997 1998 1999
---------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Income Average Income Average Income Average
Average or Yield or Average or Yield or Average or Yield or
(Unaudited) Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- -------- ------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $13,029 $15,762 $16,895
======= ======= =======
Net interest spread 4.81% 4.79% 4.24%
====== ====== ======
Average yield on average
earning assets(2) 9.01% 8.86% 8.05%
====== ====== ======
Interest expense to average
earning assets 3.16% 2.92% 2.66%
====== ====== ======
Net interest margin(4) 5.85% 5.94% 5.39%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended Nine Months Ended
September 30, 1999(1) September 30, 2000(1)
---------------------------------- ----------------------------------
Interest Interest
Income Average Income Average
Average or Yield or Average or Yield or
(Unaudited) Balance Expense Rate Balance Expense Rate
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $12,210 $18,252
======= =======
Net interest spread 4.33% 4.21%
===== =====
Average yield on average
earning assets(2) 8.03% 8.94%
===== =====
Interest expense to average
earning assets 2.54% 3.62%
===== =====
Net interest margin(4) 5.50% 5.32%
===== =====
</TABLE>
(1) Average yields and rates for the nine months ended September 30, 1999
and 2000, have been annualized.
(2) Tax-exempt income has not been adjusted to its tax-equivalent basis.
(3) Nonaccrual loans are included in the average balance.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
Analysis of Changes in Interest Differential
The following table shows the unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
such dollar amounts to changes in volume as well as changes in rates. Rate and
volume variances have been allocated proportionally between rate and volume
changes.
<TABLE>
<CAPTION>
Year Ended Year Ended
(dollars in thousands) December 31, 1998 December 31, 1999
over 1997 over 1998
------------------------------- ---------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
------- ----- ------- ------- ------- -------
Interest income attributable to:
<S> <C> <C> <C> <C> <C> <C>
Loans and leases $ 2,451 $ 350 $ 2,801 $ 2,465 $(2,041) $ 424
Investment securities 1,220 (516) 704 387 205 592
Balance due from banks 13 33 46 (61) (23) 84
Federal funds sold (98) (2) (100) 838 (34) 804
------- ----- ------- ------- ------- -------
Total increase (decrease) 3,586 (135) 3,451 3,629 (1,893) 1,736
------- ----- ------- ------- ------- -------
Interest expense attributable to:
Now and Super Now 28 (11) 17 26 (42) (16)
Savings 19 -- 19 76 44 120
Money Market 88 (201) (113) 19 (138) (119)
Time deposits 795 (126) 669 1,004 (530) 474
Borrowed funds 174 (48) 126 106 38 144
------- ----- ------- ------- ------- -------
Total increase (decrease) 1,104 (386) 718 1,231 (628) 603
------- ----- ------- ------- ------- -------
Total change in net interest $ 2,482 $ 251 $ 2,733 $ 2,398 $(1,265) $ 1,133
======= ===== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
(dollars in thousands) September 30, 2000
over September 30, 1999
---------------------------------
Increase (Decrease) Due To
----------------------------------
Volume Rate Total
-------- ------- --------
Interest income attributable to:
<S> <C> <C> <C>
Loans and leases $ 8,833 $ 1,225 $ 10,058
Investment securities 1,188 1,020 2,208
Balance due from banks (45) 14 (31)
Federal funds sold 300 315 615
-------- ------- --------
Total increase (decrease) 10,277 2,573 12,850
-------- ------- --------
Interest expense attributable to:
Now and Super Now 22 2 24
Savings 264 187 451
Money Market 73 176 249
Time deposits 4,217 1,360 5,577
Borrowed funds 509 (1) 508
-------- ------- --------
Total increase (decrease) 5,084 1,724 6,808
-------- ------- --------
Total change in net interest $ 5,193 $ 849 $ 6,042
======== ======= ========
</TABLE>
Net interest income for the nine months ended September 30, 2000, was
$18.3 million, an increase of $6.0 million over the corresponding period in
1999. The increase in net interest income is attributable to an increase of
$12.9 million in income earned from interest-earning assets and an increase of
$6.8 million in expense from interest-bearing liabilities. Interest expense
increased 121.4% to $12.4 million for the nine
71
<PAGE> 72
months ended September 30, 2000, compared to a $5.6 million increase for the
corresponding period in 1999. The increase in interest expense was the result of
rising interest rates and increases in deposit balances.
Total interest-earning assets averaged $458.5 million for the nine
months ended September 30, 2000, compared to $313.5 million for the year ended
December 31, 1999. The average yield on interest-earning assets increased to
8.94% during the nine months ended September 30, 2000, compared to 8.05% for the
year ended December 31, 1999, due to a general increase in market rates.
Interest-bearing liabilities averaged $351.5 million during the nine
months ended September 30, 2000, compared to $219.1 million for the year ended
December 31, 1999. The average cost of these liabilities increased in the nine
months ended September 30, 2000, to 4.73% from 3.81% at the year ended December
31, 1999. The average cost of interest-bearing liabilities increased primarily
as a result of rising interest rates and a change in the liability mix in 2000.
In the near-term, management does not anticipate Humboldt Bancorp's net interest
margins will be significantly impacted by competitive pressure for deposit
accounts, although there can be no assurance that this will not occur.
Net interest income for the year ended December 31, 1999, was $16.9
million, an increase of $1.1 million compared to $15.8 million in 1998. The
increase in net interest income is attributable to an increase of $1.7 million
in income earned from interest-earning assets offset by an increase of $0.6
million in expense from interest-bearing liabilities. Interest expense increased
7.8% to $8.3 million for the year-ended December 31, 1999, compared to $7.7
million for the year-ended December 31, 1998. The increase in interest expense
was primarily a result of increased volume, which was partially offset by
falling interest rates.
Total interest-earning assets averaged $313.5 million at year-end
December 31, 1999, compared to $265.4 million for the year ended December 31,
1998. The average yield on interest-earning assets decreased to 8.05% for the
year ended December 31, 1999, compared to 8.86% for the year ended December 31,
1998.
Interest-bearing liabilities averaged $219.1 million for the year ended
December 31, 1999, compared to $190.2 million for the year ended December 31,
1998. The average cost of these liabilities decreased for the year ended
December 31, 1999, to 3.81% from 4.07% at year-end December 31, 1998. The
average cost of interest-bearing liabilities decreased primarily as a result of
declining interest rates in 1999.
Net interest income for the year ended December 31, 1998, totaled $15.8
million, compared with $13.0 million for the year ended December 31, 1997. The
increase in net interest income was attributable to a significant increase in
earning assets and a slight increase in net interest yield. The yield on loans
increased by 0.2% over the same period in 1997, and the cost of funds decreased
0.1%. The prime rate used to price a significant portion of the loan portfolio
at September 30, 2000, and at December 31, 1999, 1998 and 1997 was 9.13%, 8.00%,
8.35% and 8.42% on average, respectively. Net loans comprised 68.5% of average
earning assets at September 30, 2000, 64.1% at December 31, 1999, 66.0% at
December 31, 1998, and 68.2% at December 31, 1997.
Loan fees included in net interest income were $961,000 for the nine
months ended September 30, 2000, $983,000 for the year ended December 31, 1999,
$1.4 million for the year ended December 31, 1998, and $729,000 for the year
ended December 31, 1997.
Provision for Loan and Lease Losses
An allowance for loan and lease losses is maintained at a level that
management of Humboldt Bancorp considers adequate for losses that can be
reasonably anticipated. The allowance is increased by a charge to operating
expenses referred to as a provision for loan and lease losses, and is reduced by
the net loan that is charged-off. See "Loan Losses and Recoveries" for a table
summarizing the changes in the allowance for loan and lease losses.
72
<PAGE> 73
For the nine months ended September 30, 2000, management charged $1.6
million to the provision for loan and lease losses compared to $0.7 million for
the nine months ended September 30, 1999. This was a 128.6% increase from the
prior year. The increase in the provision for loan and lease losses was related
to the increase in loans outstanding.
For the years ended December 31, 1999, 1998 and 1997, management charged
$1.0 million, $2.1 million, and $.8 million, respectively, to the provision for
loan and lease losses. The ratio of the allowance for loan and lease losses to
total loans and leases at December 31, 1999, 1998 and 1997 equaled 1.47%, 1.62%
and 1.48%, respectively. The decrease in the provisions from 1998 to 1999 was
due to a decrease in leases and issuing bank credit card charge-offs and
increase in recoveries from issuing bank credit card charge offs. The increase
in the provision from 1997 to 1998 is attributable to an increase in loans
originated, and an increase in credit card and lease charge-offs, and an
increase in charge-offs. The Merchant Bancard Department does not include
issuing bank credit card services.
Non-Interest Income
The following table sets forth components of Humboldt Bancorp's
non-interest income:
<TABLE>
<CAPTION>
Nine Months Ended
(dollars in thousands) Year Ended December 31, September 30,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fees and other income:
Merchant Bankcard services $ 3,906 $ 6,177 $ 13,178 $ 9,175 $ 15,820
Lease finance department (residuals and rentals) 1,306 1,575 1,250 1,177 787
Issuing bankcard (credit card) services 778 1,019 519 317 204
Fees for customer services 291 346 415 244 143
Earnings on life insurance 195 106 161 114 294
Loan and lease servicing fees 346 87 293 216 187
Net gain on O.R.E.O -- -- -- -- 86
Other 89 421 836 487 942
------- ------- -------- -------- --------
Total fees and other income 6,911 9,731 16,652 11,730 18,463
Service charges on deposit accounts 1,300 2,097 2,411 1,806 2,255
Net gain (loss) on sale of loans (204) 645 695 349 342
Net investment securities gains (losses) 102 -- (235) (93) (89)
------- ------- -------- -------- --------
Total non-interest income $ 8,109 $12,473 $ 19,523 $ 13,792 $ 20,971
======= ======= ======== ======== ========
</TABLE>
Non-interest income is primarily derived from Merchant Bankcard fees,
service charges on deposit accounts, lease finance department lease residuals
and rentals, and issuing bankcard (credit card) fees.
During the past four fiscal years, Humboldt Bank's Merchant Bankcard
Department has increased in importance to Humboldt Bank's revenues. Humboldt
Bank offers merchant bankcard services to a variety of merchants located
throughout the United States, including first time merchants and small to
medium-sized merchants in the retail, telephone, mail order and Internet
commerce industries. In general, merchant bankcard services involve collecting
funds for, and crediting the accounts of, merchants for sales of merchandise and
services to credit card customers. For its services, Humboldt Bank receives a
service fee and other processing fees. Also, at September 30, 2000, and as of
December 31, 1999, 1998 and 1997, Humboldt Bank held merchant reserves
(primarily in non-interest bearing accounts) of $45.2 million, $54.2 million,
$47.0 million and $33.0 million, respectively. See "Business of Humboldt Bancorp
- Merchant Bankcard."
During 1996, Humboldt Bank actively pursued credit card income through
nationwide secured and unsecured credit card programs. In early 1997, this
strategy was abandoned due to a perceived increase in credit risk
73
<PAGE> 74
and extreme competition from major credit card issuers. Currently, management
estimates that at present levels of credit card receivables, Humboldt Bank makes
a modest monthly profit net of service expenses and write-offs. Therefore, while
Humboldt Bank intends to continue credit card lending to its customer base,
there are no further plans to solicit credit card business beyond its market
areas.
Non-interest income increased $7.2 million, or 52.2% for the nine-month
period ended September 30, 2000, compared to the nine months ended September 30,
1999. The principal reason for this increase was income generated by Merchant
Bankcard operations. During the first nine months of 2000, Merchant Bankcard
operations generated $15.8 million in income compared to $9.2 million for the
same period in 1999. The remainder of the increase in non-interest income for
the nine months ended September 30, 2000, compared to the same period in 1999,
is primarily attributable to service charges and fees which were partially
offset by a decrease in net gain on sale of loans.
Non-interest income increased $7.1 million, or 56.8%, for the year-ended
December 31, 1999, compared to the year-ended December 31, 1998. The principal
reason for this increase was income generated by Merchant Bankcard operations.
During 1999, Merchant Bankcard operations generated $13.2 million in income
compared to $6.2 million in 1998.
Non-interest income for 1998 totaled $12.5 million, an increase of $4.4
million, or 54.3%, from $8.1 million earned in 1997. The increases for the year
ended 1998, compared to the year ended 1997, are attributable primarily to the
activities of the Merchant Bankcard and, to a lesser extent, the activities of
the Lease Finance and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. The increase in gain on sale of
loans is attributable in part to selling some portfolio loans at a gain. The
decrease in gain on sale of investments is attributable to the fact that no
investments were sold in 1998. Service charges on deposit accounts increased
$0.8 million or 61.5%, fees and other income increased $2.8 million or 40.6%,
and all other non-interest income increased $0.7 million or 700.0%.
Non-Interest Expense
Non-interest expenses consist principally of employee salaries and
benefits, Merchant Bankcard expenses, and fixed asset (occupancy and equipment)
expenses. Non-interest expense increased $9.5 million, or 46.1%, to $30.1
million for the nine months ended September 30, 2000, compared to $20.6 million
in the corresponding period of 1999. This increase was primarily due to Merchant
Bankcard operations of $4.6 million, salaries and benefits of $3.3 million,
primarily relating to increases in personnel, occupancy expenses of $0.6 million
and miscellaneous other expenses of $1.0 million. Salaries and employee benefits
represented the single largest component of non-interest expense at $12.1
million or 37.5% as of September 30, 2000.
Non-interest expense increased $8.9 million, or 45.4%, to $28.5 million
for the year-ended December 31, 1999, compared to $19.6 million for 1998. This
was due to increases in Merchant Bankcard operation expense of $4.8 million, as
well as increases in salary and employee benefits of $2.7 million, primarily
relating to the increase in personnel. Salaries and employee benefits
represented the single largest component of non-interest expense, totaling $11.9
million, or 41.7% of total non-interest expense, in 1999. Humboldt Bancorp's
investments in new and expanded technology to support internal services, to
ensure Year 2000 compliance, and to provide additional technology-based products
for Humboldt Bancorp's customers, also resulted in expense increases.
Non-interest expense for the year ended 1998 totaled $19.6 million, an
increase of $4.1 million or 26.5% from the year ended 1997. Salaries and
employee benefits represented the single largest component of non-interest
expense, totaling $9.2 million or 46.7% in 1998 and $6.8 million or 43.9% in
1997.
Full time equivalent employees numbered 399, 318, 250, and 209 on
September 30, 2000, December 31, 1999, 1998 and 1997, respectively.
74
<PAGE> 75
Fixed assets expense increased $.7 million or 31.3% for the nine months
ended September 30, 2000, compared to the corresponding period for the prior
year. Fixed assets increased during the first nine months ended September 30,
2000, due to the opening of a new headquarters for Capitol Valley Bank and the
acquisition of Capitol Thrift and Loan. Fixed assets expense increased $312,000,
or 11.5%, to $3.0 million for the year ended 1999. This increase can be
attributed to increased maintenance and repairs on older equipment and increased
rental expense partially offset by increased rental income. Fixed assets expense
increased $245,000 or 9.9% to $2.7 million for the year ended 1998. This
increase can be attributed to increased maintenance and repairs on older
equipment and increased rental expense, partially offset by increased rental
income. This increase also can be partly attributed to depreciation expense
related to the purchase of an in-house computer system, a local area network and
a wide area network, and the purchase of furniture and fixtures and leasehold
improvements.
Other expenses (excluding salaries and employee benefits and fixed
assets) increased $5.6 million or 57.7% for the nine months ended September 30,
2000, compared to the nine months ended September 30, 1999, increased $5.9
million, or 76.6%, in 1999 from 1998, and increased $1.5 million or 24.2% in
1998 from 1997, primarily due to the Merchant Bankcard program and the Issuing
Bankcard (Credit Card) program in 1999 and 1998.
The following table summarizes the significant components and
percentages of non-interest expense for the years ended December 31, 1997, 1998,
1999 and the nine months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
Nine Months Ended
(dollars in thousands) Year Ended December 31, September 30,
----------------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 6,806 $ 9,151 $11,866 $ 8,764 $12,138
Net occupancy and equipment expense 2,466 2,711 3,023 2,092 2,747
Merchant Bankcard expenses(1) 822 2,665 7,460 5,087 9,679
Professional services 1,342 1,123 1,446 984 914
Issuing Bankcard expenses(1) 1,021 346 240 202 111
Stationery, supplies & postage 887 884 955 788 746
Intangible expense 426 372 459 264 471
FDIC and other insurance 164 186 217 160 214
Advertising expenses 265 247 412 337 305
Business development 242 249 414 253 235
Telephone and travel 478 598 870 572 784
Data processing/ATM expense 170 324 299 198 256
Other expenses 407 722 833 876 1,520
------- ------- ------- ------- -------
Total expenses $15,496 $19,578 $28,494 $20,577 $30,120
======= ======= ======= ======= =======
</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.
75
<PAGE> 76
Provision for Income Taxes
The provision for income taxes for the nine-month period ended September
30, 2000, was $2.5 million, representing an effective tax rate of 33.3% compared
to $1.5 million, or 31.9% for the nine-month period ended September 30, 1999.
The combined effective tax rates of 33.3%, 33.3%, 38.5% and 32.3% during
the nine months ended September 30, 2000, and for the years ended December 31,
1999, 1998 and 1997, respectively, on reported income was below the expected
statutory federal rate of 34.0% and the state franchise tax rate of 7.1% (net of
the federal benefit) principally because of exemptions for Enterprise Zone loans
for state tax purposes, exemptions for municipal obligations for federal
purposes, low income housing tax credits, bank owned life insurance and other
permanent differences.
Investments
Humboldt Bancorp invests excess funds in a variety of instruments in
order to meet liquidity and profitability goals. A portion of available funds is
invested in liquid investments including overnight federal funds. The balance is
invested in investment securities including U.S. Treasury and Agency securities
such as collateralized mortgage obligations ("CMOs"), tax-exempt municipal
bonds, corporate bonds, and Federal Home Loan Bank and Federal National Mortgage
Corporation stock.
At September 30, 2000, Humboldt Bancorp's portfolio of investment
securities at fair value totaled $100.5 million, a decrease of $15.0 million, or
13%, compared with December 31, 1999.
The following table provides the book value of Humboldt Bancorp's
portfolio of investment securities as of December 31, 1997, 1998 and 1999, and
September 30, 2000:
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, September 30,
------------------------------------ -------------
1997 1998 1999 2000
------- ------- -------- --------
<S> <C> <C> <C> <C>
Investments available-for-sale:
U.S. Treasury and agencies $ 2,996 $ 3,000 $ 3,551 $ 2,522
CMOs issued by U.S. agencies 62,433 56,682 87,316 63,135
Obligations of political subdivisions 12,190 16,227 19,614 19,757
Corporate debt and other securities 1,286 1,062 5,480 15,055
------- ------- -------- --------
Total investment securities $78,905 $76,971 $115,961 $100,469
======= ======= ======== ========
</TABLE>
Investment securities at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, 1999 September 30, 2000
------------------------------------- -------------------------------------
Approx. Approx.
Amortized Market Amortized Market
Cost Value % Yield* Cost Value % Yield*
--------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Three months or less $ 1,000 $ 1,000 4.82% $ -- $ -- $ --%
Three to twelve months -- -- -- 1,521 1,516 5.39
One to three years 2,551 2,537 5.70 1,001 1,000 6.25
CMO issued by U.S. agencies:
Three months or less 697 697 7.85 413 412 8.88
Three to twelve months 11,374 11,396 7.36 6,770 6,737 6.42
One to three years 56,381 56,079 6.09 40,827 40,666 6.81
</TABLE>
76
<PAGE> 77
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, 1999 September 30, 2000
-------------------------------------- ----------------------------------------
Approx. Approx.
Amortized Market Amortized Market
Cost Value % Yield* Cost Value % Yield*
---------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Three to five years 12,130 12,070 5.22 10,461 10.423 7.02
Five to fifteen years 6,733 6,655 7.25 4,664 4,555 8.40
Obligations of political
subdivisions:
Three months or less -- -- -- -- -- --
Three to twelve months -- -- -- 103 104 8.60
One to three years 485 496 9.11 529 543 9.15
Three to five years 1,328 1,341 9.01 1,480 1,516 8.91
Five to fifteen years 11,982 11,950 7.47 14,513 14,380 7.58
Over fifteen years 5,820 5,714 7.29 3,492 3,519 7.96
Corporate debt and other securities
Three months or less 1,000 1,000 4.82 913 913 7.01
Three to twelve months 625 625 5.96 -- -- --
One to three years -- -- -- 6,789 6,795 7.42
Three to five years -- -- -- 1,281 1,288 7.50
Five to fifteen years 3,855 3,800 7.41 5,912 5,894 8.58
Over fifteen years -- -- -- 160 160 10.88
-------- -------- -------- -------- -------- --------
Total securities $115,961 $115,360 6.47% $100,469 $100,421 7.17%
======== ======== ======== ======== ======== ========
</TABLE>
* Weighted average yield is stated on a federal tax-equivalent basis of 34%, and
has been annualized, where appropriate.
At September 30, 2000, the book value of the following issuers'
securities exceeded ten percent (10%) of Humboldt Bancorp's capital.
(dollars in thousands)
<TABLE>
<CAPTION>
Issuer Book Value Market Value
------ ---------- ------------
<S> <C> <C>
FRMAC CMO's $33,618 $35,551
FNMA CMO's $21,610 $21,429
GNMA CMO's $ 6,853 $6,768
</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. Capitol Thrift and
Loan focuses primarily on consumer mortgage and commercial real estate lending
in Northern, Central and Southern California.
At September 30, 2000, Humboldt Bancorp had total net loans outstanding
of $383.0 million. This represented 74.1% of total consolidated deposits and
64.7% of total consolidated assets of Humboldt Bancorp. At December 31, 1999,
Humboldt Bancorp had total net loans outstanding of $225.1 million. This
represented 59.5% of the total consolidated deposits and 53.1% of total
consolidated assets of Humboldt Bancorp. At December 31, 1998, Humboldt Bancorp
had total net loans outstanding of $186.0 million. This represented 65.5% of
total
77
<PAGE> 78
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
December 31, 1995 December 31, 1996
------------------------- -------------------------
Type of Loan Amount Percentage Amount Percentage
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 15,874 13.79% $ 21,205 14.85%
Residential 23,036 20.01 31,519 22.07
Commercial & agricultural 54,879 47.67 61,030 42.73
--------- ------ --------- ------
Total real estate loans 93,789 81.47 113,754 79.65
Commercial 16,284 14.15 20,559 14.39
Lease financing 3,974 3.45 3,168 2.22
Credit card and related accounts 1,203 1.05 2,021 1.42
Consumer 2,192 1.90 2,508 1.76
Other 159 0.14 3,725 2.60
--------- ------ --------- ------
Total loans and leases 117,601 102.16 145,735 102.04
Less:
Deferred loan fees (616) (0.54) (765) (0.54)
Allowance for loan losses (1,868) (1.62) (2,146) (1.50)
--------- ------ --------- ------
Loans and lease receivables, net $ 115,117 100.00% $ 142,824 100.00%
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) As of As of As of As of
December 31, 1997 December 31, 1998 December 31, 1999 September 30, 2000
--------------------- --------------------- --------------------- ---------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage Amount Percentage
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 20,165 12.80% $ 20,667 11.11% $ 22,118 9.82% $ 29,678 7.75%
Residential 27,253 17.30 35,226 18.93 45,185 20.07 78,345 20.46
Commercial & agricultural 65,772 41.76 80,197 43.11 99,053 44.01 219,449 57.30
--------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 113,190 71.86 136,090 73.15 166,356 73.90 327,472 85.51
Commercial 28,091 17.83 33,981 18.27 39,295 17.45 41,452 10.82
Lease financing 8,732 5.55 9,867 5.30 17,202 7.64 13,044 3.41
Credit card and related accounts 7,062 4.48 5,672 3.05 3,456 1.54 2,983 0.78
Consumer 2,440 1.55 2,110 1.13 1,938 0.86 2,324 0.61
Other 1,177 0.75 2,097 1.13 1,216 0.54 4,358 1.14
--------- ------ --------- ------ --------- ------ --------- ------
Total loans and leases 160,692 102.02 189,817 102.03 229,463 101.93 391,633 102.26
Less:
Deferred loan fees (809) (0.51) (724) (0.39) (987) (0.44) (2,465) (0.64)
Allowance for loan losses (2,371) (1.51) (3,055) (1.64) (3,354) (1.49) (6,186) (1.62)
--------- ------ --------- ------ --------- ------ --------- ------
Loans and lease receivables, net $ 157,512 100.00% $ 186,038 100.00% $ 225,122 100.00% $ 382,982 100.00%
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
At September 30, 2000, and December 31, 1999, 1998 and 1997, Humboldt
Bancorp had no concentration of loans which exceeded 10% of total loans not
otherwise identified by the categories set forth above.
78
<PAGE> 79
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, 2000, the breakdown of construction loans was as
follows (dollars in thousands):
<TABLE>
<S> <C>
Owner-occupied single family construction $13,510
Owner-occupied commercial construction $ 1,461
Speculation construction $ 3,828
Acquisition/development $10,879
-------
Total $29,678
</TABLE>
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months, are secured by deeds of trust
and usually do not exceed 80% of the appraised value of the home to be built.
All owner-occupied single family construction borrowers have been pre-qualified
for long-term loans using Fannie Mae underwriting guidelines.
Humboldt Bancorp also makes loans to developers, primarily in its
service area, for the purpose of acquiring unimproved land and developing such
land. These loans typically have a maturity of 12 to 24 months, have a floating
rate tied to prime rate as reported in the Wall Street Journal, usually do not
exceed 75% of the appraised value, are secured by a first deed of trust and, in
the case of corporations, are personally guaranteed. Loan commitment and
origination fees of 0.5% to 1% are usually charged.
All commercial construction loans are underwritten using the estimated
cash flow the secured real property would provide in the event of a default by
the borrower. A debt coverage ratio of 1.25:1 is required. In all cases,
Humboldt Bancorp pre-approves a long-term loan to pay off the construction loan.
Risks associated with real estate construction loans are generally
considered higher than risks associated with other forms of lending. Loan funds
are advanced upon the security of the project under construction, which is more
difficult to value prior to the completion of construction. Should a default
occur which results in foreclosure, Humboldt Bancorp could be adversely affected
in that it would have to control the project and attempt either to arrange for
completion of construction or to dispose of the unfinished project.
Humboldt Bancorp's underwriting criteria are designed to evaluate and
minimize the risk of each construction loan. A wide variety of factors are
carefully considered before originating a construction loan, including the
availability of permanent financing to the borrower (which may be provided by
Humboldt Bancorp at market rates), the reputation of the borrower and the
contractor, independent valuations and reviews of cost estimates,
preconstruction sale information and cash flow projections of the borrower. At
the time of Humboldt Bancorp's origination of a construction loan to a builder,
the builder often has a signed contract with a purchaser for the sale of the
to-be-constructed house, which, by assuring the builder of a repayment source,
lessens Humboldt Bancorp's underwriting risks on the construction loan. To
reduce the risks inherent in construction lending, Humboldt Bancorp limits the
number of properties which can be constructed on a "speculative" or unsold basis
by a builder at any one time to two to four houses and requires the borrower or
its principals personally to guarantee repayment of the loan. Moreover, Humboldt
Bancorp controls certain of the risks associated with construction lending by
requiring builders to submit itemized bills to Humboldt Bancorp, whereupon
Humboldt Bancorp disburses the builder's loan funds directly to the contractor
and subcontractors, rather than to the builder. For a contractor meeting
specific criteria, loan funds may be disbursed directly to the contractor.
79
<PAGE> 80
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp has historically been and continues to be an originator
of owner-occupied, single-family, residential real estate loans in its market
area. These residential loans, as a percentage of total net loans outstanding,
were 20.5% at September 30, 2000, 20.1% at December 31, 1999, 18.9% at December
31, 1998, and 17.3% at December 31, 1997. The decrease in residential real
estate loans in 2000, 1998 and 1997 is attributable to the sale of portfolio
loans. The higher volume of residential real estate loans in 1999 is
attributable to lower rates at the beginning of 1999. Humboldt Bancorp also
offers FHA and VA mortgage loans in its market area, which are underwritten and
closed by a correspondent lender.
Humboldt Bancorp originates owner-occupied, single-family, residential
fixed-rate mortgage loans at competitive interest rates within its market area.
Generally, Humboldt Bancorp sells these loans in the secondary market. There
were, however, no loans held for sale at September 30, 2000, and fixed-rate
loans of $2.1 million for sale at December 31, 1999, $7.7 million for sale at
December 31, 1998, and $48,000 for sale at December 31, 1997. These balances are
included in Real Estate - Residential totals in the table above.
Humboldt Bancorp also offers adjustable-rate residential mortgage loans.
The adjustable-rate loans currently offered by Humboldt Bancorp have interest
rates which adjust every one, three or five years from the closing date of the
loan or on an annual basis commencing after an initial fixed-rate period of one,
three or five years in accordance with a designated index.
The retention of adjustable-rate loans in Humboldt Bancorp's portfolio
helps reduce Humboldt Bancorp's exposure to increases or decreases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable-rate loans. In addition, there can be no assurance that yields on
Humboldt Bancorp's adjustable-rate loans will fully adjust to compensate for
increases in Humboldt Bancorp's cost of funds.
Humboldt Bancorp evaluates both the borrower's ability to make principal
and interest payments and the value of the property that will secure the loan.
Humboldt Bancorp originates residential mortgage loans with loan-to-value ratios
of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the
time of origination, however, Humboldt Bancorp requires private mortgage
insurance in an amount intended to reduce Humboldt Bancorp's exposure to 80% of
the appraised value of the underlying collateral.
Residential mortgage loan originations come from a number of sources,
including solicitations by Humboldt Bancorp, referrals by builders and real
estate brokers, existing borrowers and depositors and walk-in customers. Loan
applications are accepted at all of Humboldt Bancorp's offices.
At September 30, 2000, Humboldt Bancorp had approximately $18.1 million
in owner-occupied home equity line of credit loans, representing approximately
4.7% of its net loan portfolio. Humboldt Bancorp's home equity lines of credit
have adjustable interest rates tied to the prime interest rate plus a margin.
Home equity lines of credit are secured by liens against owner-occupied,
residential real property. Home equity loans are generally limited so that the
amount of such loans, along with any senior indebtedness, does not exceed 80% of
the value of the real estate security.
Real Estate - Commercial and Agricultural
Humboldt Bancorp's commercial real estate loan portfolio includes loans
secured by small apartment buildings, strip shopping centers, small office
buildings, farms and other business properties, generally located within
Humboldt Bancorp's primary market areas. Commercial and agricultural loans as a
percentage of total net loans outstanding were 57.3% at September 30, 2000,
44.0% at December 31, 1999, 43.1% at December 31, 1998, and 41.8% at December
31, 1997. Commercial and agricultural loans are secured by property of which 98%
is commercial property and 2% is agricultural property.
80
<PAGE> 81
Permanent commercial real estate loans have a maximum term of 10 years,
with 25-year amortization schedules being the norm. Interest rates on permanent
loans generally either adjust (subject, in some cases, to specified interest
rate caps) at one- to five-year intervals to specified spreads over the related
index. Commercial real estate loans are generally written in amounts up to 70%
of the appraised value of the property or sale price.
Commercial real estate loans generally present a higher level of risk
than loans secured by owner-occupied, single family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project.
Humboldt Bancorp entered into a number of SBA guaranteed loans and has
loans where SBA has a subordinate lien position. These loans are eligible for
sale on the secondary market. Humboldt Bancorp sold SBA guaranteed loans in
2000, 1999 and 1998.
Business Loans
Humboldt Bancorp's commercial loans consist of: (i) loans secured by
commercial real estate and (ii) business loans which are not secured by real
estate or if secured by real estate, the principal source of repayment is
expected to be business income. Business loans as a percentage of total net
loans outstanding were 10.8% at September 30, 2000, 17.5% at December 31, 1999,
18.3% at December 31, 1998, and 17.8% at December 31, 1997. Business loans
include revolving lines of credit, working capital loans, equipment financing,
letters of credit and inventory financing.
In recent years, Humboldt Bancorp has emphasized business lending.
Humboldt Bancorp originates business loans to small and medium sized businesses
in its market area. Humboldt Bancorp's business borrowers are generally small
businesses engaged in manufacturing, distribution or retailing, or professionals
in healthcare, accounting and law. Business loans are made generally to finance
the purchase of inventory, new or used equipment or commercial vehicles, and for
short-term working capital. Such loans are generally secured by equipment and
inventory, but unsecured loans may be granted. Business loans are generally made
for terms of five years or less, depending on the purpose of the loan and the
collateral, with loans to finance operating expenses made for one year or less.
Generally, business loans are made in amounts ranging between $50,000 and
$300,000.
Humboldt Bancorp underwrites its business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and Humboldt Bancorp seeks to
structure such loans to have more than one source of repayment. For loans with
maturities exceeding one year, Humboldt Bancorp requires that borrowers and
guarantors provide updated financial information at least annually throughout
the term of the loan.
Humboldt Bancorp's business loans may be structured as short-term loans,
term loans or as lines of credit. Short-term business loans are for periods of
12 months or less and are generally self-liquidating from asset conversion
cycles. Business term loans are generally made to finance the purchase of assets
and have maturities of five years or less. Business lines of credit are
typically made for the purpose of providing short-term working capital and are
usually approved with a term of 12 months and are reviewed at that time to see
if extension is warranted. Humboldt Bancorp also offers standby letters of
credit for its business borrowers.
Business loans are often larger and may involve greater risk than other
types of lending. Because payments on such loans are often dependent on
successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. Humboldt
Bancorp seeks to minimize these risks through its underwriting guidelines, which
require that the loan be supported by adequate cash flow of the borrower,
profitability of the business, collateral and personal guarantees of the
individuals in the business. In addition,
81
<PAGE> 82
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
$13.0 million or 3.4% of total net loans outstanding at September 30, 2000,
$17.2 million or 7.6% of total net loans outstanding at December 31, 1999, $9.9
million or 5.3% of total net loans outstanding at December 31, 1998, and $8.7
million or 5.6% of total net loans outstanding at December 31, 1997. The
increase in Humboldt Bancorp's lease financing loans in 1998 and 1997 was mostly
attributable to an increase in credit card equipment and leases acquired from
Humboldt Bancorp's joint venture subsidiary, Bancorp Financial Services. The
decrease in Humboldt Bancorp's lease financing loans in 2000 and 1999 was caused
by a planned reduction in leases purchased from Bancorp Financial Services.
However, Humboldt Bancorp may continue in the future to purchase leases from
Bancorp Financial Services.
Credit Card and Related Accounts
Humboldt Bank offers credit card loans through its participation as a
Principal Member of Visa. Management believes that providing credit card
services helps Humboldt Bank remain competitive by offering customers an
additional service.
During 1996, Humboldt Bank began to actively pursue credit card income
through nationwide secured and unsecured credit card programs. In early 1997,
this strategy was abandoned due to a perceived increase in credit risk and
extreme competition from major credit card issuers. Currently, management
estimates that at present levels of credit card receivables, Humboldt Bank makes
a modest monthly profit net of service expenses and write-offs. Therefore, while
Humboldt Bank intends to continue credit card lending to its customer base,
there are no further plans to solicit credit card business beyond its market
areas. Credit card loans were $3.0 million at September 30, 2000, $3.5 million
at December 31, 1999, $5.7 million at December 31, 1998, and $7.1 million at
December 31, 1997. Credit card loans as a percentage of total net loans
outstanding were 0.8% at September 30, 2000, 1.5% at December 31, 1999, 3.1% at
December 31, 1998, and 4.5% at December 31, 1997. The rate currently charged by
Humboldt Bank on its credit card loans ranges from 13.9% to 19.8%, and Humboldt
Bank is permitted to change the interest rate on 30 days notice. Processing of
bills and payments is contracted to an outside service. At September 30, 2000,
Humboldt Bank had a commitment to fund an aggregate of $7.1 million of credit
card loans, which represented the aggregate credit limit on credit cards.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile
loans and miscellaneous other consumer loans, including unsecured loans.
Consumer loans as a percentage of total net loans outstanding were 0.6% at
September 30, 2000, 0.9% at December 31, 1999, 1.1% at December 31, 1998, and
1.6% at December 31, 1997.
Loan Servicing
Humboldt Bancorp sells the majority of the mortgages and some of the
Small Business Administration loans it originates to institutional investors.
However, it retains the servicing on these loans in order to generate ongoing
revenues and to retain local customer relationships. Humboldt Bancorp's
servicing portfolio in which it has sold ownership but retains the servicing was
$174.8 million, $163.7 million and $144.5 million at September 30, 2000,
December 31, 1999, and December 31, 1998, respectively.
82
<PAGE> 83
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 Bancorp's fees for servicing mortgage loans range generally
from .250% to .375% per annum on the outstanding principal balances of the
loans. Servicing fees are collected and retained by Humboldt Bancorp out of
monthly mortgage payments. Humboldt Bancorp's servicing portfolio can be reduced
by normal amortization and prepayment or liquidation of outstanding loans.
Approximately 90% of the loans serviced by Humboldt Bancorp have outstanding
balances of greater than $100,000 and approximately 10% are adjustable rate
mortgages.
Humboldt Bancorp accounts for revenue from the sale of loans where
servicing is retained in conformity with the requirements of Statements of
Financial Accounting Standards No. 125. Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities. Humboldt Bancorp records
an asset representing the right to service loans for others when it sells a loan
and retains the servicing rights. The total cost of originating or purchasing
the loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.
In general, the value of Humboldt Bancorp's loan servicing portfolio may
be adversely affected as mortgage interest rates decline and loan prepayments
increase. This would also decrease income generated from Humboldt Bancorp's loan
servicing portfolio. This negative effect on Humboldt Bancorp's income
attributable to existing servicing may be offset somewhat by a rise in
origination and servicing income attributable to new loan originations, which
historically have increased in periods of low mortgage interest rates.
The following table sets forth the dollar amount of Humboldt Bancorp's
mortgage loan servicing portfolio. Although Humboldt Bancorp intends to continue
to increase its servicing portfolio, increases will depend on market conditions
and the availability of capital.
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
<S> <C> <C>
Mortgage loan servicing portfolio:
Loans originated by Humboldt Bancorp and sold: $159.6 Million $169.6 Million
Loans originated by Humboldt Bancorp but awaiting funding: $ 2.1 Million $ 0.0 Million
</TABLE>
Humboldt Bancorp also services a portfolio of SBA loans, which is
anticipated to increase during 2000 as a result of an increase in selling and
marketing efforts. As of September 30, 2000, SBA Loans originated and serviced
by Humboldt Bank were $5.2 million and as of December 31, 1999, were $4.1
million.
For the most part, the Small Business Administration loans are tied to
the prime rate, and as a result there is less risk of prepayment due to
declining rates as compared with fixed rate real estate loans.
83
<PAGE> 84
Maturities of Loans and Leases
The following table represents the maturity distribution of the
following loan categories as of September 30, 2000.
<TABLE>
<CAPTION>
Within 1 1 year to 5 years
(dollars in thousands) year 5 years or more Total
-------- --------- ------- -------
<S> <C> <C> <C> <C>
Loans:
Commercial $ 7,042 $ 5,170 $29,240 $41,452
Real Estate Construction $22,021 $ 7,657 $ 7,025 $29,678
------- ------- ------- -------
Total $29,063 $12,827 $29,240 $71,130
======= ======= ======= =======
</TABLE>
Loans shown above with maturities greater than one year include $18.0
million of floating interest rate loans and $29.3 million of fixed rate loans.
The following table represents the maturity distribution of the
following loan categories as of December 31, 1999.
<TABLE>
<CAPTION>
Within 1 1 year to 5 years
(dollars in thousands) year 5 years or more Total
-------- --------- ------- -------
<S> <C> <C> <C> <C>
Loans:
Commercial $ 5,707 $4,965 $28,623 $39,295
Real Estate Construction $17,649 $4,469 $ 0 $22,118
------- ------ ------- --------
Total $23,356 $9,434 $28,623 $61,413
======= ====== ======= ========
</TABLE>
Loans shown above with maturities greater than one year include $5.8
million of floating interest rate loans and $35.8 million of fixed rate loans.
Humboldt Bancorp's renewal policy is that all maturing loans are
reviewed on a case-by-case basis, new financial statements are requested from
the borrower and an in-depth credit analysis is performed after which the loan
may be extended, renewed, restructured or demand made for payment in full
depending upon the circumstances.
Loan Losses and Recoveries
Humboldt Bancorp maintains an allowance for loan and lease losses at a
level that management of Humboldt Bancorp considers adequate for losses that can
be reasonably anticipated.
The Issuing Bankcard (Credit Card) Department's allowance for losses
also constitutes a portion of Humboldt Bancorp's allowance. The Issuing Bankcard
(Credit Card) Department was established in 1996. The Issuing Bankcard (Credit
Card) Department's allowance at September 30, 2000, and December 31, 1999, 1998
and 1997, was $166,000 or 2.7%, $186,000 or 5.8%, $330,000 or 10.8%, and
$278,000 or 11.7% of the total allowance. The increase in Issuing Bankcard
(Credit Card) Department's allowance from 1997 to 1998, both as to amount and as
a percentage of the total allowance, is attributable to the Issuing Bankcard
(Credit Card) Department's increase in the number of credit card accounts. Since
early 1997, Humboldt Bank has focused on its customer base for issuing Humboldt
Bank credit cards. Accordingly, the allowance for losses for the Issuing
Bankcard (Credit Card) Department at September 30, 2000, has decreased from the
allowance at December 31, 1999 and 1998.
84
<PAGE> 85
The adequacy of the allowance for loan and lease losses is measured in
the context of several key ratios and factors discussed below. The allowance is
increased by a charge to operating expenses and is reduced by net charge-offs
which are loans actually removed from the consolidated balance sheet after
netting out recoveries on previously charged-off assets. Humboldt Bancorp's
policy is to charge-off loans when, in management's opinion, the loan or a
portion thereof is deemed uncollectible, although concerted efforts are made to
maximize recovery. Humboldt Bancorp's historical net loan and lease losses or
recoveries stem from Humboldt Bancorp's underwriting and collection practices,
and the quality of the loan portfolio.
During the first nine months of 2000, loan charge-offs net of recoveries
was $773,000, a 50.7% increase in loan charge-offs net of recoveries compared to
$513,000 during the nine months ended September 30, 1999. This increase is the
result of recoveries in 1999 and not an increase in charge-offs, which actually
decreased in the first nine months of 2000. Charge-offs recorded for the nine
months ended September 30, 2000, were consistent with Humboldt Bancorp's
historical experience in view of the growth of the loan portfolio. Management
expects its current loan underwriting, oversight and collection policies to
promote high quality loans and to limit loan losses. These policies include
aggressive action to limit credit losses. As part of these policies, Humboldt
Bancorp has hired additional staff and engaged consultants to support credit
administration functions. Therefore, management expects net charge-offs, as a
percentage of average outstanding loans for the year 2000 will be comparable to
that of prior years.
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,
------------------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan and lease
losses balance, beginning
of period $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,055 $ 3,354
--------- --------- --------- --------- --------- --------- ---------
Loans and leases charged off:
Real estate -- (46) -- (141) (67) (67) (45)
Commercial (11) (122) (193) (191) (218) (216) (6)
Consumer (23) (29) (11) (25) (29) (29) (30)
Lease financing (254) (132) (124) (316) (148) (108) (570)
Credit card and related
accounts -- -- (475) (956) (614) (402) (210)
Other (30) (45) (7) (5) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total loans and leases
charged off (318) (374) (810) (1,634) (1,076) (822) (861)
Recoveries:
Real estate -- -- -- -- 98 98 2
Commercial 9 78 129 54 7 7 9
Consumer 4 5 9 8 6 5 5
Lease financing 49 34 34 24 9 9 6
Credit card and related
accounts -- -- 87 105 209 190 66
Other 1 2 3 3 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total recoveries 63 119 262 194 329 309 88
--------- --------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries (255) (255) (548) (1,440) (747) (513) (773)
Charges incident to mergers -- -- -- -- -- -- 2,003
--------- --------- --------- --------- --------- --------- ---------
Provision charged to operations 792 533 773 2,124 1,046 697 1,602
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan and lease
losses balance, end of
period $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354 $ 3,239 $ 6,186
========= ========= ========= ========= ========= ========= =========
Loans and leases outstanding at
end of period, net of unearned
interest income $ 116,985 $ 144,970 $ 159,883 $ 189,093 $ 228,476 $ 206,337 $ 389,168
========= ========= ========= ========= ========= ========= =========
</TABLE>
85
<PAGE> 86
<TABLE>
<CAPTION>
Nine Months Ended
(dollars in thousands) Year Ended December 31, September 30,
------------------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average loans and leases
outstanding for
the period $ 102,931 $ 134,617 $ 151,695 $ 175,173 $ 200,986 $ 198,561 $ 321,900
========= ========= ========= ========= ========= ========= =========
Ratio of net loans and leases
charged off (recovered) to
average loans and leases
outstanding 0.25% 0.19% 0.36% 0.82% 0.37% 0.35% 0.32%
Ratio of allowance for loan
and lease losses to loans
and leases at end of period 1.60% 1.48% 1.48% 1.62% 1.47% 1.57% 1.59%
</TABLE>
The adequacy of the allowance for loan and lease losses is measured in
the context of several key ratios and factors including: (1) the ratio of the
allowance to total outstanding loans, (2) the ratio of total nonperforming loans
to total loans, and (3) the ratio of net charge-offs (recoveries) to average
loans outstanding. Additional factors considered in establishing an appropriate
allowance include a careful assessment of the financial condition of the
borrower, a realistic determination of the value and adequacy of underlying
collateral, the condition of the local economy and the condition of the specific
industry of the borrower, comprehensive analysis of the levels and trends of
loan categories, and a review of delinquent and classified loans. Management's
evaluation is based on a system whereby each loan is "graded" at the time of
origination, extension or renewal. Each grade is assessed a risk factor, which
is calculated to assess the adequacy of the allowance for loan losses. Further,
management considers other factors including changes in the nature and volume of
the loan portfolio, overall portfolio quality, loan concentrations, trends in
the level of delinquent and classified loans, specific problem loans and
commitments, and current and anticipated economic conditions.
On a quarterly basis, management considers the factors that follow in
establishing Humboldt Bancorp's Allowance for Loan and Lease Losses. The results
are reported to the board of directors on a quarterly basis.
- 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.
The following table sets forth the allocation of the allowance for loan
and lease losses by loan or lease type as of the dates specified. The allocation
of individual categories of loans includes amounts applicable to
86
<PAGE> 87
specifically identified as well as unidentified losses inherent in that segment
of the loan portfolio and will necessarily change whenever management determines
that the risk characteristics of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance
for loan and lease losses into loan categories lends an appearance of exactness
which may not exist, in that the allowance is utilized as a single unallocated
allowance available for all loans and undisbursed commitments. The allocation
below should not be interpreted as an indication of the specific amounts or loan
categories in which future charge-offs may occur:
<TABLE>
<CAPTION>
(dollars in thousands) As of December 31,
----------------------------------------------------------------------------------------------------
1995 1996 1997 1998
--------------------- --------------------- --------------------- ---------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate construction $ 129.7 6.9% $ 138.5 6.5% $ 132.7 5.6% $ 141.7 4.6%
Commercial and other
Real Estate 833.8 44.6% 1,014.1 47.3% 963.9 40.6% 1,254.2 41.1%
Consumer 41.3 2.2% 41.5 1.9% 22.3 0.9% 21.1 0.7%
Lease financial 415.6 22.2% 217.4 10.1% 125.7 5.3% 422.7 13.8%
Credit card and related
accounts 0.0 0.0% 83.0 3.9% 310.8 13.1% 326.1 10.7%
Other 447.6 24.1% 651.5 30.4% 816.0 34.4% 889.2 29.1%
-------- ------ -------- ------ -------- ------ -------- ------
Total Allowance $1,868.0 100.0% $2,146.0 100.0% $2,371.4 100.0% $3,055.0 100.0%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) As of September 30,
----------------------
2000
----------------------
Percent
Amount of Total
-------- --------
<S> <C> <C>
Real estate construction $2,569.4 41.54%
Commercial and other
Real Estate 1,685.4 27.25%
Consumer 198.5 3.21%
Lease financial 363.0 5.87%
Credit card and related
accounts 178.8 2.89%
Other 1,190.9 19.24%
-------- ------
Total Allowance $6,186.0 100.0%
======== ======
</TABLE>
Non-Performing Assets
Humboldt Bancorp's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
Loans that are delinquent 90 days or more, unless well secured and in the
process of collection, are placed on nonaccrual status on a cash basis, and
previously accrued but uncollected interest is reversed against income.
Thereafter, income is recognized only as it is collected in cash. Collectibility
is determined by considering the borrower's financial condition, cash flow,
quality of management, the existence of collateral or guarantees and the state
of the local economy.
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,
--------------------------------------- -----------------
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Loans on nonaccrual status $ 619 $ 218 $ 838 $ 311 $ 767 $2,023
Loans - leases past due -
greater than 90 days 261 159 843 241 282 1,449
Restructured loans 75 -- 23 -- -- --
------ ------ ------ ------ ------ ------
Total nonperforming loans 955 377 1,704 552 1,049 3,472
Other real estate owned -- 233 148 175 120 808
Total nonperforming assets $ 955 $ 610 $1,852 $ 727 $1,169 $4,280
====== ====== ====== ====== ====== ======
Allowance for loan losses $1,868 $2,146 $2,371 $3,055 $3,354 $6,186
Ratio of total nonperforming
assets to total assets 0.49% 0.28% 0.65% 0.23% 0.28% 0.72%
</TABLE>
87
<PAGE> 88
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, September 30,
--------------------------------------- -----------------
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ratio of total nonperforming
loans to total loans 0.81% 0.26% 1.06% 0.29% 0.46% 0.89%
Ratio of allowance for loan losses
to total non-performing assets 195.60% 351.80% 128.02% 420.22% 286.91% 144.53%
</TABLE>
The increase in non-performing assets at September 30, 2000, compared to
December 31, 1999, is due to increases in all categories as a result of the
acquisition of Capitol Thrift and Loan.
The table below shows the gross interest income that would have been
recorded at September 30, 2000, and December 31, 1999, if these loans had been
current in accordance with their original terms and had been outstanding
throughout the period or if new for part of the period since origination; and
the amount of interest that was included in net income for the period. There
were no restructured loans 90 days past due at December 31, 1999, or at
September 30, 2000.
<TABLE>
<CAPTION>
(in dollars) Year Ended Nine Months Ended
December 31, 1999 September 30, 2000
---------------------- ------------------------
Gross Interest Gross Interest
Income Earned Income Earned
------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-accrual loans $64,588 $13,376 $135,593 $22,156
Other real estate owned $ 9,591 $ -- $ 90,030 $37,469
</TABLE>
Potential Problem Loans
At September 30, 2000, and December 31, 1999, there were no loans or
other interest bearing assets classified for regulatory purposes as loss,
doubtful, substandard or special mention that: (i) represented or resulted from
trends or uncertainties which management anticipates could have a material
impact on future operating results, liquidity or capital resources, or (ii)
represented material credits or assets about which management had information
that would cause serious doubt as to the ability of the borrower to comply with
the repayment terms.
Deposits
The following table sets forth the average balances of Humboldt
Bancorp's interest-bearing deposits, interest expense, and average rates paid
for the periods indicated:
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------------ ------------------------------------------
Average Interest Average Average Interest Average
Actual Balance Expense Rate Actual Balance Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits $ 70,767 $ 59,050 $ -- --% $ 96,884 $ 83,965 $ -- --%
Interest-bearing accounts:
Interest-bearing checking 52,003 46,177 1,158 2.51 49,615 51,609 1,061 2.06
Savings 21,952 19,976 359 1.80 21,635 20,985 378 1.80
Time deposits 110,464 100,072 5,456 5.45 115,833 114,633 6,126 5.34
-------- -------- ------ ---- -------- -------- ------ ----
Total interest-bearing accounts 184,419 166,225 6,973 4.19 187,083 187,227 7,565 4.04
-------- -------- ------ ---- -------- -------- ------ ----
Total deposits $255,186 $225,275 $6,973 3.10% $283,967 $271,192 $7,565 2.79%
======== ======== ====== ==== ======== ======== ====== ====
</TABLE>
88
<PAGE> 89
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------------- -------------------------------------------
Average Interest Average Average Interest Average
Actual Balance Expense Rate Actual Balance Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits $110,523 $106,829 $ -- --% $132,724 $119,611 $ -- 0.00%
Interest-bearing accounts:
Interest-bearing checking 63,547 56,312 925 1.64 70,459 61,628 959 2.08
Savings 32,533 24,781 498 2.01 45,084 41,474 918 2.96
Time deposits 172,027 134,608 6,601 4.90 268,658 231,781 9,820 5.66
-------- -------- ------ ---- -------- -------- -------- ----
Total interest-bearing accounts 268,107 215,701 8,024 3.72 384,201 334,883 11,697 4.67
-------- -------- ------ ---- -------- -------- -------- ----
Total deposits $378,630 $322,530 $8,024 2.49% $516,925 $454,494 $ 11,697 3.44%
======== ======== ====== ==== ======== ======== ======== ====
</TABLE>
Total deposits increased from the year ended December 31, 1999, to the
nine months ended September 30, 2000, by $138.3 million, or 36.5%, and from the
year ended December 31, 1998, to the year ended December 31, 1999, by $94.7
million, or 33.4%. The primary reason for this increase during the first nine
months of 2000 is to the acquisition of Capitol Thrift and Loan, and during 1999
the purchase of two CalFed branches, with deposits totaling $72.2 million.
Management attributes the remaining increase to Humboldt Bancorp's ongoing
marketing efforts. Changes occurred in all deposit categories:
non-interest-bearing deposits increased by 20.1%, interest-bearing demand
deposits decreased by 11.0%, savings accounts increased by 38.8%, and time
deposits increased by 56.2%.
At December 31, 1998, total deposits were $284.0 million, an increase of
$28.8 million or 11.3% from total deposits of $255.2 million at December 31,
1997. Deposit growth in 1998 was due primarily to internal growth and not as a
result of acquisitions.
Non-interest-bearing demand deposits continued to be a significant
portion of Humboldt Bancorp's deposit base. To the extent Humboldt Bancorp can
fund operations with these deposits, net interest spread, which is the
difference between interest income and interest expense, will improve. At
September 30, 2000, non-interest bearing demand deposits accounted for 25.7% of
total deposits, down from 29.2% as of December 31, 1999. In general, the number
of non-interest-bearing demand accounts has been primarily from acquisitions and
our Merchant Bankcard operations. Merchant reserves are a source of funds and
are held in the event the merchant's customer returns a purchased item and is
charged-back with the return. See "Business of Humboldt Bancorp - Merchant
Bankcard."
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as Humboldt Bancorp adjusts its pricing and product strategies based on market
conditions, including competing deposit products. At September 30, 2000, total
interest-bearing deposit accounts were $384.2 million, an increase of $116.1
million, or 43.3%, from December 31, 1999. At December 31, 1999, total
interest-bearing accounts were $268.1 million, an increase of $81.0 million, or
43.3%, from December 31, 1998. Interest-bearing demand accounts increased $2.4
million, or 4.8%, from December 31, 1997 to 1998.
At September 30, 2000, time certificates of deposit in excess of
$100,000 totaled $88.5 million, or 17.1% of total outstanding deposits, compared
to $68.1 million, or 18.0%, of total outstanding deposits at December 31, 1999,
$46.5 million, or 16.4% of total outstanding deposits at December 31, 1998, and
$40.6 million, or 15.9%, of total outstanding deposits at December 31, 1997.
Humboldt Bancorp has never had brokered deposits. All public-entity time
certificates of deposit are from local government agencies located in Humboldt,
Trinity and Mendocino Counties.
The majority of certificates of deposit in denominations of $100,000
or more in the past have tended to mature in less than one year. However,
management can give no assurance that this trend will continue in the future.
89
<PAGE> 90
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at September 30, 2000.
<TABLE>
<CAPTION>
As of
September 30,
(dollars in thousands) 2000
-------------
<S> <C>
Three months or less $ 77,027
Over three through twelve months 153,866
Over one year to three years 33,083
Over three years 4,682
--------
Total $268,658
========
</TABLE>
Short-Term Borrowings
The following table sets forth certain information with respect to
Humboldt Bancorp's FHLB short-term borrowings as of December 31, 1997, 1998, and
1999, and September 30, 2000.
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, September 30,
------------------------------ -------------
1997 1998 1999 2000
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Amount outstanding at end of period $1,761 $3,402 $5,316 $11,354
Weighted average interest rate at end of period 6.18% 6.13% 7.21% 6.90%
Maximum amount outstanding at any month-end
and during the year $1,774 $3,461 $5,395 $11,354
Average amount outstanding during the period $ 767 $3,011 $4,658 $ 8,556
Weighted average interest rate during the period 6.19% 6.16% 6.84% 6.88%
</TABLE>
Shareholders' Equity
Shareholders' equity increased $12.9 million or 37.8% during the nine
months ended September 30, 2000. Shareholders' equity at September 30, 2000, was
$47.0 million compared to $34.1 million at December 31, 1999. Shareholders'
equity increased $6.3 million or 22.7% during 1999 compared with $27.8 million
at December 31, 1998, which was an increase of $4.2 million or 17.8% compared
with the $23.6 million at December 31, 1997.
The increase in the nine months ended September 30, 2000, reflects net
income and comprehensive income of $5.3 million, $0.2 million in exercised stock
options, and $7.4 million net proceeds from the issuance of 640,000 shares of
common stock in an offering that was completed in March 2000.
Asset-Liability Management and Interest Rate Sensitivity
The operating income and net income of Humboldt Bancorp depend to a
substantial extent on "rate differentials," or 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
90
<PAGE> 91
communities and customers through deployment of its resources on a
corporate-wide basis so that qualified loan demands may be funded wherever
necessary in its branch banking system. Asset/liability management involves
managing the relationship between interest rate sensitive assets and interest
rate sensitive liabilities.
The interest rate sensitivity of Humboldt Bancorp is measured over time
and is based on Humboldt Bancorp's ability to reprice its assets and
liabilities. The difference between the amount of assets and liabilities
repriced at the same time is referred to as the "gap." This gap represents the
risk, or opportunity, in repricing. In addition to the volumes of assets and
liabilities repricing, two other factors create interest rate risk; how much
each rate type will change by (e.g. money market deposit account rates change
less than prime) and how soon it will reprice. Humboldt Bancorp is somewhat
asset sensitive and its near term performance could be enhanced by rising rates
and negatively affected by falling rates due mainly to the significant amount of
earning assets tied to prime rate.
Interest Rate Risk. The table below shows the potential change in net
interest income (NII) if rates change as of September 30, 2000. Humboldt
Bancorp's NII 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, 2000.
Economic Risk. Humboldt Bancorp also measures the potential change
in the net present value of Humboldt Bancorp's net existing assets and
liabilities if rates change (the "economic value of equity" or "EVE"). The table
below also shows the EVE. The EVE is determined by valuing Humboldt Bancorp
assets and liabilities as of September 30, 2000, using a present value cash flow
calculation as if Humboldt Bancorp is liquidated. The EVE declines when rates
increase because there are more fixed rate assets than liabilities. However,
Humboldt Bancorp's NIM earnings would also increase as rates increased (from the
interest rate risk) and this benefit would offset the decline in EVE.
<TABLE>
<CAPTION>
% Change in
Change in NII NII to Shareholder
Change in (In thousands Equity
Interest Rates pre-tax) (pre-tax) % of EVE
-------------- ------------- ------------------ --------
<S> <C> <C> <C>
+2% 818 1.70% (15.00)%
+1% 417 0.90% (7.00)%
-1% (462) (1.00)% 7.00%
-2% (1,128) (2.40)% 15.00%
</TABLE>
The following table sets forth the repricing opportunities for the
assets and liabilities of Humboldt Bancorp at September 30, 2000. Assets and
liabilities are classified by the earliest possible repricing date or maturity,
whichever comes first.
<TABLE>
<CAPTION>
Repricing In
-----------------------------------------------------------------
Five
Less Three One Three Years Non-
Than Through Through Through Through Over Interest
Three Twelve Three Five Fifteen Fifteen Bearing
(dollars in thousands) Months Months Years Years Years Years And Other Total
--------- --------- --------- ------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Net loans $ 124,723 $ 42,398 $ 75,355 $56,671 $61,367 $ 28,654 -- $389,168
Investment securities 412 8,357 49,004 13,227 24,829 3,519 -- 99,348
Federal funds sold 35,395 -- -- -- -- -- -- 35,395
FHLB and trust preferred stock -- -- -- -- -- -- 1,073 1,073
Interest-bearing deposits
with banks 45 99 -- -- -- -- -- 144
Non-interest earning assets -- -- -- -- -- -- 67,097 67,097
--------- --------- --------- ------- ------- -------- --------- --------
Total assets $ 160,575 $ 50,854 $ 124,359 $69,898 $86,196 $ 32,173 $ 68,170 $592,225
========= ========= ========= ======= ======= ======== ========= ========
Liabilities:
Non-interest-bearing deposits $ -- $ -- $ -- $ -- $ -- $ -- $ 132,724 $132,724
Interest-bearing deposits 192,570 153,866 33,083 4,682 -- -- -- 384,201
</TABLE>
91
<PAGE> 92
<TABLE>
<CAPTION>
Repricing In
-----------------------------------------------------------------
Five
Less Three One Three Years Non-
Than Through Through Through Through Over Interest
Three Twelve Three Five Fifteen Fifteen Bearing
(dollars in thousands) Months Months Years Years Years Years And Other Total
--------- --------- --------- ------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowings 3,024 5,172 217 8,251 -- -- -- 16,664
Other liabilities -- -- -- -- -- -- 11,651 11,651
Stockholders' equity -- -- -- -- -- -- 46,985 46,985
--------- --------- --------- ------- ------- -------- --------- --------
Total liabilities and stockholders'
equity $ 195,594 $ 159,038 $ 33,300 $12,933 $ -- $ -- $ 191,360 $592,225
========= ========= ========= ======= ======= ======== ========= ========
Interest rate sensitivity gap $ (35,019) $(108,184) $ 91,059 $56,965 $86,196 $ 32,173 $(123,190)
Cumulative interest rate sensitivity
gap $ (35,019) $(143,203) $ (52,144) $ 4,821 $91,017 $123,190 $ --
</TABLE>
Although the gap position is negative during the first twelve months
after September 30, 2000, management believes that Humboldt Bancorp is somewhat
asset sensitive based on Humboldt Bancorp's interest rate simulation model and
has a reasonable interest rate risk. The net interest margin should increase
slightly when rates increase and shrink somewhat when rates fall. This is
because this interest rate risk is driven by concentration of rate sensitive
variable rate and short-term commercial loans, one of Humboldt Bancorp's major
business lines. Humboldt Bancorp does have a significant amount of fixed rate
loans to offset the impact from repricing of short-term loans. However, there
can be no assurance that fluctuations in interest rates will not have a material
adverse impact on Humboldt Bancorp.
Historically, Humboldt Bancorp's asset rates change more quickly than
deposit rates, and management feels Humboldt Bancorp's asset yields will change
more than cost of funds when rates change.
Liquidity
Humboldt Bancorp's liquidity is primarily a reflection of Humboldt
Bancorp's ability to acquire funds to meet loan demand and deposit withdrawals
and to service other liabilities as they come due. Humboldt Bancorp has adopted
policies to maintain a relatively liquid position to enable it to respond to
changes in the financial environment and ensure sufficient funds are available
to meet those needs. Generally, Humboldt Bancorp's major sources of liquidity
are customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale. To augment liquidity, Humboldt Bancorp has a Federal Funds
borrowing arrangement with two correspondent banks totaling $11.0 million.
Additionally, Humboldt Bancorp is a member of the Federal Home Loan
Bank, and through its membership has the ability to pledge qualifying collateral
for short term (up to six months) and long-term (up to five years) borrowings.
Management may use this facility to fund loan advances by pledging single-family
residential mortgages , commercial real estate loans or investment securities as
qualifying collateral.
The following table sets forth certain information with respect to
Humboldt Bancorp's liquidity as of December 31, 1997, 1998 and 1999 and
September 30, 2000.
<TABLE>
<CAPTION>
(dollars in thousands) December 31, September 30,
----------------------------------- -------------
1997 1998 1999 2000
-------- ------- -------- -------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 21,442 $28,626 $ 31,339 $ 29,088
Federal funds sold 3,520 2,250 21,375 35,395
Interest earning deposits 3,020 3,020 20 144
</TABLE>
92
<PAGE> 93
<TABLE>
<CAPTION>
(dollars in thousands) December 31, September 30,
----------------------------------- -------------
1997 1998 1999 2000
-------- ------- -------- -------------
<S> <C> <C> <C> <C>
Unpledged securities 80,180 57,994 87,742 76,148
-------- ------- -------- ---------
Total liquid assets $108,162 $91,890 $140,476 $140,775
======== ======= ======== ========
Liquid ratios(1)
Liquid assets to:
Ending assets 38.1% 28.7% 33.2% 23.8%
Ending deposits(2) 42.4% 32.4% 37.1% 27.2%
</TABLE>
(1) Liquid assets include cash and due from banks, federal funds sold,
interest-bearing deposits and market value of available-for-sale
securities less book value of pledged securities.
(2) Less pledged public deposits.
The liquidity ratios reflect merchant reserves held primarily in
non-interest bearing accounts to fund charge-backs to Humboldt Bank's Merchant
Bankcard Department's merchants and the pledging of investments for selected
deposits and current VISA and MasterCard pledging requirements.
The decrease in liquidity at September 30, 2000, compared to December
31, 1999, is mainly attributable to the acquisition of Capitol Thrift and Loan
in April 2000. The increase during 1999 is primarily attributable to deposits
acquired from the CalFed branch purchase acquisitions. The decrease in liquidity
at December 31, 1998, compared to December 31, 1997, is mainly attributable to
the pledging of investments for selected deposits and current Visa and
MasterCard pledging requirements.
The analysis of liquidity also includes a review of the changes that
appear in the consolidated statements of cash flows for the nine months ended
September 30, 2000. The statement of cash flows includes operating, investing
and financing categories. Operating activities include net income of $5.0
million, which is adjusted for non-cash items and increases or decreases in cash
due to changes in certain assets and liabilities. Investing activities consist
primarily of both proceeds from and purchases of investments, the impact of net
growth in loans and the acquisition of Capitol Thrift and Loan. Financing
activities present the cash flows associated with deposit accounts, changes in
borrowed funds and common stock transactions.
Part of Humboldt Bancorp's normal lending activity involves making
commitments to extend credit. One risk associated with the loan commitments is
the demand on Humboldt Bancorp's liquidity that would result if a significant
portion of the commitments were unexpectedly funded at one time. Humboldt
Bancorp assesses the likelihood of projected funding requirements by reviewing
historical patterns, current and forecasted economic conditions and individual
client funding needs. At September 30, 2000 and December 31, 1999, 1998 and
1997, Humboldt Bancorp had $103.8 million , $75.5 million, $59.7 million and
$47.2 million, respectively, in undisbursed commitments. Further, management
maintains unpledged securities that are available to secure additional
borrowings in the form of reverse repurchase agreements or FHLB advances. At
September 30, 2000, Humboldt Bancorp had approximately $76.1 million in
unpledged securities. 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.
93
<PAGE> 94
Trust Preferred Securities
During March 2000, Humboldt Bancorp formed a Delaware business trust for
the purpose of issuing $5.3 million of 10.875% junior subordinated debt
securities commonly referred to as trust preferred securities. Trust preferred
securities are a hybrid form of a security which is considered debt, with
interest paid deductible for income tax purposes, but is considered Tier 1
capital for bank regulatory purposes. The trust preferred securities were issued
to institutional investors. The junior subordinated debt securities underlying
trust preferred securities are due in the year 2030, and interest is paid
semi-annually. Beginning in March 2010 and thereafter, we may redeem the trust
preferred securities based on a declining premium of the stated value of the
trust preferred securities. The trust preferred securities are guaranteed by
Humboldt Bancorp. Proceeds from the trust preferred securities were used to
strengthen the capital structure of Humboldt Bancorp and to acquire Capitol
Thrift and Loan.
Common Stock Offering
On March 29, 2000, Humboldt Bancorp completed a public offering of
640,000 shares of its common stock at $12.50 per share, providing gross proceeds
of $8.0 million before offering expenses of approximately $519,000. Proceeds
from the offering were used to enhance the capital structure of Humboldt Bancorp
and the acquisition of Capitol Thrift and Loan.
Humboldt Bank Plaza
On June 30, 1998, Humboldt Bank purchased from an unaffiliated party a
90,000 square foot building and approximately 29 acres of property located at
2440 Sixth Street, Eureka, California 95501. The property was purchased as a
site for the current Humboldt Bank Plaza at a cost of approximately $2.9
million. Humboldt Bancorp began occupying the building in November 2000.
Further, 20,090 square feet of the Plaza has been renovated at a cost of
$1.2 million and has been leased for ten years to the District Attorney's Family
Support Division, a Humboldt County agency. During the initial year of the lease
to the agency, monthly lease income will be $27,122.
Capital Resources
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and nonmember banks. The requirements address both risk-based capital
and leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a corporation has previously received special
attention or has a high susceptibility to interest rate risk.
The following reflects Humboldt Bancorp's various capital ratios at
September 30, 2000 and December 31, 1999, as compared to regulatory minimums:
<TABLE>
<CAPTION>
Minimum
September 30, Capital
December 31, 1999 2000 Requirement
----------------- ------------- -----------
<S> <C> <C> <C>
Tier 1 capital 10.90% 10.56% 4.0%
Total risk-based capital 12.07% 11.81% 8.0%
Leverage ratio 7.50% 8.58% 4.0%
</TABLE>
In connection with the formation of Capitol Valley Bank, and in
connection with the acquisition of Capitol Thrift and Loan, Humboldt Bank,
Capitol Valley Bank and Capitol Thrift and Loan are required to maintain certain
leverage ratios. See "Business of Humboldt Bancorp - Capital Adequacy
Guidelines."
94
<PAGE> 95
Effects of Inflation
Assets and liabilities of financial institutions are principally
monetary in nature. Accordingly, interest rates, which generally move with the
rate of inflation, have a potentially significant effect on Humboldt Bancorp's
net interest income. Humboldt Bancorp attempts to limit inflation's impact on
rates and net income margins through a continuing asset/liability management
program.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 137, issued June 1999, defers the required effective date
of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities." SFAS No. 138 is an amendment to
SFAS No. 133 that is intended to add comprehensive guidance on accounting for
derivatives and hedging activities. The effective date for an entity that has
not adopted SFAS No. 133 before June 15, 2000, is concurrent with the adoption
of SFAS No. 133 or no later than January 1, 2001. The adoption of SFAS Nos. 133
and 138 are not expected to have a material impact on the financial statements
of Humboldt Bancorp.
In April 2000, the FASB issued FASB Interpretation No. (FIN) 44,
"Accounting for Certain Transactions involving Stock Compensation: an
Interpretation of APB Opinion No. 25." This seeks to interpret the application
of APB 25, especially in relation to modifications to the terms of stock awards
and the scope of APB 25. When FIN 44 affects awards and modifications made after
December 15, 1998, but before July 1, 2000, the effect of applying FIN 44 should
only be recognized on a prospective basis. No additional compensation cost
measured on the initial application of FIN 44 that is attributable to periods
prior to July 1, 2000, should be recognized and, therefore, no adjustments
should be made to financial statements for periods prior to July 1, 2000.
Adoption of FIN 44 is not expected to have a material impact on the financial
statements of Humboldt Bancorp.
BUSINESS OF HUMBOLDT BANCORP
Introduction
Humboldt Bancorp is a multi-bank holding company with two bank
subsidiaries, Humboldt Bank and Capitol Valley Bank, and a thrift subsidiary,
Capitol Thrift and Loan. In addition, Humboldt Bancorp owns a 50% interest in
Bancorp Financial Services, a leasing corporation. Reference to Humboldt
Bancorp, Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan in this
section is reference to just Humboldt Bancorp, Humboldt Bank, Capitol Valley
Bank and Capitol Thrift and Loan, respectively.
Humboldt Bancorp was incorporated under the laws of the state of
California on January 23, 1995. Humboldt Bancorp initially was organized for the
purpose of becoming the holding company for Humboldt Bank. On January 2, 1996,
the plan of reorganization was effected and shares of Humboldt Bancorp common
stock were issued to the shareholders of Humboldt Bank in exchange for their
Humboldt Bank common stock. Humboldt Bank was incorporated as a California
state-licensed bank on March 13, 1989, and began its operations in the
Eureka/Humboldt area of California on September 13, 1989. Capitol Valley Bank
was incorporated on December 17, 1998, and began its operations as a California
state-chartered bank in Roseville, California on March 3, 1999. Capitol Thrift
and Loan is a California industrial loan corporation that was acquired on April
7, 2000.
In addition to its main branch located in Eureka, California, Humboldt
Bank has nine branches located in Humboldt, Trinity and Mendocino counties.
Capitol Valley Bank has one main branch office located in Roseville,
95
<PAGE> 96
California, 20 miles from downtown Sacramento. Capitol Thrift and Loan has nine
branches located in Northern, Central and Southern California and focuses
primarily on consumer mortgage and commercial real estate lending. Bancorp
Financial Services, a California corporation, is jointly owned by Humboldt
Bancorp and Tehama Bancorp and makes automobile loans to consumers and
commercial equipment leases of less than $100,000 to small businesses. Bancorp
Financial Services markets its automobile products primarily in California but
its equipment lease products are marketed nationally.
As of September 30, 2000, Humboldt Bancorp had total assets of $592.2
million, total deposits of $516.9 million, and shareholders' equity of $47.0
million. Humboldt Bancorp's net income for the nine months ended September 30,
2000, and the year ended December 31, 1999, was $5.0 million and $4.6 million,
respectively, which was Humboldt Bancorp's ninth consecutive year of increased
net income. For the nine months ended September 30, 2000, and year ended
December 31, 1999, Humboldt Bancorp's return on average assets was 1.29% and
1.27%, respectively, and return on average equity was 15.98% and 15.10%,
respectively. Since the year ended December 31, 1995, Humboldt Bancorp has
increased annual earnings by an average of 20.3% per year and maintained return
on average assets in excess of 1.22%. 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,
organizing Capitol Valley Bank, acquiring Capitol Thrift and Loan, and expansion
of new business lines. Humboldt Bank opened its first office in 1989 in Eureka,
California, and acquired its next branch in 1991 in Fortuna, California.
Humboldt Bank then acquired five of its branches from U.S. Bank: Arcata and
McKinleyville in 1993 and Loleta, Weaverville and Willow Creek in 1995. In 1997,
Humboldt Bancorp acquired the Garberville branch from First Nationwide Bank. In
August 1999, Humboldt Bank completed the acquisition of two branches of CalFed
located in Eureka and Ukiah. Management believes the branch acquisitions have
strengthened Humboldt Bank's market position by increasing our presence in our
primary region of Humboldt and Trinity counties. Humboldt Bancorp plans to open
two new branches in Eureka, Henderson Center and Eureka High School in the last
quarter of 2000.
In order to strengthen its market position in Capitol Valley Bank's
market area of Roseville, California, in September 1999, Humboldt Bancorp
acquired the stock and services of the key executives of Silverado Merger
Corporation, which was Silverado Bank, a bank in organization in Roseville,
California. Silverado was in the process of raising the necessary capital to
open as a commercial banking institution.
Management of Humboldt Bancorp has historically searched for and
developed non-traditional business lines for the company. An example of this is
Humboldt Bancorp's 50% joint venture, Bancorp Financial Services, formed in
1996. In addition to making automobile loans and commercial equipment leases,
Bancorp Financial Services acquires leases and contracts, which are then
packaged as asset-backed securities for placement in the public securities
market. Another example is Humboldt Bank's merchant bankcard services business
line. These services involve collecting funds for, and crediting the accounts
of, merchants for sales of merchandise and services to credit card customers.
This department, including ATM activities, has grown significantly since 1993,
is now staffed by 107 employees, and had total revenue of $15.8 million for the
nine-month period ended September 30, 2000.
In April 2000 Humboldt Bancorp acquired Capitol Thrift and Loan, an
industrial loan corporation with branch locations in Napa, Covina, Fresno,
Lancaster, Lodi, Riverside, Roseville, Sacramento and San Diego, California.
Capitol Thrift and Loan focuses primarily on consumer mortgage and commercial
real estate lending.
Lending Activities
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financing, credit card and consumer loans, made almost
exclusively to individuals and businesses primarily in Northern California.
96
<PAGE> 97
Humboldt Bancorp has no foreign loans. The net loan and lease portfolio as of
September 30, 2000, and December 31, 1999, totaled $383.0 million and $225.1
million, respectively, which represented 73.7% and 59.5%, respectively, of total
deposits and 64.7% and 53.1%, respectively, of total assets. Humboldt Bancorp
also generates fee income by servicing mortgage loans. See "Loan Servicing"
below.
Real Estate Loans and Real Estate Banking Operations
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential
and commercial properties and to finance land acquisition and development. At
September 30, 2000, and December 31, 1999, Humboldt Bancorp had outstanding real
estate-secured construction loans totaling $29.7 and $22.1 million,
respectively, representing 7.8% and 9.8%, respectively of Humboldt Bancorp's net
loan portfolio. The large increase is a result of increased loan activity at
Capitol Valley Bank.
Humboldt Bancorp's owner-occupied single-family construction loans
typically have a maturity of up to nine months and are secured by deeds of trust
and usually do not exceed 80% of the appraised value of the home to be built.
Loans to developers for the purpose of acquiring unimproved land and
developing such land into one-to-four improved residential lots typically have a
maturity of 12 to 24 months, have a floating rate tied to the prime rate,
usually do not exceed 75% of the appraised value, are secured by a first deed of
trust and require the borrower or its principals to personally guarantee
repayment of the loan. To also reduce the risks inherent in construction
lending, Humboldt Bancorp limits the number of properties that can be
constructed on a "speculative" or unsold basis by a builder at any one time to
two to four houses.
Commercial construction loans are underwritten using the actual or
estimated cash flow the secured real property would provide to an investor in
the event of a default by the borrower. A debt coverage ratio of 1.25:1 and a
maximum loan to value of 70% are required in most cases.
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp also originates owner-occupied, single-family,
residential real estate loans in its market area. At September 30, 2000 and
December 31, 1999, Humboldt Bancorp had outstanding owner-occupied,
single-family, residential real estate loans totaling $59.1 and $45.2 million,
respectively. Humboldt Bancorp originates fixed-rate mortgage loans and
adjustable-rate residential mortgage loans. Fixed-rate mortgages are at
competitive rates and adjustable-rate loans currently offered by Humboldt
Bancorp have interest rates which adjust every one, three or five years from the
closing date of the loan or on an annual basis commencing after an initial
fixed-rate period of one, three or five years 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, 2000, and December 31, 1999,
Humboldt Bancorp had approximately $17.4 and $15.7 million, respectively, in
home equity line of credit loans, representing approximately 4.6% and 6.9%,
respectively, of its gross loan portfolio. Humboldt Bancorp's home equity lines
of credit have adjustable interest rates tied to the prime interest rate plus a
margin.
Generally, Humboldt Bancorp sells its owner-occupied, single-family,
residential fixed-rate loans to institutional investors in the secondary market,
but retains the servicing of such loans. There were, however, no real estate
loans pending sale at September 30, 2000.
Real Estate - Commercial and Agricultural
97
<PAGE> 98
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, 2000 and December 31, 1999, Humboldt Bancorp had outstanding real
estate secured commercial and agricultural loans totaling $219.4 million and
$99.1 million, respectively. Real Estate secured by commercial and real estate
loans increased primarily due to the acquisition of Capitol Thrift and Loan.
Business Loans
Humboldt Bancorp's commercial loans consist of: (i) loans secured by
commercial real estate, and (ii) business loans which are not secured by real
estate or, if secured by real estate, the principal source of repayment is
expected to be business income. For a discussion of Humboldt Bancorp's loans
secured by commercial real estate lending see " -- Real Estate - Commercial and
Agricultural." Business loans include revolving lines of credit, working capital
loans, equipment financing, letters of credit and inventory financing. At
September 30, 2000 and at December 31, 1999 and 1998, Humboldt Bancorp had
business loans totaling $41.5 million, $39.3 million, and $34.0 million
representing 10.8%, 17.5% and 18.3%, respectively, of Humboldt Bancorp's net
loan portfolio.
Typically, business loans are floating rate obligations and are made for
terms of five years or less, depending on the purpose of the loan and the
collateral. No single business customer accounted for more than 3.0% of total
gross loans at September 30, 2000.
Lease Financing Loans
Humboldt Bancorp makes lease financing loans to finance credit card
swipe machines and other small ticket leases. The dollar amount of each lease
usually ranges from under $2,000 to $5,000 and the term is approximately three
to five years. At September 30, 2000 and December 31, 1999 and 1998, Humboldt
Bancorp had outstanding lease financing loans totaling $13.0, $17.2 and $9.9
million, respectively, representing 3.4%, 7.6% and 5.3%, respectively, of
Humboldt Bancorp's net loan portfolio.
Credit Card and Related Service
Humboldt Bank offers credit card accounts through its participation as a
principal member of Visa. Management believes that providing credit card
services to its customers helps Humboldt Bank remain competitive by offering an
additional service. Currently Humboldt Bank does not actively solicit credit
card business beyond its customer base and market area. At September 30, 2000
and December 31, 1999 and 1998, credit card loans totaled $3.0 million, $3.5
million and $5.7 million, or 0.8%, 1.5% and 3.1%, respectively of Humboldt
Bancorp's net loan portfolio.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile
loans and miscellaneous other consumer loans, including unsecured loans.
Consumer lending affords Humboldt Bancorp the opportunity to earn yields higher
than those obtainable on single-family residential lending. At September 30,
2000, and December 31, 1999 and 1998, consumer loans totaled $2.3 million, $1.9
million and $2.1 million, or 0.6%, 0.9% and 1.1%, respectively, of Humboldt
Bancorp's net loan portfolio.
Other Loans
98
<PAGE> 99
At SEPTEMBER 30, 2000 and December 31, 1998 and 1999, Humboldt Bancorp
had outstanding other loans totaling $4.4 million, $1.2 million and $2.1
million. These loans consist mainly of overdrafts of less than 30 days' duration
and state and political loans.
Loan Servicing
Humboldt Bancorp sells the majority of its mortgage loans and most of
the Small Business Administration loans that it originates to institutional
investors. However, it retains the servicing on these loans in order to generate
ongoing revenues. Humboldt Bancorp's servicing portfolio, in which it has sold
ownership but retains the servicing, was $174.8 million, $163.7 million and
$144.5 million at SEPTEMBER 30, 2000, and December 31, 1999 and 1998,
respectively.
Merchant Bankcard
In 1993, Humboldt Bank established a merchant draft processing operation
("Merchant Bankcard"). Since that time, the operation has grown steadily both in
volume and scope of activities. In general, Merchant Bankcard services involve
collecting funds for, and crediting the accounts of, merchants for sales of
merchandise and services to credit and debit card customers. The Merchant
Bankcard Department specializes in providing processing for first time merchants
and small-to medium-sized merchants in the retail, telephone, mail order and
Internet commerce industries.
While these merchants vary in size, a typical merchant customer
generates approximately $40,000 in annual credit card charge volume. Humboldt
Bank believes that there is a market for providing Merchant Bankcard services to
these merchants, who are often overlooked by larger banks. For the nine months
ended September 30, 2000, no one merchant accounted for more than 2.2% of
Merchant Bankcard's total gross processing volume. At SEPTEMBER 30, 2000, the
Merchant Bankcard Department provided processing services to approximately
67,486 merchants.
The transaction processing industry provides merchants with credit and
debit card processing services. The industry has grown rapidly in recent years
as a result of wider merchant acceptance and rapid technological advances within
the bankcard industry.
Humboldt Bank markets its Merchant Bankcard services through independent
service and marketing organizations ("ISOs"). In most cases, the ISOs solicit
merchant accounts and perform the service and collection function, while
Humboldt Bank provides the accounting and credit function. For these functions,
Humboldt Bank receives an average processing fee of approximately 0.15%. As of
SEPTEMBER 30, 2000, the three ISOs engaged by Humboldt Bank, as described above,
represented 59,687 merchant accounts. Further, those three ISOs represented
$1,928 million of total Merchant Bankcard gross processing volume for the nine
months ended SEPTEMBER 30, 2000. These three contracts expire in 2000, 2002, and
2004. During the fourth quarter of 1999, two additional ISOs signed contracts
for this service with Humboldt Bank.
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, 2000, Proprietary accounts
represented $309.4 million of total Merchant Bankcard gross volume and 7,799
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, 2000, net revenues
for the Proprietary account segment have grown 115.2% relative to the same
99
<PAGE> 100
time period in 1999, while net revenues for the ISO segment have decreased 5.5%
relative to the same time period in 1999.
Humboldt Bancorp intends to continue to expand the Proprietary account
segment of its business. The rapid acceptance of the Internet as a method to
transact commerce has led to an increase in the number of smaller Internet-based
merchants. Humboldt Bank believes its processing services are well suited to
these lower volume merchants. Further, Humboldt Bank has entered into several
key relationships with web site providers and gateway services that cater to
business services for merchants for the purpose of advertising Humboldt Bank's
merchant bankcard services. In addition, Humboldt accepts applications for
merchant processing services at its Merchant Bankcard web site,
www.merchant.humboldtbank.com.
Many of the merchants processing through the Merchant Bankcard
Department accept consumers' credit card numbers over the telephone. There are
no signed drafts and the entire process is handled electronically. Since
consumers find these transactions easier to dispute than transactions involving
signed drafts, the charge-back rates for services provided over the telephone
and through the Internet are generally higher. Further, because most of the
merchants are located outside the Humboldt-Eureka, California area, they require
more Humboldt Bank personnel to follow and monitor their accounts. Humboldt Bank
views its risk management and fraud avoidance practices as integral to its
operations and overall success because of Humboldt Bank's potential liability
for merchant fraud, charge backs and other losses. While the first time and
small to medium sized merchants may be potentially lucrative to Humboldt Bank,
these accounts are perceived high risk because of lack of business experience
and higher monitoring costs. For ISO accounts, risk is mitigated by requiring
merchant reserves and by ISO reserves and guarantees. Reserves are demand
deposit or "checking" account balances with minimum required balances
established by withholding a percentage of process volume. For the Proprietary
account segment, risk management and fraud control occur initially at the
application stage when merchant applications are reviewed against certain
criteria to determine acceptance or denial. Furthermore, Humboldt Bank addresses
these risks by actively monitoring all merchants on a daily basis, employing an
aggressive fraud control team, requiring personal guarantees for nearly all
merchants and holding reserve deposits for certain merchants. These deposits
which totaled $53.5 million were comprised of $48.1 million in non-interest
bearing deposits and $5.4 million in interest-bearing deposits at SEPTEMBER 30,
2000.
In the event a consumer is dissatisfied with the merchandise or service,
in general, a merchant must accept a charge-back for a period of 120 days. The
merchant's checking account is debited with the charge-back if sufficient funds
exist; otherwise, the merchant's reserve funds are debited. If a merchant's
reserves are insufficient to fund the charge-back and an ISO is involved,
Humboldt Bank looks to the applicable and available guarantee, if any, of the
ISO. If the merchant's reserve is exhausted and either (i) an ISO is involved
but no guarantee is applicable or available, or (ii) no ISO is involved,
Humboldt Bank uses its internal reserves to fund the charge-back.
100
<PAGE> 101
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the nine months ended September 30, 2000, and the years ended
December 31, 1997, 1998 and 1999, is set forth below:
<TABLE>
<CAPTION>
Nine Months
Ended
(dollars in thousands) Year Ended December 31, September 30,
---------------------------------------- -------------
1997 1998 1999 2000
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Number of accounts:
ISO 32,694 59,595 62,646 59,687
Proprietary 412 2,754 5,641 7,799
---------- ---------- ---------- ----------
Total 33,106 62,349 68,287 67,486
========== ========== ========== ==========
Gross Processing Volume:
ISO $1,419,355 $2,100,500 $2,695,037 $1,928,435
Proprietary 8,645 71,500 215,780 309,440
---------- ---------- ---------- ----------
Total $1,428,000 $2,172,000 $2,910,817 $2,237,875
========== ========== ========== ==========
Net Processing Revenue:
ISO $ 3,229 $ 3,026 $ 3,768 $ 2,475
Proprietary 9 178 2,739 3,955
---------- ---------- ---------- ----------
Total $ 3,238 $ 3,204 $ 6,507 $ 6,430
========== ========== ========== ==========
</TABLE>
A summary of the Merchant Bankcard Department's merchant demand
deposit account balances at September 30, 2000, and the years ended December 31,
1997, 1998 AND 1999, is set forth below:
<TABLE>
<CAPTION>
Nine Months
Ended
(dollars in thousands) Year Ended December 31, September 30,
-------------------------------- -------------
1997 1998 1999 2000
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Merchant's Reserves:
ISO $32,957 $45,088 $47,587 $41,141
Proprietary 82 1,881 6,566 10,002
------- ------- ------- -------
Total $33,039 $46,969 $54,153 $51,143
======= ======= ======= =======
</TABLE>
A summary of the Merchant Bankcard Department's losses for the nine
months ended September 30, 2000, and for the years ended December 31, 1997, 1998
and 1999 in connection with merchant bankcard services involving an ISO, and for
losses in connection with its own merchant bankcard services when an ISO was not
involved, is set forth below:
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
---------------------------------- -------------
1997 1998 1999 2000
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
ISO Servicing Loss $ 14,682 $ -- $ -- $ 7,500
Proprietary Loss $ -- $ 17,829 $127,049 $36,440
</TABLE>
Merchant bankcard processing services are highly regulated by credit
card associations such as VISA. In order to participate in the credit card
programs, Humboldt Bank must comply with the credit card association's rules and
regulations, which may change from time to time. In November 1999, VISA adopted
rule changes that required staged-in compliance by March 31, 2001. To become
compliant, Humboldt Bank would have had to restrict processing volume because
its overall chargeback percentage was in excess of what the new rules would have
allowed. As a result of these regulations, Humboldt Bank merchant bankcard
income would have been reduced. In
101
<PAGE> 102
October 2000, VISA adopted a revised set of rules that are less restrictive than
the November 1999 rules and with which Humboldt Bank is in full compliance.
Humboldt Bank expects to continue to be in compliance with the October 2000
regulations going forward and does not anticipate any reduction of merchant
bankcard income as a result of VISA's adoption of new rules.
ATM Funding
In 1996, Humboldt Bank began its automated teller machine ("ATM")
funding activities by sponsoring several non-bank companies that place and
service ATMs in various public places such as restaurants, stores, and gas
stations. ATM networks such as Star, Plus and Cirrus require a placement company
to be sponsored by a chartered financial institution. Humboldt Bank sponsors
these companies and provides cash for their ATMs. Humboldt Bank contracts with
bonded money carriers and correspondent vault centers throughout the nation to
provide a ready amount of cash when these placement companies so require.
Humboldt Bank earns a fee for each sponsored transaction and a fee for the cash
advanced.
Capitol Valley Bank
In March 1999, Humboldt Bancorp contributed capital, totaling $4.5
million, to form Capitol Valley Bank and an additional infusion of capital in
the amount of $1.2 million was made in July 2000. Capitol Valley Bank is located
in Roseville, California, and opened for business March 3, 1999. Humboldt
Bancorp believes that the Sacramento-Roseville, California market represents an
attractive location for a community bank. The Sacramento-Roseville region's
infrastructure contains a major airport, deep-water port, transcontinental
railroad and an interstate freeway system. Roseville is located approximately 20
miles northeast of downtown Sacramento. The city of Roseville is an important
link along the Interstate 80 corridor linking Sacramento and Auburn, California
and Reno, Nevada. Capitol Valley Bank will focus primarily on products and
services for individuals, professionals and small to middle-size businesses.
In September 1999, Humboldt Bancorp entered into an agreement to
acquire, for 49,502 shares of Humboldt Bancorp common stock and warrants to
purchase up to 99,000 shares of Humboldt Bancorp common stock at $10.91 per
share, all of the outstanding shares of Silverado Merger Corporation, which was
Silverado Bank, a bank in organization, which had yet to raise the necessary
capital to open as a commercial banking institution. As part of the acquisition,
Capitol Valley Bank hired Silverado Merger Corporation's president and entered
into non-competition agreements with the shareholders of Silverado Merger
Corporation prohibiting them from participating in any financial institution
within 30 miles of Capitol Valley Bank until December 31, 2002. In addition,
Capitol Valley Bank's board was expanded to include three new directors,
consisting of some of the prior directors of Silverado Merger Corporation.
Finally, as part of the acquisition agreement, some shareholders and supporters
of Silverado Merger Corporation purchased $1.6 million of Humboldt Bancorp's
restricted common stock at $12.00 per share pursuant to a private placement.
Silverado Merger Corporation had no operations. Therefore, Silverado
Merger Corporation's financial statements are immaterial. Humboldt Bancorp
acquired Silverado Merger Corporation to expand Capitol Valley Bank's presence
in the Sacramento-Roseville, California area through business associates and
contacts of the former directors and organizers of Silverado Merger Corporation.
As of September 30, 2000, Capitol Valley Bank had total assets of $62.0
million, total loans of $40.7 million, and total deposits of $57.1 million.
102
<PAGE> 103
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama Bank
to organize and share equally in a subsidiary leasing company, Bancorp Financial
Services. Bancorp Financial Services was organized as a California corporation
on November 25, 1996, and Humboldt Bank and Tehama Bank each contributed $2.0
million towards its capitalization as of January 2, 1997. Subsequently during
1998, Humboldt Bank and Tehama Bank each contributed their interests in Bancorp
Financial Services to their respective holding companies, Humboldt Bancorp and
Tehama Bancorp. In March 2000, both Humboldt Bancorp and Tehama Bancorp made an
infusion of capital in Bancorp Financial Services of $999,750 each. Bancorp
Financial Services makes consumer automobile loans and commercial equipment
leases of generally less than $100,000 to small businesses.
During November and December 2000, Bancorp Financial Services
experienced a cash shortage due to a decline and uncertainty in the
securitization market. As a result, Humboldt Bancorp made a loan guarantee of
$7.0 million to Bancorp Financial Services' primary commercial bank lender which
was released on December 28, 2000. Also Humboldt Bancorp committed to purchase
$4.0 million in subordinated debentures of Bancorp Financial Services. Humboldt
Bancorp and Tehama Bancorp intend to sell all or substantially all of their
interests in Bancorp Financial Services.
In addition to making leases and loans, Bancorp Financial Services buys
and services commercial equipment lease contracts throughout the United States
directly from lessors, brokers, finance companies, banks and thrifts nationwide.
Bancorp Financial Services also buys and services consumer automobile contracts
primarily in Northern California. While it maintains its own portfolio of
contracts, the majority of acquired leases are sold to its wholly-owned
subsidiary, BFS Funding Corporation, which packages the leases as asset-backed
securities for placement in the public market on a non-recourse and partial
recourse basis. Bancorp Financial Services retains the servicing and management
of all leases it acquires regardless of their subsequent sale. Likewise, Bancorp
Financial Services acquires consumer automobile contracts from dealers
throughout Northern California and similarly repackages and sells the payment
streams to institutional investors in the financial marketplace while retaining
the servicing. In addition to service fees, Bancorp Financial Services generates
income through spreads on its lease portfolio, loan portfolio, gains on sales,
and ongoing fees and charges.
Previously, Humboldt Bank purchased leases from Bancorp Financial
Services. In order to avoid any related party investments, it is not anticipated
that Humboldt Bank will acquire leases from Bancorp Financial Services in the
future. In addition, Humboldt Bank has in the past extended credit to Bancorp
Financial Services. See "Certain Relationships and Related Transactions."
The Bancorp Financial Services board of directors consists of seven
members including Bancorp Financial Services' Chief Executive Officer, Kevin D.
Cochrane, and two three-member groups each representing Humboldt Bancorp and
Tehama Bancorp. Humboldt Bancorp has elected Theodore S. Mason, Lawrence
Francesconi and Gary L. Evans to the board of directors of Bancorp Financial
Services.
Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method. For the nine months ended September 30, 2000,
and the years ended December 31, 1999 and 1998, Humboldt Bancorp recognized
revenue of $372,000, $450,000 and $259,000, respectively. Assuming consummation
of the merger, Humboldt Bancorp will account for Bancorp Financial Services on a
consolidated basis.
The Federal Reserve Board, FDIC and other financial institution
regulatory agencies have proposed to amend their capital adequacy standards for
bank holding companies and other financial institutions concerning the treatment
of residual interests. Residual interests are defined as those on balance sheet
assets that represent interests in transferred financial assets retained by a
seller after transfer of the financial assets. For example, Bancorp Financial
Services makes leases and loans which are then packaged and sold as asset-backed
securities for placement in the public market on a non-recourse and partial
recourse basis. If the proposed regulations are adopted, Bancorp Financial
Services would be required to retain risk-based capital in an amount equal to
the amount of the residual interests that are retained on Bancorp Financial
Services' balance sheet.
103
<PAGE> 104
Capitol Thrift and Loan
On April 7, 2000, Humboldt Bancorp acquired Capitol Thrift and Loan for
approximately $16.5 million consisting of $11.9 million in cash and the balance
consisting of a $4.6 million promissory note subject to adjustment. The $4.6
million promissory note is due January 30, 2002, and up to $2.0 million of the
promissory note may be exchanged for common stock. We funded the cash portion of
the acquisition through the raising of capital through the issuance of $8.0
million in gross proceeds of common stock and approximately $5.3 million in
gross proceeds of trust preferred securities.
Capitol Thrift and Loan is a California corporation licensed under the
California Industrial Loan Law. Capitol Thrift and Loan conducts a general
consumer and commercial finance business from eight branches located throughout
the State of California. At the time of the acquisition, Capitol Thrift and Loan
operated ten branches. Two branches were subsequently consolidated.
Capitol Thrift and Loan's primary source of revenue is providing
commercial and single-family, residential real estate loans to customers who are
predominantly small and middle-market businesses and individuals. Capitol Thrift
and Loan does not provide general commercial banking services such as demand
checking accounts, lines of credit, safe deposit boxes and wire transfer.
Capitol Thrift and Loan funds its lending activities by issuing thrift
certificates and investment certificates.
The main office of Capitol Thrift and Loan is located at 1424 Second
Street, Napa, California 94559. Capitol Thrift and Loan's deposits are insured
up to $100,000 by the Federal Deposit Insurance Corporation. As of September 30,
2000, Capitol Thrift and Loan had total assets of $126.2 million, total deposits
of $106.6 million and net income of $703,000 for the nine months September 30,
2000. Subsequent to April 7, 2000, Humboldt Bancorp accounted for Capitol Thrift
and Loan on a consolidated basis.
In 1996 and 1997, Capitol Thrift and Loan experienced an increase in
loss on other real estate owned (OREO) and expenses related thereto. A majority
of the losses related to loans made prior to June 1992, at which time credit
underwriting policies were strengthened. As a result of these increases, in
August 1998, Capitol Thrift and Loan entered into an agreement with the FDIC and
the California Department of Financial Institutions pursuant to which management
and the Capitol Thrift and Loan board of directors agreed to reduce the level of
classified assets as outlined in the agreement, develop and implement a plan
with specific strategies for reducing RPHFS, classified and non-performing
loans, and revise the methodology for calculating the allowance for losses on
loans. In addition, Capitol Thrift and Loan is required to maintain Tier 1
capital of 8% or more of Capitol Thrift and Loan's adjusted total assets. As of
September 30, 2000, Capitol Thrift and Loan's Tier 1 capital was 9.7%. Capitol
Thrift and Loan's management believes that Capitol Thrift and Loan has complied
with the provisions of the agreement.
Further, as a condition of the California Department of Financial
Institution's consent to Humboldt Bancorp acquisition of Capitol Thrift and
Loan, Capitol Thrift and Loan is required to maintain a ratio of tangible
shareholders' equity to tangible assets of not less than 8%. Humboldt Bank shall
maintain a ratio of tangible shareholders' equity to tangible assets of not less
than 7%. As of September 30, 2000, the tangible shareholders equity to tangible
assets ratio was 8.3% for Capitol Thrift and Loan and 7.7% for Humboldt Bank.
Acquisition of California Federal Branches
On August 27, 1999, Humboldt Bank completed the acquisition of two
branches located at 959 Myrtle Avenue, Eureka, CA 95501, and 607 South State
Street, Ukiah, CA 95482, from CalFed. Under the terms of the purchase agreement,
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.
104
<PAGE> 105
Total deposits acquired by Humboldt Bank were approximately $72.2 million and
loans acquired were approximately $0.1 million.
Human Resources
At September 30, 2000, Humboldt Bancorp employed a total of 399
full-time equivalent employees. None of Humboldt Bancorp's employees are
represented by a collective bargaining group and management considers its
relations with its employees to be good.
Competition
Humboldt Bancorp's primary market area consists of Humboldt, Trinity and
Mendocino counties and nearby communities of adjacent counties. Humboldt Bancorp
has recently entered into Placer County with the opening of Capitol Valley Bank
in Roseville, California and into Northern, Central and Southern California with
the acquisition of Capitol Thrift and Loan.
Humboldt Bancorp actively competes for all types of deposits and loans
with other banks and financial institutions located in its service area,
including credit unions, which are able to offset more favorable savings rates
and loan rates due primarily to favorable tax treatment. In California
generally, major banks and local regional banks dominate the commercial banking
industry. By virtue of their larger capital bases, such institutions have
substantially greater lending limits than those of Humboldt Bancorp, as well as
more locations, more products and services, greater economies of scale and
greater ability to make investments in technology for the delivery of financial
services.
An independent bank's principal competitors for deposits and loans are
other banks, particularly major banks, savings and loan associations, credit
unions, thrift and loans, mortgage brokerage companies and insurance companies.
Increased deregulation of financial institutions has increased competition.
Other institutions, such as mutual funds, brokerage houses, credit card
companies and even retail establishments have offered new investment vehicles,
such as money-market funds, that also compete with banks. The direction of
federal legislation in recent years favors competition between different types
of financial institutions and encourages new entrants into the financial
services market. It is anticipated that this trend will continue.
Humboldt Bancorp's strategy for meeting competition has been to maintain
a sound capital base and liquidity position, employ experienced management, and
concentrate on particular segments of the market particularly businesses and
professionals, by offering customers a degree of personal attention that, in the
opinion of management, is not generally available through Humboldt Bancorp's
larger competitors. Humboldt Bancorp relies upon specialized services,
responsive handling of customer needs, local promotional activity, and personal
contacts by its officers, directors and staff, compared with large multi-branch
banks that compete primarily on interest rates and location of branches. The
acquisition of Capitol Thrift and Loan increased Humboldt Bancorp's loan
portfolio and the continuation of Capitol Thrift and Loan's industrial loan
charter will provide favorable lending terms so as to assist Humboldt Bancorp to
compete with institutions for more loans. No assurance can be given that
Humboldt Bancorp will be able to compete successfully for more loans. Also, no
assurance can be given that, because of customer loyalty, available products and
services or other reasons, customers in Humboldt Bancorp's branches will not
withdraw their business and establish banking relationships with competitors.
Historically, insurance companies, brokerage firms, credit unions and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. The Financial Services
Modernization Act of 1999 eliminates most of the separation between banks,
brokerage firms and insurance companies by permitting securities firms and
insurers to buy banks and by permitting banks to underwrite securities and
insurance. Generally speaking, the Act is likely to increase competition for
community banks such as Humboldt Bank, Capitol Valley Bank and Capitol Thrift
and Loan, but may also cause consolidations and mergers with larger competitors.
The Financial Services Modernization Act may also increase cross-border
consolidations and mergers.
105
<PAGE> 106
Properties
As of September 30, 2000, Humboldt Bank had nine branch offices, Capitol
Valley Bank had one main branch, Capitol Thrift and Loan had nine branches, and
Bancorp Financial Services had one main office. In addition, Humboldt Bancorp is
consolidating its operations at one administration office.
Rental expense for all leases of premises for the nine months ended
September 30, 2000, was $517,000, and for the years ended December 31, 1999,
1998 and 1997, was $401,000, $269,000 and $128,000, respectively. Rental income
from all properties owned and leased for the NINE months ended September 30,
2000, and for the years ended December 31, 1999, 1998 and 1997, was $262,000,
$302,000, $177,000 and $65,000, respectively.
Legal Proceedings
On December 7, 1998, the case of Freeman, et al. v. Citibank (South
Dakota), N.A., et al., Civil Action No. CV-98-RRA-3029-S ("Freeman"), was filed
in the United States District Court, Northern District of Alabama, Northern
Division. This case is a purported class action brought on behalf of Mr. Freeman
and others similarly situated (VISA credit cardholders issued by Citibank (South
Dakota), hereinafter "Citibank"), against Citibank and VISA International
(hereinafter "VISA") to: (i) enjoin the collection of debts charged to Citibank
VISA cards for gambling at Internet casino websites, (ii) have Internet casino
gambling declared unlawful and (iii) recover all payments including principal,
interest and penalties received by Citibank and VISA related to such debts. Mr.
Freeman is alleging that Citibank and VISA were facilitating, participating in
and profiting from gambling by allowing Mr. Freeman to use his Citibank VISA
card to purchase "e-cash" at a website owned and operated by a provider of such
"virtual" commodity (hereinafter the "Merchant Provider"), which he accessed
from an on-line casino operation. Mr. Freeman proceeded to play the game of
blackjack with his e-cash and lost $30. The action alleges violation of the
federal Wire Act and the federal Racketeering Influenced and Corrupt
Organizations Act ("RICO"). Mr. Freeman is seeking treble damages pursuant to
RICO, punitive damages and attorney's fees, in addition to compensatory damages
and declaratory relief. Citibank has pending a motion to compel arbitration in
the case and the plaintiff has moved to consolidate this action with others
which have been filed against VISA across the country. To date neither motion
has been heard by the court.
Humboldt Bank is not a defendant in the Freeman case. However, Humboldt
Bank provides merchant processing for the Merchant Provider used by Mr. Freeman,
and on April 21, 1999, Citibank sent a letter to Humboldt Bank seeking indemnity
for the Freeman action pursuant to VISA regulations. Humboldt Bank and Citibank
have had preliminary discussions regarding this matter, but at this time
Humboldt Bank has neither acknowledged nor disputed the applicability of the
VISA regulation cited by Citibank. The Freeman action is in its preliminary
stages and the outcome at this time cannot be determined. A similar lawsuit in a
United States District Court in Wisconsin (not involving Humboldt Bank insofar
as is known) was recently dismissed; however, that decision is not binding on
the Freeman court. Until the Freeman action is ultimately determined, any
potential action against Humboldt Bank by Citibank would be premature. In the
event it is ultimately determined that Humboldt Bank is obligated to indemnify
Citibank, Humboldt Bank intends to seek indemnity against both the Merchant
Provider and the company which, through its independent marketing efforts,
presented the Merchant Provider's application for merchant services to Humboldt
Bank.
On May 17, 2000, the case of Lawrence Bradley v. Visa International
Service Association and Travelers Bank USA Corp. (Civil Action No. C 00-01777
SBA), was filed in the United States District Court, Northern District of
California. This case is a purported class action brought on behalf of Mr.
Bradley and others similarly situated (holders of VISA credit cards issued by
Travelers Bank, hereinafter "Travelers" (although Humboldt Bank believes
plaintiff means Citibank)), against Travelers and VISA International
(hereinafter "Visa") to: (i) enjoin the collection of debts charged to
Traveler's Visa cards for gambling at Internet casino websites, (ii) have
Internet casino gambling declared unlawful, and (iii) recover all payments,
including principal, interest and penalties, received by Travelers and Visa
related to such debts. Mr. Bradley is alleging that Travelers and Visa were
facilitating, participating in and profiting from gambling by allowing Mr.
Bradley to use his Travelers Visa card to purchase
106
<PAGE> 107
"e-cash" at a website owned and operated by Cryptologic and Intersafe Global,
which he accessed from seven online casino operations. Mr. Bradley proceeded to
participate in certain games with his e-cash and allegedly lost in the aggregate
$7,048. The action alleges violation of the federal Wire Act and the federal
Racketeering Influenced and Corrupt Organizations Act ("RICO"). Mr. Bradley is
seeking treble damages pursuant to RICO, punitive damages and attorney's fees,
in addition to compensatory damages and declaratory relief.
Humboldt Bank provided merchant processing for Cryptologic's and
Intersafe Global's credit card operations, and on July 3, 2000, Citibank sent a
letter to Humboldt Bank seeking indemnity for the Bradley action pursuant to
Visa regulations. Humboldt Bank and Citibank have had preliminary discussions
regarding this matter, but Humboldt Bank has not yet formally responded to
Citibank's letter. The Bradley action is in its preliminary stages, and the
outcome at this time cannot be determined. The Bradley action is very similar to
the Freeman case. In the event it is ultimately determined that Humboldt Bank is
obligated to indemnify Citibank, Humboldt Bank intends to seek indemnity against
Cryptologic, Intersafe Global and creditcards.com, the company which, through
its independent marketing efforts, presented Cryptologic's and Intersafe
Global's application for merchant services to Humboldt Bank.
On June 23, 2000, Humboldt Bank was served with two lawsuits entitled
Christopher Bradford, et. al. v. Leasecomm Corporation, et. al. , Commonwealth
of Massachusetts, Middlesex, ss. (Superior Court Civil No. 00-2756), and Frances
M. Okougbo, et. al. v. Leasecomm Corporation, et. al. , Commonwealth of
Massachusetts, Middlesex, ss. (Superior Court Civil No. 00-2757). These are
purported class action lawsuits in which plaintiffs allege that they were
charged excessive fees by defendants for entering into non cancellable equipment
leases and merchant agreements in connection with establishing a business in
which revenues may be received through credit cards payments. In the Bradford
and Okougbo lawsuits, plaintiffs are alleging, among other things, that
CardService International, and creditcards.com used deceptive practices to sign
plaintiffs to merchant agreements establishing merchant accounts with Humboldt
Bank and were charged excessive fees. CardService International and
creditcards.com are independent service and marketing organizations that market
Humboldt Bank's merchant services. In the Bradford and Okougbo lawsuits,
plaintiffs are also alleging that Humboldt Bank was either an agent of
CardService International and creditcards.com, or CardService International and
creditcards.com were agents of Humboldt Bank, and that Humboldt Bank should be
jointly and severally liable for any damages. Plaintiffs in the Bradford and
Okougbo lawsuits are seeking, among other things, a refund of all monies paid,
including costs and interest, and attorney's fees and multiple damages. These
cases are in their initial stages, and Humboldt Bank has an indemnification
agreement with CardService International. Further, Humboldt Bancorp is seeking
indemnification from creditcards.com.
We are also involved in other litigation, the outcome of which, we
believe, will not have a material effect on our operations or financial
condition.
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP
Humboldt Bancorp and our subsidiaries, Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & Loan Association are extensively regulated under both
federal and state laws and regulations. These laws and regulations are primarily
intended to protect depositors, not shareholders. The following information
describes statutory or regulatory provisions affecting us; however, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions at issue.
We are a registered bank holding company under the Bank Holding Company
Act, regulated, supervised and examined by the Federal Reserve Bank of San
Francisco. We must file with the Federal Reserve Bank an annual report and
additional reports as the Federal Reserve Board may require. We are also
periodically examined by the Federal Reserve Board. Humboldt Bank and Capitol
Valley Bank, as California state-licensed banks, and Capitol Thrift & Loan
Association, an Industrial Loan Company licensed under the California Industrial
Loans Laws, are also regulated, supervised, and periodically examined by the
California Department of Financial Institutions and the Federal Deposit
Insurance Corporation ("FDIC").
107
<PAGE> 108
The regulations of the Federal Reserve Board, the FDIC, and the
California Department of Financial Institutions govern most aspects of Humboldt
Bancorp's, Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift & Loan
Association's businesses and operations, including, but not limited to, the
scope of its business, investments, reserves against deposits, the nature and
amount of any collateral for loans, the time of availability of deposited funds,
the issuance of securities, the payment of dividends, bank expansion and bank
activities, including real estate development and insurance activities, and the
making of periodic reports. Various consumer laws and regulations also apply to
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan Association. The
Federal Reserve Board, the FDIC, and the California Department of Financial
Institutions have broad enforcement powers over depository institutions,
including the power to prohibit a bank from engaging in business practices which
are considered to be unsafe or unsound, to impose substantial fines and other
civil and criminal penalties, to terminate deposit insurance, and to appoint a
conservator or receiver under a variety of circumstances. The Federal Reserve
Board also has broad enforcement powers over bank holding companies, including
the power to impose substantial fines and other civil and criminal penalties.
Regulation of Bank Holding Companies
Our activities are subject to extensive regulation by the Federal
Reserve Board. The Bank Holding Company Act requires us to obtain the prior
approval of the Federal Reserve Board before (i) directly or indirectly
acquiring ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, we would own or control more than 5%
of the shares of the other bank or bank holding company (unless the acquiring
company already owns or controls a majority of such shares); (ii) acquiring all
or substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve Board will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
Federal Reserve Board also considers capital adequacy and other financial and
managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us
from acquiring or retaining direct or indirect ownership or control of more than
5% of the voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities that, by statute or by Federal Reserve Board regulation or
order, have been determined to be activities closely related to the business of
banking or of managing or controlling banks.
Federal Deposit Insurance
The FDIC insures deposits of federally insured banks, savings banks,
savings associations and thrifts and safeguards the safety and soundness of the
banking industry. Two separate insurance funds are maintained and administered
by the FDIC. In general, bank deposits are insured through the Bank Insurance
Fund.
Deposits in savings associations are insured through the Savings
Association Insurance Fund ("SAIF"). A SAIF member may merge with a bank as long
as the bank continues to pay the SAIF insurance assessments on the deposits
acquired. Humboldt Bank continues to pay SAIF insurance assessments on deposits
acquired from CalFed and HomeFed branch acquisitions. The Economic Growth and
Regulatory Paperwork Reduction Act as part of the Omnibus Appropriations Bill
provided for the recapitalization of SAIF requiring a one time assessment,
payable on November 30, 1996, of approximately 65 basis points per $100 of
deposits of SAIF insured deposits and for years 1997 through 1999, payment of
interest on Financing Corporation ("FICO") bonds that were issued to help pay
for the clean up of the savings and loan industry. Banks paid approximately 1.3
cents per $100 of deposits for this special assessment from 1997 through 1999,
and from the Year 2000, banks will pay approximately 2.4 cents per $100 of
deposits until the FICO bonds mature in 2017 through 2019.
108
<PAGE> 109
Deposits in Humboldt Bank, Capitol Valley Bank and Capitol Thrift and
Loan are insured to a maximum of $100,000 per depositor by the FDIC. The banks
and thrifts are required to pay quarterly deposit insurance premium assessments
to the FDIC. In general terms, each institution is assessed insurance premiums
according to how much risk to the insurance fund the institution represents.
Well-capitalized institutions with few supervisory concerns are assessed lower
premiums than other institutions. Currently, insurance fund assessments range
from zero for well-capitalized institutions to 0.27% of deposits for
institutions that are not (with a statutory minimum of $2,000 paid by all
institutions). Through September 30, 2000, the assessment for Humboldt Bank,
Capitol Valley Bank and Capitol Thrift and Loan was $54,000, $3,000 and $24,000,
respectively.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or pursuant to written agreement with, the
FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital.
Capital Adequacy Guidelines
The Federal Reserve Board and the FDIC employ similar risk-based capital
guidelines in their examination and regulation of bank holding companies and
financial institutions. If capital falls below the minimum levels established by
the guidelines, the bank holding company, bank or savings bank may be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities. Failure to satisfy applicable capital guidelines could
subject a banking institution to a variety of enforcement actions by federal
regulatory authorities, including the termination of deposit insurance by the
FDIC.
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories. Off-balance sheet items are also
taken into account in the calculation of risk-based capital, with each class of
off-balance sheet item being converted to a balance sheet equivalent. From these
computations, the total of risk-weighted assets is derived. Risk-based capital
ratios therefore state capital as a percentage of total risk-weighted assets and
off-balance sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require all bank holding companies
and banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
common shareholders' equity, qualifying perpetual preferred stock (within limits
and subject to certain conditions, particularly if the preferred stock is
cumulative preferred stock), and minority interests in equity accounts of
consolidated subsidiaries, less intangibles. Tier 2 capital includes: (i) the
allowance for loan losses up to 1.25% of risk-weighted assets; (ii) any
qualifying perpetual preferred stock exceeding the amount includable in Tier 1
capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v) mandatory
convertible securities and (vi) subordinated debt and intermediate term
preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of Tier
1 and Tier 2 capital, less reciprocal holdings of other banking organizations
and capital instruments. At December 31, 1998 and 1999 and September 30, 2000,
Humboldt Bancorp's general loan loss reserve was 1.4%, 1.2% and 1.3%,
respectively, of risk-weighted assets.
Humboldt Bancorp's Tier 1 risk-based capital ratio at September 30,
2000, December 31, 1999, and December 31, 1998, was 10.56%, 10.90% and 11.75%,
respectively.
The FDIC has added a market risk component to the capital requirements
of nonmember banks. The market risk component could require additional capital
for general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC's evaluation of an
institution's capital adequacy takes account of a variety of factors as well,
including interest rate risks to which the institution is subject, the level and
quality of an institution's earnings, loan and investment portfolio
characteristics and risks, risks arising from the conduct of nontraditional
activities and other factors. Accordingly, the FDIC's final supervisory judgment
concerning an institution's capital adequacy could differ significantly from the
conclusions that might be drawn from the absolute level of an institution's
risk-based capital ratios. Therefore, institutions generally are expected to
109
<PAGE> 110
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, 2000, December 31, 1999, and at December 31, 1998, was 11.81%,
12.07% and 13.00%, respectively.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles.
Humboldt Bancorp's leverage ratio at September 30, 2000, and December 31, 1999,
and December 31, 1998, was 8.58%, 7.50% and 8.12%, respectively. At September
30, 2000, December 31, 1999, and at December 31, 1998, Humboldt Bancorp and its
subsidiaries were in compliance with all regulatory capital requirements.
In order to resolve the problems of undercapitalized institutions and to
prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. Financial institution regulatory
agencies generally are required to appoint a receiver or conservator shortly
after an institution enters the category of weakest capitalization. The Federal
Deposit Insurance Corporation Improvement Act of 1991 also authorizes the
regulatory agencies to reclassify an institution from one category into a lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. Undercapitalized institutions are required to
take certain specified actions in order to increase their capital or otherwise
decrease the risks to the federal deposit insurance funds.
The following table illustrates the capital guidelines applicable to
Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan, as well as their
total risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of
September 30, 2000.
As of September 30, 2000
<TABLE>
<CAPTION>
Capitol Minimum Necessary to
Humboldt Capitol Valley Thrift and Necessary to Be Be Adequately
Bank Bank Loan Well Capitalized Capitalized
-------- -------------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Total Risk-Based Capital Ratio 11.02% 10.20% 11.00% 10.0% 8.0%
Tier 1 Risk-Based Capital Ratio 9.84% 9.02% 9.74% 6.0% 4.0%
Leverage Ratio 7.66% 8.38% 8.27% 5.0% 4.0%
</TABLE>
In connection with Humboldt Bancorp's organization of Capitol Valley
Bank, Humboldt Bank has committed to the FDIC that it will remain "well
capitalized" and that it will maintain minimum Tier 1 leverage capital ratios of
at least 6.5% for the initial 12 months of operation of Capitol Valley Bank,
6.8% for the next 12 months, and 7.2% for the third 12-month period. During the
first nine months of 2000, Humboldt Bancorp
110
<PAGE> 111
contributed approximately $1.2 million to Capitol Valley Bank and is expected to
contribute an additional $0.5 million in the last quarter of 2000.
In addition, as a condition of Humboldt Bancorp's acquisition of Capitol
Thrift and Loan, Humboldt Bancorp represented to the California Department of
Financial Institutions that Capitol Thrift and Loan will maintain a leverage
ratio of not less than 8% and Humboldt Bank will maintain a leverage ratio of
not less than 7%.
Limits on Dividends and Other Payments
We have never paid cash dividends, but have declared stock dividends.
Our ability to obtain funds for the payment of cash dividends, if any, and for
other cash requirements is dependent on the amount of dividends that may be
declared by Humboldt Bancorp subsidiaries. California bank law provides that
dividends may be paid from the lesser of retained earnings or net income of the
bank for its last three years. Further, a California-chartered bank may not
declare a dividend without the approval of the California Department of
Financial Institutions if the total of dividends and distributions declared in a
calendar year exceeds the greater of the bank's retained earnings or net income
for its last fiscal year or its current fiscal year. State-chartered banks'
ability to pay dividends may be affected by capital adequacy guidelines of their
primary federal bank regulatory agency as well. See "Capital Adequacy
Guidelines." Moreover, regulatory authorities are authorized to prohibit banks
and bank holding companies from paying dividends if payment of dividends would
constitute an unsafe and unsound banking practice.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that we should not pay cash dividends on common stock unless
(i) our net income for the past year is sufficient to fully fund the proposed
dividends and (ii) our prospective rate of earnings retention is consistent with
our capital needs, asset quality and overall financial condition.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that the institution
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public.
The most recent CRA examinations of Humboldt Bank, concluded July 27,
1999, of Capitol Valley Bank, concluded August 10, 2000, of Capitol Thrift and
Loan, concluded October 14, 1998, each resulted in a satisfactory rating.
Although CRA examinations occur on a regular basis, CRA performance evaluations
are used principally in the evaluation of regulatory applications submitted by
an institution. CRA performance evaluations are considered in evaluating
applications for such things as mergers, acquisitions and applications to open
branches.
The Financial Services Modernization Act of 1999 revises the CRA by
reducing the frequency of examinations for smaller banks, those with assets of
less than $250 million, and by requiring disclosure by community groups as to
the amount of funds received from lenders and the manner those community groups
used those funds. These revisions are not expected to significantly impact the
application of CRA to Humboldt Bancorp.
State Regulation
As California-chartered institutions, Humboldt Bank, Capitol Valley Bank
and Capitol Thrift and Loan are subject to regular examination by the California
Department of Financial Institutions. State regulation affects the internal
organization of Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan,
as well as their savings and thrift deposits, mortgage lending, investment and
other activities. State regulation may contain limitations on an
111
<PAGE> 112
institution's activities that are in addition to limitations imposed under
federal law. State regulation also contains many provisions that are consistent
with federal law, such as provisions of California law limiting loans by either
of Humboldt Bank or Capitol Valley Bank to any one borrower to 15.0% of
unimpaired capital and surplus, plus 10.0% of unimpaired capital and surplus if
the additional amount is fully secured by certain forms of "readily marketable
collateral" and limiting loans at Capitol Thrift and Loan to 20% of unimproved
capital and surplus.
The California Department of Financial Institutions may initiate
supervisory measures or formal enforcement actions, and if the grounds provided
by law exist, the California Department of Financial Institutions may place a
California-chartered financial institution in conservatorship or receivership.
Whenever the Commissioner of Financial Institutions considers it necessary or
appropriate, he may also examine the affairs of any holding company or any
affiliate of a California-chartered financial institution.
California Industrial Loan Law
Capitol Thrift and Loan is an industrial loan company licensed under the
California Industrial Loan Law and is regulated, supervised and periodically
examined by the California Department of Financial Institutions (CDFI) and the
FDIC.
Industrial loan companies may issue investment certificates and
securities, subject to certain qualifications and approvals. The total amount of
investment certificates issued and outstanding at any time by an industrial loan
company is subject to limitations based on the amount of its unimpaired capital
and surplus. Real estate holdings are limited to the purchase and construction
of a building to carry on business, property taken to satisfy a debt, and
property acquired through foreclosure. An industrial loan company may invest
funds in any investments that are permissible for commercial banks.
California law authorizes industrial loan companies to make closed-end
and open-end loans, with limits or restrictions on aggregate loans to one
borrower, loan-to-value ratios, maximum loan charges and loan terms, loan fees,
advertising, foreclosure procedures and other loan features. California law also
authorizes insurance premium finance agencies, and sets forth regulations for
insurance premium finance loans.
On September 30, 2000, California adopted a new law that transformed
deposit taking industrial loan companies into industrial banks, a new
classification of banks. Industrial banks now are regulated as banks subject to
California banking law, and are no longer subject to any of the laws governing
industrial loans companies; however, industrial banks are still prohibited from
accepting demand deposits.
Recent Legislation
Financial Services Modernization Legislation. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, also
referred to as Financial Services Modernization Act. The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve member
banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial services providers by revising and expanding the BHC Act
framework to permit a holding company system to engage in a full range of
financial activities through a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not only banking, insurance
and securities activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. Generally, the Financial Services Modernization Act:
112
<PAGE> 113
- Repeals historical restrictions on, and eliminates many federal
and state law barriers to, affiliations among banks, securities
firms, insurance companies, and other financial services
providers;
- Provides a uniform framework for the functional regulation of
the activities of banks, savings institutions and their holding
companies;
- Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their
financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of
consumer information;
- Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act, sometimes referred to as CRA; and
- Addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of
financial institutions.
In order for a company to take advantage of the ability to affiliate
with other financial services providers, it must become a "Financial Holding
Company" as permitted under an amendment to the BHC Act. To become a Financial
Holding Company, a company would file a declaration with the Federal Reserve
Board, electing to engage in activities permissible for Financial Holding
Companies and certifying that the company is eligible to do so because all of
its insured depository institution subsidiaries are well-capitalized and
well-managed. In addition, the Federal Reserve Board must also determine that
each of a holding company's insured depository institution subsidiaries has at
least a "satisfactory" CRA rating.
113
<PAGE> 114
MANAGEMENT OF HUMBOLDT BANCORP
The board of directors of Humboldt Bancorp consists of 12 directors.
Not all of the directors of Humboldt Bancorp then in office immediately prior to
the completion of the merger will continue to serve as directors of Humboldt
Bancorp. Assuming consummation of the merger, there will be a total of eleven
directors including four directors selected by Tehama Bancorp, and Messrs.
Mason, Angell, Evans, Francesconi, Janssen, Winzler and Weborg from Humboldt
Bancorp's existing board.
Board of Directors
Subject to the terms of the merger agreement, each of the current
directors has been elected to serve for the ensuing year and until his or her
successor is elected and qualified at the annual stockholder meeting of Humboldt
Bancorp for the year 2001. As of January 1, 2001, the directors, their ages, and
their principal occupations during the past five years were:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Ronald F. Angell 58 Attorney and Partner with the firm of Roberts, Hill, Bragg, Angell & Perlman.
Board member since 1989.
Marguerite Dalianes 57 Former owner, Dalianes Worldwide Travel Service, since 1975. Board member
since 1992.
Gary L. Evans 57 Certified Public Accountant associated with the firm of Aalfs, Evans &
Company since 1976. Board member since 1989.
Lawrence Francesconi 69 Retired. From 1952 to 1992, owner of Redwood Bootery, retail shoe store.
Board member since 1991. Chairman of the Board since March 1999.
James O. Johnson 71 Owner, Jim Johnson General Contractor and Property Manager. Board member
since 1997.
Theodore S. Mason 57 President and Chief Executive Officer of Humboldt Bancorp since 1996 and of
Humboldt Bank from 1989 until July 15, 1999. Board member since 1989.
John C. McBeth 54 President, O & M Industries, mechanical contractors, since 1964. Board
member since 1991.
Jerry L. Thomas 55 President and Director of Special Projects, Eureka Fisheries, Inc. Board
member since 1998.
Edythe E. Vaissade 62 Retired. From 1989 to 1997, Vice President, Humboldt Bank. Board member
since 1998.
Thomas W. Weborg 57 President/Chief Executive Officer of Cucina Holdings, Inc. Board member
since November 1999.
John R. Winzler 70 Consulting Engineer and Chairman of the Board of Winzler & Kelly. Board
member since 1989.
Michael L. Renner 47 President, L&M Renner, Inc. Board member since 1996.
</TABLE>
Executive Officers
As of January 1, 2001, 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
Humboldt Bancorp in 1989.
</TABLE>
114
<PAGE> 115
<TABLE>
<CAPTION>
BIOGRAPHICAL
OFFICER NAME AGE POSITION SKETCH
------------ --- -------- ------------
<S> <C> <C> <C>
Paul A. Ziegler 41 Executive Vice Mr. Ziegler joined Bank/Bancorp as the Vice President
President of & Chief Administrative Officer in January 1994.
Humboldt Bancorp
PATRICK J. RUSNAK 37 Senior Vice Mr. RUSNAK has been Senior Vice President and Chief
President and Chief Financial Officer of BANCORP SINCE NOVEMBER 2000.
FINANCIAL OFFICER PREVIOUSLY HE WAS CONTROLLER OF UNITED COMMUNITY
BANKS, INC., A BANK HOLDING COMPANY BASED IN
BLAIRSVILLE, GEORGIA.
Ronald V. Barkley 63 Senior Vice Mr. Barkley has been the Senior Vice PRESIDENT AND
President and Chief CHIEF Credit Officer of the Bank/Bancorp since June
Credit Officer of 1989.
Humboldt Bancorp
Kenneth J. Musante 34 Senior Vice Senior Vice President and Manager of Humboldt
President and Bank's Merchant Bankcard Department since 1993.
Manager of the
Merchant Bankcard
Department of
Humboldt Bank
</TABLE>
Compensation of Directors
Directors of Humboldt Bancorp who are also employees of Humboldt Bancorp
or its subsidiaries do not receive compensation for their service on Humboldt
Bancorp's board of directors. During 1998, for the period January through May,
non-employee directors of Humboldt Bancorp received a fee of $400 per board
meeting attended and $200 per board meeting not attended; Loan Committee members
received $150 per meeting attended; and all other committee members received
$100 per meeting attended. Since June 1998, non-employee directors of Humboldt
Bancorp have received a fee of $700 per board meeting attended, $200 per board
meeting not attended, $450 per special board meeting attended, and $200 per
meeting for all committee meetings attended.
After the merger, the directors of Humboldt Bancorp will receive fees in
amounts which are substantially similar to those presently paid to the
directors.
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide for
indemnification of agents including directors, officers and employees, to the
maximum extent allowed by California law, including the use of an indemnity
agreement. The Articles further provide for the elimination of director
liability for monetary damages to the maximum extent allowed by California law.
The indemnification law of the state of California generally allows
indemnification, in matters not involving the right of the corporation, to an
agent of the corporation if that person acted in good faith and in a manner that
person reasonably believed to be in the best interests of the corporation, and
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;
115
<PAGE> 116
- 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 $100,000 in 1999 (the "named executive officers"), the
following table sets forth all cash and non-cash compensation (including
bonuses, other annual compensation, deferred compensation and options granted)
received from Humboldt Bancorp and Humboldt Bank for services performed in all
capacities during the last three years.
Summary Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------------
Other
Annual
Compensation Options
Name and Principal Position Year Salary(1) Bonus(2) ($)(3) Granted(4)
--------------------------- ---- --------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 1999 $275,000 $157,810 $ 1,987 12,095
President and Chief Executive Officer 1998 $275,000 $ 58,809 $ 2,434 6,050
1997 $250,000 $ 45,990 $ 1,782 6,655
Alan J. Smyth 1999 $175,475 $ 27,285 $ 3,018 5,971
Senior Vice President and former 1998 $175,000 $ 12,932 $ 3,704 0
Chief Financial Officer 1997 $160,000 $ 1,865 $ 2,107 6,352
Ronald V. Barkley 1999 $129,880 $ 46,782 $ 1,863 5,978
Senior Vice President and Chief Credit 1998 $130,000 $ 35,550 $ 2,279 0
Officer 1997 $145,000 $ 34,991 $ 1,882 6,352
</TABLE>
116
<PAGE> 117
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------------------
Other
Annual
Compensation Options
Name and Principal Position Year Salary(1) Bonus(2) ($)(3) Granted(4)
--------------------------- ---- --------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Paul A. Ziegler 1999 $96,000 $63,677 $ 714 4,308
Executive Vice President 1998 $77,000 $51,340 $ 738 0
1997 $77,000 $25,825 $ 554 15,427
</TABLE>
(1) Includes amounts of salary or bonus deferred by Messrs. Mason, Smyth and
Barkley as provided by Humboldt Bank's Deferred Compensation Plan.
(2) Includes amounts paid to Messrs. Mason, Smyth, Barkley and Ziegler as
provided by Humboldt Bank's Incentive Bonus Plan.
(3) Includes amounts imputed to Messrs. Mason, Smyth, Barkley and Ziegler as
income for tax purposes as provided by Humboldt Bank's automobile
program and Humboldt Bank's life insurance program.
(4) Adjusted to reflect stock dividends and stock splits.
Employment Contracts
Humboldt Bank entered into an employment agreement with Mr. Mason on May
1, 1989, whereby Mr. Mason agreed to serve as Humboldt Bank's President and
Chief Executive Officer. The term of this agreement was extended on December 10,
1996, to January 1, 2001. The agreement has been revised to refer to Humboldt
Bancorp effective July 15, 1999, and has been extended to January 1, 2002. Under
the terms of the agreement, Mr. Mason is entitled to receive a base salary of
$125,000 per year and an incentive bonus based on a percentage ranging from 4%
to 2.5% of Humboldt Bancorp's pre-tax net profits as provided by an Incentive
Bonus Plan. During his term of employment, Mr. Mason may be reimbursed for
travel, meals, entertainment expenses, service to charitable organizations, and
membership in selected committees and other organizations. In addition, he is
eligible for typical employee benefits including paid vacation, sick leave,
medical insurance, and the use of an automobile owned by Humboldt Bank.
Humboldt Bank entered into an employment agreement with Mr. Smyth on
August 19, 1989, whereby Mr. Smyth agreed to serve as Humboldt Bank's Senior
Vice President and Chief Financial Officer. Mr. Smyth's employment agreement was
for an initial three years to be automatically renewed for successive one-year
terms. Mr. Smyth's current annual salary is $85,000 per annum. In addition, Mr.
Smyth is entitled to a percentage of Humboldt Bank's pre-tax profits ranging
from 2% to .5%.
Humboldt Bank entered into an employment agreement with Mr. Barkley on
June 1, 1989, whereby Mr. Barkley agreed to serve as Humboldt Bank's Senior Vice
President and Chief Credit Officer. Mr. Barkley's employment agreement was for
an initial two years to be automatically renewed for successive one-year terms.
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%.
Humboldt Bancorp provided Mr. Patrick Rusnak with an offer letter
whereby he commenced employment November 1, 2000, and became Senior Vice
President and Chief Financial Officer effective November 15, 2000. Mr. Rusnak's
salary is $150,000 per annum, plus a formula-based bonus if Humboldt Bancorp
achieves certain financial criteria, and if he is terminated within one year of
a change in control, he will receive his base salary of $150,000 for two years.
117
<PAGE> 118
Benefit Plans
Retirement Plan: Humboldt Bancorp has a defined contribution retirement
plan, for which Humboldt Bank and Capitol Valley Bank signed on as sponsors,
covering substantially all of Humboldt Bancorp and its banking subsidiaries
employees. Management is in the process of adopting the plan as a Humboldt
Bancorp Plan. Bank contributions to the plan are made at the discretion of the
boards of directors of the subsidiary banks in amounts not to exceed the maximum
amounts deductible under the profit sharing plan rules of the Internal Revenue
Service. Employees may elect to have a portion of their compensation contributed
to the plan in conformity with the requirements of Section 401(k) of the
Internal Revenue Code. Bank contributions to the plans were $223,000 during
1999, $188,000 during 1998, and $134,000 during 1997.
Director Fee Plan: Humboldt Bancorp has adopted the Humboldt Bank
Director Fee Plan (the "Fee Plan"). The Fee Plan permits each director of
Humboldt Bancorp to elect to receive his/her director's fees in the form of
Humboldt Bancorp common stock, cash, or a combination of Humboldt Bancorp common
stock and cash, and to elect to defer the receipt of any of the foregoing until
the end of his/her term as a Bank director. If deferral is elected, the amount
of the director's fees will be credited to an account on behalf of the director.
However, this crediting will constitute a mere promise on the part of Humboldt
Bank and Humboldt Bancorp to pay/distribute on this account. The account is
otherwise unsecured and unfunded, and subject to the general claims of creditors
of Humboldt Bank and Humboldt Bancorp. The Fee Plan provides for the issuance of
up to 40,000 shares of Humboldt Bancorp common stock. The amount of director
fees deferred in 1999 was $85,000, in 1998 was $57,000, and in 1997 was $43,000.
At December 31, 1998 and 1999, the liability for amounts due under this plan
totaled $108,000 and $194,000, or approximately 4,758 and 18,940 shares of
stock, respectively.
Employee Stock Bonus Plan: Humboldt Bank has an Employee Stock Bonus
Plan, which is funded annually at the sole discretion of the board of directors.
The plan is currently sponsored by Humboldt Bank only. Funds are invested in
Humboldt Bancorp common stock, when available, which is purchased at the current
market price on behalf of all employees except the executive officers of
Humboldt Bancorp. The compensation cost recognized for 1999, 1998, and 1997 was
$20,000 each year. In addition, in 1999, $100,000 was transferred from the
profit sharing plan discussed above under "Benefit Plans -- Retirement Plan."
Post-Employment Benefit Plans and Life Insurance Policies: Humboldt
Bancorp has entered into Officer Salary Continuation Agreements and Deferred
Compensation Agreements with key executive officers and certain employees of
Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank. The Officer and
Employee Salary Continuation Agreements provide for payments in the event of
retirement, death, disability or change in control. The Deferred Compensation
Agreements allow the employees to defer a portion of current compensation in
exchange for Humboldt Bancorp's commitment to pay a deferred benefit at
retirement. Deferred compensation is vested as to the amounts deferred. If death
occurs prior to or during retirement, Humboldt Bancorp will pay the employee's
beneficiary or estate the benefits set forth in the agreement. Both the Officer
Salary Continuation Agreements and the Deferred Compensation Agreements are
unfunded although, as discussed below, Humboldt Bancorp has purchased life
insurance policies in connection with their implementation.
The Officer Salary Continuation Agreements provide that upon retirement,
or death prior to retirement, the following executive officers will be entitled
to the following benefits: Theodore S. Mason - $100,000 per year for 15 years;
Alan J. Smyth - $40,000 per year for 10 years; Ronald V. Barkley - $40,000 per
year for 10 years; Paul A. Ziegler - $142,000 for 15 years; Kenneth J. Musante -
$78,542 per year for 15 years; John E. Dalby -$128,165 per year for 15 years and
Richard L. Whitsell - $74,102 per year for 15 years. In the event of disability,
these employees will be entitled to the following amounts payable over the same
period unless otherwise noted: Theodore S. Mason - $472,202, Alan J. Smyth -
$252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $40,694, Kenneth J.
Musante - $146,665, John E. Dalby - $39,151, and Richard L. Whitsell - $123,724
in a lump sum or as otherwise agreed. Salary continuation benefits may also be
paid if termination is without cause or due to a change in control of Humboldt
Bancorp.
118
<PAGE> 119
In the event of a change of control, the officers named below will be
entitled to full vesting of their benefits under the Officer Salary Continuation
Agreements, and if an executive officer in connection with the change of control
is terminated without cause, he shall be entitled to the fully vested payments.
The fully vested payments are as follows: Theodore S. Mason - $472,202, Alan J.
Smyth - $252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $40,694,
Kenneth J. Musante - $158,398, John E. Dalby - $39,151 and Richard L. Whitsell -
$123,724.
Humboldt Bancorp has purchased single premium life insurance policies in
connection with the implementation of these salary continuation and deferred
compensation plans. The policies provide protection against the adverse
financial effects from their death and provide income to offset expenses
associated with the plans. The specified employees are insured under the
policies, but Humboldt Bancorp is the owner and beneficiary. At September 30,
2000, and December 31, 1999 and 1998, the cash surrender value of these policies
totaled approximately $8,558,000, $5,157,000 and $4,943,000, respectively.
At September 30, 2000, and December 31, 1999 and 1998, liabilities
recorded for the estimated present value of future salary continuation and
deferred compensation benefits totaled approximately $3,178,000, $2,716,000 and
$2,038,000, respectively. In the event of death or under other selected
circumstances, Humboldt Bancorp is contingently liable to make future payments
greater than the amounts recorded as liabilities. Based on present
circumstances, Humboldt Bancorp does not consider it probable that this
contingent liability will be incurred or that in the event of death, a liability
would be material after consideration of life insurance benefits.
Stock Option Plan: Humboldt Bancorp has a stock option plan under which
incentive and non-statutory stock options, as defined under the Internal Revenue
Code, may be granted. Options representing 456,255 shares of the Bancorp's no
par value common stock may be granted under the plan by the board of directors
to directors, officers and key, full-time employees at an exercise price not
less than the fair market value of the shares on the date of grant. In addition,
at December 31, 1999 and September 30, 2000, 671,762 and 605,849 options,
respectively, were outstanding that were granted by Humboldt Bank prior to the
formation of the Bancorp. Options may have an exercise period of not longer than
ten years, and the options are subject to a graded vesting schedule of 33% per
year for incentive stock options. Non-statutory stock options vest immediately.
The Stock Option Plan contains an antidilution provision in the event of
a private or public offering of Humboldt Bancorp common stock. Under the current
antidilution provision, participants will be granted additional options to
purchase shares of Humboldt Bancorp common stock based on the number of shares
issued in the public offering. Additional options will be granted to a current
employee, officer or director who hold options so as to maintain an optionee's
proportionate interest in Humboldt Bancorp by reason of his or her unexercised
portions of options as before the issuance. However, the total number may not
exceed that available for grant under the Humboldt Bancorp Stock Option Plan and
the former Humboldt Bank Stock Option Plan. Directors of Humboldt Bancorp have
agreed to waive the antidilution provision of the stock option plan representing
approximately 42% of the outstanding options under the stock option plans.
The exercise price for such additional options shall be the fair market
value of the Humboldt Bancorp common stock on the date of the additional grant,
except that in the case of an incentive stock option, the exercise price shall
be 110% if the optionee is an employee owning more than 10% of the combined
voting power of all classes of stock of Humboldt Bancorp.
The following tables set forth the number of options granted to Humboldt
Bancorp's executive officers during 1999 and the number and value of unexercised
options held by these executive officers as of December 31, 1999.
119
<PAGE> 120
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1999
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Options Granted Exercise Annual Rates of Stock
Options to Employees Price Expiration Price Appreciation for
Name Granted in 1999 per Share Date Option Term 5% / 10%
----------------- ------- --------------- --------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 5,550 13.33% $ 9.27 01/21/09 $83,049/$132,242
Theodore S. Mason 6,595 30.32% $ 14.32 09/23/09 $153,833/$244,954
Alan J. Smyth 2,750 6.67% $ 9.27 01/21/09 $41,525/$66,121
Alan J. Smyth 3,221 14.81% $ 14.32 09/23/09 $75,132/$119,636
Ronald V. Barkley 2,750 6.67% $ 9.27 01/21/09 $41,525/$66,121
Ronald V. Barkley 3,228 14.84% $ 14.32 09/23/09 $75,296/$119,896
Paul A. Ziegler 2,750 6.67% $ 9.27 01/21/09 $41,525/$66,121
Paul A. Ziegler 1,558 7.16% $ 14.32 09/23/09 $36,342/$57,868
</TABLE>
AGGREGATED OPTION EXERCISES IN 1999
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Shares Options at Year-end In-the-money
Acquired on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
----------------- ----------- -------- -------------------- ------------------
<S> <C> <C> <C> <C>
Theodore S. Mason -- -- 153,237/12,237 $1,246,644/$31,381
Alan J. Smyth 12,468 118,320 75,937/5,068 $613,785/$13,583
Ronald V. Barkley 12,375 138,451 76,102/5,068 $615,308/$13,583
Paul A. Ziegler -- -- 30,970/8,218 $182,693/$18,392
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Personnel Committee is composed of Ronald F. Angell (Chairman), Mike
Renner, Marguerite Dalianes, Larry Francesconi, John R. Winzler and Theodore
Mason. Mr. Mason is president of Humboldt Bancorp and was president of Humboldt
Bank. Ms. Dalianes is a former owner of Dalianes Worldwide Travel Service, which
during 1999 and 1998 provided travel services in the amount of $77,000 and
$73,000 to Humboldt Bancorp and its subsidiaries.
120
<PAGE> 121
SECURITIES OWNERSHIP
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of December 31, 2000, the number and
percentage of shares of Humboldt Bancorp's outstanding common stock before and
after the merger and the concurrent public offering, which are beneficially
owned, directly or indirectly, by:
- each of Humboldt Bancorp's directors and nominee directors;
- Humboldt Bancorp's named executive officers; and
- 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, 2000. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Humboldt Bancorp knows of no person who
beneficially owns more than 5% of the outstanding shares of its common stock.
Further, management is not aware of any arrangements which may, at a subsequent
date, result in a change of control of Humboldt Bancorp.
<TABLE>
<CAPTION>
Prior to the Merger After the Merger
--------------------------------------- -----------------------------------------
Shares Shares
Beneficially Beneficially
Name Owned Options Percentage Owned Options Percentage
---- ------------ ------- ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald F. Angell 67,400 42,500 1.83% 67,400 42,500 1.17%
Marguerite Dalianes 33,295 42,327 1.26%
Gary L. Evans 45,673 76,851 2.02% 45,673 76,581 1.30%
Lawrence Francesconi 58,596 36,169 1.58% 58,596 36,169 1.01%
James O. Johnson 19,968 8,975 0.48%
John C. McBeth 64,200 8,975 1.22% 64,200 8,975 0.78%
Michael L. Renner 52,585 12,861 1.09%
John R. Winzler 97,004 59,512 2.58% 86,863 59,512 0.93%
Jerry L. Thomas 11,226 5,865 0.29% 11,226 5,865 0.45%
Edythe E. Vaissade 49,110 53,333 1.70%
Theodore S. Mason 51,694 164,419 3.52% 51,694 164,419 2.27%
Alan J. Smyth 29,410 77,347 1.76% 29,410 77,347 1.13%
Ronald V. Barkley 14,212 75,841 1.49% 14,212 75,841 0.96%
Paul A. Ziegler 2,000 42,877 0.75% 2,000 42,877 0.48%
Thomas W. Weborg 9,166 2,233 0.19% 9,166 2,233 0.10%
</TABLE>
121
<PAGE> 122
<TABLE>
<CAPTION>
Prior to the Merger After the Merger
--------------------------------------- ---------------------------------------
Shares Shares
Beneficially Beneficially
Name Owned Options Percentage Owned Options Percentage
---- ------------ ------- ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Garry D. Fish* 0 0 0 43,695 3,905 0.51%
Gary C. Katz* 0 0 0 78,988 3,905 0.89%
John W. Koeberer* 0 0 0 51,028 3,905 0.59%
Gary L. Napier* 0 0 0 57,844 3,905 0.66%
All Directors and
Executive Officers
(17 Persons) 605,539 729,270 21.77% 682,135 608,209 13.72%
</TABLE>
* Nominee for directorship. Shares and Options calculated on the exchange
ratio of 1.775 shares of Humboldt Bancorp for each share of Tehama
Bancorp.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, we had a $3.8 million line of credit extended to Bancorp
Financial Services, in which we own a 50% interest. The line of credit expired
May 2, 2000, and was not renewed. It had borne an interest rate of the prime
rate published in the Wall Street Journal plus 0.25% per annum. During each of
the years ended December 31, 1999 and 1998, the maximum amount outstanding under
the line of credit was $3.0 million. Further, during each of the years ended
December 31, 1999 and 1998, Humboldt Bank purchased $2.0 million in leases
generated by Bancorp Financial Services.
Some of Humboldt Bancorp's directors and executive officers and their
immediate families, as well as the companies in which they may have interests,
have had loans with Humboldt Bank in the ordinary course of the Bank's business.
In addition, Humboldt Bank expects to have loans with these persons in the
future. In management's opinion, all these loans and commitments to lend were
made in the ordinary course of business, were made in compliance with applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing for comparable transactions with other persons of similar
creditworthiness and, in the opinion of management, did not involve more than a
normal risk of collectibility or present other unfavorable features. The
outstanding balance under extensions of credit by Humboldt Bank to directors and
executive officers of Humboldt Bancorp and Humboldt Bank and to the companies
that these directors and executive officers may have an interest was $4,865,000,
$6,451,000, and $6,218,000 as of December 31, 1999, 1998 and 1997, respectively.
We have, and in the future will, enter into transactions with our
directors or companies in which they may have an interest. During the year ended
December 31, 1999, 1998 and 1997, no transaction exceeded $60,000, except that
we engaged the services of Dalianes Worldwide Travel Service, which was formerly
owned by Marguerite Dalianes, one of our directors. Fees paid by us to Dalianes
Worldwide Travel Service for the year ended December 31, 1999 and 1998, amounted
to $77,000 and $73,000, respectively.
122
<PAGE> 123
TEHAMA BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial
condition and results of operation contains forward-looking statements that
involve risks and uncertainties. Tehama Bancorp's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the section entitled "Risk Factors" and
elsewhere in this document.
Business Organization
Tehama Bank, chartered as Tehama County Bank in Red Bluff, California in
1984, was created by local business people with $2,500,000 in initial capital.
Tehama Bancorp, Tehama Bank's parent holding company was created in 1997 with
Tehama Bank as its only subsidiary. The Red Bluff Branch remains Tehama Bank's
main office and largest of six branch locations. Tehama Bank has branches in Los
Molinos (Tehama County), Chico (Butte County), Willows and Orland (Glenn
County), and Redding (Shasta County). Branch support services are provided by
centralized operations and loan centers located in the Tehama Bank Business
Center in Red Bluff, adjacent to Tehama Bank and Tehama Bancorp administrative
offices.
Throughout its history, Tehama Bank has engaged in basic consumer and
commercial banking, offering a diverse range of banking products and services to
individuals, businesses and the professional community. Tehama Bank's Merchant
Card Processing Department processes third-party credit card transactions for
selected merchants under contract to a third party. In 1996, Tehama Bank entered
into a joint venture agreement with Humboldt Bank to organize Bancorp Financial
Services. Bancorp Financial Services makes consumer automobile loans and
commercial equipment leases of generally less than $100,000 to small businesses.
During 1999, Tehama Bank installed a wide area computer network to link its
branches and operating departments, which provides enhanced communication and
customer service. Tehama Bank also has a website at "tehamabank.com", which
offers extensive product information, rate charts, interactive calculators to
assist customers with their savings plans and loan payment calculations, and
on-line banking, which enables customers to view their account information, pay
bills, and transfer funds between accounts. Late in the fourth quarter of 1998,
Tehama Bank expanded its Manufactured Housing lending activities by establishing
a dedicated department to meet the needs of this segment of its business. At the
same time, Tehama Bank also established an ATM Services department to furnish
cash to automated teller machines (ATMs) owned by third parties throughout the
United States.
Overview
For the nine months ended September 30, 2000, net income was $2.3
million, an increase of 53.3% over net income of $1.5 million for the nine
months ended September 30, 1999. Diluted earnings per share were $1.18 and $.79
for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Annualized return on average assets was 1.35% for the nine months
ended September 30, 2000, compared with 1.00% for the comparable nine months in
1999. For the first nine months of 2000, annualized return on average equity was
15.29%, compared with 11.20% for the first nine months of 1999. The increase in
earnings for the nine months ended September 30, 2000, can be attributed to
growth in earning assets, increases in service charges on deposit accounts,
growth in ATM cash servicing income, and a reduction in the provision for loan
and lease losses.
Net income for the year ended December 31, 1999, was $2.2 million,
representing an increase of $.2 million, or 10.0%, over the $2.0 million for
1998, which was an increase of $.7 million, or 53.8%, over the net income of
$1.3 million for the year ended December 31, 1997. Shareholders' equity totaled
$18.6 million on December 31, 1999, compared to $17.7 million in 1998, and $15.9
million at December 31, 1997. Diluted earnings per share for 1999, 1998 and 1997
were $1.20, $1.06 and $.71, respectively.
123
<PAGE> 124
For the year 1999, net interest income increased $.7 million (8.5%) to
$8.9 million from $8.2 million in 1998. The interest income component was up $.2
million (1.4%) to $14.0 million from $13.8 million, due to an $11.9 million
(7.0%) increase in average earning assets. The yield on average earning assets
decreased by 44 basis points in 1999, to 7.70%, from 8.14% in 1998. Average
loans increased $9.4 million, however, the yield decreased by 69 basis points,
to 8.56% from 9.25%, resulting in substantially the same interest income on
loans of $11.2 million in 1999 and in 1998. Investment income on securities
increased $1.0 million (66.7%) to $2.5 million from $1.5 million in 1998 due to
an increase in average securities of $16.7 million and an increase of 13 basis
points in yield, to 5.66% in 1999 from 5.53% in 1998. Average fed funds sold
decreased by $14.2 million and the yield decreased by 43 basis points to 4.79%.
Interest expense on deposits decreased by $.5 million (9.8%) to $5.1 million.
Non-interest income for 1999 increased $.9 million (32.1%) to $3.7
million. Third-party ATM servicing fees, a service started at the end of 1998,
provided $.5 million of the increase. Loan packaging fees from the manufactured
housing division provided $.3 million and income from Bancorp Financial Services
provided $.1 million. Merchant processing fees decreased $.2 million to $1.1
million.
Non-interest expense increased $1.2 million in 1999 (16.9%) to $8.3
million from $7.1 million in 1998. This increase was attributed to increases in
salary and related benefits expenses of $.5 million (13.2%), occupancy expenses
of $.1 million (14.0%), and all other non-interest expenses of $.6 million
(24.4%). These increases were the result of opening of a branch in Redding in
September 1998, installation of a Wide Area Network connecting all branches,
support departments, and administration, start-up costs for lending and
speciality departments, relocation of the Red Bluff branch and loan center, and
overall general expansion.
Assets of Tehama Bancorp were $211.8 million at December 31, 1999, which
was an increase of $12.0 million, or 6.0% from the $199.8 million at year end
1998, which was an increase of $30.1 million, or 17.7%, over the $169.7 million
at December 31, 1997. Net loans at year end 1999 were $143.0, up $24.0 million
(20.2%) from $119.0 at year end 1998, which was an increase of $.3 million, or
0.3%, from $118.7 million at December 31, 1997. Nonperforming loans were $1.4
million at the end of 1999 compared to $.9 million at the end of 1998 and $1.2
million at the end of 1997. Deposits grew $8.0 million (4.4%) to $188.5 million
at December 31, 1999, from $180.5 million at December 31, 1998, which was an
increase of $27.8 million, or 18.2%, over the $152.7 million at December 31,
1997.
For the nine months ended September 30, 2000, Tehama Bancorp realized a
return on average assets of 1.35%, compared to 1.11% , 1.10% and 0.80% for the
years ended December 31, 1999, 1998 and 1997. For the nine months ended
September 30, 2000, Tehama Bancorp realized a return on average shareholders'
equity of 15.29%, compared to 12.52% , 11.91% , and 8.39% for the years ended
December 31, 1999, 1998 and 1997.
Tehama Bancorp ended 1999 with a Tier 1 capital ratio of 12.6%, a total
risk-based capital ratio of 13.9%, and leverage ratio of 9.4%. For the nine
months ended September 30, 2000, Tehama Bancorp had a Tier 1 capital ratio of
11.9%, a total risk based capital ratio of 13.1% and a leverage ratio of 9.4%.
Net Interest Income / Net Income
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for the nine months ended September 30, 2000,
totaled $7.3 million and was up $762,000 (11.7%) over the nine months ended
September 30, 1999. The increase was generally attributable to an increase in
average earning assets of approximately $17.5 million, or 9.7%, from the prior
year. Average loans increased $32.1 million, or 25%, from the prior year and
reflected the overall strength of the local and national economy. The assets
were funded by a mix of deposits that showed growth in all deposit types,
including non-interest bearing demand deposits, as well as an increase in
borrowings.
124
<PAGE> 125
Net interest income for 1999 totaled $8.9 million and was up $.7 million
(8.5%) over the prior year. The interest income component was up $.2 million to
$14.0 million. Most of the increase was attributable to growth in average
earning assets, primarily in commercial loans, which increased $9.4 million in
1999 over 1998. Average outstanding loan balances of $130.6 million for 1999
reflected a 7.8% increase over 1998 balances. This increase contributed an
additional $.9 million to interest income. This increase was offset by an
average 69 basis point decrease in loan yields that caused a reduction of $.9
million in interest income. Competitive pressures on loan pricing and increases
in the outstanding volume of indirect auto loans have generally lower yields.
Average balances on the investment portfolio grew $16.7 million (62.1%) which
added $.9 million to interest income. The average yield received on securities
was up 13 basis points and added $.1 million to interest income. Interest income
on Federal funds sold decreased $.7 million as the average balances were $14.2
million (64.5%) lower.
Interest expense decreased $.5 million (8.9%) in 1999 over 1998. The
average balances of interest bearing liabilities increased $10.9 million (8.5%).
The higher balances were due largely to growth in interest-bearing demand
deposit accounts. Interest expense attributable to the higher volume was $.3
million. Lower rates paid on all interest bearing liabilities and the increased
proportion of lower rate demand deposits more than offset the higher expense by
$.8 million. Net interest margin for 1999 was 4.89% versus 4.84% in 1998. Net
interest income for 1999 totaled $8.9 million and was up 8.5% ($.7 million) over
1997.
Average earning assets were $170.1 million in 1998 for an increase of
$18.1 million over 1997. In 1998, interest income increased by $1.3 million to
$13.9 million. The average yield received on all interest earning assets fell 16
basis points to 8.14%. Interest expense increased $.4 million (7.7%) in 1998
over 1997. Average interest bearing liabilities increased $12.2 million in 1998.
Net interest margin for 1998 and 1997 was 4.84% and 4.86%, respectively.
The first of the following two tables presents, for the periods
indicated, Tehama Bancorp's interest income from average earning assets,
interest expense on average interest-bearing liabilities, and Tehama Bancorp's
net interest income and net interest margins. The second table presents a
summary of the effect of the changes in volumes and rates for each major
component of earning assets and interest-bearing liabilities and their
contribution to net interest income. It shows the portion attributable to
changes in average rates versus the portion attributable to changes in average
volumes for the periods indicated. Changes in interest income and expense
resulting from combined rate and volume changes have been allocated to volume
changes.
Average Balance Sheets, Net Interest Income and Interest Yields/Rates
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1997 1998
---------------------------------- -----------------------------------
(dollars in thousands) Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Commercial loans(1) $ 13,460 $ 1,433 10.65% $ 25,095 $ 2,411 9.61%
Real estate loans(1) 54,372 4,974 9.15% 59,336 5,462 9.21%
Installment loans(1) 41,255 3,728 9.04% 36,780 3,341 9.08%
--------- --------- --------- --------- --------- ---------
Sub-total loans 109,087 10,135 9.29% 121,211 11,214 9.25%
Federal funds sold 11,630 627 5.39% 21,985 1,147 5.22%
Investments(2) 31,239 1,852 5.93% 26,932 1,489 5.53%
Investment in Class C Note -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total earning assets 151,956 12,614 8.30% 170,128 13,850 8.14%
--------- ---------
Less: Allowance for
loan losses (1,095) (1,905)
Less: Unearned
discount (1,414) (1,807)
Cash and due from banks 5,011 5,455
Other real estate owned 482 97
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
---------------------------------------- ---------------------------------------
1999 1999
---------------------------------------- ---------------------------------------
(dollars in thousands) Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Commercial loans(1) $ 34,481 $ 3,494 10.13% $ 34,268 $ 2,425 9.46%
Real estate loans(1) 61,158 4,878 7.98% 59,360 3,518 7.92%
Installment loans(1) 34,926 2,799 8.01% 32,866 2,136 8.69%
--------- --------- --------- --------- --------- ---------
Sub-total loans 130,565 11,171 8.56% 126,494 8,079 8.54%
Federal funds sold 7,825 375 4.79% 9,440 333 4.72%
Investments(2) 43,589 2,465 5.66% 44,926 1,877 5.59%
Investment in Class C Note -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total earning assets 181,979 14,011 7.70% 180,860 10,289 7.61%
--------- ---------
Less: Allowance for
loan losses (1,953) (1,935)
Less: Unearned
discount (836) (1,054)
Cash and due from banks 10,919 9,123
Other real estate owned 105 52
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
2000
-------------------------------------------
(dollars in thousands) Average Income Yield
Balance Expense Rate
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Earning assets:
Commercial loans(1) $ 36,186 $ 2,797 10.32%
Real estate loans(1) 73,467 4,632 8.42%
Installment loans(1) 48,988 3,006 8.20%
--------- --------- ---------
Sub-total loans 158,641 10,435 8.79%
Federal funds sold 369 15 5.43%
Investments(2) 38,173 1,698 5.94%
Investment in Class C Note 1,216 83 9.12%
--------- --------- ---------
Total earning assets 198,399 12,231 8.23%
---------
Less: Allowance for
loan losses (2,382)
Less: Unearned
discount (432)
Cash and due from banks 15,427
Other real estate owned 54
</TABLE>
125
<PAGE> 126
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1997 1998
---------------------------------- -----------------------------------
(dollars in thousands) Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Premises and equipment, net 1,791 2,070
Cash surrender value of
life insurance 1,571 2,544
Accrued interest
receivable and other assets 4,805 5,963
--------- ---------
Total Assets $ 163,107 $ 182,545
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 36,871 $ 1,242 3.37% $ 42,968 $ 1,419 3.30%
Savings accounts 13,187 394 2.99% 14,166 412 2.91%
Time deposits 65,383 3,589 5.49% 70,632 3,774 5.34%
Other short-term borrowings 264 -- -- 162 10 6.17%
Long-term borrowings -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 115,705 5,225 4.52% 127,928 5,615 4.39%
--------- ---------
Non-interest bearing deposits 30,769 35,900
Other liabilities 1,118 1,846
--------- ---------
Total liabilities 147,592 165,674
--------- ---------
Common stock 12,255 12,703
Retained earnings 3,351 4,150
Accumulated other
comprehensive (loss) income (91) 8
--------- ---------
Total shareholders' equity 15,515 16,871
--------- ---------
Total liabilities and
shareholders' equity $ 163,107 $ 182,545
========= =========
Net interest income $ 7,389 $ 8,235
========= =========
Interest income as a
percentage of average earning assets
8.30% 8.14%
Interest expense as a
percentage of average earning assets
3.44% 3.30%
Net yield on average
earning assets (net interest margin)
4.86% 4.84%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
-------------------------------------- ---------------------------------------
1999 1999
-------------------------------------- ---------------------------------------
(dollars in thousands) Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Premises and equipment, net 2,570 2,522
Cash surrender value of
life insurance 3,348 3,312
Accrued interest
receivable and other assets 6,505 5,880
--------- ---------
Total Assets $ 202,637 $ 198,760
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 55,129 $ 1,490 2.70% $ 55,188 $ 1,111 2.69%
Savings accounts 15,534 349 2.25% 15,516 261 2.25%
Time deposits 67,845 3,255 4.80% 67,385 2,417 4.80%
Other short-term borrowings 308 16 5.19% 259 11 5.68%
Long-term borrowings -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 138,816 5,110 3.68% 138,348 3,800 3.67%
--------- ---------
Non-interest bearing deposits 43,507 41,394
Other liabilities 2,365 1,544
--------- ---------
Total liabilities 184,688 181,087
--------- ---------
Common stock 13,165 13,076
Retained earnings 5,517 5,639
Accumulated other
comprehensive (loss) income (733) (1,042)
--------- ---------
Total shareholders' equity 17,949 17,673
--------- ---------
Total liabilities and
shareholders' equity $ 202,637 $ 198,760
========= =========
Net interest income $ 8,901 $ 6,489
========= =========
Interest income as a
percentage of average earning assets
7.70% 7.61%
Interest expense as a
percentage of average earning assets
2.81% 2.81%
Net yield on average
earning assets (net interest margin)
4.89% 4.80%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
2000
-------------------------------------------
(dollars in thousands) Average Income Yield
Balance Expense Rate
--------- --------- ---------
<S> <C> <C> <C>
Premises and equipment, net 2,806
Cash surrender value of
life insurance 3,533
Accrued interest
receivable and other assets 8,046
---------
Total Assets $ 226,315
=========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 49,722 $ 1,074 2.89%
Savings accounts 23,592 590 3.34%
Time deposits 71,978 2,934 5.45%
Other short-term borrowings 5,934 289 6.51%
Long-term borrowings 1,737 93 7.15%
--------- --------- ---------
Total interest-bearing liabilities 152,963 4,980 4.35%
--------- ---------
Non-interest bearing deposits 51,376
Other liabilities 2,108
---------
Total liabilities 206,316
---------
Common stock 14,957
Retained earnings 5,889
Accumulated other
comprehensive (loss) income (847)
---------
Total shareholders' equity 19,999
---------
Total liabilities and
shareholders' equity $ 226,315
=========
Net interest income $ 7,251
=========
Interest income as a
percentage of average earning assets
8.23%
Interest expense as a
percentage of average earning assets
3.34%
Net yield on average
earning assets (net interest margin)
4.89%
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest
income has been included only for the period prior to the loan
being placed on a nonaccrual basis. Loan interest income
includes loan fees of approximately $153,000 and $126,000 for
the nine-month periods ended September 30, 1999 and September
30, 2000, respectively, and $392,000, $639,000, and $195,000 for
the years ending December 31, 1997, 1998 and 1999, respectively.
(2) Applicable nontaxable yields have not been calculated on a
taxable-equivalent basis.
126
<PAGE> 127
Changes in Volume/Rate
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000, over
Year Ended December 31, Year Ended December 31, Nine Months Ended
(dollars in thousands) 1998 Compared to 1997 1999 Compared to 1998 September 30, 1999
----------------------------- ------------------------------- -----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 557 $ (37) $ 520 $ (738) $ (34) $ (772) $ (321) $ 3 $ (318)
Investment securities (255) (108) (363) 923 53 976 (232) 136 (96)
Loans 1,127 (48) 1,079 865 (908) (43) 2,059 297 2,356
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 1,429 (193) 1,236 1,050 (889) 161 1,506 436 1,942
------- ------- ------- ------- ------- ------- ------- ------- -------
Borrowed funds (6) 1 (5) 8 (2) 6 316 55 371
Interest-bearing demand
and savings accounts 236 (41) 195 443 (435) 8 51 241 292
Time certificates 287 (87) 200 (149) (370) (519) 165 352 517
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 517 (127) 390 302 (807) (505) 532 648 1,180
------- ------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income $ 912 $ (66) $ 846 $ 748 $ (82) $ 666 $ 974 $ (212) $ 762
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) A change due to both volume and rate has been allocated to rate.
(2) Changes calculated in nontaxable securities have not considered tax
equivalents effects.
Total interest income increased $1.9 million, or 18.9%, in the nine
months ended September 30, 2000, compared to the same period in 1999. Total
interest income increased $.2 million or 1.4% in 1999 to $14.0 million. During
1998, interest income increased $1.2 million or 9.5% to $13.8 million. Interest
expense in 1999 decreased $.5 million or 9.8% to $5.1 million from $5.6 million
in 1998. In 1998, interest expense increased by $.4 million or 7.7%. Net
interest income for 1999 increased by $.7 million or 7.9%. Tehama Bancorp's net
interest margin increased to 4.89% in 1999 from 4.84% in 1998. Net interest
margin was 4.86% in 1997.
Average earning assets increased by $17.5 million in the nine months
ended September 30, 2000, to $198.4 million compared to $180.9 million in the
same period of 1999. Average loans grew by $32.1 million while investment assets
declined by $14.6 million, reflecting the funding of significant demand for new
loans in Tehama Bancorp's market area. Average interest-bearing liabilities
increased $14.6 million and non-interest bearing demand deposits increased $10.0
million. Non-earning assets increased $15.3 million reflecting the funding and
servicing of third party ATM machines and the growth of Bancorp Financial
Services.
Average earning assets increased by $11.9 million in 1999 to $182.0
million compared to $170.1 million in 1998. For the year ended December 31,
1999, average loans increased by $9.4 million (7.8%) to $130.6 million, average
investments increased by $16.7 million (62.1%) to $43.6 million, and average
federal funds sold decreased by $14.2 million (64.5%) to $7.8 million. Average
interest bearing liabilities increased by $10.9 million (8.5%) to $138.8
million.
For the year ended December 31, 1998, average earning assets increased
by $18.1 million (11.9%) to $170.1 million, compared to $152.0 million 1997.
Average loans increased by $1.2 million (11.1%) to $121.2 million, average fed
funds sold increased by $.5 million (83.3%) to $1.1 million and investments
decreased by $4.3 million (13.8%) to $26.9 million. Average interest bearing
liabilities grew by $12.2 million (10.5%) to $127.9 million from $115.7 million
in 1997. All major interest bearing liability categories grew during 1998 with
the exception of federal funds purchased, which decreased by $.1 million (33.3%)
to $.2 million.
Non-interest Income and Expense
Non-interest Income
Tehama Bancorp receives a significant portion of its income from
non-interest sources related both to activities conducted by Tehama Bank (loan
originations, servicing and depositor service charges), as well as from Merchant
Bankcard processing fees, ATM servicing fees, income from the leasing
subsidiary, and loan packaging
127
<PAGE> 128
fees. The following table presents the dollar amount of Tehama Bancorp's
non-interest income for the years ended December 31, 1997, 1998 and 1999, and
the nine months ended September 30, 1999 and 2000, respectively.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------ ------------------
(dollars in thousands) 1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NON-INTEREST INCOME:
Service charges $ 549 $ 712 $ 778 $ 573 $ 695
Gain on sale of loans 49 108 182 168 156
Gain on sale and call of investment securities -- 29 10 -- --
Loan servicing fees 74 57 47 37 24
Merchant processing fees 1,323 1,336 1,072 832 640
ATM servicing fees -- -- 452 250 747
Loan packaging fees -- -- 261 217 80
Undistributed income of investment in
leasing company 35 301 444 288 323
Other income 160 258 494 345 356
------ ------ ------ ------ ------
Total non-interest income $2,191 $2,801 $3,740 $2,710 $3,021
====== ====== ====== ====== ======
</TABLE>
Non-interest income increased $311,000, or 11.5% for the nine month
period ended September 30, 2000, compared to the nine months ended September 30,
1999. The increase was primarily the result of increased service charges on
deposit accounts and growth in revenues from the ATM cash servicing department.
Non-interest income increased $939,000 or 33.5% in 1999 to $3.7 million.
The increase was primarily the result of an increase of $452,000 in income
resulting from Tehama Bank's entry into the business of servicing third party
ATM machines and $261,000 in loan packaging fees on manufactured housing loans.
Additional non-interest income categories reflecting an increase in 1999
included: depositor service charges, up $66,000 primarily as a result of growth
in Tehama Bancorp's deposit base; income from Tehama Bancorp's 50% investment in
Bancorp Financial Services, up $143,000 as a result of increased volume of
leasing activity; and gains on the sale of real estate mortgages, up $74,000.
All other non-interest income decreased by $56,000 from 1998.
Non-interest income categories with decreased income in 1999 were led by
gain on sale of loans with a decline of $252,000 and a decrease of $263,000 in
income generated by the Merchant Bankcard department. In 1991, Tehama Bank
contracted with CardService International, Inc. (CSI) for the solicitation on
behalf of Tehama Bank of merchants who accept credit cards as payment for goods
and services. As a result, Tehama Bank has obtained electronic credit card draft
processing relationships with approximately 27,000 merchants on a nationwide
basis. Tehama Bank also entered into an agreement with First Data Resources,
Inc. (FDRI) for the processing of merchant credit card transactions. Because of
increased competition for this business among community banks, Tehama Bank and
CSI renegotiated their contract in March of 1999 for an additional five years.
Among other things, the contract provided for a declining level of fee income
over the life of the contract, a provision whereby the Bank reimburses CSI for
50% of the earnings on all funds held by Tehama Bank for CSI, and the
elimination of reimbursement by CSI of personnel costs incurred by the bank in
providing merchant card services to CSI. Fee income to Tehama Bank from CSI
totaled $.6 million for the nine months ended September 30, 2000, $1.1 million
for the twelve months ended December 31, 1999, $1.3 million for the twelve
months ended December 31, 1998, and $1.3 million for the twelve months ended
December 31, 1997. Fee income under the revised contract is expected to decline
to $.9 million in 2000, $.7 million in 2001, and $.6 million in 2002, and 2003.
For the year ended December 31, 1998, non-interest income increased
$610,000 or 27.8% to $2.8 million from $2.2 million in 1997. The overall
increase in non-interest income was primarily the result of increased income
from Bancorp Financial Services, up $266,000, service charges on deposit
accounts, up $163,000, and gains on sale of loans up $59,000.
Non-interest Expense
128
<PAGE> 129
Non-interest expense reflects the costs of products, services, systems,
facilities and personnel for Tehama Bancorp. Non-interest expense increased
$130,000, or 2.1%, to $6.3 million for the nine months ended September 30, 2000,
compared to $6.1 million in the corresponding period of 1999.
The following table presents Tehama Bancorp's non-interest expense for
the nine months ended September 30, 1999 and 2000, and the years ended December
31, 1997, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------ ------------------
(dollars in thousands) 1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and related benefits $2,797 $3,791 $4,290 $3,143 $3,098
Occupancy 832 946 1,078 760 898
Data processing fees 221 259 270 207 196
Professional services 393 237 300 313 206
Directors' fees 155 170 190 164 129
Stationery and supplies 231 143 203 244 240
Advertising 119 154 111 177 185
Telephone 94 122 191 135 148
Other 1,119 1,240 1,627 980 1,153
------ ------ ------ ------ ------
Total non-interest expense $5,961 $7,062 $8,260 $6,123 $6,253
====== ====== ====== ====== ======
</TABLE>
Salaries and Related Benefits
Salary and related benefits expense remained essentially unchanged at
$3.1 million for the nine month periods ended September 30, 2000 and September
30, 1999. At September 30, 2000, the full time equivalent (FTE) staff was 108
versus 116 at December 31, 1999.
Salary and related benefits expense increased $500,000 (13.2%) to $4.3
million in 1999 from $3.8 million in 1998. At the end of 1999, the FTE staff was
116 versus 105 at the end of 1998. Salaries and employee related benefits
expense for 1998 was $3.8 million, an increase of 35.5% over the $2.8 million
incurred in 1997. Increases in salary expense during these periods are
attributable to the hiring of additional branch, administrative, unique lending
and other specialty department personnel due to the significant growth recorded
by Tehama Bank during those years. In 1998, the FTE staff increased 14 positions
from the end of 1997. Statement of Financial Accounting Standards No. 91
requires Tehama Bank to defer loan origination costs (salary and related
benefits) associated with the origination of loans, which results in recording
salary expense at an amount less than that actually paid by Tehama Bank. The
capitalized costs amounted to $603,000 in 1999, $154,000 in 1998, and $259,000
in 1997.
Occupancy and Furniture and Equipment
Premise and fixed asset related occupancy expenses, including equipment
expenses, were $898,000 for the nine months ended September 30, 2000, compared
to $760,000 for the equivalent period in 1999, an increase of 18.2%. Premise and
fixed asset related occupancy expenses, including equipment expenses, were $1.1
million in 1999. This was an increase of $132,000 (14.0%) over 1998. For 1998,
occupancy expenses increased $114,000 or 13.7% to $946,000 over 1997. Increases
during these periods are attributable to the opening of a branch in Redding,
California, installation of a Wide Area Network, start-up costs associated with
unique lending and other specialty departments and relocation of the Red Bluff
branch and loan center.
Other Expenses
129
<PAGE> 130
All other non-interest expenses increased $37,000, or 1.7%, to $2.3
million for the nine months ended September 30, 2000, compared to $2.2 million
in the corresponding period of 1999. The increase was primarily due to increased
occupancy, advertising and telephone expense, partially offset by reductions in
salary expense, professional services expense and directors' fees. All other
non-interest expenses increased $173,000 (17.7%) to $1.2 million.
All other non-interest expenses increased $600,000 (24.4%) to $2.9
million in 1999 from $2.3 million in 1998. Increases in all other non-interest
expenses primarily consisted of increases in professional services expenses of
$63,000 (26.6%), primarily due to additional legal expenses related to
collection efforts in certain credit relationships, implementation of a stock
option plan, and implementation of a shareholder rights plan. In addition, there
were increases in stationery and supplies expenses of $60,000 (42.0%), increases
in telephone expenses of $69,000 (56.6%), increases in all other expenses of
$375,000 (20.6%), all of which increased primarily due to the addition of the
Redding branch, start-up costs associated with unique lending and specialty
departments, relocation of the Red Bluff branch and loan center, and overall
general expansion during 1999. All other non-interest expenses were relatively
unchanged in 1998 compared to 1997, decreasing only $7,000 (0.3%) during that
period.
Provision for Taxes
The effective tax rate on income was 30.9% for the nine months ended
September 30, 2000, compared to 27.6% for the comparable period in 1999. The
effective tax rate on income was 26.5%, 29.8%, and 32.0% in 1999, 1998 and 1997,
respectively. The primary factor reducing the effective tax rate of Tehama
Bancorp in 1999 was due to permanent differences in tax accounting from
obligations of state political subdivisions and for income from Tehama Bancorp's
investment in Bancorp Financial Services.
Balance Sheet Analysis
Loans and Leases
Tehama Bank concentrates its lending activities in four principal areas:
installment loans (including indirect auto loans); real estate mortgage loans
(including construction); commercial real estate loans and commercial loans
(including agricultural loans). At September 30, 2000, these four categories
accounted for approximately 30%, 21%, 26%, and 23% of Tehama Bank's loan
portfolio, respectively. At December 31, 1999, these categories were
approximately 30%, 31%, 16%, and 19% of Tehama Bank's loan portfolio,
respectively, as compared to 26%, 39%, 10%, and 19% at December 31, 1998. The
increase in commercial real estate loans reflects Tehama Bank's emphasis on
commercial and business-related loans, while growth in installment loans
occurred as a result of continued growth in the indirect auto loan portfolio.
The following table summarizes the composition of the loan and lease portfolio
as of December 31, 1995, 1996, 1997, 1998, and 1999, and September 30, 2000.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1996 1997 1998
----------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 10,594 12.9% $ 10,064 10.7% $ 15,455 12.7% $ 22,680 18.5%
Commercial real
Estate 10,035 12.2% 8,959 9.6% 11,221 9.2% 11,782 9.7%
Real estate
Construction 5,602 6.8% 5,824 6.2% 11,141 9.1% 8,874 7.2%
Real estate mortgage 26,624 32.5% 31,456 33.6% 39,891 32.6% 38,673 31.5%
Leases -- 0.0% 471 0.5% 2,405 2.0% 8,745 7.1%
Installment 29,163 35.6% 36,916 39.4% 41,951 34.4% 31,954 26.0%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal 82,018 100.0% 93,690 100.0% 122,064 100.0% 122,708 100.0%
Less:
Unearned discount (594) (1,110) (1,722) (1,649)
Net deferred loan
fees & costs (32) 4 95 32
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
----------------------- ------------------------
(dollars in thousands) 1999 2000
----------------------- ------------------------
<S> <C> <C> <C> <C>
Commercial $ 27,576 19.0% $ 33,864 20.1%
Commercial real
Estate 23,718 16.3% 35,315 20.9%
Real estate
Construction 9,035 6.2% 7,698 4.6%
Real estate mortgage 35,411 24.4% 36,867 21.9%
Leases 6,212 4.3% 4,270 2.5%
Installment 43,212 29.8% 50,617 30.0%
---------- ---------- ---------- ----------
Subtotal 145,164 100.0% 168,631 100.0%
Less:
Unearned discount (696) (295)
Net deferred loan
fees & costs 706 980
</TABLE>
130
<PAGE> 131
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
-------------------------------------------------------- -------------
(dollars in thousands) 1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan
and lease losses (810) (897) (1,705) (2,081) (2,148) (2,383)
--------- --------- --------- --------- --------- -------------
Total loans, net $ 80,582 $ 91,687 $ 118,732 $ 119,010 $ 143,026 $ 166,933
========= ========= ========= ========= ========= =============
</TABLE>
The following tables set forth the maturity distribution of commercial
and real estate construction loans outstanding as of September 30, 2000 and
December 31, 1999, which, based on remaining scheduled repayments of principal,
were due within the periods indicated:
September 30, 2000
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE FIVE FIVE
(dollars in thousands) YEAR YEARS YEARS TOTAL
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Loans:
Commercial loans $14,249 $11,217 $ 8,398 $33,864
Real estate construction loans 6,295 601 802 7,698
------- ------- ------- -------
Total: $20,544 $11,818 $ 9,200 $41,562
======= ======= ======= =======
Loans due after one year with:
Fixed rates 7,549 3,755
Variable rates 4,269 5,445
------- -------
Total $11,818 $ 9,200
======= =======
</TABLE>
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN
ONE FIVE FIFTEEN
(dollars in thousands) YEAR YEARS YEARS TOTAL
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Loans:
Commercial $10,490 $ 6,845 $10,241 $27,576
Real estate construction 6,280 2,712 43 9,035
------- ------- ------- -------
Total $16,770 $ 9,557 $10,284 $36,611
======= ======= ======= =======
Fixed $ 4,717 $ 3,612
Variable 4,840 6,672
------- -------
Total $ 9,557 $10,284
======= =======
</TABLE>
The majority of Tehama Bank's loans are direct loans made to
individuals, local businesses and agri-businesses. Direct loans are originated
at each of Tehama Bank's branch offices and by various loan specialists who
cover Tehama Bank's entire service area. Tehama Bank also purchases installment
loan contracts for the purchase of new and used automobiles from area automobile
dealers and originates loans for the purchase of manufactured homes for sale to
third parties. Tehama Bank relies substantially on local promotional activity,
and personal contacts by bank officers, directors and employees to compete with
other financial institutions. Tehama Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment. Commercial loans are diversified as to industries and types of
business, with no material industry or specific borrower concentrations. These
loans are generally made to small and mid-size businesses and professionals.
Commercial loans consist of
131
<PAGE> 132
credit lines for operating needs, loans for equipment purchases, working
capital, and various other business loan products. Most of these loans have
floating rates with the majority tied to Tehama Bank's reference rate, which is
set based on the prime rate established by Tehama Bank's primary correspondent
bank. The primary source of repayment on most commercial loans is cash flow from
primary business operations. Collateral in the form of real estate, cash
deposits, accounts receivable, inventory, equipment or other financial
instruments is often obtained as a secondary source of repayment. Leases are
secured by equipment and, while sold to Tehama Bank, are serviced by Tehama
Bancorp's jointly owned leasing company, Bancorp Financial Services. Interest
recorded on these leases is reflected in Tehama Bank's interest income category.
Installment loans include a range of traditional consumer loan products
offered by Tehama Bancorp such as personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. The construction loans are generally composed of commitments to
customers within Tehama Bancorp's service area for construction of both
commercial properties and single-family residences. Other real estate loans
consist primarily of loans to Tehama Bank's depositors secured by first trust
deeds on commercial and residential properties typically with short-term
maturities and original loan to value ratios not exceeding 75%. Average loans in
1999 were $130.6 million representing an increase of $9.4 million or 7.7% over
1998. Average loans of $121.2 million in 1998 represented an increase of $12.1
million or 11.1% from $109.1 million in 1997.
Risk Elements
Tehama Bancorp assesses and manages credit risk on an ongoing basis
through stringent credit review and approval policies, extensive internal
monitoring and established formal lending policies. Additionally, Tehama Bancorp
contracts with an outside loan review consultant to periodically grade new loans
and to review the existing loan portfolio. Management believes its ability to
identify and assess risk and return characteristics of Tehama Bancorp's loan
portfolio is critical for profitability and growth. Management emphasizes credit
quality in the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio. Ultimately, credit
quality may be influenced by underlying trends in the economic and business
cycles.
Tehama Bancorp's business is concentrated in Tehama, Shasta, Glenn and
Butte counties in California whose economy is highly dependent on the
agricultural, timber and tourism industries. As a result, Tehama Bancorp lends
money to individuals and companies dependent upon these industries.
Tehama Bancorp monitors the effects of current and expected economic
conditions and other factors on the collectibility of loans. When, in
management's judgment, these loans are impaired, an appropriate provision for
losses is recorded. In extending credit and commitments to borrowers, Tehama
Bancorp generally requires collateral and/or guarantees as security. The
repayment of such loans is expected to come from cash flow or from proceeds from
the sale of selected assets of the borrowers. Tehama Bancorp's requirement for
collateral and/or guarantees is determined on a case-by-case basis in connection
with management's evaluation of the credit-worthiness of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, income-producing properties, residences and other real
property. Tehama Bancorp secures its collateral by perfecting its interest in
business or personal assets, obtaining deeds of trust, or outright possession
among other means.
Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. Tehama Bank's
loan policies and underwriting standards include, but are not limited to, the
following: 1) maintaining a thorough understanding of Tehama Bank's service area
and limiting investments outside of this area, 2) maintaining a thorough
understanding of borrowers' knowledge and capacity in their field of expertise,
3) basing real estate construction loan approval not only on salability of the
project, but also on the borrowers' capacity to support the project financially
in the event it does not sell within the original projected time period, and 4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing
132
<PAGE> 133
inspection and analysis by Tehama Bank's lending officers. In addition, Tehama
Bank strives to diversify the risk inherent in the portfolio by avoiding
concentrations to individual borrowers and on any one project.
Nonaccrual, Past Due and Restructured Loans
Tehama Bancorp's current policy is to cease accruing interest when a
loan becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection. The following table sets forth nonaccrual loans and
loans past due 90 days or more as of December 31, 1995, 1996, 1997, 1998 and
1999, and as of SEPTEMBER 30, 2000, respectively:
Non-Performing Loans
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
------------------------------------------------------ -------------
(dollars in thousands) 1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Past due 90 days or more and still accruing:
Real estate $-- $ 274 $ 94 $ 24 $ 75 $1,390
Commercial -- -- 164 536 516 1,377
Installment and other 128 203 424 117 26 49
------ ------ ------ ------ ------ ------
Total 128 477 682 677 617 2,816
------ ------ ------ ------ ------ ------
Nonaccrual loans 136 123 595 254 751 365
------ ------ ------ ------ ------ ------
Total nonperforming loans $ 264 $ 600 $1,277 $ 931 $1,368 $3,181
====== ====== ====== ====== ====== ======
Interest foregone $ 4 $ 4 $ 29 $ 45 $ 70 $ 28
====== ====== ====== ====== ====== ======
</TABLE>
At September 30, 2000, the recorded investment in loans that are
considered impaired was $89,000. Such impaired loans had a valuation allowance
of $45,000. At December 31, 1999, the recorded investment in loans that are
considered impaired was $259,000. Such impaired loans had a valuation allowance
of $78,000. The recorded investment in impaired loans at December 31, 1998, was
$1.4 million and the related allowance for loan and lease losses for these loans
was $459,000. Tehama Bancorp recognized no interest income on impaired loans
during these periods. There were no troubled debt restructurings or loan
concentrations in excess of 10% of total loans not otherwise disclosed as a
category of loans as of December 31, 1999. Management is not aware of any
potential problem loans, which were accruing and current at December 31, 1999,
where serious doubt exists as to the ability of the borrower to comply with the
present repayment terms.
The increase in loans past due 90 days or more and still accruing as of
September 30, 2000, was attributable to one agricultural credit relationship in
the aggregate amount of $2.1 million consisting of a combination of real estate
and commercial loans. These loans were pending a restructure and refinancing at
September 30, 2000, and were paid in full on October 6, 2000, from an unrelated
third party lender.
133
<PAGE> 134
Other Real Estate Owned
Other real estate owned was $168,000, $36,000, $50,000 and $339,000 at
September 30, 2000, and December 31, 1999, 1998 and 1997, respectively.
Allowance for Loan and Lease Loss Activity
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
outstanding. The allowance is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based upon the interaction of three primary factors: (1)
the loan and lease portfolio growth in the period, (2) a comprehensive grading
and review formula for total loans and leases outstanding, and (3) actual
previous charge-offs. The allowance for loan and lease losses totaled $2.4
million or 1.42% of total loans and leases at September 30, 2000, compared to
$2.1 million or 1.48% of total loans and leases at December 31, 1999, $2.1
million or 1.70% at December 31, 1998, and $1.7 million or 1.40% at December 31,
1997. The decrease in the allowance as a percentage of total loans since 1998 is
primarily due to the increase in loan balances in a generally strong economic
environment. It is the policy of management to maintain the allowance for loan
and lease losses at a level adequate for losses inherent in the loan portfolio.
Based on information currently available to analyze credit loss potential,
including economic factors, overall credit quality, historical delinquency and a
history of actual charge-offs, management believes that the credit loss
provision and allowance is prudent and adequate. However, no prediction of the
ultimate level of loans charged off in future years can be made with any
certainty.
The following table presents the activity within the allowance for loan
and lease losses for the years ended December 31, 1995, 1996, 1997, 1998 and
1999, and for the nine month periods ended September 30, 1999 and September 30,
2000, respectively:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------------- --------------------
(dollars in thousands) 1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of year $ 721 $ 810 $ 897 $ 1,705 $ 2,081 $ 2,081 $ 2,148
Provision charged to expense 330 570 1,705 1,113 1,325 1,025 700
------- ------- ------- ------- ------- ------- -------
Charge-offs:
Real Estate -- -- -- -- -- -- (21)
Commercial (87) (131) (42) (168) (1,089) (1,029) (226)
Installment (163) (407) (937) (794) (349) (308) (295)
------- ------- ------- ------- ------- ------- -------
Total Charge-offs (250) (538) (979) (962) (1,438) (1,337) (542)
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial -- 16 -- 73 89 35 --
Installment 9 39 82 152 91 75 77
------- ------- ------- ------- ------- ------- -------
Total Recoveries 9 55 82 225 180 110 77
------- ------- ------- ------- ------- ------- -------
Net Charge-offs (241) (483) (897) (737) (1,258) (1,227) (465)
------- ------- ------- ------- ------- ------- -------
Balance, end of period $ 810 $ 897 $ 1,705 $ 2,081 $ 2,148 $ 1,879 $ 2,383
======= ======= ======= ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding (annualized) 0.30% 0.55% 0.82% 0.61% 0.96% 1.29% 0.39%
</TABLE>
The following table represents the allocation of the allowance for loan
losses as of December 31, 1995, 1996, 1997, 1998, and 1999, and as of September
30, 2000, respectively. The table sets forth the allocation of the allowance for
loan and lease losses by loan or lease type as of the dates specified. The
allocation of individual categories of loans includes amounts applicable to
specifically identified as well as unidentified losses inherent in that segment
of the loan portfolio and will necessarily change whenever management determines
that the risk characteristics of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance
for loan and lease losses into loan categories lends an appearance of exactness
which may not exist, in that the allowance is utilized as a single
134
<PAGE> 135
unallocated allowance available for all loans and undisbursed commitments. The
allocation below should not be interpreted as an indication of the specific
amounts or loan categories in which future charge-offs may occur:
<TABLE>
<CAPTION>
As of December 31, As of September 30
-------------------------------------------------------------------------------------------- ------------------
1995 1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ---------------- ------------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 170 21.0% $ 119 13.3% $ 187 11.0% $ 368 17.7% $ 816 38.0% $1,316 55.2%
Real estate 189 23.3% 147 16.4% 520 30.5% 404 19.4% 228 10.6% 322 13.5%
Installment 451 55.7% 631 70.3% 998 58.5% 1,309 62.9% 1,104 51.4% 745 31.3%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance $ 810 100.0% $ 897 100.0% $1,705 100.0% $2,081 100.0% $2,148 100.0% $2,383 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investment securities
Tehama Bancorp maintains a securities portfolio consisting of U.S.
Treasury, U.S. Government agencies and corporations, state and political
subdivisions, asset-backed and other securities. An independent custodian holds
investment securities in safekeeping. The provisions of Statement of Financial
Accounting Standards No. 115 require, among other things, that certain
investments in debt and equity securities be classified under three categories:
securities held-to-maturity; trading securities; and securities
available-for-sale. Securities classified as held-to-maturity are to be reported
at amortized cost; securities classified as trading securities are to be
reported at fair value with unrealized gains and losses included in operations;
and securities classified as available-for-sale are to be reported at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax. If a security is sold,
any gain or loss is recorded as a charge to earnings and the equity adjustment
is reversed. At December 31, 1999, Tehama Bank held $26.8 million in securities
classified as available-for-sale, compared with $34.3 million at year-end 1998.
At December 31, 1999, unrealized gains of $1,000 and unrealized losses of $1.4
million, net of tax benefits of $561,000, related to these securities, was
reflected in shareholders' equity, compared with $46,000 and $81,000,
respectively, for year-end 1998, net of tax benefits of $14,000. Tehama Bancorp
had $11.7 million of amortized cost in securities classified as held-to-maturity
securities at December 31, 1999, compared with $12.9 million at year-end 1998.
The following table sets forth the maturity distribution and estimated
market value of securities available-for-sale and the weighted-average yields of
these securities as of September 30, 2000, and December 31, 1999:
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Securities After One But After Five But
Available-for-Sale (1) Within One Year Within Five Years Within Ten Years After Ten Years
--------------------- ---------------------- --------------------- ----------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ -- -- $ 9,236 5.62% $ -- -- $ -- --
Tax-exempt municipals -- -- -- -- -- -- 184 7.33%
--------- --------- --------- --------- --------- --------- --------- ---------
Totals $ -- -- $ 9,236 5.62% $ -- -- $ 184 7.33%
========= ========= ========= ========= ========= ========= ========= =========
Securities not due at
a Single maturity date:
Mortgage backed
securities $ 9,440 6.39%
Collateralized
mortgage obligations $ 6,778 5.98%
</TABLE>
<TABLE>
<CAPTION>
Securities
Available-for-Sale (1) Total
---------------------
(dollars in thousands) Amount Yield
--------- ---------
<S> <C> <C>
U.S. government agencies $ 9,236 5.62%
Tax-exempt municipals 184 7.33%
--------- ---------
Totals $ 9,420 5.65%
========= =========
Securities not due at
a Single maturity date:
Mortgage backed
securities
Collateralized
mortgage obligations
</TABLE>
135
<PAGE> 136
<TABLE>
<CAPTION>
Securities After One But After Five But
Available-for-Sale(1) Within One Year Within Five Years Within Ten Years After Ten Years
--------------------- ---------------------- --------------------- ----------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Reserve
Bank Stock $ 367 6.00%
Federal Home Loan
Bank Stock $ 584 8.09%
Other $ 135 6.14%
</TABLE>
<TABLE>
<CAPTION>
Securities
Available-for-Sale(1) Total
---------------------
(dollars in thousands) Amount Yield
--------- ---------
<S> <C> <C>
Federal Reserve
Bank Stock
Federal Home Loan
Bank Stock
Other
</TABLE>
(1) Yields calculated on nontaxable securities have been adjusted for tax
equivalents effects.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Securities After One But After Five But
Available-for-Sale(1) Within One Year Within Five Years Within Ten Years After Ten Years
----------------------- ----------------------- ----------------------- -----------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ -- -- $ 9,165 5.62% $ -- -- $ -- --
Tax-exempt municipals -- -- -- -- -- -- 174 7.33%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals $ -- -- $ 9,165 5.62% $ -- -- $ 174 7.33%
========== ========== ========== ========== ========== ========== ========== ==========
Securities not due at
a Single maturity date:
Mortgage backed
securities $ 9,773 6.39%
Collateralized
mortgage obligations $ 6,695 5.98%
Federal Reserve
Bank Stock $ 367 6.00%
Federal Home Loan
Bank Stock $ 616 4.80%
</TABLE>
<TABLE>
<CAPTION>
Securities
Available-for-Sale(1) Total
-----------------------
(dollars in thousands) Amount Yield
---------- ----------
<S> <C> <C>
U.S. government agencies $ 9,165 5.62%
Tax-exempt municipals 174 7.33%
---------- ----------
Totals $ 9,339 5.65%
========== ==========
Securities not due at
a Single maturity date:
Mortgage backed
securities
Collateralized
mortgage obligations
Federal Reserve
Bank Stock
Federal Home Loan
Bank Stock
</TABLE>
(1) Yields calculated on nontaxable securities have been adjusted for tax
equivalents effects.
The following table sets forth the maturity distribution and amortized
cost of securities held-to-maturity as of September 30, 2000 and December 31,
1999, and weighted average yields of such securities:
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Securities After One But After Five But
Held-to-Maturity Within One Year Within Five Years Within Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- ----------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 1,371 7.35% $ 5,755 7.61% $ 3,865 7.32% $ 300 6.21% $11,291 7.44%
</TABLE>
136
<PAGE> 137
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Securities After One But After Five But
Held-to-Maturity Within One Year Within Five Years Within Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 525 8.04% $ 4,438 7.51% $ 5,776 7.50% $ 984 6.85% $11,723 7.47%
</TABLE>
The following table is a comparison of the amortized cost and
approximate fair value of the securities portfolio as of December 31, 1997, 1998
and 1999, and as of September 30, 2000, respectively:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------------------------------------------- ---------------------
1997 1998 1999 2000
-------------------- -------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $17,065 $17,079 $16,211 $16,217 $ 9,507 $ 9,165 $ 9,505 $ 9,236
Obligations of states and
political subdivisions 10,970 11,270 12,999 13,348 11,922 11,784 11,490 11,486
Commercial paper -- -- 5,989 5,981 -- -- -- --
Mortgage backed securities -- -- 10,992 10,958 10,525 9,773 9,940 9,440
Collateralized mortgage
obligations -- -- -- -- 7,004 6,695 6,997 6,778
Other securities 375 375 936 936 984 984 951 951
------- ------- ------- ------- ------- ------- ------- -------
Total investment
securities $28,410 $28,724 $47,127 $47,440 $39,942 $38,401 $38,883 $37,891
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Deposits
Deposits represent Tehama Bank's primary source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of the deposit base without major fluctuations in
overall deposit balances. Tehama Bank normally experiences a seasonal decline in
deposits in the first quarter of each year. In order to assist in meeting its
funding needs, Tehama Bank maintains an unsecured borrowing arrangement with a
correspondent bank in the amount of $7.5 million. During 1998, Tehama Bank
applied for, and was accepted as a member of the Federal Home Loan Bank of San
Francisco (the "FHLB"). At September 30, 2000, Tehama Bank held stock in the
FHLB which would allow Tehama Bank to borrow up to 25% of Tehama Bank's total
assets using various loans or securities as collateral. The following table
presents the composition of the deposit mix at December 31, 1997, 1998 and 1999,
and September 30, 2000, respectively.
137
<PAGE> 138
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
------------------------------------------------------------- ------------------
(dollars in thousands) 1997 1998 1999 2000
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing:
Demand $ 34,810 22.8% $ 39,191 21.7% $ 50,686 26.9% $ 51,322 24.5%
Interest-bearing:
Savings 14,076 9.2 14,815 8.2 15,575 8.3 39,719 18.9
Money market 25,415 16.7 39,790 22.1 37,554 19.9 29,714 14.2
NOW accounts 10,365 6.8 12,831 7.1 13,508 7.2 12,011 5.7
Time, $100,000 or more 13,173 8.6 15,569 8.6 15,238 8.1 25,083 12.0
Other time 54,832 35.9 58,325 32.3 55,906 29.6 51,942 24.8
-------- ----- -------- ----- -------- ----- -------- -----
Total interest-bearing
deposits 117,861 77.2 141,320 78.3 137,781 73.1 158,469 75.5
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits $152,671 100.0% $180,511 100.0% $188,467 100.0% $209,791 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table represents maturities of time deposits at September
30, 2000, and December 31, 1999:
<TABLE>
<CAPTION>
As of December 31, 1999 As of September 30, 2000
------------------------------------------- -------------------------------------------
Over Over Over Over
Three One Three Three One
Three Through Through Over Months Through Through Over
Months Twelve Three Three or Twelve Three Three
(dollars in thousands) or Less Months Years Years Total Less Months Years Years Total
------- ------- ------- ----- ------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturities of time deposits:
$100,000 or more $ 3,224 $11,047 $3,967 $-- $15,238 $ 6,635 $17,816 $ 632 $-- $25,083
======= ======= ====== === ======= ======= ======= ====== === =======
Other time $17,466 $34,460 $3,958 $22 $55,906 $17,974 $30,067 $3,888 $13 $51,942
======= ======= ====== === ======= ======= ======= ====== === =======
</TABLE>
Off-Balance Sheet Items
Tehama Bank has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. Tehama Bank has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options etc. As of December 31, 1999, commitments to extend
credit were the only financial instruments with off-balance sheet risk. Loan
commitments increased to $27.1 million from $17.8 million at December 31, 1998,
and standby letters of credit increased to $285,000 from $144,000 at December
31, 1998. The commitments represent 18.9% of total loans at year end 1999 versus
14.7% in 1998.
Liquidity
Liquidity management refers to Tehama Bancorp's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
Tehama Bancorp's liquidity position. Short-term borrowing arrangements,
short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. Tehama Bank assesses the likelihood of projected
funding requirements by reviewing historical funding patterns, current and
forecasted economic conditions and individual client funding needs. Commitments
to fund loans and outstanding standby letters of credit at September 30, 2000,
were approximately $27.9 million and at December 31, 1999, were approximately
$27.4 million. Such loans relate primarily to revolving lines of credit and
other commercial loans, and to real estate construction loans. Tehama Bancorp's
sources of liquidity consist of overnight funds sold to correspondent banks,
unpledged marketable investments, a Federal funds line of credit with a
correspondent bank, a line of credit with the Federal Home Loan Bank of San
Francisco backed by a pledge of marketable investments, and loans held for sale.
Additional liquidity
138
<PAGE> 139
can be obtained through new borrowings from the Federal Home Loan Bank of San
Francisco secured by a pledge of eligible real estate loans or sales of eligible
real estate loans or the guaranteed portion of government guaranteed loans in
the secondary market, promotional activities to attract new deposit accounts
within Tehama Bank's market areas, increasing interest-bearing deposit accounts
by offering higher rates of interest, and raising deposits, primarily time
certificates deposit, outside Tehama Bank's market area through use of brokered
certificates of deposit or the use of national certificate of deposit quotation
services. Tehama Bank has not obtained brokered certificates of deposit in the
past and does not currently have any brokered certificates of deposits on its
books.
A common measurement of liquidity for banks is the ratio of loans to
deposits. Tehama Bank's target range for this ratio is 70-80%. The lower this
ratio, the higher Tehama Bank's liquidity, but at the cost of fewer assets in
the loan category, which is the highest yielding earning asset. This ratio for
Tehama Bank was 80.7% as of September 30, 2000, compared to 77.0% as of December
31, 1999, 67.1% as of December 31, 1998, and 77.8% as of December 31, 1997.
Management monitors the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions, pending new loan fundings and individual customer needs.
The principal cash requirements of Tehama Bancorp are for expenses
incurred in the support of administration and operations of Tehama Bank. For
nonbanking functions, Tehama Bancorp is dependent upon the payment of cash
dividends by Tehama Bank to service its commitments. Tehama Bancorp expects that
the cash dividends paid by Tehama Bank to Tehama Bancorp will be sufficient to
meet this payment schedule.
Capital Resources
Tehama Bancorp and Tehama Bank are subject to various minimum capital
requirements as defined by regulation. The current and projected capital
position of Tehama Bancorp and the impact of capital plans and long-term
strategies are reviewed regularly by management. Tehama Bancorp's capital
position represents the level of capital available to support continued
operations and expansion. Tehama Bancorp's primary capital resource is
shareholders' equity, which increased $927,000 or 5.2% from the previous year
end, and in 1998 increased $1.8 million or 11.3% from December 31, 1997. The
ratio of total risk-based capital to risk-adjusted assets was 13.1% at September
30, 2000, compared to 13.9% at December 31, 1999, 14.9% at December 31, 1998,
and 13.9% at December 31, 1997. Tier 1 risk-based capital to risk-adjusted
assets was 11.9% at September 30, 2000, compared to 12.6% at December 31, 1999,
13.6% at December 31, 1998 and 12.7% at December 31, 1997.
Federal regulation imposes upon all FDIC-insured financial institutions
a variable system of risk-based capital guidelines designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the Federal
Reserve Board's risk-based capital guidelines, Tehama Bancorp (on a consolidated
basis) and Tehama Bank under FDIC guidelines are required to maintain total
risk-based capital equal to at least 8% of risk-weighted assets. Assets and
off-balance sheet items are categorized by the guidelines according to risk, and
certain assets considered to present less risk than others permit maintenance of
capital at less than the 8% ratio. The guidelines establish two categories of
qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2
comprising supplementary capital requirements. At least one-half of the required
capital must be maintained in the form of Tier 1 capital. For Tehama Bank and
Tehama Bancorp, Tier l capital includes only common stockholders' equity and
retained earnings, but qualifying perpetual preferred stock would also be
included without limit if Tehama Bancorp or Tehama Bank were to issue such
stock. Tier 2 capital includes, among other items, certain types of intermediate
term and perpetual preferred stock, mandatory convertible debt securities,
subordinated debt and a limited amount of the allowance for loan and lease
losses.
The guidelines also require all insured institutions to maintain a
minimum leverage ratio of 3% Tier 1 capital to total average assets (the
"leverage ratio"). The Federal Reserve Board emphasizes that the leverage ratio
constitutes a minimum requirement for the most well-run banking organizations.
All other banking organizations are required to maintain a minimum leverage
ratio ranging generally from 4% to 5%. Tehama Bancorp's and Tehama Bank's
required minimum leverage ratio is 4%.
139
<PAGE> 140
Federal regulations require that insured banks with significant "trading
activity" adjust their risk-based capital calculations in order to maintain
adequate capital against such market risk exposures as changes in the general
level of interest rates, equity prices, foreign exchange rates and commodity
prices. Tehama Bank currently has no trading assets or liabilities. However, the
Uniform Financial Institutions Rating System (the "CAMELS" system) applicable to
Tehama Bank has included for all bank regulatory examinations since 1997 a
rating for sensitivity to market risk. Ratings in this category are intended to
reflect the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices may adversely affect an institution's earnings
and capital.
Prompt Corrective Action Regulations (the "PCA Regulations") of the
federal bank regulatory agencies establish five capital categories in descending
order (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized), assignment to which depends
upon the institution's total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio. Institutions classified in one of the three
undercapitalized categories are subject to certain mandatory and discretionary
supervisory actions, which include increased monitoring and review,
implementation of capital restoration plans, asset growth restrictions,
limitations upon expansion and new business activities, requirements to augment
capital, restrictions upon deposit gathering and interest rates, replacement of
senior executive officers and directors, and requiring divestiture or sale of
the institution. Tehama Bank has been classified as a well-capitalized bank
since adoption of the PCA Regulations.
The Board of Governors and other federal banking agencies have adopted a
revised minimum leverage ratio for bank holding companies as a supplement to the
risk-weighted capital guidelines. The old rule established a 3% minimum leverage
standard for well-run banking organizations (bank holding companies and banks)
with diversified risk profiles. Banking organizations which did not exhibit such
characteristics or had greater risk due to significant growth, among other
factors, were required to maintain a minimum leverage ratio 1% to 2% higher. The
old rule did not take into account the implementation of the market risk capital
measure set forth in the federal regulatory agency capital adequacy guidelines.
The revised leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1
capital to total assets) for the highest rated bank holding companies or those
that have implemented the risk-based capital market risk measure. All other bank
holding companies must maintain a minimum Tier 1 leverage ratio of 4% higher
leverage capital ratios required for bank holding companies that have
significant financial and/or operational weaknesses, a high risk profile, or are
undergoing or anticipating rapid growth. The old rule remains in effect for
banks, however, the federal regulatory agencies are currently continuing work on
a revised leverage rule for banks. The risk-based capital ratios decreased in
1999 as the growth in total assets outpaced the increase in equity. Capital
increased by $2.2 million from income, $602,000 from the exercise of stock
options, and related tax benefit, and decreased $237,000 from the retirement of
common stock through a common stock repurchase program and $854,000 from the
payment of a cash dividend. Capital ratios are reviewed on a regular basis to
ensure that capital exceeds the prescribed regulatory minimums and is adequate
to meet Tehama Bancorp's future needs. All ratios are in excess of the
regulatory definition of "well capitalized."
Disclosure of Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Investments," requires the disclosure of fair value of
most financial instruments, whether recognized or not recognized in the
financial statements. The intent of presenting the fair values of financial
instruments is to depict the market's assessment of the present value of net
future cash flows discounted to reflect both current interest rates and the
market's assessment of the risk that the cash flows will not occur. In
determining fair values, Tehama Bancorp used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings and
accrued interest payable as all of these instruments are short term in nature.
Securities are reflected at quoted market values. Loans and deposits have a long
term time horizon which requires more complex calculations for fair value
determination. Loans are grouped into homogeneous categories and broken down
between fixed and variable rate instruments. Loans with a variable rate, which
reprice immediately, are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows using current
rates. Credit risk and repricing risk factors are included in the current rates.
Fair value for nonaccrual loans is reported at
140
<PAGE> 141
carrying value and is included in the net loan total. Since the allowance for
loan and lease losses exceeds any potential adjustment for nonaccrual valuation,
no further valuation adjustment has been made. Demand deposits, savings and
certain money market accounts are short term in nature so the carrying value
equals the fair value. For deposits that extend over a period in excess of four
months, the fair value is estimated by discounting the future cash payments
using the rates currently offered for deposits of similar remaining maturities.
At 1999 year end, the fair values calculated on Tehama Bank's assets are .84%
below the carrying values versus 1.46% above the carrying values at year end
1998. The change in the calculated fair value percentage relates to the
securities and loan categories and is the result of changes in interest rates in
1999.
Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects Tehama Bancorp indirectly through its effect on the ability of
its customers to repay loans, or its impact on market rates of interest, and
thus the ability of Tehama Bank to attract loan customers. Inflation affects the
growth of total assets by increasing the level of loan demand, and potentially
adversely affects Tehama Bancorp's capital adequacy because loan growth in
inflationary periods may increase more rapidly than capital. Interest rates in
particular are significantly affected by inflation, but neither the timing nor
the magnitude of the changes coincides with changes in the Consumer Price Index,
which is one of the indicators used to measure the rate of inflation.
Adjustments in interest rates may be delayed because of the possible imposition
of regulatory constraints. In addition to its effects on interest rates,
inflation directly affects Tehama Bancorp by increasing Tehama Bancorp's
operating expenses. In management's opinion, the effect of inflation during the
three-year period ended December 31, 1999, has not been significant to Tehama
Bancorp's financial position or results of operations.
Asset/Liability Management
The goal for managing the assets and liabilities of Tehama Bank is to
maximize shareholder value and earnings while maintaining a high quality balance
sheet without exposing Tehama Bank to undue interest rate risk. The board of
directors has overall responsibility for Tehama Bancorp's interest rate risk
management policies. Tehama Bank has an Asset/Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Generally, asset/liability management is a comprehensive integrated
process for overall financial management. The major purpose of asset/liability
management is to ensure that Tehama Bank's primary financial objectives,
profitability, capital adequacy, risk tolerance, and liquidity are achieved.
Through asset/liability management, Tehama Bank develops a methodology, which
can be used to optimize the critical risk/return tradeoff that the institution
faces in pricing, maturity selection, funds allocation, and other decisions
every day. Correct asset liability management enables Tehama Bank to achieve
earnings which are adequate and consistent, thereby enabling the achievement of
profitability and risk objectives. The primary capital objective is capital
preservation, which is achieved by controlling interest rate and credit-related
risk exposure, and by the retention of earnings. Tehama Bank will also strive to
ensure that each dollar of capital is optimally leveraged. Tehama Bank's
asset/liability management program consists of four major disciplines: interest
rate risk management, net interest margin/spread management, capital management,
and liquidity management. The formal integration of these inter-related areas
into an effective asset/liability management program that includes a process of
planning, organizing, and controlling all of Tehama Bank's financial resources
will enable Tehama Bank to achieve a planned net interest margin over time
within acceptable risk levels. Tehama Bancorp's asset/liability management
policy is designed to ensure that Tehama Bank is managed to provide adequate
liquidity, maintain adequate capital, and, provide a satisfactory and consistent
level of profits, within suitable interest rate risk constraints.
Activities involved in asset/liability management include but are not
limited to lending, accepting and placing deposits, investing in securities and
issuing debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk,
141
<PAGE> 142
the structure of the balance sheet is managed with the goal that movements of
interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin under changing interest environments.
BUSINESS OF TEHAMA BANCORP
General
Tehama Bancorp was organized as a California corporation in January 1997
for the purpose of reorganizing Tehama Bank as the wholly-owned subsidiary of
Tehama Bancorp. This transaction was approved by the shareholders of Tehama Bank
at the 1997 Annual Meeting of Tehama Bank, and was made effective as of the
close of business June 30, 1997. Tehama Bancorp is registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank
holding company under the Bank Holding Company Act of 1956, as amended, and
reports annually to and is examined by the Federal Reserve Board. The common
stock of Tehama Bancorp is registered with the Securities and Exchange
Commission (the "SEC") pursuant to section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Tehama Bancorp files periodic
reports and proxy materials with the SEC pursuant to sections 13 and 14 of the
Exchange Act.
Tehama Bank is Tehama Bancorp's only consolidated subsidiary. Aside from
engaging indirectly in the business conducted by Tehama Bank, which was
incorporated March 15, 1984, and commenced banking operations on August 30,
1984, Tehama Bancorp engages in leasing activities through Bancorp Financial
Services, of which it is the owner of a one-half interest.
Offices
The headquarters of Tehama Bank and Tehama Bancorp are located at 239
South Main Street, Red Bluff, California. The main office of Tehama Bank is
located at 333 Main Street, Red Bluff, California, and branch offices are
located at 7843 Highway 99E, in the unincorporated community of Los Molinos,
Tehama County; at 2025 Pillsbury Road, Chico, Butte County; at 301 Walker
Street, Orland, Glenn County; at 160 North Butte Street, Willows, Glenn County,
and 1770 Pine Street, Redding, Shasta County.
Tehama Bank's main office in Red Bluff and its Chico, Orland, Willows
and Redding offices all maintain the same lobby hours (9:00 A.M. through 5:00
P.M., Monday through Thursday, and 9:00 A.M. through 6:00 P.M. on Fridays).
Tehama Bank's Los Molinos office maintains lobby hours of 9:00 A.M. through 4:00
P.M., Monday through Thursday, and 9:00 A.M. through 5:00 P.M. on Friday. The
Red Bluff, Chico, Orland and Willows offices also maintain drive-up windows for
transactions during the hours of 8:00 A.M. through 5:30 P.M., Monday through
Thursday, and 8:00 A.M. through 6:00 P.M. on Friday. The Redding office
maintains a drive-up window for transactions during the hours of 8:00 A.M.
through 5:00 P.M., Monday through Thursday, and 8:00 A.M. through 6:00 P.M. on
Friday. Additionally, ATMs are available at the Red Bluff, Chico, Orland,
Willows and Redding offices. The Los Molinos office does not have either a
drive-up window or an ATM.
Services
Tehama Bank conducts a commercial banking business including accepting
demand, savings and time deposits, issuing letters of credit, and making
commercial, real estate, and consumer loans. It also offers installment note
collection, issues cashier's checks, sells traveler's checks, acts as a licensed
merchant bankcard sales clearer, and provides the following: 24-hour automated
teller service, bank-by-mail and night depository services, safe deposit boxes,
and other customary banking services. Most of Tehama Bank's customers are
individuals and small businesses. Tehama Bank serves as a merchant processor,
under contract with a third party, for processing credit card transactions of
selected merchants. Tehama Bank also provides cash and cash services to selected
privately-owned ATMs.
142
<PAGE> 143
Tehama Bank is a member bank of the Federal Reserve System, and the
accounts of its depositors are insured by the FDIC to the maximum amount
provided by law. Tehama Bank does not offer trust services or international
banking services and does not plan to do so in the near future.
Leasing Activities
During 1996, Tehama Bank entered into a joint venture with Humboldt Bank
to organize and share equally in a subsidiary leasing company. Bancorp Financial
Services was organized as a California corporation on November 25, 1996, and
Tehama Bank and Humboldt each contributed $2 million towards its capitalization
as of January 2, 1997. Effective April 1, 1998 Tehama Bank transferred its
interest in Bancorp Financial Services to Tehama Bancorp. Tehama Bank extends
credit to Bancorp Financial Services and purchases (on a non-recourse basis)
leases originated by Bancorp Financial Services, both of which types of
transactions provide additional funding for its operations. Bancorp Financial
Services' offices are located at 2540 Venture Oaks, in Sacramento, California.
Bancorp Financial Services engages in equipment leasing in the so-called "small
ticket" segment of the industry, which generally includes leases of $100,000 or
less. Bancorp Financial Services' business plan is to acquire such leases from
independent lessors or brokers through brokerage or discount, to service them
and, at predetermined intervals, package and resell them to investors. Income to
Tehama Bancorp is generated through spreads on its lease portfolio, gains on
sales, and ongoing fees and charges. Bancorp Financial Services' board of
directors includes Chief Executive Officer Kevin D. Cochrane, three members from
the Humboldt Bancorp board of directors and three members from the Tehama
Bancorp board of directors. Humboldt Bancorp and Tehama Bancorp intend to sell
all or substantially all of their interests in Bancorp Financial Services. See
"Business of Humboldt Bancorp - Bancorp Financial Services."
Lending Activities
As of the close of business on December 31, 1999, Tehama Bank's loan
portfolio consisted of $68.1 million in real estate loans (including $9.0
million in real estate construction loans and $23.7 million in commercial real
estate loans), $33.8 million in commercial loans (including $6.2 million in
commercial leases), and $43.2 million in installment loans to individuals for
household, family and other personal expenditures. Comparable segments of the
loan portfolio as of December 31, 1998, were carried at values of $59.3 million,
$31.4 million, and $31.9 million, respectively. As of December 31, 1997, Tehama
Bank's portfolio consisted of $62.3 million in real estate loans (including $8.9
million in real estate construction loans), $17.9 million in commercial loans
(including $2.4 million in commercial leases), and $42.0 million in installment
loans to individuals for household, family and other personal expenditures.
As of December 31, 1999, 1998 and 1997, Tehama Bank had outstanding
credit commitments (including standby letters of credit) of $27.4 million, $18
million and $17.5, respectively. Tehama Bank expects 40% of its commitments to
lend as of December 31, 1999, will not be exercised within the year 2000.
At December 31, 1999, Tehama Bank's loan limit to individual customers
for unsecured loans was $2.5 million and the limit for unsecured and secured
loans combined was $4.3 million. For customers desiring loans in excess of
Tehama Bank's lending limits, Tehama Bank may loan on a participation basis,
with its correspondent banks taking the amount of the loan in excess of Tehama
Bank's lending limits. In other cases, Tehama Bank may refer such borrowers to
larger banks or other lending institutions. No material portion of Tehama Bank's
loans is concentrated within a single industry or group of related industries.
Deposits
Approximately 48% of Tehama Bank's deposits are attracted from and
around the city of Red Bluff. A material portion of Tehama Bank's deposits has
not been obtained from a single person or a few persons, the loss of any one or
more of which would have a materially adverse effect on the business of Tehama
Bank. Furthermore, (1) the extent to which the business of Tehama Bank is
seasonal is insignificant; (2) the importance of, and risks
143
<PAGE> 144
attendant to, foreign sources and applications of Tehama Bank's funds is
negligible; and (3) Tehama Bank as of December 31, 1999, held $70,203 in United
States agency deposits and $1.9 million in local agency deposits.
Employees
At September 30, 2000, Tehama Bank employed 120 persons, including four
executive officers and a total of 47 other officers. None of Tehama Bank's
employees is presently represented by a union or covered under a collective
bargaining agreement. Management of Tehama Bank believes that its employee
relations are excellent.
Competition
Tehama Bank's primary service areas include Tehama, Butte, Glenn and
Shasta counties, and contain a total of 88 competitive banking offices, of which
37 are offices of major chain banking systems and 51 are offices of other
independent banks. On June 30, 1999, amounts reported by state and federal
agencies indicated that these banking offices held approximately $3.1 billion in
total deposits, averaging approximately $35.2 million per office. The service
areas also contain the offices of 11 savings and loan associations, with
approximately $694 million in total deposits as of June 30, 1999.
The banking business in California generally, and in Tehama Bank's
primary service areas specifically, is highly competitive with respect to both
loans and deposits and is dominated by a relatively small number of major banks
with many offices operating over a wide geographic area. Among the advantages
such major banks have over Tehama Bank are their ability to finance wide ranging
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Such banks offer certain services such as trust
services and international banking which are not offered directly by Tehama Bank
(but are offered indirectly through correspondent institutions) and, by virtue
of their greater total capitalization (legal lending limits to an individual
customer are limited to a percentage of a bank's total capital accounts), such
banks have substantially higher lending limits than does Tehama Bank. Other
entities, both governmental and private, seeking to raise capital through the
issuance and sale of debt or equity securities, also provide competition for
Tehama Bank in the acquisition of deposits.
Commercial banks also compete with other types of financial institutions
(savings associations and credit unions) and with other markets for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for available funds with money market
instruments. In periods of high interest rates, such money market funds have
provided substantial competition to banks for deposits, and it is anticipated
they may continue to do so in the future.
In order to compete with other financial institutions in its primary
service areas, Tehama Bank relies principally upon (a) direct personal contact
by officers, directors, employees and shareholders, (b) extended lobby hours,
and (c) specialized promotions. Tehama Bank focuses its promotional activities
on the advantages of dealing with an independent bank.
Properties
Tehama Bank leases its Orland and Redding branch offices, and owns the
land and buildings in which its Chico, Los Molinos and Willows branch offices
are located. Tehama Bank leases from a director of Tehama Bank the building in
which its Red Bluff branch office is located, leases the building in which its
Red Bluff administrative headquarters is located and, subject to the ground
lease described below, owns the building (adjacent to its administrative offices
and operations center) in which its loan servicing operations are conducted.
Tehama Bank's total rentals for premises and equipment for fiscal year 1999 were
approximately $202,933 and its minimum future commitments under operating
leases, as of December 31, 1999, totaled $1.3 million.
Tehama Bank acquired the right to purchase its former head office in
which its loan servicing operations are now conducted, by assignment in 1988
from two of Tehama Bank's directors, Orville Jacobs and John Koeberer.
144
<PAGE> 145
The building, a two-story commercial building with approximately 7,700 square
feet of space, was acquired for a price of $25,000. The assignment contains a
right of first refusal in favor of Messrs. Jacobs and Koeberer whereby they have
the right to repurchase the building from Tehama Bank in the event that Tehama
Bank elects to sell, vacate or sublet the building to a party other than a
financial institution. This right of first refusal has a term concurrent with
the terms of the underlying ground lease. The ground lease provides for an
initial term of eight (8) years that terminated on December 31, 1988. It further
provides for four (4) additional options to extend the term of the ground lease
for a period of eight (8) years each, or a total of 32 years. The base rent is
to be adjusted during each extension term in accordance with the fair market
rental value of the land as of the commencement of the applicable extension
term. The current lease term, at a monthly rental of $2,310, expires December
31, 2004.
Tehama Bank's administrative offices are leased for an initial term of
ten years, and the lease further provides for one additional option to extend
the term of the lease for a period of five years. The current lease term, at a
monthly rental of $2,860, expires March 15, 2004.
Tehama Bank's operations center is leased on a month-to-month basis,
with a 60 day notice of termination requirement, for a monthly rental of $500.
Tehama Bank acquired the Willows office at a combined value (land and
building) of approximately $340,000 in connection with its 1997 acquisition of
deposits and assets of Wells Fargo Bank branches located in Willows and Orland,
California. The building area is approximately 6,400 square feet. The Orland
office is a leased facility also acquired in connection with the Wells Fargo
Bank transaction. Tehama Bank assumed existing leases on the building and
adjacent parking lot with the second of three five-year options commencing
August 1, 1997. Monthly payments on the building and lot leases are $2,210 and
$350, respectively.
Tehama Bank during 1999 moved its branch in Red Bluff to a building
which, with an adjacent parking area, Tehama Bank leases from director Harry
Dudley. The lease provides for an initial term of five years, and further
provides for four additional options to extend the term of the lease for a
period of five years each, or a total of 20 years. The current lease term, at a
monthly rental of $2,900 for the building and $575 for the parking lot, expires
August 1, 2004. The base monthly rents are to be increased by 2% for each
successive twelve month period of the leases beginning in year two and
continuing through year ten, encompassing the initial period and the first
extension option period. Monthly lease payments in years eleven through
twenty-five, encompassing the second through fourth extension option periods
shall be negotiated each time the lease is extended.
The Redding office is currently leased for an initial term of ten years,
and further provides for two additional options to extend the term of the lease
for a period of five years each, or a total of ten years. The current lease
term, at a monthly rental of $7,454, expires July 15, 2008.
Legal Proceedings
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to Tehama Bancorp's and Tehama Bank's business, to
which Tehama Bancorp or Tehama Bank is a party or of which any of their
properties are subject.
145
<PAGE> 146
SUPERVISION AND REGULATION OF TEHAMA BANCORP
Tehama Bancorp and Tehama Bank are extensively regulated under both
federal and state laws and regulations, just as Humboldt Bancorp and its
subsidiaries. For a general description of these laws and regulations, see
"Supervision and Regulation of Humboldt Bancorp." Below are the results of
specific applications of those laws to Tehama Bancorp and Tehama Bank.
Deposit Insurance Assessments
Tehama Bank's deposit insurance assessment rate is at the lower end of
the range (from $0 to $0.27 per $100 of deposits) imposed by the FDIC in 1995.
Tehama Bank does not anticipate that its deposit insurance assessment for 2000
will differ materially from its assessment for 1999 ($18,236).
Capital Requirements
As of December 31, 1999, Tehama Bancorp's and Tehama Bank's total
risk-based capital ratios were approximately 13.9% and 12.0%, and their leverage
ratios were approximately 9.4% and 7.9%, respectively. Tehama Bancorp's and
Tehama Bank's required minimum leverage ratio is 4%. It is not expected that
compliance with the risk-based capital guidelines or minimum leverage
requirements will have a materially adverse effect on the business of Tehama
Bancorp or Tehama Bank in the reasonably foreseeable future. Nor does Tehama
Bank expect that its sensitivity to market risk will adversely affect its
overall CAMELS rating.
Tehama Bank has been classified as a well-capitalized bank since
adoption of the Prompt Corrective Action Regulations.
Community Reinvestment Act
Community Reinvestment Act ("CRA") regulations effective as of July 1,
1995, evaluate Tehama Bank's lending to low and moderate income individuals and
businesses across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of applications to merge,
establish new branches or form bank holding companies. In addition, any bank
rated in "substantial noncompliance" with the CRA regulations may be subject to
enforcement proceedings. Tehama Bank has a current rating of "satisfactory" CRA
compliance.
Safety and Soundness Standards
Federal bank regulations establish for insured financial institutions
safety and soundness standards for (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit underwriting; (4)
interest rate exposure; (5) asset growth; (6) compensation, fees and benefits;
and (7) excessive compensation. If an agency determines that an institution
fails to meet any standard established by the guidelines, the agency may require
the financial institution to submit to the agency an acceptable plan to achieve
compliance with the standard. Agencies may elect to initiate enforcement action
in certain cases where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution. Tehama Bank has not
been and does not expect to be required to submit a safety and soundness
compliance plan because of a failure to meet any of the safety and soundness
standards.
The Financial Services Modernization Act of 1999
Tehama Bancorp and Tehama Bank have not determined whether or when
either of them may seek to acquire and exercise new powers or activities under
the Financial Services Modernization Act of 1999, and the extent to which
competition will change among financial institutions affected by the Act has not
yet become apparent.
146
<PAGE> 147
MANAGEMENT OF TEHAMA BANCORP
The following is a brief account of the business experience of each
director.
<TABLE>
<CAPTION>
NAME AGE POSITION BIOGRAPHICAL SKETCH
---- --- -------- -------------------
<S> <C> <C> <C>
Henry C. Arnest 59 Director of Tehama Bank Mr. Arnest is Vice President of Sales and Marketing for
since 1984; director of the Alzeta Corporation, and was formerly Vice President
Tehama Bancorp since and General Manager for Northwestern Carbon.
1997
Louis J. Bosetti 69 Director of Tehama Bank Mr. Bosetti was the Superintendent of Schools for Tehama
since 1984; director of County from 1971 until retirement in 1991, and is
Tehama Bancorp since currently self-employed as an educational consultant.
1997
Harry Dudley 69 Director of Tehama Bank Mr. Dudley was Founder of Dudleys' Excavating, Inc., a
since 1989; director of construction company located in Gerber, California,
Tehama Bancorp since continuously for 45 years. He started Western Plastic,
1997 Inc., which built the first fiberglass septic tanks in the
western United States. He was President and major
stockholder of Countryside Cable, a cable television
company, in central Tehama County. He has also been
involved in the development of numerous commercial and
residential real estate properties in the area and has
been a director of the Red Bluff Roundup Association for
15 years.
William P. Ellison 52 Director, Chief Mr. Ellison became President and Chief Executive Officer
Executive Officer, of the Bank January 1, 1996, and from 1991 until that time
President of Tehama Bank served the Bank as Vice President and later Senior Vice
since 1996; held same President (Operations). Prior to joining the staff of
positions with Tehama Tehama Bank, Mr. Ellison was employed by Bank of America
Bancorp since 1997 for 21 years.
Dr. Garry D. Fish 55 Director of Tehama Bank Dr. Fish has been engaged in the practice of optometry in
since 1984; director of Red Bluff since 1972.
Tehama Bancorp since
1997
Max M. Froome 50 Director of Tehama Bank Mr. Froome was self-employed as a landscape contractor
since 1984; director of from 1978 to 1992 and currently is self-employed as a
Tehama Bancorp since broker of antiques.
1997
</TABLE>
147
<PAGE> 148
<TABLE>
<CAPTION>
NAME AGE POSITION BIOGRAPHICAL SKETCH
---- --- -------- -------------------
<S> <C> <C> <C>
Orville K. Jacobs 70 Director of Tehama Bank Mr. Jacobs is retired and was a developer of real estate
since 1984; director of in Tehama County for 14 years, during which time he was
Tehama Bancorp since involved with commercial real estate ventures in Red Bluff
1997 and surrounding communities. He served as member of the
Red Bluff Chamber of Commerce for 11 years, and was a
founding Director of the Tehama Local Development Corp.
Mr. Jacobs is presently on the advisory board for
Celebrity City, and is owner of Antelope Service Center.
Gary C. Katz 50 Director of Tehama Bank Mr. Katz is the Chairman and Chief Executive Officer of
since 1984; director of Katz Investments and former President and majority owner
Tehama Bancorp since of Phoenix Broadcasting, Inc.
1997
John W. Koeberer 56 Chairman of the Board of Mr. Koeberer is Chairman of the Board and is the President
Tehama Bank since 1984; and co-owner of three corporations: Urban Park
Chairman of the Board of Concessionaires, California Guest Services, Inc., and The
Tehama Bancorp since Picnic People, Inc., which operate park concessions at
1997 Lassen Volcanic National Park, Shasta Lake and numerous
facilities in the San Francisco Bay Area. He is a member
of the California Travel & Tourism Commission and serves
on the boards of directors of both the United States
Chamber of Commerce and the California State Chamber of
Commerce. He is the Chairman of the Lassen Park Foundation
and President of the California Parks Hospitality
Association. He also serves on the board of directors of
the San Francisco Visitor and Convention Bureau and the
California Travel Industries Association.
Raymond C. Lieberenz 56 Director and secretary Mr. Lieberenz is Secretary of the board, was formerly a
of Tehama Bank since licensed real estate broker and appraiser, and currently
1984; director and teaches in the Tehama County Schools.
secretary of Tehama
Bancorp since 1997
</TABLE>
148
<PAGE> 149
<TABLE>
<CAPTION>
NAME AGE POSITION BIOGRAPHICAL SKETCH
---- --- -------- -------------------
<S> <C> <C> <C>
Leslie L. Melburg 47 Director of Tehama Bank Mr. Melburg is Senior Partner in charge of Design for
since 1998; director of Nichols, Melburg, Rossetto Architects, a forty-eight
Tehama Bancorp since person architectural firm with offices located in Redding,
1998 Chico, Sacramento and Fort Bragg. He has won a number of
awards for design accomplishments and his projects have
been published in trade and architecture periodicals. He
is a director of numerous community organizations
including the Redding Chamber of Commerce and actively
participates in many other city and county organizations.
Gary L. Napier 59 Director of Tehama Bank Mr. Napier is Vice Chairman of the Board and has been
since 1984 and of Tehama owner of Buffum and Napier Insurance Brokers since 1965.
Bancorp since 1997; Vice He is also the President of Torja Corporation, a private
Chairman of Tehama Bank investment company.
since 1987 and of Tehama
Bancorp since 1987
John D. Regh 47 Director of Tehama Bank Mr. Regh is the President of Inland Business Machines
and Tehama Bancorp since Systems and Inland Leasing. Inland Business Machines was
1998 established in 1986 and is involved in the sales, service
and financing of office equipment. He also serves on the
boards of directors for the Chico Chamber of Commerce and
Butte Creek Country Club.
Terence A. Rust 59 Director of Tehama Bank Dr. Rust is a dentist engaged in the speciality practice
since 1984; director of of oral and maxillofacial surgery, and has maintained an
Tehama Bancorp since office in Redding since 1970.
1997
</TABLE>
TEHAMA BANCORP EXECUTIVE COMPENSATION
The following table provides information concerning compensation of all
executive officers of Tehama Bancorp who received, during any of the periods
indicated, annual salary and bonus exceeding $100,000. All compensation was paid
by Tehama Bank for services to Tehama Bank.
149
<PAGE> 150
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------
OTHER
ANNUAL
COMPENSATION ALL OTHER
NAME YEAR SALARY BONUS(1) ($)(2) COMPENSATION(3)
---- ---- -------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
William P. Ellison 1999 $125,000 $ 70,000 $ 2,718 $ 4,000
1998 $120,000 -0- $ 2,356 $ 12,458
1997 $126,600 $ 51,500 $ 1,770 $ 27,575
W. Steven Gilman(4) 1999 $ 83,680 $ 17,500 $ 736 $ 12,584
1998 $ 81,000 -0- $ 2,231 $ 4,081
1997 $ 80,500 $ 20,000 $ 1,191 $ 4,325
Wayne N. Shaffer 1999 $ 87,500 $ 21,500 $ 1,740 $ 16,910
1998 $ 75,000 -0- $ 1,769 $ 7,809
1997 $ 34,375 -0- -0- -0-
</TABLE>
(1) Bonuses are indicated for the years upon which they are based, and are
payable March of the succeeding year.
(2) Includes payment of insurance premiums, matching contributions to the
employee stock ownership plan and use of an automobile.
(3) Includes amounts accrued pursuant to salary continuation agreements and,
in the case of Mr. Ellison, director's fees of $9,000.
(4) Mr. Gilman, Tehama Bank's former Chief Administrative Officer, resigned
his position on May 17, 2000.
Stock Option Plans
The Tehama Bancorp 1994 Stock Option Plan (the "1994 Plan") was
terminated for the purpose of granting new options on May 14, 1999, the
effective date of the 1999 Stock Option Plan (the "1999 Plan") approved by the
shareholders of Tehama Bancorp at the 1999 Annual Meeting of Shareholders.
Options for 79,437 shares of Common Stock of Tehama Bancorp remain outstanding
under the 1994 Plan.
Under the 1999 Plan, nonstatutory (sometimes also called
"non-qualified") options to purchase shares of Tehama Bancorp's Common Stock may
be granted to employees, directors and consultants of Tehama Bancorp, and
incentive options may be granted to employees. The 1999 Plan is administered by
the board of directors, which selects the individuals to whom options will be
granted, the type of option to be granted, the exercise price of each option,
the number of shares covered by such option and the other terms and conditions
of each option, including the vesting schedule. By terms of the 1999 Plan, each
director of Tehama Bancorp was granted automatically on May 17, 1999, a
five-year non-statutory option for 5,000 shares of Common Stock, exercisable at
the price of $11.875 per share and vesting in increments of 1,000 shares
immediately and on the first through the fourth anniversaries of the grant date.
The exercise price of each option granted pursuant to the 1999 Plan
ordinarily may not be less than one hundred percent (100%) of the fair market
value of the stock subject to the option on the date the option is granted, and
no option may have a term exceeding ten years. All options (except for automatic
option grants to directors of Tehama Bancorp) terminate upon termination of
employment, but may be exercised (to the extent vested) for varying periods
after termination of employment. During an optionee's lifetime, the optionee's
incentive options may be exercised only by him or her and may not be
transferred. An optionee's nonstatutory options also are not transferable during
the optionee's lifetime, except to the extent otherwise permitted in the option
agreement. The exercise price of shares issued pursuant to exercise of an option
under the 1999 Plan may always be paid in cash and, in addition, may be paid, in
the discretion of the board with (1) Company shares already owned by the
optionee,
150
<PAGE> 151
valued at their fair market value, (2) the proceeds of a resale of the shares by
an authorized securities broker or (3) the proceeds of a loan (by a securities
broker or lender approved by Tehama Bancorp) secured by a pledge of the shares
acquired by the exercise.
The board has authority to delegate its administrative powers to one or
more committees of the board. A total of 562,947 shares are reserved for
issuance under the 1999 Plan, of which 447,715 are reserved for options granted
and outstanding under the 1999 Plan. As of the date of this document, there are
approximately 111 persons who are officers or employees of Tehama Bancorp
eligible to receive option grants under the 1999 Plan; no current director is
eligible to receive a further grant in addition to the option granted in 1999.
The board may amend, suspend or terminate the 1999 Plan at any time and for any
reason.
If Tehama Bancorp at any time succeeds to the business of another
corporation through merger or consolidation, or through the acquisition of stock
or assets of such corporation, options may be granted under the 1999 Plan in
substitution of options previously granted by such other corporation to purchase
shares of its stock, which options are outstanding at the date of the
succession.
The shares reserved for the 1999 Plan, and outstanding options granted
under the 1999 Plan, are subject to adjustment of their number or price in the
event of a subdivision of the outstanding shares of Tehama Bancorp, a
declaration of a dividend payable in such shares or in a form other than such
shares in an amount that has a material effect on the value of outstanding
shares, a combination or consolidation of the outstanding shares, a
recapitalization, a spinoff or a similar occurrence. In the event that Tehama
Bancorp is a party to a merger or other reorganization, outstanding options will
be subject to the agreement of merger or reorganization, which may provide (by
way of example) for the assumption of outstanding options under the 1999 Plan by
the surviving corporation or its parent, for their continuation by Tehama
Bancorp (if Tehama Bancorp is the surviving corporation), or for payment of a
cash settlement per share of the option equal to the difference between the
amount to be paid for one share of Tehama Bancorp under such agreement and the
exercise price per share of the option, in all cases without the optionees'
consent. Any cancellation of options may not occur until after optionees have
been notified of the merger or reorganization and have had reasonable
opportunity to exercise their exercisable options.
Option Grants, Exercises and Year-End Values for 1999
The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, information concerning options granted
or exercised during 1999 and the estimated 1999 year-end value of unexercised
options held by such executive officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED FY-END FY-END(2)
OPTIONS ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME GRANTED EXERCISE REALIZED(1) UNEXERCISABLE) UNEXERCISABLE)
---- ------- -------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
William P. Ellison 5,500 5,616 $10,889 15,312 / 12,078 $0.00 / $0.00
W. Steven Gilman -- -- -- 7,590 /3,960 $0.00 / $0.00
Wayne N. Shaffer -- -- -- 2,200 / 3,300 $0.00 / $0.00
</TABLE>
(1) Market value of underlying securities on the date(s) of exercise, minus
the exercise or base price.
(2) Market value of underlying securities at year-end 1999, minus the
exercise or base price.
Salary Continuation Agreements
151
<PAGE> 152
In order to provide long-term incentive to selected senior executive
officers, the Bank in 1993 entered into Executive Salary Continuation Agreements
(each an "SCA") with three former and one current senior executive officer of
Tehama Bancorp, Chief Executive Officer William P. Ellison. An agreement
amending the SCA with Mr. Ellison also was entered into effective in 1998, and
SCAs were entered into subsequently with other officers of Tehama Bancorp,
including Senior Vice Presidents W. Steven Gilman and Wayne N. Shaffer.
Benefits payable under the SCAs are intended by Tehama Bancorp to be
funded by single-premium life insurance policies which were purchased in
connection with entering into the SCAs and of which Tehama Bancorp is the owner
and beneficiary. The total amount of such premiums paid by the Bank in
connection with all SCAs entered into is $3,015,000. Notwithstanding the
existence of such policies of insurance, however, the SCAs create no rights or
interests in the property or assets of Tehama Bancorp, the sole obligation of
Tehama Bancorp under the SCAs is an unfunded and unsecured promise to pay money
in the future, and the status of any person who may assert a claim pursuant to
an SCA is that of an unsecured general creditor of Tehama Bancorp.
Generally, each SCA provides the named executive officer with a
specified annual money benefit (the "Annual Benefit") payable to the executive
or to his named beneficiary or surviving spouse or estate, in that order, for a
period of up to fifteen years following the executive's retirement upon or after
a specified retirement age. If the executive should die or become disabled prior
to such specified retirement age, a percentage of the Annual Benefit (on a
sliding upward scale depending upon the number of years which elapse between
execution of the SCA and the executive's early death or disability) would be
payable.
No Annual Benefit is payable if the executive's employment is terminated
for cause or the executive voluntarily terminates his employment with Tehama
Bancorp prior to his specified retirement age, but the full Annual Benefit is
payable if the executive's employment with Tehama Bancorp is terminated by
Tehama Bancorp without cause or in connection with a change in control of Tehama
Bancorp. The amount of the Annual Benefit also is subject to reduction if in any
year it exceeds the compensation expense which (with respect to the payment of
such Annual Benefit) Tehama Bancorp may deduct under the Internal Revenue Code
or if any portion of the Annual Benefit not waived by the executive constitutes
an "excess parachute" payment under the Code.
Subject to such contingencies, the following table sets forth
information regarding benefits payable under the SCAs which are currently in
effect between Tehama Bancorp and the executive officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
YEARS
REQUIRED YEAR ANNUAL
ANNUAL FOR FULL BENEFIT RETIREMENT
NAME BENEFIT BENEFIT COMMENCES AGE
------------------ ------- -------- ------------ ----------
<S> <C> <C> <C> <C>
William P. Ellison $75,000 10 2010 62
Wayne S. Shaffer $50,000(1) 11 See Note 1 62
</TABLE>
(1) If Mr. Shaffer's employment continues through November 3, 2008, the
minimum benefit is $31,786, which is increased to $37,380 and $43,439 if
Mr. Shaffer's service extends through November 3, 2006 and 2007,
respectively.
SECURITIES OWNERSHIP
The following table sets forth beneficial ownership of Tehama
Bancorp common stock by directors, and by directors and executive officers as a
group, as of January 5, 2001. There are no family relationships among any of the
directors and executive officers. As of that date, no person known to Tehama
Bancorp owned beneficially or of record more than five percent (5%) of the
outstanding shares of its common stock. Beneficial ownership is determined under
applicable rules of the Securities Exchange Commission, and includes shares
outstanding over
152
<PAGE> 153
which the individual exercises sole or shared voting or investment power and
shares which the individual has the right to acquire by exercising options
vested no later than 60 days after January 5, 2001. (*) indicates beneficial
ownership of less than one percent (1%) of shares deemed outstanding for
purposes of the beneficial ownership rules.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
---------------------------------------------------------
Percent
Name Sole(2) Shared(3) Of Class
---- ------- --------- --------
<S> <C> <C> <C>
Henry C. Arnest III 23,504 -- 1.18%
Louis J. Bosetti 3,930 29,009 1.66%
Harry Dudley 2,200 46,605 2.45%
William P. Ellison 40,966 -- 2.06%
Dr. Garry D. Fish 14,333 12,484 1.35%
Max M. Froome 3,008 -- *
Orville K. Jacobs 54,084 1,210 2.78%
Gary C. Katz 10,368 36,332 2.35%
John W. Koeberer 30,948 -- 1.56%
Raymond C. Lieberenz 3,729 13,401 *
Leslie L. Melburg 9,385 -- *
Gary L. Napier 34,788 -- 1.75%
John D. Regh 12,073 -- *
Terrance A. Rust 15,586 54,027 3.50%
------- ------- -------
All directors and principal
officers (17 persons) as a group 279,705 193,068 23.77%
======= ======= =======
</TABLE>
(1) The calculations in the table are based on the total number of shares
outstanding, including 2,825 shares held for the benefit of the
principal officers pursuant to Tehama Bancorp's Employee Stock Ownership
Plan and related trust agreement (see "Employee Stock Ownership Plan" in
this Tehama Bancorp section), and includes certain unexercised but
exercisable stock options as indicated in footnote (2).
(2) The named persons exercise sole voting and investment power with respect
to shares listed in this column. Includes for each named director
(except Mr. Ellison) 2,200 shares as to which options granted pursuant
to Tehama Bancorp's 1999 Stock Option Plan are exercisable within 60
days of January 5, 2001. Includes for Mr. Ellison 6,600 shares as to
which options granted under the 1999 Stock Option Plan and 20,790 shares
as to which options granted under the 1994 Stock Option Plan are
exercisable within 60 days of January 5, 2001. See "Stock Option Plan"
in this Tehama Bancorp section.
(3) The named persons share voting and investment power with respect to
shares listed in this column.
* Indicates less than one percent (1%).
153
<PAGE> 154
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Tehama Bancorp has had and expects to have in the future, banking
transactions in the ordinary course of its business with directors, principal
officers, their respective associates and members of their immediate families.
All loans and commitments to lend extended to such persons during 1999 by the
Bank were made in accordance with Bank policy on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of Tehama Bancorp
and the Bank, did not involve more than the normal risk of collectibility or
present other unfavorable features.
Transactions with Management
During 1999, Tehama Bank placed radio advertising in the gross amount of
$2,924 with agencies employed by stations owned and operated by director Gary
Katz, and paid brokerage commissions in the total amount of $14,369 to an
insurance agency owned in part by director Gary Napier for insurance purchased
through the agency. In addition, lease payments in the gross amount of $10,425
were paid to director Harry Dudley to rent Tehama Bank's relocated branch in Red
Bluff. No other business transactions of any kind existed or were entered into
between Tehama Bancorp and its directors and their affiliates.
EXPERTS
The financial statements of Humboldt Bancorp and subsidiaries as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, included in this document have been audited by Richardson &
Company, independent auditors, as stated in their report appearing herein and
have been so included in reliance upon the report given upon their authority as
experts in accounting and auditing.
The financial statements of Tehama Bancorp and subsidiary as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in this document have been audited by Perry-Smith LLP,
independent auditor, as stated in their report appearing herein and have been so
included in reliance upon the report given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the common stock to be issued by Humboldt Bancorp is
being passed upon by, and tax matters in connection with this offering will be
passed upon by, Bartel Eng & Schroder, a Law Corporation, Sacramento,
California. Legal matters in connection with the merger will be passed upon for
Humboldt Bancorp by Gary Steven Findley & Associates, Anaheim, California, and
for Tehama Bancorp by Shapiro Buchman Provine & Patton LLP, Walnut Creek,
California.
WHERE YOU CAN FIND MORE INFORMATION
Humboldt Bancorp has filed a registration statement on Form S-4 to
register with the Commission the common stock to be issued to shareholders of
Tehama Bancorp in the merger. This document is a part of that Registration
Statement and constitutes a prospectus of Humboldt Bancorp in addition to being
a proxy statement for the special meetings of Humboldt Bancorp and Tehama
Bancorp. As allowed by the Commission's rules, this document does not contain
all of the information you can find in the registration statement or the
documents provided as exhibits to the registration statement.
Humboldt Bancorp and Tehama Bancorp file annual, quarterly and special
reports, proxy statements and other information with the Commission. You may
read and copy any reports, statements and other information filed by Humboldt
Bancorp and Tehama Bancorp at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on
154
<PAGE> 155
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.
155
<PAGE> 156
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HUMBOLDT BANCORP AND SUBSIDIARIES
Independent Auditor's Report................................................................... F-3
Consolidated Balance Sheets, December 31, 1998 and 1999, and September 30, 2000 (unaudited).... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999,
and for the Nine Month Periods Ended September 30, 1999 and 2000 (unaudited).................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1997, 1998, and 1999, and for the Nine Month Period Ended September 30, 2000 (unaudited)...... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999,
and for the Nine Month Periods Ended September 30, 1999 and 2000 (unaudited)................... F-8
Notes to Consolidated Financial Statements..................................................... F-10
TEHAMA BANCORP AND SUBSIDIARY
Consolidated Balance Sheet, September 30, 2000 (unaudited) and December 31, 1999............... F-40
Consolidated Statements of Income for the Nine Month Periods Ended September 30, 1999
and 2000 (unaudited)........................................................................... F-41
Consolidated Statement of Cash Flows for the Nine Month Periods Ended September 30, 1999
and 2000 (unaudited)........................................................................... F-42
Notes to Consolidated Financial Statements..................................................... F-43
Independent Auditor's Report................................................................... F-46
Consolidated Balance Sheet, December 31, 1998 and 1999......................................... F-47
Consolidated Statement of Income for the Years Ended December 31, 1997, 1998 and 1999.......... F-48
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended December 31,
1997, 1998 and 1999............................................................................ F-49
</TABLE>
F-1
<PAGE> 157
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999............................................................... F-51
Notes to Consolidated Financial Statements..................................................... F-53
</TABLE>
F-2
<PAGE> 158
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiaries
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp) and Subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Humboldt Bancorp
and Subsidiaries at December 31, 1998 and 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
RICHARDSON & COMPANY
Sacramento, California
January 14, 2000
F-3
<PAGE> 159
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1998 1999 2000
--------- --------- ---------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 28,626 $ 31,339 $ 29,088
Interest-bearing deposits in other banks 3,020 20 144
Federal funds sold 2,250 21,375 35,395
Investment securities, at fair value 77,802 115,360 100,421
Loans held for sale 7,677 2,147
Loans and leases, net of allowance for loan and
lease losses of $3,055,000 in 1998 and
$3,354,000 in 1999 178,361 222,975 382,982
Premises and equipment, net 7,950 9,750 14,854
Accrued interest receivable and other assets 14,289 20,683 29,341
--------- --------- ---------
TOTAL ASSETS $ 319,975 $ 423,649 $ 592,225
========= ========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 96,884 $ 110,523 $ 132,724
Interest-bearing 187,083 268,107 384,201
--------- --------- ---------
Total deposits 283,967 378,630 516,925
Accrued interest payable and other liabilities 4,758 5,564 11,660
Long-term debt 3,402 5,316 16,655
--------- --------- ---------
TOTAL LIABILITIES 292,127 389,510 545,240
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized, 4,469,885 shares in 1998 and
4,731,093 shares in 1999 issued and outstanding 25,877 28,405 41,934
Retained earnings 1,485 6,088 5,083
Accumulated other comprehensive income (loss) 486 (354) (32)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,848 34,139 46,985
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 319,975 $ 423,649 $ 592,225
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 160
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 15,961 $ 18,762 $ 19,186 $ 14,136 $ 24,178
Interest and dividends on investment securities
Taxable 2,700 3,239 3,667 2,271 4,248
Exempt from Federal income tax 569 739 875 631 806
Dividends 83 78 106 37 107
Interest on federal funds sold 612 512 1,316 696 1,313
Interest on deposits in other banks 128 174 90 73 42
-------- -------- -------- -------- --------
Total Interest Income 20,053 23,504 25,240 17,844 30,694
INTEREST EXPENSE
Interest on deposits 6,973 7,565 8,024 5,410 11,697
Interest on long-term debt and other borrowings 51 177 321 225 745
-------- -------- -------- -------- --------
Total Interest Expense 7,024 7,742 8,345 5,635 12,442
-------- -------- -------- -------- --------
NET INTEREST INCOME 13,029 15,762 16,895 12,209 18,252
Provision for loan and lease losses 773 2,124 1,046 697 1,602
-------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 12,256 13,638 15,849 11,512 16,650
OTHER INCOME
Fees and other income 6,911 9,731 16,652 11,731 18,463
Service charges on deposit accounts 1,300 2,097 2,411 1,805 2,255
Net (loss) gain on sale of loans (204) 645 695 349 342
Net investment securities gains (loss) 102 (235) (93) (89)
-------- -------- -------- -------- --------
Total Other Income 8,109 12,473 19,523 13,792 20,971
OTHER EXPENSES
Salaries and employee benefits 6,806 9,151 11,866 8,659 12,138
Net occupancy and equipment expense 2,466 2,711 3,023 2,092 2,747
Other expenses 6,224 7,716 13,605 9,826 15,235
-------- -------- -------- -------- --------
Total Other Expenses 15,496 19,578 28,494 20,577 30,120
-------- -------- -------- -------- --------
Income Before Income Taxes 4,869 6,533 6,878 4,727 7,501
Provision for income taxes 1,611 2,517 2,271 1,537 2,481
-------- -------- -------- -------- --------
NET INCOME $ 3,258 $ 4,016 $ 4,607 $ 3,190 $ 5,020
======== ======== ======== ======== ========
NET INCOME PER SHARE $ .69 $ .82 $ .91 $ .64 $ .88
======== ======== ======== ======== ========
NET INCOME PER SHARE---
ASSUMING DILUTION $ .61 $ .75 $ .83 $ .58 $ .82
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 161
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,526,918 $ 17,179 $ 2,060 $ 361 $ 19,600
10% stock dividend 357,775 3,113 (3,113)
Fractional shares purchased (5) (5)
Stock options exercised and
related tax benefit 56,662 317 317
Comprehensive income:
Net income $ 3,258 3,258 3,258
Other comprehensive
income, net of tax:
Unrealized holding
gains on securities
available-for-sale
arising during the
year, net of taxes
of $274 384 384 384
----------- ----------- ----------- ----------- ----------- ------------
Total comprehensive income $ 3,642
===========
BALANCE AT
DECEMBER 31, 1997 3,941,355 20,609 2,200 745 23,554
10% stock dividend 400,275 4,723 (4,723)
Fractional shares purchased (8) (8)
Stock options exercised
and related tax benefit 128,255 545 545
Comprehensive income:
Net income $ 4,016 4,016 4,016
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $185 (259) (259) (259)
----------- ----------- ----------- ----------- ----------- ------------
Total comprehensive income $ 3,757
===========
BALANCE AT
DECEMBER 31, 1998 4,469,885 25,877 1,485 486 27,848
</TABLE>
(Continued)
F-6
<PAGE> 162
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
5 for 2 stock split fractional
shares purchased $ (4) $ (4)
Sale of stock 153,652 $ 1,833 1,833
Stock options exercised
and related tax benefit 107,556 695 695
Comprehensive income:
Net income $ 4,607 4,607 4,607
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $593 (840) $ (840) (840)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income $ 3,767
===========
BALANCE AT
DECEMBER 31, 1999 4,731,093 28,405 6,088 (354 34,139
10% stock dividend 472,879 6,022 (6,022)
Fractional shares purchased (3) (3)
Sale of stock 640,000 7,309 7,309
Stock options exercised
and related tax benefit 69,662 198 198
Comprehensive income:
Net income $ 5,020 5,020 5,020
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $87 322 322 322
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income $ 5,342
===========
BALANCE AT
SEPTEMBER 30, 2000
(UNAUDITED) 5,913,634 $ 41,934 $ 5,083 $ (32) $ 46,985
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 163
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES (Unaudited)
Net income $ 3,258 $ 4,016 $ 4,607 $ 3,190 $ 5,020
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan and lease losses 773 2,124 1,046 697 1,603
Depreciation 1,565 1,586 1,543 1,115 1,142
(Gain) loss on sale of investments (102) 235 93 89
Loss on sale of OREO 52
Amortization 1,390 1,517 1,717 977 (137)
Equity in income of investment
in leasing company (22) (259) (450) (300) (334)
(Increase) decrease in loans held
for sale 15 (7,629) 5,530 6,958 2,147
Increase in interest receivable
and other assets (1,422) (734) (2,218) (728) (5,566)
Increase in interest payable and
other liabilities 1,913 1,355 806 1,142 1,909
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,368 1,976 12,868 13,144 5,873
INVESTING ACTIVITIES
Net (increase) decrease in interest-
bearing deposits with banks (3,000) 3,000 3,000 (124)
Net decrease (increase) in federal
funds sold 3,050 1,270 (19,125) (53,895) (7,520)
Proceeds from maturities and sales
of investment securities
available-for-sale 22,261 28,169 36,441 27,920 33,206
Purchases of investment securities
available-for-sale (62,711) (27,967) (76,656) (57,939) (15,081)
Purchases of investment securities
held-to-maturity (2,342)
Proceeds from maturities and sales of
investment securities held-to-
maturity 179
Net increase in loans and leases (15,491) (23,370) (45,654) (24,715) (55,974)
Purchases of premises and
equipment (1,100) (3,901) (2,638) (2,586) (6,246)
Investment in partnerships/
leasing company (2,000) (91) (1,242) (1,242) (1,000)
Proceeds from the sale of OREO 139 322 123 175 1,533
Purchase of subsidiary (10,923)
Premium paid on deposits
purchased (1,040) (2,355) (2,355)
--------- --------- --------- --------- ---------
NET CASH USED BY
INVESTING ACTIVITIES (59,892) (25,568) (108,106) (111,637) (64,292)
</TABLE>
(Continued)
F-8
<PAGE> 164
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------------- ------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposit accounts $ 62,535 $ 28,781 $ 93,832 $ 91,848 $ 40,316
Net proceeds from long-term debt
and notes payable 1,000 1,700 2,000 1,300 10,408
Payments on long-term debt and
notes payable (14) (59) (86) (64) (2,060)
Proceeds from issuance of common
stock 203 362 2,209 2,184 7,507
Fractional shares purchased (5) (8) (4) (3)
-------- -------- -------- -------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 63,719 30,776 97,951 95,268 56,168
-------- -------- -------- -------- --------
NET INCREASE IN CASH
AND DUE FROM BANKS 11,195 7,184 2,713 (3,225) (2,251)
Cash and due from banks at
beginning of year 10,247 21,442 28,626 28,626 31,339
-------- -------- -------- -------- --------
CASH AND DUE FROM
BANKS AT END OF YEAR $ 21,442 $ 28,626 $ 31,339 $ 25,401 $ 29,088
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 6,940 $ 7,755 $ 7,972 $ 5,435 $ 12,297
Income taxes $ 1,809 $ 2,830 $ 2,921 $ 2,506 $ 4,020
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 3,113 $ 4,723 $ 6,022
Net change in unrealized gains
on securities available-for-sale $ 658 $ (444) $ (1,432) $ (406) $ (553)
Net change in deferred income
taxes on unrealized gains on
securities available-for-sale $ (274) $ 185 $ 592 $ 290 $ 231
Deposit liabilities assumed in
exchange for assets acquired
in connection with purchase
of branches $ 75 $ 831 $ 72,105
Loans transferred to OREO $ 54 $ 349 $ 120
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 165
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: Humboldt Bancorp (Bancorp), formed in 1995, is a bank holding company
whose principal activity is the ownership and management of its wholly-owned
subsidiaries, Humboldt Bank and Capitol Valley Bank. Humboldt Bank was
incorporated on March 13, 1989 and opened for business on September 13, 1989.
Capitol Valley Bank was incorporated on December 17, 1998 and opened for
business on March 3, 1999. Bancorp and the Banks operate under California state
charters and are subject to regulation, supervision and regular examination by
the Federal Reserve Bank, Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The regulations of these agencies govern most
aspects of the Banks' business. The accounting and reporting policies of
Humboldt Bancorp and Subsidiaries conform with generally accepted accounting
principles and general practices within the banking industry.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Bancorp and its wholly-owned subsidiaries, Humboldt Bank and
Capitol Valley Bank. All material intercompany accounts and transactions have
been eliminated.
Nature of Operations: Bancorp is locally owned and operated and its primary
service area is the communities of Northern California. Through its
subsidiaries, Bancorp's business is primarily focused on servicing the banking
needs of individuals living and working in the Bancorp primary service areas and
local businesses, including retail, professional and real estate related
enterprises in those service areas. Bancorp offers a broad range of services to
individuals and businesses with an emphasis upon efficiency and personalized
attention. Bancorp provides a full line of consumer services, and also offers
specialized services to small businesses, middle market companies, and
professional firms, such as courier services and appointment banking. Bancorp
offers personal and business checking and savings accounts (including individual
interest-bearing negotiable orders of withdrawal ("NOW") accounts and/or
accounts combining checking and savings accounts with automatic transfers), IRA
and Keogh accounts, time certificates of deposit and direct deposit of social
security, pension and payroll checks. It also makes available commercial,
construction, accounts receivable, inventory, automobile, home improvement, real
estate, office equipment, leasehold improvement, lease receivable financing and
other consumer loans (including overdraft protection lines of credit), drafts
and standby letters of credit, credit card activities to both individuals
(including both secured and unsecured credit cards) and merchants and travelers'
checks (issued by an independent entity).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities: Securities are classified as held-to-maturity if Bancorp
has both the intent and ability to hold those debt securities to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Securities are classified as available-for-sale if Bancorp intends to hold those
debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of Bancorp assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors. Securities
available- for-sale are carried at fair value. Unrealized holding gains or
losses are reported as increases or decreases in stockholders' equity, net of
the related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in earnings.
F-10
<PAGE> 166
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Bancorp's investments in mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using methods approximating the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loans and Leases Held for Sale: Bancorp sells mortgage loans, the guaranteed
portion of Small Business Administration (SBA)-guaranteed loans and loan
participations (with servicing retained) for cash proceeds equal to the
principal amount of loans, participation or leases with yield rates to the
investor based upon the current market rate. In accordance with Statement of
Financial Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, Bancorp records an asset
representing the right to service loans for others when it sells a loan and
retains the servicing rights. The total cost of originating or purchasing the
loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.
SFAS No. 125 also required the assessment of all capitalized servicing rights
for impairment based on current fair value of those rights. For purposes of
evaluating and measuring impairment, Bancorp stratifies servicing rights based
on the type and interest rates of the underlying loans. Impairment is measured
as the amount by which the servicing rights for a stratum exceed their fair
value.
A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. Bancorp's investment in an SBA loan is
allocated among the sold and retained portions of the loan based on the relative
fair value of each portion at the time of loan origination, adjusted for
payments and other activities. Because the portion retained does not carry an
SBA guarantee, part of the gain recognized on the sold portion of the loan may
be deferred and amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.
Loans and leases held for sale are recorded at the lower of cost or market
determined on an aggregate basis.
Loan and Leases: Loans and leases are stated at the amount of unpaid principal,
less the allowance for losses, net deferred loan fees and costs and unearned
income. Interest on loans is accrued and credited to income based on the
principal amount outstanding. Unearned income on installment loans is recognized
as income over the term of the loans using a method that approximates the
interest method.
Bancorp's leasing operations consist principally of the leasing of point-of-sale
terminals, printers for credit card vouchers and related equipment. Bancorp also
has purchased small equipment leases from Bancorp Financial Services, a
subsidiary of the Bancorp. All of Bancorp's leases are classified and accounted
for as direct financing leases. Under the direct financing method of accounting
for leases, the total net rentals receivable under the lease contracts, net of
unearned income, are recorded as a net investment in direct financing leases,
and the unearned income is recognized each month as it is earned so as to
produce a constant periodic rate of return on the unrecovered investment.
F-11
<PAGE> 167
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan origination fees and certain direct origination and acquisition costs are
capitalized and recognized as an adjustment of the yield on the related loan or
lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.
Credit card origination costs are deferred and netted against the related credit
card fee, if any, and the net amount amortized on a straight-line basis over the
initial privilege period. Fees received and marketing costs incurred in
connection with unsuccessful efforts to create credit card relationships are
recorded as revenue and expense when the refundable period expired. Amounts paid
to third-party direct marketing specialists related to successful efforts to
create credit card relationships are deferred and netted against related fees
and all other amounts are recorded as expenses in the period the services were
performed. Annual service fees are deferred and amortized over the credit card
privilege period.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan, including credit card receivables, and lease portfolios.
Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and leases and other
pertinent factors. The allowance is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are evaluated on a regular
basis and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known. Loans and leases deemed uncollectible are
charged to the allowance. Credit card receivables are charged to the allowance
when they become 120 days past due. Provisions for losses and recoveries on
loans and leases previously charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that Bancorp will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Allowances on impaired loans are established based on the
present value of expected future cash flows discounted at the loans effective
interest rate or for collateral-dependent loans, on the fair value of the
collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and
leases, including impaired loans and leases, are classified as nonaccrual if
collection of principal or interest is considered doubtful, generally if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans and leases are well-secured and in the
process of collection. If a loan or lease or a portion of a loan or lease is
classified as doubtful or is partially charged off, the loan or lease is
classified as nonaccrual. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis.
F-12
<PAGE> 168
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the case where a nonaccrual loan or lease had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan and lease losses until prior charge-offs have been fully
recovered.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets. The
useful lives of buildings and improvements are estimated to be fifteen to thirty
years. The useful lives of furniture, fixture and equipment are estimated to be
three to ten years. Leasehold improvements are amortized over the life of the
related lease, or the life of the asset, whichever is shorter. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.
Foreclosed Real Estate: Foreclosed real estate includes both formally foreclosed
property and in-substance foreclosed property. In-substance foreclosed
properties are those properties for which Bancorp has taken physical possession,
regardless of whether formal foreclosure proceedings have taken place. At the
time of foreclosure, foreclosed real estate is recorded at the lower of the
carrying amount or fair value less cost to sell, which becomes the property's
new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of their new cost basis or fair value minus estimated costs
to sell. Revenue and expenses from operations and subsequent adjustments to the
carrying amount of the property are included in income (loss) on foreclosed real
estate.
Intangible Assets: The premiums paid to acquire the deposits of the
McKinleyville, Arcata, Weaverville, Willow Creek, Loleta, Garberville, Ukiah and
Eureka (Burre Center) branches were allocated to core deposit intangibles based
on the results of valuation studies performed to determine the fair value of the
deposit base acquired. Core deposit intangibles are being amortized over the
estimated remaining life of the related deposits of 8 to 10 years.
Investment in Leasing Company: Humboldt Bank, along with another bank, formed a
California corporation, Bancorp Financial Services, Inc. for the purpose of
operating an equipment leasing company. In January 1997, Humboldt Bank
contributed capital totaling $2,000,000 for a 50% interest in this corporation.
The investment is accounted for using the equity method. During 1998, this
investment was transferred to the Bancorp.
Investments in Limited Partnerships: Bancorp owns approximately 99% interests in
two limited partnerships that own and operate affordable housing projects.
Investment in these projects serves as an element of Bancorp's compliance with
the Community Reinvestment Act and Bancorp receives tax benefits in the form of
deductions for operating losses and tax credits. The tax credits may be used to
reduce taxes currently payable or may be carried back one year or forward twenty
years to recapture or reduce taxes. Bancorp uses the equity method of accounting
for the partnerships' operating results and tax credits are recorded in the
years they became available to reduce income taxes.
Income Taxes: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal loans and securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes.
F-13
<PAGE> 169
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred taxes are computed using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards, and then a valuation allowance is
established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized.
Advertising: Advertising costs are charged to operations in the year incurred.
Net Income Per Share: Net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
after giving retroactive effect to stock dividends and splits. Net income per
share---assuming dilution is computed similar to net income per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. Included in the denominator is the dilutive effect of stock
options computed under the treasury method.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business
Bancorp has entered into off-balance- sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash and Cash Equivalents: For the purpose of presentation in the Statement of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."
Unaudited Interim Financial Data: The interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments, including
normal recurring accruals necessary for fair presentation of results of
operations for the interim periods included herein, have been made. The results
of operations for the nine months ended September 30, 2000, are not necessarily
indicative of results to be anticipated for the year ending December 31, 2000.
Recently Issued Accounting Standards: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133), was issued. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. Statement No. 137, issued June 1999,
defers the effective date of Statement No. 133 to all fiscal quarters of fiscal
years beginning after September 30, 2000. The Bancorp does not expect the
adoption of this Statement to have a material impact on its financial position
or results of operations.
F-14
<PAGE> 170
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS
Cash and due from banks include amounts Bancorp is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirements at December 31, 1998 and 1999 were $10,936,000
and $14,064,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1998 to secure the full performance
of all of Bancorp's payment obligations to MasterCard in connection with
Bancorp's MasterCard membership.
NOTE C--INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
-------- -------- -------- --------
Total available-for-sale $ 76,971 $ 1,191 $ 360 $ 77,802
======== ======== ======== ========
December 31, 1999:
Available-for-Sale
U.S. Government and agency securities $ 3,551 $ 14 $ 3,537
Municipal securities 19,614 $ 211 324 19,501
Collateralized mortgage obligations issued
by U.S. government agencies 87,316 233 652 86,897
Corporate bonds 625 625
Mortgage-backed securities 3,855 55 3,800
Equity securities 1,000 1,000
-------- -------- -------- --------
Total available-for-sale $115,961 $ 444 $ 1,045 $115,360
======== ======== ======== ========
</TABLE>
F-15
<PAGE> 171
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE C--INVESTMENT SECURITIES (Continued)
The maturities of investment securities at December 31, 1999 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------- --------
<S> <C> <C>
Amounts maturing in:
Three months or less $ 1,697 $ 1,697
Over three months through twelve months 11,999 12,021
After one year through three years 59,417 59,112
After three years through five years 13,458 13,411
After five years through fifteen years 18,715 18,605
After fifteen years 9,675 9,514
Equity securities 1,000 1,000
-------- --------
$115,961 $115,360
======== ========
</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.
Proceeds from sales of investment securities available-for-sale during 1997,
1998 and 1999 were $12,418,000, $445,550 and $6,986,000, respectively. Gross
gains and losses on those sales were $108,000 and $6,000 in 1997 and $32,000 and
$267,000 in 1999, respectively. There were no gains or losses on the investment
securities sold in 1998.
Investment securities with an amortized cost of approximately $3,000,000 and
$3,551,000 and an approximate market value of $3,013,000 and $3,537,000 at
December 31, 1998 and 1999, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $4,878,000 and
$2,593,000 and an approximate market value of $4,804,000 and $2,609,000 at
December 31, 1998 and 1999, respectively, were pledged to secure certain
deposits. Furthermore, investment securities with an amortized cost of
approximately $5,289,000 and $3,698,000 and an approximate market value of
$5,224,000 and $3,703,000 at December 31, 1998 and 1999, were pledged as
collateral for an advance from the Federal Home Loan Bank. In addition,
investment securities with an amortized cost of approximately $10,188,000 and
$24,186,000 and an approximate market value of $10,229,000 and $23,975,000 at
December 31, 1998 and 1999, respectively, were pledged to Visa and Mastercard to
secure the full performance of all of Bancorp's payment obligations to Visa and
Mastercard in connection with Bancorp's Visa and Mastercard membership.
F-16
<PAGE> 172
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE D--LOANS AND LEASES, NET
The components of loans and leases in the balance sheet were as follows at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Real estate--construction and land development $ 20,667 $ 22,118
Real estate--commercial and agricultural 80,197 99,053
Real estate--family and multifamily residential 27,549 43,038
Commercial, industrial and agricultural 33,981 39,295
Leases, net of unearned income of $1,896,000
and $1,203,000 in 1998 and 1999, respectively 9,867 17,202
Credit card receivables 5,672 3,456
Consumer loans, net of unearned income of
$1,000 in 1998 2,110 1,938
State and political subdivisions 1,512 707
Other 585 509
--------- ---------
182,140 227,316
Deferred loan fees (724 (987)
Allowance for loan and lease losses (3,055) (3,354)
--------- ---------
$ 178,361 $ 222,975
========= =========
</TABLE>
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1998 and 1999, follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Three months or less $ 71,990 $ 86,369
Over three months to twelve months 15,463 15,585
Over one year to three years 28,428 37,796
Over three years to five years 32,113 46,573
Over five years to fifteen years 21,979 23,797
Over fifteen years 11,856 16,429
--------- ---------
181,829 226,549
Nonaccrual loans 311 767
--------- ---------
$ 182,140 $ 227,316
========= =========
</TABLE>
At December 31, 1998 and 1999 approximately $1,348,000 and $45,000,
respectively, of Bancorp's credit card receivables were secured by savings
accounts.
F-17
<PAGE> 173
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE D--LOANS AND LEASES, NET (Continued)
At December 31, 1998, the recorded investment in loans for which impairment had
been recognized in accordance with Statement No. 114 totaled $338,000, with a
corresponding valuation allowance of $126,000. At December 31, 1999, the
recorded investment in loans for which impairment had been recognized totaled
$849,000, with a corresponding valuation allowance of $114,000. For the years
ended December 31, 1997, 1998 and 1999, the average recorded investment in
impaired loans was approximately $156,000, $515,000 and $892,000, respectively.
In 1997 and 1999, Bancorp recognized $5,000 and $3,000, respectively, of
interest on impaired loans (during the portion of the year that they were
impaired), all of which was recognized on the cash basis. In 1998, Bancorp
recognized $41,000 of interest on impaired loans (during the portion of the year
that they were impaired), of which $21,000 was related to impaired loans for
which interest was recognized on the cash basis.
In addition, at December 31, 1997 and 1998, Bancorp had other nonaccrual loans
of approximately $97,000 and $246,000 for which impairment had not been
recognized. If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately $5,000 in
1997, $16,000 in 1998 and $1,000 in 1999. Bancorp has no commitments to loan
additional funds to the borrowers of impaired or nonaccrual loans.
Bancorp receives fees for servicing retained on loans and leases sold. Loans and
leases being serviced by Bancorp for others were as follows at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Loans $ 123,232 $ 144,531 $ 163,672
Lease financing receivables 701 2
Credit cards 904
--------- --------- ---------
$ 124,837 $ 144,533 $ 163,672
========= ========= =========
</TABLE>
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>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Beginning balance $ 2,146 $ 2,371 $ 3,055
Provision for loan and lease losses 773 2,124 1,046
Credit cards charged off (475) (956) (614)
Leases charged off (124) (316) (148)
Loans charged off (211) (362) (314)
Credit card recoveries 87 105 209
Lease recoveries 34 24 9
Loan recoveries 141 65 111
--------- --------- ---------
Ending balance $ 2,371 $ 3,055 $ 3,354
========= ========= =========
</TABLE>
F-18
<PAGE> 174
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land $ 1,962 $ 2,265
Buildings and improvements 5,168 5,505
Furniture, fixtures and equipment 3,007 4,526
Leasehold improvements 203 310
-------- --------
10,340 12,606
Accumulated depreciation (2,390) (3,941)
-------- --------
7,950 8,665
Construction in progress 1,085
-------- --------
$ 7,950 $ 9,750
======== ========
</TABLE>
NOTE F--INVESTMENT IN EQUIPMENT LEASING COMPANY
The following information summarizes the activity of the equipment leasing
company recorded by the Bancorp using the equity method of accounting for the
years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Balance sheet
Assets $22,737 $26,943
======= =======
Liabilities $18,065 $21,356
Equity 4,672 5,587
------- -------
$22,737 $26,943
======= =======
Income statement
Revenues $ 3,280 $ 5,180
Expenses 2,679 4,291
------- -------
Net income 601 889
x 50% x 50%
------- -------
Bancorp's share of net income $ 300 $ 444
======= =======
</TABLE>
NOTE G--TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1998 and 1999, Bancorp recorded $739,000 and
$871,000, respectively, of servicing rights related to loans originated and
sold. Amortization of the servicing rights was $141,000 and $268,000 for the
years ended December 31, 1998 and 1999, respectively. The estimated fair value
of the
F-19
<PAGE> 175
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE G--TRANSFERS OF FINANCIAL ASSETS (Continued)
servicing assets aggregated $640,000 and $1,751,000 at December 31, 1998 and
1999, respectively. A valuation allowance is recorded where the fair value is
below the carrying amount of the servicing assets. No valuation allowance was
needed at December 31, 1998 or 1999.
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Negotiable order of withdrawal (NOW) $ 22,314 $ 29,789
Savings and money market 48,936 66,291
Time, $100,000 and over 46,355 68,061
Other time 69,478 103,966
-------- --------
$187,083 $268,107
======== ========
</TABLE>
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
NOW $ 190 $ 207 $ 193
Savings and money market 1,327 1,232 1,218
Time, $100,000 and over 1,803 2,412 2,627
Other time 3,653 3,714 3,986
------ ------ ------
$6,973 $7,565 $8,024
====== ====== ======
</TABLE>
The maturities of time deposits at December 31, 1999 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Three months or less $ 64,138
Over three months through twelve months 82,481
Over one year through three years 23,461
Over three years 1,947
--------
$172,027
========
</TABLE>
NOTE I--LINE OF CREDIT
Humboldt Bank and Capitol Valley Bank have uncommitted federal funds lines of
credit agreements with two financial institutions. The maximum borrowings
available under the lines totaled $10,500,000 and $500,000 for Humboldt Bank and
Capitol Valley Bank, respectively. Availability of the lines are subject to
federal funds balances available for loan and continued borrower eligibility.
These lines are intended to support short-term liquidity, and
F-20
<PAGE> 176
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE I--LINE OF CREDIT (Continued)
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 and 1999 there were
no borrowings outstanding under the agreements.
NOTE J--LONG-TERM DEBT
Humboldt Bank has three advances totaling $3,316,000 from the Federal Home Loan
Bank (FHLB) at December 31, 1999. The first advance totaling $732,000 is due in
monthly installments of principal and interest, at 6.19%, of approximately
$5,000 through February 15, 2004. The second advance of $1,000,000 is due at
maturity on December 31, 2007. Interest is due semi-annually at 6.18%. The third
advance totaling $1,584,000 is due in monthly installments of principal and
interest, at 6.08%, of approximately $14,000 through April 8, 2013. Investment
securities with an amortized cost of $3,698,000 and approximate fair value of
$3,703,000 at December 31, 1999, were held as collateral for these three
advances. Humboldt Bank also had loans with an approximate principal balance of
$2,214,000 at December 31, 1999 pledged as collateral for these advances.
Bancorp has a $2,000,000 unsecured note payable to another Bank. Interest is due
monthly at prime plus .5%, which was 9% at December 31, 1999, and principal is
due at maturity on March 1, 2001.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2004 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Humboldt
Bancorp Bank Total
------ ------- ------
<S> <C> <C> <C>
2000 $ 93 $ 93
2001 $2,000 99 2,099
2002 107 107
2003 114 114
2004 755 755
</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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Merchant credit card processing fees $ 3,906 $ 6,177 $13,178
Lease residuals and rentals 1,306 1,575 1,250
Credit card program fees 778 1,019 519
Equity in income of investment in leasing company 22 259 450
Fees for customer services 291 346 415
Earnings on life insurance 195 106 161
Loan and lease servicing fees 346 87 293
Other (none exceeding 1% of revenues) 67 162 386
------- ------- -------
$ 6,911 $ 9,731 $16,652
======= ======= =======
</TABLE>
F-21
<PAGE> 177
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Merchant credit card program $ 822 $ 2,665 $ 7,460
Professional and other outside services 1,342 1,122 1,446
Stationery, supplies and postage 887 884 955
Telephone and travel 478 598 870
Amortization of core deposit intangible 426 372 459
Credit card program 1,021 346 240
Data processing and ATM fees 170 324 299
Development 242 249 414
Advertising 265 247 412
FDIC and other insurance 164 186 217
Other (none exceeding 1% of revenues) 407 723 833
------- ------- -------
$ 6,224 $ 7,716 $13,605
======= ======= =======
</TABLE>
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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Currently payable
Federal $ 1,707 $ 2,063 $ 1,728
State 602 709 654
------- ------- -------
2,309 2,772 2,382
Deferred tax benefit
Federal (606) (353) (310)
State (206) (85) (119)
------- ------- -------
(812) (438) (429)
Tax benefit of exercised stock options
recorded as an addition to common stock 114 183 318
------- ------- -------
Net provision for income taxes $ 1,611 $ 2,517 $ 2,271
======= ======= =======
</TABLE>
F-22
<PAGE> 178
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE M--INCOME TAXES (Continued)
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Income tax at Federal statutory rate $ 1,655 $ 2,221 $ 2,338
State franchise tax, less federal
income tax benefit 348 467 492
Interest on municipal obligations exempt
from Federal tax (176) (227) (284)
Interest on enterprise zone loans exempt
from State tax (52) (38) (77)
Life insurance earnings and expenses (93) (55) (79)
Low income housing credits (165)
Deferred tax asset valuation allowance
change (99) 122
Other differences 28 27 46
------- ------- -------
Provision for income taxes $ 1,611 $ 2,517 $ 2,271
======= ======= =======
</TABLE>
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>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 929 $ 934
Nonqualified benefit plans 935 1,188
Deferred loan fees 298 359
State franchise taxes 241 222
Depreciation 593 675
Unrealized securities holding losses 247
Merchant Bankcard program 393 629
Core deposit intangible amortization 110 202
Organization costs 149
Other 201 139
------- -------
Total deferred tax assets 3,700 4,744
Valuation allowance for deferred tax assets (435) (435)
------- -------
Deferred tax assets recognized 3,265 4,309
Deferred tax liabilities:
Unrealized securities holding gains 346
Equity in income of subsidiaries 116 248
FHLB stock dividends 49 61
Other 78 301
------- -------
Total deferred tax liabilities 589 610
------- -------
Net deferred tax asset $ 2,676 $ 3,699
======= =======
</TABLE>
F-23
<PAGE> 179
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE M--INCOME TAXES (Continued)
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
Bancorp's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.
Income taxes (payable) receivable were $(141,000) and $398,000 at December 31,
1998 and 1999, respectively. The income tax expense (benefit) related to net
investment securities gains was $42,000 and $(97,000) during 1997 and 1999,
respectively. There were no net investment gains during 1998.
NOTE N--EARNINGS PER SHARE
The following is a computation of basic and diluted earnings per share for the
years ended December 31, which has been retroactively adjusted for stock
dividends and splits (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net income $ 3,258 $ 4,016 $ 4,607
========== ========== ==========
Weighted-average common shares outstanding 4,755,846 4,876,404 5,048,547
========== ========== ==========
Earnings per share $ .69 $ .82 $ .91
========== ========== ==========
Diluted:
Net income $ 3,258 $ 4,016 $ 4,607
========== ========== ==========
Weighted-average common shares outstanding 4,755,846 4,876,404 5,048,547
Net effect of dilutive stock options - based on the
treasury stock method using average market price 568,786 502,037 508,274
---------- ---------- ----------
Weighted-average common shares outstanding
and common stock equivalents 5,324,632 5,378,441 5,556,821
========== ========== ==========
Earnings per share - assuming dilution $ .61 $ .75 $ .83
========== ========== ==========
</TABLE>
Options to purchase 30,250 shares of common stock at $10.25 per share were
outstanding at December 31, 1997 and options to purchase 1,100 and 35,203 shares
of common stock at $13.52 per share and $14.32 per share, respectively, were
outstanding at December 31, 1999 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. All options outstanding at December 31, 1998
were included in the computation of diluted EPS.
F-24
<PAGE> 180
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE O--BENEFIT PLANS
Retirement Plan: Humboldt Bank has a defined contribution retirement plan
covering substantially all of the Bank's and Bancorp's employees. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $134,000
during 1997, $189,000 during 1998 and $223,000 during 1999.
Director Fee Plan: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each Bancorp director to elect to receive
his/her director's fees in the form of Bancorp common stock, cash, or a
combination of Bancorp common stock and cash, and to elect to defer the receipt
of any of the foregoing until the end of his/her term as a Bancorp director. If
deferral is elected, the amount of the director's fees shall be credited to an
account on behalf of the director, however, such crediting shall constitute a
mere promise on the part of the Bancorp to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the general claims of
creditors of Humboldt Bank and Bancorp. The Fee Plan provides for the issuance
of up to 40,000 shares of Bancorp common stock. The amount of such fees deferred
in 1997, 1998 and 1999 totaled $43,000, $58,000 and $86,000, respectively. At
December 31, 1998 and 1999, the liability for amounts due under this plan
totaled $110,000 and $196,000, respectively, or approximately 13,079 and 20,083
shares of stock.
Employee Stock Bonus Plan: Humboldt Bank has an Employee Stock Bonus Plan which
is funded annually at the sole discretion of the Board of Directors. Funds are
invested in Bancorp stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bancorp. The compensation cost recognized for 1997, 1998 and 1999 was $20,000,
$20,000 and $20,000, respectively. In addition, $100,000 was transferred from
the profit sharing plan into this Plan.
NOTE P--STOCK OPTION PLAN
The Bancorp has a stock-based compensation plan consisting of a fixed stock
option plan which is described below. The Bancorp applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for its stock option plan.
Had compensation cost for the Bancorp's stock option plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of SFAS No. 123, the Bancorp's net income and net income per share
would have been adjusted to the pro forma amounts indicated below (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net income
As reported $ 3,258 $ 4,016 $ 4,607
Pro forma 3,194 3,716 4,407
Net income per share
As reported .69 .82 .91
Pro forma .67 .76 .87
Net income per share--assuming dilution
As reported .61 .75 .83
Pro forma .60 .69 .80
</TABLE>
F-25
<PAGE> 181
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE P--STOCK OPTION PLAN (Continued)
The Bancorp has a stock option plan under which incentive and nonstatutory stock
options, as defined under the Internal Revenue Code, may be granted. Options
representing 456,255 shares of the Bancorp's no par value common stock may be
granted under the plan by the Board of Directors to directors, officers and key,
full-time employees at an exercise price not less than the fair market value of
the shares on the date of grant. In addition, 671,762 options are outstanding
that were granted by Humboldt Bank prior to the formation of the Bancorp.
Options may have an exercise period of not longer than 10 years and the options
are subject to a graded vesting schedule of 33% per year for incentive stock
options. Nonstatutory stock options vest immediately.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected life:
Incentive 10 years 10 years 10 years
Nonstatutory 10 years 10 years 10 years
Expected volatility 10.69% 10.69% 15.00%
Risk-free interest rate:
Incentive 6.24% 5.95% 6.50%
Nonstatutory 6.78% 5.20% 6.50%
</TABLE>
A summary of stock option activity, adjusted to give effect to stock dividends
in 1997, 1998 and 2000 and the 1999 stock split follows:
<TABLE>
<CAPTION>
Incentive Stock Options
-------------------------------------------------------------------------------------------
1997 1998 1999
-------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- -------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 2.81 508,682 $ 3.78 601,692 $ 4.08 531,352
Options granted 8.68 100,259 9.75 6,050 10.87 62,944
Options exercised 3.40 (4,274) 2.02 (75,031 2.26 (46,868)
Options expired 4.09 (2,975) 8.32 (1,359) 9.27 (307)
-------- -------- --------
Shares under option at
end of year 3.78 601,692 4.08 531,352 5.03 547,121
======== ======== ========
Options exercisable at
end of year 444,433 446,815 446,113
Weighted-average fair
value of options granted
during the year 4.04 4.37 5.36
</TABLE>
F-26
<PAGE> 182
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE P--STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
Nonstatutory Stock Options
-----------------------------------------------------------------------------------------------
1997 1998 1999
------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- -------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 3.27 531,714 $ 3.79 493,866 $ 4.33 452,562
Options granted 10.14 33,275 9.29 30,800 13.04 26,699
Options exercised 2.66 (71,123) 2.76 (72,104) 3.77 (71,592)
------- -------- --------
Shares under option at
end of year 3.79 493,866 4.33 452,562 5.56 407,669
======== ======== ========
Options exercisable at
end of year 493,866 452,562 407,669
Weighted-average fair value
of options granted
during the year 4.54 3.80 6.39
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
$1.95 to $3.57 609,224 4.0 years $ 2.94
$4.37 to $6.54 126,509 6.6 years 4.76
$9.09 to $11.59 182,754 8.5 years 6.43
$13.52 to $14.32 36,303 9.8 years 13.04
---------
$1.95 to $14.32 954,790 6.7 years 4.23
=========
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- ----------------
<S> <C> <C>
$1.95 to $3.57 609,223 $ 2.94
$4.37 to $6.54 114,055 5.28
$9.09 to $11.59 117,375 10.01
$13.52 to $14.32 33,129 14.29
-----------
$1.95 to $14.32 873,782 4.63
===========
</TABLE>
F-27
<PAGE> 183
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE Q--RELATED PARTY TRANSACTIONS
Bancorp has entered into transactions with its directors, executive officers and
their affiliates and subsidiaries of the Bancorp (related parties). The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Loans outstanding at beginning of year $ 6,218 $ 6,451
Loan disbursements 2,095 2,862
Loan repayments (1,862) (4,448)
------- -------
Loans outstanding at end of year $ 6,451 $ 4,865
======= =======
</TABLE>
At December 31, 1998 and 1999, commitments to related parties of approximately
$605,000 and $4,892,000 were undisbursed. Bancorp has issued letters of credit
on behalf of related parties totaling $2,270,000 at December 31, 1999.
Deposits received from directors and officers totaled $1,531,000 and $634,000 at
December 31, 1998 and 1999, respectively.
Bancorp made payments totaling $50,000 in 1997, $73,000 in 1998 and $77,000 in
1999 to a travel business owned by a director. Payments under contracts with
directors' companies for premises remodeling, repair and engineering services
totaled $14,800 in 1997, $32,000 in 1998 and $33,000 in 1999. Bancorp purchased
computer equipment and office furniture from businesses owned by members of
executive officers' immediate families totaling $17,000 in 1997 and $20,000 in
1998. Bancorp paid fees for payroll services and other miscellaneous expenses
totaling $11,000 in 1997 and $4,000 in 1998 to a business with which a director
is associated. In 1997, Bancorp entered into a long term lease for a branch
office with a company owned by a director. Payments on this lease during 1997,
1998 and 1999 totaled $13,000, $31,000 and $37,000. In 1999, Bancorp purchased a
branch that leases its facility from a company owned by a director. Payments on
this lease during 1999 totaled $24,000.
Humboldt Bank and Capitol Valley Bank routinely participate in loan
transactions. At December 31, 1999, the outstanding loan balances purchased from
Humboldt Bank by Capitol Valley Bank was $2,649,000 and the outstanding loan
balances purchased from Capitol Valley Bank by Humboldt Bank was $2,760,000.
Humboldt Bank provides loan support and performs loan servicing for Capitol
Valley Bank. The amount of loans serviced by Humboldt Bank at December 31, 1999
totaled $13,358,000.
Bancorp purchases leases that are originated by its subsidiary, Bancorp
Financial Services. These outstanding lease receivable balances, net of unearned
interest, totaled $5,403,000 and $12,534,000 at December 31, 1998 and 1999,
respectively. In addition, Humboldt Bank has entered into a $3.8 million line of
credit with Bancorp Financial Services, which expires May 2, 2000 and bears
interest at the prime rate plus .50% (currently 9%) per annum.
F-28
<PAGE> 184
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES
Postemployment Benefit Plans and Life Insurance Policies: Bancorp has purchased
single premium life insurance policies in connection with the implementation of
salary continuation and deferred compensation plans for certain key employees.
The policies provide protection against the adverse financial effects from the
death of a key employee and provide income to offset expenses associated with
the plans. The specified employees are insured under the policies, but the
Bancorp is the owner and beneficiary. At December 31, 1998 and 1999, the cash
surrender value of these policies totaled approximately $4,943,000 and
$5,157,000, respectively.
The plans are unfunded and provide for Bancorp to pay the employees specified
amounts for specified periods after retirement and allow the employees to defer
a portion of current compensation in exchange for the Bancorp's commitment to
pay a deferred benefit at retirement. If death occurs prior to or during
retirement, Bancorp will pay the employee's beneficiary or estate the benefits
set forth in the plans.
At December 31, 1998 and 1999, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $2,038,000 and $2,716,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of Bancorp. Otherwise no benefits are paid upon termination. Deferred
compensation is vested as to the amounts deferred. In the event of death or
under certain other circumstances, Bancorp is contingently liable to make future
payments greater than the amounts recorded as liabilities. Based on present
circumstances, Bancorp does not consider it probable that such a contingent
liability will be incurred or that in the event of death, such a liability would
be material after consideration of life insurance benefits.
Lease Commitments: Bancorp leases eight sites under noncancelable operating
leases expiring in May 2000, September 2000, October 2000, November 2000,
February 2006, September 2007, October 2008 and June 2009. The lease expiring
May 2000 includes an option to renew for two additional five-year terms, with
the monthly rental being adjusted to the fair market rental value. The lease
expiring November 2000 includes an option to extend the lease for an additional
term of one year. The lease expiring in February 2006 requires adjustments to
the base rent after two years for changing price indices with a maximum annual
increase of five percent and includes an option to renew for two consecutive
five-year terms. The lease expiring September 2007 is renewable for two
consecutive five-year periods and requires adjustment every September 1 based on
changing price indices but not less than 2% nor more than 10%. The lease
expiring October 2008 requires annual adjustments to the base rent every
November 3 of the greater of 2% or the percentage increase in the Consumer Price
Index and includes an option to extend the term of the lease for three
consecutive five-year terms. The lease expiring June 2009 requires scheduled
adjustments to the base rent every two years and includes an option to renew for
two consecutive five-year terms.
As of December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Lease
Commitment
----------
<S> <C>
Year ended December 31:
1999 $ 414
2000 356
2001 361
2002 367
2003 372
Thereafter 1,401
------
Total minimum lease commitments $3,271
======
</TABLE>
F-29
<PAGE> 185
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
$128,000, $269,000 and $401,000, respectively. Sublease rental income was $4,000
in 1997.
Financial Instruments with Off-Balance-Sheet Risk: Bancorp's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of Bancorp's commitments and contingent
liabilities at December 31, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Contractual Amounts
1998 1999
------- -------
<S> <C> <C>
Commitments to extend credit $42,200 $62,256
Credit card arrangements 12,299 9,256
Standby letters of credit 5,240 3,951
</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. Bancorp's credit policies and procedures for credit commitments
and financial guarantees are the same as those for extension of credit that are
recorded on the balance sheet. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to Bancorp.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Bancorp evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, certificates of deposits and
income-producing commercial properties. At December 31, 1998 and 1999,
approximately $1,300,000 and $157,000, respectively, of Bancorp's undisbursed
credit card commitments were secured by deposit accounts.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees extending more
than two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers.
Bancorp holds assigned deposit accounts as collateral supporting those
commitments for which collateral is deemed necessary. The extent of collateral
held for those commitments at December 31, 1998 and 1999 varies from zero to
100%; the average amount collateralized is approximately 92% in 1998 and 83% in
1999. None of these letters of credit were utilized during 1998 or 1999.
Bancorp has not incurred any losses on its commitments in 1997, 1998 or 1999.
F-30
<PAGE> 186
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Merchant Credit and Debit Card Sales Processing: Bancorp processes the
settlement of credit and debit card sales for merchants located throughout the
continental United States, Alaska, Hawaii and Puerto Rico. The process involves
collecting funds from the card issuing bank and crediting the merchant accounts
in exchange for a merchant discount and other processing fees. The more
significant areas of risk associated with this process includes the risk that
funds due from the card issuing bank will be uncollectible, that significant
fines may be assessed for violations of VISA or MasterCard rules or that the
merchant will be unable to absorb chargebacks, deliver products due to
insolvency or may commit fraud. To protect Bancorp from losses, merchant
deposits of $46,969,000 at December 31, 1998 and $54,153,000 at December 31,
1999 have been established by withholding a percentage of merchant processing
volume. Bancorp has incurred approximately $18,000 and $127,000 in losses during
1998 and 1999, respectively. No losses were incurred in 1997. Bancorp processed
approximately $2.2 billion and $2.9 billion of credit and debit card sales for
merchants during 1998 and 1999, respectively. Bancorp markets its merchant
bankcard services through five independent service and marketing organizations
(ISO's). Those five ISO's represent $2.8 billion of Bancorp's credit and debit
card sales during 1999. In addition, the merchant bankcard services are
regulated by VISA. At this time Bancorp does not believe it is in complete
compliance with the VISA requirements and is seeking a waiver. If the waiver is
not obtained, Bancorp would need to restructure its merchant bankcard
operations, which would adversely affect Bancorp's revenues for these services.
Legal Proceedings: Bancorp is a party to claims and legal proceedings arising in
the ordinary course of business. After taking into consideration information
furnished by legal counsel to the Bancorp as to the current status of various
claims and proceedings to which Bancorp is a party, management is of the opinion
that the ultimate aggregate liability represented thereby, if any, will not have
a material adverse effect on the financial position or results of operations of
the Bancorp.
NOTE S--CONCENTRATIONS OF CREDIT RISK
Most of Bancorp's business activity is with customers located within the State
of California, primarily in Northern California except for the merchant credit
card debit card sales processing as discussed in Note R. The economy of Humboldt
Bank's primary service area is heavily dependent on the area's major industries
which are timber, commercial fishing, agriculture and tourism. General economic
conditions or natural disasters affecting the primary service area or its major
industries could affect the ability of customers to repay loans and the value of
real property used as collateral.
In addition to the types of loans as set forth in Note D, Bancorp has
concentrations in out-of-area participation loans, motel loans, commercial real
estate and construction loans. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters of credit
were granted primarily to commercial borrowers. Bancorp, as a matter of policy,
does not extend credit to any single borrower or group of related borrowers on a
secured basis in excess of 25% of its unimpaired capital (shareholders' equity
plus the allowance for loan and lease losses) and on an unsecured basis in
excess of 15% of its unimpaired capital.
Bancorp places its cash investments primarily in financial instruments backed by
the U.S. Government and its agencies or by high quality financial institutions
or corporations. At December 31, 1998 and 1999, approximately 9% and 63%,
respectively, of Bancorp's net worth was invested in federal funds sold to a New
York bank. In addition, at December 31, 1999, Bancorp had deposits in federally
insured banks in excess of federally insured limits by $4,196,000.
F-31
<PAGE> 187
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE T--REGULATORY MATTERS
Generally, the primary source of cash for the Bancorp will be dividends received
from its subsidiaries. Banking regulations limit the amount of cash dividends
that may be paid without prior approval of Humboldt Bank and Capitol Valley
Bank's regulatory agency. Cash dividends are limited to the lesser of retained
earnings, if any, or net income for the last three years, net of the amount of
any other distributions made to shareholders during such periods. As of December
31, 1999, $6,217,000 was available for cash dividend distributions for Humboldt
Bank without prior approval. Capitol Valley Bank could not declare dividends at
December 31, 1999 without prior approval from the regulatory agency.
Bancorp and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minium capital requirements can initiate certain mandatory---and possible
additional discretionary---actions by regulators that, if undertaken, could have
a direct material effect on the Bancorp's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bancorp and its subsidiaries must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
These capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that Bancorp
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bancorp and its subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized Bancorp must maintain minimum total
risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category. The Bancorp and its
subsidiaries' actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------- ------ --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Consolidated $28,915 13.00% > $17,798 > 8.0%
- -
Humboldt Bank $25,683 11.66% > $17,617 > 8.0% > $22,022 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $26,131 11.75% > $8,899 > 4.0%
- -
Humboldt Bank $22,931 10.41% > $8,809 > 4.0% > $13,213 > 6.0%
- - - -
Tier I Capital
(to Average Assets)
Consolidated $26,131 8.12% > $12,878 > 4.0%
- -
Humboldt Bank $22,931 7.23% > $12,690 > 4.0% > $15,863 > 5.0%
- - - -
</TABLE>
F-32
<PAGE> 188
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE T--REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------- ------ --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)
Consolidated $34,666 12.07% $22,984 > 8.0%
-
Humboldt Bank $29,454 11.05% $21,354 > 8.0% $26,692 > 10.0%
- -
Capitol Valley Bank $ 3,683 20.29% $ 1,452 > 8.0% $ 1,816 > 10.0%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $31,312 10.90% $11,492 > 4.0%
-
Humboldt Bank $26,181 9.82% $10,677 > 4.0% $16,015 > 6.0%
- -
Capitol Valley Bank $ 3,602 19.84% $ 726 > 4.0% $ 1,089 > 6.0%
- -
Tier I Capital
(to Average Assets)
Consolidated $31,312 7.50% $16,689 > 4.0%
-
Humboldt Bank $26,181 6.61% $15,844 > 4.0% $19,805 > 5.0%
- -
Capitol Valley Bank $ 3,602 19.82% $ 727 > 4.0% $ 909 > 5.0%
- -
</TABLE>
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1998 and 1999 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 1999 for Humboldt Bancorp (parent company only) are
presented as follows (dollars in thousands):
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------
1998 1999
------- -------
<S> <C> <C>
Assets
Cash $ 805 $ 757
Investment in subsidiaries 24,162 32,922
Investment in leasing company 2,281 2,731
Other assets 197 453
------- -------
$27,445 $36,863
======= =======
Liabilities
Borrowed funds $ 2,000
Other liabilities $ 83 370
Stockholders' equity
Common stock 25,877 28,405
Retained earnings 1,485 6.088
------- -------
$27,445 $36,863
======= =======
</TABLE>
F-33
<PAGE> 189
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividends from subsidiaries $ 2,085 $ 2,500
Reimbursement from subsidiaries of allocated expenses 2,210
Other income $ 2 3 7
Expenses (24) (87) (3,227)
------- ------- -------
(Loss) income before taxes (22) 2,001 1,490
Tax benefit (expense) 106 (51) 307
------- ------- -------
Income before equity in income of subsidiaries and
leasing company 84 1,950 1,797
Equity in undistributed income of subsidiaries and
leasing company 3,174 2,066 2,810
------- ------- -------
Net income $ 3,258 $ 4,016 $ 4,607
======= ======= =======
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,258 $ 4,016 $ 4,607
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in undistributed income of subsidiaries
and leasing company (3,174) (2,066) (2,810)
Dividend of Humboldt Bank's investment in leasing
company to Bancorp (2,085)
Amortization 4 4 9
Increase in other assets (188) (265)
Increase in other liabilities 83 287
------- ------- -------
Net cash provided (used) by operating activities 88 (236) 1,828
Investing activities:
Investment in Capitol Valley Bank (4,500)
Investment in Humboldt Bank (1,900)
Reimbursement from subsidiary 114 183 319
------- ------- -------
Net cash provided (used) by investing activities 114 183 (6,081)
</TABLE>
F-34
<PAGE> 190
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Financing activities:
Proceeds from note payable $ 2,000
Cash paid for fractional shares $ (5) $ (8) (4)
Proceeds from issuance of common stock 203 362 2,209
------- ------- -------
Net cash provided by financing activities 198 354 4,205
------- ------- -------
Net increase (decrease) in cash 400 301 (48)
Cash at beginning of year 104 504 805
------- ------- -------
Cash at end of year $ 504 $ 805 $ 757
======= ======= =======
</TABLE>
NOTE V--BANCORP ACQUISITION OF SILVERADO MERGER CORPORATION
In September 1999, Bancorp acquired all of the outstanding shares of Silverado
Merger Corporation for 49,502 shares of Bancorp restricted common stock and
warrants to purchase up to 99,000 shares of Bancorp stock for $10.91 per share.
Bancorp has the right to repurchase the 49,502 shares of common stock for $.91
each, and the warrants to purchase up to 99,000 shares of common stock for
$10.91 per share cannot become exercisable, in the event Capitol Valley Bank
fails to achieve certain business objectives by December 31, 2001. Until the
contingencies related to the issuance of the restricted stock and warrants are
resolved, the amount recorded for this transaction will be a liability of
$45,002 and the stock and warrants issued will not be included in per share
information. The fair value as of the merger date of the stock and warrants
issued to the Silverado Merger Corporation stockholders will be recorded as an
additional cost of the acquisition if all the requirements of the acquisition
agreement are achieved. Otherwise, the 49,502 shares of restricted stock will be
repurchased for $.91 per share and the warrants will expire. As part of the
acquisition agreement, some shareholders and supporters of Silverado Merger
Corporation purchased $1.6 million of Bancorp restricted common stock at $12.00
per share pursuant to a private placement. Silverado has no operations, and all
of its obligations and liabilities were extinguished prior to consummation of
the merger. Therefore, Silverado's financial statements at the time of the
merger were immaterial.
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underling value of the Bancorp as a
whole.
F-35
<PAGE> 191
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 28,626 $ 28,626 $ 31,339 $ 31,339
Interest-bearing deposits in other banks 3,020 3,020 20 20
Federal funds sold 2,250 2,250 21,375 21,375
Investment securities 77,802 77,802 115,360 115,360
Loans and leases held for sale 7,677 7,731 2,147 2,149
Loans and lease financing receivables, net 178,361 178,386 222,975 222,114
Accrued interest receivable 1,779 1,779 2,147 2,147
Cash surrender value of life insurance 4,943 4,943 5,157 5,157
Financial liabilities:
Deposits 283,967 283,997 378,630 378,655
Accrued interest payable 306 306 678 678
Long-term debt 3,402 3,402 5,316 5,316
</TABLE>
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating its
fair value disclosures for financial instruments:
Cash and due from banks, interest-bearing deposits in other banks and
federal funds sold: The carrying amount is a reasonable estimate of fair
value.
Investment securities: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. The carrying amount of accrued interest
receivable approximates its fair value.
Loans and leases held for sale: Fair values for loans and leases held
for sale are based on quoted market prices or dealer quotes. If a quoted
price is not available, fair value is estimated using quoted market
prices for similar loans or leases.
Loans and lease financing receivables, net: For variable-rate loans that
reprice frequently and fixed rate loans that mature in the near future,
with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other fixed rate loans are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Bancorp's lease portfolio has relatively high
fixed rates that usually do not fluctuate with market changes and,
therefore, the carrying amount is a reasonable estimate of the fair
value. Loan and lease fair value estimates include judgments regarding
future expected loss experience and risk characteristics and are
adjusted for the allowance for loan and lease losses. The carrying
amount of accrued interest receivable approximates its fair value.
F-36
<PAGE> 192
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Cash surrender value of life insurance: The carrying amount approximates
its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits. The
carrying amount of accrued interest payable approximates fair value.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar debt instruments.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit, credit card arrangements and standby
letters of credit. The contract or notional amounts of Bancorp's
financial instruments with off-balance-sheet risk are disclosed in Note
R. Estimating the fair value of these financial instruments is not
considered practicable due to the immateriality of the amounts of fees
collected, which are used as a basis for calculating the fair value, on
such instruments.
NOTE X--SUBSEQUENT EVENTS
Bancorp has entered into a merger agreement with Global Bancorp, a California
bank holding company that owns Capitol Thrift and Loan Association, a California
industrial loan company with 10 branches located throughout California. Under
the merger agreement, Capitol Thrift will become a wholly-owned subsidiary of
Bancorp. The acquisition is subject to conditions including approval by the
shareholders of Global Bancorp, regulatory approval, and the completion of a
stock offering. The estimated purchase price of Global Bancorp will be $16.5
million, $11.8 million of which will be in cash and $4.7 million of which will
be a contingent payment in the form of a promissory note due on January 30, 2002
bearing interest at 8%, that is contingent on future events and can be adjusted
upward or downward based on criteria set forth in the merger agreement. The
merger will be accounted for as a purchase. If either party fails to complete
the acquisition for certain specified reasons, a termination fee of $250,000 to
$350,000 could be imposed.
In February 2000, Bancorp filed a registration statement for the sale of a
minimum of 320,000 shares of common stock at $12.50 per share. Bancorp intends
to use the proceeds to assist in the purchase of Global Bancorp. Bancorp
incurred $238,000 of costs related to the stock offering as of December 31,
1999. These costs are recorded as an other asset and are expected to be netted
against the proceeds raised upon successful completion of the stock offering. In
addition, Bancorp intends to acquire additional capital of $5 million by the
issuance of subordinated debentures at an estimated rate of 10.875% per annum.
In 1998, Bancorp purchased a building and land for approximately $2.9 million.
Bancorp intends to renovate the property so that all of Bancorp's administrative
offices and departments will be centrally located. The estimated cost of the
renovation is $3.3 to $3.9 million. At December 31, 1999, approximately $1.1
million in costs have been incurred for design work. Upon its completion,
Bancorp has an agreement to lease a portion of the facility to a local agency in
exchange for approximately $27,000 per month.
F-37
<PAGE> 193
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE X--SUBSEQUENT EVENTS (Continued)
On January 11, 2000, Bancorp's Board of Directors declared a 10% stock dividend
on outstanding common stock to be distributed on February 7, 2000, to holders of
record on January 28, 2000. As a result of the dividend, 472,879 shares of
common stock will be distributed and fractional shares will be purchased at
$12.727 per share. All per share data and computations have been retroactively
adjusted to reflect the stock dividend.
NOTE Y--OPERATING SEGMENTS
Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose
operating results are regularly reviewed by the organization's decision makers
and whose revenue from external customers is 10 percent or more of total
revenue. The Bancorp has two reportable segments under this definition, retail
banking and credit card operations. The retail banking segment provides
traditional banking services such as checking, savings, IRA and Keogh accounts,
time certificates of deposit, loans, and lease financings. The credit card
segment processes the settlement of credit and debit card sales for merchants
and issues and maintains credit card accounts for its customers. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each segment receives an allocation of
administrative expenses. The Bancorp evaluates performance based on profit or
loss from operations before income taxes. The Bancorp's reportable segments are
strategic business units that provide different services that are carried out by
separate departments. Included in the retail banking segment are all other
operations of the Bancorp, which include an investment in an equipment leasing
company.
The following table includes segment profit, including certain revenues and
expenses, and segment assets (in thousands) of and for the year ended:
<TABLE>
<CAPTION>
Retail Credit Card
Banking Operations Total
-------- -------- --------
<S> <C> <C> <C>
December 31, 1998:
Revenue from external customers $ 3,524 $ 8,304 $ 11,828
Interest revenue 22,339 1,165 23,504
Interest expense 7,593 149 7,742
Depreciation and amortization 2,886 217 3,103
Segment profit, before taxes 4,444 2,089 6,533
Other significant non-cash items:
Additions to reserves for potential losses 1,240 1,183 2,423
Segment assets 262,301 57,674 319,975
Investment in equity method investees 2,281 2,281
</TABLE>
F-38
<PAGE> 194
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE Y--OPERATING SEGMENTS (Continued)
<TABLE>
<CAPTION>
Retail Credit Card
Banking Operations Total
-------- -------- --------
<S> <C> <C> <C>
December 31, 1999:
Revenue from external customers $ 4,071 $ 14,992 $ 19,063
Interest revenue 24,612 628 25,240
Interest expense 8,163 182 8,345
Depreciation and amortization 2,987 273 3,260
Segment profit, before taxes 2,691 4,187 6,878
Other significant non-cash items:
Additions to reserves for potential losses 686 832 1,636
Segment assets 361,543 62,106 423,649
Investment in equity method investees 4,063 4,063
</TABLE>
F-39
<PAGE> 195
TEHAMA BANCORP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 21,174,869 $ 17,157,451
Investment securities (market value of $38,026,000 at
September 30, 2000 and $38,400,500 at December 31, 1999) 38,010,254 38,513,743
Loans, less allowance for loan losses of $2,382,671 at
September 30, 2000 ($2,148,074 at December 31, 1999) 166,933,158 143,025,745
Bank premises and equipment, net 2,574,783 2,716,042
Other real estate 167,693 35,986
Investment in leasing company 4,136,402 2,793,416
Investment in Class C Lease-Backed Notes 2,042,693 --
Accrued interest receivable and other assets 8,030,334 7,551,742
------------- -------------
TOTAL ASSETS $ 243,070,186 $ 211,794,125
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 51,321,987 $ 50,686,125
Interest bearing 158,469,115 137,781,272
------------- -------------
Total deposits 209,791,102 188,467,397
Short-term borrowings 7,000,000 2,100,000
Long-term borrowings 2,539,904 --
Accrued interest payable and other liabilities 2,404,160 2,588,756
------------- -------------
Total liabilities 221,735,166 193,156,153
------------- -------------
Commitments
Shareholders' equity
Preferred stock - no par value; 2,000,000 shares
authorized; none issued -- --
Common stock - no par value; 4,000,000 shares
authorized; 1,896,140 shares issued and outstanding
at September 30, 2000 (1,884,750 at December 31, 1999) 15,543,434 15,413,603
Retained earnings 6,366,737 4,077,990
Accumulated other comprehensive loss (575,151) (853,621)
------------- -------------
Total shareholders' equity 21,335,020 18,637,972
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 243,070,186 $ 211,794,125
============= =============
</TABLE>
See accompanying notes.
F-40
<PAGE> 196
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended,
September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $10,435,003 $ 8,079,580
Interest on Federal funds sold 14,892 332,618
Interest on investment securities:
Taxable 1,267,784 1,411,750
Exempt from Federal income taxes 430,281 464,903
Other Interest income 83,156 --
----------- -----------
Total interest income 12,231,116 10,288,851
----------- -----------
Interest expense on deposits 4,598,864 3,794,720
Interest on short-term and long-term borrowings 381,506 5,312
----------- -----------
Total interest expense 4,980,370 3,800,032
----------- -----------
Net interest income 7,250,746 6,488,819
Provision for loan losses 700,000 1,025,000
----------- -----------
Net interest income after
provision for loan losses 6,550,746 5,463,819
----------- -----------
Non-interest income:
Service charges 694,718 573,405
Merchant processing fees 640,000 832,419
Gain on sale of loans 155,757 168,261
Automatic teller machine servicing fees 747,084 250,419
Loan packaging fees 79,646 216,816
Undistributed income from investment 323,020 287,799
Other income 380,943 380,651
----------- -----------
Total non-interest income 3,021,168 2,709,770
----------- -----------
Non-interest expense:
Salaries and employee benefits 3,098,300 3,143,336
Occupancy 897,540 760,258
Other 2,256,853 2,219,504
----------- -----------
Total non-interest expense 6,252,693 6,123,098
----------- -----------
Income before income taxes 3,319,221 2,050,491
Income taxes 1,026,400 566,900
----------- -----------
Net income $ 2,292,821 $ 1,483,591
=========== ===========
Basic earnings per share $ 1.21 $ 0.79
=========== ===========
Diluted earnings per share $ 1.18 $ 0.79
=========== ===========
Weighted average number of
shares outstanding 1,887,465 1,867,549
=========== ===========
Weighted average number of shares
outstanding including common
stock equivalents 1,944,553 1,867,549
=========== ===========
</TABLE>
See accompanying notes.
F-41
<PAGE> 197
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------ ------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,292,821 $ 1,483,591
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 700,000 1,025,000
Depreciation and amortization 378,219 305,303
Deferred loan origination (costs) fees, net (274,291) 309,744
Increase in interest receivable and other assets (969,528) (1,275,920)
(Decrease) increase in interest payable and other liabilities (184,596) 752,302
Undistributed earnings of investment in leasing company (323,020) (287,799)
------------ ------------
Net cash provided by operating activities 1,619,605 2,312,221
------------ ------------
Cash flows from investing activities:
Net increase in maturities, purchases and sales of
investment securities 956,681 5,533,613
Net increase in loans (24,198,118) (17,940,224)
Purchases of other real estate (16,609) --
Purchases of premises and equipment (191,064) (490,690)
Investment in Class C Lease-Backed Notes (2,375,655) --
Proceeds from investment in Class C Lease-Backed Notes 332,962 --
Investment in leasing company (999,750) --
------------ ------------
Net cash used in investing activities (26,491,553) (12,897,301)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
and savings accounts 15,442,466 12,512,159
Net increase (decrease) in time deposits 5,881,239 (10,077,339)
Net increase in short-term borrowings 4,900,000 --
Borrowings under long-term debt agreement 2,907,655 --
Payments on long-term borrowings (367,751) --
Payments of cash dividends -- (853,979)
Payments for fractional shares (4,074) --
Retirement of common stock -- (236,647)
Proceeds from exercise of stock options 129,831 492,445
------------ ------------
Net cash provided by financing activities 28,889,366 1,836,639
------------ ------------
Increase (decrease) in cash and cash equivalents 4,017,418 (8,748,441)
Cash and cash equivalents at beginning of period 17,157,451 22,762,664
------------ ------------
Cash and cash equivalents at end of period $ 21,174,869 $ 14,014,223
============ ============
</TABLE>
See accompanying notes.
F-42
<PAGE> 198
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A Basis of Presentation
The financial information included herein is unaudited (although the
12/31/99 data is derived from audited financial statements), but has been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary
to a fair presentation of the financial position, results of operations, changes
in shareholder equity, and cash flows for the interim periods presented.
Certain information and footnotes required by generally accepted
accounting principles for annual financial statements are not included in these
interim financial statements. Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K. Operating results for the three months and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000.
Tehama Bancorp was incorporated on January 15, 1997 and consumated a
merger with Tehama Bank on June 30, 1997. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary Tehama Bank,
and a 50% interest in Bancorp Financial Services, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
Note B Agreement and Plan of Reorganization and Merger
On September 20, 2000, Tehama Bancorp and Humboldt Bancorp announced the
signing of a definitive Agreement and Plan of Reorganization and Merger (the
"Agreement") under which Humboldt Bancorp will acquire all of the outstanding
shares of common stock of Tehama Bancorp pursuant to a tax-free exchange of
shares. The Agreement, which has been approved unanimously by the Boards of
Directors of both companies, is subject to conditions customary to transactions
of this type, including approval by the shareholders of both Humboldt Bancorp
and Tehama Bancorp, approval by bank regulatory authorities, and satisfaction of
certain other terms and conditions. The merger will be accounted for under the
pooling-of-interests method of accounting.
Under the terms of the Agreement, Tehama shareholders will receive 1.775
shares of Humboldt common stock for each Tehama Bancorp share. The value to
Tehama Shareholders will vary if the price of Humboldt Bancorp shares goes down
within an established range before closing; however, in no event will Tehama
shareholders receive less than $17.47 per share. There will be no change to the
exchange formula if the price of Humboldt Bancorp shares goes up; shareholders
of both companies will share in any appreciation of the price of Humboldt
Bancorp stock at closing. Shareholders of Tehama are expected to acquire
approximately 37% of the shares of the combined companies, and the board of
directors following the merger will consist of seven members from the current
Humboldt Bancorp board and four members from the current Tehama Bancorp board.
At December 31, 1999, and June 30, 2000, Humboldt reported total assets
of approximately $423.6 and $575.3 million, shareholders' equity of
approximately $34.1 and $44.3 million and net income of approximately $4.6 and
$2.8 million, respectively. At December 31, 1999, and June 30, 2000, Tehama had
approximately $211.8 and $233.4 million in assets, shareholders' equity of
approximately $18.6 and $20.1 million and net income of approximately $2.2 and
$1.4 million, respectively.
Note C Earnings per Share
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
Diluted earnings per share is computed by dividing net income by the weighted
average of common shares outstanding including common stock equivalents of
options.
Note D New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
which was subsequently amended in June 1999 by FASB Statement No. 137 and in
June 2000 by FASB Statement No. 138. FASB Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that entities recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
FASB Statement No.
F-43
<PAGE> 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
137 deferred the required adoption date to fiscal quarters of all fiscal years
beginning after June 15, 2000. FASB Statement No. 138 addresses certain issues
causing difficulties in implementing FASB Statement No. 133. The implementation
of these pronouncements is not expected to have a material effect on the
Company's financial statements.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This statement replaces FASB Statement No. 125
and revises certain of the standards for accounting for securitizations and
other transfers of financial assets and collateral and their related
disclosures. However, most of the provisions of FASB Statement No. 125 were
carried over without reconsideration. The statement will be applied
prospectively and is effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. In management's opinion, adoption
of this statement will not be material to the Company's financial position or
results of operations.
Note E Dividends
On March 16, 2000, the Board of Directors declared a 10% stock dividend
payable May 15, 2000 to shareholders of record on April 10, 2000. The dividend
resulted in a charge to retained earnings in the amount of $2,223,728, which was
based on the estimated fair value of the Company's common stock. In connection
with the 10% stock dividend, the Company increased the number of stock options
under its stock option plans by 10% and reduced the exercise prices accordingly.
All references to weighted average shares outstanding, per share amounts, option
shares, and exercise prices included in the accompanying consolidated financial
statements and notes reflect the 10% stock dividend and its retroactive effect.
Note F Segment Information
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management. Generally, financial information is reported on the basis that it is
used internally for evaluating segment performance and in deciding how to
allocate resources to segments.
The Company has four reportable segments: Retail and Commercial Banking,
Merchant Card Processing, ATM Cash Services, and Bancorp. The Retail and
Commercial Banking segment offers a diverse range of traditional loan and
deposit products and services to individuals and businesses. The Merchant Card
Processing segment is responsible for the processing of third-party credit card
transactions. The ATM Cash Services segment is responsible for servicing third
party ATM machines. The Bancorp segment represents the activity at the Bank's
holding company, which primarily consists of the Company's share of net income
from its joint venture in a leasing company Bancorp Financial Services, Inc.
The accounting policies of the segments are the same as those described Note A.
F-44
<PAGE> 200
The following table includes selected financial information for the three months
ended September 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
---------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Three Months Ended September 30, 2000
Interest income $ 4,289 $ -- $ -- $ 58 $ 4,347
Interest expense 1,886 -- -- 49 1,935
Provision for loan and lease losses 100 -- -- -- 100
Non-interest income 498 224 350 50 1,122
Depreciation expense 110 1 4 -- 115
Other non-interest expense 1,484 151 285 26 1,946
Income before income taxes 1,207 72 61 33 1,373
Segment assets $223,605 $ 6 $12,970 $6,489 $243,070
Three Months Ended September 30, 1999
Interest income $ 3,478 $ -- $ -- $ -- $ 3,478
Interest expense 1,209 -- -- -- 1,209
Provision for loan and lease losses 300 -- -- -- 300
Non-interest income 519 253 168 91 1,031
Depreciation expense 89 1 3 -- 93
Other non-interest expense 1,875 79 63 61 2,078
Income before income taxes 524 173 102 30 829
Segment assets $202,035 $ 13 $ 6,768 $2,978 $211,794
</TABLE>
The following table includes selected financial information for the nine months
ended September 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
---------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
Interest income $ 12,148 $ -- $ -- $ 83 $ 12,231
Interest expense 4,913 -- -- 67 4,980
Provision for loan and lease losses 700 -- -- -- 700
Non-interest income 1,256 689 747 329 3,021
Depreciation expense 331 2 11 -- 344
Other non-interest expense 4,697 426 689 97 5,909
Income before income taxes 2,763 261 47 248 3,319
Segment assets $223,605 $ 6 $12,970 $6,489 $243,070
Nine Months Ended September 30, 1999
Interest income $ 10,289 $ -- $ -- $ -- $ 10,289
Interest expense 3,800 -- -- -- 3,800
Provision for loan and lease losses 1,025 -- -- -- 1,025
Non-interest income 1,330 841 251 288 2,710
Depreciation expense 260 3 8 -- 271
Other non-interest expense 5,331 175 203 144 5,853
Income before income taxes 1,203 663 40 144 2,050
Segment assets $202,035 $ 13 $ 6,768 $2,978 $211,794
</TABLE>
F-45
<PAGE> 201
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Tehama Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Tehama
Bancorp and subsidiary as of December 31, 1998 and 1999, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tehama Bancorp and subsidiary as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Perry - Smith LLP
February 3, 2000, except for
Note 10 as to which the
date is March 16, 2000
F-46
<PAGE> 202
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,362,664 $ 17,157,451
Federal funds sold 14,400,000
Investment securities (market value of $47,440,300 in 1998 and
$38,400,500 in 1999) (Note 2) 47,092,556 38,513,743
Loans and leases, less allowance for loan and lease losses of
$2,080,831 in 1998 and $2,148,074 in 1999 (Notes 3, 9 and 13) 119,009,536 143,025,745
Bank premises and equipment, net (Note 4) 2,337,327 2,716,042
Investment in leasing company (Note 5) 2,335,967 2,793,416
Accrued interest receivable and other assets (Notes 7, 12 and 16) 6,243,914 7,587,728
------------- -------------
$ 199,781,964 $ 211,794,125
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 39,191,013 $ 50,686,125
Interest bearing (Note 6) 141,319,598 137,781,272
------------- -------------
Total deposits 180,510,611 188,467,397
Short-term borrowings (Notes 2 and 8) 2,100,000
Accrued interest payable and other liabilities 1,560,096 2,588,756
------------- -------------
Total liabilities 182,070,707 193,156,153
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
Preferred stock - no par value; 2,000,000 shares authorized;
none issued
Common stock - no par value; 4,000,000 shares authorized; 1,672,129 and
1,884,750 shares issued and outstanding in 1998 and 1999, respectively 12,824,202 15,413,603
Retained earnings 4,908,485 4,077,990
Accumulated other comprehensive loss (Notes 2, 5 and 14) (21,430) (853,621)
------------- -------------
Total shareholders' equity 17,711,257 18,637,972
------------- -------------
$ 199,781,964 $ 211,794,125
============= =============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-47
<PAGE> 203
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $10,135,028 $11,213,700 $11,171,325
Interest on Federal funds sold 626,727 1,146,637 374,576
Interest on investment securities:
Taxable 1,269,062 905,625 1,852,955
Exempt from Federal income taxes 583,198 583,934 611,767
----------- ----------- -----------
Total interest income 12,614,015 13,849,896 14,010,623
Interest expense:
Interest on deposits (Note 6) 5,224,556 5,604,825 5,094,019
Interest on short-term borrowings (Note 8) 9,642 15,842
----------- ----------- -----------
Total interest expense 5,224,556 5,614,467 5,109,861
----------- ----------- -----------
Net interest income 7,389,459 8,235,429 8,900,762
Provision for loan and lease losses (Note 3) 1,705,000 1,113,000 1,325,000
----------- ----------- -----------
Net interest income after provision for
loan and lease losses 5,684,459 7,122,429 7,575,762
----------- ----------- -----------
Non-interest income:
Service charges 549,488 711,977 777,786
Gain on sale of loans 49,199 108,366 181,875
Gain on sale and call of investment securities
(Note 2) 28,885 9,546
Loan servicing fees 74,133 57,283 47,239
Merchant processing fees 1,322,564 1,335,672 1,072,419
Automatic teller machine servicing fees 451,530
Loan packaging fees 260,871
Undistributed income of investment in leasing
company (Note 5) 35,256 300,711 444,364
Other income 159,909 257,733 495,084
----------- ----------- -----------
Total non-interest income 2,190,549 2,800,627 3,740,714
----------- ----------- -----------
Other expenses:
Salaries and employee benefits (Notes 3 and 12) 2,796,756 3,790,753 4,289,689
Occupancy (Notes 4 and 9) 831,656 945,899 1,077,927
Other (Note 11) 2,332,830 2,325,734 2,892,647
----------- ----------- -----------
Total other expenses 5,961,242 7,062,386 8,260,263
----------- ----------- -----------
Income before income taxes 1,913,766 2,860,670 3,056,213
Income taxes (Note 7) 613,000 852,000 809,000
----------- ----------- -----------
Net income $ 1,300,766 $ 2,008,670 $ 2,247,213
=========== =========== ===========
Basic earnings per share (Note 10) $ .73 $ 1.10 $ 1.20
=========== =========== ===========
Diluted earnings per share (Note 10) $ .71 $ 1.06 $ 1.20
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-48
<PAGE> 204
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
RETAINED
SHARES AMOUNT EARNINGS
--------- ------------ -----------
<S> <C> <C> <C>
Balance, January 1, 1997 1,610,940 $ 12,225,722 $ 2,905,644
Comprehensive income (Note 14):
Net income 1,300,766
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities
Total comprehensive income
Stock options exercised and related tax benefit (Note 10) 17,351 112,042
Cash dividend - $.40 per share (644,376)
---------- ------------ -----------
Balance, December 31, 1997 1,628,291 12,337,764 3,562,034
Comprehensive income (Note 14):
Net income 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities
Total comprehensive income
Retirement of common stock (Note 10) (18,803) (260,559)
Stock options exercised and related tax benefit (Note 10) 62,641 746,997
Cash dividend - $.40 per share (662,219)
---------- ------------ -----------
Balance, December 31, 1998 1,672,129 12,824,202 4,908,485
---------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(LOSS) INCOME EQUITY INCOME
------------- ------------- -------------
<S> <C> <C> <C>
Balance, January 1, 1997 $(18,190) $ 15,113,176
Comprehensive income (Note 14):
Net income 1,300,766 $ 1,300,766
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities 28,070 28,070 28,070
-----------
Total comprehensive income $ 1,328,836
===========
Stock options exercised and related tax benefit (Note 10) 112,042
Cash dividend - $.40 per share (644,376)
----------- ------------
Balance, December 31, 1997 9,880 15,909,678
Comprehensive income (Note 14):
Net income 2,008,670 $ 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (31,310) (31,310) (31,310)
-----------
Total comprehensive income $ 1,977,360
===========
Retirement of common stock (Note 10) (260,559)
Stock options exercised and related tax benefit (Note 10) 746,997
Cash dividend - $.40 per share (662,219)
----------- ------------
Balance, December 31, 1998 (21,430) 17,711,257
----------- ------------
</TABLE>
(Continued)
F-49
<PAGE> 205
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------- RETAINED
SHARES AMOUNT EARNINGS
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1998 1,672,129 $ 12,824,202 $ 4,908,485
Comprehensive income (Note 14):
Net income 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on
available-for-sale investment securities
Total comprehensive income
Retirement of common stock (Note 10) (18,684) (236,647)
Stock options exercised and related tax benefit (Note 10) 60,249 602,320
Cash dividend - $.50 per share (853,980)
10% stock dividend (Note 10) 171,056 2,223,728 (2,223,728)
------------ ------------ ------------
Balance, December 31, 1999 1,884,750 $ 15,413,603 $ 4,077,990
============ ============ ============
Disclosure of reclassification amount,
net of taxes (Note 14):
Unrealized holding losses
arising during the year
Add: unrealized holding gains resulting
from investment in leasing company
Less: reclassification adjustment
for gains included in net income
Net unrealized losses on available-for-sale
investment securities
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(LOSS) INCOME EQUITY INCOME
------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (21,430) $ 17,711,257
Comprehensive income (Note 14):
Net income 2,247,213 $ 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on
available-for-sale investment securities (832,191) (832,191) (832,191)
------------
Total comprehensive income $ 1,415,022
============
Retirement of common stock (Note 10) (236,647)
Stock options exercised and related tax benefit (Note 10) 602,320
Cash dividend - $.50 per share (853,980)
10% stock dividend (Note 10)
------------ ------------
Balance, December 31, 1999 $ (853,621) $ 18,637,972
============ ============
1999 1998
------------ ------------
Disclosure of reclassification amount,
net of taxes (Note 14):
Unrealized holding losses
arising during the year $ (839,548) $ (12,508)
Add: unrealized holding gains resulting
from investment in leasing company 13,085
Less: reclassification adjustment
for gains included in net income 5,728 18,802
------------ ------------
Net unrealized losses on available-for-sale
investment securities $ (832,191) $ (31,310)
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-50
<PAGE> 206
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,300,766 $ 2,008,670 $ 2,247,213
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 1,705,000 1,113,000 1,325,000
Depreciation and amortization 263,929 331,672 424,756
Gain on sales and calls of investment
securities (28,885) (9,546)
(Accretion) amortization of investment
security (discounts) premiums, net 27,823 1,668 (125,091)
Deferred loan origination (costs) fees, net (91,971) 63,383 (673,254)
Undistributed earnings of investment in
leasing company (35,256) (300,711) (444,364)
Provision for losses on other real estate 60,000
Gain on sale of other real estate (23,959) (16,710)
Write down of other assets 6,500
Loss on sale of other assets 45,399 45,226 1,095
(Increase) decrease in loans held for sale (229,428) 304,428 (47,923)
Increase in cash surrender value of life
insurance policies (65,204) (117,602) (150,769)
(Increase) decrease in accrued interest
receivable and other assets (220,378) 122,584 (297,053)
Increase (decrease) in accrued interest
payable and other liabilities (312,331) 418,803 1,028,660
Deferred taxes (219,000) (122,000) 87,000
Other 32,610
------------ ------------ ------------
Net cash provided by operating activities 2,205,390 3,840,236 3,388,124
------------ ------------ ------------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets
and liabilities of another bank 17,031,577
Proceeds from sales and calls of available-for-sale
investment securities 8,240,138 15,502,130 4,504,512
Proceeds from called held-to-maturity investment
securities 80,000 641,350 355,250
Proceeds from matured available-for-sale invest-
ment securities 1,095,000 1,540,000 40,368,261
Proceeds from matured held-to-maturity investment
securities 1,767,800
Purchases of available-for-sale investment
securities (6,059,041) (33,188,997) (39,165,876)
Purchases of held-to-maturity investment
securities (225,000) (3,229,579) (996,037)
Principal payments received from mortgage-backed
available-for-sale investment securities 53,201 43,599 487,012
Net increase in loans (28,593,443) (1,762,474) (24,962,227)
Purchases of premises and equipment (508,258) (680,996) (758,237)
Purchases of other real estate (15,448)
Proceeds from sale of other real estate 49,618 399,271 266,365
Proceeds from sale of other foreclosed assets 143,506 207,333 76,684
Investment in leasing company (2,000,000)
Purchase of life insurance policies (355,000) (995,000) (380,000)
------------ ------------ ------------
Net cash used in investing activities (11,047,702) (21,523,363) (18,451,941)
------------ ------------ ------------
</TABLE>
(Continued)
F-51
<PAGE> 207
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
and savings accounts $ 6,908,625 $ 21,951,669 $ 10,706,132
Net (decrease) increase in time deposits 6,018,014 5,887,885 (2,749,346)
Proceeds from exercise of stock options 98,942 601,437 492,445
Net increase in short-term borrowings 2,100,000
Payment of cash dividends (644,376) (662,219) (853,980)
Retirement of common stock (260,559) (236,647)
------------ ------------ ------------
Net cash provided by financing activities 12,381,205 27,518,213 9,458,604
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 3,538,893 9,835,086 (5,605,213)
Cash and cash equivalents at beginning of year 9,388,685 12,927,578 22,762,664
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,927,578 $ 22,762,664 $ 17,157,451
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 5,028,411 $ 5,609,794 $ 5,125,173
Income taxes $ 875,000 $ 854,000 $ 70,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 78,957 $ 110,295 $ 216,706
Other assets acquired through foreclosure of
consumer loans $ 228,903 $ 198,067 $ 74,060
Net change in unrealized (loss) gain on
available-for-sale investment securities $ 48,498 $ (52,923) $ (1,392,529)
Unrealized gain resulting from investment in
leasing company $ 13,085
Supplemental schedule related to acquisition:
On February 21, 1997, the Bank acquired or
assumed the following assets and liabilities
of another bank (Note 16):
Deposits assumed $ 18,141,712
Premises and equipment (480,226)
Loans (18,633)
Other liabilities assumed 47,218
------------
17,690,071
Premium paid for deposits (658,494)
------------
Cash acquired $ 17,031,577
============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-52
<PAGE> 208
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Tehama Bancorp (the "Company") was incorporated on January 15, 1997 and
subsequently obtained approval of the Board of Governors of the Federal
Reserve System to be a bank holding company. On June 30, 1997, Tehama
Bank (the "Bank") consummated a merger with Tehama Bancorp that was
effected through the exchange of one share of the Company's stock for
each share of the Bank's stock. The Bank is engaged in consumer and
commercial banking, offering products and services to individuals and
businesses in a four- county region.
The accounting and reporting policies of the Company and its subsidiary
conform with generally accepted accounting principles and prevailing
practices within the banking industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All material
intercompany transactions and accounts have been eliminated in
consolidation.
The Company's fifty percent investment in Bancorp Financial Services,
Inc., a leasing company, is accounted for by the equity method. Although
the Company owns fifty percent of the outstanding stock of the leasing
company, it does not have the ability to significantly influence the
financial and operating policies of Bancorp Financial Services, Inc.
Investment Securities
Investments are classified into one of the following categories:
- Available-for-sale securities reported at fair value,
with unrealized gains and losses excluded from earnings
and reported, net of taxes, as accumulated other
comprehensive income (loss) within shareholders' equity.
- Held-to-maturity securities, which management has the
positive intent and ability to hold, reported at
amortized cost, adjusted for the accretion of discounts
and amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities
is reported in interest income, net of applicable adjustments for
accretion of discounts and amortization of premiums. In addition,
unrealized losses that are other than temporary are recognized in
earnings for all investments.
Loans Held for Sale
Loans held for sale consist of mortgage loans and are carried at the
lower of cost or market value. Market value is determined using the
specific identification method as of the balance sheet date. Unrealized
losses and realized gains and losses are determined on the specific
identification method and are reflected in non-interest income or other
expense. Loans held for sale are included on the consolidated balance
sheet in accrued interest receivable and other assets.
F-53
<PAGE> 209
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower of
principal balance or market value at the date of transfer adjusted for
accretion of discounts. Interest is accrued daily based upon outstanding
loan balances. However, when, in the opinion of management, loans are
considered to be impaired and the future collectibility of interest and
principal is in serious doubt, loans are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to
reduce principal to the extent necessary to ensure collection.
Subsequent payments on these loans, or payments received on nonaccrual
loans for which the ultimate collectibility of principal is not in
doubt, are applied first to earned but unpaid interest and then to
principal.
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical matter, at the loan's observable market price or the fair
value of collateral if the loan is collateral dependent. A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due
(including both principal and interest) in accordance with the
contractual terms of the loan agreement.
Loan origination fees, commitment fees, direct loan origination costs
and purchase premiums and discounts on loans are deferred and recognized
as an adjustment of yield, to be amortized to interest income over the
contractual term of the loan. The unamortized balances of deferred fees
and costs and unearned loan discounts are reported as components of net
loans.
Transfers and Servicing of Loans
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
subsequently amortized in proportion to and over the period of the
related net servicing income or expense. Servicing assets and
liabilities are periodically evaluated for impairment. Servicing assets
and liabilities were not material for the years ended December 31, 1999
and 1998.
Servicing rights on loans serviced for others with unpaid balances of
$14,630,000 were sold in December 1999. Loans with unpaid balances of
approximately $19,509,000 and $2,698,000 were being serviced for others
at December 31, 1998 and 1999, respectively. A gain of $85,500 is
reflected in non-interest income.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can be
expected to occur in the normal course of business. The determination of
the allowance is based on estimates made by management, to include
consideration of the character of the loan and lease portfolio,
specifically identified problem loans and leases, potential losses
inherent in the portfolio taken as a whole and economic conditions in
the Bank's service area. These estimates are particularly susceptible to
changes in the economic environment and market conditions. The allowance
is established through a provision for loan and lease losses which is
charged to expense.
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the Bank's recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property, net of
estimated selling costs, is charged against the allowance for loan and
lease losses. A valuation allowance for losses on other real estate is
maintained to provide for temporary declines in value. Subsequent gains
or losses on sales or writedowns resulting from permanent impairment are
recorded in other income or expense as incurred. On the balance sheet,
other real estate is included in accrued interest receivable and other
assets.
F-54
<PAGE> 210
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of furniture, fixtures and
equipment are estimated to be three to ten years. Leasehold improvements
are amortized over the life of the related lease, or the life of the
asset, whichever is shorter. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation and amortization are
removed from the accounts, and any resulting gain or loss is recognized
in income for the period. The cost of maintenance and repairs is charged
to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
The Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income taxes to the subsidiary represents
its proportionate share of the consolidated provision for income taxes.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents. Generally,
Federal funds are sold for one day periods.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts
to issue common stock, such as stock options, result in the issuance of
common stock which shares in the earnings of the Company. The treasury
stock method has been applied to determine the dilutive effect of stock
options in computing diluted EPS.
Merchant Bank Card Processing
The Bank serves as a merchant processor, under contract with a third
party, for processing credit card transactions of selected merchants.
Processing fees are recorded as non-interest income and were based upon
a contractual percentage of valid credit card transactions processed
each month through February 1999. Beginning in March 1999, the Bank
earns a flat fee based on minimum processing levels. Prior to 1999,
selected direct costs of the Bank's merchant card processing personnel
were reimbursed by the program's marketing agent. The credit card
processing equipment and related software are assets of the third party
and are not reflected in the consolidated financial statements.
Automated Teller Machine Cash Services
The Bank supplies cash to selected privately-owned automated teller
machines (ATM's). Fees are recorded as non-interest income based upon a
contractual percentage of the cash supplied each month.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
F-55
<PAGE> 211
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
New Financial Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended by SFAS 137 to delay the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Management does not
believe that the adoption of SFAS 133 will have a significant impact on
its financial position and results of operations when implemented.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 1998 and 1999 consisted of the following:
Available-for-Sale:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. Government
corporations and agencies $ 16,211,356 $ 42,535 $ (36,891) $ 16,217,000
Obligations of states and political
subdivisions 140,000 1,000 141,000
Commercial paper 5,988,631 (7,631) 5,981,000
Government guaranteed mortgage-
backed securities 10,992,410 2,535 (36,945) 10,958,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 569,100 569,100
------------ ------------ ------------ ------------
$ 34,268,697 $ 46,070 $ (81,467) $ 34,233,300
============ ============ ============ ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $35,397 were recorded net of $13,967 in tax benefits as
accumulated other comprehensive loss within shareholders' equity at
December 31, 1998. Proceeds and gross realized gains on called
available-for-sale investment securities for the year ended December 31,
1998 totaled $15,502,130 and $21,389, respectively.
F-56
<PAGE> 212
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
corporations and agencies $ 9,506,988 $ (341,988) $ 9,165,000
Obligations of states and political
subdivisions 198,996 (24,996) 174,000
Government guaranteed mortgage-
backed securities 10,525,346 $ 1,327 (753,673) 9,773,000
Collateralized mortgage obligations 7,003,596 (308,596) 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 616,300 616,300
------------ ------------ ------------ ------------
$ 28,218,426 $ 1,327 $ (1,429,253) $ 26,790,500
============ ============ ============ ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $1,427,926 were recorded net of $561,220 in tax benefits as
accumulated other comprehensive loss within shareholders' equity at
December 31, 1999. Proceeds and gross realized gains on sales and calls
of available-for-sale investment securities for the year ended December
31, 1999 totaled $4,504,512 and $4,296, respectively.
Held-to-Maturity:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $12,859,256 $ 347,744 $ - $13,207,000
=========== =========== =========== ===========
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1998 totaled $641,350 and
$7,496, respectively. There were no sales or transfers of held-to-
maturity investment securities during the years ended December 31, 1997
or 1998.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $11,723,243 $ 110,732 $ (223,975) $11,610,000
=========== =========== =========== ===========
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1999 totaled $355,250 and
$5,250, respectively. There were no sales or transfers of held-to-
maturity investment securities during the year ended December 31, 1999.
F-57
<PAGE> 213
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
---------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year $ 525,315 $ 529,000
After one year through five years $ 9,506,988 $ 9,165,000 4,437,891 4,480,000
After five years through ten years 5,775,768 5,679,000
After ten years 198,996 174,000 984,269 922,000
----------- ----------- ----------- -----------
9,705,984 9,339,000 11,723,243 11,610,000
Investment securities not
due at a single maturity date:
Government guaranteed
mortgage-backed securities 10,525,346 9,773,000
Collateralized mortgage obli-
gations 7,003,596 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank
stock 616,300 616,300
----------- ----------- ----------- -----------
$28,218,426 $26,790,500 $11,723,243 $11,610,000
=========== =========== =========== ===========
</TABLE>
Investment securities with amortized costs of approximately $2,228,000
and $24,008,000 and estimated market values of $2,243,000 and
$22,719,000 were pledged to secure deposits and short-term borrowing
arrangements at December 31, 1998 and 1999, respectively. Additionally,
investment securities with amortized costs of $2,000,000 and $2,982,000
and estimated market values of $2,000,000 and $2,867,000 were pledged to
VISA at December 31, 1998 and 1999 in conjunction with the Bank's
merchant processing services.
3. LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Commercial $ 22,679,709 $ 27,576,401
Commercial real estate 11,781,897 23,717,451
Real estate - construction 8,873,686 9,034,743
Real estate - mortgage 38,673,581 35,410,666
Leases 8,744,942 6,212,446
Installment 31,953,756 43,212,382
------------- -------------
122,707,571 145,164,089
Unearned discount (1,649,410) (695,730)
Deferred loan origination costs, net 32,206 705,460
Allowance for loan and lease losses (2,080,831) (2,148,074)
------------- -------------
$ 119,009,536 $ 143,025,745
============= =============
</TABLE>
F-58
<PAGE> 214
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 896,733 $ 1,705,200 $ 2,080,831
Provision charged to operations 1,705,000 1,113,000 1,325,000
Losses charged to allowance (978,709) (962,480) (1,438,474)
Recoveries 82,176 225,111 180,717
----------- ----------- -----------
Balance, end of year $ 1,705,200 $ 2,080,831 $ 2,148,074
=========== =========== ===========
</TABLE>
At December 31, 1998 and 1999, nonaccrual loans totaled $253,900 and
$750,600, respectively. Interest foregone on nonaccrual loans totaled
approximately $29,400, $44,500 and $70,200 for the years ended December
31, 1997, 1998 and 1999, respectively. The recorded investment in loans
that were considered to be impaired at December 31, 1998 and 1999
totaled $1,352,900 and $258,600, respectively. The related allowance for
loan and lease losses for these loans at December 31, 1998 and 1999 was
$459,100 and $78,200, respectively. The average recorded investment in
impaired loans for the years ended December 31, 1997, 1998 and 1999 was
$123,800, $287,400 and $677,300, respectively. The Bank recognized no
interest income on impaired loans during these same periods.
Salaries and employee benefits totaling $259,000, $154,000 and $603,000
have been deferred as loan origination costs for the years ended
December 31, 1997, 1998 and 1999, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Land $ 200,840 $ 200,840
Bank premises 878,406 945,713
Furniture, fixtures and equipment 2,046,561 2,614,738
Leasehold improvements 313,288 405,944
----------- -----------
3,439,095 4,167,235
Less accumulated depreciation and amortization (1,101,768) (1,451,193)
----------- -----------
$ 2,337,327 $ 2,716,042
=========== ===========
</TABLE>
Depreciation and amortization included in occupancy expense totaled
$233,319, $299,299 and $379,522 for the years ended December 31, 1997,
1998 and 1999, respectively.
5. INVESTMENT IN LEASING COMPANY
On January 2, 1997, the Bank invested $2,000,000 in a joint venture with
another community bank to form Bancorp Financial Services, Inc.
(Bancorp). In March 1998, ownership of the investment in Bancorp was
transferred to the holding company through a dividend from the Bank.
Bancorp principally engages in the business of originating, purchasing
and selling lease contracts. The lease contracts provide financing
primarily for the acquisition of computers, medical and other business
equipment. All equipment leased is acquired from unrelated parties. The
Company's fifty percent interest in Bancorp's net income for the years
ended December 31, 1997, 1998 and 1999 totaled $35,256, $300,711 and
$444,364, respectively.
In 1999, Bancorp had other comprehensive income of $26,170, net of
$18,186 in tax liabilities. The Company's fifty percent interest in
Bancorp's other comprehensive income for the year ended December 31,
1999 totaled $13,085.
F-59
<PAGE> 215
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Savings $ 14,815,345 $ 15,574,850
Money market 39,779,595 37,554,451
NOW accounts 12,831,352 13,508,011
Time, $100,000 or more 15,568,599 15,238,417
Other time 58,324,707 55,905,543
------------ ------------
$141,319,598 $137,781,272
============ ============
</TABLE>
At December 31, 1999, aggregate annual maturities of time deposits are
as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $66,195,805
2001 4,729,234
2002 196,492
2003 22,429
-----------
$71,143,960
===========
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Savings $ 394,557 $ 411,548 $ 348,498
Money market 1,033,029 1,185,336 1,309,145
NOW accounts 208,777 234,125 181,236
Time, $100,000 or more 692,358 752,158 645,163
Other time 2,895,835 3,021,658 2,609,977
---------- ---------- ----------
$5,224,556 $5,604,825 $5,094,019
========== ========== ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
1997
----
Current $ 576,000 $ 256,000 $ 832,000
Deferred (168,000) (51,000) (219,000)
--------- --------- ---------
Income tax expense $ 408,000 $ 205,000 $ 613,000
========= ========= =========
1998
----
Current $ 686,000 $ 288,000 $ 974,000
Deferred (102,000) (20,000) (122,000)
--------- --------- ---------
Income tax expense $ 584,000 $ 268,000 $ 852,000
========= ========= =========
</TABLE>
F-60
<PAGE> 216
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Federal State Total
-------- -------- --------
1999
----
<S> <C> <C> <C>
Current $481,000 $241,000 $722,000
Deferred 70,000 17,000 87,000
-------- -------- --------
Income tax expense $551,000 $258,000 $809,000
======== ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 655,000 $ 584,000
Salary continuation expense 272,000 322,000
Future benefit of state tax deduction 85,000 76,000
Unrealized loss on available-for-sale investment securities 14,000 561,000
Capitalization of organization costs 28,000 20,000
Other real estate 13,000
----------- -----------
Total deferred tax assets 1,067,000 1,563,000
----------- -----------
Deferred tax liabilities:
Bank premises and equipment (85,000) (83,000)
Future liability of state deferred tax asset (65,000) (57,000)
Undistributed interest in earnings of leasing company (27,000) (66,000)
Federal Home Loan Bank stock dividends (7,000)
----------- -----------
Total deferred tax liabilities (177,000) (213,000)
----------- -----------
Net deferred tax assets $ 890,000 $ 1,350,000
=========== ===========
</TABLE>
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rate to operating income before income
taxes. The tax effects for these differences are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------- ----------------------------- -----------------------------
Amount Rate % Amount Rate % Amount Rate%
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax ex-
pense, at statutory
rate $ 650,680 34.0 $ 972,628 34.0 $ 1,039,112 34.0
State franchise tax, net
of Federal tax effect 128,402 6.7 151,661 5.3 166,913 5.5
Interest on obligations
of states and political
subdivisions (180,281) (9.4) (171,124) (6.0) (193,784) (6.3)
Dividends received de-
duction from invest-
ment in leasing
company (81,793) (2.9) (120,867) (4.0)
Net increase on cash
surrender value of
officer life insurance (22,169) (1.1) (39,985) (1.4) (50,827) (1.7)
Other 36,368 1.8 20,613 .8 (31.547) (1.0)
----------- ----------- ----------- ----------- ----------- -----------
Total income
tax expense $ 613,000 32.0 $ 852,000 29.8 $ 809,000 26.5
=========== =========== =========== =========== =========== ===========
</TABLE>
F-61
<PAGE> 217
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a $7,500,000 unsecured borrowing arrangement with one of
its correspondent banks. There were no borrowings outstanding under this
arrangement at December 31, 1998. At December 31, 1999, the Bank had
outstanding borrowings of $2,100,000 under this arrangement at an
interest rate of 5.75%. Interest expense was $9,642 and $15,842 for the
years ended December 31, 1998 and 1999, respectively.
At December 31, 1999, the Bank could also borrow up to twenty-five
percent of its total assets from the Federal Home Loan Bank, secured by
investment securities with amortized costs totaling $17,483,000 and
estimated market values totaling $16,421,000. There were no borrowings
under this arrangement at December 31, 1998 or 1999.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Bank leases premises and equipment under non-cancelable operating
leases. These leases expire on various dates through 2008 and have
various renewal options ranging from five to ten years.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $ 219,938
2001 220,783
2002 206,280
2003 191,794
2004 151,002
Thereafter 320,522
----------
$1,310,319
==========
</TABLE>
Rental expense for premises and equipment included in occupancy expense
totaled approximately $111,000, $156,000 and $203,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. Management
uses the same credit policies in making commitments and letters of
credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Commitments to extend credit $17,847,000 $27,109,000
Letters of credit $ 140,000 $ 285,000
</TABLE>
F-62
<PAGE> 218
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Management evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include real
estate, accounts receivable, deposit accounts and personal property.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 1999, commercial loan commitments represent
approximately 69% of total commitments and are generally unsecured. Real
estate loan commitments represent 18% of total commitments and are
generally secured by property with a loan-to-value ratio not to exceed
80%. Unsecured credit cards and consumer lines of credit represent the
remaining 13% of total commitments. In addition, the majority of the
Bank's commitments have variable interest rates.
The Bank's financial instruments also include commitments to sell loans.
Commitments to sell loans are agreements to sell to another party, loans
originated by the Bank. The Bank only sells loans to third parties
without recourse. As long as the Bank has fulfilled its obligations as
stated in the sales commitment on such loans, the Bank is not exposed to
credit loss if the borrower fails to perform according to the promissory
note.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction,
commercial and installment loans to customers throughout Tehama, Butte,
Glenn and Shasta counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential real
estate. Additionally, automobiles, trucks and recreational vehicles
secure a substantial portion of the Bank's installment loans. However,
personal and business income represents the primary source of repayment
for a majority of these loans.
Merchant Bank Card Processing
The Bank has a merchant transaction servicing agreement for the
processing of credit card transactions with First Data Resources, Inc.
(FDRI). The Bank is contingently liable for undetected fraud on
third-party credit card transactions processed under its agreement with
FDRI. However, the Bank is reimbursed on a monthly basis by the
marketing agent of the program, CardService International, Inc. (CSI),
for losses incurred. The Bank has not incurred any losses to date for
transactions processed under this program.
Data Processing
The Bank has also entered into a data processing service agreement with
Bank Processing, Inc. Under this agreement, the Bank's minimum payments
are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $152,904
2001 152,904
2002 89,194
--------
$395,002
========
</TABLE>
F-63
<PAGE> 219
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Correspondent Banking Agreements
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. Uninsured
deposits totaled $10,239,315 at December 31, 1999.
Contingencies
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the financial position or results of operations of the
Company.
10. SHAREHOLDERS' EQUITY
Dividends
On March 16, 2000, the Board of Directors declared a 10% stock dividend
payable May 15, 2000 to shareholders of record on April 10, 2000. The
dividend was charged to retained earnings in the amount of $2,223,728,
which was based on the estimated fair value of the Company's common
stock. In addition to the 10% stock dividend, the Company increased the
number of stock options under its stock option plans by 10% and reduced
the exercise prices accordingly. All references to weighted average
shares outstanding, per share amounts, option shares, and exercise
prices included in the accompanying consolidated financial statements
and notes reflect the 10% stock dividend and its retroactive effect.
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. The
Company's only present source of income with which to pay dividends is
dividends from the Bank. The California Financial Code restricts the
total cash dividend payment of any state bank at any time to the lesser
of (1) the Bank's retained earnings or (2) the Bank's net income for its
last three fiscal years, less distributions made to shareholders during
the same three-year period. At December 31, 1999, the Bank had
$3,243,078 in retained earnings available for dividend payments to the
Company.
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
------------------- ---------- ----------- ---------
<S> <C> <C> <C>
December 31, 1997
Basic earnings per share $1,300,766 1,776,634 $ .73
=====
Effect of dilutive stock options 65,489
---------- ----------
Diluted earnings per share $1,300,766 1,842,123 $ .71
========== ========== =====
December 31, 1998
Basic earnings per share $2,008,670 1,830,352 $1.10
=====
Effect of dilutive stock options 56,418
---------- ----------
Diluted earnings per share $2,008,670 1,886,770 $1.06
========== ========== =====
</TABLE>
F-64
<PAGE> 220
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
------------------- ---------- ----------- ---------
<S> <C> <C> <C>
December 31, 1999
Basic earnings per share $2,247,213 1,871,707 $1.20
=====
Effect of dilutive stock options 6,575
---------- ----------
Diluted earnings per share $2,247,213 1,878,282 $1.20
========== ========== =====
</TABLE>
The following options were not included in the computation of diluted
earnings per share because their exercise prices were greater than the
average market prices of the common shares during the same periods:
options to purchase 37,829 shares of common stock at prices ranging from
$15.28 to $15.91 outstanding during the second and third quarters of
1998; options to purchase 57,508 shares of common stock at prices
ranging from $12.73 to $15.91 outstanding during the fourth quarter of
1998; options to purchase 36,850 shares of common stock at prices
ranging from $12.05 to $15.28 outstanding during the first quarter of
1999; options to purchase 57,844 shares of common stock at prices
ranging from $11.15 to $15.28 outstanding during the second quarter of
1999; and options to purchase 151,894 shares of common stock at prices
ranging from $10.80 to $15.28 outstanding during the third and fourth
quarters of 1999.
Stock Options
In 1999 and 1994, the Board of Directors established stock option plans
for which 553,442 shares of common stock are reserved for issuance to
employees and directors under incentive and nonstatutory agreements. The
Company assumed all obligations under the 1994 plan as of July 1, 1997
and options to purchase shares of the Company's common stock were
substituted for options to purchase shares of common stock of the Bank.
The plans require that the option price may not be less than the fair
market value of the stock at the date the option is granted, and that
the stock must be paid in full at the time the option is exercised.
Options granted generally vest at twenty percent each year. The options
under the plans expire on dates determined by the Board of Directors,
but not later than ten years from the date of grant. Outstanding options
under the 1994 Plan are exercisable until their expiration date;
however, no new options will be granted under this plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been recognized
for its stock option plans. Had compensation cost been determined based
on the fair value at grant date for awards in 1999 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below. Pro forma compensation expense is recognized in the
years the options become vested.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Net earnings - as reported $ 2,008,670 $ 2,247,213
Net earnings - pro forma $ 1,982,003 $ 2,191,458
Basic earnings per share - as reported $ 1.10 $ 1.20
Basic earnings per share - pro forma $ 1.08 $ 1.17
Diluted earnings per share - as reported $ 1.06 $ 1.20
Diluted earnings per share - pro forma $ 1.05 $ 1.16
</TABLE>
F-65
<PAGE> 221
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1998 1999
------- -------
<S> <C> <C>
Dividend yield 2.50% 3.54%
Expected volatility 59.54% 48.94%
Risk-free interest rate 4.68% 5.94%
Expected option life 5 years 5 years
</TABLE>
A summary of combined activity within the plans follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 215,409 $ 8.37 189,772 $ 8.60 174,346 $ 10.87
Options granted 13,200 $ 10.91 57,508 $ 14.65 101,750 $ 10.69
Options exercised (19,086) $ 8.04 (68,905) $ 7.95 (66,274) $ 7.92
Options canceled (19,751) $ 8.22 (4,029) $ 8.13 (14,720) $ 10.00
-------- -------- --------
Options outstanding,
end of year 189,772 $ 8.60 174,346 $ 10.87 195,102 $ 11.85
======== ======== ========
Options exercisable,
end of year 132,018 $ 8.25 108,612 $ 9.26 70,598 $ 12.00
======== ======== ========
Weighted average fair
value of options
granted during the
year $ 3.58 $ 2.20
</TABLE>
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------------------
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
$ 9.77 5,500 1 year 4,400
$ 11.15 20,994 1 year 16,794
$ 10.91 11,550 2 years 6,930
$ 13.75 5,500 3 years 2,200
$ 15.28 23,650 3 years 9,460
$ 15.91 11,979 3 years 4,792
$ 12.73 11,979 3 years 4,792
$ 13.18 2,200 3 years 880
$ 12.05 5,500 4 years 1,100
$ 9.55 13,750 10 years 2,750
$ 10.80 82,500 10 years 16,500
------- -----------
195,102 70,598
======= ===========
</TABLE>
F-66
<PAGE> 222
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
During 1997, the Board of Directors authorized the repurchase of up to
$500,000 of the Company's common stock. Repurchases will generally be
made at market prices. Shares were purchased for $260,559 and $236,647
during the years ended December 31, 1998 and 1999, respectively.
Regulatory Capital
The Company and the Bank are subject to certain regulatory capital
requirements administered by the Board of Governors of the Federal
Reserve System (FRB). Failure to meet these minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. Each of these components is defined in
the regulations. Management believes that the Company and the Bank meet
all their capital adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the Federal Depository
Insurance Corporation (FDIC) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
Tehama Bancorp and subsidiary $15,271,900 9.4% $17,137,200 9.4% $18,941,300 9.4%
Tehama Bank $15,118,600 9.3% $14,222,200 7.9% $15,752,500 7.9%
Minimum requirement for "Well-
Capitalized" institution $ 8,127,700 5.0% $ 9,073,500 5.0% $10,096,000 5.0%
Minimum regulatory requirement $ 6,502,200 4.0% $ 7,258,800 4.0% $ 8,076,800 4.0%
Tier 1 Risk-Based Capital Ratio
Tehama Bancorp and subsidiary $15,271,900 12.7% $17,137,200 13.6% $18,941,300 12.6%
Tehama Bank $15,118,600 12.5% $14,222,200 11.5% $15,752,500 10.7%
Minimum requirement for "Well-
Capitalized" institution $ 7,236,200 6.0% $ 7,562,900 6.0% $ 9,019,400 6.0%
Minimum regulatory requirement $ 4,824,200 4.0% $ 5,042,000 4.0% $ 6,012,900 4.0%
Total Risk-Based Capital Ratio
Tehama Bancorp and subsidiary $16,787,300 13.9% $18,719,024 14.9% $20,823,700 13.9%
Tehama Bank $16,634,000 13.8% $15,772,281 12.8% $17,596,900 12.0%
Minimum requirement for "Well-
Capitalized" institution $12,041,500 10.0% $12,604,900 10.0% $15,032,300 10.0%
Minimum regulatory requirement $ 9,633,200 8.0% $10,083,900 8.0% $12,025,800 8.0%
</TABLE>
F-67
<PAGE> 223
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Data processing fees $ 220,909 $ 258,618 270,145
Professional services 392,863 236,966 300,407
Directors' fees 155,350 170,450 189,600
Stationery and supplies 231,170 143,070 202,984
Advertising 118,708 154,297 111,470
Telephone 93,700 121,571 191,481
Other 1,120,130 1,240,762 1,626,560
---------- ---------- ----------
$2,332,830 $2,325,734 $2,892,647
========== ========== ==========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
In 1987, the Bank adopted an employee stock ownership plan. This plan is
designed to invest primarily in securities of the Company, purchased on
the open market. The Company's contributions to the plan are at the sole
discretion of the Board of Directors. Contributions are limited on a
participant-by-participant basis to the lesser of $30,000 or twenty-five
percent of the participant's compensation for the plan year. Employee
contributions are not permitted. The Company made contributions of
$29,875, $39,403 and $38,332 for the years ended December 31, 1997, 1998
and 1999, respectively.
Profit Sharing Plan
During 1992, the Bank adopted the Tehama Bank 401(k) Profit Sharing
Plan. The plan is available to all employees of the Bank. The Bank's
contribution to the plan is discretionary and is allocated at
twenty-five percent of each participant's annual contribution. Aggregate
contributions to the profit sharing plan totaled $30,795, $38,868 and
$54,632 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Salary Continuation Plans
The Bank has salary continuation plans for key executives. Under these
plans, the Bank is obligated to provide the executives, or their
designated beneficiaries, with annual benefits for fifteen years after
retirement or death. These benefits are substantially equivalent to
those available under insurance policies purchased by the Bank on the
lives of the executives. In addition, the estimated present value of
these future benefits are accrued over the period from the effective
date of the plans until each of the executive's expected retirement
date. The expense recognized under these plans for the years ended
December 31, 1997, 1998 and 1999 totaled $136,293, $114,620 and
$163,207, respectively.
Under these plans, the Bank invested in single premium life insurance
policies with cash surrender values totaling $2,946,792 and $3,477,561
at December 31, 1998 and 1999, respectively. On the consolidated balance
sheet, the cash surrender value of life insurance policies is included
in accrued interest receivable and other assets.
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company and Bank enter into
transactions with related parties, including Directors and affiliates.
These transactions are on substantially the same terms and conditions as
those prevailing for comparable transactions with unrelated parties and
include borrowings from the Bank, the purchase of casualty insurance and
advertising through Directors and the leasing of the Red Bluff branch
from a Director.
F-68
<PAGE> 224
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS (Continued)
The following is a summary of the aggregate lending activity involving
related party borrowers for the year ended December 31, 1999:
<TABLE>
<S> <C>
Balance, beginning of year $ 4,700,000
Disbursements 2,600,000
Amounts repaid (3,000,000)
-----------
Balance, end of year $ 4,300,000
===========
Undisbursed commitments to related parties,
December 31, 1999 $ 1,343,000
===========
</TABLE>
During 1997 and 1998, the Bank purchased a total of approximately
$8,802,000 in leases from Bancorp Financial Services, Inc. at the same
price offered to other lease purchasers. Leases were evaluated for
creditworthiness in accordance with the Bank's normal underwriting
procedures. At December 31, 1998 and 1999, the remaining balances on
these leases totaled $8,427,000 and $5,050,000, respectively. There were
no leases purchased during 1999.
14. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income that historically has not been recognized in the calculation of
net income. Unrealized gains and losses on the Bank's available-for-sale
investment securities are included in other comprehensive income. Total
comprehensive income and the components of accumulated other
comprehensive income (loss) are presented in the Statement of Changes in
Shareholders' Equity.
For the years ended December 31, 1997, 1998 and 1999, the Bank held
securities classified as available-for-sale which had unrealized
(losses) gains as follows:
<TABLE>
<CAPTION>
Tax
Before (Expense) After
Tax Benefit Tax
----------- ----------- -----------
<S> <C> <C> <C>
For the Year Ended December 31, 1997
Other comprehensive income:
Unrealized holding gains $ 48,498 $ (20,428) $ 28,070
=========== =========== ===========
For the Year Ended December 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (20,846) $ 8,338 $ (12,508)
Less: reclassification adjustment for
gains included in net income 28,885 (10,083) 18,802
----------- ----------- -----------
Total other comprehensive loss $ (49,731) $ 18,421 $ (31,310)
=========== =========== ===========
For the Year Ended December 31, 1999
Other comprehensive loss:
Unrealized holding losses $(1,382,983) $ 543,435 $ (839,548)
Less: reclassification adjustment for
gains included in net income 9,546 (3,818) 5,728
----------- ----------- -----------
(1,392,529) 547,253 (845,276)
Add: unrealized holding gains resulting
from investment in leasing company 22,178 (9,093) 13,085
----------- ----------- -----------
Total other comprehensive loss $(1,370,351) $ 538,160 $ (832,191)
=========== =========== ===========
</TABLE>
F-69
<PAGE> 225
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures include estimated fair values for financial instruments for
which it is practicable to estimate fair value. These estimates are made
at a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for sale
at one time, nor do they attempt to estimate the value of anticipated
future business related to the instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by management to
estimate the fair value of its financial instruments at December 31,
1998 and 1999:
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment securities: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
Loans: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. Fair values of loans held for sale are estimated using quoted
market prices for similar loans. Fair values for other loans are
estimated using discounted cash flow analyses, using interest rates
being offered at each reporting date for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of accrued
interest receivable approximates its fair value.
Life insurance policies: The fair values of life insurance policies are
based on current cash surrender values at each reporting date as
provided by the insurers.
Deposits: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at each reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis using
interest rates being offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
Short-term borrowings: Short-term borrowings were originated near year
end. The carrying amount is estimated to be fair value.
Treasury tax and loan agreement: For the Treasury Tax and Loan
Agreement, which is included in accrued interest payable and other
liabilities on the consolidated balance sheet, the carrying amount is
estimated to be fair value.
Commitments to extend credit: Commitments to extend credit are primarily
for adjustable rate loans and letters of credit. For these commitments,
there are no differences between the committed amounts and fair values.
Commitments to fund fixed rate loans are at rates which approximate fair
value at each reporting date.
F-70
<PAGE> 226
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,362,664 $ 8,362,664 $ 17,157,451 $ 17,157,451
Federal funds sold 14,400,000 14,400,000
Investment securities 47,092,556 47,440,300 38,513,743 38,400,500
Loans 119,009,536 121,472,837 143,025,745 141,427,964
Accrued interest receivable 1,213,291 1,213,291 1,339,557 1,339,557
Cash surrender value of life
insurance policies 2,946,792 2,946,792 3,477,561 3,477,561
------------ ------------ ------------ ------------
$193,024,839 $195,835,884 $203,514,057 $201,803,033
============ ============ ============ ============
Financial liabilities:
Deposits $180,510,611 $180,715,000 $188,467,397 $188,354,076
Short-term borrowings 2,100,000 2,100,000
Accrued interest payable 451,947 451,947 436,635 436,635
Treasury tax and loan
agreement 191,014 191,014 373,041 373,041
------------ ------------ ------------ ------------
$181,153,572 $181,357,961 $191,377,073 $191,263,752
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 17,847,000 $ 17,847,000 $ 27,109,000 $ 27,109,000
Standby letters of credit 140,000 140,000 285,000 285,000
------------ ------------ ------------ ------------
$ 17,987,000 $ 17,987,000 $ 27,394,000 $ 27,394,000
============ ============ ============ ============
</TABLE>
16. BRANCH ACQUISITION
The Bank acquired certain assets and liabilities of the Willows and
Orland branches of Wells Fargo Bank on February 21, 1997 summarized as
follows:
<TABLE>
<S> <C>
Cash $17,031,577
Fair value of assets and liabilities acquired, net 451,641
Premium paid for deposits 658,494
-----------
Deposits assumed $18,141,712
===========
</TABLE>
The deposit premium is included on the consolidated balance sheet in
accrued interest receivable and other assets and is being amortized
using the straight-line method over fifteen years. Amortization expense
totaled $30,611, $32,373 and $45,234 for the years ended December 31,
1997, 1998 and 1999, respectively.
F-71
<PAGE> 227
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management. Generally, financial information is reported on the basis
that it is used internally for evaluating segment performance and in
deciding how to allocate resources to segments.
The Company has two reportable segments: Retail and Commercial Banking
and Merchant Card Processing. The Retail and Commercial Banking segment
offers a diverse range of traditional loan and deposit products and
services to individuals and businesses. The Merchant Card Processing
segment is responsible for the processing of third-party credit card
transactions. Results of operations from segments below the quantitative
thresholds are attributable to two operating segments of the Company.
Those segments include ATM Cash Services and Bancorp, the Bank's holding
company. Neither of those segments has ever met any of the quantitative
thresholds for determining reportable segments.
The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies.
The following table includes selected financial information for the
years ended December 31, 1997, 1998 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and
Commercial Banking Merchant Card Processing
----------------------------------------- -----------------------------------------
(Dollars in thousands) 1997 1998 1999 1997 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 12,614 $ 13,849 $ 14,011
Interest expense (5,225) (5,614) (5,110)
--------- --------- --------- --------- --------- ---------
Net interest income 7,389 8,235 8,901
--------- --------- --------- --------- --------- ---------
Provision for loan and lease losses (1,705) (1,113) (1,325)
--------- --------- --------- --------- --------- ---------
Net interest income after pro-
vision for loan and lease
losses 5,684 7,122 7,576
Non-interest income 868 1,210 1,760 $ 1,323 $ 1,341 $ 1,085
Depreciation expense (229) (295) (365) (4) (5) (4)
Other non-interest expense (5,453) (6,483) (7,006) (171) (193) (346)
--------- --------- --------- --------- --------- ---------
Income before income taxes $ 870 $ 1,554 $ 1,965 $ 1,148 $ 1,143 $ 735
========= ========= ========= ========= ========= =========
Segment assets $ 169,673 $ 197,224 $ 199,827 $ 15 $ 16 $ 12
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
All Other Consolidated Total
----------------------------------------- -----------------------------------------
(Dollars in thousands) 1997 1998 1999 1997 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 12,614 $ 13,849 $ 14,011
Interest expense (5,225) (5,614) (5,110)
--------- --------- --------- --------- --------- ---------
Net interest income 7,389 8,235 8,901
--------- --------- --------- --------- --------- ---------
Provision for loan and lease losses (1,705) (1,113) (1,325)
--------- --------- --------- --------- --------- ---------
Net interest income after pro-
vision for loan and lease
losses 5,684 7,122 7,576
Non-interest income $ 251 $ 896 2,191 2,802 3,741
Depreciation expense (11) (233) (300) (380)
Other non-interest expense $ (104) (87) (529) (5,728) (6,763) (7,881)
--------- --------- --------- --------- --------- ---------
Income before income taxes $ (104) $ 164 $ 356 $ 1,914 $ 2,861 $ 3,056
========= ========= ========= ========= ========= =========
Segment assets $ 34 $ 2,542 $ 11,955 $ 169,722 $ 199,782 $ 211,794
========= ========= ========= ========= ========= =========
</TABLE>
F-72
<PAGE> 228
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 373,445 $ 165,475
Investment in subsidiary 14,796,283 15,436,106
Investment in leasing company 2,335,967 2,793,416
Other assets 205,562 242,975
------------ ------------
$ 17,711,257 $ 18,637,972
============ ============
SHAREHOLDERS' EQUITY
Common stock $ 12,824,202 $ 15,413,603
Retained earnings 4,908,485 4,077,990
Accumulated other comprehensive loss (21,430) (853,621)
------------ ------------
$ 17,711,257 $ 18,637,972
============ ============
</TABLE>
F-73
<PAGE> 229
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Dividends declared by subsidiary - eliminated
in consolidation $ 125,000 $ 662,219 $ 500,000
---------- ---------- ----------
Expenses:
Professional fees 79,571 82,478 163,255
Other expenses 24,006 4,318 22,944
---------- ---------- ----------
Total expenses 103,577 86,796 186,199
---------- ---------- ----------
Income before equity in undistributed
income of subsidiary and undistributed
income of investment in leasing company 21,423 575,423 313,801
Equity in undistributed income of investment in
leasing company 251,135 444,364
Equity in undistributed income of subsidiary 374,759 1,156,112 1,485,099
---------- ---------- ----------
Income before income taxes 396,182 1,982,670 2,243,264
Income tax benefit 33,000 26,000 3,949
---------- ---------- ----------
Net income $ 429,182 $2,008,670 $2,247,213
========== ========== ==========
</TABLE>
F-74
<PAGE> 230
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 429,182 $ 2,008,670 $ 2,247,213
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Undistributed income of leasing
company (251,135) (444,364)
Undistributed income of subsidiary (374,759) (1,156,112) (1,485,099)
Increase in other assets (132,942) (72,620) (37,413)
------------ ------------ ------------
Net cash (used in) provided by operating
activities (78,519) 528,803 280,337
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 98,942 746,997 602,320
Payment of cash dividends (662,219) (853,980)
Retirement of common stock (260,559) (236,647)
------------ ------------ ------------
Net cash used in (provided by) financing
activities 98,942 (175,781) (488,307)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 20,423 353,022 (207,970)
Cash and cash equivalents at beginning
of period 20,423 373,445
------------ ------------ ------------
Cash and cash equivalents at end of year $ 20,423 $ 373,445 $ 165,475
============ ============ ============
Non-cash investing activities:
Net change in unrealized (loss) gain on
available-for-sale investment securities $ 58,785 $ (52,923) $ (1,392,529)
Unrealized gain resulting from investment
in leasing company $ 13,085
Dividend of investment in leasing company
from the Bank to the Company $ 2,084,832
Non-cash financing activities:
Issuance of common stock in exchange
for assets and liabilities of the Bank $ 15,403,302
</TABLE>
F-75
<PAGE> 231
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is entered into as of September 20, 2000 by and between Humboldt Bancorp, a
California corporation ("Humboldt"), and Tehama Bancorp, a California
corporation ("Tehama").
RECITALS:
WHEREAS, the respective Boards of Directors of Tehama and Humboldt have
determined that it is in the best interests of Tehama and Humboldt and their
respective shareholders for Tehama to be merged with Humboldt, upon the terms
and subject to the conditions set forth in this Agreement and in accordance with
the California Corporations Code and other applicable laws;
WHEREAS, Tehama Bank is a wholly-owned subsidiary of Tehama and Humboldt
Bank, Capitol Valley Bank and Capitol Thrift & Loan Association are wholly-owned
subsidiaries of Humboldt;
WHEREAS, each of the Boards of Directors of Tehama and Humboldt have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, Tehama's and Humboldt's Boards of Directors have resolved to
recommend approval of the merger of Tehama and Humboldt to their respective
shareholders; and
WHEREAS, upon the consummation of the Merger of Tehama with Humboldt,
Tehama Bank shall become a wholly-owned subsidiary of Humboldt.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, Tehama and Humboldt
hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, either Tehama or
Humboldt shall have authorized, recommended, publicly proposed
or publicly announced an intention to authorize, recommend or
propose, or shall have entered or announced an intention to
enter into a letter of intent, an agreement-in-principle or a
definitive agreement with any Person (other than Tehama,
Humboldt or any of
A-1
<PAGE> 232
their respective Subsidiaries) to effect, an Acquisition
Transaction or failed to publicly oppose a Tender Offer or an
Exchange Offer (as defined below). As used herein, the term
"Acquisition Transaction" shall mean (i) a merger, consolidation
or similar transaction involving Tehama, Humboldt or any of
their respective Subsidiaries (other than internal mergers,
reorganizations, consolidations or dissolutions involving only
existing Subsidiaries), (ii) the disposition, by sale, lease,
exchange, dissolution or liquidation, or otherwise, of all or
substantially all of the assets of Tehama or Humboldt or any
asset or assets of Tehama or Humboldt the disposition or lease
of which would result in a material change in the business or
business operations of Tehama or Humboldt, a transfer (other
than routine or previously scheduled transactions involving
existing Employee Plans or Benefit Arrangements) of any shares
of stock or other securities of Tehama or Humboldt by Tehama or
Humboldt, or a material change in the assets, liabilities or
results of operations or the future prospects of Tehama or
Humboldt, including, but not limited to a grant of an option
entitling any Person (other than Tehama or Humboldt) to acquire
any shares of stock of Tehama or Humboldt or any assets material
to the business of Tehama or Humboldt; or (iii) the issuance
(other than pursuant to outstanding stock options or pursuant to
Section 8.5) sale or other disposition by Tehama or Humboldt
(including, without limitation, by way of merger, consolidation,
share exchange or any similar transaction) of shares of Tehama
Common Stock or Humboldt Common Stock or other Equity
Securities, or the grant of any option, warrant or other right
to acquire shares of Tehama Common Stock or Humboldt Common
Stock or other Equity Securities, representing directly, or on
an as-exercised, as-exchanged or as-converted basis (in the case
of options, warrants, rights or exchangeable or convertible
Equity Securities), 15% or more of the voting securities of
Tehama or Humboldt;
(b) Prior to termination of this Agreement (i) any Person (other
than a person who is a party to a Director Shareholder
Agreement) shall have increased the number of shares of Tehama
Common Stock or Humboldt Common Stock over which such person has
beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) by a number that is greater
than 1% of the then outstanding shares of Tehama Common Stock or
Humboldt Common Stock if, after giving effect to such increase,
such Person owns, beneficially, more than 10% of the outstanding
shares of Tehama Common Stock or Humboldt Common Stock, or (ii)
any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns, or has the right
to acquire beneficial ownership of, more than 10% of the then
outstanding shares of Tehama Common Stock or Humboldt Common
Stock; or
(c) The approval by Tehama's or Humboldt's shareholders, or the
consummation by Tehama or Humboldt, of any Acquisition
Transaction as described in Subsection (a) of this Paragraph.
A-2
<PAGE> 233
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5 and 6.4.12.
"Affected Party" shall have the meaning given to it in Section 5.7.
"Affiliate" or "affiliate" shall mean, with respect to any other Person,
any Person that, directly or indirectly, controls or is controlled by or
is under common control with such Person.
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3.
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law of
the State of California.
"California Financial Code" shall mean the Financial Code of the State
of California.
"CDFI" shall mean the California Department of Financial Institutions.
"Classified Assets" shall have the meaning given to such term in Section
6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section 2.1.
"Closing Schedules" shall have the meaning given to such term in Section
5.7.
"Commissioner" shall mean the Commissioner of Financial Institutions of
the State of California.
"Conversion Rate" shall mean 1.775 shares of Humboldt Common Stock
(except if the Humboldt Average Trading Price is less than $9.84375 but
equal to or greater than $9.75, the Conversion Rate shall mean the
quotient of $17.473 divided by the Humboldt Average Trading Price,
otherwise the Conversion Rate shall remain at 1.775). If the Humboldt
Average Trading Price is less than $9.75, the parties may renegotiate
the Conversion Rate.
A-3
<PAGE> 234
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements or
covenants of such party contained in Articles 5 or 6.
"Director Shareholder Agreement" shall have the meaning given such term
in Sections 7.2.10 and 7.3.10.
"Dissenting Shares" shall mean shares of Tehama Common Stock or Humboldt
Common Stock which come within all of the descriptions set forth in
Subparagraphs (1), (2), (3) and (4) of Paragraph (b) of Section 1300 of
the California Corporations Code.
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Paragraph (a)
of Section 1301 of the California Corporations Code.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any
Governmental Entity pertaining to health or to the environment,
including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the Federal Water Pollution Control Act
Amendments, the Occupational Safety and Health Act of 1970, as amended,
the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"),
the Hazardous Materials Transportation Act of 1975, as amended, the Safe
Drinking Water Act, as amended, and the Toxic Substances Control Act, as
amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean Illinois Stock Transfer, or such other
Person as Humboldt shall have appointed to perform the duties set forth
in Section 2.8.
"Exchange Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of an exchange offer or the filing by
any Person of a registration statement under the Securities Act with
respect to an exchange offer to purchase any shares of Tehama Common
Stock or Humboldt Common Stock such that, upon consummation of
A-4
<PAGE> 235
such offer, such Person would own or control 15% or more of the then
outstanding shares of Tehama Common Stock or Humboldt Common Stock.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Entity" shall mean any court, federal, state, local or
foreign government or any administrative agency or commission or other
governmental authority or instrumentality whatsoever.
"Hazardous Substances" shall have the meaning given such term in Section
3.23.4.
"Humboldt" shall mean Humboldt Bancorp.
"Humboldt Average Trading Price" shall mean shall mean the average
closing price during regular hours for Humboldt Common Stock as reported
on the NASDAQ National Market System during the twenty prior days on
which Humboldt Common Stock traded ending with the end of the fifth day
immediately preceding the Effective Time.
"Humboldt Collateralizing Real Estate" shall have the meaning given to
such term in Section 4.19.1.
"Humboldt Common Stock" shall mean the common stock, no par value per
share, of Humboldt.
"Humboldt Documents" shall have the meaning given to such term in
Section 4.6.2.
"Humboldt Fairness Opinion" shall have the meaning given to such term in
Section 7.2.9.
"Humboldt Filings" shall have the meanings given such term in Section
4.6.1.
"Humboldt Financial Statements" shall mean the financial statements of
Humboldt for the year ended December 31, 1999.
"Humboldt Market Value Per Share" shall mean the last trade of Humboldt
Common Stock prior to the Effective Time.
"Humboldt Material Adverse Event" shall have the meaning given to such
term in Section 8.1.9
A-5
<PAGE> 236
"Humboldt Properties" shall have the meaning given to such term in
Section 4.19.1.
"Humboldt Stock Plans" shall have the meaning set forth in Section 4.5.
"Humboldt Superior Proposal" shall have the meaning set forth in Section
6.4.12.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning given to such
term in Section 3.7.2.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement, the actual knowledge, after reasonable
inquiry, of any director or executive officer of Tehama or Humboldt.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable federal
laws of the United States and laws of any state having jurisdiction over
the Merger, to permit the parties to consummate the Merger.
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or
prospects of a Person and its subsidiaries, if any, taken as a whole
(unless specifically indicated otherwise); or (ii) on the ability of a
Person that is a party to this Agreement to perform its obligations
under this Agreement or to consummate the transactions contemplated by
this Agreement.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Agreement" shall have the meaning given to such term in Section
2.1.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OREO" shall have the meaning given such term in Section 3.13.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on Tehama or Humboldt in accordance
with Paragraph (b) of Section 1301 of the California Corporations Code
and has not withdrawn such demand prior to the Effective Time.
"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.
A-6
<PAGE> 237
"Registration Statement" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements, and
other documents required to be filed with respect to federal, state,
local and foreign Taxes, and the term "Return" means any one of the
foregoing Returns.
"Tehama" shall mean Tehama Bancorp.
"Tehama Certificates" shall have the meaning given such term in Section
2.8.1. "Tehama Collateralizing Real Estate" shall have the meaning given
such term in Section 3.23.1.
"Tehama Common Stock" shall mean the common stock, no par value, of
Tehama.
"Tehama Documents" shall have the meaning given to such term in Section
3.6.2.
"Tehama Fairness Opinion" shall have the meaning given to such term in
Section 7.3.7.
"Tehama Filings" shall have the meaning given such term in Section
3.6.1.
"Tehama Financial Statements" shall have the meaning given to such term
in Section 3.7.3.
"Tehama Material Adverse Event" shall have the meaning given such term
in Section 8.1.8.
"Tehama Properties" shall have the meaning given such term in Section
3.23.1.
"Tehama Stock Options" shall mean any options to purchase any shares of
Tehama Common Stock or any other Equity Securities of Tehama granted on
or prior to the Effective Time, whether pursuant to the Tehama Stock
Option Plans or otherwise.
"Tehama Stock Option Plans" shall mean Tehama's written 1994 and 1999
Stock Option Plans as described in Schedule 3.5 hereto.
"Tehama Superior Proposal" shall have the meaning set forth in Section
6.2.5.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
A-7
<PAGE> 238
"Subsidiary" shall mean, with respect to any corporation (the "parent"),
any other corporation, association or other business entity of which
more than 50% of the shares of the Voting Stock are owned or controlled,
directly or indirectly, by the parent or by one or more Subsidiaries of
the parent, or by the parent and one or more of its Subsidiaries.
"Surviving Corporation" shall have the meaning given to such term in
Section 2.1.
"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, or other taxes, together
with any interest and any penalties, additions to tax, or additional
amounts with respect thereto, and the term "Tax" means any one of the
foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal
Governmental Entity before the Merger may become effective, including,
but not limited to, any filing required to be made with the California
Franchise Tax Board to obtain a Tax Clearance Certificate for the
Merger.
"Tender Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of a tender offer or the filing by
any person of a registration statement under the Securities Act with
respect to, a tender offer to purchase any shares of Tehama Common Stock
or Humboldt Common Stock such that, upon consummation of such offer,
such person would own or control 15% or more of the then outstanding
voting securities of Tehama or Humboldt.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote
in the election of the directors, trustees or Persons performing similar
functions of the Person in question, including, without limitation,
nonvoting securities that are convertible or exchangeable into voting
securities, but shall not include any stock or other interest so
entitling the holders thereof to vote only upon the happening of a
contingency (other than a conversion or exchange thereof into voting
securities), whether or not such contingency has occurred.
ARTICLE 2. THE MERGER
Section 2.1 The Merger. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, Tehama
shall be merged with Humboldt, with Humboldt being the
A-8
<PAGE> 239
Surviving Corporation of the merger, all pursuant to the Agreement of Merger
attached to this Agreement as Exhibit 2.1 (the "Merger Agreement") and in
accordance with the applicable provisions of the California Corporations Code
(the "Merger"). The closing of the Merger (the "Closing") shall take place at a
location and time and Business Day to be designated by Humboldt and reasonably
concurred to by Tehama (the "Closing Date") which shall not, however, unless the
parties agree otherwise in writing, be later than thirty (30) days after the
receipt of necessary shareholder approvals and the Last Regulatory Approval and
expiration of all applicable waiting periods. The Merger shall be effective when
the Merger Agreement (together with any other documents required by law to
effectuate the Merger) shall have been filed with the Secretary of State of the
State of California. When used in this Agreement, the term "Effective Time"
shall mean the time of filing of the Merger Agreement with the Secretary of
State, and "Surviving Corporation" shall mean Humboldt.
Section 2.2 Effect of Merger. By virtue of the Merger and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of Tehama and Humboldt shall
be vested in and be held and enjoyed by the Surviving Corporation, without
further act or deed, and all the estates and interests of every kind of Tehama
and Humboldt, including all debts due to either of them, shall be as effectively
the property of the Surviving Corporation as they were of Tehama and Humboldt
immediately prior to the Effective Time, and the title to any real estate vested
by deed or otherwise in either Tehama or Humboldt shall not revert or be in any
way impaired by reason of the Merger; and all rights of creditors and liens upon
any property of Tehama and Humboldt shall be preserved unimpaired and all debts,
liabilities and duties of Tehama and Humboldt shall be debts, liabilities and
duties of the Surviving Corporation and may be enforced against it to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by it, and none of such debts, liabilities or duties shall be expanded,
increased, broadened or enlarged by reason of the Merger.
Section 2.3 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of Humboldt in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation until amended and the name of the Surviving Corporation
shall be "Humboldt Bancorp."
Section 2.4 Conversion of Humboldt Stock. The authorized and issued
capital stock of Humboldt immediately prior to the Effective Time, on and after
the Effective Time, pursuant to the Merger Agreement and without any further
action on the part of Humboldt shall remain as the common stock of the Surviving
Corporation.
Section 2.5 Conversion of Tehama Stock Options. At the Effective Time,
all outstanding rights with respect to Tehama Common Stock pursuant to stock
options under the Tehama Stock Option Plans shall be converted into and become
equivalent rights with respect to Humboldt Common Stock at the applicable
Conversion Rate with a corresponding adjustment in the option price, and
Humboldt shall assume each Tehama Stock Option in accordance with the terms of
Tehama Stock Option Plans and the stock option agreement by which it is
evidenced.
A-9
<PAGE> 240
Section 2.6 Conversion of Tehama Common Stock. Except as provided in
Section 2.7, each share of Tehama Common Stock shall be converted at the
Effective Time into and become the right to receive that number of shares of
duly authorized, validly issued, fully paid and nonassessable shares of Humboldt
Common Stock equal to the Conversion Rate, subject to adjustment, if any, as
provided in any other section of this Agreement; provided, however, that the
shares held by any shareholder who properly exercises dissenters' rights
provided under the California Corporations Code, shall not be so converted and
in lieu of such conversion shall be treated in accordance with the provisions of
the California Corporations Code.
Section 2.7 Fractional Shares. No fractional shares of Humboldt Common
Stock shall be issued in the Merger. In lieu thereof, each holder of Tehama
Common Stock who would otherwise be entitled to receive a fractional share shall
receive an amount in cash equal to the product (rounded to the nearest
hundredth) obtained by multiplying (a) Humboldt Market Value Per Share by (b)
the fraction of a share of Humboldt Common Stock to which such holder would
otherwise be entitled. No such holder shall be entitled to dividends or other
rights in respect of any such fraction.
Section 2.8 Exchange Procedures. On or as soon as practicable after the
Effective Time, (i) Humboldt will deliver to the Exchange Agent: (i)
certificates representing the number of shares of Humboldt Common Stock issuable
in the Merger; and (ii) cash for the payout of fractional shares.
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of Tehama Common Stock ("Tehama
Certificates"), accompanied by a duly executed letter of transmittal in proper
form, the Exchange Agent shall, as promptly as practicable thereafter, deliver
to each holder of such surrendered Tehama Certificates, certificates
representing the appropriate number of shares of Humboldt Common Stock ("New
Certificates") and/or checks for payment of cash in lieu of fractional shares,
in respect of the Tehama Certificates. In no event shall the holders of Tehama
Certificates be entitled to receive interest on cash amounts due them hereunder.
2.8.2 Until a Tehama Certificate has been surrendered and
exchanged as herein provided, each share of Tehama Common Stock represented by
such Tehama Certificate shall represent, on and after the Effective Time, the
right to receive the Conversion Rate into which each such share of Tehama Common
Stock shown thereon has been converted as provided by Section 2.6, including the
right to vote such shares of Humboldt Common Stock. No dividends or other
distributions that are declared on any shares of Humboldt Common Stock into
which any shares of Tehama Common Stock have been converted at the Effective
Time shall be paid to the holder of such Tehama shares until the Tehama
Certificates evidencing such Tehama shares have been surrendered in exchange for
New Certificates in the manner herein provided, but upon such surrender, such
dividends or other distributions, from and after the Effective Time, will be
paid to such holders. In no event shall the holders entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
A-10
<PAGE> 241
2.8.3 No transfer taxes shall be payable by any shareholder in
respect to the issuance of New Certificates, except that if any New Certificate
is to be issued in a name other than that in which the Tehama Certificates
surrendered shall have been registered, it shall be a condition of such issuance
that the holder requesting such issuance shall properly endorse the certificate
or certificates and shall pay to Humboldt or the Exchange Agent any transfer
taxes payable by reason thereof, or of any prior transfer of such surrendered
certificate, or establish to the satisfaction of Humboldt or the Exchange Agent
that such taxes have been paid or are not payable.
2.8.4 Any Humboldt Common Stock or cash delivered to the
Exchange Agent and not distributed pursuant to this Section 2.8 at the end of
nine months from the Effective Time, shall be returned to Humboldt, in which
event the Persons entitled thereto shall look only to Humboldt for payment
thereof.
2.8.5 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 and 2.8.3 hereof, if any holder of Tehama Common Stock shall be
unable to surrender such holder's Tehama Certificates because such Tehama
Certificates have been lost or destroyed, such holder may deliver in lieu
thereof an affidavit and indemnity undertaking in form and substance and, if
required, with surety satisfactory to the Exchange Agent and Humboldt.
2.8.6 The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of Humboldt Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such shares of Humboldt Common Stock for the account of the Persons entitled
thereto.
2.8.7 After the Effective Time, there shall be no further
registration of transfers of the shares of Tehama Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Tehama Certificates representing such shares of Tehama Common Stock are
presented to Humboldt, they shall be canceled and exchanged for Humboldt Common
Stock as provided in this Article 2.
Section 2.9 Board of Directors of Humboldt and Tehama Bank following the
Effective Time. At the Effective Time and thereafter through the end of the term
for which directors are elected at Humboldt's 2001 annual meeting, the Board of
Directors of Humboldt shall total 11 directors of which seven directors shall be
existing directors of Humboldt and four directors shall be existing directors of
Tehama, provided that such number of directors may be modified during such
period by vote of a majority of the seven Humboldt directors and of a majority
of the four Tehama directors. Such directors shall be listed on Schedule 2.9 and
shall be appointed as directors of Humboldt to serve until the next annual
meeting of shareholders of Humboldt and until such successors are elected and
qualified. In the event an individual listed on Schedule 2.9 shall not be able
to serve as a director at the Effective Time and until the next annual meeting
of shareholders of Humboldt, the existing directors of Humboldt or Tehama
depending upon which Board of Directors such individual served, shall appoint a
replacement. At the Effective Time, the then existing Board of Directors of
A-11
<PAGE> 242
Tehama Bank shall total 16 directors with 14 existing directors of Tehama Bank
and two persons to be selected by Humboldt.
Section 2.10 Management of Humboldt and Tehama Bank following the
Effective Time. At the Effective Time, the then existing management of Humboldt
shall be the management of the Surviving Corporation and the management of
Tehama Bank shall continue as the management of Tehama Bank after the Effective
Time.
Section 2.11 Expenses. Each party will pay their own expenses except
that the parties will share the costs identified with preparation of the proxy
materials by Bartel Eng Linn & Schroder, including the Registration Statement
and printing related expenses, on the basis of 63% Humboldt and 37% Tehama.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF TEHAMA
Tehama represents and warrants to Humboldt as follows:
Section 3.1 Organization; Corporate Power; Etc. Tehama is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. Tehama is
a bank holding company registered under the BHCA. Each of Tehama's Subsidiaries
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business substantially as it is being conducted
on the date of this Agreement, except where the failure to have such power or
authority would not have a Material Adverse Effect on Tehama taken as a whole or
the ability of Tehama to consummate the transactions contemplated by this
Agreement. Tehama has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining all requisite Regulatory Approvals,
Tehama will have the requisite corporate power and authority to perform its
respective obligations hereunder with respect to the consummation of the
transactions contemplated hereby. Tehama is the sole shareholder of Tehama Bank.
Tehama Bank is a California state-chartered banking institution duly organized,
validly existing and in good standing under the laws of the State of California
and has all requisite corporate power and authority to own, lease and operate
its properties and assets and to carry on its business substantially as it is
being conducted on the date of this Agreement. Tehama Bank is authorized by the
CDFI to conduct a general banking business. Tehama Bank is a member of the
Federal Reserve System. Tehama Bank's deposits are insured by the FDIC in the
manner and to the full extent provided by law. Tehama Bank maintains and
operates branch offices only in the State of California. Neither the scope of
business or Tehama, or any Subsidiary of Tehama, including Tehama Bank, nor the
location of any of their respective properties, requires that Tehama or any of
its respective Subsidiaries be licensed or qualified to conduct business in any
jurisdiction other than the state of California, where the failure to be so
licensed or qualified would, individually or in the aggregate, have a Material
Adverse Effect on Tehama taken as a whole.
A-12
<PAGE> 243
Section 3.2 Licenses and Permits. Except as disclosed on Schedule 3.2,
Tehama and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on Tehama or on the ability of
Tehama to consummate the transactions contemplated by this Agreement. The
properties, assets, operations and businesses of Tehama, and those of its
Subsidiaries, including Tehama Bank, are and have been maintained and conducted,
in all material respects, in compliance with all applicable licenses,
certificates, franchises, rights and permits.
Section 3.3 Subsidiaries. Other than as set forth on Schedule 3.3, there
is no corporation, partnership, joint venture or other entity in which Tehama
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 3.4 Authorization of Agreement; No Conflicts.
3.4.1 The execution and delivery of this Agreement and the
Merger Agreement by Tehama, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of Tehama, subject only to the approval of this
Agreement, the Merger Agreement and the Merger by Tehama's shareholders. This
Agreement has been duly executed and delivered by Tehama and constitutes a
legal, valid and binding obligation of Tehama, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles. The Merger Agreement, upon the
receipt of all Requisite Regulatory Approvals and the due execution and filing
of such Merger Agreement in accordance with the applicable provisions of the
California Corporations Code, will constitute a legal, valid and binding
obligation of Tehama, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and by general
equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and will not conflict with,
or result in any violation of or default or loss of a material benefit under,
any provision of the Articles of Incorporation or Bylaws of Tehama, or except
for the necessity of obtaining Requisite Regulatory Approvals, and the approval
of the shareholders of Tehama, any material mortgage, indenture, lease,
agreement or other material instrument or any permit, concession, grant,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Tehama or any of its assets or properties, other than
any such conflict, violation, default or loss which (i) will not have a Material
Adverse Effect on Tehama, or on Humboldt immediately following consummation of
the Merger; or (ii) will be cured or waived prior to the Effective Time. No
material consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required in connection
with the execution and
A-13
<PAGE> 244
delivery of this Agreement or the Merger Agreement by Tehama or the performance
by Tehama of its obligations hereunder and thereunder, except for (a) filings
required in order to obtain the Requisite Regulatory Approvals; (b) the filing
and approval of the Merger Agreement with the Secretary of the State of
California; and (c) Tax Filings.
Section 3.5 Capital Structure. The authorized capital stock of Tehama
consists of 4,000,0000 shares of Tehama Common Stock, no par value per share and
2,000,000 shares of preferred stock. On the date of this Agreement, 1,896,140
shares of Tehama Common Stock were outstanding, no shares of preferred stock
were outstanding and 241,627 shares of Tehama Common Stock were reserved for
issuance pursuant to outstanding Tehama Stock Options under the Tehama Stock
Option Plans. All outstanding shares of Tehama Common Stock are validly issued,
fully paid and nonassessable and do not possess any preemptive rights and were
not issued in violation of any preemptive rights or any similar rights of any
Person. Except for the Tehama Stock Options and Tehama's obligations under the
Shareholder Protection Rights Plan, both described on Schedule 3.5 to this
Agreement, Tehama does not have outstanding any options, warrants, calls,
rights, commitments, securities or agreements of any character to which Tehama
is a party or by which it is bound obligating Tehama to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
Tehama or obligating Tehama to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 3.6 Tehama Filings.
3.6.1 Since January 1, 1997, Tehama and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the Federal Reserve Board or any Federal Reserve Bank; (b) the CDFI; (c) the
FDIC; (d) the SEC; (e) the California Department of Corporations; and (f) any
other applicable federal, state or local governmental or regulatory authority.
All such reports, registrations and filings, and all reports sent to Tehama's
shareholders during the three-year period ended December 31, 1999 (whether or
not filed with any Regulatory Authority), are collectively referred to as the
"Tehama Filings. Except to the extent prohibited by law, copies of the Tehama
Filings have been made available to Humboldt. As of their respective filing or
mailing dates, each of the past Tehama Filings (a) was true and complete in all
material respects (or was amended so as to be so promptly following discovery of
any discrepancy); and (b) complied in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the governmental or
regulatory authority with which it was filed (or was amended so as to be so
promptly following discovery of any such noncompliance) and none contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Tehama
Financial Statements, together with the financial statements contained in the
Tehama Filings, have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in
A-14
<PAGE> 245
nature and amount) the financial position of Tehama as of the dates thereof and
the results of its operations, cash flows and changes in shareholders' equity
for the periods then ended.
3.6.2 Tehama, or Tehama Bank, as the case may be, has filed each
report, schedule and amendments to each of the foregoing since January 1, 1997
that Tehama or Tehama Bank was required to file with the Federal Reserve Board,
the SEC, the FDIC, the California Department of Corporations or the CDFI (the
"Tehama Documents"), all of which have been made available to Humboldt. As of
their respective dates, the Tehama Documents complied in all material respects
with the applicable requirements of the BHCA, the Exchange Act, the Federal
Deposit Insurance Act and the California Financial Code, as the case may be, and
the rules and regulations of the Federal Reserve Board, the FDIC, the SEC, the
California Department of Corporations and the CDFI thereunder applicable to such
Tehama Documents, and none of the Tehama Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Tehama included in the Tehama Filings comply in all material
respects with applicable regulatory accounting requirements and with the
published rules and regulations of the Federal Reserve Board, the FDIC, the SEC
or the CDFI (as applicable) with respect thereto, and have been prepared in
accordance with GAAP, or applicable regulatory accounting principles, applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted by
regulations of the Federal Reserve Board, the FDIC or the CDFI) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the financial position of Tehama as of
the dates thereof and the consolidated results of its operations and cash flows
or changes in financial position for the periods then ended.
Section 3.7 Accuracy of Information Supplied.
3.7.1 No representation or warranty of Tehama contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of Tehama or any of its Subsidiaries, including Tehama Bank, to Humboldt
in connection herewith and none of the information supplied or to be supplied by
Tehama or its Subsidiaries, including Tehama Bank, to Humboldt hereunder to the
best of Tehama's Knowledge contains or will contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
3.7.2 None of the information supplied or to be supplied by
Tehama or relating to Tehama and approved by Tehama which is included or
incorporated by reference in (i) the Registration Statement on Form S-4 to be
filed with the SEC by Humboldt in connection with the issuance of shares of
Humboldt Common Stock in the Merger (including the Joint Proxy Statement of
Humboldt and Tehama and the Prospectus of Humboldt ("Joint Proxy
Statement/Prospectus") constituting a part thereof, the "Registration
Statement") will, at the time the Registration Statement becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit
A-15
<PAGE> 246
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) the Joint Proxy Statement/Prospectus and any amendment or
supplement thereto will, at all times from the date of mailing to shareholders
of Tehama through the date of the meeting of shareholders of Tehama to be held
in connection with the Merger, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
Humboldt Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The Joint
Proxy Statement/Prospectus (except for such portions thereof that relate only to
Humboldt and its Subsidiaries) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
3.7.3 Tehama has delivered or will deliver to Humboldt copies
of: (a) the audited balance sheets of Tehama Bank as of December 31, 1999, 1998
and 1997 and the related statements of income, changes in shareholders' equity
and cash flows for the years then ended and the related notes to such financial
statements, all as audited by Perry-Smith LLP, independent public accountants
(the "Tehama Financial Statements"), and Tehama will hereafter until the Closing
Date deliver to Humboldt copies of additional financial statements of Tehama and
its Subsidiaries as provided in Sections 5.1.1(iii) and 6.1.11(iii). The Tehama
Financial Statements have been prepared (and all of said additional financial
statements will be prepared) in accordance with GAAP, or applicable regulatory
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) consistently followed
throughout the periods covered by such statements, and present (and, when
prepared, will present) fairly the financial position of Tehama and its
Subsidiaries, including Tehama Bank, as of the respective dates indicated and
the results of operations, cash flows and changes in shareholders' equity at the
respective dates and for the respective periods covered by such financial
statements (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount). In addition, Tehama has delivered or
made available to Humboldt copies of all management or other letters delivered
to Tehama or Tehama Bank by its independent accountants in connection with any
of the Tehama Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
Tehama or Tehama Bank issued at any time since January 1, 1997, and will make
available for inspection by Humboldt or its representatives, at such times and
places as Humboldt may reasonably request, reports and working papers produced
or developed by such accountants or consultants.
Section 3.8 Compliance with Applicable Laws. Except as disclosed on
Schedule 3.8, to the best of Tehama's Knowledge the respective businesses of
Tehama and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually
A-16
<PAGE> 247
or in the aggregate would not have a Material Adverse Effect on Tehama, or
Humboldt at or following the Effective Time. Except as set forth in Schedule
3.8, to the Knowledge of Tehama no investigation or review by any Governmental
Entity with respect to Tehama or Tehama Bank is pending or threatened, nor has
any Governmental Entity indicated to Tehama or Tehama Bank an intention to
conduct the same.
Section 3.9 Litigation. Except as set forth in Schedule 3.9, to the
Knowledge of Tehama there is no suit, action or proceeding or investigation
pending or threatened against or affecting Tehama or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on Tehama
or its Subsidiaries; nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Tehama or any
of its Subsidiaries that has, or which, insofar as reasonably can be foreseen,
in the future would have, any such Material Adverse Effect. Schedule 3.9
contains a true, correct and complete list, including identification of the
applicable insurance policy covering such litigation, if any, subject to
reservation of rights, if any, the applicable deductible and the amount of any
reserve therefor, of all pending litigation in which Tehama or any of its
Subsidiaries is a named party of which Tehama has Knowledge, and except as
disclosed on Schedule 3.9, all of the litigation shown on such Schedule is
adequately covered by insurance in force, except for applicable deductibles, or
has been adequately reserved for in accordance with Tehama's prior business
practices.
Section 3.10 Agreements with Banking Authorities. Neither Tehama nor any
Subsidiary of Tehama is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 3.11 Insurance. Tehama and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 3.11 contains a list of all policies of insurance and bonds
carried and owned by Tehama or any Subsidiary. None of Tehama or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material current claims outstanding thereunder have
been filed in timely fashion. Tehama and its Subsidiaries have filed claims
with, or given notice of claim to, their insurers or bonding companies in timely
fashion with respect to all material matters and occurrences for which they
believe they have coverage.
Section 3.12 Title to Assets other than Real Property. Each of Tehama
and its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 3.13), it owns or leases, free and clear of all
mortgages, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for: (a) rights
of lessors, lessees or sublessees in such matters as are reflected in a written
lease; (b) encumbrances as set forth in the Tehama Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) encumbrances, if any, that are not substantial
in character, amount or extent and do not detract materially from the value, or
interfere with present use, or the ability of Tehama or its
A-17
<PAGE> 248
Subsidiary to sell or otherwise dispose of the property subject thereto or
affected thereby; and (e) other matters as described in Schedule 3.12.
Materially all such properties and assets are, and require only routine
maintenance to keep them, in good working condition, normal wear and tear
excepted.
Section 3.13 Real Property. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by Tehama or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Each of Tehama and its
respective Subsidiaries has good and marketable title to the real properties
that it owns, as described in such Schedule, free and clear of all mortgages,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (a) rights of lessors,
lessees or sublessees in such matters as are reflected in a written lease; (b)
current Taxes (including assessments collected with Taxes) not yet due and
payable; (c) encumbrances, if any, that are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with
present use, or the ability of Tehama to dispose, of Tehama's interest in the
property subject thereto or affected thereby; and (d) other matters as described
in Schedule 3.13. Tehama and its Subsidiaries have valid leasehold interests in
the leaseholds they respectively hold, free and clear of all mortgages, liens,
security interests, charges, claims, assessments and encumbrances, except for
(a) claims of lessors, co-lessees or sublessees in such matters as are reflected
in a written lease; (b) title exceptions affecting the fee estate of the lessor
under such leases; and (c) other matters as described in Schedule 3.13. To the
best of Tehama's Knowledge, the activities of Tehama and its Subsidiaries with
respect to all real property owned or leased by them for use in connection with
their operations are in all material respects permitted and authorized by
applicable zoning laws, ordinances and regulations and all laws and regulations
of any Governmental Entity. Except as set forth in Schedule 3.13, Tehama and its
Subsidiaries enjoy quiet possession under all material leases to which they are
the lessees and all of such leases are valid and in full force and effect,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles. Materially all buildings and improvements on
real properties owned or leased by Tehama or any of its Subsidiaries are in good
condition and repair, and do not require more than normal and routine
maintenance, to keep them in such condition, normal wear and tear excepted.
Section 3.14 Taxes.
3.14.1 Filing of Returns. Except as set forth on Schedule
3.14.1, Tehama and its Subsidiaries have duly prepared and filed or caused to be
duly prepared and filed all federal, state, and local Returns (for Tax or
informational purposes) which were required to be filed by or in respect of
Tehama and its Subsidiaries, or any of their properties, income and/or
operations on or prior to the Closing Date. As of the time they were filed, the
foregoing Returns accurately reflected the material facts regarding the income,
business, assets, operations, activities, status, and any other information
required to be shown thereon. Except as set forth on Schedule 3.14.1, no
extension of time within which Tehama or any of its Subsidiaries may file any
Return is currently in force.
A-18
<PAGE> 249
3.14.2 Payment of Taxes. Except as disclosed on Schedule 3.14.2
with respect to all amounts in respect of Taxes imposed on Tehama or any
Subsidiary or for which Tehama or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of Tehama or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
3.14.3 Audit History. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of
Tehama or any Subsidiary currently in progress of which Tehama has Knowledge.
Except as disclosed on Schedule 3.14.3, Tehama and its Subsidiaries have not
received any written notices within the three years preceding the Closing Date
of any pending or threatened audit, by the Internal Revenue Service or any
state, local or foreign agency, for any Returns or Tax liability of Tehama or
any Subsidiary for any period. Tehama and its Subsidiaries currently have no
unpaid deficiencies assessed by the Internal Revenue Service or any state, local
or foreign taxing authority arising out of any examination of any of the Returns
of Tehama or any Subsidiaries filed for fiscal years ended on or after December
31, 1995 through the Closing Date, nor to the Knowledge of Tehama is there
reason to believe that any material deficiency will be assessed.
3.14.4 Statute of Limitations. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of Tehama or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of Tehama or any
Subsidiaries are currently pending.
3.14.5 Withholding Obligations. Except as set forth on Schedule
3.14.5, Tehama and its Subsidiaries have withheld from each payment made to any
of their respective officers, directors and employees, the amount of all
applicable Taxes, including, but not limited to, income tax, social security
contributions, unemployment contributions, backup withholding and other
deductions required to be withheld therefrom by any Tax law and have paid the
same to the proper taxing authorities within the time required under any
applicable Tax law.
3.14.6 Tax Liens. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by Tehama or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
3.14.7 Tax Reserves. Tehama and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The Tehama Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
Tehama Financial Statements and all periods prior thereto.
A-19
<PAGE> 250
3.14.8 IRC Section 382 Applicability. None of Tehama or any of
its Subsidiaries, including any party joining in any consolidated return to
which Tehama is a member, underwent an "ownership change" as defined in IRC
Section 382(g) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
3.14.9 Disclosure Information. Within 45 days of the date of
this Agreement, Tehama will deliver to Humboldt Schedule 3.14.9 setting forth
the following information with respect to Tehama and as of the most recent
practicable date (as well as on an estimated pro forma basis as of the Closing
giving effect to the consummation of the transactions contemplated hereby): (a)
Tehama's basis in its assets; (b) the amount of any net operating loss, net
capital loss, unused investment or other credit, unused foreign tax, or excess
charitable contribution allocable to Tehama; and (c) the amount of any deferred
gain or loss allocable to Tehama and arising out of any deferred intercompany
transactions.
Section 3.15 Performance of Obligations. Tehama and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of Tehama or any of its Subsidiaries is in material default under or in
breach of any term or provision of any covenant, contract, lease, indenture or
any other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on Tehama or its Subsidiaries. To Tehama's Knowledge, and except as
disclosed on Schedule 3.15 or in the portion of Schedule 3.16 that identifies
90-day past due or classified or nonaccrual loans, no party with whom Tehama or
any of its Subsidiaries has an agreement that is of material importance to the
businesses of Tehama or its Subsidiaries is in default thereunder.
Section 3.16 Loans and Investments. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of Tehama or its Subsidiaries, including Tehama Bank, are, and
constitute, in all material respects, the legal, valid and binding obligations
of the parties thereto and are enforceable against such parties in accordance
with their terms, except as the enforceability thereof may be limited by
applicable law and otherwise by bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors generally and by general
equitable principles. Except as described on Schedule 3.16, as of July 31, 2000,
no loans or investments held by Tehama or any Subsidiary, including Tehama Bank
are: (i) more than ninety days past due with respect to any scheduled payment of
principal or interest, other than loans on a nonaccrual status; (ii) classified
as "loss," "doubtful," "substandard" or "specially mentioned" by Tehama Bank or
any banking regulators; or (iii) on a nonaccrual status in accordance with
Tehama Bank's loan review procedures. Except as set forth on Schedule 3.16, none
of such assets (other than loans) are subject to any restrictions, contractual,
statutory or other, that would materially impair the ability of the entity
holding such investment to dispose freely of any such assets at any time, except
restrictions on the public distribution or transfer of any such investments
under the Securities Act and the
A-20
<PAGE> 251
regulations thereunder or state securities laws and pledges or security
interests given in connection with government deposits. All loans, leases or
other extensions of credit outstanding, or commitments to make any loans, leases
or other extensions of credit made by Tehama or Tehama Bank to any Affiliates of
Tehama or Tehama Bank are disclosed on Schedule 3.16. For outstanding loans or
extensions of credit where the original principal amounts are in excess of
$50,000 and which by their terms are either secured by collateral or supported
by a guaranty or similar obligation, the security interests have been duly
perfected in all material respects and have the priority they purport to have in
all material respects, other than by operation of law, and, in the case of each
guaranty or similar obligation, each has been duly executed and delivered to
Tehama or any Subsidiary, including Tehama Bank, and to Tehama's Knowledge, is
still in full force and effect.
Section 3.17 Brokers and Finders. Except as set forth on Schedule 3.17,
none of Tehama or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. Tehama agrees to indemnify and hold
harmless Humboldt and its affiliates, and to defend with counsel selected by
Humboldt and reasonably satisfactory to Tehama, from and against any liability,
cost or expense, including attorneys' fees, incurred in connection with a breach
of this Section 3.17.
Section 3.18 Material Contracts. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which Tehama or any
Subsidiary is a party as of the date of this Agreement, except for loans and
other extensions of credit made by Tehama or Tehama Bank in the ordinary course
of its business and those items specifically disclosed in the Tehama Financial
Statements.
Section 3.19 Absence of Material Adverse Effect. Since January 1, 2000,
the respective businesses of Tehama and its Subsidiaries, including Tehama Bank,
have been conducted only in the ordinary course, in the same manner as
theretofore conducted, and no event or circumstance has occurred or is expected
to occur which to Tehama's Knowledge has had or which, with the passage of time
or otherwise, could reasonably be expected to have a Material Adverse Effect on
Tehama.
Section 3.20 Undisclosed Liabilities. Except as disclosed on Schedule
3.20, none of Tehama or any of its Subsidiaries to Tehama's Knowledge has any
liabilities or obligations, either accrued, contingent or otherwise, that are
material to Tehama and its Subsidiaries and that have not been: (a) reflected or
disclosed in the Tehama Financial Statements; or (b) incurred subsequent to
December 31, 1999 in the ordinary course of business. Tehama has no Knowledge of
any basis for the assertion against Tehama, or any of its Subsidiaries, of any
liability, obligation or claim (including without limitation that of any
Governmental Entity) that will have or cause, or could reasonably be expected to
have or cause, a Material Adverse Effect on Tehama that is not fully and fairly
reflected and disclosed in the Tehama Financial Statements or on Schedule 3.20.
A-21
<PAGE> 252
Section 3.21 Employees; Employee Benefit Plans; ERISA.
3.21.1 All material obligations of Tehama or its Subsidiaries
for payment to trusts or other funds or to any Governmental Entity or to any
individual, director, officer, employee or agent (or his or her heirs, legatees
or legal representatives) with respect to unemployment compensation benefits,
profit-sharing, pension or retirement benefits or social security benefits,
whether arising by operation of law, by contract or by past custom, have been
properly accrued for the periods covered thereby on the Tehama Financial
Statements and paid when due. All material obligations of Tehama or its
Subsidiaries, whether arising by operation of law, by contract or by past custom
for vacation or holiday pay, bonuses and other forms of compensation which are
payable to their respective directors, officers, employees or agents have been
properly accrued on the Tehama Financial Statements for the periods covered
thereby and paid when due. Except as set forth on Schedule 3.21.1, there are no
unfair labor practice complaints, strikes, slowdowns, stoppages or other
controversies pending or, to the Knowledge of Tehama, attempts to unionize or
controversies threatened between Tehama or any Subsidiary or Affiliate and or
relating to, any of their employees that are likely to have a Material Adverse
Effect on Tehama and its Subsidiaries, taken as a whole. None of Tehama or any
Subsidiary is a party to any collective bargaining agreement with respect to any
of their employees and, except as set forth on Schedule 3.21.1, none of Tehama
or any Subsidiary is a party to a written employment contract with any of their
respective employees and there are no understandings with respect to the
employment of any officer or employee of Tehama or any Subsidiary which are not
terminable by Tehama or such Subsidiary without liability on not more than
thirty (30) days' notice. Except as disclosed in the Tehama Financial Statements
for the periods covered thereby, all material sums due for employee compensation
have been paid and all employer contributions for employee benefits, including
deferred compensation obligations, and all material benefit obligations under
any Employee Plan (as defined in Section 3.21.3 hereof) or any Benefit
Arrangement (as defined in Section 3.21.4 hereof) have been duly and adequately
paid or provided for in accordance with plan documents. Except as set forth on
Schedule 3.21.1, no director, officer or employee of Tehama or any Subsidiary is
entitled to receive any payment of any amount under any existing agreement,
severance plan or other benefit plan as a result of the consummation of any
transaction contemplated by this Agreement or the Merger Agreement. To Tehama's
Knowledge, Tehama and its Subsidiaries have materially complied with all
applicable federal and state statutes and regulations which govern workers'
compensation, equal employment opportunity and equal pay, including, but not
limited to, all civil rights laws, Presidential Executive Order 11246, the Fair
Labor Standards Act of 1938, as amended, and the Americans with Disabilities
Act.
3.21.2 Tehama has delivered as Schedule 3.21.2 a complete list
of:
(a) All current employees of Tehama or any of its
Subsidiaries together with each employee's tenure with Tehama or such
Subsidiary, title or job classification, and the current annual rate of
compensation anticipated to be paid to each such employee; and
(b) All Employee Plans and Benefit Arrangements,
including all plans or practices providing for current compensation or accruals
for active Employees, including, but not
A-22
<PAGE> 253
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 Tehama or
any of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of Tehama or any of its Subsidiaries (any such plan being herein referred to as
an "Employee Plan"). True and complete copies of each such Employee Plan,
including amendments thereto, have been previously delivered or made available
to Humboldt, together with (i) all agreements regarding plan assets with respect
to such Employee Plans, (ii) a true and complete copy of the annual reports for
the most recent three years (Form 5500 Series including, if applicable,
Schedules A and B thereto) prepared in connection with any such Employee Plan,
(iii) a true and complete copy of the actuarial valuation reports for the most
recent three years, if any, prepared in connection with any such Employee Plan
covering any active employee of Tehama or its Subsidiaries, (iv) a copy of the
most recent summary plan description of each such Employee Plan, together with
any modifications thereto, and (v) a copy of the most recent favorable
determination letter (if applicable) from the Internal Revenue Service for each
Employee Plan. Except as disclosed on Schedule 3.21.3 none of the Employee Plans
is a "multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple
employer plan" as covered in Section 412(c) of the IRC, and none of Tehama or
any of its Subsidiaries has been obligated to make a contribution to any such
multiemployer or multiple employer plan within the past five years. None of the
Employee Plans of Tehama or any of its Subsidiaries is, or for the last five
years has been, subject to Title IV of ERISA. Each Employee Plan which is
intended to be qualified under Section 401(a) of the IRC is so qualified and
each trust maintained pursuant thereto is exempt from income tax under Section
501(a) of the IRC, and none of Tehama or any of its Subsidiaries is aware of any
fact which has occurred which would cause the loss of such qualification or
exemption.
3.21.4 Except as disclosed in Schedule 3.21.4, none of Tehama or
any of its Subsidiaries maintains (other than base salary and base wages) any
form of current or deferred compensation, bonus, stock option, stock
appreciation right, severance pay, salary continuation, retirement or incentive
plan or arrangement for the benefit of any director, officer or employee,
whether active or retired, of Tehama or any of its Subsidiaries or for any class
or classes of such directors, officers or employees. Except as disclosed in
Schedule 3.21.4, none of Tehama or any of its Subsidiaries maintains any group
or individual health insurance, welfare or similar plan or arrangement for the
benefit of any director, officer or employee of Tehama or any of its
Subsidiaries, whether active or retired, or for any class or classes of such
directors, officers or employees. Any such plan or arrangement described in this
Section 3.21.4, copies of which have been delivered or made available to
Humboldt, shall be herein referred to as a "Benefit Arrangement."
3.21.5 All Employee Plans and Benefit Arrangements are operated
in material compliance with the requirements prescribed by any and all statutes,
governmental or court orders, or governmental rules or regulations currently in
effect, including but not limited to ERISA and the
A-23
<PAGE> 254
IRC, applicable to such plans or arrangements, and plan documents relating to
any such plans or arrangements, materially comply with or will be amended to
materially comply with applicable legal requirements. None of Tehama or any of
its Subsidiaries, nor any Employee Plan, nor any trusts created thereunder, nor
any trustee, administrator nor any other fiduciary thereof, has engaged in a
"prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of
the IRC, that could subject Tehama or any of its Subsidiaries or Humboldt to
liability under Section 409 or 502(i) of ERISA or Section 4975 of the IRC or
that would adversely affect the qualified status of such plans; each "plan
official" within the meaning of Section 412 of ERISA of each Employee Plan is
bonded to the extent required by such Section 412; with respect to each Employee
Plan, to Tehama's Knowledge, no employee of Tehama or any Subsidiary, nor any
fiduciary of any Employee Plan, has engaged in any breach of fiduciary duty as
defined in Part 4 of Subtitle B of Title I of ERISA which could subject Tehama
or any of its Subsidiaries to liability if Tehama or any such Subsidiary is
obligated to indemnify such Person against liability. Except as disclosed in
Schedule 3.21.5, Tehama and its Subsidiaries have not failed to make any
material contribution or pay any amount due and owing as required by law or the
terms of any Employee Plan or Benefit Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee Plan
or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, to Tehama's Knowledge there is no pending or threatened
legal action, proceeding or investigation against any Employee Plan which could
result in material liability to such Employee Plan, other than routine claims
for benefits, and there is no basis for any such legal action, proceeding or
investigation.
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(g)(2)) materially
complies and has materially complied with the requirements of Section 601
through 608 of ERISA or Section 4980B of the IRC governing continuation coverage
requirements for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of Tehama or
any of its Subsidiaries maintains any Employee Plan or Benefit Arrangement
pursuant to which any benefit or other payment will be required to be made by
Tehama or any of its Subsidiaries or Affiliates or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of Tehama or
any Subsidiary or Affiliate thereof, in either case as a result of the
consummation of the transactions contemplated by this Agreement or the Merger
Agreement.
Section 3.22 Powers of Attorney. No power of attorney or similar
authorization given by Tehama or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
A-24
<PAGE> 255
Section 3.23 Hazardous Materials. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
Tehama and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in and de
minimus quantities discharged from motor vehicles in their ordinary operation on
any of the Tehama Properties (as defined below), Tehama and its Subsidiaries
have not engaged in the generation, use, manufacture, treatment, transportation,
storage (in tanks or otherwise), or the disposal, of Hazardous Substances other
than as permitted by and only in compliance with applicable law. To Tehama's
Knowledge, no material amount of Hazardous Substances have been released,
emitted or disposed of, or otherwise deposited, on, in or from any real property
which is now or has been previously owned since January 1, 1997, or which is
currently or during the past three years was leased, by Tehama or any of its
Subsidiaries, including OREO (collectively, the "Tehama Properties"), or to
Tehama's Knowledge, on or in any real property in which Tehama or any of its
Subsidiaries now holds any security interest, mortgage or other lien or interest
with an underlying obligation in excess of $25,000 ("Tehama Collateralizing Real
Estate"), except for (i) matters disclosed on Schedule 3.23; (ii) ordinary and
necessary quantities of cleaning, pest control and office supplies used and
stored in compliance with applicable Environmental Laws, or ordinary rubbish,
debris and nonhazardous solid waste stored in garbage cans or bins for regular
disposal off-site, or petroleum contained in, and de minimus quantities
discharged from, motor vehicles in their ordinary operation on such Tehama
Properties; and (iii) such releases, emissions, disposals or deposits which
constituted a violation of an Environmental Law but did not have a Material
Adverse Effect on the Tehama Property involved and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against
Tehama or any of its Subsidiaries in excess of $25,000 individually or in the
aggregate. To Tehama's Knowledge, no activity has been undertaken on any of the
Tehama Properties since January l, 1997, and to the Knowledge of Tehama no
activities have been or are being undertaken on any of the Tehama
Collateralizing Real Estate, that would cause or contribute to:
(a) any of the Tehama Properties or Tehama
Collateralizing Real Estate becoming a treatment, storage or disposal facility
within the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. 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 Tehama Property or Tehama Collateralizing Real Estate involved.
A-25
<PAGE> 256
3.23.2 To Tehama's Knowledge, there are not, and never have
been, any underground storage tanks located in or under any of the Tehama
Properties or the Tehama Collateralizing Real Estate.
3.23.3 None of Tehama or any of its Subsidiaries has received
any written notice of, and to Tehama's Knowledge none has received any verbal
notice of, any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for remedial
or responsive actions or for compensation, with respect to any of the Tehama
Properties or Tehama Collateralizing Real Estate, alleging noncompliance with or
violation of any Environmental Law or seeking relief under any Environmental Law
and none of the Tehama Properties or Tehama Collateralizing Real Estate is
listed on the United States Environmental Protection Agency's National
Priorities List of Hazardous Waste Sites, or, to Tehama's Knowledge any other
list, schedule, log, inventory or record of hazardous waste sites maintained by
any federal, state or local agency.
3.23.4 "Hazardous Substances" shall mean any hazardous, toxic or
infectious substance, material, gas or waste which is regulated by any local,
state or federal Governmental Entity, or any of their agencies.
Section 3.24 Stock Options. Schedule 3.5 to this Agreement contains a
description of the Tehama Stock Option Plans and list of all Tehama Stock
Options outstanding, indicating for each: (a) the grant date; (b) whether vested
or unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of Tehama
set forth in this Agreement shall be deemed to be made on and as of the date
hereof and as of the Effective Time.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HUMBOLDT
Humboldt represents and warrants to Tehama that:
Section 4.1 Organization; Corporate Power; Etc. Humboldt is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. Humboldt
is a bank holding company registered under the BHCA. Each of Humboldt's
Subsidiaries has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business substantially as it is being
conducted on the date of this Agreement, except where the failure to have such
power or authority would not have a Material Adverse Effect on Humboldt taken as
a whole or the ability of Humboldt to consummate the transactions contemplated
by this Agreement. Humboldt has all requisite corporate power and authority to
enter into this Agreement and, subject
A-26
<PAGE> 257
to obtaining all Requisite Regulatory Approvals, Humboldt will have the
requisite corporate power and authority to perform its respective obligations
hereunder with respect to the consummation of the transactions contemplated
hereby. Humboldt is the sole shareholder of Humboldt Bank, Capitol Valley Bank
and Capitol Thrift & Loan. Humboldt Bank and Capitol Valley Bank are California
state-chartered banking institutions duly organized, validly existing and in
good standing under the laws of the State of California and each has all
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business substantially as it is being conducted
on the date of this Agreement. Humboldt Bank and Capitol Valley Bank are
authorized by the CDFI to conduct general banking businesses. Humboldt Bank is
not a member of the Federal Reserve System and Capitol Valley Bank is not a
member of the Federal Reserve System. Both Humboldt Bank's and Capitol Valley
Bank's deposits are insured by the FDIC in the manner and to the full extent
provided by law. Humboldt Bank and Capitol Valley Bank each maintains and
operates branch offices only in the State of California. Capitol Thrift & Loan
is a California state-chartered industrial loan company duly organized, validly
existing and in good standing under the laws of the State of California and has
all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business substantially as it is being
conducted on the date of this Agreement. Capitol Thrift & Loan is authorized by
the CDFI to conduct a general industrial loan business. Capitol Thrift & Loan is
not a member of the Federal Reserve System. Capitol Thrift & Loan's deposits are
insured by the FDIC in the manner and to the full extent provided by law.
Capitol Thrift & Loan maintains and operates branch offices only in the State of
California. Neither the scope of business of Humboldt or any Subsidiary, nor the
location of any of their respective properties, requires that Humboldt or any of
its respective Subsidiaries be licensed to conduct business in any jurisdiction
other than those jurisdictions in which they are licensed or qualified to do
business as a foreign corporation, where the failure to be so licensed or
qualified would, individually or in the aggregate, have a Material Adverse
Effect on Humboldt taken as a whole.
Section 4.2 Licenses and Permits. Except as disclosed on Schedule 4.2,
Humboldt and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on Humboldt taken as a whole,
or on the ability of Humboldt to consummate the transactions contemplated by
this Agreement. The properties, assets, operations and businesses of Humboldt
and those of its Subsidiaries, are and have been maintained and conducted, in
all material respects, in compliance with all applicable licenses, certificates,
franchises, rights and permits.
Section 4.3 Subsidiaries. Other than as set forth on Schedule 4.3, there
is no corporation, partnership, joint venture or other entity in which Humboldt
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
A-27
<PAGE> 258
Section 4.4 Authorization of Agreement; No Conflicts.
4.4.1 The execution and delivery of this Agreement and the
Merger Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
part of Humboldt, subject only to the approval of this Agreement and the Merger
Agreement by Humboldt's shareholders. This Agreement has been duly executed and
delivered by Humboldt and constitutes a legal, valid and binding obligation of
Humboldt, enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the rights of creditors generally and by general equitable
principles. The Merger Agreement, upon the receipt of all Requisite Regulatory
Approvals and the due execution and filing of such Merger Agreement in
accordance with the applicable provisions of the California Corporations Code,
will constitute a legal, valid and binding obligation of Humboldt, enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally or by general equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and will not conflict with, or result in any violation of or
default or loss of a material benefit under, any provision of the Articles of
Incorporation or Bylaws of Humboldt, or except for the necessity of obtaining
the Requisite Regulatory Approvals, and the approval of the shareholders of
Humboldt, any material mortgage, indenture, lease, agreement or other material
instrument, or any permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Humboldt or any of its assets or properties or any of its Subsidiaries, other
than any such conflict, violation, default or loss which (i) will not have a
Material Adverse Effect on Humboldt taken as a whole; or (ii) will be cured or
waived prior to the Effective Time. No material consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required in connection with the execution and delivery of this
Agreement by Humboldt or the performance by Humboldt of its obligations
hereunder, except for (a) filings required in order to obtain Requisite
Regulatory Approvals; (b) the filing of the Registration Statement (including
the Joint Proxy Statement/Prospectus constituting a part thereof) with the SEC
relating to the Merger and the declaration of effectiveness of the Registration
Statement by the SEC and any applicable state securities law regulatory
authorities; (c) the filing and approval of the Merger Agreement with the
Secretary of the State of California; (d) any approvals required to be obtained
pursuant to the BHCA or the Federal Deposit Insurance Act or any other required
governmental approval for the execution and delivery of this Agreement by
Humboldt or the consummation of the Merger; and (e) any consents,
authorizations, approvals, filings or exemptions required to be made or obtained
under the securities or "blue sky" laws of various jurisdictions in connection
with the issuance of shares of Humboldt Common Stock contemplated by this
Agreement.
Section 4.5 Capital Structure of Humboldt. The authorized capital stock
of Humboldt consists of 50,000,000 shares of Humboldt Common Stock, no par value
per share. On the date of this Agreement 5,916,343 shares of Humboldt Common
Stock were outstanding, 1,017,920 shares
A-28
<PAGE> 259
of Humboldt Common Stock were reserved for issuance pursuant to employee stock
option and other employee stock plans (the "Humboldt Stock Plans"). All
outstanding shares of Humboldt Common Stock are validly issued, fully paid and
nonassessable and do not possess any preemptive rights and were not issued in
violation of any preemptive rights or any similar rights of any Person. The
issuance of the shares of Humboldt Common Stock proposed to be issued pursuant
to this Agreement at the Effective Time will have been duly authorized by all
requisite corporate action of Humboldt, and such shares, when issued as
contemplated by this Agreement, will constitute duly authorized, validly issued,
fully paid and nonassessable shares of Humboldt Common Stock, and will not have
been issued in violation of any preemptive or similar rights of any Person. As
of the date of this Agreement, and except for this Agreement, the Humboldt Stock
Plans and as disclosed in Schedule 4.5, Humboldt does not have outstanding any
options, warrants, calls, rights, commitments, securities or agreements of any
character to which Humboldt is a party or by which it is bound obligating
Humboldt to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock of Humboldt or obligating Humboldt to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Humboldt also has outstanding $5,310,000 in 10 7/8% Fixed Rate Junior
Subordinate Deferrable Interest Debentures due 2030 pursuant to an Indenture
dated March 23, 2000.
Section 4.6 Humboldt Filings.
4.6.1 Since January 1, 1997, Humboldt and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the Federal Reserve Board or any Federal Reserve Bank; (b) the CDFI; (c) the
FDIC; (d) the SEC; (e) the California Department of Corporation and (f) any
other applicable federal, state or local governmental or regulatory authority.
All such reports, registrations and filings including the Humboldt Financial
Statements are collectively referred to as the "Humboldt Filings". Except to the
extent prohibited by law, copies of the Humboldt Filings have been made
available to Tehama. As of their respective filing or mailing dates, each of the
past Humboldt Filings (a) was true and complete in all material respects (or was
amended so as to be so promptly following discovery of any discrepancy); and (b)
complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the governmental or regulatory authority
with which it was filed (or was amended so as to be so promptly following
discovery of any such noncompliance) and none contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Humboldt Financial
Statements, together with the financial statements contained in the Humboldt
Filings, have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the period involved
(except as may be indicated in the notes thereto) and fairly present (subject,
in the case of the unaudited statements, to recurring adjustments normal in
nature and amount) the consolidated financial position of Humboldt as of the
dates thereof and the consolidated results of its operations, cash flows and
changes in shareholders' equity for the period then ended.
A-29
<PAGE> 260
4.6.2 Humboldt and its Subsidiaries, have filed each report,
schedule, and amendments to each of the foregoing since January 1, 1997 that
Humboldt, or its Subsidiaries were required to file with the Federal Reserve
Bank, the FDIC, the California Department of Corporations or the CDFI (the
"Humboldt Documents"), all of which have been made available to Tehama. As of
their respective dates, the Humboldt Documents complied in all material respects
with the applicable requirements of the BHCA, the Federal Deposit Insurance Act
and the California Financial Code, as the case may be, and the rules and
regulations of the Federal Reserve Bank, the FDIC, the California Department of
Corporations and the CDFI thereunder applicable to such Humboldt Documents, and
none of the Humboldt Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of Humboldt included in the
Humboldt Filings comply in all material respects with applicable accounting
requirements and have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto, or in the
case of the unaudited statements, as permitted by regulations of the Federal
Reserve Bank, the FDIC, or the CDFI), and fairly present (subject, in the case
of the unaudited statements, to recurring adjustments normal in nature and
amount) the consolidated financial position of Humboldt as of the dates thereof
and the consolidated results of its operations and cash flows or changes in
financial position for the periods then ended.
Section 4.7 Accuracy of Information Supplied.
4.7.1 No representation or warranty of Humboldt contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of Humboldt or any of its Subsidiaries, including Humboldt Bank, Capitol
Valley Bank and Capitol Thrift & Loan, to Tehama in connection herewith and none
of the information supplied or to be supplied by Humboldt or any of its
Subsidiaries, including Humboldt Bank, Capitol Valley Bank and Capitol Thrift &
Loan, to Tehama hereunder to the best of Humboldt's Knowledge contains or will
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.7.2 None of the information supplied or to be supplied by
Humboldt or relating to Humboldt and Humboldt Bank, Capitol Valley Bank and
Capitol Thrift & Loan, which is included or incorporated by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by Humboldt in
connection the issuance of shares of Humboldt Common Stock in the Merger will,
at the time the Registration Statement becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (ii)
the Joint Proxy Statement/Prospectus and any amendment or supplement thereto
will, at all times from the date of mailing to shareholders of Humboldt through
the date of the meeting of shareholders of Humboldt to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
A-30
<PAGE> 261
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
Humboldt Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement (except for such portions thereof that relate only to
Tehama and its Subsidiaries) will comply in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder.
4.7.3 Humboldt has delivered or will deliver to Tehama copies
of: (a) the audited balance sheets of Humboldt and its Subsidiaries as of
December 31, 1999, 1998 and 1997 and the related statements of income, changes
in shareholders' equity and cash flows for the years then ended and the related
notes to such financial statements, all as audited by Richardson & Co.,
independent public accountants (the "Humboldt Financial Statements"), and
Humboldt will hereafter until the Closing Date deliver to Tehama copies of
additional financial statements of Humboldt as provided in Section 5.1.1(iii).
The Humboldt Financial Statements have been prepared (and all of said additional
financial statements will be prepared) in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) consistently
followed throughout the periods covered by such statements, and present (and,
when prepared, will present) fairly the financial position of Humboldt and its
Subsidiaries as of the respective dates and for the respective periods covered
by such financial statements (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount). In addition, Humboldt has
delivered or made available to Tehama copies of all management or other letters
delivered to Humboldt by its independent accountants in connection with any of
the Humboldt Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
Humboldt issued at any time since January 1, 1997, and will make available for
inspection by Tehama or its representatives, at such times and places as Tehama
may reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 4.8 Compliance With Applicable Laws. Except as disclosed on
Schedule 4.8, to the best of Humboldt's Knowledge, the respective businesses of
Humboldt and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on Humboldt and its
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to Humboldt is pending or, to the Knowledge of Humboldt,
threatened, nor has any Governmental Entity indicated to Humboldt an intention
to conduct the same, other than those the outcome of which, as far as can be
reasonably foreseen, will not have a Material Adverse Effect on Humboldt and its
Subsidiaries, taken as a whole.
A-31
<PAGE> 262
Section 4.9 Litigation. Except as disclosed on Schedule 4.9, there is no
suit, action or proceeding or investigation pending or, to the Knowledge of
Humboldt, threatened against or affecting Humboldt or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on Humboldt
and its Subsidiaries, taken as a whole; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Humboldt or any of its Subsidiaries that has, or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect. Schedule 4.9 contains a true, correct and complete list, including
identification of the applicable insurance policy covering such litigation, if
any, subject to reservation of rights, if any, the applicable deductible and the
amount of any reserve therefor, of all pending litigation in which Humboldt or
any of its Subsidiaries is a named party of which Humboldt has Knowledge, and
except as disclosed on Schedule 4.9, all of the litigation shown on such
Schedule is adequately covered by insurance in force, except for applicable
deductibles, or has been adequately reserved for in accordance with Humboldt's
prior business practices.
Section 4.10 Agreements with Banking Authorities. Except at set forth on
Schedule 4.10, neither Humboldt nor any Subsidiary of Humboldt is a party to any
written agreement or memorandum of understanding with, or order or directive
from, any Governmental Entity.
Section 4.11 Insurance. Humboldt and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 4.11 contains a list of all policies of insurance and bonds
carried and owned by Humboldt or any Subsidiary. None of Humboldt or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material current claims thereunder have been filed in
timely fashion. Humboldt and its Subsidiaries have filed claims outstanding
with, or given notice of claim to, their insurers or bonding companies in timely
fashion with respect to all material matters and occurrences for which they
believe they have coverage.
Section 4.12 Title to Assets other than Real Property. Each of Humboldt
and its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 4.13), it owns or leases, free and clear of all
mortgages, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for: (a) rights
of lessors, lessees or sublessees in such matters as are reflected in a written
lease; (b) encumbrances as set forth in the Humboldt Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) encumbrances, if any, that are not substantial
in character, amount or extent and do not detract materially from the value, or
interfere with present use, or the ability of Humboldt or its Subsidiary to sell
or otherwise dispose of the property subject thereto or affected thereby; and
(e) other matters as described in Schedule 4.12. Materially all such properties
and assets are, and require only routine maintenance to keep them, in good
working condition, normal wear and tear excepted.
A-32
<PAGE> 263
Section 4.13 Real Property. Schedule 4.13 is an accurate list and
general description of all real property owned or leased by Humboldt or any of
its Subsidiaries, including OREO. Each of Humboldt and its respective
Subsidiaries has good and marketable title to the real properties that it owns,
as described in such Schedule, free and clear of all mortgages, covenants,
conditions, restrictions, easements, liens, security interests, charges, claims,
assessments and encumbrances, except for (a) rights of lessors, lessees or
sublessees in such matters as are reflected in a written lease; (b) current
Taxes (including assessments collected with Taxes) not yet due and payable; (c)
encumbrances, if any, that are not substantial in character, amount or extent
and do not materially detract from the value, or interfere with present use, or
the ability of Humboldt to dispose, of Humboldt's interest in the property
subject thereto or affected thereby; and (d) other matters as described in
Schedule 4.13. Humboldt and its Subsidiaries have valid leasehold interests in
the leaseholds they respectively hold, free and clear of all mortgages, liens,
security interests, charges, claims, assessments and encumbrances, except for
(a) claims of lessors, co-lessees or sublessees in such matters as are reflected
in a written lease; (b) title exceptions affecting the fee estate of the lessor
under such leases; and (c) other matters as described in Schedule 4.13. To the
best of Humboldt's Knowledge, the activities of Humboldt and its Subsidiaries
with respect to all real property owned or leased by them for use in connection
with their operations are in all material respects permitted and authorized by
applicable zoning laws, ordinances and regulations and all laws and regulations
of any Governmental Entity. Except as set forth in Schedule 4.13, Humboldt and
its Subsidiaries enjoy quiet possession under all material leases to which they
are the lessees and all of such leases are valid and in full force and effect,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles. Materially all buildings and improvements on
real properties owned or leased by Humboldt or any of its Subsidiaries are in
good condition and repair, and do not require more than normal and routine
maintenance, to keep them in such condition, normal wear and tear excepted.
Section 4.14 Performance of Obligations. Humboldt and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of Humboldt or any of its Subsidiaries is in material default under or
in breach of any term or provision of any covenant, contract, lease, indenture
or any other agreement, written or oral, to which any is a party, is subject or
is otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on Humboldt and its Subsidiaries, taken as a whole. To Humboldt's
Knowledge, and except as disclosed on Schedule 4.14, no party with whom Humboldt
or any of its Subsidiaries has an agreement that is of material importance to
the business of Humboldt and its Subsidiaries, taken as a whole, is in default
thereunder.
Section 4.15 Brokers and Finders. Except as set forth on Schedule 4.15,
none of Humboldt or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of the Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein and therein, will
result in any liability to any broker or finder. Humboldt agrees to indemnify
and hold harmless
A-33
<PAGE> 264
Tehama and its affiliates, and to defend with counsel reasonably satisfactory to
Tehama, from and against any liability, cost or expense, including attorneys'
fees, incurred in connection with a breach of this Section 4.15.
Section 4.16 Absence of Material Adverse Effect. Since January 1, 2000,
the respective businesses of Humboldt and its Subsidiaries have been conducted
only in the ordinary course, in substantially the same manner as theretofore
conducted, and no event or circumstance has occurred or is expected to occur
which to Humboldt's Knowledge has had or which, with the passage of time or
otherwise, could reasonably be expected to have a Material Adverse Effect on
Humboldt and its Subsidiaries, taken as a whole.
Section 4.17 Undisclosed Liabilities. Except as disclosed on Schedule
4.17, none of Humboldt or any of its Subsidiaries to Humboldt's Knowledge has
any liabilities or obligations, either accrued, contingent or otherwise, that
are material to Humboldt and its Subsidiaries, taken as a whole, and that have
not been: (a) reflected or disclosed in the Humboldt Financial Statements; or
(b) incurred subsequent to December 31, 1999 in the ordinary course of business.
Humboldt has no Knowledge of any basis for the assertion against Humboldt or any
of its Subsidiaries, of any liability, obligation or claim (including without
limitation that of any Governmental Entity) that will have or cause, or could
reasonably be expected to have or cause, a Material Adverse Effect on Humboldt
and its Subsidiaries, taken as a whole, that is not fairly reflected in the
Humboldt Financial Statements or on Schedule 4.17.
Section 4.18 Taxes.
4.18.1 Filing of Returns. Except as set forth on Schedule
4.18.1, Humboldt and its Subsidiaries have duly prepared and filed or caused to
be duly prepared and filed all federal, state, and local Returns (for Tax or
informational purposes) which were required to be filed by or in respect of
Humboldt and its Subsidiaries, or any of their properties, income and/or
operations on or prior to the Closing Date. As of the time they were filed, the
foregoing Returns accurately reflected the material facts regarding the income,
business, assets, operations, activities, status, and any other information
required to be shown thereon. Except as set forth on Schedule 4.18.1, no
extension of time within which Humboldt or any of its Subsidiaries may file any
Return is currently in force.
4.18.2 Payment of Taxes. Except as disclosed on Schedule 4.18.2
with respect to all amounts in respect of Taxes imposed on Humboldt or any
Subsidiary or for which Humboldt or any Subsidiary is or could be liable,
whether to taxing authorities (as, for example, under law) or to other Persons
(as, for example, under Tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before the Closing Date, all
applicable tax laws and agreements have been or will be fully complied with in
all material respects, and all such amounts required to be paid by or on behalf
of Humboldt or any Subsidiary to taxing authorities or others on or before the
date hereof have been paid.
A-34
<PAGE> 265
4.18.3 Audit History. Except as disclosed on Schedule 4.18.3,
there is no review or audit by any taxing authority of any Tax liability of
Humboldt or any Subsidiary currently in progress of which Humboldt has
Knowledge. Except as disclosed on Schedule 4.18.3, Humboldt and its Subsidiaries
have not received any written notices within the three years preceding the
Closing Date of any pending or threatened audit, by the Internal Revenue Service
or any state, local or foreign agency, for any Returns or Tax liability of
Humboldt or any Subsidiary for any period. Humboldt and its Subsidiaries
currently have no unpaid deficiencies assessed by the Internal Revenue Service
or any state, local or foreign taxing authority arising out of any examination
of any of the Returns of Humboldt or any Subsidiaries filed for fiscal years
ended on or after December 31, 1995 through the Closing Date, nor to the
Knowledge of Humboldt is there reason to believe that any material deficiency
will be assessed.
4.18.4 Statute of Limitations. Except as disclosed on Schedule
4.18.4, no agreements are in force or are currently being negotiated by or on
behalf of Humboldt or any Subsidiaries for any waiver or for the extension of
any statute of limitations governing the time of assessments or collection of
any Tax. No closing agreements or compromises concerning Taxes of Humboldt or
any Subsidiaries are currently pending.
4.18.5 Withholding Obligations. Humboldt and its Subsidiaries
have withheld from each payment made to any of their respective officers,
directors and employees, the amount of all applicable Taxes, including, but not
limited to, income tax, social security contributions, unemployment
contributions, backup withholding and other deductions required to be withheld
therefrom by any Tax law and have paid the same to the proper taxing authorities
within the time required under any applicable Tax law.
4.18.6 Tax Liens. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by Humboldt or its Subsidiaries, except for liens for Taxes that
are not yet due and payable.
4.18.7 Tax Reserves. Humboldt and its Subsidiaries have made
full and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The Humboldt Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
Humboldt Financial Statements and all periods prior thereto.
4.18.8 IRC Section 382 Applicability. None of Humboldt or any of
its Subsidiaries, including any party joining in any consolidated return to
which Humboldt is a member, underwent an "ownership change" as defined in IRC
Section 382(g) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
A-35
<PAGE> 266
Section 4.19 Hazardous Materials. Except as set forth on Schedule 4.19:
4.19.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
Humboldt and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in, and de
minimus quantities discharged from, motor vehicles in their ordinary operation
on any of the Humboldt Properties (as defined below), Humboldt and its
Subsidiaries have not engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or the disposal, of Hazardous
Substances other than as permitted by and only in compliance with applicable
law. To Humboldt's Knowledge, no material amount of Hazardous Substances have
been released, emitted or disposed of, or otherwise deposited, on, in or from
any real property which is now or has been previously owned since January 1,
1997, or which is currently or during the past three years was leased, by
Humboldt or any of its Subsidiaries, including OREO (collectively, the "Humboldt
Properties"), or to Humboldt's Knowledge, on or in any real property in which
Humboldt or any of its Subsidiaries now holds any security interest, mortgage or
other lien or interest with an underlying obligation in excess of $25,000
("Humboldt Collateralizing Real Estate"), except for (i) matters disclosed on
Schedule 4.19; (ii) ordinary and necessary quantities of cleaning, pest control
and office supplies used and stored in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in, and de
minimus quantities discharged from, motor vehicles in their ordinary operation
on such Humboldt Properties; and (iii) such releases, emissions, disposals or
deposits which constituted a violation of an Environmental Law but did not have
a Material Adverse Effect on the Humboldt Property involved and would not result
in the incurrence or imposition of any liability, expense, penalty or fine
against Humboldt or any of its Subsidiaries in excess of $25,000 individually or
in the aggregate. To Humboldt's Knowledge, no activity has been undertaken on
any of the Humboldt Properties since January l, 1997, and to the Knowledge of
Humboldt no activities have been or are being undertaken on any of the Humboldt
Collateralizing Real Estate, that would cause or contribute to:
(a) any of the Humboldt Properties or Humboldt
Collateralizing Real Estate becoming a treatment, storage or disposal facility
within the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(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
A-36
<PAGE> 267
ordinance; the cumulative effect of which would have a material adverse effect
on the Humboldt Property or Humboldt Collateralizing Real Estate involved.
4.19.2 To Humboldt's Knowledge, there are not, and never have
been, any underground storage tanks located in or under any of the Humboldt
Properties or the Humboldt Collateralizing Real Estate.
4.19.3 None of Humboldt or any of its Subsidiaries has received
any written notice of, and to Humboldt's Knowledge none has received any verbal
notice of, any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for remedial
or responsive actions or for compensation, with respect to any of the Humboldt
Properties or Humboldt Collateralizing Real Estate, alleging noncompliance with
or violation of any Environmental Law or seeking relief under any Environmental
Law and none of the Humboldt Properties or Humboldt Collateralizing Real Estate
is listed on the United States Environmental Protection Agency's National
Priorities List of Hazardous Waste Sites, or, to Humboldt's Knowledge, any other
list, schedule, log, inventory or record of hazardous waste sites maintained by
any federal, state or local agency.
Section 4.20 Employees.
4.20.1 Except as set forth in Schedule 4.20.1, there are no
material controversies pending or threatened between Humboldt or any of its
Subsidiaries and any of their employees.
4.20.2 Except as disclosed in the Humboldt Financial Statements
at December 31, 1999, or in Schedule 4.20.2, all material sums due for employee
compensation and benefits have been duly and adequately paid or provided for,
and all deferred compensation obligations are fully funded. Neither Humboldt nor
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, is a party to any
collective bargaining agreement with respect to any of its employees or any
labor organization to which its employees or any of them belong.
4.20.3 To Humboldt's Knowledge, no governmental agency or
claimant or representative of such claimant has alleged a material violation of
ERISA by Humboldt, the liability of which, if adversely determined would result
in a material adverse change in the capital or earnings of Humboldt.
Section 4.21 Powers of Attorney. No power of attorney or similar
authorization given by Humboldt or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 4.22 Loans and Investments. Except as set forth on Schedule
4.22, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of Humboldt or its Subsidiaries, are, and constitute, in all
material respects, the legal, valid and binding obligations of the parties
thereto and
A-37
<PAGE> 268
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 4.22, as of July 31, 2000, no loans or investments held by Humboldt or
any Subsidiary, are: (i) more than ninety days past due with respect to any
scheduled payment of principal or interest, other than loans on a nonaccrual
status; (ii) classified as "loss," "doubtful," "substandard" or "specially
mentioned" by Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, or
any banking regulators; or (iii) on a nonaccrual status in accordance with
Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift & Loan's, loan review
procedures. Except as set forth on Schedule 4.22, none of such assets (other
than loans) are subject to any restrictions, contractual, statutory or other,
that would materially impair the ability of the entity holding such investment
to dispose freely of any such assets at any time, except restrictions on the
public distribution or transfer of any such investments under the Securities Act
and the regulations thereunder or state securities laws and pledges or security
interests given in connection with government deposits. All loans, leases or
other extensions of credit outstanding, or commitments to make any loans, leases
or other extensions of credit made by Humboldt or Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & Loan, to any Affiliates of Humboldt or Humboldt Bank,
Capitol Valley Bank and Capitol Thrift & Loan, are disclosed on Schedule 4.22.
For outstanding loans or extensions of credit where the original principal
amounts are in excess of $100,000 and which by their terms are either secured by
collateral or supported by a guaranty or similar obligation, the security
interests have been duly perfected in all material respects and have the
priority they purport to have in all material respects, other than by operation
of law, and, in the case of each guaranty or similar obligation, each has been
duly executed and delivered to Humboldt or any Subsidiary, and to Humboldt's
Knowledge, is still in full force and effect.
Section 4.23 Material Contracts. Schedule 4.23 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which Humboldt or any
Subsidiary is a party as of the date of this Agreement, except for loans and
other extensions of credit made by Humboldt or its Subsidiaries, in the ordinary
course of its business and those items specifically disclosed in the Humboldt
Financial Statements.
Section 4.24 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of
Humboldt set forth in this Agreement shall be deemed to be made on and as of the
date hereof and as of the Effective Time.
ARTICLE 5. ADDITIONAL AGREEMENTS
Section 5.1 Access to Information, Due Diligence, etc.
5.1.1 Upon reasonable notice, each party shall permit the other
party and its accountants, counsel and other representatives reasonable access
to their officers, employees, properties, books, contracts, commitments and
records and from the date hereof through the
A-38
<PAGE> 269
Effective Time, and shall furnish or provide access to each other as soon as
practicable, (i) a copy of each of Tehama's Filings or Humboldt's Filings filed
subsequent to the date of this Agreement promptly after such document has been
filed with the appropriate Governmental Entity, provided, however, that copies
of any Returns relating to Taxes of Tehama or any of its Subsidiaries shall be
furnished to Humboldt at least 15 Business Days prior to the proposed date of
filing thereof and shall not be filed without the prior reasonable approval of
Humboldt, which approval shall not be unreasonably withheld or delayed; (ii)
unless otherwise prohibited by law, a copy of each report, schedule and other
documents filed or received by it during such period with any Regulatory
Authority or the Internal Revenue Service, as to documents other than related to
employees or customers and other than those distributed to banks generally;
(iii) as promptly as practicable following the end of each calendar month after
the date hereof, a balance sheet of Tehama or Humboldt as of the end of such
month; and (iv) all other information concerning its business, properties,
assets, financial condition, results of operations, liabilities, personnel and
otherwise as Tehama or Humboldt may reasonably request.
5.1.2 Until the Effective Time, a representative of Humboldt
shall be entitled and shall be invited to attend meetings of the Board of
Directors of Tehama or Tehama Bank and of the Loan and Audit Committees of
Tehama and Tehama Bank, and at least five (5) days' prior written notice of the
dates, times and places of such meetings shall be given to Humboldt except that
in the case of special meetings Humboldt shall receive the same number of days'
prior notice as Tehama's directors receive for such meetings; provided, however,
that such representative shall excuse himself or herself from any portion of any
such meetings that (i) relate to approval of, or the exercise of any rights
under, this Agreement by Tehama, (ii) involve discussions between such Board of
Directors or such Loan or Audit Committee and legal counsel for Tehama that are
entitled to be protected from disclosure under an attorney-client privilege
which would be lost due to the presence of such representative of Humboldt, or
(iii) constitute the Executive Session of any Board of Directors meeting.
5.1.3 Until the Effective Time, a representative of Tehama shall
be entitled and shall be invited to attend meetings of the Boards of Directors
of Humboldt and Humboldt Bank, and of the Loan and Audit Committees of Humboldt
and Humboldt Bank, at least five (5) days' prior to written notice of the dates,
times and places of such meetings shall be given to Tehama except that in the
case of special meetings Tehama shall receive the same number of days' prior
notice as Humboldt's directors receive for such meetings; provided, however,
that such representative shall excuse himself or herself from any portion of any
such meetings that (i) relate to approval of, or the exercise of any rights
under, this Agreement by Humboldt, (ii) involve discussions between such Boards
of Directors or such Loan or Audit Committees and legal counsel for Humboldt
that are entitled to be protected from disclosure under an attorney-client
privilege which would be lost due to the presence of such representative of
Tehama, or (iii) constitute the Executive Session of any Board of Directors
meeting.
5.1.4 Humboldt and Tehama each agrees to keep confidential and
not divulge to any other party or Person (other than to the employees,
attorneys, accountants and consultants of each
A-39
<PAGE> 270
who have a need to receive such information and other than as may be required by
law) any information received from the other, unless and until such documents
and other information otherwise becomes publicly available or unless the
disclosure of such information is authorized by each party. In the event of
termination of this Agreement for any reason, the parties shall promptly return,
or at the election of the other party destroy, all nonpublic documents obtained
from the other and any copies or notes of such documents (except as otherwise
required by law) and, upon the request of the other party, confirm such
destruction to the other in writing.
Section 5.2 Shareholder Approval.
5.2.1 Tehama and Humboldt each shall promptly call a meeting of
its respective shareholders to be held at the earliest practicable date after
the date on which the initial Registration Statement is filed with the SEC, but
in no event later than December 31, 2000, for the purpose of approving this
Agreement and authorizing the Merger Agreement and the Merger. Each of the
respective Boards of Directors will recommend to the respective shareholders
approval of this Agreement, the Merger Agreement and the Merger; provided,
however, that Tehama's Board of Directors or Humboldt's Board of Directors may
withdraw its recommendation if such Board of Directors believes in good faith
(based on a written opinion of a financial advisor that is experienced in
evaluating the fairness of Acquisition Proposals) that a Tehama Superior
Proposal or Humboldt Superior Proposal, as applicable (defined below) has been
made and shall have determined in good faith, after consultation with and based
on written advice of its outside legal counsel, that the withdrawal of such
recommendation is necessary for such Board of Directors to comply with its
fiduciary duties under applicable law.
5.2.2 If the Merger is approved by vote of the shareholders of
Humboldt and Tehama, then, within ten (10) days thereafter Humboldt and Tehama
shall send a Dissenting Shareholder Notice to each recordholder of any
Dissenting Shares.
Section 5.3 Taking of Necessary Action.
5.3.1 Subject to the terms and conditions of this Agreement,
each of the parties hereto agrees, subject to applicable laws and the fiduciary
duties of Tehama's or Humboldt's Boards of Directors, as advised in writing by
their respective counsel, to use all reasonable efforts promptly to take or
cause to be taken all action and promptly to do or cause to be done all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Merger Agreement, including, without limitation, the delivery of any
certificate or other document reasonably requested by counsel to a party to this
Agreement. Without limiting the foregoing, Humboldt and Tehama will use their
reasonable efforts to obtain all consents of third parties and Government
Entities necessary or, in the reasonable opinion of Humboldt or Tehama advisable
for the consummation of the transactions contemplated by this Agreement. Without
limiting the foregoing, Humboldt shall take all actions necessary to execute and
file the Merger Agreement and to effect all transactions contemplated by this
Agreement and Tehama shall take all actions necessary to effect all transactions
contemplated
A-40
<PAGE> 271
by this Agreement and the Merger Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the Merger Agreement, or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of Tehama, the proper officers or directors of
Humboldt or Tehama, as the case may be, shall take all such necessary action.
Notwithstanding the foregoing, nothing in this Agreement shall be construed to
require Tehama to take any action (or omit to take any action) which may affect
the Conversion Rate, except as may be specifically provided for or required by
this Agreement.
5.3.2 The obligations of Tehama or Humboldt contained in Section
6.2.5 of this Agreement shall continue to be in full force and effect despite
any Default thereof by reason of receipt of a Tehama Superior Proposal or
Humboldt Superior Proposal, as applicable (defined below) and any Default
thereof by the defaulting party shall entitle either Tehama or Humboldt to such
legal or equitable remedies as may be provided in this Agreement or by law
notwithstanding that any action or inaction of the Board of Directors or
officers of the defaulting party which is required to enable such party to
fulfill such obligations may be excused based on the continuing fiduciary
obligations of such party's Board of Directors and officers to its shareholders.
Notwithstanding the foregoing, however, in the event of a termination of this
Agreement by Humboldt or Tehama and the actual payment of the liquidated damages
to the other party as provided for in Section 8.5 of this Agreement, neither
Humboldt, Tehama or their respective directors or officers shall have any
obligations or liabilities of any kind under this Agreement by reason of any
such Default, and Humboldt or Tehama shall have no further obligations of any
kind under this Agreement.
5.3.3 Tehama shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of Tehama (for purposes
of Rule 145 under the Securities Act) to deliver to Humboldt, on the date of
this Agreement, a written agreement in the form attached hereto as Exhibit 5.3
(the "Affiliate Agreements").
Section 5.4 Registration Statement and Applications.
5.4.1 Humboldt and Tehama will cooperate and jointly prepare and
file as promptly as practicable the Registration Statement, the statements,
applications, correspondence or forms to be filed with appropriate State
securities law regulatory authorities, and the statements, correspondence or
applications to be filed to obtain the Requisite Regulatory Approvals to
consummate the transactions contemplated by this Agreement. Each of Humboldt and
Tehama shall use all reasonable efforts to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Joint Proxy Statement/Prospectus to the
shareholders of Tehama. Each party will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents and opinions of counsel concerning it and its
Subsidiaries received by such party.
5.4.2 Each party shall provide to the other at the request of
the other party: (i) immediately prior to the filing thereof, copies of all
material statements, applications,
A-41
<PAGE> 272
correspondence or forms to be filed with state securities law regulatory
authorities, the SEC and other appropriate regulatory authorities to obtain the
Requisite Regulatory Approvals to consummate the transactions contemplated by
this Agreement; provided, however, that no approval need be obtained from any
party to which such materials are provided; and (ii) promptly after delivery to,
or receipt from, such regulatory authorities all written communications,
letters, reports or other documents relating to the transactions contemplated by
this Agreement.
Section 5.5 Expenses.
5.5.1 Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same, including,
without limitation, all costs associated with any resales of Humboldt Common
Stock by Affiliates of Tehama; provided, however, that Humboldt will file on a
timely basis at its own expense the reports required by Rule 144(c) of the
Securities Act.
5.5.2 Tehama and Humboldt shall use their best efforts to ensure
that their attorneys, accountants, financial advisors, investment bankers and
other consultants engaged by them in connection with the transaction
contemplated by this Agreement submit full and final bills on or before the
Closing Date and that all such expenses are paid or properly accrued prior to
the Closing Date.
Section 5.6 Notification of Certain Events.
5.6.1 Tehama shall provide to Humboldt, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Sections 6.1 and 6.2, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.2 Humboldt shall provide to Tehama, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Section 6.3 and 6.4, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in writing of
any change or event which could reasonably be expected to have a Material
Adverse Effect on the business, properties, assets, financial condition, results
of operations, liabilities or personnel of such party or on its ability to
consummate the transactions contemplated by this Agreement or the Merger
Agreement.
5.6.4 Tehama and Humboldt shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statement or Joint Proxy Statement/Prospectus at any time contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statement therein, in light of
the circumstances under which they were made, not misleading or that the
Registration Statement or the Joint Proxy
A-42
<PAGE> 273
Statement/Prospectus otherwise is required to be amended and supplemented, which
notice shall specify, in reasonable detail, the circumstances thereof. Humboldt
shall promptly amend and supplement such materials and disseminate the new or
modified information so as to fully comply with the Securities Act. If the
amendment or supplement so required relates to information concerning Tehama,
the out-of-pocket costs and expenses of preparing, filing and disseminating such
amendment or supplement shall be borne by Tehama.
Section 5.7 Closing Schedules. Tehama has delivered to Humboldt on or
before the date of this Agreement all of the Schedules to this Agreement which
Tehama is required to deliver to Humboldt hereunder (the "Tehama Schedules").
Humboldt has delivered to Tehama on or before the date of this Agreement all of
the Schedules to this Agreement which Humboldt is required to deliver to Tehama
hereunder ( the "Humboldt Schedules"). Immediately prior to the Closing Date,
Tehama shall have prepared updates of the Tehama Schedules provided for in this
Agreement and shall deliver to Humboldt revised schedules containing the updated
information (or a certificate signed by Tehama's Chief Executive Officer stating
that there have been no changes on the applicable schedules); and Humboldt shall
have prepared updates of the Humboldt Schedules provided for in this Agreement
and shall deliver to Tehama revised Schedules containing updated information (or
a certificate signed by Humboldt's Chief Executive Officer stating that there
has been no change on the applicable schedules). Such updated schedules shall
sometimes be referred to collectively, as the "Closing Schedules." The Closing
Schedules shall be dated as of the day prior to the Closing Date and shall
contain information as of the day prior to the Closing Date or as of such
earlier date as is practicable under the circumstances. In the event the Closing
Schedules disclose an event, occurrence or circumstance that has had or could
reasonably be expected to have a Material Adverse Effect on Tehama, on the one
hand, or on Humboldt, on the other hand, or on consummation of the transactions
contemplated by this Agreement, that was not disclosed in the previously
delivered Schedules hereto, the party delivering such Closing Schedules (the
"Affected Party") shall so notify the other party in the letter of transmittal
for such Closing Schedules, the Closing Date shall be delayed for seven (7)
Business Days and such other party shall be entitled to terminate this Agreement
within five (5) Business Days after receiving such Closing Schedules that
disclose such event, occurrence or circumstance. In the event of any such
termination, the terminating party shall have no liability for such termination.
The Affected Party shall have no liability to the terminating party in such an
event unless (i) as a result of the existence of such event, occurrence or
circumstance so disclosed in the Closing Schedules any of the representations or
warranties of the Affected Party contained in this Agreement are found to have
been untrue in any material respect as of the date of this Agreement, or (ii)
the event, occurrence or circumstance could have been prevented in the exercise
of reasonable diligence by any officers or directors of the Affected Party, in
either of which cases the Affected Party shall be liable to the terminating
party for Liquidated Damages as provided in Section 8.5 hereof.
Section 5.8 Additional Accruals/Appraisals. Immediately prior to the
Closing Date, at Humboldt's request, Tehama and/or Tehama Bank shall, consistent
with GAAP and applicable banking regulations, establish such additional accruals
and reserves as may be necessary to conform Tehama's or Tehama Bank's accounting
and credit and OREO loss reserve practices and methods
A-43
<PAGE> 274
to those of Humboldt, provided, however, that no accrual or reserve made by
Tehama or Tehama Bank pursuant to this Section 5.8, or any litigation or
regulatory proceeding arising out of any such accrual or reserve, or any other
effect on Tehama or Tehama Bank resulting from Tehama's or Tehama Bank's
compliance with this Section 5.8, shall constitute or be deemed to be a breach,
violation of or failure to satisfy any representation, warranty, covenant,
condition or other provision of this Agreement or otherwise be considered in
determining whether any such breach, violation or failure to satisfy shall have
occurred.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 Affirmative Conduct of Tehama. During the period from the
date of execution of this Agreement through the Effective Time, Tehama shall
carry on its business, and shall cause each of its respective Subsidiaries to
carry on its business, in the ordinary course in substantially the manner in
which heretofore conducted, subject to changes in law applicable to all
California state-chartered banks or all member banks insured by the FDIC and
directives from regulators, and use all commercially reasonable efforts to
preserve intact its business organization, keep available the services of its
officers and employees, (other than terminations in the ordinary course of
business) and preserve its relationships with customers, depositors, suppliers
and others having business dealings with it; and, to these ends, shall fulfill
each of the following:
6.1.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 which are within its ability to influence or control;
6.1.2 Advise Humboldt promptly in writing of any change that
would have a Material Adverse Effect on its capital structure, financial
condition, assets, results of operations, business or prospects or of any matter
which would make the representations and warranties set forth in Article 3
hereof not true and correct in any material respect as of the effective date of
the Registration Statement and at the Effective Time;
6.1.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify Humboldt in writing promptly of any facts or circumstances which
could affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
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
A-44
<PAGE> 275
their terms, terminate any material contract, agreement, understanding,
commitment, or offer, whether written or oral, (collectively referred to as an
"Understanding") or materially default in the performance of any of its
obligations under any Understanding where such default would have a Material
Adverse Effect on Tehama;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on Tehama;
6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.1.8 Maintain its tangible assets and properties in good
condition and repair, normal wear and tear excepted in accordance with prior
practices;
6.1.9 Promptly advise Humboldt in writing of any event or any
other transaction within the Knowledge of Tehama, whereby any Person or related
group of Persons acquires, after the date of this Agreement, directly or
indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated
by the SEC pursuant to the Exchange Act) or control of 5% or more of the
outstanding shares of Tehama Common Stock either prior to or after the record
date fixed for the Tehama shareholders' meeting or any adjourned meeting thereof
to approve the transactions contemplated herein;
6.1.10 (a) Maintain a reserve 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 Tehama's or Tehama Bank's portfolio of
loans and leases, in accordance with GAAP and applicable regulatory accounting
principles and banking laws and regulations;
(b) Charge off all loans, receivables and other assets,
or portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by Tehama or
Tehama Bank, Tehama or Tehama Bank has submitted in writing to such regulatory
authority the basis upon which it has so disregarded such classification or
direction, and such regulatory authority retracts its direction requiring such
charge-off;
6.1.11 Furnish to Humboldt, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of Tehama or Tehama Bank and access to the
working papers related thereto, provided, however, that Tehama need not furnish
Humboldt any materials relating to deliberations of Tehama's Board of Directors
or Tehama Bank's Board of Directors with respect to its approval of this
Agreement, communications of Tehama's legal counsel with the Board of Directors
or officers of Tehama regarding Tehama's
A-45
<PAGE> 276
rights against or obligations to Humboldt or its Subsidiaries under this
Agreement, or books, records and documents covered by the attorney-client
privilege or which are attorneys' work product; (ii) copies of all material
reports, renewals, filings, certificates, statements, correspondence and other
documents specific to Tehama or Tehama Bank or filed with or received from any
Federal Reserve Bank, the FDIC, the SEC, the CDFI or any Governmental Entity;
(iii) monthly unaudited balance sheets, statements of income and changes in
shareholders' equity for Tehama and Tehama Bank and quarterly unaudited balance
sheets, statements of income and changes in shareholders' equity for Tehama and
Tehama Bank, in each case prepared on a basis consistent with past practice; and
(iv) such other reports as Humboldt may reasonably request (which are otherwise
deliverable under this Section 6.1.11) relating to Tehama. Each of the financial
statements of Tehama or Tehama Bank delivered pursuant to this Section 6.1.11
shall be accompanied by a certificate of the Chief Financial Officer of Tehama
or Tehama Bank to the effect that such financial statements fairly present the
financial information presented therein of Tehama or Tehama Bank, for the
periods covered, subject to recurring adjustments normal in nature and amount,
necessary for a fair presentation and are prepared on a basis consistent with
past practice;
6.1.12 Tehama agrees that through the Effective Time, as of
their respective dates, (i) each Tehama Filing will be true and complete in all
material respects; and (ii) each Tehama Filing will comply in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Governmental Entity with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such Tehama Filings that is intended to present
the financial position of Tehama during the periods involved to which it relates
will fairly present in all material respects the financial position of Tehama
and will be prepared in accordance with GAAP or consistent with applicable
regulatory accounting principles and banking law and banking regulations, except
as stated therein;
6.1.13 Maintain reserves for contingent liabilities in
accordance with GAAP or applicable regulatory accounting principles and
consistent with past practices;
6.1.14 Promptly notify Humboldt of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against Tehama or any of its
assets;
6.1.15 Inform Humboldt of the amounts and categories of any
loans, leases or other extensions of credit, or other assets, that have been
classified by any bank regulatory authority or by any unit of Tehama Bank as
"Specially Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or any
comparable classification ("Classified Assets"). Tehama will furnish to
Humboldt, as soon as practicable, and in any event within fifteen days after the
end of each calendar month, schedules including the following: (i) Classified
Assets by type (including each credit or other asset in an amount equal to or
greater than $10,000), and its classification category; (ii) nonaccrual credits
A-46
<PAGE> 277
by type (including each credit in an amount equal to or greater than $10,000);
(iii) renegotiated loans by type (loans on which interest has been renegotiated
to lower than market rates because of the financial condition of the borrowers);
(iv) delinquent credits by type (including each delinquent credit in an amount
equal to or greater than $10,000), including an aging into 30-89 and 90+ day
categories; (v) loans or leases or other assets charged off, in whole or in
part, during the previous month by type (including each such loan or lease or
other asset in an amount equal to or greater than $10,000); and (vi) OREO or
assets owned stating with respect to each its type;
6.1.16 Furnish to Humboldt, upon Humboldt's request, schedules
with respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by Tehama to any director or
officer (at or above the Vice President level) of Tehama or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of
Tehama, including, with respect to each such loan or lease, the identity and, to
the best Knowledge of Tehama, the relation of the borrower to Tehama or Tehama
Bank, the loan or lease type and the outstanding and undrawn amounts; and (iii)
standby letters of credit, by type, (including each letter of credit in a face
amount equal to or greater than $10,000); and
6.1.17 Make available to Humboldt copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit of
$150,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $50,000 in the case of unsecured loans or unsecured
extensions of credit, which are approved by Tehama after the date of this
Agreement, within ten Business Days of preparation of such packages.
Section 6.2 Negative Covenants of Tehama. During the period from the
date of execution of this Agreement through the Effective Time, Tehama agrees
that without Humboldt's prior written consent, it shall not and its Subsidiaries
shall not:
6.2.1 (a) Declare or pay any dividend on, other than regular
cash dividends consistent with past practices, or make any other distribution in
respect of any of its capital stock; (b) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire (except pursuant to any Employee Plan,
Benefit Arrangement or the Tehama Stock Option Plans) any shares of its capital
stock;
6.2.2 Take any action that would or might result in any of the
representations and warranties of Tehama set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
A-47
<PAGE> 278
6.2.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
Tehama or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of Tehama Common Stock pursuant to the
exercise of Tehama Stock Options;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
6.2.5 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
Humboldt, and its representatives) concerning any such solicited Acquisition
Proposal. Tehama shall notify Humboldt immediately if any inquiry regarding an
Acquisition Proposal is received by Tehama, including the terms thereof. For
purposes of this Section 6.2.5, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than Humboldt would acquire or
participate in a merger or other business combination or reorganization
involving Tehama or any of its Subsidiaries; (b) proposal by which any Person or
group, other than Humboldt, would acquire the right to vote ten percent (10%) or
more of the capital stock of Tehama entitled to vote for the election of
directors; (c) acquisition of the assets of Tehama other than in the ordinary
course of business; or (d) acquisition in excess of ten percent (10%) of the
outstanding capital stock of Tehama, other than as contemplated by this
Agreement. Notwithstanding the foregoing, nothing contained in this Agreement
shall prevent Tehama or Tehama's Board of Directors from (i) furnishing
nonpublic information to, or entering into discussions or negotiations with, any
Person or entity in connection with an unsolicited bona fide written Acquisition
Proposal by such Person or entity, or recommending an unsolicited bona fide
written Acquisition Proposal to the shareholders of Tehama, if and only to the
extent that (A) the Board of Directors of Tehama has determined and believes in
good faith (after consultation with and the concurrence of its financial
advisor) that such Acquisition Proposal would, if consummated, result in a
transaction materially more favorable, from a financial point of view, to
Tehama's shareholders than the transaction contemplated by this Agreement (any
such more favorable Acquisition Proposal being referred to in this Agreement as
a "Tehama Superior Proposal") and Tehama's Board of Directors has determined in
good faith, after consultation with and based on written advice from its outside
legal counsel, that such action is necessary for Tehama to comply with its
fiduciary duties to shareholders under applicable law, and (B) prior to
furnishing such nonpublic information to, or entering into discussions or
negotiations with, such Person or entity, Tehama's Board of Directors has
received from such Person or entity an executed confidentiality agreement, with
terms no more favorable to such party than those contained in the
Confidentiality Agreement between Tehama and Humboldt, or (ii) complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal, if such Rule is applicable thereto;
A-48
<PAGE> 279
6.2.6 Acquire or agree to acquire by merging, consolidating
with, or by purchasing all or a substantial portion of the assets of, or in any
other manner, any business or any Person or otherwise acquire or agree to
acquire any assets which are material to Tehama, other than in the ordinary
course of business consistent with prior practice;
6.2.7 Sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, to Tehama, except in the
ordinary course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of Tehama or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one year)
issued, in its ordinary course of business consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement; (b) commitments to make loans or other
extensions of credit in the ordinary course of business consistent with prior
practice; and (c) loan sales in the ordinary course of business, without any
recourse, provided that no commitment to sell loans shall extend beyond the
Effective Time;
6.2.10 Make or enter into a commitment to make any loan or other
extension of credit to any director, officer or employee of Tehama or any of its
Subsidiaries, except in accordance with practice or policy in existence on the
date of this Agreement and in compliance with all applicable laws and all
applicable regulations and directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent with
prior practice or as required by an existing contract, and provided prior
disclosure thereof has been made in Schedule 6.2.11, grant any general or
uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any Person;
6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose
of any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on June 30, 2000 or reduce
the amount of the Loan Loss Reserves or any other reserves for potential losses
or contingencies;
A-49
<PAGE> 280
6.2.14 Make any capital expenditures, or commitments with
respect thereto, except those in the ordinary course of business which do not
exceed $25,000 individually or $50,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract
or agreement, enter into any new employment contract or agreement or make any
bonus or any special or extraordinary payments to any Person except for payments
under Tehama's 2000 bonus program for employees, such amount not to exceed
$400,000 in the aggregate;
6.2.16 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
Humboldt, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
report or proposed Tax election or change in any method or period of accounting,
to Humboldt for its approval, which it shall not unreasonably withhold or delay;
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
6.2.19 Change its fiscal year or methods of accounting in effect
at December 31, 1999, except as required by changes in GAAP or regulatory
accounting principles as concurred to by Tehama's independent public
accountants;
6.2.20 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization;
6.2.21 Take or cause to be taken into OREO any commercial
property without an environmental report reporting no adverse environmental
condition on such property, with a copy of such report delivered to Humboldt
prior to taking such property into OREO; or
6.2.22 Take or cause to be taken any action which would
disqualify the Merger from being accounted for on a "pooling of interest" basis;
or
6.2.23 Make any new elections with respect to Taxes or any
changes in current elections with respect to Taxes affecting the assets owned by
Tehama or its Subsidiaries. Humboldt
A-50
<PAGE> 281
shall be deemed to have consented in writing to any election Tehama or its
Subsidiaries shall desire to make if: (i) the electing Person shall have
notified the Chief Executive Officer of Humboldt in writing of its desire to
make such election, including in such notice a reasonably complete summary of
the election it desires to make and the reasons it desires to make such election
at least 20 Business Days prior to the due date (including extensions thereof)
for filing such election; and (ii) Humboldt shall not have responded in writing
to such notice by the fifth Business Day prior to the due date (including
extensions thereof) for filing such election.
Section 6.3 Affirmative Conduct of Humboldt. During the period from the
date of execution of this Agreement through the Effective Time, Humboldt shall
carry on its business, and shall cause each of its respective Subsidiaries to
carry on its business, in the ordinary course in substantially the manner in
which heretofore conducted, subject to changes in law applicable to all
California state-chartered banks, industrial loan companies or all member and/or
nonmember banks insured by the FDIC, as applicable, and directives from
regulators (except to the extent Tehama shall otherwise consent in writing), and
use all commercially reasonable efforts to preserve intact its business
organization, keep available the services of its officers and employees, (other
than terminations in the ordinary course of business) and preserve its
relationships with customers, depositors, suppliers and others having business
dealings with it; and, to these ends, shall fulfill each of the following:
6.3.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise Tehama promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.3.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify Tehama in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.3.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any
Understanding or materially default in the performance of any of its obligations
under any Understanding where such default would have a Material Adverse Effect
on Humboldt;
A-51
<PAGE> 282
6.3.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on Humboldt;
6.3.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.3.8 Maintain its tangible assets and properties in good
condition and repair, normal wear and tear excepted in accordance with prior
practices;
6.3.9 Promptly advise Tehama in writing of any event or any
other transaction within the Knowledge of Humboldt, whereby any Person or
related group of Persons acquires, after the date of this Agreement, directly or
indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated
by the SEC pursuant to the Exchange Act) or control of 5% or more of the
outstanding shares of Humboldt Common Stock either prior to or after the record
date fixed for the Humboldt shareholders' meeting or any adjourned meeting
thereof to approve the transactions contemplated herein;
6.3.10 (a) Maintain a Loan Loss Reserve at a level which is
adequate to provide for all known and reasonably expected losses on loans,
leases and other extensions of credit outstanding and other inherent risks in
Humboldt's or Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift &
Loan's, portfolio of loans and leases, in accordance with GAAP and applicable
regulatory accounting principles and banking laws and regulations;
(b) Charge off all loans, receivables and other assets,
or portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by Humboldt or
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, Humboldt or
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, has submitted in
writing to such regulatory authority the basis upon which it has so disregarded
such classification or direction, and such regulatory authority retracts its
direction requiring such charge-off;
6.3.11 Furnish to Tehama, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of Humboldt or Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & Loan, and access to the working papers related
thereto, provided, however, that Humboldt need not furnish Tehama any materials
relating to deliberations of Humboldt's Board of Directors with respect to its
approval of this Agreement, communications of Humboldt's legal counsel with the
Board of Directors or officers of Humboldt regarding Humboldt's rights against
or obligations to Tehama or its Subsidiaries under this Agreement, or books,
records and documents covered by the attorney-client privilege or which are
attorneys' work product; (ii) copies of all material reports, renewals, filings,
certificates, statements, correspondence and other documents specific to
Humboldt or it Subsidiaries, or filed with or
A-52
<PAGE> 283
received from any Federal Reserve Bank, the FDIC, the SEC, the CDFI or any
Governmental Entity; (iii) monthly unaudited balance sheets, statements of
income and changes in shareholders' equity for Humboldt and its Subsidiaries,
and quarterly unaudited balance sheets, statements of income and changes in
shareholders' equity for Humboldt and its Subsidiaries, in each case prepared on
a basis consistent with past practice; and (iv) such other reports as Tehama may
reasonably request (which are otherwise deliverable under this Section 6.3.11)
relating to Humboldt. Each of the financial statements of Humboldt or its
Subsidiaries, delivered pursuant to this Section 6.3.11 shall be accompanied by
a certificate of the Chief Financial Officer of Humboldt or its Subsidiaries, to
the effect that such financial statements fairly present the financial
information presented therein of Humboldt or its Subsidiaries, for the periods
covered, subject to recurring adjustments normal in nature and amount, necessary
for a fair presentation and are prepared on a basis consistent with past
practice;
6.3.12 Humboldt agrees that through the Effective Time, as of
their respect dates, (i) each Humboldt Filing will be true and complete in all
material respects; and (ii) each Humboldt Filing will comply in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Governmental Entity with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such Humboldt Filings that is intended to present
the financial position of Humboldt, on a consolidated basis, during the periods
involved to which it relates will fairly present in all material respects the
financial position of Humboldt, on a consolidated basis, and will be prepared in
accordance with GAAP or consistent with applicable regulatory accounting
principles and banking law and regulations, except as stated therein;
6.3.13 Maintain reserves for contingent liabilities in
accordance with GAAP or applicable regulatory accounting principles and
consistent with past practices;
6.3.14 Promptly notify Tehama of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against Humboldt or any of
its assets, which is expected to have a Material Adverse Effect on Humboldt and
its Subsidiaries taken as a whole;
6.3.15 Inform Tehama of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any subsidiary of Humboldt, as Classified
Assets. Humboldt will furnish to Tehama, as soon as practicable, and in any
event within fifteen days after the end of each calendar month, schedules
including the following: (i) Classified Assets by type (including each credit or
other asset in an amount equal to or greater than $10,000), and its
classification category; (ii) nonaccrual credits by type (including each credit
in an amount equal to or greater than $10,000); (iii) renegotiated loans by type
(loans on which interest has been renegotiated to lower than market rates
because of the financial condition of the borrowers); (iv) delinquent credits by
type (including each delinquent
A-53
<PAGE> 284
credit in an amount equal to or greater than $10,000), including an aging into
30-89 and 90+ day categories; (v) loans or leases or other assets charged off,
in whole or in part, during the previous month by type (including each such loan
or lease or other asset in an amount equal to or greater than $10,000); and (vi)
OREO or assets owned stating with respect to each its type; and
6.3.16 Furnish to Tehama, upon Tehama's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by Humboldt to any director or
officer (at or above the Vice President level) of Humboldt or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of
Humboldt, including, with respect to each such loan or lease, the identity and,
to the best Knowledge of Humboldt, the relation of the borrower to Humboldt or
its subsidiary, the loan or lease type and the outstanding and undrawn amounts;
and (iii) standby letters of credit, by type, (including each letter of credit
in a face amount equal to or greater than $10,000).
Section 6.4 Negative Covenants of Humboldt. During the period from the
date of execution of this Agreement through the Effective Time, Humboldt agrees
that without Tehama's prior written consent, it shall not and its Subsidiaries
shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular
cash dividends consistent with past practices, or make any other distribution in
respect of any of its capital stock; (b) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.4.2 Take any action that would or might result in any of the
representations and warranties of Humboldt set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
6.4.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
Humboldt or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of Humboldt Common Stock pursuant to the
exercise of Humboldt Stock Options or pursuant to the proposed acquisition of
another financial entity identified by Humboldt in writing to Tehama prior to
the execution of the Agreement;
6.4.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
A-54
<PAGE> 285
6.4.5 Sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, to Humboldt, except in the
ordinary course of business consistent with prior practice;
6.4.6 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of Humboldt or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.4.7 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.4.8 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on June 30, 2000 or reduce
the amount of the Loan Loss Reserves or any other reserves for potential losses
or contingencies;
6.4.9 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.4.10 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
Tehama, in writing, or file or amend any federal, foreign, state or local Tax
Return or report or make any tax election or change any method or period of
accounting unless required by GAAP or applicable law and, then, only after
submitting such Tax return or report or proposed Tax election or change in any
method or period of accounting, to Tehama for its approval, which it shall not
unreasonably withhold or delay;
6.4.11 Change its fiscal year or methods of accounting in effect
at December 31, 1999, except as required by changes in GAAP or regulatory
accounting principles as concurred to by Humboldt's independent public
accountants;
6.4.12 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
Tehama, and its representatives) concerning any such solicited Acquisition
Proposal. Humboldt shall notify Tehama immediately if any inquiry regarding an
Acquisition Proposal is received by Humboldt, including the terms thereof. For
purposes of this Section 6.4.12, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than Tehama
A-55
<PAGE> 286
would acquire or participate in a merger or other business combination or
reorganization involving Humboldt; (b) proposal by which any Person or group,
other than Tehama, would acquire the right to vote ten percent (10%) or more of
the capital stock of Humboldt entitled to vote for the election of directors;
(c) acquisition of the assets of Humboldt other than in the ordinary course of
business; or (d) acquisition in excess of ten percent (10%) of the outstanding
capital stock of Humboldt other than as contemplated by this Agreement.
Notwithstanding the foregoing, nothing contained in this Agreement shall prevent
Humboldt or its Board of Directors from (i) furnishing nonpublic information to,
or entering into discussions or negotiations with, any Person or entity in
connection with an unsolicited bona fide written Acquisition Proposal by such
Person or entity, or recommending an unsolicited bona fide written Acquisition
Proposal to the shareholders of Humboldt, if and only to the extent that (A) the
Board of Directors of Humboldt has determined and believes in good faith (after
consultation with and the concurrence of its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction materially
more favorable, from a financial point of view, to Humboldt's shareholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Humboldt Superior
Proposal") and Humboldt's Board of Directors has determined in good faith, after
consultation with and based on written advice from its outside legal counsel,
that such action is necessary for Humboldt to comply with its fiduciary duties
to shareholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such Person
or entity, Humboldt's Board of Directors received from such Person or entity an
executed confidentiality agreement, with terms no more favorable to such party
than those contained in the Confidentiality Agreement between Tehama and
Humboldt, or (ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal, if such Rule is applicable thereto;
6.4.13 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization;
6.4.14 Take or cause to be taken into OREO any commercial
property without an environmental report reporting no adverse environmental
condition on such property, with a copy of such report delivered to Tehama prior
to taking such property into OREO; or
6.4.15 Take or cause to be taken any action which would
disqualify the Merger from being accounted for on a "pooling of interest" basis;
or
6.4.16 Make any new elections with respect to Taxes or any
changes in current elections with respect to Taxes affecting the assets owned by
Humboldt or its Subsidiaries. Tehama shall be deemed to have consented in
writing to any election Humboldt or its Subsidiaries shall desire to make if:
(i) the electing Person shall have notified the Chief Executive Officer of
Tehama in writing of its desire to make such election, including in such notice
a reasonably complete summary of the election it desires to make and the reasons
it desires to make such election at least 20 Business Days prior to the due date
(including extensions thereof) for filing such election; and
A-56
<PAGE> 287
(ii) Tehama shall not have responded in writing to such notice by the fifth
Business Day prior to the due date (including extensions thereof) for filing
such election.
6.4.17 Humboldt agrees to file a registration statement for or
otherwise register with the Securities and Exchange Commission the stock options
of Tehama outstanding at the Closing and the related common stock of Humboldt
promptly after the Closing.
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 Conditions to the Parties' Obligations. The obligations of
all the parties to this Agreement to effect the Merger shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreement and the Merger shall
have been validly approved by the holders of a majority of the outstanding
shares of Tehama Common Stock and Humboldt Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Merger under applicable federal laws of the United States or applicable
laws of any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger Agreement shall have been obtained or expired, as the
case may be (all such permits, approvals and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals"),
without the imposition of any condition which in the reasonable judgment of any
party to be affected by such condition is materially burdensome upon such party
or its respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any Governmental Entity which: (i) makes the consummation of the
Merger illegal; (ii) requires the divestiture by Humboldt of any material asset
or of a material portion of the business of Humboldt; or (iii) imposes any
condition upon Humboldt or its Subsidiaries (other than general provisions of
law applicable to all banks and bank holding companies) which in the judgment of
Humboldt would be materially burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 Humboldt and Tehama shall have received an opinion from
Bartel Eng Linn & Schroder, dated the Effective Time, subject to assumptions and
exceptions normally included, and in form and substance reasonably satisfactory
to Humboldt and Tehama, to the effect that the Merger
A-57
<PAGE> 288
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the IRC and that Humboldt and Tehama will each be a
party to that reorganization within the meaning of Section 368(b) of the IRC;
7.1.6 Humboldt and Tehama shall have received from Richardson &
Co., who are the independent public accountants of Humboldt, letters, dated at
the effective date of the Registration Statement and at the Effective Time, in
form and substance satisfactory to Humboldt and Tehama that the Merger may be
accounted for as a pooling of interests;
7.1.7 Humboldt and Tehama shall have received opinions of
counsel for the other party in substantially the forms previously agreed to by
the parties as set forth in Exhibits 7.1.7A and 7.1.7B, respectively, dated as
of the Closing Date;
7.1.8 No action, suit or proceeding shall have been instituted
or threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger Agreement
which presents a substantial risk that such transactions will be restrained or
that either party hereto may suffer material damages or other relief as a result
of consummating such transactions; and
7.1.9 The holders of less than 10% of the outstanding shares of
Tehama Common Stock shall have exercised dissenters' rights. Dissenters of
Humboldt shall be included in such calculation. Dissenters' rights shall be
deemed to be exercised to the extent at the Effective Time the holder of such
shares have complied with the California Corporations Code concerning
dissenters' rights.
Section 7.2 Conditions to Humboldt's Obligations. The obligations of
Humboldt to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by Humboldt) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of Tehama contained in Article 3 shall be true in
all material respects as of the Effective Time as though made at the Effective
Time, except to the extent they expressly refer to an earlier time and except
where the failure to be true, individually or in the aggregate, would not have
or would not be reasonably likely to have, a Material Adverse Effect on the
Surviving Corporation or Tehama Bank, or upon the consummation of the
transactions contemplated hereby; (b) Tehama shall have duly performed and
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time, except where the failure to so perform and comply, individually
or in the aggregate, would not have or would not be reasonably likely to have a
Material Adverse Effect on Tehama or Tehama Bank, or upon the consummation of
the transactions contemplated hereby; (c) none of the events or conditions
entitling Humboldt to terminate this Agreement under Article 8 shall have
occurred and be continuing; and (d) Tehama shall have delivered to Humboldt
certificates dated the date of the
A-58
<PAGE> 289
Effective Time and signed by the President and Chief Executive Officer to the
effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition of
any material burden or restriction on any of the parties hereto not in existence
on the date hereof, each consent to the consummation of the Merger required to
be obtained from any Person under any agreement, contract or license to which
Tehama is a party or by or under which it is bound or licensed, the withholding
of which might have a Material Adverse Effect on Tehama, the Surviving
Corporation or Humboldt at or following the Effective Time, or on the
transactions contemplated by this Agreement;
7.2.3 Tehama shall have delivered its Closing Schedules to
Humboldt on the day immediately preceding the Closing Date and none of such
Closing Schedules shall reflect any item that was not on the Tehama Schedules
(or in the Tehama Financial Statements) delivered on the date of execution of
this Agreement that has had, would have, or could be reasonably likely to have,
a Material Adverse Effect on Tehama, the Surviving Corporation or Humboldt at or
after the Effective Time, or on the consummation of the transactions
contemplated hereby;
7.2.4 Between the date of this Agreement and the Effective Time,
no event or circumstance shall have occurred which has had or could reasonably
be expected to have a Material Adverse Effect on Tehama, or its Subsidiaries,
and Humboldt shall have received a certificate signed on behalf of Tehama by the
President and Chief Executive Officer of Tehama to such effect;
7.2.5 Counsel for Humboldt shall have approved, in the exercise
of counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to Humboldt
hereunder or that are reasonably requested by such counsel;
7.2.6 The sale of the Humboldt Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
7.2.7 Tehama shall have delivered to Humboldt not later than the
date of this Agreement all of the executed Affiliate Agreements in the form
attached hereto as Exhibit 5.3;
7.2.8 None of Tehama or any of its Subsidiaries shall be subject
to any memorandum of understanding, cease and desist order, or other agreement
with any Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect;
7.2.9 The fairness opinion (the "Humboldt Fairness Opinion") to
be commissioned by Humboldt's Board of Directors shall provide that the terms of
the Merger, from a financial
A-59
<PAGE> 290
standpoint, are fair to the shareholders of Humboldt, and shall not have been
revoked, at any time prior to the meeting of Humboldt's shareholders at which
the Merger is to be voted on;
7.2.10 All of Tehama's director-shareholders shall have
delivered to Humboldt on the date of this Agreement the Director-Shareholder
Agreements in the form attached hereto as Exhibit 7.2.10.
Section 7.3 Conditions to Tehama's Obligations. The obligations of
Tehama to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by Tehama) of the following conditions:
7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of Humboldt contained in Article 4 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
Humboldt and its Subsidiaries, taken as a whole, or upon consummation of the
transactions contemplated hereby; (b) Humboldt shall have duly performed and
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with it prior to or at the Effective
Time, except where the failure to so perform and comply, individually or in the
aggregate, would not have or would not be reasonably likely to have a Material
Adverse Effect on Humboldt and its Subsidiaries, taken as a whole, or upon the
consummation of the transactions contemplated hereby; (c) none of the events or
conditions entitling Tehama to terminate this Agreement under Article 8 shall
have occurred and be continuing; and (d) Humboldt shall have delivered to Tehama
certificates dated the date of the Effective Time and signed by a duly
authorized officer to the effect set forth in Subsections 7.3.1(a), (b) and (c);
7.3.2 Counsel for Tehama shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to Tehama hereunder
or that are reasonably requested by such counsel;
7.3.3 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of Humboldt and its Subsidiaries,
taken as a whole, from December 31, 1999 to the Effective Time that results in a
Material Adverse Effect as to Humboldt and its Subsidiaries, taken as a whole;
7.3.4 Humboldt has taken such action as appropriate to convert
Tehama Stock Options to Humboldt Stock Options adjusted for the Conversion Rate;
7.3.5 Prior to the Closing Date, Humboldt shall have taken all
corporate action required to effectuate the appointment of the four individuals
named on Schedule 2.9 hereto to its Board of Directors effective immediately
after the Effective Time and to place in nomination such
A-60
<PAGE> 291
individuals as directors of Humboldt for election at Humboldt's annual meeting
of shareholders in 2001;
7.3.6 Humboldt shall have delivered its Closing Schedules to
Tehama on the day immediately preceding the Closing Date and none of such
Closing Schedules shall reflect any item that was not on the Humboldt Schedules
(or in the Humboldt Financial Statements) delivered on the date of execution of
this Agreement that has had, or would have a Material Adverse Effect on Humboldt
and its Subsidiaries, taken as a whole, at or after the Effective Time, or on
the consummation of the transactions contemplated hereby;
7.3.7 The fairness opinion (the "Tehama Fairness Opinion") to be
commissioned by Tehama's Board of Directors shall provide that the terms of the
Merger, from a financial standpoint, are fair to the shareholders of Tehama, and
shall not have been revoked, at any time prior to the meeting of Tehama's
shareholders at which the Merger is to be voted on;
7.3.8 The sale of the Humboldt Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
and
7.3.9 None of Humboldt or any of its Subsidiaries shall be
subject to any memorandum of understanding, cease and desist order, or other
agreement with any Governmental Entity restricting the conduct of any of their
respective businesses, prospects and operations, so as to have a Material
Adverse Effect.
7.3.10 All of Humboldt's director-shareholders shall have
delivered to Tehama on the date of this Agreement the Director-Shareholder
Agreements in the form attached hereto as Exhibit 7.3.10.
ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time:
8.1.1 By mutual consent of the Boards of Directors of Humboldt
and Tehama;
8.1.2 By Humboldt or Tehama upon the failure to satisfy any
conditions specified in Section 7.1, if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
A-61
<PAGE> 292
8.1.3 By Humboldt or Tehama if an Acquisition Event involving
the other party shall have occurred;
8.1.4 By Tehama if there shall have been a material breach of
any of the representations or warranties of Humboldt set forth in this
Agreement, which breach, in the reasonable opinion of Tehama, by its nature
cannot be cured or is not cured prior to the Closing and which breach would, in
the reasonable opinion of Tehama, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on Humboldt and its
Subsidiaries, taken as a whole, or upon the consummation of the transactions
contemplated hereby;
8.1.5 By Humboldt if there shall have been a material breach of
any of the representations or warranties of Tehama set forth in this Agreement,
which breach, in the reasonable opinion of Humboldt, by its nature cannot be
cured or is not cured prior to the Closing and which breach would, in the
reasonable opinion of Humboldt, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on Tehama and its
Subsidiaries, taken as a whole, or upon the consummation of the transactions
contemplated hereby;
8.1.6 By Tehama after the occurrence of a Default by Humboldt
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
Tehama, cannot be cured prior to the Closing or, even though curable by the
Closing, it is not cured prior to the Closing;
8.1.7 By Humboldt after the occurrence of a Default by Tehama
and the 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
Humboldt, cannot be cured prior to the Closing or, even though curable by the
Closing, it is not cured prior to the Closing;
8.1.8 By Humboldt if the Closing Schedules delivered by Tehama
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the Tehama Financial Statements
delivered to Humboldt on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on Tehama and its
Subsidiaries, taken as a whole, or after the Effective Time, on Humboldt, or on
the consummation of the transactions contemplated hereby (a "Tehama Material
Adverse Event");
8.1.9 By Tehama if the Closing Schedules delivered by Humboldt
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the Humboldt Financial
Statements delivered to Tehama on or before the date hereof, that has had or
could reasonably be expected to have a Material Adverse Effect on Humboldt and
its Subsidiaries, taken as a whole, or on the consummation of the transactions
contemplated hereby (a "Humboldt Material Adverse Event");
8.1.10 By Tehama upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to March 31, 2001;
A-62
<PAGE> 293
8.1.11 By Humboldt upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to March 31, 2001; or
8.1.12 By Humboldt or Tehama in the event the Humboldt Average
Trading Price is below $9.75 and the parties do not renegotiate the Conversion
Rate.
Section 8.2 Effect of Termination; Survival. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.4, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of
Tehama and Humboldt; provided, however, that after any such approval by such
shareholders, no amendments shall be made which by law require further approval
by such shareholders without such further approval.
Section 8.4 Waiver. Any term or provision of this Agreement, other than
regulatory approval or any of the provisions required by law, may be waived in
writing at any time by the party which is, or whose shareholders are, entitled
to the benefits thereof.
Section 8.5 Liquidated Damages; Cancellation Fee.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving Tehama, then Tehama shall pay to Humboldt the sum of One Million Five
Hundred Thousand Dollars ($1,500,000) in cash and Tehama shall issue to Humboldt
shares of Tehama Common Stock pursuant to the Tehama Stock Option Agreement
dated September 12, 2000; or (ii) an Acquisition Event involving Humboldt then
Humboldt shall pay to Tehama the sum of One Million Five Hundred Thousand
Dollars ($1,500,000) in cash and Humboldt shall issue to Tehama shares of
Humboldt Common Stock pursuant to the Humboldt Stock Option Agreement dated
September 12, 2000.
8.5.2 In the event of termination of this Agreement by Tehama
pursuant to Section 8.1.10 as a result of the revocation of the Tehama Fairness
Opinion; or a termination of this Agreement by Humboldt pursuant to Section
8.1.5 (breach of representations or warranties of Tehama) or Section 8.1.7
(Default) or Section 8.1.8 (disclosure in the Closing Schedules of a Tehama
Material Adverse Event), where such breach of representation or warranty,
Default or Tehama Material Adverse Event shall have been caused in whole or in
material part by any action or inaction within the control of Tehama or any of
its Subsidiaries, or any of their directors or executive officers (it being
understood that any breach or Default or Tehama Material Adverse Event
A-63
<PAGE> 294
that occurred after the date of this Agreement and was outside of the control of
Tehama and its Subsidiaries, and the directors and executive officers thereof,
such as, by way of example only, the filing of a lawsuit against Tehama, shall
not come within this Section 8.5.2), then, Tehama shall pay to Humboldt the sum
of Five Hundred Thousand Dollars ($500,000), in cash; provided, however, that if
an Acquisition Event occurs involving Tehama within one hundred eighty (180)
days following any termination by Humboldt to which this Section 8.5.2 applies,
Tehama shall pay to Humboldt an additional Two Hundred Fifty Thousand Dollars
($250,000).
8.5.3 In the event of the termination of this Agreement by
Humboldt pursuant to Section 8.1.11 as a result of the revocation of the
Humboldt Fairness Opinion; or a termination of this Agreement by Tehama pursuant
to Section 8.1.4 (breach of representations and warranties of Humboldt) or
Section 8.1.6 (Default), or Section 8.1.9 (disclosure in Closing Schedules of a
Humboldt Material Adverse Event), where such breach of representation or
warranty, or such Default or Humboldt Material Adverse Event shall have been
caused in whole or in material part by any action or inaction within the control
of Humboldt or any of its Subsidiaries, or any of their directors or executive
officers (it being understood that any action or inaction outside of the control
of Humboldt, its Subsidiaries and their directors and executive officers, such
as, by way of example only, the filing of a lawsuit against Humboldt, shall not
come within this Section 8.5.3), then, Humboldt shall pay to Tehama the sum of
Five Hundred Thousand Dollars ($500,000), in cash; provided, however, that if an
Acquisition Event occurs involving Humboldt within one hundred eighty (180) days
following any termination by Tehama to which this Section 8.5.3 applies,
Humboldt shall pay to Tehama an additional Two Hundred Fifty Thousand Dollars
($250,000).
8.5.4 The parties have determined that the occurrence of any of
the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3 would
cause a substantial damage and loss and lost business opportunities to the party
terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.4, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
Humboldt or Tehama for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties hereto, nor any Affiliates of any such
parties, shall have any further obligation or liability of any kind to the other
party, except pursuant to Sections 5.1.4, 5.5 and 9.5.
A-64
<PAGE> 295
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time or to a
termination of this Agreement.
Section 9.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so delivered, mailed or sent, as the case may be, to the parties
at the following addresses (or any such other address for a party as shall be
specified by like notice):
If to Tehama at:
Tehama Bancorp
239 S. Main St.
Red Bluff, California 96080
Fax No. (530) 528-3020
Attention: William P. Ellison, President/CEO
with a copy to:
Shapiro, Buchman, Provine & Patton LLP
1333 North California Boulevard, Suite 350
Walnut Creek, California 94596
Fax No. (925) 948-9701
Attention: John W. Carr, Esq.
If to Humboldt at:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Fax No. (707) 441-0214
Attention: Theodore S. Mason, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
A-65
<PAGE> 296
Section 9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.4 Entire Agreement/No Third Party Rights/Assignment. This
Agreement (including the documents and instruments referred to herein): (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) except as expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 Nondisclosure of Agreement. Humboldt and Tehama agree,
except as required by law or the rules of the NASDAQ, so long as this Agreement
is in effect, not to issue any public notice, disclosure or press release with
respect to the transactions contemplated by this Agreement without seeking the
consent of the other party, which consent shall not be unreasonably withheld.
Section 9.6 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law.
Section 9.7 Headings/Table of Contents. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.8 Enforcement of Agreement. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Merger Agreement is not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the State of California or any state having jurisdiction, this
being in addition to any remedy to which they are entitled at law or in equity.
Section 9.9 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 9.10 Attorneys' Fees. If any legal action or any arbitration
upon mutual agreement is brought for the enforcement of this Agreement or
because of an alleged dispute, breach or default
A-66
<PAGE> 297
in connection with this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs and expenses incurred in that
action or proceeding, in addition to any other relief to which it may be
entitled.
IN WITNESS WHEREOF, Humboldt and Tehama have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
above written.
HUMBOLDT BANCORP TEHAMA BANCORP
By: /s/ Theodore S. Mason By: /s/ William Ellison
A-67
<PAGE> 298
APPENDIX B
[Effective Date]
Members of the Board of Directors
Tehama Bancorp
239 S. Main Street
Red Bluff, CA 96080-0890
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Tehama Bancorp ("Tehama") of the
Conversion Ratio as defined in Section 2.1(a) of the Agreement and Plan of
Reorganization dated as of September 20, 2000 (the "Agreement"), in the proposed
merger (the "Merger") of Humboldt Bancorp ("Humboldt") and Tehama. On the
Effective Time (as such term is defined in the Agreement), each share of Tehama
Common Stock will be converted into the right to receive 1.775 shares of
Humboldt Common Stock subject to adjustment as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) certain publicly available financial and
other data with respect to Humboldt and Tehama, including consolidated financial
statements for recent years and interim periods to June 30, 2000; (iii) certain
other publicly available financial and other information concerning Humboldt and
Tehama and the trading markets for the publicly traded securities of Humboldt
and Tehama; (iv) publicly available information concerning other banks and bank
holding companies, the trading markets for their securities and the nature and
terms of certain other merger transactions we believed relevant to our inquiry;
and (v) evaluations and analyses prepared and presented to the Board of
Directors of Tehama or a committee thereof in connection with the Merger. We
have held discussions with senior management of Humboldt and Tehama concerning
the companies' past and current operations, financial condition and prospects.
We have reviewed with the senior management of Tehama earnings projections for
Tehama as a stand-alone entity, assuming the Merger does not occur. We have also
reviewed with the management of Humboldt earnings projections for Humboldt as a
stand-alone entity, assuming the Merger does not occur. Certain financial
projections for the combined companies and for Tehama and Humboldt as
stand-alone entities were derived by us based partially upon the projections and
information described above, as well as our own assessment of general economic,
market and financial conditions.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied on advice of counsel
and independent accountants as to all legal and financial reporting matters with
respect to Humboldt, Tehama, the Merger and the Agreement. We have relied upon
the managements of Tehama and Humboldt as to the reasonableness of the financial
and operating forecasts, projections and projected operating cost savings (and
the assumptions and bases therefor) provided to us, and we have assumed that
such forecasts, projections and projected operating cost savings reflect the
best currently available estimates and judgments of the applicable managements.
We have also assumed, without assuming any responsibility for the independent
verification of same, that the aggregate allowances for loan losses for Tehama
and Humboldt are adequate to cover such losses. We have not made or obtained any
evaluations or appraisals of the property of Tehama or Humboldt, nor have we
examined any individual loan credit files. For purposes of this opinion, we have
assumed that the
<PAGE> 299
Tehama Bancorp
__________, 2001
Page 2
Merger will have the tax, accounting and legal effects (including, without
limitation, that the Merger will be accounted for as a pooling of interests)
described in the Agreement. Our opinion as expressed herein is limited to the
fairness, from a financial point of view, to the holders of the Common Stock of
Tehama of the Conversion Ratio in the Merger and does not address Tehama's
underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Tehama and Humboldt, including interest income, interest expense, net interest
income, net interest margin, provision for loan losses, non-interest income,
non-interest expense, earnings, dividends, internal capital generation, book
value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
Tehama and for Humboldt; (ii) the assets and liabilities of Tehama and Humboldt,
including the loan, investment and mortgage portfolios, deposits, other
liabilities, historical and current liability sources and costs and liquidity;
and (iii) the nature and terms of certain other merger transactions involving
banks and bank holding companies. We have also taken into account our assessment
of general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily based
upon conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of Tehama. This letter does not constitute a recommendation to the
Board of Directors or to any shareholder of Tehama with respect to any approval
of the Merger. This opinion is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without our prior written
consent, which consent is hereby granted.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Conversion Ratio in the Merger is fair,
from a financial point of view, to the holders of the Common Stock of Tehama.
Very truly yours,
Dain Rauscher Wessels
<PAGE> 300
APPENDIX C
[Effective Date]
Board of Directors
Humboldt Bancorp
701 Fifth Street
Eureka, CA 95501
Ladies & Gentlemen:
You requested an update of our opinion dated August 17, 2000, the fairness to
the holders of the outstanding shares of common stock of Humboldt Bancorp,
Eureka, California, ("Humboldt"), from a financial point of view, of the merger
consideration (as described below) to be received by the shareholders of Tehama
Bancorp, Red Bluff, California, ("Tehama"), in the proposed merger of Humboldt
and Tehama (the "Merger") as of the date of this letter.
D.A. Davidson & Co. ("Davidson") understands that Humboldt and Tehama have
entered into an Agreement and Plan of Merger (the "Agreement"). Pursuant to the
Agreement, Tehama will merge into Humboldt, which will be the surviving
corporation. One hundred percent of the outstanding common stock shares of
Tehama will be converted into shares of common stock of Humboldt; each
outstanding share of Tehama common stock will be exchanged for 1.775 shares of
Humboldt common stock, as more fully described in the Agreement, and subject to
certain adjustments if the Humboldt Average Trading Price is less than $9.84375.
Davidson, as part of its investment banking business, is engaged in the
valuation of banking and other businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We make a market in the
common stock of Humboldt but do not publish a research recommendation on the
stock. We do not make a market in nor publish a research recommendation on the
stock of Tehama. Davidson has received a fee for providing our opinion to you.
We have acted as financial advisor to both Humboldt and Tehama in connection
with both companies' consideration of an investment in Central Pacific Mortgage
Company, and we have acted as Humboldt's financial advisor in connection with,
and have participated in certain negotiations leading to, the Agreement.
In connection with our opinion, we have:
1. Evaluated financial and operating information relating to
Humboldt and Tehama including without limitation, financial
reports of both companies filed with the
C-1
<PAGE> 301
Board of Directors
Humboldt Bancorp
[Effective Date]
Page 2 of 4
SEC and other regulatory agencies for the fiscal years ending
December 31, 1998 and 1999 and for the periods ending March 31,
2000, June 30, 2000, and September 30, 2000, and other internal
operating reports and analyses, asset quality evaluations and
related information;
2. Reviewed the financial terms and conditions of the executed
September 20, 2000 of the Agreement;
3. Conducted conversations with representatives of management of
both companies regarding recent and projected financial
performance and certain other information regarding both
companies furnished to us by them;
4. Compared the financial performance of both companies with those
of certain other companies in the banking industry in California
and Oregon, the western United States and the United States
generally, which we deemed to be relevant;
5. Considered the financial terms, to the extent publicly
available, of selected business combinations of companies in the
banking industry which are deemed to be comparable, in whole or
in part, to the Merger;
6. Compared the relative contributions of assets, liabilities,
income and expenses to the resulting company in the merger to
those of certain other companies in the banking industry in
California and Oregon, which have recently engaged in a merger
transaction, which we deemed to be relevant;
7. Made inquiries regarding and discussed the Merger and the
Agreement and other related matters with Humboldt's counsel; and
8. Performed such other analyses and examinations, as we deemed
appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information provided to us by both companies for the
purpose of this opinion. Additionally, where appropriate, we have relied upon
publicly available information that we believe to be reliable, accurate and
complete; however, we cannot guarantee the reliability, accuracy or completeness
of any such publicly available information. We have also assumed the
reasonableness of and relied upon the estimates and judgments of each company's
management as to the resulting company's future business and financial
prospects. Our analysis and review is based upon there being no material changes
in either company's assets, financial condition, results of operation, business
or prospects since the respective dates of their last financial statements made
C-2
<PAGE> 302
Board of Directors
Humboldt Bancorp
[Effective Date]
Page 3 of 4
available to us. We have relied on advice of Humboldt's counsel and independent
accountants as to all legal and financial reporting matters with respect to the
Merger. We assume that the Merger will be completed in a manner that complies in
all respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations.
We have not made an independent evaluation of the assets or liabilities of
Humboldt or Tehama, nor has either company furnished us with such appraisals. We
are not experts in the evaluation of loan portfolios for the purposes of
assessing the adequacy of the allowance for loan and lease losses and have
assumed that such allowances for each of the companies are, in the aggregate,
adequate to cover such losses.
Our opinion is necessarily based upon economic, market and other conditions as
in effect on, and the information made available to us as of [Effective Date].
Events occurring after [Effective Date] could materially affect the assumptions
used in preparing this opinion.
The preparation of an opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Consequently, this opinion is not
readily susceptible to partial analysis of summary description. Moreover, the
evaluation of fairness, from a financial point of view, of the Exchange Ratio is
to some extent subjective, based on our experience and judgment, and not merely,
the result of mathematical analysis of financial data. Accordingly, not
withstanding the separate factors summarized above, we believe that our analyses
must be considered as a whole and that selecting portions of our analysis and of
the factors considered by us, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying our
opinion.
Our opinion is limited to the fairness of the merger consideration, from a
financial point of view, to the holders of Humboldt common stock. This letter is
intended for the benefit of the Humboldt Board of Directors and may not be used
for any purpose and is not a recommendation to any Humboldt common stock holder
as to how such holder should vote with respect to the merger. Our opinion does
not address the underlying business decision to proceed with the merger. This
opinion may not be used or referred to by Humboldt, or quoted or disclosed to
any person in any manner, without prior written consent, which consent is hereby
given to the inclusion of this opinion in a joint proxy statement/prospectus
filed with the Securities and Exchange Commission in connection with the Merger.
In furnishing this opinion, we do not admit that we are experts within the
meaning of the term "experts" as used in the Securities Act and the rules and
C-3
<PAGE> 303
Board of Directors
Humboldt Bancorp
[Effective Date]
Page 4 of 4
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
We are not expressing an opinion regarding the price at which Humboldt's stock
may trade at any future time after the date of this letter.
Based upon the foregoing and other such matters we have deemed relevant, it is
our opinion, as of [Effective Date] that the merger consideration including the
exchange ratio of 1.775 which will be used to exchange Tehama common shares into
shares of Humboldt common stock as specified in the Agreement is fair, from a
financial point of view, to the common stock holders of Humboldt.
Very truly yours,
D.A. DAVIDSON & CO.
By:
-----------------------------
Albert V. Glowasky
Managing Director
C-4
<PAGE> 304
APPENDIX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision does not apply
to any shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to
D-1
<PAGE> 305
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 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
D-2
<PAGE> 306
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.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
D-3
<PAGE> 307
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 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.
D-4
<PAGE> 308
(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.
D-5
<PAGE> 309
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
<TABLE>
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger by and among Humboldt
Bancorp and Tehama Bancorp dated as of September 20, 2000, is attached as
Appendix A to the proxy/prospectus contained in Part I of this
Registration Statement
3.1 Amended and Restated Articles of Incorporation of Humboldt Bancorp(1)
3.2 Bylaws of Humboldt Bancorp(1)
5.1 Opinion of counsel re: legality(7)
8.1 Form Opinion re: tax matters as to the merger of Tehama Bancorp with and
into Humboldt Bancorp(7)
10.1 Amended Employment Agreement with Theodore S. Mason(2)
10.2 Director Fee Plan(3)
10.3 Amended Humboldt Bancorp Stock Option Plan(3)
10.4 Salary Continuation Agreement with Theodore S. Mason(3)
</TABLE>
<PAGE> 310
<TABLE>
<S> <C>
10.5 Salary Continuation Agreement with Alan J. Smyth(3)
10.6 Salary Continuation Agreement with Ronald V. Barkley(3)
10.7 Salary Continuation Agreement with Paul A. Ziegler(4)
10.8 Director-Shareholder's Agreement in the Global Bancorp and Humboldt Bank
merger(4)
10.9 Affiliate's Agreement with Global Bancorp(4)
10.10 Trust Indenture in connection with certificates of interest in a
promissory note for the Global Bancorp merger(4)
10.11 Deferred Compensation Agreement with Theodore Mason(4)
10.12 Deferred Compensation Agreement with Alan J. Smyth(4)
10.13 Deferred Compensation Agreement with Ronald V. Barkley(4)
10.14 Plan of Reorganization with Silverado Merger Co.(4)
10.15 Global Bancorp Loan Purchase Agreement(5)
10.16 Affiliate's Agreement signed by Tehama Bancorp affiliates in connection
with the Tehama Bancorp Merger (7)
10.17 Humboldt Bancorp Stock Option Agreement to purchase Tehama Bancorp common
stock(7)
10.18 Tehama Bancorp Stock Option Agreement to purchase Humboldt Bancorp common
stock(7)
10.19 Humboldt Bancorp Indenture - Junior subordinated debt securities(6)
10.20 Amended and Restated Declaration of Trust for junior subordinated debt
securities(6)
21.1 Subsidiaries of Humboldt Bancorp are Humboldt Bank, a California state
chartered bank, Capitol Valley Bank, a California state chartered bank,
Bancorp Financial Services, a California corporation, and Capitol Thrift
and Loan Association, a California industrial loan association (7)
23.1 Consent of Bartel Eng & Schroder is included with the opinion re: legality
as Exhibit 5.1 to this Registration Statement(7)
23.2 Consent of Richardson & Company, independent accountants for Humboldt
Bancorp
23.3 Consent of Perry-Smith LLP, independent accountants for Tehama Bancorp
23.4 Consent of Dain Rauscher Wessels, financial advisor of Tehama Bancorp(7)
23.5 Consent of D.A. Davidson, financial advisor of Humboldt Bancorp
23.6 Consent of Bartel Eng & Schroder is included in Exhibit 8.1(7)
24.1 Power of Attorney(7)
99.1 Fairness Opinion of Dain Rauscher Wessels is attached as Appendix B to the
proxy statement/prospectus included in Part I to the Registration
Statement
</TABLE>
<PAGE> 311
<TABLE>
<S> <C>
99.2 Fairness Opinion of D.A. Davidson is attached as Appendix C to the proxy
statement/prospectus included in Part I to the Registration Statement
99.3 Proxy Card Humboldt Bancorp(7)
99.4 Proxy Card Tehama Bancorp(7)
</TABLE>
(1) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996, and previously filed with the Commission.
(2) Incorporated by reference to the Company's Definitive Proxy Statement for
the Company's 1996 Annual Meeting previously filed with the Commission
(and, with respect to the Stock Option Plan, as amended pursuant to the
terms set forth in the Definitive Proxy Statement for the Company's 1998
Annual Meeting).
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1998, and previously filed with the Commission.
(4) Previously filed on November 12, 1999, with the Company's filing on Form
S-4 (File No. 333-90925).
(5) Previously filed on February 7, 2000, with the Company's pre-effective
amendment No. 1 to Form S-4 (File No. 333-90925).
(6) Filed on November 14, 2000, with the Company's Form 10-Q for the quarter
ended September 30, 2000.
(7) Previously filed on November 14, 2000, with the Company's filing on Form
S-4 (File No. 333-49866).
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.
<PAGE> 312
The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus with is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE> 313
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Pre-effective amendment number 1 to registration statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Eureka, California, on January 10, 2001.
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.
<TABLE>
<S> <C> <C> <C>
/s/ Theodore S. Mason 1/10/01 /s/ Patrick J. Rusnak 1/10/01
------------------------------- -------------------------------
Theodore S. Mason, President, Date Patrick J. Rusnak, Chief Date
Chief Executive Officer & Financial Officer (Principal
Director (Principal Executive Accounting and Financial Officer)
Officer)
/s/ Theodore S. Mason* 1/10/01 /s/ Theodore S. Mason* 1/10/01
------------------------------- -------------------------------
Ronald F. Angell, Date Marguerite Dalianes, Director Date
Director
/s/ Theodore S. Mason* 1/10/01 /s/ Theodore S. Mason* 1/10/01
------------------------------- -------------------------------
Gary L. Evans, Director Date Lawrence Francesconi, Date
Chairman of the Board
/s/ Theodore S. Mason* 1/10/01 /s/ Theodore S. Mason* 1/10/01
------------------------------- -------------------------------
James O. Johnson, Director Date John C. McBeth, Director Date
/s/ Theodore S. Mason* 1/10/01 /s/ Theodore S. Mason* 1/10/01
------------------------------- -------------------------------
Michael L. Renner, Director Date Jerry L. Thomas, Director Date
/s/ Theodore S. Mason* 1/10/01 /s/ Theodore S. Mason* 1/10/01
------------------------------- -------------------------------
Edythe E. Vaissade, Director Date Jerry L. Thomas, Director Date
/s/ Theodore S. Mason* 1/10/01
-------------------------------
Thomas W. Weborg, Director Date
</TABLE>
*Pursuant to a power of attorney
<PAGE> 314
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger by and among Humboldt
Bancorp and Tehama Bancorp dated as of September 20, 2000, is attached as
Appendix A to the proxy/prospectus contained in Part I of this
Registration Statement
3.1 Amended and Restated Articles of Incorporation of Humboldt Bancorp(1)
3.2 Bylaws of Humboldt Bancorp(1)
5.1 Opinion of counsel re: legality(7)
8.1 Form Opinion re: tax matters as to the merger of Tehama Bancorp with and
into Humboldt Bancorp(7)
10.1 Amended Employment Agreement with Theodore S. Mason(2)
10.2 Director Fee Plan(3)
10.3 Amended Humboldt Bancorp Stock Option Plan(3)
10.4 Salary Continuation Agreement with Theodore S. Mason(3)
</TABLE>
<PAGE> 315
<TABLE>
<S> <C>
10.5 Salary Continuation Agreement with Alan J. Smyth(3)
10.6 Salary Continuation Agreement with Ronald V. Barkley(3)
10.7 Salary Continuation Agreement with Paul A. Ziegler(4)
10.8 Director-Shareholder's Agreement in the Global Bancorp and Humboldt Bank
merger(4)
10.9 Affiliate's Agreement with Global Bancorp(4)
10.10 Trust Indenture in connection with certificates of interest in a
promissory note for the Global Bancorp merger(4)
10.11 Deferred Compensation Agreement with Theodore Mason(4)
10.12 Deferred Compensation Agreement with Alan J. Smyth(4)
10.13 Deferred Compensation Agreement with Ronald V. Barkley(4)
10.14 Plan of Reorganization with Silverado Merger Co.(4)
10.15 Global Bancorp Loan Purchase Agreement(5)
10.16 Affiliate's Agreement signed by Tehama Bancorp affiliates in connection
with the Tehama Bancorp Merger (7)
10.17 Humboldt Bancorp Stock Option Agreement to purchase Tehama Bancorp common
stock(7)
10.18 Tehama Bancorp Stock Option Agreement to purchase Humboldt Bancorp common
stock(7)
10.19 Humboldt Bancorp Indenture - Junior subordinated debt securities(6)
10.20 Amended and Restated Declaration of Trust for junior subordinated debt
securities(6)
21.1 Subsidiaries of Humboldt Bancorp are Humboldt Bank, a California state
chartered bank, Capitol Valley Bank, a California state chartered bank,
Bancorp Financial Services, a California corporation, and Capitol Thrift
and Loan Association, a California industrial loan association (7)
23.1 Consent of Bartel Eng & Schroder is included with the opinion re: legality
as Exhibit 5.1 to this Registration Statement(7)
23.2 Consent of Richardson & Company, independent accountants for Humboldt
Bancorp
23.3 Consent of Perry-Smith LLP, independent accountants for Tehama Bancorp
23.4 Consent of Dain Rauscher Wessels, financial advisor of Tehama Bancorp(7)
23.5 Consent of D.A. Davidson, financial advisor of Humboldt Bancorp
23.6 Consent of Bartel Eng & Schroder is included in Exhibit 8.1(7)
24.1 Power of Attorney(7)
99.1 Fairness Opinion of Dain Rauscher Wessels is attached as Appendix B to the
proxy statement/prospectus included in Part I to the Registration
Statement
</TABLE>
<PAGE> 316
<TABLE>
<S> <C>
99.2 Fairness Opinion of D.A. Davidson is attached as Appendix C to the proxy
statement/prospectus included in Part I to the Registration Statement
99.3 Proxy Card Humboldt Bancorp(7)
99.4 Proxy Card Tehama Bancorp(7)
</TABLE>
(1) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996, and previously filed with the Commission.
(2) Incorporated by reference to the Company's Definitive Proxy Statement for
the Company's 1996 Annual Meeting previously filed with the Commission
(and, with respect to the Stock Option Plan, as amended pursuant to the
terms set forth in the Definitive Proxy Statement for the Company's 1998
Annual Meeting).
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1998, and previously filed with the Commission.
(4) Previously filed on November 12, 1999, with the Company's filing on Form
S-4 (File No. 333-90925).
(5) Previously filed on February 7, 2000, with the Company's pre-effective
amendment No. 1 to Form S-4 (File No. 333-90925).
(6) Filed on November 14, 2000, with the Company's Form 10-Q for the quarter
ended September 30, 2000.
(7) Previously filed on November 14, 2000, with the Company's filing on Form
S-4 (File No. 333-49866).
