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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission file number 0-21656
HUMBOLDT BANCORP
(Exact name of registrant as specified in its charter)
California 93-1175466
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2998 Douglas Boulevard, Suite 330
Roseville, California 95661
- --------------------------------------------------------------------------------
Address of Principal Executive Offices (Zip Code)
(916)-783-2812
----------------
(Telephone Number)
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 12 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.
YES [X] NO [ ]
Common stock, no par value: 12,584,563 shares
outstanding as of November 1, 2002
INDEX
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at September 30, 2002 and
December 31, 2001
Consolidated Statements of Operations (unaudited) for the Three and
Nine Months Ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
PART II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Part 1 - Financial Information
Item 1 - Financial Statements
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
(Restated)
------------------------------------
(dollars in thousands)
(unaudited)
ASSETS
Cash and due from banks $ 32,085 $ 54,567
Interest-bearing deposits in other banks 324 920
Investment securities available-for-sale, at fair value 172,622 172,473
Loans and leases 755,092 664,332
Less: allowance for loan and lease losses 11,554 9,765
------------------------------------
Net loans 766,646 654,567
Premises and equipment, net 17,007 19,270
Net assets of discontinued operations - 6,669
Accrued interest receivable and other assets 45,965 50,451
------------------------------------
TOTAL ASSETS $ 1,011,541 $ 958,917
====================================
LIABILITIES
Deposits
Noninterest-bearing $ 237,553 $ 213,092
Interest-bearing 575,685 593,994
------------------------------------
Total deposits 813,238 807,086
Accrued interest payable and other liabilities 21,403 21,539
Borrowed funds 82,167 45,560
Guaranteed Preferred Beneficial Interests in Company's
Junior Subordinated Debentures (Trust Preferreed
Securities) 20,150 20,150
Net liabilities of discontinued operations 54 -
------------------------------------
TOTAL LIABILITIES 937,012 894,335
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized, 12,584,000 shares in 2002 and 12,420,000
shares in 2001 issued and outstanding 65,290 67,459
Retained earnings (accumulated deficit) 5,131 (3,265)
Accumulated other comprehensive income 4,109 388
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 74,529 64,582
------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,011,541 $ 958,917
====================================
See accompanying notes to the consolidated financial statements
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three For the Nine
Months Ended September 30, Months Ended September 30,
2002 2001 2002 2001
(Restated) (Restated)
-------------------------------------------------------------
(dollars in thousands)
(unaudited)
INTEREST INCOME
Interest and fees on loans and leases $13,952 $13,915 $40,875 $42,072
Interest and dividends on investment securities
Taxable 2,117 1,729 5,668 5,226
Exempt from Federal income tax 349 365 1,070 1,174
Interest on deposits 4 483 18 1,360
-------------------------------------------------------------
Total Interest Income 16,422 16,492 47,631 49,832
INTEREST EXPENSE
Interest on deposits 3,394 6,316 10,552 20,046
Interest on borrowed funds and other 1,080 743 2,975 2,331
-------------------------------------------------------------
Total Interest Expense 4,474 7,059 13,527 22,377
-------------------------------------------------------------
NET INTEREST INCOME 11,948 9,433 34,104 27,455
Provision for loan losses 1,103 509 2,191 1,886
-------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,845 8,924 31,913 25,569
NON-INTEREST INCOME
Fees and other income 4,866 5,731 15,339 16,761
Service charges on deposit accounts 891 1,185 3,036 3,859
Net gain on sale of loans 583 389 1,732 855
Net investment securities gain 532 126 828 282
-------------------------------------------------------------
Total Non-interest Income 6,872 7,431 20,935 21,757
OTHER EXPENSES
Salaries and employee benefits 6,115 6,306 19,493 19,042
Net occupancy and equipment expense 1,578 1,507 4,749 4,219
Merger Related Items - - - 3,531
Other expenses 5,339 4,304 15,869 12,625
-------------------------------------------------------------
Total Other Expenses 13,032 12,117 40,111 39,417
-------------------------------------------------------------
Income Before Income Taxes 4,685 4,238 12,737 7,909
Provision for income taxes 1,108 1,454 3,485 2,718
-------------------------------------------------------------
NET INCOME CONTINUING OPERATIONS 3,577 2,784 9,252 5,191
-------------------------------------------------------------
DISCONTINUED OPERATIONS
Loss on wind-down of discontinued operations, net of tax - - (276) (14,594)
-------------------------------------------------------------
NET INCOME (LOSS) $3,577 $2,784 $8,976 ($9,403)
=============================================================
EARNINGS (LOSS) PER SHARE - BASIC:
Continuing Operations $0.29 $0.22 $0.74 0.42
Discountined Operations $0.00 $0.00 ($0.02) ($1.18)
-------------------------------------------------------------
Net income (loss) $0.29 $0.22 $0.72 ($0.76)
=============================================================
EARNINGS (LOSS) PER SHARE - DILUTED:
Continuing Operations $0.27 $0.21 $0.71 0.40
Discountined Operations $0.00 $0.00 ($0.02) ($1.12)
-------------------------------------------------------------
Net income (loss) $0.27 $0.21 $0.69 ($0.72)
=============================================================
BASIC SHARES OUTSTANDING 12,543 12,505 12,476 12,435
DILUTED SHARES OUTSTANDING 13,182 13,015 13,026 13,021
DIVIDENDS DECLARED PER SHARE $ 0.03 $ - $ 0.05 $ -
See accompanying notes to the consolidated financial statements
HUMBOLDT BANCORP AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
2002 2001
Restated
------------------------------
(dollars in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 8,976 $ (9,403)
Adjustments to reconcile net income
to net cash provided by operating activities:
Wind-down of discontinued Operations 276 14,304
Depreciation and amortization 4,381 3,247
Provision for loan losses 2,191 1,886
Gain on sale of securities (828) (282)
Net change in other assets 3,813 (12,256)
Net change in other liabilities (136) 7,744
Net change in loans held for sale - 373
Net gain on sale of loans (1,732) -
------------------------------
Net cash provided by operating activities $ 16,941 $ 5,613
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF PURCHASE ACQUISITIONS:
Proceeds from sale/maturities of securities available for sale $ 94,214 $ 57,178
Proceeds from maturities of securities held to maturity - 8,045
Purchases of securities available for sale (89,250) (81,725)
Purchases of securities held to maturity - (155)
Net change in loans (89,430) (53,889)
Federal funds sold, net - (34,425)
Net change in interest-bearing deposits in banks 596 (112)
Investing activities related to wind-down of discontinued operations 3,795 -
Proceeds from sale of foreclosed real estate 698 623
Proceeds from disposal of premises and equipment 846 -
Purchases of bank premises and equipment (901) (3,326)
------------------------------
Net cash used in investing activities $ (79,432) $ (107,786)
CASH FLOWS FROM FINANCING ACTIVITIES, NET OF PURCHASE ACQUISITIONS
Net change in deposits $ 6,152 $ 107,934
Payments on borrowed funds (21,793) (16,941)
Proceeds from borrowed funds 58,400 4,888
Repurchase of common stock (4,191) -
Proceeds of issuance of trust prefered securites - 5,000
Payments of cash dividends (571) -
Proceeds from issuance of stock for exercised options 2,021 401
Fractional shares purchased (9) (9)
------------------------------
Net cash provided by financing activities 40,009 101,273
------------------------------
Net change in cash and cash equivalents (22,482) (900)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 54,567 60,126
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,085 $ 59,226
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,834 $ 22,680
Income Taxes 1,500 4,541
Non-cash transactions
Unrealized holding gains on securities 5,316 1,905
Deferred income taxes on unrealized holding gains
and losses on securities 1,595 881
Loans transferred to foreclosed property $ 620 $ 480
See accompanying notes to the consolidated financial statements
HUMBOLDT BANCORP AND SUBSIDIARIES
STATEMENTS OF OTHER COMPREHENSIVE INCOME
For the Three For the Nine
Months Ended September 30, Months Ended September 30,
2002 2001 2002 2001
(Restated) (Restated)
-------------------------------------------------------------
(dollars in thousands)
(unaudited)
Net income (loss) $ 3,577 $ 2,784 $ 8,976 $ (9,403)
-------------------------------------------------------------
Other comprehensive income:
Unrealized holding gains on securities available for sale 2,285 1,445 5,226 2,187
Net unrealized holding gains (losses) in interest rate swaps
qualifying as cash flow hedges 743 - 918 -
Reclassification adjustment for realized gains
on securities transactions (532) (126) (828) (282)
-------------------------------------------------------------
Total other comprehensive income before income taxes 2,496 1,319 $5,316 1,905
-------------------------------------------------------------
Income tax expense (benefit) related to the above items:
Unrealized holding gains on securities available for sale 701 744 1,568 1,006
Net unrealized holding gains/(losses) in interest rate swaps
qualifying as cash flow hedges 223 - 275 -
Reclassification adjustment for realized gains
on securities transactions (161) (68) (248) (125)
-------------------------------------------------------------
Total income tax expense 763 676 1,595 881
-------------------------------------------------------------
Net other comprehensive income 1,733 643 3,721 1,024
-------------------------------------------------------------
Total comprehensive income $ 5,310 $ 3,427 $ 12,697 $ (8,379)
=============================================================
See accompanying notes to the consolidated financial statements
SIGNIFICANT ACCOUNTING DEVELOPMENT
On August 13, 2002, Humboldt Bancorp ("Humboldt") announced in a press release
that, during a review of existing contracts in connection with the pending sale
of the Company's proprietary merchant bankcard portfolio (the "MBC Portfolio"),
it was determined that compensation expense related to certain employment
agreements should have been recognized over each employee's service period and
not just at the time of a sale. The employment agreements, which were in effect
since 1997, provided for two employees of the Company's merchant bankcard
division to earn an equity interest in the MBC Portfolio. As a result of the
foregoing, Humboldt's Form 10-K for the year 2001 will be restated from the
amounts previously reported to reflect recognition of compensation expense based
on management's estimate of the value of MBC Portfolio as of the date of the
financial statements. This report on Form 10-Q reflects the impact of this
restatement for both the three and nine-month periods ended September 30, 2001.
For purposes of the Form 10-K/A and Form 10-Q/A (the "Forms"), and in accordance
with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Humboldt
has amended and restated in its entirety each item of the Forms that were
affected by the restatement. In order to preserve the nature and character of
the disclosures provided in the Forms as they were originally filed, no attempt
was made to modify or update any disclosure except those required to reflect the
effects of the restatement.
Humboldt Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies
The accounting and financial reporting policies of Humboldt and its
subsidiaries conform to generally accepted accounting principles and general
banking industry practices. The consolidated financial statements have not been
audited and all material intercompany balances and transactions have been
eliminated. A more detailed description of Humboldt's accounting policies is
included in the 2001 annual report filed on Form 10-K.
In management's opinion, all accounting adjustments necessary to accurately
reflect the financial position and results of operations on the accompanying
financial statements have been made. These adjustments are considered normal and
recurring accruals considered necessary for a fair and accurate presentation.
The results for interim periods are not necessarily indicative of results for
the full year or any other interim periods.
Note 2 - Per Share Data
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing net
income available to common shareholders and assumed conversions by the weighted
average number of common shares plus common equivalent shares outstanding
including dilutive stock options. All amounts have been restated to reflect the
six-for five stock split paid on August 19, 2002 to shareholders of record as of
August 5, 2002. The following table provides reconciliation of the basic and
dilutive earnings per share computations for the three and nine months ended
September 30, 2002 and 2001.
Table 1 - Earnings Per Share
For the Three Months For the Nine Months
Ended Sept 30, Ended Sept 30,
2002 2001 2002 2001
(In thousands, except per share data) (Restated) (Restated)
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average shares outstanding 12,543 12,505 12,476 12,435
Net income (loss) $ 3,577 $ 2,784 $ 8,976 $ (9,403)
Net income from continuing operations $ 3,577 $ 2,784 $ 9,252 $ 5,191
Basic earnings (loss) per share $ 0.29 $ 0.22 $ 0.72 $ (0.76)
Basic earnings per share - continuing operations $ 0.29 $ 0.22 $ 0.74 $ 0.42
Diluted earnings per share:
Weighted average shares outstanding 12,543 12,505 12,476 12,435
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price for the period 639 510 550 586
---------------------------------------------------
Total weighted average shares and common
stock equivalents outstanding 13,182 13,015 13,026 13,021
===================================================
Net income (loss) $ 3,577 $ 2,784 $ 8,976 $ (9,403)
Net income from continuing operations $ 3,577 $ 2,784 $ 9,252 $ 5,191
Diluted earnings (loss) per share $ 0.27 $ 0.21 $ 0.69 $ (0.72)
Diluted earnings per share - continuing operations $ 0.27 $ 0.21 $ 0.71 $ 0.40
Note 3 - Stock Split
On July 22, 2002, Humboldt announced a six-for-five stock split payable to
shareholders of record as of August 5, 2002 on August 19, 2002.
Note 4 - Segment Information
Through September 30, 2002, Humboldt operated in two principal industry
segments: retail banking and merchant bankcard services. Humboldt's core retail
banking segment includes commercial, commercial real estate, construction, and
permanent residential lending along with all depository activities. Humboldt's
merchant bankcard department segment provides services for approximately 102,000
merchants throughout the United States.
Table 2 - Business Segments
For the nine months ended For the three months ended
September 30, 2002 September 30, 2002
Merchant Merchant
Retail Bancard Retail Bancard
Banking Services Total Banking Services Total
------------------------------------------- ------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Non-interest income $ 8,631 $ 12,304 $ 20,935 $ 3,456 $ 3,416 $ 6,872
Interest income 47,631 - 47,631 16,561 (139) 16,422
Interest expense 13,527 - 13,527 4,569 (95) 4,474
Segment profit, before taxes (1) 9,383 3,354 12,737 2,836 1,849 4,685
Segment assets $ 936,890 $ 74,651 $1,011,541 $ 936,890 $ 74,651 $ 1,011,541
For the nine months ended For the three months ended
September 30, 2001 September 30, 2001
Merchant Merchant
Retail Bancard Retail Bancard
Banking Services Total Banking Services Total
------------------------------------------- ------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Non-interest income $ 6,361 $ 15,396 $ 21,757 $ 2,222 $ 5,209 $ 7,431
Interest income 49,572 260 49,832 16,364 92 16,456
Interest expense 22,194 183 22,377 6,973 50 7,023
Segment profit, before taxes (1) 5,449 2,460 7,909 2,108 2,130 4,238
Segment assets $ 870,522 $ 88,861 $ 959,383 $ 870,522 $ 88,861 $ 959,383
(1) Excludes discontinued operations
Note 5 - Formation of HB Investment Trust
During the first quarter of 2002, the company formed and funded HB
Investment Trust ("HBIT"), a Maryland real estate investment trust, as a
subsidiary of Humboldt Bank. HBIT provides Humboldt Bank with flexibility in
raising capital. Humboldt Bank contributed loans with a net book value of
approximately $217 million, and cash of $750,000 in exchange for 100% of the
common and preferred stock in HBIT. As of September 30, 2002, HBIT is included
in the Consolidated Financial Statements.
Note 6 - Discontinued Operations
During the first quarter of 2001, Humboldt completed a review of strategic
alternatives available for Bancorp Financial Services, Inc. ("BFS"), a wholly
owned subsidiary that engaged in sale and servicing of small ticket equipment
leases and the origination and servicing of indirect automobile loans. The
result of this evaluation was the classification of BFS as a discontinued
operation, based on management's expectation that the company would be sold as a
going concern. The first quarter 2001 financial results included a loss on
discontinued operations $1.1 million, which included the after-tax operating
loss of BFS and a reserve for the expected loss on the sale of the company of
approximately $700,000. During the second quarter of 2001, it was determined
that the prospects for the sale of BFS as a going concern were unlikely and
management implemented a plan to wind down the operations of BFS in an orderly
manner. For the year ended December 31, 2001, Humboldt recognized a loss on
discontinued operations of $14.0 million. During the first nine months ended
September 30, 2002, Humboldt recorded a $276,000 loss on discontinued
operations. The discontinuance of the leasing business has been accounted for
under Accounting Principles Board ("APB") Opinion No. 30, and accordingly, the
results of this operation are classified as discontinued in all periods
presented.
During the first quarter of 2002, BFS completed the transfer of the Class C
lease-backed notes with a carrying value of $3.9 million to a third party in
exchange for a reduction in the related secured debt of a like amount. BFS has a
remaining loan obligation to the third party of approximately $1.2 million,
which, according to the terms of the borrowing agreement, will only be repaid
upon the receipt of cash flows from retained interest assets by BFS in the
future. During the fourth quarter of 2001, Humboldt Bancorp assumed certain
debts of BFS owed to commercial banks. These obligations are unsecured and the
agreements provide for scheduled monthly principal and interest payments over a
period of three years. At September 30, 2002, the aggregate balance of these
borrowings was $1.8 million.
During the second quarter of 2002, Humboldt completed the liquidation of
all remaining leases and loans on the balance sheet of BFS (including the
transfer of servicing responsibility) and also completed the sale of previously
charged-off leases. As a result of this action, at June 30, 2002 BFS completed
ceased operations and all remaining employees were terminated. Although certain
accruals were established for the expected costs related to completion of the
wind-down, such accruals were not sufficient to cover the actual expenses
recognized during the second quarter of 2002 and a loss on discontinued
operations of $276,000 was recognized.
As of September 30, 2002, BFS had total assets of approximately $1.1
million, which included cash of $825,000 and taxes receivable of $292,000. Total
liabilities were approximately $1.2 million and included security deposits
payable of $1.1 million and an aggregate remaining balance accrual for wind-down
expenses of $89,000. Management believes this accrual is sufficient to cover the
remaining wind-down costs.
Note 7 - Subsequent Events
On October 7th, 2002, Humboldt announced that the definitive agreement to
sell its proprietary merchant bankcard operations to iPayment Holdings, Inc.,
originally announced on July 22nd, was terminated. Humboldt announced on
September 13th that the transaction had not closed as scheduled on August 30th
and that both parties were continuing efforts to complete the transaction. On
October 3rd, both parties executed an amendment to the existing purchase
agreement. This amendment provided for, among other things, the payment of $1
million to Humboldt as a non-refundable deposit toward the purchase price. This
payment was received by Humboldt and will be reflected in the Company's fourth
quarter operating results.
On July 31, 2002, Humboldt announced that it had entered into a definitive
agreement to sell its Lancaster and Riverside, California branches. This
transaction is expected to close during the first quarter of 2003, subject to
regulatory approval. The buyer will assume approximately $15 million of deposit
liabilities and assume the facility leases for both locations. Humboldt does not
expect this transaction will a material impact on the future results of
operations.
Note 8 - Restatement
On August 13, 2002, Humboldt announced in a press release that, during a
review of existing contracts in connection with the pending sale of the
Company's proprietary merchant bankcard portfolio (the "MBC Portfolio"), it was
determined that compensation expense related to certain employment agreements
should have been recognized over each employee's service period and not just at
the time of a sale. The employment agreements, which were in effect since 1997,
provided for two employees of the Company's merchant bankcard division to earn
an equity interest in the MBC Portfolio.
As a result of the foregoing, the Company's consolidated financial
statements for the first, second, and third quarters of 2001 and the first
quarter of 2002 have been restated from amounts previously reported. The
principal effects of the restatement on the accompanying consolidated financial
statements are set forth below:
Table 3 - Restated Condensed Financial Statements
Condensed Income Statement
(in thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
September 30, 2001 September 30, 2001
-------------------------------------------------------------------------
Previously Previously
Restated Reported Restated Reported
Interest income $ 16,492 $ 16,492 $ 49,832 $ 49,832
Interest expense 7,059 7,059 22,377 22,377
----------------------------------- ----------------------------------
Net interest income 9,433 9,433 27,455 27,455
Provision for loan losses 509 509 1,886 1,886
----------------------------------- ----------------------------------
Net interest income after provision 8,924 8,924 25,569 25,569
Non-interest income 7,431 7,431 21,757 21,757
Non-interest expense 12,117 11,964 39,417 38,196
----------------------------------- ----------------------------------
Income before taxes 4,238 4,391 7,909 9,130
Provision for income taxes 1,454 1,507 2,718 3,245
----------------------------------- ----------------------------------
Net income from continuing operations 2,784 2,884 5,191 5,885
Income (loss) from discontinued operations - - (14,594) (14,594)
----------------------------------- ----------------------------------
Net income (loss) $ 2,784 $ 2,884 $ (9,403) $ (8,709)
=================================== ==================================
Earnings per share - Basic:
Continuing operations $ 0.22 $ 0.23 $ 0.42 $ 0.47
Discontinued operations $ - $ - $ (1.18) $ (1.17)
Net income (loss) $ 0.22 $ 0.23 $ (0.76) $ (0.70)
Earnings per share - Diluted
Continuing operations $ 0.21 $ 0.22 $ 0.40 $ 0.45
Discontinued operations $ - $ - $ (1.12) $ (1.12)
Net income (loss) $ 0.21 $ 0.22 $ (0.72) $ (0.67)
Basic shares 12,505 12,505 12,435 12,435
Diluted shares 13,015 13,015 13,021 13,021
Condensed Balance Sheet
(in thousands)
As of September 30, 2001 As of December 31, 2001
-------------------------------------------------------------------------
Previously Previously
Assets Restated Reported Restated Reported
Cash and equivalents $ 107,628 $ 107,628 $ 55,487 $ 55,487
Investment securities 160,646 160,646 172,473 172,473
Net loans 627,145 627,145 654,567 654,567
Premises and equipment, net 19,449 19,449 19,270 19,270
Other assets 44,515 43,377 57,120 55,947
----------------------------------- ----------------------------------
Total assets $ 959,383 $ 958,245 $ 958,917 $ 957,744
=================================== ==================================
Liabilities
Deposits $ 820,741 $ 820,741 $ 807,086 $ 807,086
Borrowings 42,866 42,866 45,560 45,560
Trust preferred securities 10,465 10,465 20,150 20,150
Accrued interest payable and other liabilities 21,458 18,417 21,539 18,122
----------------------------------- ----------------------------------
Total liabilities $ 895,530 $ 892,489 $ 894,335 $ 890,918
=================================== ==================================
Stockholders' Equity
Common stock 67,415 $ 67,415 67,459 $ 67,459
Retained earnings (accumulated deficit) (5,659) (3,756) (3,265) (1,021)
Accumulated other comprehensive income 2,097 2,097 388 388
----------------------------------- ----------------------------------
Total stockholders' equity 63,853 65,756 64,582 66,826
----------------------------------- ----------------------------------
Total liabilities and stockholders' equity $ 959,383 $ 958,245 $ 958,917 $ 957,744
=================================== ==================================
Note 9 - Recent Accounting Pronouncements
The Company has recorded goodwill and core deposit intangibles acquired in
prior years' purchase business combinations and, effective January 1, 2002,
accounts for them in accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no
longer being amortized, but is periodically evaluated for impairment. The
Company determined that no impairment existed as of September 30, 2002. Core
deposit intangibles are amortized to their estimated residual values over their
expected useful lives; such lives and residual values are also periodically
reassessed to determine if any amortization period adjustments are indicated.
The Company determined that no such adjustments were required as of September
30, 2002.
The following table summarizes the Company's goodwill and core deposit
intangible assets as of January 1, 2002 and September 30, 2002 (dollars in
thousands).
Table 4 - Goodwill & Core Deposit Intangibles
(In Thousands)
January 1 September 30
(Dollars in Thousands) 2002 Additions Reductions 2002
-----------------------------------------------------------
Goodwill $ 525 $ 3,432 - $ 3,957
Accumulated Amortization (263) - - (263)
-----------------------------------------------------------
Net $ 262 3,432 - $ 3,694
-----------------------------------------------------------
Core Deposit Intangibles $ 5,851 - - $ 5,851
Accumulated Amortization (3,565) - (376) (3,941)
-----------------------------------------------------------
Net $ 2,286 - $ 1,910
-----------------------------------------------------------
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions of that
Statement. Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations, Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, it retains the requirement in Opinion 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. By broadening
the presentation of discontinued operations to include more disposal
transactions, the FASB has enhanced management's ability to provide information
that helps financial statement users to assess the effects of a disposal
transaction on the ongoing operations of an entity. The Company adopted the
provisions of Statement 144 on January 1, 2002. The adoption of Statement No.
144 did not have a material impact on the financial condition or operating
results of the Company.
Part I Item II
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although Humboldt believes that the assumptions underlying the forward-looking
statements contained in the discussion are reasonable, any of the assumptions
could be inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the markets where Humboldt operates); competition from
other providers of financial services offered by Humboldt; government regulation
and legislation; changes in interest rates; material unforeseen changes in the
financial stability and liquidity of Humboldt's credit customers; and other
risks detailed in Humboldt's filings with the Securities and Exchange
Commission, all of which are difficult to predict and which may be beyond the
control of Humboldt. Humboldt undertakes no obligation to revise forward-looking
statements to reflect events or changes after the date of this discussion or to
reflect the occurrence of unanticipated events.
Overview
Humboldt Bancorp ("Humboldt") is a bank holding company registered under
the Bank Holding Company Act of 1956. On June 1, 2002, Humboldt was granted
final regulatory approval for collapsing its Capitol Valley Bank and Tehama Bank
charters into that of Humboldt Bank. Under one bank charter, Capitol Valley Bank
and Tehama Bank will continue to retain their respective names and operate as
divisions of Humboldt Bank. As of September 30, 2002, Humboldt Bank had total
assets of $999 million.
Total consolidated assets at September 30, 2002 were $1.01 billion,
compared with $959 million at December 31, 2001, an increase of 7% on an
annualized basis. During the first quarter of 2001, Humboldt adopted a plan
whereby Bancorp Financial Services, Inc. is classified as a discontinued
operation. Additional information regarding this is provided in Note 5 of the
notes to the Consolidated Financial Statements.
Summary of Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in future periods.
Humboldt's significant accounting policies are described in Note 1 in the Notes
to the Consolidated Financial Statements for the year ended December 31, 2001 as
filed on Form 10-K (the "Notes to the 2001 Consolidated Financial Statements).
Not all of these critical accounting policies require management to make
difficult, subjective or complex judgments or estimates. However, management
believes that the following policies could be considered critical within the SEC
definition.
Reserves and Contingencies
Humboldt must manage and control certain inherent risks in the normal course of
its business. These include, credit risk, fraud risk, operations and settlement
risk, and interest rate risk. Humboldt has established reserves for risk of
losses, including loan losses, tax contingencies, merchant bankcard losses and
losses related to discontinued operations. The allowance for loan losses
represents Humboldt's estimate of the probable losses that have occurred as of
the date of the financial statements, as further described in Note 1 in the
Notes to the 2001 Consolidated Financial Statements. Management believes that
Humboldt has appropriately accrued for tax exposures. The allowance for merchant
bankcard losses represents Humboldt's estimate of probable losses that have
occurred as of the date of the financial statements. Reserves related to the
wind-down of discontinued operations represent management's estimate of losses
that will be incurred upon the disposition of assets and the costs associated
with operations during the wind-down period.
If Humboldt prevails in a matter for which an accrual has been established or is
required to pay an amount exceeding recorded reserves, the financial impact will
be reflected in the period in which the matter is resolved.
Derivative Financial Instruments
Humboldt has a policy that provides for the use of derivative financial
instruments to hedge interest rate risk. This policy permits the use of interest
rate swaps, cap and floor contracts to hedge specific interest rate risk
exposures as part of Humboldt's asset/liability management process. This policy
limits the notional amount of total derivative financial instruments to 15% of
total assets. Note 1 in the Notes to the 2001 Consolidated Financial Statements
contains additional information on accounting policies related to derivative
financial instruments.
Discontinued Operations/Off-Balance Sheet Financing
During the first quarter of 2001, Humboldt classified its leasing subsidiary,
Bancorp Financial Services, Inc. ("BFS") as a discontinued operation upon
adoption of a plan to sell the subsidiary. During the second quarter of 2001, it
was determined that a sale of BFS was unlikely and the plan was modified to
wind-down the operations of BFS. Management believes that the wind-down of BFS
meets the requirements for classification as a discontinued operation. Note 3 in
the Notes to the 2001 Consolidated Financial Statements contains additional
information about Discontinued Operations.
Prior to its classification as a discontinued operation, BFS formed three
subsidiaries that were not consolidated on the financial statements of BFS or
Humboldt. These subsidiaries are commonly referred to as special purpose
entities, or SPEs. As of September 30, 2002 and December 31, 2001, only two
subsidiaries were not consolidated. Both of the remaining unconsolidated
subsidiaries are considered "qualifying" SPEs that were formed for the sole
purpose of issuing lease-backed notes to institutional investors. Additional
information on these SPEs is provided in Note 3 in the Notes to the 2001
Consolidated Financial Statements.
Revenue recognition
Humboldt's primary sources of revenue are interest income and fees received in
connection with providing merchant bankcard processing services. Interest income
is recorded on an accrual basis. Note 1 in the Notes to the 2001 Consolidated
Financial Statements contains an explanation of the process for determining when
the accrual of interest income is discontinued on impaired loans and under what
circumstances loans are returned to an accruing status. Merchant bankcard
revenue is recorded on a cash basis.
An additional source of revenue for Humboldt is related to the gains recorded in
connection with the sale of loans for which Humboldt retains the right to
service the loans. Recording of such gains involves the use of estimates and
assumptions related to the expected life of the loans and future cash flows.
Note 1 in the Notes to the 2001 Consolidated Financial Statements contains
additional information regarding Humboldt's accounting policy for revenue
recorded in connection with the sale of loans. Mortgage servicing rights
resulting from the sale of loans are based upon estimates and are subject to the
risk of prepayments.
Results of Continuing Operations
For the three months ended September 30, 2002, Humboldt reported net income of
$3.6 million, or $0.27 per diluted share, compared to a net income of $2.8
million, or $.21 per diluted share, for the same period in 2001. Humboldt
reported net income from continuing operations for the nine months of 2002 of
$9.3 million, or $0.71 per diluted share, compared to a net income of $5.2
million, or $.40 per diluted share, for the same period in 2001. The operating
results as of September 30, 2002 produced a return on average shareholders'
equity and return on average assets of 17.65% and 1.27%, respectively, compared
with 15.53% and 1.18%, respectively, for the same period in 2001 (exclusive of
merger-related expenses and loss on discontinued operations).
The following table summarizes the components of income and expense for the
three and nine months ended September 30 of 2002 and 2001 and the changes in
those components for the periods presented.
Table 5 - Condensed Consolidated Statements of Income
(in thousands, except per share data)
For the Three Months Percent For the Nine Months Percent
Ended September 30 Change Increase Ended September 30 Change Increase
2002 2001 Amount (Decrease) 2002 2001 Amount (Decrease)
------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 16,422 $ 16,492 (70) 0% $ 47,631 $ 49,832 (2,201) -4%
Interest expense 4,474 7,059 (2,585) -37% 13,527 22,377 (8,850) -40%
------------------------------------ -------------------------------
Net Interest Income 11,948 9,433 2,515 27% 34,104 27,455 6,649 24%
Provision for loan losses 1,103 509 594 117% 2,191 1,886 305 16%
------------------------------------ -------------------------------
Net interest income after
provision for loan losses 10,845 8,924 1,921 22% 31,913 25,569 6,344 25%
Non-interest income 6,872 7,431 (559) -8% 20,935 21,757 (822) -4%
Non-interest expense 13,032 12,117 915 8% 40,111 39,417 694 2%
Income before taxes 4,685 4,238 447 11% 12,737 7,909 4,828 61%
Income taxes 1,108 1,454 (346) -24% 3,485 2,718 767 28%
------------------------------------ -------------------------------
Net income from continuing
operations 3,577 2,784 793 28% 9,252 5,191 4,061 78%
Income (loss) on discontinued
operations, net of tax - - - nm (276) (14,594) 14,318 98%
------------------------------------ -------------------------------
Net income (loss) $ 3,577 $ 2,784 793 28% $ 8,976 $ (9,403) 18,379 195%
==================================== ===============================
nm - not meaningful
Net Interest Income
Net interest income is the largest source of Humboldt's operating income.
Net interest income was $34.1 million for the nine months ended September 30,
2002, an increase of 24% over the comparable period in 2001. Net interest income
for the third quarter of 2002 was $11.9 million, an increase of 27% over the
same period in 2001. The increase in net interest income for the nine months and
quarter ended September 30, 2002 is primarily attributable to increases in
outstanding average interest earning assets over the comparable prior year
period and an increase in the net interest margin described below.
For the nine months ended September 30, 2002, the net interest margin (net
interest income as a percentage of average interest earning assets) on a
fully-tax equivalent basis was 5.25%, a increase of 48 basis points over the
comparable prior year period. For the quarter ended September 30, 2002, the
tax-equivalent net interest margin was 5.16%, an increase of 55 basis points
over the same period in 2001. The increase in the net interest margin is
primarily attributable to changes in Humboldt's deposit pricing strategy that
resulted in the cost of interest bearing liabilities decreasing by 201 basis
points for the nine month period ended September 30, 2002 as compared to the
same period in 2001. For the same time period, the tax-equivalent yield on
earning assets declined by 128 basis points. The change in deposit pricing
strategy had the greatest impact on certificates of deposit balances, which
decreased by $53 million, or 15%, on an average-balance basis from the nine
month period ended September 30, 2001 to the same period in 2002. This outflow
of deposits was offset by a decrease in earning assets invested in federal funds
sold which yielded a lower rate than that paid on the certificates of deposit.
The following table shows the relative impact of changes in average
balances of interest earning assets and interest bearing liabilities, and
interest rates earned (on a fully-tax equivalent basis) and paid by Humboldt on
those assets and liabilities for the nine month period ended September 30, 2002
and 2001:
Table 6 - Average Consolidated Balance Sheets and Net Interest Analysis
Fully tax-equivalent basis
(in thousands)
For the Nine Months Ended
Sept 30, 2002 Sept 30, 2001
-------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance (1) Rate Balance (1) Rate
------------ ------------ ------------------------- ------------ ------------
Assets:
Interest-earning assets:
Loans, net of unearned income (2) $ 696,433 40,875 7.85% 604,776 42,072 9.30%
Investment securities 183,536 7,241 5.27% 133,933 6,990 6.98%
Federal funds sold
and other interest income 1,124 18 2.14% 47,322 1,360 3.84%
------------ ------------ ------------------------- ------------ ------------
Total interest-earning assets /
interest income 881,093 48,134 7.30% 786,031 50,422 8.58%
------------ ------------ ------------------------- ------------ ------------
Non-interest-earning assets:
Allowance for loan losses (10,341) (8,834)
Cash and due from banks 43,777 58,440
Premises and equipment 18,081 19,114
Goodwill and other intangibles 8,610 4,761
Other assets 30,823 40,794
------------ ------------
Total assets $ 972,043 900,306
============ ============
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts $ 48,705 108 0.30% 41,028 211 0.69%
Savings deposits 230,108 2,525 1.47% 186,120 5,025 3.61%
Certificates of deposit 302,689 7,919 3.50% 355,879 14,810 5.56%
Individual Retirement Accounts
------------ ------------ ------------------------- ------------ ------------
Total interest-bearing deposits 581,502 10,552 2.43% 583,027 20,046 4.60%
-------------------------- --------------------------------------- ------------
Federal Home Loan Bank advances 54,349 1,339 3.29% 31,388 1,165 4.96%
Other borrowings (3) 27,951 1,636 7.83% 17,897 1,166 8.71%
------------ ------------ ------------------------- ------------ ------------
Total borrowed funds 82,300 2,975 4.83% 49,285 2,331 6.32%
------------ ------------ ------------------------- ------------ ------------
Total interest-bearing liabilities /
interest expense 663,802 13,527 2.72% 632,312 22,377 4.73%
Non-interest-bearing liabilities:
Non-interest-bearing deposits 215,269 180,313
Other liabilities 22,899 19,208
------------ ------------
Total liabilities 901,970 831,833
------------ ------------
Stockholders' equity 70,073 68,473
------------ ------------
Total liabilities
and stockholders' equity $ 972,043 900,306
============ ============
Net interest-rate spread 4.58% 3.85%
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.67% 0.92%
------------- ------------
Net interest income /
margin on interest-earning assets (4) $ 34,607 5.25% $ 28,045 4.77%
============ ============= ============ ============
(1) Interest income on tax-exempt securities and loans has been increased by 50%
to reflect comparable interest on taxable securities.
(2) For computational purposes, includes non-accrual loans and mortgage loans
held for sale.
(3) Includes Trust Preferred Securities.
(4) Tax equivalent net interest income as a percentage of average earning assets
The following table shows the relative impact on net interest income of
changes in the average outstanding balances (volume) of earning assets and
interest bearing liabilities and the rates earned and paid by Humboldt on such
assets and liabilities. Variances resulting from a combination of changes in
rate and volume are allocated in proportion to the absolute dollar amounts of
the change in each category.
Table 7 - Change in Interest Income and Expense on a Tax Equivalent Basis
Unaudited
(in thousands)
Nine Months Ended September 30,
2002 Compared to 2001
Increase (Decrease)
in interest income and expense
due to changes in:
Volume Rate Total
Interest-earning assets:
Loans and leases: $5,380 ($6,577) ($1,197)
Investment securities: 1,957 (1,706) 251
Federal funds sold & other interest income (740) (602) (1,342)
-------------------------------------
Total interest-earning assets / interest income 6,597 (8,885) (2,288)
Interest-bearing liabilities:
Transactions accounts 17 (120) (103)
Savings deposits 483 (2,983) (2,500)
Certificates of deposit (1,392) (5,499) (6,891)
-------------------------------------
Total interest-bearing deposits (892) (8,602) (9,494)
FHLB advances 596 (422) 174
Other borrowings 588 (118) 470
-------------------------------------
Total borrowed funds 1,184 (540) 644
-------------------------------------
Total interest-bearing liabilities 292 (9,142) (8,850)
-------------------------------------
Increase (decrease) in net interest income $6,304 258 6,562
=====================================
Provision for Loan Loss
The provision for loan losses was $1.1 million, or 0.60% of average loans
on an annualized basis, for the three months ended September 30, 2002, compared
with $509,000, or 0.34% of average loans, for the same period in 2001. For the
nine months ended September 30, 2002, the provision for loan losses was $2.2
million or 0.42% of average loans on an annualized basis, compared with $1.9
million or 0.42% of average loans, for the same period in 2001. Net charge-offs
for the three months ended September 30, 2002 were $16,000, or 0.01% of average
loans on an annualized basis, compared to $353,000 or 0.23% of average loans for
the same period in 2001. Net charge offs for the nine months ended September 30,
2002 were $402,000 or 0.08% of average loans on an annualized basis, compared
with $1.1 million or 0.25% of average loans for the same period in 2001. The
ratio of allowance for loan losses to total loans was 1.53% at September 30,
2002 compared to 1.47% at December 31, 2001. It is management's belief that this
increase of six basis points is warranted in light of recent publicized concerns
about real estate market valuations in California.
The provision for loan losses and allowance for loan losses reflect
management's consideration of the various risks in the loan portfolio.
Additional discussion of loan quality and the allowance for loan losses is
provided in the Asset Quality discussion section of this report.
Non-interest Income
Non-interest income for the three months ended September 30, 2002 was $6.9
million, a decrease of $559,000, or 8%, over the comparable 2001 period.
Non-interest income for the nine months ended September 30, 2002 was $21
million, a decrease of $822,000, or 4%, over the comparable 2001 period. The
following table summarizes the major categories of non-interest income for the
three and nine months ended September 30, 2002 and 2001 and the changes in those
components for the periods presented:
Table 8 -Other Non-Interest Income
(In thousands)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
Change Change Change Change
2002 2001 Amount Percent 2002 2001 Amount Percent
------------------------------------------------------------------------------------------------------
Merchant processing fees $3,966 $ 3,694 272 7% $ 12,679 $ 10,286 2,393 23%
ATM fees 239 661 (422) -64% 1,214 2,291 (1,077) -47%
Bank-owned life insurance 205 230 (25) -11% 640 652 (12) -2%
Service charges on deposit
accounts 652 501 151 30% 1,822 1,627 195 12%
Gain on sale of loans 583 389 194 50% 1,732 855 877 103%
Gain (loss) on sale of
securities 532 126 406 322% 828 282 546 194%
Other 695 1,830 (1,135) -62% 2,020 5,764 (3,744) -65%
------------------------------------------------------------------------------------------------------
Total other non-interest
income $6,872 $ 7,431 (559) -8% $ 20,935 $ 21,757 (822) -4%
======================================================================================================
The decrease in non-interest income is primarily attributable to the
recording of a pre-tax gain of $ 3.3 million in the first nine months of 2001
recognized in connection with the modification of the terms of an agreement with
a merchant processing ISO. This pre-tax gain is reflected in the "other"
category above. The decrease was partially offset by an increase in merchant
processing fees. Gains on the sale of investment securities recorded during the
three and nine months ended September 30, 2002 were $532,000 and $828,000,
respectively, as compared with $126,000 and $282,000 for the same periods in
2001. The majority of securities sold during the first nine months of 2002 and
2001 were in connection with comprehensive reviews of Humboldt's securities
portfolio in light of changes in market interest rates, loan growth and other
factors. Gains on the sale of loans recorded during the three months and nine
months ended September 30, 2002 were $583,000 and $1.7 million, respectively, as
compared with $389,000 and $855,000 for the same periods in 2001. The increase
in gains recognized on the sale of loans is primarily attributable to the volume
growth associated with the Humboldt's SBA loan origination business. SBA loans
sold grew from $4.8 million dollars to $20.0 million dollars for the nine months
ended September 30, 2001 and 2002 respectively. For the three months ended
September 30, 2002 and 2001, SBA loans sold were $2.6 million and $5.4 million
respectively.
ATM fees decreased by $1.1 million or 47%, as the result of Humboldt's
decision to exit the ATM funding business. This process was completed by
September 30, 2002. Management does not expect the decision to exit the ATM
funding business will have a significant impact on the results of operations due
to a decrease in related operating expenses and the implementation of a strategy
to reduce federal reserve requirements through the reclassification of certain
deposit account balances.
Non-interest Expense
For the three months ended September 30, 2002, non-interest expense totaled
$13.0 million, an increase of $915,000, or 8%, over the same period in 2001. For
the nine months ended September 30, 2002, non-interest expense totaled $40.1
million, an increase of $694,000 or 2% over the same period in 2001. Included in
non-interest expense for the first nine months of 2001 was $3.5 million of
operating expenses related to the merger with Tehama. These expenses consisted
primarily of professional fees, data processing expenses, compensation
arrangements and depreciation of equipment. Excluding the merger-related
expenses, non-interest expense increased by 12% during the first nine months of
2002 over the same period in 2001.
Salary and employee benefit expense, which represents the single largest
component of non-interest expense, decreased by $191,000, or 3% for the three
months ended September 30, 2002 as compared with the same period in 2001. Salary
and employee benefit expense for the nine months ended September 30, 2002
increased $451,000 or 2% over the same period in 2001. This increase is
primarily attributed to an increase in group health insurance rates, severance
agreements related to the charter consolidation initiative, and normal cost of
living salary adjustments.
Occupancy and equipment expense, excluding merger-related expense, for the
three months ended September 30, 2002 increased by $71,000 or 5% over the same
period in 2001. For the nine months ended September 30, 2002, occupancy and
equipment expense increased by $530,000 or 13% over the same period in 2001.
This increase is primarily attributed to repairs and maintenance of various
premises and depreciation expense related to new technology initiatives.
Other non-interest expense for the nine months ended September 30, 2002
increased $3.2 million or 26% compared to the same period in 2001. For the three
months ended September 30, 2002, other non-interest expense increased $1.0
million or 24%. This increase is primarily attributed to the charter
consolidation initiative ($889,000); prepayment penalties on FHLB advances
($358,000); and legal and other professional fees associated with the new CEO
search, restatement of prior period financial results, the planned sale of the
Company's proprietary merchant bankcard operations, and the formation of the HB
Estate Investment Trust ($660,000).
Income Taxes
Income tax expense for the nine months ended September 30, 2002 was $3.5
million, compared with $2.7 million for the same period in 2001. The effective
tax rate (income tax expense as a percentage of pre-tax net income) for the nine
months ended September 30, 2002, was 27.3% compared to 34.3% for the comparable
2001 period. The reduction of effective tax rate is attributable to seven full
months of tax benefit associated the HB Investment Trust (See Note 4 - Formation
of HB Investment Trust).
On September 11, 2002, California enacted a law requiring large banks
(those with average assets in excess of $500 million) to conform to federal law
with respect to accounting for bad debts. Prior to the law change, all banks,
regardless of size, were eligible to use the reserve method of accounting for
bad debts which enabled them to take deductions for anticipated bad debt losses
prior to the losses being incurred for California tax purposes. With the change,
large banks may now only deduct actual charge-offs net of recoveries in
determining their California taxable income. Banks that are required to conform
to the new law must include in taxable income 50 percent of their existing bad
debt reserves as of the end of the prior tax year. As a concession for requiring
large banks to comply with the new law, recapture of the remaining 50 percent of
the reserve is waived thereby creating a permanent tax benefit. The Company's
tax benefit resulting from the law change was $150,000 and has been reflected in
the Company's income tax expense for the quarter ended September 30, 2002.
Investment Securities
Average securities for the nine months of 2002 were $184 million, an
increase of $50 million, or 37%, over the comparable 2001 period. During the
second quarter of 2002 and the first quarter of 2001, Humboldt conducted reviews
of its securities portfolio in consideration of recent changes in market
interest rates, loan demand and other factors. As a result of these reviews,
certain investment securities were sold. Humboldt sold securities of $80.1
million resulting in net gains of $828,000 during the nine-month period ending
September 30, 2002 and sold $61 million resulting in gains of $282,000 during
the same period in 2001. During the three-month period ending September 30,
2002, Humboldt sold $40 million of securities. A portion of the proceeds from
the sale of securities was used to repay $25 million of FHLB borrowings.
Loans
Humboldt experienced annualized loan growth of 18% for the nine-month
period ended September 30, 2002. This growth was the result of continued
favorable economic conditions in Humboldt's primary market areas, in particular
the greater Sacramento, California region. Total loans were $755 million at
September 30, 2002, compared to $664 million at December 31, 2001. Average loans
for the nine months ended September 30, 2002, were $696 million, compared to
$605 million for the same period of 2001. The average yield on loans for the
nine months ended September 30, 2002 was 7.85%, compared to 9.30% for the same
period in 2001. The decrease in the average yield on loans is primarily due to
the general decline in market interest rates. The average prime rate, the
benchmark index for a substantial percentage of Humboldt loans for the nine
months of 2002 was 4.75% as compared to 7.55% during the same period in 2001.
Asset Quality
Non-performing assets, which include non-accrual loans, loans past-due 90
days or more and still accruing interest and other real estate owned totaled $2
million at September 30, 2002, compared to $4.6 million at December 31, 2001.
Total non-performing loans at September 30, 2002, decreased by $2.5 million from
year-end 2001. Non-performing loans at September 30, 2002 consisted primarily of
loans secured by real estate that are generally well secured and in the process
of collection. Other real estate owned at September 30, 2002 totaled $88,000,
compared to $166,000 at December 31, 2001.
Management classifies loans as non-accrual when principal or interest is 90
days or more past due and the loan is not sufficiently collateralized and in the
process of collection. Once a loan is classified as non-accrual, it cannot be
reclassified as an accruing loan until all principal and interest payments are
brought current and the prospects for future payments in accordance with the
loan agreement appear relatively certain. Foreclosed properties held as other
real estate owned are recorded at the lower of Humboldt's recorded investment in
the loan or market value of the property less expected selling costs.
The following table presents information about Humboldt's non-performing
assets, including quality ratios:
Table 9- Non-Performing Assets
(in thousands)
September 30, December 31, September 30,
2002 2001 2001
----------------------------------------------------
Non-accrual loans $1,230 $2,915 $3,899
Loans past due 90 days or more and
still accruing 715 1,560 2,358
----------------------------------------------------
Total non-performing loans 1,945 4,475 6,257
Other real estate owned 88 166 538
----------------------------------------------------
Total non-performing assets $2,033 $4,641 $6,795
====================================================
Total non-performing loans as a percentage
of total loans 0.26% 0.67% 0.98%
Total non-performing assets as a percentage
of total assets 0.20% 0.48% 0.71%
The decrease in non-accrual loans from year-end 2001 is primarily
attributable to strong collection efforts and loan charge offs.
At September 30, 2002, Humboldt had approximately $14 million of
outstanding loans that were not included in the non-performing or non-accrual
categories, but for which management had knowledge that the borrowers had
certain identified weaknesses based on Humboldt's internal risk rating system.
This figure represents an increase of $2.7 million and $3 million from the
periods ended June 30, 2002 and December 31, 2001 respectively. Although these
weaknesses are serious enough for management to be uncertain of the borrowers'
ability to comply with the original repayment terms of the loans, no losses are
anticipated at this time in connection with these loans based on current market
conditions, cash flow generation and collateral values. These loans are subject
to routine management review and are considered in determining the adequacy of
the allowance for loan losses.
The allowance for loan and lease losses ("ALL") at September 30, 2002
totaled $11.5 million, an increase of $1.8 million, or 18%, from December 31,
2001. The ratio of ALL to total loans at September 30, 2002 was 1.53%, compared
with 1.47% at December 31, 2001. At September 30, 2002 and December 31, 2001,
the ratio of ALL to total non-performing loans was 594% and 218%, respectively.
The following table provides an analysis of the changes in the ALLL for the
nine months ended September 30, 2002 and 2001 respectively.
Table 10 - Summary of Loan Loss Experience
(in thousands)
Nine Months Ended
September 30
2002 2001
-------------------------------------
Balance beginning of period $9,765 $8,367
Provision for loan losses 2,191 1,886
Loans charged-off (953) (1,482)
Charge-off recoveries 551 360
-------------------------------------
Net charge-offs (402) (1,122)
-------------------------------------
Balance end of period $11,554 $9,131
=====================================
September 30, December 31,
Total loans: 2002 2001
At period end $755,092 $664,332
Average (Nine months for 2002) $696,433 $616,159
As a percentage of average loans:
Net charge-offs (annualized basis for 2002) 0.08% 0.24%
Provision for loan losses (annualized basis for 2002) 0.42% 0.47%
Allowance as a percentage of period end loans 1.53% 1.47%
Allowance as a percentage of non-performing loans 594% 218%
Management believes that the ALL at September 30, 2002 is sufficient to
absorb losses inherent in the loan portfolio. This assessment is based upon the
best available information and does involve uncertainty and matters of judgment.
Accordingly, the adequacy of the loan loss reserve cannot be determined with
precision and could be susceptible to significant change in future periods.
Humboldt also bears certain indirect credit risks related to its Merchant
Bankcard segment, which provides VISA and Mastercard settlement services for
approximately 102,000 merchants located throughout the United States.
Accordingly, Humboldt has implemented active risk mitigation and management
practices and established reserves for losses associated with this segment. For
the first nine months of 2002, Humboldt recognized net losses charged against
the reserve of $411,000. This represents an annualized loss rate of .01% on
total processed transaction volume of 3.74 billion.
Deposits and Borrowed Funds
Total deposits increased by $6.2 million during the nine months ended
September 30, 2002, an annual increase of 1%. Total average non-interest bearing
deposits for the nine months ended September 30, 2002 were $217 million, an
increase of $37 million, or 20%, from the same period in 2001.
As of September 30, 2002, Humboldt had $31 million of brokered deposits at
an average rate of 2.97%. Each of these brokered deposits mature during the
second quarter of 2003.
Total average borrowed funds for the nine months ended September 30, 2002
were $85 million, an increase of $35 million, or 71%, from the comparable 2001
period. Most of this increase is attributed to increased trust preferred
securities issuance and increased net borrowings from the FHLB in order to fund
growth of the loan portfolio. At September 30, 2002 Humboldt had aggregate FHLB
borrowings of approximately $57 million.
Asset/Liability Management
Humboldt's financial performance is largely dependent upon its ability to
manage market interest rate risk, which can be further defined as the exposure
of Humboldt's net interest income to fluctuations in interest rates. Since net
interest income is the largest component of Humboldt's revenue, management of
interest rate risk is a priority. Humboldt's interest rate risk management
program includes a coordinated approach to managing interest rate risk and is
governed by policies and Humboldt's Asset and Liabilities Committee ("ALCO").
The ALCO meets regularly to evaluate the impact of market interest rates on the
assets, liabilities, net interest margin, capital and liquidity of Humboldt and
to determine the appropriate strategic plans to address the impact of these
factors.
Humboldt's balance sheet structure is primarily short-term with most assets
(84%) and liabilities (54%) either repricing or maturing in five years or less.
Management monitors the sensitivity of net interest income to changes in market
interest rates by utilizing a simulation model. This model measures net interest
income sensitivity and volatility to interest rate changes based on assumptions
which management believes are reasonable. Factors considered in the simulation
model include actual maturities, estimated cash flows, repricing
characteristics, and the relative sensitivity of assets and liabilities to
changes in market interest rates. The simulation model considers other factors
that can impact net interest income, including the mix of earning assets and
liabilities, yield curve relationships, customer preferences and general market
conditions. Utilizing the simulation model, management can project the impact of
changes in interest rates on net interest income.
At September 30, 2002, Humboldt's simulation model indicated that annual
net interest income would increase by approximately 2.5%, or $1.2 million, if
interest rates increased by 200 basis points and would decrease by approximately
1.6%, or $733,000, if interest rates decreased by 100 basis points. Assuming
both the increase and decrease are ramped over 12 months and no change in the
size or composition of the balance sheet, both of the simulation results are
within the limits of Humboldt's policy.
Interest Rate Swap Contract
In order to assist with managing interest rate sensitivity, Humboldt has
entered into off-balance sheet contracts that are considered derivative
financial instruments. As of September 30, 2002, Humboldt had three such
contracts, all of which are interest rate swap agreements. These agreements are
classified as cash flow hedges, which require the fair value of each swap
agreement to be recognized on the balance sheet with the offset recorded as a
component of other comprehensive income in stockholders' equity.
Table 11 - Interest Rate Swap Contracts
As of September 30, 2002
(In thousands)
Maturity Date Notional Amount Rate Paid Rate Received Fair Value
January 2005 $25,000 4.75% (1) 6.72% $933
July 2005 $25,000 4.75% (2) 6.30% $687
December 2006 $10,000 8.42% (3) 5.42% ($702)
(1) Variable rate based on Prime
(2) Variable rate based on Prime
(3) Variable rate based on 3 month LIBOR plus 360 basis points
Capital Resources and Liquidity
The following table shows Humboldt's capital ratios, as calculated under
regulatory guidelines, compared to the regulatory minimum capital ratio and the
regulatory minimum capital ratio needed to qualify as a "well-capitalized"
institution at September 30, 2002 and December 31, 2001:
Table 12 - Capital Ratios
September 30, December 31,
2002 2001
Leverage ratio 8.43% 8.45%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 5.00% 5.00%
Tier I risk-based capital 9.70% 10.48%
Regulatory minimum 4.00% 4.00%
Well-capitalized minimum 6.00% 6.00%
Total risk-based capital 11.04% 11.72%
Regulatory minimum 8.00% 8.00%
Well-capitalized minimum 10.00% 10.00%
On February 6, 2002, Humboldt announced the authorization of a stock
repurchase for up to 600,000 shares. As of September 30, 2002, a total of
425,160 shares had been repurchased under this authorization. On July 22, 2002,
Humboldt's Board of Directors authorized a second stock repurchase authorization
for up to 1.2 million shares in connection with the planned sale of the
company's proprietary merchant bankcard operations. No shares will be
repurchased under this authorization until such time a sale of the business is
completed.
Table 13 - Cash Dividends
As of September 30, 2002
Dividend Payout %
Second Quarter 2002 $0.025 10.9%
Third Quarter 2002 $0.025 8.6%
The table above reflects cash dividends paid by Humboldt, as adjusted for
the six-for-five split in August 2002. Prior to the second quarter of 2002,
Humboldt did not pay cash dividends. Although it is the intention of the Company
to pay cash dividends on a quarterly basis, there is no assurance that any
future cash dividends will be paid. The payment of cash dividends is subject to
Federal regulatory requirements for capital levels and other restrictions.
Further, the cash dividends paid from Humboldt Bank to Humboldt Bancorp (the
primary source of cash available for dividends) is subject to both Federal and
State regulatory requirements.
Liquidity measures the ability to meet current and future cash flow needs
as they become due. Maintaining an adequate level of liquid funds, at the most
economical cost, is an important component of Humboldt's asset and liability
management program. Humboldt has several sources of available funding to provide
the required level of liquidity, including deposits and short and long-term
borrowings. Like most banking organizations, Humboldt relies primarily upon cash
inflows from financing activities (deposit gathering, short-term borrowing and
issuance of long-term debt) in order to fund its investing activities (loan
origination and securities purchases). The financing activity cash inflows such
as loan payments and securities sales and prepayments are also a significant
component of liquidity.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in Humboldt's quantitative and
qualitative disclosures about market risk as of September 30, 2002 from that
presented in Humboldt's Annual Report on Form 10-K for the year ended December
31, 2001.
Item 4. Controls and Procedures
Within 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls,
or in other factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities - None
Item 3 - Defaults Upon Senior Securities - None
Item 4 - Submission of Matters to a vote of Security Holders - None
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On July 24, 2002, Humboldt filed a Form 8-K disclosing that Humboldt had
entered into a definitive agreement with iPayment Holdings, Inc. for the sale of
Humboldt's proprietary merchant bankcard operations, declared a six-for-five
stock split and approved a stock repurchase authorization for one million common
shares. A copy of the press release for this combined announcement was included
as an exhibit to the Form 8-K. The agreement with iPayment Holdings, Inc. was
subsequently terminated on October 4, 2002. A Report on Form 8-K was filed on
October 8, 2002, disclosing the termination and receipt by Humboldt of a
non-refundable $1 million deposit. A copy of the press release announcing the
termination was included as an exhibit to the Form 8-K.
On July 26, 2002, Humboldt filed a Form 8-K with disclosures under Item 7
and Item 9 for a definitive slide presentation prepared for use by Robert M.
Daugherty, President and Chief Executive Officer and Patrick J. Rusnak, Chief
Financial Officer at the Keefe, Bruyette & Woods, Inc. community bank investor
conference held in New York, New York on July 24, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13th, 2002 HUMBOLDT BANCORP
/S/ ROBERT M. DAUGHERTY
----------------------------------------
Robert M. Daugherty
President and Chief Executive Officer
/S/ PATRICK J. RUSNAK
----------------------------------------
Patrick J. Rusnak
Chief Financial Officer
CERTIFICATION
I, Robert M Daugherty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Humboldt Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 11/13/02 /S/ ROBERT M. DAUGHERTY
--------------- -------------------------------------
Robert M. Daugherty
President and Chief Executive Officer
CERTIFICATION
I, Patrick J Rusnak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Humboldt Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 11/13/02 /S/ PATRICK J. RUSNAK
--------------- ------------------------
Patrick J. Rusnak
Chief Financial Officer