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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2000
Commission File Number: 0-27784
HUMBOLDT BANCORP
(Exact name of small business issuer as specified in its charter)
California 93-1175446
(State or other jurisdiction of (I.R.S. Employer Identification No.)
of incorporation or organization)
2440 Sixth Street
Eureka, California
(Address of principal executive offices)
95501
(Zip Code)
(707) 445-3233
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. X Yes ___ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K, and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K. |_|
Issuer's revenues for the most recent fiscal year were: $70,799,000
Aggregate Market Value of the voting stock held by non-affiliates of the
registrant as of March 1, 2001: $60,519,000
Number of shares of common stock outstanding at December 31, 2000, as adjusted:
5,982,456
Documents incorporated by reference: Information required by Items 10 through 12
of Part III to this Form 10-K are incorporated by reference to Humboldt
Bancorp's proxy statement which will be filed within 120 days of the end of the
fiscal year.
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ANNUAL REPORT ON FORM 10-K
PART I
Discussions of certain matters contained in this Annual Report on Form
10-K may constitute forward-looking statements within the meaning of the Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which Humboldt
Bancorp (referred to as "Humboldt" or "we" when such reference includes Humboldt
Bancorp and its subsidiaries, collectively, "Humboldt Bancorp" when referring
only to the parent company. Reference to Humboldt Bank, Capitol Valley Bank and
Capitol Thrift & Loan in this section is reference to just, Humboldt Bank,
Capitol Valley Bank and Capitol Thrift & Loan, respectively and "Banks"
collectively), operates, projections of future performance, perceived
opportunities in the market and statements regarding Humboldt's mission and
vision. Humboldt's actual results, performance and achievements may differ
materially from the results, performance and achievements expressed or implied
in such forward-looking statements. For a discussion of some of the factors that
might cause such a difference, see "Item 1. Business--Factors That May Affect
Future Results of Operations."
ITEM 1. BUSINESS
Introduction
Humboldt Bancorp is a multi-bank holding company with three bank
subsidiaries, Humboldt Bank, Capitol Valley Bank, and Capitol Thrift & Loan. As
of December 31, 2000, Humboldt also owns a 50% interest in Bancorp Financial
Services, a leasing corporation.
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.
As of December 31, 2000, Humboldt had total assets of $608.0 million,
total deposits of $506.8 million, and shareholders' equity of $50.8 million.
Humboldt's net income for the year ended December 31, 2000, and 1999, was $6.9
million and $4.6 million, respectively, which was Humboldt's ninth consecutive
year of increased net income. For the year ended December 31, 2000, and 1999,
Humboldt's return on average assets was 1.28% and 1.27%, respectively, and
return on average equity was 15.93% and 15.10%, respectively. Since the year
ended December 31, 1995, Humboldt has increased annual earnings by an average of
25.7% per year and maintained return on average assets in excess of 1.22%.
During the same period, Humboldt has achieved a return on average equity greater
than 14.5% in each year while maintaining high asset quality.
Recent Events
On March 9, 2001, Tehama Bancorp the former holding company of Tehama
Bank, merged with and into Humboldt Bancorp. Upon consummation of the merger,
the outstanding shares of Tehama Bancorp were converted into an aggregate of
3.39 million shares of Humboldt Bancorp stock. The stock was issued to Tehama
Bancorp shareholders in a tax-exempt exchange accounted for as a
pooling-of-interests. As of December 31, 2000, Tehama Bancorp has $244.3 million
in assets, $206.0 million in deposits and $22.3 million in shareholders' equity.
Tehama Bank was founded in 1984 and serves four Northern California counties
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through six branch offices. The financial information included with this Form
10-K does not reflect the merger of Humboldt Bancorp and Tehama Bancorp.
Humboldt Bancorp's Family of Companies.
The following provides a summary of all the affiliated bank's,
subsidiaries, and segments of the company.
Banks
Humboldt Bank - Humboldt Bank founded in 1989, is a state-chartered bank
with its main office located in Eureka, California, Humboldt Bank has nine
branches located in Humboldt, Trinity and Mendocino counties. At December 31,
2000, Humboldt Bank had total assets of $424.6 million, total net loans of
$258.8 million, and total deposits of $349.5 million.
Capitol Valley Bank - Capitol Valley Bank, formed by Humboldt as a de-novo
state-chartered bank in 1999, has its main office located in Roseville,
California. At December 31, 2000, Capitol Valley Bank had total assets of $54.6
million, total net loans of $38.9 million, and total deposits of $49.0 million.
Capitol Thrift & Loan - Capitol Thrift & Loan, acquired by Humboldt in
April 2000, is a California industrial bank and has its main office located in
Napa, California. Capitol Thrift & Loan has nine branches located in Northern,
Central, and Southern California and focuses primarily on consumer mortgage and
commercial real estate lending. At December 31, 2000, Capitol Thrift & Loan had
total assets of $128.2 million, total net loans of $110.2 million, and total
deposits of $108.6 million.
Subsidiaries and Segments
Merchant Bankcard Department - Merchant Bankcard Department is an operating
segment of Humboldt Bank. The Merchant Bankcard Department processes the
settlement of credit and debit card sales for merchants, and issues, and
maintains credit card accounts for its customers. At December 31, 2000, the
Merchant Bankcard Department had total assets of $58.4 million and had total
revenues for 2000 of $23.6 million.
Bancorp Financial Services, Inc. - Bancorp Financial Services, Inc. a
California corporation, was jointly formed by Humboldt and Tehama Bancorp in
1996. Bancorp Financial Services, Inc. acquires equipment lease contracts of
generally less than $150,000 and issues securities backed by the leases in
private placement offerings to institutional investors. Bancorp Financial
Services, Inc. acts as the servicer for leases held in its portfolio and those
transferred in securitization. In addition, Bancorp Financial Services, Inc.
originates and services indirect automobile loans, primarily within the State of
California. For all presentations in the Form 10-K, Bancorp Financial Services,
Inc. is accounted for under the equity method, reflecting Humboldt's 50%
ownership interest. At December 31, 2000, Bancorp Financial Services had total
assets of $53.2 million and for the year ended December 31, 2000, had a net
loss of approximately $235,000, of which $117,000 will be attributed to Humboldt
Bancorp due to its 50% interest.
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Lending Activities
Humboldt concentrates its lending activities in real estate,
commercial, lease financing, credit card and consumer loans, made almost
exclusively to individuals and businesses primarily in Northern California.
Humboldt has no foreign loans. The net loan and lease portfolio as of December
31, 2000, and 1999, totaled $407.9 million and $225.1 million, respectively,
which represented 80.5% and 59.5%, respectively, of total deposits and 67.1% and
53.1%, respectively, of total assets. Humboldt also generates fee income by
servicing mortgage loans.
Real Estate Loans and Real Estate Banking Operations
Real Estate - Construction
Humboldt makes loans to finance the construction of residential and
commercial properties and to finance land acquisition and development.
Humboldt'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 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 also originates owner-occupied, single-family, residential
real estate loans in its market area. At December 31, 2000 and December 31,
1999, Humboldt had outstanding owner-occupied, single-family, residential real
estate loans totaling $59.3 and $39.8 million, respectively. Humboldt 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 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 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 requires private mortgage insurance in an amount intended to
reduce Humboldt's exposure to 80% of the appraised value of the underlying
collateral.
Generally, Humboldt 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 December 31, 2000.
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Real Estate - Multi-Family Residential
Humboldt also originates multi-family, residential real estate loans in
its market area. At December 31, 2000 and December 31, 1999, Humboldt had
outstanding multi-family, residential real estate loans totaling $18.1 and $5.4
million, respectively.
Real Estate - Commercial and Agricultural
In order to enhance the yield on and decrease the average term to
maturity of its assets, Humboldt originates permanent loans secured by
commercial real estate. Humboldt'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's primary market area. Real estate commercial and agricultural
loans are secured by both commercial and single-family property.
Business Loans
Humboldt'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'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.
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 December 31, 2000.
Leases
Humboldt makes leases to finance credit card swipe terminals and other
small ticket items. The dollar amount of each lease usually ranges from under
$2,000 to $5,000 and the term is approximately three to five years.
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 remain competitive by offering an
additional service. Currently Humboldt does not actively solicit credit card
business beyond its customer base and market area.
Consumer Loans
The consumer loans originated by Humboldt include automobile loans and
miscellaneous other consumer loans, including unsecured loans. Consumer lending
affords Humboldt the opportunity to earn yields higher than those obtainable on
single-family residential lending.
5
Loan Servicing
Humboldt 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's servicing portfolio, in which it has sold ownership but
retains the servicing, was $198.6 million at December 31, 2000.
Savings and Deposit Activities
Humboldt offers customary banking services including personal and
business checking, savings accounts, time certificates of deposit, IRA, and
Keogh accounts. Most of Humboldt's deposits are obtained from commercial
businesses, professionals and individuals with high income or net worth. In
addition, Merchant Bankcard reserves are held primarily in non-interest bearing
accounts.
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 twelve months
ended December 31, 2000, no one merchant accounted for more than 1.5% of
Merchant Bankcard's total gross processing volume. At December 31, 2000, the
Merchant Bankcard Department provided processing services to approximately
70,000 merchants.
The transaction processing industry provides merchants with credit and
debit card processing services. The industry has grown rapidly in recent years
as a result of wider merchant acceptance and rapid technological advances within
the 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
0.10%. As of December 31, 2000, the three ISOs engaged by Humboldt Bank, as
described above, represented 60,315 merchant accounts. Further, those three ISOs
represented $2.6 billion of total Merchant Bankcard gross processing volume for
the year ended December 31, 2000.
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
ISOs 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
6
fee of approximately 4% of the gross processing volume. For the year ended
December 31, 2000, Proprietary accounts represented $431.0 million of total
Merchant Bankcard gross volume and 9,027 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, the year ended
December 31, 2000, net revenues for the Proprietary account segment have
increased 93.0% as compared to the same time period in 1999, while net revenues
for the ISO segment have decreased 11.3% relative to the same time period in
1999.
Humboldt intends to continue to expand the Proprietary account segment
of its business. Management wants to ensure revenue independent of ISOs and to
generate more fee income. 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. If Humboldt is
not successful in these marketing efforts, Merchant Bankcard's financial results
may be adversely affected.
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
higher staffing levels 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 new and smaller merchants may be
potentially lucrative to Humboldt Bank, these accounts are perceived high risk
because of lack of business experience. For ISO accounts, risk is mitigated by
requiring merchant reserves and by ISO reserves and guarantees. Reserves are
demand deposit or accounts with minimum required balances established by
withholding a percentage of processing 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 totaled $50.4
million at December 31, 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 offset the charge-back. A
failure in Humboldt's
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the years ended December 31, 1998, 1999, and 2000, is set forth
below:
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For Years Ended December 31,
------------------------------------------
1998 1999 2000
------------------------------------------
(Dollars in thousands)
Number of Accounts
ISO $ 59,595 $ 62,646 $ 60,315
Proprietary 2,754 5,641 9,027
----------- ----------- -----------
Total $ 62,349 $ 68,287 $ 69,342
=========== =========== ===========
Gross Processing Volume:
ISO $ 2,100,500 $ 2,695,037 $ 2,578,300
Proprietary 71,500 215,780 430,980
----------- ----------- -----------
Total $ 2,172,000 $ 2,910,817 $ 3,009,280
=========== =========== ===========
NetProcessing Revenue:
ISO $ 3,026 $ 3,768 $ 3,343
Proprietary 178 2,739 5,292
----------- ----------- -----------
Total $ 3,204 $ 6,507 $ 8,635
=========== =========== ===========
A summary of the Merchant Bankcard Department's merchant demand deposit
and certificate of deposit account balances at the years ended December 31,
1998, 1999, and 2000, is set forth below:
For Years Ended December 31,
------------------------------------------
1998 1999 2000
------------------------------------------
(Dollars in thousands)
Merchant Reserves:
ISO $ 45,088 $ 47,587 $ 40,020
Proprietary 1,881 6,566 10,341
----------- ----------- -----------
Total $ 46,969 $ 54,153 $ 50,361
=========== =========== ===========
A summary of the Merchant Bankcard Department's losses for the years
ended December 31, 1998, 1999, and 2000 in connection with merchant bankcard
services involving an ISO, and for losses in connection with its proprietary
bankcard services when an ISO was not involved, is set forth below:
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For Years Ended December 31,
------------------------------------------
1998 1999 2000
------------------------------------------
(Dollars in thousands)
Merchant Losses:
ISO $ - $ - $ 7,500
Proprietary 17,829 127,049 55,184
----------- ----------- -----------
Total $ 17,829 $ 127,049 $ 62,684
=========== =========== ===========
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 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 and convenience
stores. 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 contributed capital, totaling $4.5 million, to
form Capitol Valley Bank. Capitol Valley Bank, located in Roseville, California.
Humboldt believes that the Sacramento-Roseville, California market represents an
attractive location for a 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 entered into an agreement to acquire, for
49,502 shares of Humboldt common stock at $10.91 per share, and warrants to
purchase up to 99,000 shares of Humboldt common stock at $13.50 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
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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'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 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 December 31, 2000, Capitol Valley Bank had total assets of $54.6
million, total loans of $38.9 million, and total deposits of $49.0 million.
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama
Bank to organize and share equally in a subsidiary leasing company, Bancorp
Financial Services. Bancorp Financial Services was organized as a California
corporation on November 25, 1996, and Humboldt Bank and Tehama Bank each
contributed $2.0 million towards its capitalization as of January 2, 1997.
Subsequently during 1998, Humboldt Bank and Tehama Bank each contributed their
interests in Bancorp Financial Services to their respective holding companies,
Humboldt and Tehama Bancorp. In March 2000, both Humboldt and Tehama Bancorp
made a secondary infusion of capital in Bancorp Financial Services of $999,750
to support growth. Bancorp Financial Services makes consumer automobile loans
and commercial equipment leases of generally less than $150,000 to small
businesses.
In addition to making leases and loans, Bancorp Financial Services buys
and services commercial equipment lease contracts throughout the United States
directly from lessors, brokers, finance companies, banks and thrifts nationwide.
Bancorp Financial Services also buys and services consumer automobile contracts
primarily in Northern California. Generally, Bancorp Financial Services finances
the acquisition of the commercial lease contracts and automobile loans through
warehouse lines of credit with commercial banks. 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
leased-backed securities for private placement with institutional investors 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.
Since the latter part of the year ended December 31, 2000, Bancorp
Financial Services' commercial paper conduit facility has experienced
substantial delays in issuing term-leased backed notes due to the changing
economic environment and deterioration of the leased backed securities market.
As a result, during the fourth quarter of the year ended December 31, 2000, and
first quarter of 2001, Bancorp Financial Services experienced a cash shortage to
finance its operations and to acquire additional leases. Bancorp Financial
Services was unable to sell its leases and to replenish its warehouse lines and
clear its commercial paper conduit facility due to its inability to issue
term-leased backed notes at reasonable terms. In December 2000 Humboldt Bancorp
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made a loan guarantee of $7.0 million to Bancorp Financial Services' primary
commercial bank lender which was release on December 28, 2000. In January 2001,
Humboldt Bancorp purchased $4 million in subordinated debentures from Bancorp
Financial Services. In addition, although during the first quarter of 2001
Bancorp Financial Services was able to issue term-leased backed notes, Humboldt
Bancorp advanced Bancorp Financial Services additional funds in the amount of
approximately $3 million for its operations. Concurrently, Humboldt Bancorp
exchanged its advancement for Bancorp Financial Services' $3 million
subordinated class of a term-leased backed notes issued in February 2001.
Further, in general, due to the decline in the economy, there has been
an increase in the number of delinquencies on leases serviced by Bancorp
Financial Services. Due to business reasons, Bancorp Financial Services
repurchased certain non-performing leases that served as security to the
term-leased backed notes issued during year 2000. Because of these repurchases,
during the first quarter of 2001, Bancorp Financial Services has a substantial
number of non-performing leases.
In December 2000, the boards of directors of Humboldt Bancorp and Tehama
Bancorp decided to sell their interests in Bancorp Financial Services and in
January 2001, Bancorp Financial Services engaged an investment banker to assist
in its sale. For the year ended December 31, 2000, Humboldt Bancorp accounted
for its investment in Bancorp Financial Services using the equity method, and
Humboldt Bancorp incurred a loss of approximately $117,000 attributed to its 50%
interest in Bancorp Financial Services. As of March 31, 2001, Humboldt Bancorp's
investment, including Tehama Bancorp's investment, in Bancorp Financial Services
was approximately $7.0 million.
The Federal Reserve Board, Federal Deposit Insurance Corporation ("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. This proposal
"Docket R-1080, Proposed Revisions on Capital Rules for Residual Interests"
would significantly increase the regulatory capital required to support
on-balance sheet residual interests to a level whereby the combined company
would be required to contribute additional capital for Bancorp Financial
Services, Inc. beyond the level at which an acceptable return on capital would
be provided. 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. If the proposed regulations were
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, which was $7.4 million at
December 31, 2000.
Capitol Thrift & Loan
On April 7, 2000, Humboldt acquired Capitol Thrift & 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. Humboldt 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 & Loan is a California corporation licensed under the
California Industrial Loan Law. Capitol Thrift & Loan conducts a general
consumer and commercial finance business from nine branches located throughout
the State of California. At the time of the acquisition, Capitol Thrift & Loan
operated ten branches. Two branches were subsequently consolidated.
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.
Capitol Thrift & 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
& Loan does not provide general commercial banking services such as demand
11
checking accounts, lines of credit, safe deposit boxes and wire transfer.
Capitol Thrift & Loan funds its lending activities by issuing thrift
certificates and investment certificates.
The main office of Capitol Thrift & Loan is located at 1424 Second
Street, Napa, California 94559. Capitol Thrift & Loan's deposits are insured up
to $100,000 by the Federal Deposit Insurance Corporation. As of December 31,
2000, Capitol Thrift & Loan had total assets of $128.2 million, total deposits
of $108.6 million and net income of $1,030,000. Subsequent to April 7, 2000,
Humboldt accounted for Capitol Thrift & Loan on a consolidated basis.
In 1996 and 1997, Capitol Thrift & 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 & Loan entered into an agreement with the FDIC and
the California Department of Financial Institutions pursuant to which management
and the Capitol Thrift & 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 OREO, classified and non-performing loans,
and revise the methodology for calculating the allowance for losses on loans. In
addition, Capitol Thrift & Loan is required to maintain Tier 1 capital of 8% or
more of Capitol Thrift & Loan's adjusted total assets. Humboldt believes that
Capitol Thrift & Loan is in compliance with the agreement with FDIC and
California Department of Financial Institutions, which has subsequently been
removed.
Further, as a condition of the California Department of Financial
Institution's consent to Humboldt acquisition of Capitol Thrift & Loan. Humboldt
Bank was required to maintain a ratio of tangible shareholders' equity to
tangible assets of not less than 7.0%. As of December 31, 2000, the tangible
shareholders equity to tangible assets ratio was 7.5% for Humboldt Bank.
Acquisition of California Federal Branches
On August 27, 1999, Humboldt Bank completed the acquisition of two
branches of California Federal Bank in Eureka and Ukiah. Under the terms of the
purchase agreement, Humboldt Bank acquired all of the fixed assets relating to
CalFed's Eureka and Ukiah branch offices. Humboldt Bank primarily acquired the
two CalFed branches for access to their deposits. The purchase price for the two
branches was equal to approximately 3.25% of the aggregate deposits acquired by
Humboldt Bank. Total deposits acquired by Humboldt Bank were approximately $72.2
million and loans acquired were approximately $0.1 million.
Market Area and Competition
Humboldt's primary market area consists of Humboldt, Trinity and
Mendocino counties and nearby communities of adjacent counties. Humboldt 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 & Loan.
Humboldt 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, as well as more locations, more
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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 & 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'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's larger
competitors. Humboldt 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 & Loan increased Humboldt's loan portfolio and the continuation
of Capitol Thrift & Loan's industrial loan charter will provide favorable
lending terms so as to assist Humboldt to compete with institutions for more
loans. No assurance can be given that Humboldt 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'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 Gramm-Leach-Bliley 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 banks such as Humboldt Bank,
Capitol Valley Bank and Capitol Thrift & Loan, but may also cause consolidations
and mergers with larger competitors. The Gramm-Leach-Bliley Act may also
increase cross-border consolidations and mergers.
The following table sets forth information regarding deposit market
share and ranking by county as of June 30, 2000, which is the most recent
information available.
Rank Share
---- -----
Humboldt Bank
Humboldt County 1 29.06%
Mendocino County 8 3.32%
Trinity County 3 21.97%
Capital Valley Bank
Placer County 12 2.10%
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Rank Share
---- -----
Capitol Thrift & Loan
Placer County 22 0.13%
Fresno County 21 0.46%
Los Angeles County 138 0.01%
Napa County 15 1.49%
Riverside County 39 0.08%
San Diego County 60 0.03%
San Joaquin County 26 0.13%
Economic Conditions, Government Policies, Legislation, and Regulation
Humboldt's profitability, like most financial institutions, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by the banks on interest-bearing liabilities,
such as deposits and other borrowings, and the interest rates received by the
Banks on their interest-earning assets, such as loans extended to their
customers and securities held in their investment portfolios, comprise the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of Humboldt and the Banks, such as
inflation, recession and unemployment, and the impact which future changes in
domestic and foreign economic conditions might have on Humboldt and the Banks
cannot be predicted.
Humboldt's business is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). The Federal Reserve implements national monetary policies (with
objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve in these areas influence the growth of bank loans, investments, and
deposits and also affect interest rates earned on interest- earning assets and
paid on interest-bearing liabilities. The nature and impact on Humboldt and the
Banks of any future changes in monetary and fiscal policies cannot be fully
predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have the effect of increasing the cost of doing business, limiting
or expanding permissible activities, or affecting the competitive balance
between banks and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of banks, bank
holding companies, and other financial institutions and financial services
providers are frequently made in the U.S. Congress, in the state legislatures,
and before various regulatory agencies. See "Item 1. Business--Supervision and
Regulation of Humboldt."
Supervision and Regulation of Humboldt
Humboldt and the Banks, are subject to both federal and state laws and
regulations. These laws and regulations are primarily intended to protect
depositors, not shareholders. The following information describes certain
statutory or regulatory provisions and is qualified in its entirety by reference
to the particular statutory and regulatory provisions at issue.
Humboldt is a registered bank holding company under the Bank Holding
Company Act, regulated, supervised and examined by the Federal Reserve Bank of
14
San Francisco. The Banks are also regulated, supervised, and periodically
examined by the California Department of Financial Institutions and the
("FDIC").
The regulations of the Federal Reserve Board, the FDIC, and the
California Department of Financial Institutions govern most aspects of
Humboldt'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
the Banks. 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
Humboldt Bancorp's 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
Humboldt Bancorp 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 ("BIF").
Deposits in savings associations are insured through the Savings
Association Insurance Fund ("SAIF"). A SAIF member may merge with a bank as long
15
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.
Deposits in Humboldt Bank, Capitol Valley Bank and Capitol Thrift &
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). Due to the fact that the BIF and SAIF have reached the statutory
target level of 1.25% of total deposits, the possibility exists that an increase
in the assessment rate could occur. Should the BIF/SAIF reserve fall below the
target level due to increased levels of Bank Deposits or an increase in charges
to the BIF/SAIF reserve for Bank failures, the insurance fund assessment level
would be increased from current levels. This would adversely impact the
profitability of Humboldt. For the year ended, 2000, the assessment for the
Banks was approximately $112,000.
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 items 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), trust preferred securities, 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
16
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.
The FDIC has added a market risk component to the capital requirements
of nonmember banks. The market risk component could require additional capital
for general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC's evaluation of an
institution's capital adequacy takes account of a variety of factors as well,
including interest rate risks to which the institution is subject, the level and
quality of an institution's earnings, loan and investment portfolio
characteristics and risks, risks arising from the conduct of nontraditional
activities and other factors. Accordingly, the FDIC's final supervisory judgment
concerning an institution's capital adequacy could differ significantly from the
conclusions that might be drawn from the absolute level of an institution's
risk-based capital ratios. Therefore, institutions generally are expected to
maintain risk-based capital ratios that exceed the minimum ratios discussed
above. This is particularly true for institutions contemplating significant
expansion plans and institutions that are subject to high or inordinate levels
of risk. Moreover, although the FDIC does not impose explicit capital
requirements on holding companies of institutions regulated by the Federal
Reserve Bank, the FDIC can take account of the degree of leverage and risks at
the holding company level. If the FDIC determines that the holding company (or
another affiliate of the institution regulated by the FDIC) has an excessive
degree of leverage or is subject to inordinate risks, the FDIC may require the
subsidiary institution(s) to maintain additional capital or the FDIC may impose
limitations on the subsidiary institution's ability to support its weaker
affiliates or holding company. Humboldt's total risk-based capital ratio at
December 31, 2000, 1999, and 1998, was 11.74%, 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's leverage ratio at December 31, 2000, 1999, and 1998, was 8.70%, 7.50%
and 8.12%, respectively. At December 31, 2000, 1999, and 1998, Humboldt 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.
17
The following table illustrates the capital guidelines applicable to
the Banks and their respective regulatory capital ratio as of December 31, 2000.
Minimum
Minimum Necessary Necessary to be
Humboldt Capitol Valley Capitol Thrift to be Well Adequately
Bank Bank & Loan Capitalized Capitalized
-------- -------------- -------------- ----------------- ----------------
Total Risk-Based
Capital Ratio 10.15% 11.95% 11.01% 10.0% 8.0%
Tier 1 Risk-Based
Capital Ratio 9.09% 10.75% 9.75% 6.0% 4.0%
Leverage Ratio 7.46% 8.71% 8.45% 5.0% 4.0%
In connection with Humboldt'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 which commences in March
2001. During the year ended December 31, 2000, Humboldt contributed $1.7 million
to Capitol Valley Bank.
In addition, as a condition of Humboldt's acquisition of Capitol Thrift
& Loan, Humboldt represented to the California Department of Financial
Institutions that Capitol Thrift & 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
Humboldt has never paid cash dividends, but has 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 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.
18
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 examination of Humboldt Bank, concluded November
2000, of Capitol Valley Bank, August 2000, and of Capitol Thrift & Loan, October
1998. Humboldt Bank was rated outstanding, with each of the others receiving 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.
State Regulation
As California-chartered institutions, Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & 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 &
Loan, as well as their savings and thrift deposits, mortgage lending, investment
and other activities. State regulation may contain limitations on an
institution's activities that are in addition to limitations imposed under
federal law. State regulation also contains many provisions that are consistent
with federal law, such as provisions of California law limiting loans by either
of Humboldt Bank or Capitol Valley Bank to any one borrower to 15.0% of
unimpaired capital and surplus, plus 10.0% of unimpaired capital and surplus if
the additional amount is fully secured by certain forms of "readily marketable
collateral" and limiting loans at Capitol Thrift & 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.
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
19
Act: Section 20, which restricted the affiliation of Federal Reserve member
banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial services providers by revising and expanding the BHC Act
framework to permit a holding company system to engage in a full range of
financial activities through a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not only banking, insurance
and securities activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial services providers;
o Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer
information;
o Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community
Reinvestment Act, sometimes referred to as CRA; and
o Addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order for a company to take advantage of the ability to affiliate
with other financial services providers, it must become a "Financial Holding
Company" as permitted under an amendment to the BHC Act. To become a Financial
Holding Company, a company would file a declaration with the Federal Reserve
Board, electing to engage in activities permissible for Financial Holding
Companies and certifying that the company is eligible to do so because all of
its insured depository institution subsidiaries are well-capitalized and
well-managed. In addition, the Federal Reserve Board must also determine that
each of a holding company's insured depository institution subsidiaries has at
least a "satisfactory" CRA rating.
20
Human Resources
At December 31, 2000, Humboldt employed a total of 400 full-time
equivalent employees. None of Humboldt's employees are represented by a
collective bargaining group and management considers its relations with its
employees to be good.
Factors That May Affect Humboldt Bancorp's Future Results of Operation
Difficulties of integrating Tehama Bank could hurt Humboldt's future performance
The earnings, financial condition and prospects of Humboldt after the
merger depend in large part on Humboldt's ability to successfully integrate the
operations and management of Tehama Bank with Humboldt. 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 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 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 52.8%, 53.6% and
44.2% of total revenues, net of interest expense, for years ended December 31,
2000, 1999 and 1998, respectively. 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.
In late 2000 and continuing into 2001, the State of California has been
subject to a deterioration in the ability of major utilities to provide energy
for the State's needs. In Northern California, the crisis has resulted in
"rolling blackouts" where certain areas are not provided with any electricity
for periods of up to two hours. To date the most immediate impact has been the
significant increase in power rates for most users, including Humboldt. In
addition the major utility providers are purchasing power on a "spot" basis. The
cost of such purchases has exceeded their ability to fully collect the increases
from their customers. The long-term impact is unknown but could result in an
economic slow-down as companies located in California relocate or shift
production to areas outside the State. This could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the
21
value of real estate and other collateral securing loans, and the Humboldt's
financial condition and results of operations in general and, as a result, on
the market value of the Humboldt's common stock.
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.
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's 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 intends to seek a replacement for Mr. Mason prior to the expiration of
his contract. The loss of Mr. Mason or the inability to find a qualified
replacement could adversely affect our operations.
ITEM 2. PROPERTIES
The executive offices of Humboldt are located at 2440 6th Street, Eureka,
California. Humboldt owns this property. As of December 31, 2000, Humboldt Bank
had nine branch offices, Capitol Valley Bank had one main branch, Capitol Thrift
& Loan had nine branches, and Bancorp Financial Services had one main office. In
addition, Humboldt is consolidating its operations at one administration office.
Rental expense for all leases of premises for the years ended December 31,
2000, 1999, and 1998, was $689,000, $401,000 and $269,000, respectively. Rental
income from all properties owned and leased for the years ended December 31,
2000, 1999, and 1998, was $377,000, $302,000 and $177,000, respectively.
ITEM 3. LEGAL PROCEEDINGS
The following is litigation involving Humboldt as of December 31, 2000.
Subsequent to December 31, 2000, Humboldt has been dismissed in the following
legal actions Freeman, et al. v. Citibank (South Dakota), N.A., et al., Lawrence
Bradley v. Visa International Service Association and Travelers Bank USA Corp.,
and Christopher Bradford, et. al. v. Leasecomm Corporation, et. al..
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
22
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 "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 Merchant Bankcard Department, 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.
23
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the fourth quarter of the year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 29, 2000, Humboldt Bancorp's common stock has been traded on
the Nasdaq National Market ("Nasdaq") under the symbol "HBEK." Previously,
Humboldt Bancorp's common stock was quoted on the OTC Bulletin Board. The table
below reflects the high and low closing sales prices for Humboldt Bancorp's
common stock as reported by Nasdaq 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 reflect the 10% stock dividend February 7, 2000. In
addition, the prices indicated reflect inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions.
24
Quarter Ended High Low
------------- ----- ---
2000
Fourth quarter $11.13 $ 9.25
Third quarter 12.25 10.63
Second quarter 13.69 11.00
First quarter 15.00 10.00
1999
Fourth quarter $14.90 $11.35
Third quarter 14.65 10.90
Second quarter 11.60 8.75
First quarter 10.80 8.75
As of December 31, 2000 there were approximately 1,084 shareholders,
not including those held in street name by several brokerage firms. As of
December 31, 2000, a total of 1,094,074 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.
Humboldt distributed a 10% stock dividend on the common stock on May
30, 1998, and February 7, 2000. In addition, effective June 30, 1999, Humboldt
executed a 5-for-2 stock split. Humboldt has never declared a cash dividend on
the common stock. Payment of future dividends is at the discretion of Humboldt's
board of directors and subject to a number of factors, including our results of
operations, general business conditions, capital requirements, general financial
condition, and other factors. Further, Humboldt's ability to issue cash
dividends is subject to meeting certain regulatory requirements. See
"Supervision and Regulation of Humboldt."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Information regarding Selected Consolidated Financial Data appears on
page A-1 under the caption "Financial Highlights" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-2 through A-25 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures about
Market Risk appears on page A-2 through A-25 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quantitative and Qualitative Disclosure About Market Risk" and is
incorporated herein by reference.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding Financial Statements and Supplementary Data
appears A-26 through A-64 under the caption "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of Changes in
Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Humboldt intends to file a definitive proxy statement for the 2001
Annual Meeting of Shareholders (the "Proxy Statement") with the Securities and
Exchange Commission within 120 days of December 31, 2000. Information regarding
directors of Humboldt Bancorp will appear under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, and executive officers will appear under the captions
"Executive Compensation" -- Section 16(a) Principal Shareholders and Share
Ownership of Management and Directors in the Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear under the
captions "Compensation of Directors," "Executive Compensation" in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will appear under the caption "Principal Shareholders and Share
Ownership of Management and Directors" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, Humboldt Bank had a $3.8 million line of credit extended
to Bancorp Financial Services. 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 0.50% 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 from Bancorp
Financial Services.
Some of Humboldt'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
26
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 collectability or present other unfavorable features. The
outstanding balance under extensions of credit by Humboldt Bank to directors and
executive officers of Humboldt and Humboldt Bank and to the companies that these
directors and executive officers may have an interest was $4,631,000,
$4,865,000, and $6,451,000 as of December 31, 2000, 1999, and 1998,
respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The following documents are filed as part of this report:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . A-26
Consolidated Balance Sheets at December 31, 1999 and 2000. . . . . . . A-27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999, and 2000. . . . . . . . . . . . . . . . . . A-28
Consolidated Statements of Changes in Stockholders' Equity
for years ended December 31, 1998, 1999, and 2000. . . . . . . . . . A-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999, and 2000. . . . . . . . . . . . . . . . . . A-31
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . A-33
2. Financial Statement Schedules
All financial statement schedules are omitted, as the required information
is not applicable.
3. Exhibits
See Item 14(c) below.
(b) No reports on Form 8-K were filed by Humboldt during the quarter ended
December 31, 2000.
(c) Exhibits Required by Item 601 of Regulation S-K
3.1 Amended and Restated Articles of Incorporation of Humboldt Bancorp (1)
3.2 Bylaws of Humboldt Bancorp(1)
10.1 Amended Employment Agreement with Theodore S. Mason (2)
27
10.2 Director Fee Plan (3)
10.3 Amended Humboldt Bancorp Stock Option Plan (3)
10.4 Salary Continuation Agreement with Theodore S. Mason (3)
10.5 Salary Continuation Agreement with Alan J. Smyth (3)
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 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 S. 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)
28
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,
Capitol Thrift and Loan Association, a California industrial loan
association, and Humboldt Capital Trust, a Delaware business trust.
23.1 Consent of Richardson and Company
(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).
(8) Previously filed on January 14, 20001, with the Company's filing on
pre-effective amendment no. 1 to Form S-4 (File No. 333-49866).
(d) Additional Financial Statements
Not applicable.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchanged Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March, 2001.
By: /s/ Theodore S. Mason
-----------------------------
Theodore S. Mason
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Name Date
/s/ Theodore S. Mason March 27, 2001
Theodore S. Mason, President, Chief
Executive Officer & Director
(Principal Executive Officer)
/s/ Patrick J. Rusnak March 27, 2001
Patrick J. Rusnak, Executive Vice President,
Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/ Ronald F. Angell March 27, 2001
Ronald F. Angell, Director
/s/ Gary L. Evans March 27, 2001
Gary L. Evans, Director
/s/ Garry D. Fish March 27, 2001
Garry D. Fish, Director
/s/ Larry Francesconi March 27, 2001
Larry Francesconi, Director
/s/ Gary C. Katz March 27, 2001
Gary C. Katz, Director
/s/ John W. Koeberer March 27, 2001
John W. Koeberer, Director
30
/s/ John McBeth March 27, 2001
John McBeth, Director
/s/ Gary L. Napier March 27, 2001
Gary L. Napier, Director
/s/ Tom Weborg March 27, 2001
Tom Weborg, Director
/s/ John R. Winzler March 27, 2001
John R. Winzler, Director
A-1
FINANCIAL HIGHLIGHTS
1996(1) 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(Dollars In thousands except per share data)
Income Statement Data
Interest Income $ 16,562 $ 20,053 $ 23,504 $ 25,240 $ 42,848
Interest Expense 5,549 7,024 7,742 8,345 17,878
----------- ----------- ----------- ----------- -----------
Net interest income 11,013 13,029 15,762 16,895 24,970
Provision for loan and lease losses 533 773 2,124 1,046 1,815
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
loan and lease losses 10,480 12,256 13,638 15,849 23,155
Non-interest income 5,747 8,109 12,473 19,523 27,951
Non-interest Expense 11,325 15,496 19,578 28,494 40,964
----------- ----------- ----------- ----------- -----------
Income Before Provision For Income Taxes 4,902 4,869 6,533 6,878 10,142
Provision for income Taxes 1,926 1,611 2,517 2,271 3,287
----------- ----------- ----------- ----------- -----------
Net Income $ 2,976 $ 3,258 $ 4,016 $ 4,607 $ 6,855
=========== =========== =========== =========== ===========
Balance Sheet Data
Investment securities $ 39,933 $ 80,180 $ 77,802 $ 115,360 $ 101,275
Total net loans and leases $ 142,824 $ 157,512 $ 186,038 $ 225,122 $ 407,937
Total assets $ 214,738 $ 284,087 $ 319,975 $ 423,649 $ 607,992
Total Deposits $ 192,576 $ 255,186 $ 283,967 $ 378,630 $ 506,808
Total shareholders' equity $ 19,600 $ 23,554 $ 27,848 $ 34,139 $ 50,785
Per Share Data(2)
Net income
Basic $ 0.64 $ 0.69 $ 0.82 $ 0.91 $ 1.19
Diluted $ 0.58 $ 0.61 $ 0.75 $ 0.83 $ 1.11
Book Value $ 4.18 $ 4.94 $ 5.66 $ 6.56 $ 8.49
Weighted average shares outstanding
Basic 4,637,539 4,755,846 4,876,404 5,048,547 5,764,080
Diluted 5,135,469 5,324,632 5,378,441 5,556,821 6,186,582
Actual 4,694,327 4,769,040 4,916,874 5,204,202 5,982,456
Selected Ratios(3)
Return on average assets 1.48% 1.30% 1.32% 1.27% 1.28%
Return on average equity 16.96% 14.50% 16.02% 15.10% 15.93%
Total loans to deposits 74.17% 61.72% 65.51% 59.46% 80.49%
Net interest margin 5.98% 5.85% 5.94% 5.39% 5.28%
Efficiency ratio(4) 67.57% 73.31% 69.34% 78.24% 77.41%
Asset Quality Ratios
Reserve for loan and lease losses to:
Ending total loans and leases 1.48% 1.48% 1.62% 1.47% 1.47%
Nonperforming assets 352% 128% 420% 287% 242%
Nonperforming assets to ending total assets 0.28% 0.65% 0.23% 0.28% 0.53%
Net loan and lease charge-offs
(recoveries) to average loans and leases 0.19% 0.36% 0.82% 0.37% 0.32%
Reserve/nonperforming loans 569% 139% 553% 320% 242%
Capital Ratios
Average stockholders' equity to average assets 8.85% 8.48% 8.35% 8.42% 8.01%
Tier 1 capital ratio(5) 11.35% 10.79% 10.41% 10.90% 10.50%
Total risk-based capital ratio(6) 12.60% 12.02% 11.66% 12.07% 11.74%
Leverage ratio(7) 8.53% 7.38% 7.23% 7.50% 8.70%
Other
Average assets $ 201,780 $ 251,095 $ 304,515 $ 362,427 $ 537,600
Average earning assets $ 183,930 $ 222,555 $ 265,355 $ 314,038 $ 472,779
Number of branch offices(8) 8 9 8 11 20
Number of full-time equiv. employees 175 209 250 318 400
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed its
reorganization as a holding company on January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends in
1996, 1997, and 1998, and 2000, and a five-for-two stock split in 1999.
(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 1 capital divided by risk-weighted assets.
(6) Total capital divided by risk-weighted assets.
(7) Tier 1 capital divided by average assets.
(8) Including head office.
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of Humboldt. The
following discussion should be read in conjunction with the information under
"Selected Financial Information" and Humboldt consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which involve risks (described in the section entitled
"Factors that may affect future results of operations" contained in our Form
10-K accompanying this report) and uncertainties. Humboldt actual results may
differ significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include but are not
limited to economic conditions, competition in the geographic and business areas
in which Humboldt conducts its operations, fluctuation in interest rates, credit
quality and government regulation and other factors discussed in the Annual
Report on Form 10-K for the year ended December 31, 2000, under "Item 1.
Business--Factors That May Affect Future Results of Operations."
Overview
Humboldt Bancorp ("Humboldt" on a consolidated basis) is a bank holding
company with three principal bank subsidiaries collectively (the "Banks"):
Humboldt Bank, Capitol Valley Bank, and Capitol Thrift & Loan. Humboldt Bank and
Capitol Valley Bank are state chartered commercial banks which 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 & Loan is a California industrial bank
and primarily derives its revenue from the making of loans.
Humboldt also owns 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.
Bancorp Financial Services markets its automobile products principally in
California but its equipment lease products nationally.
Humboldt Capital Trust, a Delaware business trust formed for the
exclusive purpose of issuing trust preferred securities, is also a subsidiary of
Humboldt.
Humboldt provides a wide range of commercial banking services to small-
and medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. Humboldt has 20 branches
located in Arcata, Covina, Eureka (2), Fortuna, Fresno, Garberville, Lancaster,
Lodi, Loleta, McKinleyville, Napa, Riverside, Roseville (2), Sacramento, San
Diego, Ukiah, Weaverville, and Willow Creek.
At December 31, 2000, Humboldt had total assets of $608.0 million,
total loans of $407.9 million and total deposits of $506.8 million.
Humboldt completed two mergers during the three-year period ended
December 31, 2000, as described in Note V of Notes to Consolidated Financial
Statements. The mergers were accounted for using the purchase accounting method
and accordingly the results of operations have been included in the consolidated
financial statements since the date of acquisition.
On August 27, 1999, Humboldt's principal bank subsidiary Humboldt Bank
completed the acquisition of two branches of CalFed located in Eureka and Ukiah.
This transaction was accounted for using the purchase method of accounting and
accordingly the results of operations have been included in the consolidated
financial statements since the date of acquisition.
A-3
All outstanding and weighted average share amounts presented in this
report have been restated to reflect the 10% stock dividends in 1996, 1997,
1998, and 2000, and a five for two stock split in 1999.
Recent Developments - Trust Preferred Securities, Merger with Tehama Bancorp,
and Bancorp Financial Services
On February 22, 2001, Humboldt Bancorp completed an offering of Trust
Preferred Securities in an aggregate amount of $5.2 million, 10.20%, due 2031 to
enhance its regulatory capital base, while also providing added liquidity.
On March 9, 2001, Humboldt Bancorp completed its merger with Tehama
Bancorp, of Red Bluff, California for 3,392,944 shares of common stock in a
transaction that will be accounted for as a pooling of interests. As of December
31, 2000, Tehama Bancorp had approximately $244.3 million of total assets,
$206.0 million of total liabilities and $22.3 million of total equity. The
assets included approximately $38.7 million of investment securities and $167.6
million of loans, net of allowance for loan losses. Total liabilities included
approximately $206.0 million of deposits, of which $49.7 million were
non-interest bearing demand deposits. Tehama Bancorp's principal subsidiary
Tehama Bank, operates six branches located in four Northern California counties.
Bancorp Financial Services is engaged in the business of acquiring,
selling, and servicing primarily commercial lease contracts and automobile
loans. Generally, Bancorp Financial Services finances the acquisition of the
commercial lease contracts and automobile loans through warehouse lines of
credit with commercial banks. Eligible leases acquired by Bancorp Financial
Services are then sold to a third party commercial paper conduit facility.
Bancorp Financial Services then aggregates pools of eligible leases as security
for term-leased backed notes issued to institutional investors in various
classes of priority. Proceeds from the issuance of the term-leased backed notes
are used to pay down Bancorp Financial Services' warehouse lines and to clear
the commercial paper conduit facility. As additional security to the purchasers
of the term-leased backed notes, Bancorp Financial Services acquires an interest
in a subordinated class of the term-leased backed notes.
Since the latter part of the year ended December 31, 2000, Bancorp
Financial Services has experienced substantial delays in issuing term-leased
backed notes due to the changing economic environment and deterioration of the
leased backed securities market. As a result, during the fourth quarter of the
year ended December 31, 2000, and first quarter of 2001, Bancorp Financial
Services experienced a cash shortage to finance its operations and to acquire
additional leases. Bancorp Financial Services was unable to sell it leases to
replenish its warehouse lines and clear its commercial paper conduit facility
due to Bancorp Financial Services' inability to issue term-leased backed notes
at reasonable terms. In December 2000 Humboldt made a loan guarantee of $7.0
million to Bancorp Financial Services' primary commercial bank lender which was
release on December 28, 2000. In January 2001, Humboldt Bancorp purchased $4
million in subordinated debentures from Bancorp Financial Services. In addition,
although during the first quarter of 2001 Bancorp Financial Services was able to
issue term-leased backed notes, Humboldt Bancorp advanced Bancorp Financial
Services additional funds in the amount of approximately $3 million for its
operations. Concurrently, Humboldt Bancorp exchanged its advancement for Bancorp
Financial Services' $3 million interest in a subordinated class of the
term-leased backed notes issued in February 2001.
Further, in general, due to the decline in the economy, there has been
an increase in the number of delinquencies on leases serviced by Bancorp
Financial Services. Due to business reasons, Bancorp Financial Services
repurchased certain non-performing leases that served as security to the
term-leased backed notes. Because of these repurchases, during the first quarter
of 2001, Bancorp Financial Services has a substantial number of non-performing
leases.
As of March 30, 2001, Bancorp Financial Services' relationship with its
commercial paper conduit facility has terminated, and due to the poor condition
of the leased-back security market, it is unlikely that Bancorp Financial
Services will be able to quickly engage a new commercial paper conduit facility.
As a result, Bancorp Financial Services has been limited in acquiring new leases
and its operations have been limited primarily to servicing its current lease
portfolio. It is expected that Bancorp Financial Services will continue to incur
losses through at least the second quarter of year 2001.
In December 2000, the boards of directors of Humboldt Bancorp and Tehama
Bancorp decided to sell their interests in Bancorp Financial Services and in
January 2001, Bancorp Financial Services engaged an investment banker to assist
in its sale. For the year ended December 31, 2000, Humboldt Bancorp incurred a
loss of approximately $117,000 attributed to its 50% interest in Bancorp
Financial Services. As of March 31, 2001, Humboldt Bancorp's investment,
including Tehama Bancorp's investment, in Bancorp Financial Services was
approximately $7.0 million.
A-4
Results of Operations
For the year ended December 31, 2000, net income was $6.9 million, an
increase of 50.0% over net income of $4.6 million earned during the same period
in 1999. Diluted earnings per share were $1.11 and $0.83 for the years ended
December 31, 2000, and 1999, respectively. The return on average assets for the
years ended December 31, 2000, and 1999, was 1.28% and 1.27% respectively. The
return on average equity for the years ended December 31, 2000, and 1999, was
15.93% and 15.10%, respectively.
The 50.0% increase in earnings during 2000 as compared to 1999 was the
result of significant growth in loans, primarily through the acquisition of
Capitol Thrift & Loan, and growth in the merchant bankcard service revenues. For
2000, net interest income increased 50.3% as compared to 1999. This increase was
primarily due to a 47.8% increase in average interest-earning assets offset by a
68.2% increase in average interest-bearing liabilities for 2000 as compared to
1999. The increase in loans and merchant bankcard services contributed to a
43.6% increase in non-interest income. Increases in operating expenses were
required to service and support Humboldt growth. As a result, increases in
revenue were offset for 2000 by a 43.9% increase in recurring operating
expenses, as compared to 1999.
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 average earning assets,
18.2%, non-interest income, 56.5%, offset by increases in average
interest-bearing liabilities, 15.2%, and recurring operating expenses, 45.5%.
Net Interest Income
Net interest income increased 47.9% to $25.0 million in 2000 from $16.9
million in 1999. This increase was due to the 159.3 million, or 50.8%, increase
in average interest-earning assets, primarily due to the acquisition of Capitol
Thrift. Net interest income increased 7.0% in 1999 from $15.8 million in 1998.
This increase was primarily due to the $48.2 million, or 18.1%, increase in
average interest-earning assets, which was partially offset by the 81 basis
point decrease in Humboldt net yield on interest-earning assets.
A-5
The following table presents, for the years indicated, condensed
average balance sheet information for Humboldt, together with interest income
and yields earned on average interest-earning assets and interest expense and
rates paid on average interest-bearing liabilities.
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 2000
----------------------------- -------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Income or Yields Average Income or Yields Average Income or Yields
Balance Expense or Rate Balance Expense or Rate Balance Expense or Rate
----------------------------- -------------------------------- -------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans and leases: $ 175,173 $ 18,762 10.71% $ 200,986 $ 19,186 9.55% $ 342,351 $ 34,299 10.02%
Investment securities:
Taxable securities 63,494 3,317 5.22% 67,950 3,773 5.55% 84,243 5,844 6.94%
Nontaxable securities(1) 13,682 739 5.40% 16,292 875 5.37% 19,939 987 4.95%
Interest-earning balances
due from banks 3,502 174 4.97% 2,089 90 4.31% 738 49 6.64%
Federal funds sold: 9,504 512 5.39% 26,202 1,316 5.02% 25,508 1,669 6.54%
----------------------------- -------------------------------- -------------------------------
Total interest-earning
assets:(2) $ 265,355 $ 23,504 8.86% $ 313,519 $ 25,240 8.05% $ 472,779 $ 42,848 9.06%
Cash and due from banks 20,157 26,168 29,976
Premises and equipment, net 7,120 8,745 11,150
Loan loss allowance (2,626) (3,191) (5,342)
Other assets 14,509 17,186 29,037
--------- --------- ---------
Total assets $ 304,515 $ 362,427 $ 537,600
========= ========= =========
Interest-bearing liabilities:
Interest-bearing checking
$ savings accounts $ 72,594 $ 1,439 1.98% $ 79,955 $ 1,423 1.78% $ 107,148 $ 2,224 2.08%
Time deposit and Ira
accounts 114,633 6,126 5.34% 134,608 6,601 4.90% 245,412 14,472 5.90%
Borrowed funds 3,003 177 5.89% 4,487 321 7.15% 15,971 1,182 7.40%
----------------------------- -------------------------------- -------------------------------
Total interest-bearing
liabilities: $ 190,230 $ 7,742 4.07% $ 219,050 $ 8,345 3.81% $ 368,531 $ 17,878 4.85%
Noninterest-bearing
deposits 83,965 106,829 120,785
Other liabilities 4,883 6,030 5,244
--------- --------- ---------
Total liabilities 279,078 331,909 494,560
Shareholders' equity 25,437 30,518 43,040
--------- --------- ---------
Total liabilities &
shareholders' equity $ 304,515 $ 362,427 $ 537,600
========= ========= =========
Net interest income $ 15,762 $ 16,895 $ 24,970
-------- -------- --------
Net Interest Spread 4.79% 4.24% 4.21%
==== ==== ====
Average yield on average
earning assets(1) 8.86% 8.05% 9.06%
==== ==== ====
Interest expense to average
earning assets 2.92% 2.66% 3.78%
==== ==== ====
Net interest margin (3) 5.94% 5.39% 5.28%
==== ==== ====
- --------------
(1) Tax-exempt income has not been adjusted to its tax-equivalent basis. Net
interest margin on a fully taxable basis, for 1998, 1999, and 2000. 6.13%,
5.57%, and 5.53, respectively.
(2) Nonaccrual loans are included in the average balance.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
A-6
The most significant impact on Humboldt net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the years indicated, a
summary of the changes in net interest income due to changes in average asset
and liability balances (volume) and changes in average interest rates (rate).
Changes in interest income and expense which are not attributable specifically
to either volume or rate are allocated proportionately between both variances.
1999 compared to 1998 2000 compared to 1999
Increase / (Decrease) Increase / (Decrease)
in interest income and expense in interest income and expense
due to changes in due to changes in
-------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Income Attributable To:
Loans and Leases $ 2,465 $ (2,041) $ 424 $ 14,165 $ 948 $ 15,113
Investment securities 387 205 $ 592 1,308 875 $ 2,183
Balance due from banks (61) (23) $ (84) (90) 49 $ (41)
Federal funds sold 838 (34) $ 804 (45) 398 $ 353
------------------------------------------------------------------------------------------
Total increase(decrease) 3,629 (1,893) 1,736 15,338 2,270 17,608
------------------------------------------------------------------------------------------
Interest Expense Attributable To:
Interest-bearing checking &
savings accts 121 (136) $ (16) 566 235 $ 801
Time Deposits & Ira accounts 1,004 (530) $ 475 6,537 1,334 $ 7,871
Borrowed Funds 106 38 $ 144 850 11 $ 861
------------------------------------------------------------------------------------------
Total increase(decrease) 1,231 (628) 603 7,953 1,580 9,533
------------------------------------------------------------------------------------------
Total Change in Net Interest $ 2,398 $ (1,265) $ 1,133 $ 7,385 $ 690 $ 8,075
==========================================================================================
Interest income in 2000 increased 69.8% to $42.8 million from $25.2
million in 1999. This was primarily due to the significant increase in loans,
Humboldt highest yielding interest-earning asset, and investment securities.
Loan volume increases were primarily the result of the acquisition of Capitol
Thrift & Loan. The increase was enhanced by an increase in the yield earned on
average interest-earning assets. Average interest-earning assets increased
$159.3 million, or 50.8%, to $472.8 million in 2000, compared to $313.5 million
in 1999. Average loans increased $141.4 million, or 70.4%, to $342.4 million in
2000 from $201.0 million in 1999. Average investment securities, Federal funds
sold, increased 15.9% to $130.4 million in 2000 from $112.5 million in 1999.
The average yield on interest-earning assets increased 101 basis points
to 9.06% in 2000 from 8.05% in 1999 primarily due to an increase in the prime
lending rate. The prime lending rate peaked at 9.50% in 2000 vs. 8.50% in 1999.
Loans represented approximately 72.4% of total interest-earning assets in 2000
compared to 64.1% in 1999. The average yield on loans increased 47 basis points
to 10.02% in 2000 from 9.55% in 1999.
Interest expense in 2000 increased 115.7% to $17.9 million from $8.3
million in 1999. This increase was due to greater volumes of interest-bearing
liabilities, primarily due to the acquisitions of Capitol Thrift & Loan, the two
CalFed branches, and the formation of Capitol Valley Bank. Average
interest-bearing liabilities increased 68.2% to $368.5 million in 2000 from
$219.1 million in 1999. Interest rates increased primarily as a result of
increases in market interest rates and competitive pricing pressures.
During 2000, average noninterest-bearing deposits increased 13.1% to
$120.8 million from $106.8 million in 1999.
As a result of the foregoing, Humboldt's interest rate spread decreased
to 4.21% in 2000 from 4.24% in 1999, and the net interest margin decreased in
2000 to 5.28% from 5.39% in 1999.
A-7
Interest income increased 7.2% to $25.2 million in 1999 from $23.5
million in 1998, as a result of the increase in average interest-earning assets
offset by a decline in the yields earned. Average interest-earning assets
increased 18.1% to $313.5 million in 1999 from $265.4 million in 1998 primarily
as a result in the increase in loans and fed funds sold, 25.8 million, and 16.7
million, respectively. The yield on average interest-earning assets declined 81
basis points to 8.05% in 1999 from 8.86% in 1998, primarily as a result of
increased competition for loans.
Interest expense in 1999 increased 7.8% to $8.3 million from $7.7
million in 1998 primarily as a result of the increase in the volume of
interest-bearing liabilities offset in part by a decline in the rates paid on
interest-bearing liabilities. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 15.2% to
$219.1 million in 1999 from $190.2 million in 1998.
As a result of the foregoing, Humboldt's interest rate spread declined
to 4.24% in 1999 from 4.79% in 1998 and the net interest margin declined to
5.39% in 1999 from 5.94% in 1998.
The 50 basis point decrease in the target Fed Funds rate by the Federal
Reserve announced January 3, 2001, and the additional 50 basis point decrease
announced January 31, 2001, will likely result in a drop in Humboldt's interest
rate spread. With any further declines in interest rates, our ability to
proportionately decrease the rates on our deposit sources, may not be possible
due to competitive pressures. This may result in a larger decrease in our
interest rate spread.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in Humboldt market area. Periodic fluctuations in the provision for
loan losses result from management's assessment of the adequacy of the allowance
for loan losses; however, actual loan losses may vary from current estimates.
Refer to the section "Financial Condition--Allowance for Loan Losses"
for a description of the systematic methodology employed by Humboldt in
determining an adequate allowance for loan losses.
The provision for loan losses in 2000 was $1.8 million, or .53% of
average loans compared to $1.0 million, or .50% in 1999 and $2.1 million, or
1.20% in 1998. Management believes that the allowance for loan losses of is
adequate at December 31, 2000.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition--Nonperforming and
Classified Assets."
Other Income
Total other income increased to $28.0 million in 2000, compared to
$19.5 million in 1999 and $12.5 million in 1998. The following table sets forth
information by category of other income for the years indicated.
Years Ended December 31,
-------------------------------------
1998 1999 2000
-------------------------------------
(Dollars in thousands)
Fees and Other Income:
Merchant Credit Card Processing fees $ 6,177 $ 13,178 $ 21,271
Lease Finance Department (residuals and rentals) 1,575 1,250 927
Issuing Bankcard (Credit Card) services 1,019 519 259
Fees for customer services 346 415 449
Earnings on life insurance 106 161 433
Loan and lease servicing fees 87 293 432
Other 421 836 676
-------------------------------------
Total Fees and Other Income 9,731 16,652 24,447
Service charges on Deposit Accounts 2,097 2,411 3,134
Net Gain (Loss) on Sale of Loans 645 695 487
Net Investment Securities Gains (Losses) - (235) (117)
-------------------------------------
Total Non-Interest Income $ 12,473 $ 19,523 $ 27,951
=====================================
A-8
The increase in other income in 2000 as compared to 1999 was the result
of a $8.1 million increase in merchant bankcard fees, a $723,000 increase in
service charges, a $518,000 gain on sale of assets, offset by a decrease of
$337,000 in Bancorp Financial Services.
The increase in other income in 1999 as compared to 1998 was the result
of a $7.0 million increase in merchant credit card fees, and a $314,000 increase
in service charges.
During the past four fiscal years, Humboldt's Merchant Bankcard
Division has increased in importance. 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 December 31, 2000, 1999, and 1998, Humboldt Bank held
merchant reserves (primarily in non-interest bearing accounts) of $50.4 million,
$54.2 million, and $47.0 million, respectively. See "Business - Merchant
Bankcard."
Merchant bankcard revenue increased in 2000 to $21.3 million as
compared to $13.2 million in 1999 and $6.2 million in 1998. The primary reason
for the increase in 2000 is an increase in the number of merchants obtained
directly from Humboldt's proprietary marketing efforts.
In December 2000, Humboldt renegotiated the terms of a processing
contract with an ISO. In summary, as a result of the renegotiation, the ISO
bought down its processing rate in consideration for a note receivable to
Humboldt of $3,750,000. The term of the renegotiated contract is for 11 months
and requires Humboldt to continue to process merchant card transaction volume
from this ISO's customers. Humboldt expects to build its overall merchant card
processing business in an effort to offset any potential decline in future
revenues.
Operating Expenses
Total operating expenses increased to $41.0 million in 2000, compared
to $28.5 million in 1999 and $19.6 million in 1998. The following table sets
forth the major components of operating expenses for the years indicated.
Years Ended December 31,
------------------------------------------------
1998 1999 2000
------------------------------------------------
(Dollars in thousands)
Salaries and employee benefits $ 9,151 $ 11,866 $ 16,551
Net occupancy and equipment expense 2,711 3,023 3,829
Merchant credit card progam(1) 2,665 7,460 13,379
Professional Expenses 1,122 1,446 1,694
Issuing Bankcard expenses(1) 346 240 122
Stationery, supplies & postage 884 955 982
Intangible expense 372 459 684
FDIC and other insurance 186 217 366
Advertising expenses 247 412 374
Business development 249 414 488
Telephone and travel 598 870 1,067
Data processing/ATM expense 324 299 304
Other expenses 723 833 1,124
---------------------------------------------
Total expenses $ 19,578 $ 28,494 $ 40,964
=============================================
Efficiency ratio 69.34% 78.24% 77.41%
Total operating expenses to average assets 6.43% 7.86% 7.62%
(1) Merchant Bankcard expenses include merchant and proprietary related
expenses only. Issuing Bankcard (Credit Card) expenses include proprietary
related expenses only. Salary and employee benefits are included in salary
and employee benefits above.
A-9
The increase in operating expenses in 2000 and 1999 are primarily due
to merchant credit card operations. Merchant operations increased in 2000 and
1999, $5.9 million and $4.8 million, respectively.
The ratio of operating expenses to average assets was 7.62% in 2000,
7.86% in 1999, and 6.43% in 1998.
The efficiency ratio is computed by dividing total operating expenses
by net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. Humboldt efficiency ratio for 2000 was 77.41%, compared
to 78.24% in 1999 and 69.34% in 1998.
Compensation and benefits expenses increased in 2000 to $16.6 million,
compared to $11.9 million in 1999 and $9.2 million in 1998. The increase in
compensation and benefits is due primarily to the acquisition of Capitol Thrift
& Loan in 2000, and the formation of Capitol Valley Bank in 1999. The remaining
increase is due to additions in personnel made in 2000 and 1999 to accommodate
the growth.
The increase in occupancy and equipment, legal and other professional
fees, Federal Deposit Insurance Corporation ("FDIC") insurance and regulatory
assessments and other operating expenses was related to the acquisition of
Capitol Thrift & Loan in 2000, and the formation of Capitol Valley Bank in 1999.
The remaining increase was to accommodate growth.
Full time equivalent employees numbered 400, 318, and 250 on December
31, 2000, 1999 and 1998, respectively.
Income Taxes
Humboldt effective income tax rate as a percentage of pre-tax income
for 2000 was 32.4%, compared to 33.0% in 1999 and 38.5% in 1998. The effective
tax rates were 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.
Business Segments
Through December 31, 2000, Humboldt operated in three principal
industry segments: retail banking, thrift & loan, and merchant bankcard
department. Humboldt core retail banking segment include commercial, commercial
real estate, construction, and permanent residential lending along with all
depository activities. Humboldt's thrift & loan segment include commercial,
A-10
commercial real estate, and permanent residential lending along with time,
savings, and money market deposit account(MMDA) deposit activities. Humboldt's
merchant bankcard department segment provides services for 69,342 merchants
throughout the United States.
Retail Thrift and Merchant
(Dollars in thousands) Banking Loan (a) Bancard Dept. Total
--------------------------------------------------------
December 31, 1998:
Revenue from external customers $ 3,524 $ 8,304 $ 11,828
Interest income 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
December 31, 1999:
Revenue from external customers $ 4,071 $ 14,992 $ 19,063
Interest income 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 804 832 1,636
Segment assets 418,805 $ 60,983 423,649
Investment in equity method investees $ 4,063 $ 4,063
December 31, 2000:
Revenue from external customers $ 3,202 $ 267 $ 23,184 $ 26,653
Interest income 33,719 8,682 447 42,848
Interest expense 12,727 4,777 374 17,878
Depreciation and amortization 2,317 (92) 169 2,394
Segment profit, before taxes 3,253 1,707 5,182 10,142
Other significant non-cash items:
Additions to reserves for potential losses 1,654 4 1,004 2,662
Segment assets 418,805 $ 128,204 $ 60,983 $ 607,992
Investment in equity method investees $ 5,100 $ 5,100
(a) No information is provided for Capitol Thrift & Loan for 1999 and 1998 as
it was acquired in March, 2000.
Retail Banking
The Retail Banking segment revenues increased in 2000 as a result of an
improvement in the net interest margin and growth in earning assets. In 1999
segment revenue increased as a result of an increase in earning assets, offset
by a drop in net interest margin. Net interest income increased by $4.6 million
or 28.1% at December 31, 2000, and by $1.7 million or 11.6% at December 31,
1999.
Thrift & Loan
The Thrift & Loan segment revenues in 2000 were $8.7 million, with
Segment profit, before taxes of $1.7 million. Assets and deposits at December
31, 2000, were $128.2 million, $108.6 million, respectively. This segment was
acquired in April 2000.
A-11
Merchant Bankcard Department
The Merchant Bankcard segment provides Visa and Mastercard credit card
processing and settlement services for roughly 69,342 merchants located
throughout the United States. Annual processing volume is in excess of $3.0
billion. Humboldt's merchant bankcard customer base is made up of merchants
located in its primary market area and merchants who have been acquired by
Humboldt through out the use of independent sales organizations, or ISO's.
The Merchant Bankcard and ATM segments has experienced three successive
years of revenue and earning growth due to Humboldt's focus on marketing its
Proprietary merchant services which has a higher profit margin than ISO merchant
services. Segment profits before taxes for December 31, 2000, 1999, and 1998,
were $5.2 million, $4.2 million and $2.1 million, respectively.
Humboldt bears certain risks associated with its merchant bankcard and
ATM funding business. Due to a contractual obligation between Humboldt and VISA
and Mastercard, Humboldt stands in the place of the merchant in the event that a
merchant is unable to pay charge-backs from cardholders. As a result of this
obligation, Humboldt may incur losses associated with its merchant credit card
processing business. Accordingly, Humboldt has established a reserve to provide
for losses associated with charge-back losses. Such reserve, which totaled $2.3
million as of December 31, 2000, was estimated based upon industry loss data and
management's assumptions regarding merchant risk borne by Humboldt. Factors that
may effect Humboldt's merchant risk include the amount of merchant risk borne by
an ISO through its marketing agreement with Humboldt.
The Merchant Bankcard Department's reserves are separately accounted
for as a liability of Humboldt Bank on its financial statement since there are
no loans associated with such reserves.
Financial Condition
Total assets increased 43.5% to $608.0 million at December 31, 2000,
compared to $423.6 million at December 31, 1999. Total assets increased 32.4% in
1999 from $320.0 million at December 31, 1998. The increase in 2000 was
primarily due to the acquisition of Capitol Thrift & Loan. The increase in 1999
was primarily attributed to the acquisition of the two CalFed branches and the
formation of Capitol Valley Bank.
Investments
Humboldt 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.
A-12
At December 31, 2000, the fair value of Humboldt's investment
securities totaled $101.3 million, a decrease of $14.1 million, or 12.2%,
compared with December 31, 1999. The decrease in investments was primarily used
to fund loan growth. The following table provides the book value, approximate
market value, and maturities of the investment portfolio.
December 31, 1998 December 31, 1999 December 31, 2000
--------------------------- ------------------------- ----------------------------
Approxi- Approxi- Approxi-
mate mate mate
Amortized Market % Amortized Market % Amortized Market %
Cost Value Yield Cost Value Yield Cost Value Yield
--------------------------- ------------------------- ----------------------------
(Dollars in thousands)
U.S. Treasury and agencies
Three months or less $ 999 $ 1,000 6.04% $1,000 $1,000 4.82% - - -
Three to twelve months 2,001 2,013 6.20 - - - $ 1,512 $ 1,512 5.51%
One to three years - - - 2,551 2,537 5.70 1,000 1,009 6.25
CMO issued by U.S. agencies
Three months or less 1,398 1,348 9.08 697 697 7.85 342 341 7.49
Three to twelve months 11,384 11,384 4.16 11,374 11,396 7.36 11,130 11,127 6.53
One to three years 35,821 35,780 4.80 56,381 56,079 6.09 33,660 33,945 6.87
Three to five years 6,019 6,019 4.21 12,130 12,070 5.22 9,934 10,147 7.04
Five to fifteen years 2,060 2,083 4.60 6,733 6,655 7.25 4,657 4,707 8.01
Obligations of political subdivisions
Three months or less 280 286 7.50 - - - - - -
Three to twelve months - - - - - - 102 103 8.67
One to three years 235 243 7.75 485 496 9.11 527 540 9.19
Three to five years 1,238 1,281 8.20 1,328 1,341 9.01 1,479 1,546 8.92
Five to fifteen years 8,324 8,920 7.75 11,982 11,950 7.47 16,123 16,954 7.83
Over fifteen years 6,150 6,380 7.06 5,820 5,714 7.29 3,327 3,530 7.99
Corporate debt & other securities
Three months or less 1,062 1,065 6.22 1,000 1,000 4.82 - - -
Three to twelve months - - - 625 625 5.96 - - -
One to three years - - - - - - 5,552 5,693 7.77
Three to five years - - - - - - 4,116 4,167 9.02
Five to fifteen years - - - 3,855 3,800 7.41 3,876 3,981 7.49
Equity securities - - - - - - 1,973 1,973 6.83
--------------------------- ------------------------- ----------------------------
Total securities $76,971 $77,802 5.38% $115,961 $115,360 6.47% $99,310 $101,275 7.66%
=========================== =========================== ============================
* Weighted average yield are stated on a federal tax-equivalent basis of 34%,
and have been annualized, were appropriate
Loans
Total gross loans increased 81.5% to $416.5 million at December 31,
2000, compared to $229.5 million at December 31, 1999. Total gross loans
increased 20.9% in 1999 from $189.8 million at year-end 1998. The increases in
loan volumes in 2000 and 1999 was primarily due to the acquisition of Capitol
Thrift & Loan and the formation of Capitol Valley Bank.
Humboldt's loan portfolio consists primarily of commercial and
residential real estate lending, with the balance in commercial (non-real
estate), lease, and consumer loans. While no specific industry concentration is
considered significant, Humboldt's lending operations are dependent on the local
economy. Accordingly, a downturn in sectors of the economy could adversely
impact Humboldt borrowers. This could, in turn, reduce the demand for loans and
adversely impact the borrowers' abilities to repay their loans, while also
decreasing Humboldt net interest margin.
A-13
The following table presents the composition of Humboldt loan portfolio at
the dates indicated.
(Dollars in thousands) As of December 31,
-------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------- ------------------ ------------------ ------------------- -------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
- ------------ ------ ---------- ------ ---------- ------------------ ------------------- ------ ----------
Real estate
secured loans:
Construction $ 21,205 14.85% $ 20,165 12.80% $ 20,667 11.11% $ 22,118 9.82% $ 33,580 8.23%
Residential 31,519 22.07% 27,253 17.30% 35,226 18.93% 45,185 20.07% 77,416 18.98%
Commercial &
agricultural 61,030 42.73% 65,772 41.76% 80,197 43.11% 99,053 44.00% 240,200 58.88%
-------- ------ -------- ------- --------- ------ -------- ------ -------- ------
Total real
estate loans 113,754 79.65% 113,190 71.86% 136,090 73.15% 166,356 73.90% 351,196 86.09%
Commercial 20,559 14.39% 28,091 17.83% 33,981 18.27% 39,295 17.45% 44,149 10.82%
Lease financing 3,168 2.22% 8,732 5.54% 9,867 5.30% 17,202 7.64% 13,598 3.33%
Credit card and
related accounts 2,021 1.42% 7,062 4.48% 5,672 3.05% 3,456 1.54% 2,889 0.71%
Consumer 2,508 1.76% 2,440 1.55% 2,110 1.13% 1,938 0.86% 2,514 0.62%
Other 3,725 2.60% 1,177 0.75% 2,097 1.13% 1,216 0.54% 2,184 0.54%
-------- ------ -------- ------- -------- ------ -------- ----- -------- ------
Total loans 145,735 102.04% 160,692 102.02% 189,817 102.03% 229,463 101.93% 416,530 102.11%
Less:
Deferred loan fees (765) -0.54% (809) -0.51% (724) -0.39% (987) -0.44% (2,505) -0.61%
Allowance for
loan losses (2,146) -1.50% (2,371) -1.51% (3,055) -1.64% (3,354) -1.49% (6,088) -1.49%
-------- ------ -------- ------- -------- ------ -------- ------- -------- ------
Loans
receivable, net $142,824 100.00% $157,512 100.00% $186,038 100.00% $225,122 100.00% $407,937 100.00%
======== ====== ======== ======= ======== ====== ======== ======= ======== ======
The following table presents the maturity distribution of Humboldt's
real-estate commercial, real estate construction, residential real estate, and
commercial portfolios and the sensitivity of such loans to changes in interest
rates at December 31, 2000.
Real Estate
(in thousands of dollars) Commercial Construction Total
---------- ------------- --------
Loans maturing in:
One year or less $12,690 $25,825 $38,515
One to five years 12,895 7,755 20,650
After five years 18,564 18,564
------- ------- -------
Total $44,149 $33,580 $77,729
======= ======= =======
A-14
Loans shown above with maturities greater than one year include $14.5 million
of floating interest rate loans and $23.5 million of fixed rate loans.
Loan Servicing
Humboldt sells the majority of the residential mortgage loans and some
of the Small Business Administration ("SBA") 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's loan servicing portfolio totaled $198.6 million, $163.7 million and
$144.5 million at December 31, 2000, 1999, and 1998, respectively.
Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow and impound funds for
payment of taxes and insurance, making inspections as required of the mortgage
premises, collecting amounts from delinquent mortgages, supervising foreclosures
in the event of unremedied defaults, and generally administering the loans for
investors to whom they have been sold.
Humboldt'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 out of monthly mortgage payments.
Humboldt's servicing portfolio can be reduced by normal amortization and
prepayment or liquidation of outstanding loans. Approximately 90% of the loans
serviced by Humboldt have outstanding balances of greater than $100,000 and
approximately 10% are adjustable rate mortgages.
Humboldt accounts for revenue from the sale of loans where servicing is
retained in conformity with the requirements of Statements of Financial
Accounting Standards No. 140. Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. Humboldt 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.
The value of Humboldt'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's loan servicing portfolio.
This negative effect on Humboldt's income attributable to existing servicing may
be offset somewhat by a rise in origination and servicing income attributable to
new loan origination's, which historically have increased in periods of low
mortgage interest rates.
The following table sets forth the dollar amount of Humboldt's mortgage
loan servicing portfolio. Although Humboldt intends to continue to increase its
servicing portfolio, increases will depend on market conditions and the
availability of capital.
December 31,
---------------------------------
1999 2000
--------------- ---------------
Mortgage loan servicing portfolio:
Loans originated by Humboldt Bancorp sold: $ 159.6 Million $ 198.6 Million
Loans originated by Humboldt Bancorp but
awaiting funding: $ 2.1 Million
A-15
Humboldt 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 December 31, 2000, SBA Loans originated and serviced by Humboldt
Bank were $5.9 million an increase of $1.8 million, or 43.9% over the prior year
end.
For the most part, the SBA 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.
Nonperforming and Classified Assets
Humboldt generally places loans on nonaccrual status when they become
90 days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued and
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where a concession has been granted on the interest paid or original
repayment terms due to financial difficulties of the borrower. Other real estate
owned ("OREO") consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming
assets at the dates indicated.
As of December 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
---------------------------------------------------------
(Dollars in thousands)
Loans on nonaccrual status - $ 218 $ 838 $ 311 $ 767 $ 1,046
Loans - leases past due - greater than 90 days 159 843 241 282 788
Restructured loans 0 23 0 0 0
---------------------------------------------------------
Total nonperforming loans 377 1,704 552 1,049 1,834
Other real estate owned 233 148 175 120 681
---------------------------------------------------------
Total nonperforming assets $ 610 $ 1,852 $ 727 $ 1,169 $ 2,515
=========================================================
Allowance for loan losses $ 2,146 $ 2,371 $ 3,055 $ 3,354 $ 6,088
Ratio of total nonperforming assets to total assets 0.28% 0.65% 0.23% 0.28% 0.41%
Ratio of total nonperforming loans to total loans 0.26% 1.08% 0.30% 0.47% 0.45%
Ratio of allowance for loan losses to total loans 1.47% 1.48% 1.62% 1.47% 1.47%
Ratio of allowance for loan losses to total nonperforming assets 352% 128% 420% 287% 242%
At December 31, 2000 and 1999, Humboldt had $1.0 million and $767,000
in nonaccrual loans, respectively. The increase is a result of the acquisition
of Capitol Thrift & Loan. At December 31, 2000, accruing loans past due 90 days
or more were $788,000. Humboldt's ratio of nonperforming assets to total assets
and nonperforming loans to total loans were 0.42%, and 0.45%, respectively.
Humboldt has three classifications for problem loans: "substandard,"
"doubtful" and "loss." Substandard loans have one or more defined weakness and
are characterized by the distinct possibility that Humboldt will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectable and its continuance as an asset is not warranted.
A-16
Of the $5.5 million in classified loans and OREO at December 31, 2000,
approximately $5.0 million in loans are secured by real estate, $321,000 in
lease receivable, and $217,000 in commercial / other. The classified loans
include a variety of borrower types and are not concentrated in any particular
industry or niche business. Humboldt does not believe that any material losses
will be recognized in these classified loans. With respect to the real estate
secured loans, management believes that the allowance for loan losses are
adequate to absorb any possible loan losses.
The following table sets forth the classified loans and other real
estate owned at the dates indicated.
As of December 31,
-------------------------------------
1998 1999 2000
-------------------------------------
(Dollars in thousands)
Substandard $ 2,582 $ 2,175 $ 4,448
Doubtful 29 29 351
Loss 143 67 58
OREO 175 120 681
-----------------------------------
Classified loans and OREO $ 2,929 $ 2,391 $ 5,538
Classified to total loans and OREO 1.54% 1.05% 1.33%
Allowance for loan losses to total
classified loans and OREO 104.30% 140.28% 109.93%
With the exception of these classified loans, Humboldt was not aware of
any loans outstanding as of December 31, 2000, where the known credit problems
of the borrower would cause management to have doubts as to the ability of such
borrowers to comply with there present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Humboldt cannot, however, predict the extent to which
economic conditions in Humboldt market areas may worsen or the full impact that
such an environment may have on Humboldt loan portfolio. Accordingly, there can
be no assurance that other loans will not become 90 days or more past due, be
placed on nonaccrual, become restructured loans, or other real estate owned in
the future.
Allowance For Loan and Lease Losses
Humboldt maintains an allowance for loan and lease losses at a level
that management of Humboldt considers adequate for losses that can be reasonably
anticipated.
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'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 historical net loan and lease losses or recoveries stem from Humboldt
underwriting and collection practices, and the quality of the loan portfolio.
Net charge-offs for 2000 totaled $1,081,000, a 44.7% increase compared
to $747,000 during, 1999. This increase is primarily attributed to higher lease
net charge-offs in 2000 which increased to $830,000 compared to $139,000 for
1999. This increase is attributable primarily to a portfolio of leases purchased
in 1998 from Bancorp Financial Services Inc. Lease charge-offs in 2001 are
projected to continue at 2000 levels through most of the year. Net charge-offs
as a percentage of average loans were actually lower then any year since 1996.
Humboldt's ratio of net-charge-offs to average loans and lease outstanding for
December 31, 2000, 1999, 1998, and 1997, were 0.32%, 0.37%, 0.82% and 0.36%,
respectively. 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.
A-17
The following table sets forth information concerning Humboldt,
allowance for loan and lease losses at the dates and for the years indicated.
1996 1997 1998 1999 2000
-------------------------------------------------------------
(Dollars in thousands)
Reserve for loan and lease losses
balance, beginning of period $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354
-------------------------------------------------------------
Loans and leases charged off:
Real Estate (46) - (141) (67) (65)
Commercial (122) (193) (191) (218) (20)
Consumer (29) (11) (25) (29) (28)
Lease financing (132) (124) (316) (148) (837)
Credit card and related accounts - (475) (956) (614) (270)
Other (45) (7) (5) - (4)
--------------------------------------------------------------
Total loans and leases charged off (374) (810) (1,634) (1,076) (1,224)
Recoveries:
Real Estate - - - 98 19
Commercial 78 129 54 7 22
Consumer 5 9 8 6 6
Lease financing 34 34 24 9 7
Credit card and related accounts - 87 105 209 89
Other 2 3 3 - -
-------------------------------------------------------------
Total Recoveries 119 262 194 329 143
-------------------------------------------------------------
Net (charge-offs) recoveries (255) (548) (1,440) (747) (1,081)
Changes incident to mergers 2,000
Provision charged to operations 533 773 2,124 1,046 1,815
-------------------------------------------------------------
Reserve for loan and lease losses
balance, end of period $ 2,146 $ 2,371 $ 3,055 $ 3,354 $ 6,088
=============================================================
Loans and leases outstanding at the
end of period, net of unearned interest
income $144,970 $159,883 $189,093 $228,476 $414,025
=============================================================
Average loans and leases outstanding
for the period $134,617 $151,695 $175,173 $200,986 $342,351
=============================================================
Ratio of loans and leases charged off
to average loans and leases outstanding 0.19% 0.36% 0.82% 0.37% 0.32%
Ratio of reserve for loan and lease
losses to average loans and leases
outstanding 1.59% 1.56% 1.74% 1.67% 1.78%
Ratio of provision to average loans
and leases outstanding 0.40% 0.51% 1.21% 0.52% 0.53%
The Credit Administration Department of Humboldt reviews, or engages an
independent consulting firm to review, Humboldt's loan portfolio on a quarterly
basis to determine any weaknesses in the portfolio and the assess the general
quality of credit underwriting. The results of these reviews are presented by
the Chief Credit Officer to the board of directors of each affiliate bank
subsidiary.
A-18
All loans are assigned a credit risk rating at the time of origination
based on a scale of 1 to 8, with higher numeric ratings representing increased
levels of credit risk. For example, a risk rating of 1 is the category with
least risk and would by typical of a loan that is 100% secured by deposits held
by Humboldt. Risk ratings 2 through 8 have incrementally more risk based on the
structure of the loan, cash flow capacity of the borrower to repay, amount and
quality or the collateral, secondary sources o repayment and other factors.
During the loan review process, the risk ratings can be revised upward or
downward based on any know improvement or deterioration in the aforementioned
factors.
The Credit Administration Department conducts a quarterly analysis to
determine the adequacy of the Allowance for Loan and Lease Losses ("ALLL") for
each of Humboldt's affiliate banks. This analysis is designed to determine an
appropriate level of credit risk protection and to ensure compliance with the
1993 Interagency Policy Statement on the Allowance for Loan and Lease Losses,
which requires insured financial institutions to maintain an ALLL adequate to
absorb expected losses, and generally accepted accounting principles. The
aggregation of these analyses for the affiliate banks provides the consolidated
analysis for Humboldt.
Humboldt's ALLL analysis methodology consists primarily of assigning
expected loss ratios to loans aggregated in 13 homogenous groups based on loan
type or collateral. These groupings include both general categorizations, such
as leases and credit cards, and more specific categorizations such as lodging
loans and single-family residential construction loans. Each of the 13 groupings
is assigned an expected loss factor (ranging from 0.50% and 1.75%) based on
management's subjective assessment of historical losses, delinquency and other
qualitative trends, and inherent risks. The second component of the ALLL
analysis evaluates loans that have been adversely classified by the internal
risk rating process and assigned a grade of 5 through 8. The expected loss
factors that are applied to classified loans (grades 5 through 8) are
principally based on the 1993 Interagency Policy Statement on the Allowance for
Loan and Lease Losses. The loss factors as a percentage of the principal balance
outstanding are: .075% for grade 5 ("watch"); 15% for grade 6 ("substandard");
50% for grade 7 ("doubtful"); and, 100% for grade 8 ("loss"). The third
component of the ALLL analysis provides for specific allocations for individual
loans if, in management's opinion, the loss factor provided in component two of
the analysis does not sufficiently cover the expected loss based on current
information about the borrower's financial condition and value of any
collateral.
The difference between the allocated ALLL and the actual ALLL (as
presented in the consolidated financial statements) represents the unallocated
ALLL. The unallocated ALLL provides for known imprecision in the ALLL analysis
and provides coverage of credit losses inherent in the loan portfolio but not
adequately provided for in the ALLL analysis. Factors that could possibly cause
significant differences between expected loss rates and actual losses include,
but are not limited to, changes in national and local economic conditions, new
legal or regulatory requirements and recent changes in the composition of the
loan portfolio. Humboldt evaluates the level of the unallocated ALLL primarily
by assessing the ratio of ALLL to total loans for Humboldt as compared to other
peer bank holding companies and banks, using the Federal Reserve Uniform Bank
Performance Report and other private bank industry publications.
Humboldt does not presently utilize any self-correction mechanism to
adjust for differences between actual credit losses (net charge-offs) and
estimated credit losses as provided for in the ALLL; however, management does
take into consideration historical loss rates when establishing the loss factors
for the ALLL analysis. Since Humboldt has experienced comparatively strong loan
growth during the past five years (a compound annual growth rate of 28%) during
a time of good overall economic conditions, it is likely that credit losses
would be significantly higher that historical rates during an economic downturn.
A-19
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 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 change.
Humboldt 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:
As of December 31,
---------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------- ---------------- ----------------- ---------------- -------------------
% of % of % of % of % of
(Dollars in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
---------------- ---------------- ----------------- ---------------- -------------------
Real estate construction $ 139 6.48% $ 133 5.61% $ 142 4.65% $ 300 8.94% $ 2,529 41.54%
Commercial and other
real estate 1,014 47.25% 964 40.66% 1,254 41.05% 1,318 39.30% 1,659 27.25%
Consumer 42 1.96% 22 0.93% 21 0.69% 19 0.57% 195 3.20%
Lease financial 217 10.11% 126 5.31% 423 13.85% 490 14.61% 357 5.86%
Credit card and related 83 3.87% 311 13.12% 326 10.67% 206 6.14% 176 2.89%
Other 651 30.34% 815 34.37% 889 29.10% 1,021 30.44% 1,172 19.26%
---------------- ---------------- ----------------- ---------------- ------------------
Total reserve for loan
and lease losses $ 2,146 100.00% $ 2,371 100.00% $ 3,055 100.00% $ 3,354 100.00% $ 6,088 100.00%
================ ================ ================= ================ ===================
Deposits
Humboldt emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits totaled $506.8
million at December 31, 2000, an increase of 33.9% compared to deposits of
$378.6 million at December 31, 1999. In 1999, deposits increased 33.3% from
$284.0 million at December 31, 1998. The increase in deposits during 2000 was
primarily due to the acquisition of Capitol Thrift & Loan, and the increase
during 1999 was principally the purchase of two branches of CalFed.
Humboldt noninterest-bearing demand deposit accounts increased to
$113.5 million at December 31, 2000, compared to $110.5 million a year earlier.
Noninterest-bearing demand deposits were 22.4% of total deposits at December 31,
2000, compared to 29.2% at December 31, 1999.
A-20
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $116.5 million at year-end 2000,
an increase of 21.3% from $96.1 million at December 31, 1999. MMDA, NOW and
savings accounts were 23.0% of total deposits at December 31, 2000, compared to
25.4% at December 31, 1999.
Time certificates of deposit totaled $276.8 million, or 54.6% of total
deposits, at December 31, 2000, compared to $172.0 million, or 45.4% of total
deposits, at December 31, 1999.
As of December 31, 2000 and 1999, Humboldt had no brokered deposits
outstanding.
Other Borrowings
At December 31, 2000, other borrowings consisted of FHLB advances, and
advances under credit lines. Note I of Notes to Consolidated Financial
Statements provides the amounts outstanding during the year and the general
terms of these borrowings.
Liquidity and Cash Flow
The objective of Humboldt's liquidity management is to maintain the
Banks ability to meet the day-to-day cash flow requirements of its customers who
either wish to withdraw funds or require funds to meet their credit needs.
Humboldt must manage its liquidity position to allow the subsidiaries to meet
the needs of their customers while maintaining an appropriate balance between
assets and liabilities to meet the return on investment expectations of its
shareholders. Humboldt monitors the sources and uses of funds on a daily basis
to maintain an acceptable liquidity position. In addition to liquidity from core
deposits and repayments and maturities of loans and investments, the Banks can
utilize established credit lines, sell securities under agreements to
repurchase, secure FHLB advances or purchase overnight Federal Funds.
Humboldt Bancorp is a company separate and apart from the Banks. It
must provide for its own liquidity. Substantially all of Humboldt Bancorp's
revenues are obtained from management fees, interest received on its investments
and dividends declared and paid by the Banks. There are statutory and regulatory
provisions that could limit the ability of the Banks to pay dividends to
Humboldt Bancorp. Management of Humboldt Bancorp believes that such restrictions
will not have an impact on the ability of Humboldt Bancorp to meet its ongoing
cash obligations.
Net cash provided by operating activities, consisting primarily of net
income, totaled $5.1 million for 2000, $12.9 million for 1999 and $2.0 million
for 1998. Cash used for investing activities totaled $67.7 million in 2000,
$108.1 million in 1999 and $25.6 million in 1998. The funds used for investing
activities primarily represent loans and investment securities for each year
reported. The 1999 increase in investment activities other than loans are a
result of proceeds invested in securities as a result of the acquisition of the
two CalFed branches.
For the year ended December 31, 2000, net cash provided by financing
activities was $69.5 million, compared to $98.0 million in 1999 and $30.8
million in 1998. Historically, the primary financing activity of Humboldt has
been through deposit gathering, including the purchase of deposits. In 2000,
1999 and 1998, deposit gathering activities generated cash of $30.2 million,
$93.8 million and $28.8 million, respectively. This represents a total of 43.5%,
95.8% and 93.5% of the financing cash flows for 2000, 1999 and 1998,
respectively. The 2000 increase in financing activities other than deposits are
a result of proceeds from borrowings and the issuance of Common Stock and Trust
Preferred Securities. During 2000 these proceeds were 39.0%, 11.9%, and 7.7%,
respectively.
A-21
Capital Resources
Shareholders' equity at December 31, 2000, increased 49.0% to $50.8
million from $34.1 million at December 31, 1999, and 22.7% from $27.8 million at
December 31, 1998.
On March 7, 2000, Humboldt Bancorp completed an issuance of 640,000
shares of common stock at $12.50 per share. Proceeds from the offering were $7.4
million, after expenses.
On March 23, 2000, Humboldt Bancorp completed an offering of Trust
Preferred Securities in an aggregate amount of $5.3 million, 10.875%, due 2030
to enhance its regulatory capital base, while also providing added liquidity.
Under applicable regulatory guidelines, the Trust Preferred Securities
qualify as Tier I capital up to a maximum of 25% of Tier I capital. Any
additional portion of Trust Preferred Securities would qualify as Tier 2
capital. As of December 31, 2000, all outstanding Trust Preferred Securities
qualified as Tier I capital. As Humboldt shareholders' equity increases, the
amount of Tier I capital that can be comprised of Trust Preferred Securities
will increase.
A banking organization's total qualifying capital includes two
components: core capital (Tier 1 capital) and supplementary capital (Tier 2
capital). Core capital, which must comprise at least half of total capital,
includes common shareholders' equity, qualifying perpetual preferred stock,
trust preferred securities and minority interests, less goodwill. Supplementary
capital includes the allowance for loan losses (subject to certain limitations),
other perpetual preferred stock, trust preferred securities, certain other
capital instruments and term subordinated debt. Humboldt major capital
components are shareholders' equity and Trust Preferred Securities in core
capital, and the allowance for loan losses in supplementary capital.
At December 31, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0%, although certain banking organizations are expected to exceed
that amount by 1.0% or more, depending on their circumstances.
A-22
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991, the Federal Reserve, the Office of the Comptroller of the Currency and
the FDIC have adopted regulations setting forth a five-tier system for measuring
the capital adequacy of the financial institutions they supervise. The capital
levels of Humboldt at December 31, 2000, and the two highest levels recognized
under these regulations are as follows:
Minimum Minimum well
As of December 31, capital capitalized
2000 1999 requirement requirement
------------------------------------------------------
Tier I capital 10.50% 10.90% 4.00% 6.00%
Total risk-based capital 11.74% 12.07% 8.00% 10.00%
Leverage ratio 8.70% 7.50% 4.00% 5.00%
Humboldt's leverage ratio was 8.70% at December 31, 2000, compared to
7.50% at December 31, 1999. At December 31, 2000, Humboldt's risk-based capital
ratios were 10.50% for Tier 1 risk-based capital and 11.74% for total risk-based
capital, compared to 10.90% and 12.07%, respectively, as of December 31, 1999.
In addition, at December 31, 2000, each of the Banks, had levels of
capital that exceeded the well-capitalized guidelines. For additional
information on the capital levels and capital ratios of Humboldt and each of the
Banks, see Note T of Notes to Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
Humboldt's financial performance is impacted by, among other factors,
interest rate risk and credit risk. Humboldt does not currently utilize
derivatives to mitigate its credit risk, relying instead on an extensive loan
review process and its allowance for loan losses. See "--Allowance for Loan
Losses" herein.
Interest rate risk is the change in value due to changes in interest
rates. This risk is addressed by Humboldt's Asset & Liability Management
Committee "ALCO," which includes senior management representatives. The ALCO
monitors interest rate risk by analyzing the potential impact to the net
portfolio of equity value and net interest income from potential changes to
interest rates and considers the impact of alternative strategies or changes in
balance sheet structure. The ALCO manages Humboldt's balance sheet in part to
maintain the potential impact on net portfolio value and net interest income
within acceptable ranges despite changes in interest rates.
Humboldt's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine
Humboldt's change in net portfolio value and net interest income in the event of
hypothetical changes in interest rates. If potential changes to net portfolio
value and net interest income resulting from hypothetical interest rate changes
are not within the policy limits, the Board may direct management to adjust its
asset and liability mix to bring interest rate risk within Board-approved limits
or consider the appropriateness of changing policy limits.
A-23
Market Value of Portfolio Equity
Interest rate sensitivity is computed by estimating the changes in net
portfolio of equity value, or market value over a range of potential changes in
interest rates. The market value of equity is the market value of Humboldt's
assets minus the market value of its liabilities plus the market value of any
off-balance sheet items. The market value of each asset, liability, and
off-balance sheet item is its net present value of expected cash flows
discounted at market rates after adjustment for rate changes. Humboldt measures
the impact on market value for an immediate and sustained 100 and 200 basis
point increase and decrease (shock) in interest rates. The following table shows
Humboldt's projected change in net portfolio value for this set of rate shocks
as of December 31, 2000.
% Change in NII to
Changes in % Change in NII Shareholder Equity
Interest Rates (pre-tax) (pre-tax) % of EVE
- --------------------------------------------------------------------------------
+ 200 0.76% 0.40% -12.40%
+ 100 0.41% 0.20% -6.20%
- 100 -0.76% -0.40% 6.20%
- 200 -2.25% -1.10% 12.40%
Asset-Liability Management and Interest Rate Sensitivity
The preceding table indicates that as of December 31, 2000, an
immediate and sustained 100 or 200 basis point increase or decrease in interest
rates would decrease Humboldt's net portfolio value by less than 1.5%. The
foregoing analysis attributes significant value to Humboldt non-interest-bearing
deposit balances.
Interest Rate Risk. The table above shows the potential change in net
interest income (NII) if rates change as of December 31, 2000. Humboldt's NII
tends to increase if rates rise, and to decline if rates fall based on the
simulation model. The cause of this exposure is due to Humboldt's concentration
of short-term and rate sensitive loans as of December 31, 2000.
Economic Risk. Humboldt also measures the potential change in the net
present value of assets and liabilities if rates change (the "economic value of
equity" or "EVE"). The table above also shows the EVE. The EVE is determined by
valuing all assets and liabilities as of December 31, 2000, using a present
value cash flow calculation as if Humboldt were liquidated. The EVE declines
when rates increase primarily due to the mismatch in assets vs. liabilities.
However, Humboldt's NII would also increase as rates increased (from the
interest rate risk) and this benefit would partially offset the decline in EVE.
The market value of portfolio equity is based on the net present values
of each instrument in the portfolio, which in turn is based on cash flows
factoring in recent market prepayment estimates from public sources. The
discount rates are based on recently observed spread relationships and adjusted
for the assumed interest rate changes.
The operating income and net income of Humboldt depend to a substantial
extent on "rate differentials," or the difference between the income Humboldt
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's interest and pricing strategies are driven by its
asset-liability management analysis and by local market conditions.
A-24
Humboldt 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. Asset/liability management involves managing the
relationship between interest rate sensitive assets and interest rate sensitive
liabilities.
The interest rate sensitivity of Humboldt is measured over time and is
based on Humboldt'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 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.
The following table sets forth the repricing opportunities for the
assets and liabilities at December 31, 2000. Assets and liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
Three
Less Than Months to One Year Three Five Years Over
Three Twelve to Three Years to to Fifteen Fifteen Non-rate
(Dollars in thousands) Months Months Years Five Years Years Years Sensitive Total
-----------------------------------------------------------------------------------------------
ASSETS:
Net Loans $124,174 $ 50,017 $ 87,990 $ 67,810 $57,279 $26,755 - $414,025
Investment Securities 341 12,743 39,226 17,821 25,642 3,689 - 99,462
Federal Funds Sold 13,000 - - - - - - 13,000
FHLB & FNMA Stock - - - - - - 1,813 1,813
Interest-bearing deposits
with banks 72 99 - - - - - 171
Non-interest earning assets - - - - - - 79,521 79,521
----------------------------------------------------------------------------------------------
TOTAL ASSETS $137,587 $ 62,859 $127,216 $ 85,631 $82,921 $30,444 $ 81,334 $607,992
==============================================================================================
LIABILITIES AND EQUITY:
Non-Interest-bearing deposits $ - $ - $ - $ - $ - $ - $113,529 $113,529
Interest-bearing deposits 210,384 143,339 35,278 4,278 - - - 393,279
Borrowings 27,122 3,775 221 2,903 - 5,310 - 39,331
Other liabilities - - - - - - 11,068 11,068
Stockholders' equity - - - - - - 50,785 50,785
----------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $237,506 $ 147,114 $ 35,499 $ 7,181 $ 0 $ 5,310 $175,382 $607,992
==============================================================================================
Interest rate sensitivity gap $(99,919) $ (84,255) $ 91,717 $ 78,450 $82,921 $25,134 $(94,048)
Cumulative interest rate
sensitivity gap $(99,919) $(184,174) $(92,457) $(14,007) $68,914 $94,048
Cumulative Gap/total assets -16.43% -30.29% -15.21% -2.30% 11.33% 15.47%
A-25
Although the gap position is negative during the first twelve months
after December 31, 2000, management believes that Humboldt is somewhat asset
sensitive based on the interest rate simulation model and has an acceptable
level of interest rate risk. Based on the simulation model net income should
increase slightly when rates increase and shrink somewhat when rates (refer to
table) fall. This is because of the concentration of variable rate and
short-term commercial loans in Humboldt's portfolio. However, there can be no
assurance that fluctuations in interest rates will not have a material adverse
impact on Humboldt.
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. 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.
Recent Accounting Developments
New Accounting Pronouncement
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), issued in June 1996. It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities occurring after March 31, 2001. SFAS
No. 140 is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Disclosures about securitizations and
collateral accepted need not be reported for periods ending on or before
December 15, 2000, for which financial statements are presented for comparative
purposes. SFAS No. 140 is to be applied prospectively with certain exceptions.
Implementation of SFAS No. 140 is not expected to have a material
effect on Humboldt's financial position or results of operations.
Business Combinations
In February 2001, the FASB issued a revised Exposure Draft of a
proposed SFAS, "Business Combinations and Intangible Assets." Which tentatively
concluded that upon the effective date of the final statement on business
combinations and intangible assets, goodwill would no longer be amortized. This
conclusion includes existing goodwill as well as goodwill arising subsequent to
the effective date of the final statement. Goodwill must be reviewed for
impairment upon the occurrence of certain triggering events. The FASB has also
reached tentative conclusions on the future of the pooling-of-interest method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB is
currently redeliberating its position as to retaining the pooling method. The
FASB is currently anticipating issuing a final statement during the second
quarter of 2001.
A-26
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, 1999 and 2000, 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, 2000. 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, 1999 and 2000, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
RICHARDSON AND COMPANY
Sacramento, California
January 12, 2001, except for Note X, as to
which the date is March 12, 2001
A-27
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(dollars in thousands)
1999 2000
--------- ---------
ASSETS
Cash and due from banks $ 31,339 $ 38,225
Interest-bearing deposits in other banks 20 171
Federal funds sold 21,375 13,000
Investment securities available-for-sale, at fair value 115,360 99,433
Investment securities held-to-maturity (fair value
of $1,842,000) - 1,842
Loans held for sale 2,147 -
Loans and leases 226,329 414,025
Less: allowance for loan and lease losses 3,354 6,088
--------- ---------
Net loans 222,975 407,937
Premises and equipment, net 9,750 16,263
Accrued interest receivable and other assets 20,683 31,121
--------- ---------
TOTAL ASSETS $ 423,649 $ 607,992
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 110,523 $ 113,529
Interest-bearing 268,107 393,279
--------- ---------
Total deposits 378,630 506,808
Accrued interest payable and other liabilities 5,564 11,068
Borrowed funds 5,316 34,021
Bancorp fixed rate capital trust pass-through
securities (Trust Preferred Securities) - 5,310
--------- ---------
TOTAL LIABILITIES 389,510 557,207
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized, 4,731,093 shares in 1999 and
5,982,456 shares in 2000 issued and outstanding 28,405 42,723
Retained earnings 6,088 6,867
Accumulated other comprehensive (loss) income (354) 1,195
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 34,139 50,785
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 423,649 $ 607,992
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
A-28
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
1998 1999 2000
-------- -------- --------
INTEREST INCOME
Interest and fees on loans and leases $ 18,762 $ 19,186 $ 34,299
Interest and dividends on investment securities
Taxable 3,239 3,667 5,620
Exempt from Federal income tax 739 875 987
Dividends 78 106 224
Interest on federal funds sold 512 1,316 1,669
Interest on deposits in other banks 174 90 49
-------- -------- --------
Total Interest Income 23,504 25,240 42,848
INTEREST EXPENSE
Interest on deposits 7,565 8,024 16,696
Interest on borrowed funds and other 177 321 1,182
-------- -------- --------
Total Interest Expense 7,742 8,345 17,878
-------- -------- --------
NET INTEREST INCOME 15,762 16,895 24,970
Provision for loan and lease losses 2,124 1,046 1,815
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 13,638 15,849 23,155
OTHER INCOME
Fees and other income 9,731 16,652 24,447
Service charges on deposit accounts 2,097 2,411 3,134
Net gain on sale of loans 645 695 487
Net investment securities loss - (235) (117)
-------- -------- --------
Total Other Income 12,473 19,523 27,951
OTHER EXPENSES
Salaries and employee benefits 9,151 11,866 16,551
Net occupancy and equipment expense 2,711 3,023 3,829
Other expenses 7,716 13,605 20,584
-------- -------- --------
Total Other Expenses 19,578 28,494 40,964
-------- -------- --------
Income Before Income Taxes 6,533 6,878 10,142
Provision for income taxes 2,517 2,271 3,287
-------- -------- --------
NET INCOME $ 4,016 $ 4,607 $ 6,855
======== ======== ========
EARNINGS PER SHARE $0.82 $0.91 $1.19
===== ===== =====
DILUTED EARNINGS PER SHARE $0.75 $0.83 $1.11
===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
A-29
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- ------ ------ -------- ------------- -----
Balance at January 1, 1998 - 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
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
(Continued)
A-30
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- ------ ------ -------- ------------- -----
10% stock dividend - 472,879 $ 6,018 $ (6,018) - -
Fractional shares purchased - - - (3) - $ (3)
Sale of stock, net of issuance
costs of $691 - 640,000 7,309 - - 7,309
Directors fee, stock options
exercised and related
tax benefit - 91,510 424 - - 424
Silverado stock issuance
and related stock
dividend - 46,974 567 (55) - 512
Comprehensive income:
Net income $ 6,855 - - 6,855 - 6,855
Other comprehensive
loss, net of tax:
Unrealized holding
gains on securities
available-for-sale
arising during the
year, net of taxes
of $1,017 1,549 $ 1,549 $ 1,549
------- --------- -------- -------- ------- --------
Total comprehensive income $ 8,404
=======
BALANCE AT
DECEMBER 31, 2000 5,982,456 $ 42,723 $ 6,867 $ 1,195 $ 50,785
========= ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
A-31
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
1998 1999 2000
--------- ---------- ---------
OPERATING ACTIVITIES
Net income $ 4,016 $ 4,607 $ 6,855
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan and lease losses 2,124 1,046 1,815
Depreciation 1,586 1,543 1,648
Loss on sale of investments - 235 63
Loss (gain) on sale of and provision for
losses on foreclosed real estate - 52 (17)
Amortization 1,517 1,717 746
Equity in income of partnerships/leasing
company (259) (450) (36)
(Increase) decrease in loans held for sale (7,629) 5,530 2,147
Increase in interest receivable and other assets (734) (2,218) (9,421)
Increase in interest payable and other liabilities 1,355 806 1,326
--------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,976 12,868 5,126
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing
deposits with banks - 3,000 (151)
Net decrease (increase) in federal funds sold 1,270 (19,125) 14,875
Proceeds from maturities and sales of investment securities
available-for-sale 28,169 36,441 36,914
Proceeds from maturities of investment securities
held-to-maturity - - 534
Purchases of investment securities available-for-sale (27,967) (76,656) (17,944)
Purchases of investment securities held-to-maturity - - (2,376)
Net increase in loans and leases (23,370) (45,654) (80,301)
Purchases of premises and equipment (3,901) (2,638) (8,161)
Investment in partnerships/leasing company (91) (1,242) (1,000)
Proceeds from the sale of foreclosed real estate 322 123 837
Net cash paid in acquisition of subsidiary - - (10,923)
Premium paid on deposits purchased - (2,355) -
--------- ---------- ---------
NET CASH USED BY INVESTING ACTIVITIES (25,568) (108,106) (67,696)
FINANCING ACTIVITIES
Net increase in deposit accounts 28,781 93,832 30,199
Net proceeds from borrowings 1,700 2,000 27,098
Payments on borrowings (59) (86) (1,393)
Proceeds from issuance of Trust Preferred Securities - - 5,310
Proceeds from issuance of common stock 362 2,209 8,245
Fractional shares purchased (8) (4) (3)
--------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,776 97,951 69,456
--------- ---------- ---------
NET INCREASE IN CASH AND DUE FROM BANKS 7,184 2,713 6,886
Cash and due from banks at beginning of year 21,442 28,626 31,339
--------- ---------- ---------
CASH AND DUE FROM BANKS AT END OF YEAR $ 28,626 $ 31,339 $ 38,225
========= ========== =========
(Continued)
A-32
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
1998 1999 2000
--------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 7,755 $ 7,972 $ 17,591
Income taxes $ 2,830 $ 2,921 $ 5,995
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 4,723 - $ 6,073
Net change in unrealized gains on securities
available-for-sale $ (444) $ (1,432) $ 2,566
Net change in deferred income taxes on unrealized
gains on securities available-for-sale $ 185 $ 592 $ (1,017)
Deposit liabilities assumed in exchange for assets
acquired in connection with purchase of branches - $ 831 -
Loans transferred to foreclosed real estate $ 349 $ 120 $ 136
Loans issued to facilitate the sale of foreclosed
real estate - - $ 727
Acquisition of Subsidiary
Federal funds sold $ 6,500
Securities available-for-sale 447
Loans, net 105,885
Other real estate owned 1,972
Accrued interest receivable and other assets 1,276
Deposits (97,979)
Borrowed funds (3,000)
Interest payable and other liabilities (4,178)
---------
$ 10,923
=========
The accompanying notes are an integral part of these consolidated financial
statements.
A-33
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000
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, Capitol Valley Bank and Capitol Thrift and Loan.
Humboldt Bank was incorporated as a state-licensed bank on March 13, 1989 and
opened for business on September 13, 1989. Capitol Valley Bank was incorporated
as a state-licensed bank on December 17, 1998 and opened for business on March
3, 1999. Bancorp acquired Capitol Thrift and Loan, an industrial bank, on April
7, 2000. Bancorp and the Banks 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.
Humboldt Capital Trust, which is a Delaware statutory business trust formed for
the exclusive purpose of issuing and selling trust preferred securities, is also
a subsidiary of Bancorp.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Bancorp and its wholly-owned subsidiaries, Humboldt Bank,
Capitol Valley Bank, Capitol Thrift and Loan and Humboldt Capital Trust. All
material intercompany accounts and transactions have been eliminated.
Nature of Operations: Through its subsidiaries, Bancorp provides general
commercial banking services throughout Northern California. Lending activities
consist of real estate, commercial, lease financing, credit card and consumer
loans to individuals and businesses. Capitol Thrift and Loan provides commercial
and single-family, residential real estate loans to consumers throughout
California. Other services provided by Bancorp include automobile and commercial
equipment leasing through its 50% owned subsidiary, Bancorp Financial Services,
merchant draft processing for merchants throughout the United States and
automated teller machine (ATM) funding activities by sponsoring non-bank
companies who maintain ATM machines throughout the United States.
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.
A-34
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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, as amended by SFAS 140, 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 and 140 also require 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.
Loans 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.
A-35
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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.
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.
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.
A-36
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets. 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.
Bancorp, in some instances, makes loans to facilitate the sales of real property
held for sale. Management reviews all sales for which it is the lending
institution for compliance with sales treatment under provisions established by
Statement No. 66 Accounting for Sales of 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.
Bancorp contributed additional capital totaling $1,000,000 in 2000. 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.
A-37
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal loans and securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes.
Deferred taxes are computed using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards, and then a valuation allowance is
established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized.
Advertising: Advertising costs are charged to operations in the year incurred.
Earnings Per Share: Earnings 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. Diluted earnings per
share is computed similar to earnings 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 consolidated
Statement of Cash Flows, cash and cash equivalents include cash, balances due
from banks and certificates of deposit.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS
Cash and due from banks include amounts the Banks are required to maintain to
meet certain average reserve and compensating balance requirements of the
Federal Reserve. The total requirements at December 31, 1999 and 2000 were
$14,064,000 and $12,819,000, respectively.
A-38
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE C--INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
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
========= ======= ======= =========
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2000:
Available-for-sale
U.S. Government and agency securities $ 2,513 $ 9 - $ 2,522
Municipal securities 21,558 1,115 - 22,673
Collateralized mortgage obligations issued
by U.S. government agencies 58,723 528 $ 30 59,221
Mortgage-backed securities 12,701 343 - 13,044
Equity securities 1,973 - - 1,973
--------- ------- ------- ---------
Total available-for-sale $ 97,468 $ 1,995 $ 30 $ 99,433
========= ======= ======= =========
Held-to-maturity
Lease-backed notes $ 1,842 $ 1,842
--------- ---------
Total held-to-maturity $ 1,842 $ 1,842
========= =========
A-39
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE C--INVESTMENT SECURITIES (Continued)
The maturities of investment securities at December 31, 2000 were as follows
(dollars in thousands):
Available-for-Sale Held-to-Maturity
----------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
Amounts maturing in:
Three months or less $ 342 $ 341 - -
Over three months through twelve months 12,744 12,742 - -
After one year through three years 40,739 41,187 - -
After three years through five years 13,687 14,018 $ 1,842 $ 1,842
After five years through fifteen years 24,656 25,642 - -
After fifteen years 3,327 3,530 - -
Equity securities 1,973 1,973 - -
--------- -------- -------- -------
$ 97,468 $ 99,433 $ 1,842 $ 1,842
========= ======== ======== =======
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 1998,
1999 and 2000 were $445,550, $6,986,000 and $17,316,000, respectively. There
were no gains or losses on the investment securities sold in 1998. Gross gains
and losses on those sales were $32,000 and $267,000 in 1999 and $64,000 and
$127,000 in 2000.
Investment securities with an amortized cost of approximately $3,551,000 and
$1,512,000 and an approximate market value of $3,537,000 and $1,512,000 at
December 31, 1999 and 2000, 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 $2,593,000 and
$2,925,000 and an approximate market value of $2,609,000 and $2,964,000 at
December 31, 1999 and 2000, respectively, were pledged to secure public
deposits. Furthermore, investment securities with an amortized cost of
approximately $3,698,000 and $41,113,000 and an approximate market value of
$3,703,000 and $41,536,000 at December 31, 1999 and 2000, respectively, were
pledged as collateral for an advance from the Federal Home Loan Bank. In
addition, investment securities with an amortized cost of approximately
$24,186,000 and $20,625,000 and an approximate market value of $23,975,000 and
$20,798,000 at December 31, 1999 and 2000, 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.
A-40
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The components of loans and leases in the balance sheet were as follows at
December 31 (dollars in thousands):
1999 2000
--------- ---------
Real estate--construction and land development $ 22,118 $ 33,580
Real estate--commercial and agricultural, including unamortized
premiums of $940,000 in 2000 99,053 240,200
Real estate--family and multifamily residential, including unamortized
premiums of $2,403,000 in 2000 43,038 77,416
Commercial, industrial and agricult ral 39,295 44,149
Leases, net of unearned income of $1,203,000
and $1,354,000 in 1999 and 2000, respectively 17,202 13,598
Credit card receivables 3,456 2,889
Consumer loans 1,938 2,514
State and political subdivisions 707 689
Other 509 1,495
--------- ---------
227,316 416,530
Deferred loan fees (987) (2,505)
--------- ---------
$ 226,329 $ 414,025
========= =========
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1999 and 2000, follows (dollars in thousands):
1999 2000
--------- ---------
Three months or less $ 86,369 $ 126,295
Over three months to twelve months 15,585 49,623
Over one year to three years 37,796 87,985
Over three years to five years 46,573 67,682
Over five years to fifteen years 23,797 56,926
Over fifteen years 16,429 26,827
--------- ---------
226,549 415,338
Nonaccrual loans 767 1,192
--------- ---------
$ 227,316 $ 416,530
========= =========
A-41
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
At December 31, 1999 and 2000 approximately $45,000 and $62,000, respectively,
of Bancorp's credit card receivables were secured by savings accounts.
At December 31, 2000, the recorded investment in loans for which impairment had
been recognized in accordance with Statement No. 114 totaled $754,000, with a
corresponding valuation allowance of $188,000. 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, 1998, 1999 and 2000, the average recorded investment in
impaired loans was approximately $515,000, $892,000 and $947,000, respectively.
In 1999 and 2000, Bancorp recognized $3,000 and $44,000, 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.
Bancorp receives fees for servicing retained on loans and leases sold. Loans and
leases being serviced by Bancorp for others were $144,533,000, $163,672,000 and
$198,595,000 at December 31, 1998, 1999 and 2000.
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):
1998 1999 2000
-------- ------- -------
Beginning balance $ 2,371 $ 3,055 $ 3,354
Provision for loan and lease losses 2,124 1,046 1,815
Allowance of entities acquired through mergers
accounted for under purchase accounting method - - 2,000
Credit cards charged off (956) (614) (270)
Leases charged off (316) (148) (837)
Loans charged off (362) (314) (117)
Credit card recoveries 105 209 89
Lease recoveries 24 9 7
Loan recoveries 65 111 47
-------- ------- -------
Ending balance $ 3,055 $ 3,354 $ 6,088
======== ======= =======
A-42
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1999 2000
-------- --------
Land $ 2,265 $ 2,265
Buildings and improvements 5,505 11,796
Furniture, fixtures and equipment 4,526 5,859
Leasehold improvements 310 470
-------- --------
12,606 20,390
Accumulated depreciation (3,941) (4,127)
-------- --------
8,665 16,263
Construction in progress 1,085 -
-------- --------
$ 9,750 $ 16,263
======== ========
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, (dollars in thousands):
1999 2000
-------- --------
Balance sheet
Assets $ 26,943 $ 53,157
======== ========
Liabilities $ 21,356 $ 45,808
Equity 5,587 7,349
-------- --------
$ 26,943 $ 53,157
======== ========
Income statement
Revenues $ 5,180 $ 7,572
Expenses 4,291 7,807
-------- --------
Net income (loss) 889 (235)
x 50% x 50%
-------- --------
Bancorp's share of net income (loss) $ 444 $ (117)
======== ========
NOTE G--TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1999 and 2000, Bancorp recorded $871,000 and
$525,000, respectively, of servicing rights related to loans originated and
sold. Amortization of the servicing rights was $268,000 and $341,000 for the
years ended December 31, 1999 and 2000, respectively. The estimated fair value
of the servicing assets aggregated $1,751,000 and $2,001,000 at December 31,
1999 and 2000, 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, 1999 or 2000.
A-43
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1999 2000
--------- ---------
Negotiable order of withdrawal (NOW) $ 29,789 $ 29,342
Savings and money market 66,291 87,160
Time, $100,000 and over 68,061 94,532
Other time 103,966 182,245
--------- ---------
$ 268,107 $ 393,279
========= =========
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
1998 1999 2000
------- --------- ---------
NOW $ 207 $ 193 $ 212
Savings and money market 1,232 1,218 2,495
Time, $100,000 and over 2,412 2,627 5,008
Other time 3,714 3,986 8,981
------- ------- --------
$ 7,565 $ 8,024 $ 16,696
======= ======= ========
The maturities of time deposits at December 31, 2000 are as follows (dollars in
thousands):
Three months or less $ 93,882
Over three months through twelve months 143,339
Over one year through three years 35,278
Over three years 4,278
---------
$ 276,777
=========
NOTE I--LINES OF CREDIT AND BORROWED FUNDS
Humboldt Bank has uncommitted federal funds lines of credit agreements with two
financial institutions. The maximum borrowings available under the lines totaled
$10,500,000. Availability of the lines are subject to federal funds balances
available for loan and continued borrower eligibility. These lines are intended
to support short-term liquidity, and cannot be used for more than ten
consecutive business days or more than twelve times during a given thirty day
period. At December 31, 1999 and 2000 there were no borrowings outstanding under
the agreements.
Humboldt Bank has five advances totaling $27,605,000 from the Federal Home Loan
Bank (FHLB) at December 31, 2000. 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.
A-44
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE I--LINES OF CREDIT AND BORROWED FUNDS (Continued)
The fourth advance totaling $98,000 is due at maturity on March 14, 2001.
Interest is due monthly at 6.58%. The fifth advance totaling $24,000,000 is due
at maturity on January 29, 2001. Interest is due at maturity at 6.49%.
Investment securities with an amortized cost of $41,113,000 and approximate fair
value of $41,536,000 at December 31, 2000, were held as collateral for these
five advances.
Capitol Thrift and Loan has an agreement to borrow from the Federal Home Loan
Bank by obtaining advances or discounting eligible paper to the extent of
pledged collateral. Promissory notes and deeds of trust on the Thrift's loans
totaling $25,227,000 were held by the Federal Home Loan Bank as collateral. The
maximum borrowings available under the agreement was $12,042,000. The borrowing
outstanding under this agreement as of December 31, 2000 was $6,000,000, which
consists of two advances. The first advance, totaling $3,000,000, is due at
maturity on January 10, 2001. Interest is due monthly at 6.73%. The second
advance of $3,000,000 is due at maturity at April 25, 2001. Interest is due
monthly at 6.64%.
Bancorp has a $2,000,000 unsecured line of credit with another Bank. Interest is
due monthly at prime plus .50%, which was 10.00% at December 31, 2000, and
principal is due at maturity on March 1, 2001. The outstanding balance at
December 31, 2000 was $700,000.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2005 are as follows (dollars in
thousands):
Capitol
Thrift and Humboldt
Loan Bancorp Bank Total
---------- ------- --------- --------
2001 $ 6,000 $ 700 $ 24,197 $30,897
2002 - - 107 107
2003 - - 114 114
2004 - - 755 755
2005 - - 106 106
NOTE J--BANCORP FIXED RATE CAPITAL TRUST PASS-THROUGH SECURITIES
Humboldt Capital Trust I (the Trust) is a Delaware business trust which was
formed for the purpose of issuing Bancorp Fixed Rate Capital Trust Pass-Through
Securities (Trust Preferred Securities). The Trust Preferred Securities are
described below. Interest on the Trust Preferred Securities is payable quarterly
and is deferrable, at the option of Bancorp, for up to five years. Following the
issuance of the Trust Preferred Securities, the Trust used the proceeds from the
Trust Preferred Securities offering to purchase a like amount of Junior
Subordinated Debt Securities (the Debt Securities) of Bancorp. The Debt
Securities bear the same terms and interest rates as the related Trust Preferred
Securities. The Debt Securities are the sole assets of the Trusts and are
eliminated, along with the related income statement effects, in the consolidated
financial statements. Bancorp has fully and unconditionally guaranteed all
A-45
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE J--BANCORP FIXED RATE CAPITAL TRUST PASS-THROUGH SECURITIES (Continued)
of the obligations of the Trust. Under applicable regulatory guidelines, the
Trust Preferred Securities will qualify as Tier I capital. The following Trust
Preferred Securities were outstanding at December 31, 2000.
Optional
Amount Date of Stated Redemption
Security title Issuer Outstanding Original Issue Maturity Date
- -------------- -------- ----------- -------------- -------------- --------------
10 7/8% Fixed Rate Capital Humboldt $5,310,000 March 9, 2000 March 31, 2030 March 31, 2010
Trust Pass Through Capital
Securities Trust I
The Trust Preferred Securities are mandatorily redeemable, in whole or in part,
upon repayment of their underlying Debt Securities at their respective stated
maturities or their earlier redemption. The Debt Securities are redeemable prior
to maturity at the option of Bancorp on or after their respective optional
redemption dates.
The total amount of Trust Preferred Securities outstanding at December 31, 2000
was $5,310,000. The Trust Preferred Securities accrue interest at an annual rate
of 10 7/8%. The dividends paid on Trust Preferred Securities were $265,000 in
2000.
NOTE K--FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):
1998 1999 2000
------- -------- --------
Merchant credit card processing fees $ 6,177 $ 13,178 $ 21,271
Lease residuals and rentals 1,575 1,250 927
Credit card program fees 1,019 519 259
Equity in income of investment in leasing company 259 450 113
Fees for customer services 346 415 449
Earnings on life insurance 106 161 433
Loan and lease servicing fees 87 293 432
Other (none exceeding 1% of revenues) 162 386 563
------- -------- --------
$ 9,731 $ 16,652 $ 24,447
======= ======== ========
A-46
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1998 1999 2000
------- -------- --------
Merchant credit card program $ 2,665 $ 7,460 $13,379
Professional and other outside services 1,122 1,446 1,694
Stationery, supplies and postage 884 955 982
Telephone and travel 598 870 1,067
Amortization of core deposit intangible 372 459 684
Credit card program 346 240 122
Data processing and ATM fees 324 299 304
Development 249 414 488
Advertising 247 412 374
FDIC and other insurance 186 217 366
Other (none exceeding 1% of revenues) 723 833 1,124
------- -------- --------
$ 7,716 $ 13,605 $ 20,584
======= ======== ========
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):
1998 1999 2000
------- -------- --------
Currently payable
Federal $ 2,063 $ 2,076 $ 3,721
State 709 651 1,285
------- -------- --------
2,772 2,727 5,006
Deferred tax benefit
Federal (353) (658) (1,460)
State (85) (116) (434)
------- -------- --------
(438) (774) (1,894)
Tax benefit of exercised stock options
recorded as an addition to common stock 183 318 175
------- -------- --------
Net provision for income taxes $ 2,517 $ 2,271 $ 3,287
======= ======== =======
A-47
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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):
1998 1999 2000
------- ------- -------
Income tax at Federal statutory rate $ 2,221 $ 2,338 $ 3,448
State franchise tax, less federal
income tax benefit 467 492 726
Interest on municipal obligations exempt
from Federal tax (227) (283) (324)
Interest on enterprise zone loans exempt
from State tax (38) (79) (72)
Life insurance earnings and expenses (55) (42) (234)
Low income housing credits - (190) (141)
Deferred tax asset valuation allowance
change 122 6 (127)
Other differences 27 29 11
------- ------- -------
Provision for income taxes $ 2,517 $ 2,271 $ 3,287
======= ======= =======
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):
1999 2000
-------- --------
Deferred tax assets:
Allowance for loan and lease losses $ 924 $ 2,030
Nonqualified benefit plans 1,207 1,998
Deferred loan fees 380 97
State franchise taxes 200 440
Depreciation 752 887
Unrealized securities holding losses 247 -
Merchant Bankcard program 635 950
Core deposit intangible amortization 98 168
Organization costs 145 110
Other 276 362
------- -------
Total deferred tax assets 4,864 7,042
Valuation allowance for deferred tax assets (338) (264)
------- -------
Deferred tax assets recognized 4,526 6,778
Deferred tax liabilities:
Loan premium - 1,150
Unrealized securities holding gains - 767
Equity in income of subsidiaries 248 287
Federal Home Loan Bank stock dividends 61 38
Other 174 322
------- -------
Total deferred tax liabilities 483 2,564
------- -------
Net deferred tax asset $ 4,043 $ 4,214
======= =======
A-48
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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 receivable were $53,000 and $1,210,000 at December 31, 1999 and
2000, respectively. The income tax benefit related to net investment securities
losses was $97,000 and $48,000 during 1999 and 2000, 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):
1998 1999 2000
------- ------- -------
Basic:
Net income $ 4,016 $ 4,607 $ 6,855
=========== =========== ===========
Weighted-average common shares outstanding 4,876,404 5,048,547 5,763,848
=========== =========== ===========
Earnings per share $ 0.82 $ 0.91 $ 1.19
=========== =========== ===========
Diluted:
Net income $ 4,016 $ 4,607 $ 6,855
=========== =========== ===========
Weighted-average common shares outstanding 4,876,404 5,048,547 5,763,848
Net effect of dilutive stock options - based on the
treasury stock method using average market price 502,037 508,274 422,500
----------- ----------- -----------
Weighted-average common shares outstanding
and common stock equivalents 5,378,441 5,556,821 6,186,348
=========== =========== ===========
Diluted earnings per share $ 0.75 $ 0.83 $ 1.11
=========== =========== ===========
Options to purchase 59,290, 1,100 and 35,146 shares of common stock at $12.50,
$13.52 per share and $14.32 per share, respectively, were outstanding at
December 31, 2000 but were not included in the computation of diluted earnings
per share because the options' exercise price exceeded the average market price
of the common shares. 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
earnings per share 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 earnings per share.
A-49
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE O--BENEFIT PLANS
Retirement and Profit Sharing Plan: Humboldt Bancorp has a defined contribution
retirement plan covering substantially all of the Banks' and Bancorp's
employees. 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 retirement plan
of $189,000 during 1998, $223,000 during 1999 and $279,000 during 2000. In
addition, Bancorp has a profit sharing plan that provides for incentive
compensation based upon specified percentages. Salaries and employee benefits
expense includes amounts accrued for this plan of $950,000 during 1998,
$1,398,000 during 1999 and $1,691,000 during 2000.
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 146,410 shares of Bancorp common stock. The amount of such fees
deferred in 1998, 1999 and 2000 totaled $58,000, $86,000 and $65,000,
respectively. At December 31, 1999 and 2000, the liability for amounts due under
this plan totaled $196,000 and $215,000, respectively, or approximately 20,083
and 23,518 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 1998, 1999 and 2000 was $20,000,
$20,000 and $40,000, respectively. In addition, $100,000 was transferred from
the profit sharing plan into this Plan in 1999.
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):
1998 1999 2000
------- ------- -------
Net income
As reported $ 4,016 $ 4,607 $ 6,855
Pro forma 3,716 4,407 6,573
Earnings per share
As reported 0.82 0.91 1.19
Pro forma 0.76 0.87 1.14
A-50
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE P--STOCK OPTION PLAN (Continued)
1998 1999 2000
---- ---- ----
Diluted earnings per share
As reported 0.75 0.83 1.11
Pro forma 0.69 0.80 1.06
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, 590,512 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:
1998 1999 2000
-------------------------------
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% 15.00% 13.42%
Risk-free interest rate:
Incentive 5.95% 6.50% 5.39%
Nonstatutory 5.20% 6.50% 5.39%
A summary of stock option activity, adjusted to give effect to stock dividends
in 1998, 1999 and 2000 and the 1999 stock split follows:
Incentive Stock Options
-------------------------------------------------------------------------------------------
1998 1999 2000
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- -------- -------------- ------- -------------- --------
Shares under option at
beginning of year $ 3.78 601,692 $ 4.08 531,352 $ 5.03 547,121
Options granted 9.75 6,050 10.87 62,944 12.47 62,738
Options exercised 2.02 (75,031) 2.26 (46,868) 2.05 (45,210)
Options expired 8.32 (1,359) 9.27 (307) 10.46 (2,014)
-------- ------- --------
Shares under option at
end of year 4.08 531,352 5.03 547,121 6.08 562,635
======== ======= ========
A-51
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE P--STOCK OPTION PLAN (Continued)
Incentive Stock Options
-------------------------------------------------------------------------------------------
1998 1999 2000
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- -------- -------------- ------- -------------- --------
Options exercisable at
end of year 446,815 446,113 508,246
Weighted-average fair
value of options granted
during the year $ 4.37 $ 5.36 $ 5.35
Nonstatutory Stock Options
-------------------------------------------------------------------------------------------
1998 1999 2000
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- -------- -------------- ------- -------------- --------
Shares under option at
beginning of year $ 3.79 493,866 $ 4.33 452,562 $ 5.00 407,669
Options granted 9.29 30,800 13.04 26,699 12.50 64,759
Options exercised 2.76 (72,104) 3.77 (71,592) 2.74 (39,989)
-------- ------- --------
Shares under option at
end of year 4.33 452,562 5.00 407,669 6.33 432,439
======== ======= ========
Options exercisable at
end of year 452,562 407,669 432,439
Weighted-average fair value
of options granted
during the year 3.80 6.39 5.36
The following table summarizes information about fixed stock options outstanding
at December 31, 2000:
Options Outstanding
-----------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
$2.15 to $3.57 531,632 3.3 years $ 3.07
$4.37 to $6.54 119,302 5.6 years 5.41
$9.09 to $11.59 181,924 7.6 years 8.31
$12.50 to $14.32 162,216 9.1 years 10.99
----------
$2.15 to $14.32 995,074 6.8 years 5.60
==========
A-52
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE P--STOCK OPTION PLAN (Continued)
Options Exercisable
----------------------------------
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
- --------------- ----------- ----------------
$2.15 to $3.57 531,632 $ 3.07
$4.37 to $6.54 119,302 5.41
$9.09 to $11.59 152,149 9.94
$12.50 to $14.32 137,602 12.96
---------
$2.15 to $14.32 940,685 5.92
=========
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, 1999 and 2000 (dollars in thousands):
1999 2000
-------- --------
Loans outstanding at beginning of year $ 6,451 $ 4,865
Loan disbursements 2,862 4,861
Loan repayments (4,448) (5,095)
-------- --------
Loans outstanding at end of year $ 4,865 $ 4,631
======== ========
At December 31, 1999 and 2000, commitments to related parties of approximately
$4,892,000 and $2,193,000, respectively, were undisbursed. Bancorp has issued
letters of credit on behalf of related parties totaling $816,000 and $2,270,000
at December 31, 2000 and 1999, respectively.
Deposits received from directors and officers totaled $634,000 and $817,000 at
December 31, 1999 and 2000, respectively.
Bancorp made payments totaling $73,000 in 1998, and $77,000 in 1999 to a travel
business formerly owned by a director. Payments under contracts with directors'
companies for premises remodeling, repair and engineering services totaled
$32,000 in 1998, $33,000 in 1999 and $71,000 in 2000. Bancorp purchased computer
equipment and office furniture from businesses owned by members of executive
officers' immediate families totaling $20,000 in 1998. Bancorp leases two
facilities from companies owned by directors. Payments on these leases during
1998, 1999 and 2000 totaled $31,000, $61,000 and $93,000, respectively.
Humboldt Bank and Capitol Valley Bank routinely participate in loan
transactions. At December 31, 1999 and 2000, the outstanding loan balances
purchased from Humboldt Bank by Capitol Valley Bank was $2,649,000 and
$4,200,000 and the outstanding loan balances purchased from Capitol Valley Bank
by Humboldt Bank was $2,760,000 and $23,793,000, respectively.
A-53
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE Q--RELATED PARTY TRANSACTIONS (Continued)
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
and 2000 totaled $13,358,000 and $70,481,000, respectively.
Humboldt Bank and Capitol Valley Bank purchase leases that are originated by
Bancorp Financial Services, a subsidiary of Bancorp. These outstanding lease
receivable balances, net of unearned interest, totaled $2,163,000 and $803,000
at December 31, 1999 and 2000, respectively. In addition, Humboldt Bank extended
a $3.8 million line of credit to Bancorp Financial Services with interest at the
prime rate plus .50% per annum. This line of credit expired May 2, 2000 and was
not renewed. During 2000, Bancorp purchased $2,376,000 in Lease-Backed Notes
issued by Bancorp Financial Services Funding Company, a subsidiary of Bancorp
Financial Services. These notes earn interest at 10.625% and mature on July 15,
2005.
Bancorp made a loan guarantee of $7 million to Bancorp Financial Services'
primary commercial bank lender which was released on December 28, 2000. In
addition, Humboldt Bancorp committed to purchase $4 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 during 2001.
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, 1999 and 2000, the cash
surrender value of these policies totaled approximately $5,157,000 and
$10,407,000, 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, 1999 and 2000, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $2,716,000 and $3,870,000, 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 thirteen sites under noncancellable operating
leases. Five of the leases are renewable for an additional five-year period,
three of the leases are renewable for two consecutive five-year periods and one
of the leases is renewable for three consecutive five-year periods. The leases
contain varying requirements for increases including adjustments based on the
Consumer Price Index with minimum increases of 2% and maximum increases of 10%.
Other leases have scheduled adjustments to the base rent.
A-54
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
As of December 31, 2000, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
Year ended December 31:
2001 $ 537
2002 458
2003 430
2004 417
2005 413
Thereafter 1,024
-------
Total minimum lease commitments $ 3,279
=======
Rent expense for the years ended December 31, 1998, 1999 and 2000 totaled
$269,000, $401,000 and $689,000, respectively. Sublease rental income was
$50,000 in 2000. Future sublease income is $50,000 annually through November
2008.
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):
Contractual Amounts
1999 2000
-------------------
Commitments to extend credit $ 62,256 $ 93,457
Credit card arrangements 9,256 7,334
Standby letters of credit 3,951 2,364
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, 1999 and 2000,
approximately $157,000 and $60,000, respectively, of Bancorp's undisbursed
credit card commitments were secured by deposit accounts.
A-55
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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, 1999 and 2000 varies from zero to
100%; the average amount collateralized is approximately 83% in 1999 and 78% in
2000. None of these letters of credit were utilized during 1999 or 2000.
Bancorp has not incurred any losses on its commitments in 1998, 1999 or 2000.
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 $54,153,000 at December 31, 1999 and $50,361,000 at December 31,
2000 have been established by withholding a percentage of merchant processing
volume. Bancorp has incurred approximately $127,000 and $55,000 in losses, net
of recoveries, during 1999 and 2000, respectively. Bancorp processed
approximately $2.9 billion and $3.0 billion of credit and debit card sales for
merchants during 1999 and 2000, respectively. Bancorp markets its merchant
bankcard services through five independent service and marketing organizations
(ISO's). Those five ISO's represent $2.6 billion of Bancorp's credit and debit
card sales during 2000.
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, the Banks have
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. The Banks, as a matter of
policy, do not extend credit to any single borrower or group of related
A-56
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE S--CONCENTRATIONS OF CREDIT RISK (Continued)
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, 1999 and 2000, approximately 63% and 26%,
respectively, of Bancorp's net worth was invested in federal funds sold to one
bank. In addition, at December 31, 2000, Bancorp had deposits in federally
insured banks in excess of federally insured limits by $5,151,000.
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's, Capitol Valley
Bank's and Capitol Thrift and Loan'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, 2000, $3,776,000 was available for cash
dividend distributions for Humboldt Bank without prior approval. Capitol Valley
Bank and Capitol Thrift and Loan could not declare dividends at December 31,
2000 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, 2000, that Bancorp
meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, 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.
A-57
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE T--REGULATORY MATTERS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- -------- -------
(dollars in thousands)
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 34,666 12.07% $ 22,984 > 8.0% N/A
-
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% N/A
-
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% N/A
-
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%
- -
As of December 31, 2000:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 57,803 11.74% $ 39,385 > 8.0% N/A
-
Humboldt Bank $ 33,535 10.15% $ 26,435 > 8.0% $ 33,044 > 10.0%
- -
Capitol Valley Bank $ 5,867 11.95% $ 3,929 > 8.0% $ 4,911 > 10.0%
- -
Capitol Thrift and Loan $ 12,084 11.01% $ 8,779 > 8.0% $ 10,974 > 10.0%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 51,715 10.50% $ 19,692 > 4.0% N/A
-
Humboldt Bank $ 30,033 9.09% $ 13,218 > 4.0% $ 19,826 > 6.0%
- -
Capitol Valley Bank $ 5,280 10.75% $ 1,964 > 4.0% $ 2,947 > 6.0%
- -
Capitol Thrift and Loan $ 10,705 9.75% $ 4,390 > 4.0% $ 6,584 > 6.0%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 51,715 8.70% $ 23,862 > 4.0% N/A
-
Humboldt Bank $ 30,033 7.46% $ 16,101 > 4.0% $ 20,126 > 5.0%
- -
Capitol Valley Bank $ 5,280 8.71% $ 2,425 > 4.0% $ 3,031 > 5.0%
- -
Capitol Thrift and Loan $ 10,705 8.45% $ 5,070 > 4.0% $ 6,337 > 5.0%
- -
A-58
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1999 and 2000 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 2000 for Humboldt Bancorp (parent company only) are
presented as follows (dollars in thousands):
Condensed Balance Sheets
December 31, 1999 and 2000
1999 2000
-------- --------
Assets
Cash $ 757 $ 54
Investment in subsidiaries 32,922 47,340
Investment in leasing company 2,731 3,844
Investment securities - 2,002
Other assets 453 2,871
-------- --------
$ 36,863 $ 56,111
======== ========
Liabilities
Borrowed funds $ 2,000 $ 700
Trust preferred securities - 5,310
Other liabilities 370 511
Stockholders' equity
Common stock 28,405 42,723
Retained earnings 6,088 6,867
-------- --------
$ 36,863 $ 56,111
======== ========
Condensed Statements of Operations
For the years ended December 31, 1998, 1999 and 2000
1998 1999 2000
-------- -------- --------
Dividends from subsidiaries $ 2,085 $ 2,500 $ 6,500
Reimbursement from subsidiaries of
allocated expenses - 2,210 3,489
Other income 3 7 420
Expenses (87) (3,227) (6,506)
-------- -------- --------
Income before taxes 2,001 1,490 3,903
Tax (expense) benefit (51) 307 1,097
-------- -------- --------
Income before equity in net income of
subsidiaries and leasing company 1,950 1,797 5,000
Equity in undistributed net income of
subsidiaries and leasing company 2,066 2,810 1,855
-------- -------- --------
Net income $ 4,016 $ 4,607 $ 6,855
======== ======== ========
A-59
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows For the years
ended December 31, 1998, 1999 and 2000
1998 1999 2000
------- -------- ---------
Operating activities:
Net income $ 4,016 $ 4,607 $ 6,855
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in undistributed net income of subsidiaries
and leasing company (2,066) (2,810) (1,856)
Dividend of Humboldt Bank's investment in leasing
company to Bancorp (2,085) - -
Increase in other assets (184) (256) (2,418)
Increase in other liabilities 83 287 141
------- -------- ---------
Net cash (used) provided by operating activities (236) 1,828 2,722
Investing activities:
Acquisition of Capitol Thrift and Loan (net of dividends) - - (9,675)
Investment in Capitol Valley Bank - (4,500) (1,700)
Investment in Humboldt Bank - (1,900) (1,300)
Investment in leasing company - - (1,000)
Purchase of available-for-sale securities - - (160)
Purchase of held-to-maturity securities - - (2,376)
Proceeds from maturity of held-to-maturity securities - - 534
Reimbursement from subsidiary 183 319 -
------- -------- ---------
Net cash provided (used) by investing activities 183 (6,081) (15,677)
Financing activities:
Proceeds from note payable - 2,000 -
Payments on notes payable - - (1,300)
Proceeds from issuance of trust preferred securities - - 5,310
Cash paid for fractional shares (8) (4) (3)
Proceeds from issuance of common stock 362 2,209 8,245
------- -------- ---------
Net cash provided by financing activities 354 4,205 12,252
------- -------- ---------
Net increase (decrease) in cash 301 (48) (703)
Cash at beginning of year 504 805 757
------- -------- ---------
Cash at end of year $ 805 $ 757 $ 54
======= ======== =========
NOTE V--ACQUISITIONS
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 for $10.91 per share and warrants to purchase up to
99,000 shares of Bancorp stock for $13.50 per share. The 49,502 shares of common
stock were issued in December 2000. The warrants to purchase up to 99,000 shares
of common stock for $13.50 per share will
A-60
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE V--ACQUISITIONS (Continued)
become exercisable if Capitol Valley Bank achieves certain business objectives.
Until the contingencies related to the warrants are resolved, they will not be
included in per share information. 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 in September 1999. Silverado had 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.
Global Bancorp: On April 8, 2000 Bancorp purchased the assets and assumed the
liabilities of Global Bancorp, a bank holding company that owned Capitol Thrift
and Loan. Total consideration paid was $16,500,000, of which $11,960,000 was in
cash and the remaining $4,540,000 was a promissory note due January 30, 2002
bearing interest at 8%, which is contingent on future events and can be adjusted
upward or downward based on criteria set forth in the merger agreement. This
promissory note is not reflected in the financial statements since it is
contingent upon future events. The acquisition was accounted for using the
purchase method of accounting and the results of operations of Capitol Thrift
and Loan are included in the financial statements since the date of acquisition.
Since the fair value of tangible assets acquired net of the liabilities assumed
exceeds the cash purchase price, premises and equipment were adjusted to zero
and the excess of $1,869,000 was recorded as negative goodwill, which is being
amortized over 15 years on a straight-line basis. 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 negative goodwill with the
excess, if any, used to restore premises and equipment to fair value.
The following table presents unaudited pro forma results of operations for the
years ended December 31, 1998, 1999 and 2000, including adjustments for
amortization of negative goodwill, as though Capitol Thrift and Loan had been
acquired as of January 1, 1998 (dollars in thousands):
1998 1999 2000
------- ------- -------
Net interest income $19,146 $20,914 $26,933
Net income 4,957 5,701 6,945
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.
A-61
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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):
1999 2000
----------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ----------- -----------
Financial assets:
Cash and due from banks $ 31,339 $ 31,339 $ 38,225 $ 38,225
Interest-bearing deposits in other banks 20 20 171 171
Federal funds sold 21,375 21,375 13,000 13,000
Investment securities available-for-sale 115,360 115,360 99,433 99,433
Investment securities held-to-maturity 1,842 1,842
Loans and leases held for sale 2,147 2,149
Loans and leases, net 222,975 222,114 407,937 406,629
Accrued interest receivable 2,147 2,147 3,314 3,314
Cash surrender value of life insurance 5,157 5,157 10,407 10,407
Financial liabilities:
Deposits 378,630 378,655 506,808 506,877
Accrued interest payable 678 678 1,158 1,158
Borrowed funds 5,316 5,316 34,021 34,021
Trust preferred securities - - 5,310 5,310
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 leases, 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
A-62
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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.
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.
Borrowed funds and trust preferred securities: The fair value of borrowed
funds and trust preferred securities 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
On September 10, 2000, Bancorp entered into a merger agreement with Tehama
Bancorp, a California bank holding company that owns Tehama Bank, a California
state-licensed bank with 6 branches located in four Northern California
counties. Under the merger agreement, all of Tehama Bancorp's outstanding common
stock would be acquired by Humboldt Bancorp in a business combination accounted
for as a pooling of interests. Upon consummation of the transaction on March 9,
2001, stockholders of Tehama Bancorp received approximately 3,394,000 shares of
Humboldt Bancorp's stock. Historical financial information presented in future
reports will be restated to include Tehama Bank. Tehama Bancorp is a 50% partner
with Humboldt Bancorp in Bancorp Financial Services.
The following summarized unaudited operating data gives effect to the
acquisition had it occurred on January 1, 1998:
As of and for the year ended
(in thousands, except per share amounts)
1998 1999 2000
--------- --------- ---------
Total assets $ 663,700 $ 776,616 $ 897,778
Stockholders equity 52,824 60,042 72,313
Net income 6,290 7,298 9,338
Basic earnings per share 0.72 0.81 1.02
Diluted earnings per share 0.67 0.77 0.97
A-63
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
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 three reportable segments under this definition, retail
banking, thrift and loan and merchant bankcard services. 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
thrift and loan segment provides consumer and commercial loans funded by thrift
and investment certificates. The merchant bankcard 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 and limited
partnerships.
The following table includes segment profit, including certain revenues and
expenses, and segment assets (dollars in thousands) as of and for the year
ended:
Merchant
Retail Thrift and Bankcard
Banking Loan Services Total
--------- ------------ ---------- ---------
December 31, 1999:
Revenue from external customers $ 4,071 - $ 14,992 $ 19,063
Interest income 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 804 - 832 1,636
Segment assets 361,543 - 62,106 423,649
Investment in equity method investees 4,063 - - 4,063
December 31, 2000:
Revenue from external customers 3,202 $ 267 23,184 26,653
Interest income 33,719 8,682 447 42,848
Interest expense 12,727 4,777 374 17,878
Depreciation and amortization 2,317 (92) 169 2,394
Segment profit, before taxes 3,253 1,707 5,182 10,142
Other significant non-cash items:
Additions to reserves for potential losses 1,654 4 1,004 2,662
Segment assets 418,805 128,204 60,983 607,992
Investment in equity method investees 5,100 - - 5,100
A-64
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1999 and 2000
NOTE Z--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight quarters:
For the quarter ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
----------- --------- ------------ ------------
(Dollars in thousands, except per share data)
Interest income $ 7,804 $ 10,877 $ 12,013 $ 12,154
Interest expense 2,793 4,516 5,133 5,436
--------- -------- -------- --------
Net interest income 5,011 6,361 6,880 6,718
Provision for loan losses 557 693 352 213
Other income 6,625 7,152 7,194 6,980
Other expenses 9,362 10,339 10,419 10,844
--------- -------- -------- --------
Income before taxes 1,717 2,481 3,303 2,641
Income taxes 553 806 1,122 806
--------- -------- -------- --------
Net income $ 1,164 $ 1,675 $ 2,181 $ 1,835
========= ======== ======== ========
Earnings per share:
Basic $ 0.22 $ 0.28 $ 0.37 $ 0.31
Diluted $ 0.20 $ 0.26 $ 0.34 $ 0.29
For the quarter ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
----------- --------- ------------ ------------
(Dollars in thousands, except per share data)
Interest income $ 5,723 $ 5,783 $ 6,338 $ 7,396
Interest expense 1,792 1,789 2,054 2,710
--------- -------- -------- --------
Net interest income 3,931 3,994 4,284 4,686
Provision for loan losses 318 188 191 349
Other income 3,905 4,757 5,130 5,731
Other expenses 5,985 6,977 7,615 7,917
--------- -------- -------- --------
Income before taxes 1,533 1,586 1,608 2,151
Income taxes 536 489 512 734
--------- -------- -------- --------
Net income $ 997 $ 1,097 $ 1,096 $ 1,417
========= ======== ======== ========
Earnings per share:
Basic $ 0.20 $ 0.22 $ 0.22 $ 0.27
Diluted $ 0.19 $ 0.20 $ 0.20 $ 0.24