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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the fiscal year ended December 31, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
[REDDING BANCORP LOGO]
Commission file number 0-25135
REDDING BANCORP
(Exact name of Registrant as specified in its charter)
California 94-2823865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1951 Churn Creek Road
Redding, California 96002
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (530) 224-3333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference to Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $28,599,975 as of March 1, 2001
which was calculated based on the last reported sale of the Company's
Common Stock prior to March 1, 2001. This calculation does not
reflect a determination that certain persons are affiliates of the
Registrant for any other purpose.
As of March 1, 2001, there were 2,875,451 shares of the Registrant's
Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11 and 12 of Part III
incorporate by reference information from the Registrant's Proxy Statement
to be filed with the Securities and Exchange Commission in connection with
the solicitation of proxies for the Registrant's 2001 Annual Meeting of
Shareholders.
PART I
ITEM 1. BUSINESS.
This report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include
the information concerning possible or assumed future results of operations of
the Company set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's actual future results and shareholder values may differ
materially from those anticipated and expressed in these forward-looking
statements. Many of the factors that will determine these results and values,
including those discussed under the heading "Risk Factors That May Affect
Results," are beyond the Company's ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or and assumes no obligation
to update forward-looking statements after the date of the filing of this
report, even if new information, future events or other circumstances have made
such statements incorrect or misleading. Except as specifically noted herein all
referenced to the "Company" refer to Redding Bancorp, a California corporation,
and its consolidated subsidiaries.
GENERAL
Redding Bancorp (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and was
incorporated in California on January 21, 1982, for the purpose of organizing,
as a wholly owned subsidiary, Redding Bank of Commerce (the "Bank"). As a
financial services holding company, the Company is subject to the BHCA and to
supervision by the Board of Governors of the Federal Reserve System ("FRB"). The
Company's principal business is to serve as a holding company for the Bank and
Redding Service Corporation, a California corporation formed in 1993 for the
purpose of processing trust deeds, and for other banking or banking-related
subsidiaries which the Company may establish or acquire. The Company's principal
source of income is dividends from its subsidiaries. The Company conducts its
corporate business operations at the offices of the Bank located at 1951 Churn
Creek Road, Redding, California 96002. The Company conducts its business
operations in two geographic market areas, Redding and Roseville, California and
within two industry segments, general banking and credit card processing.
The Bank was incorporated as a California banking corporation on
November 25, 1981, and received its certificate of authority to begin banking
operations on October 22, 1982. The Bank operates two full service branches and
two loan production offices. The Company established its first full service
branch at 1177 Placer Street, Redding, California, and opened for business on
October 22, 1982. On November 1, 1988, the Bank received a certificate of
authority to establish and maintain a loan production office in Citrus Heights,
California. On September 1, 1998, the Company relocated the loan production
office to 2400 Professional Drive in Roseville, California. On March 1, 1994,
the Bank received a certificate of authority to open a second full service
branch at 1951 Churn Creek Road in Redding, California. On June 30, 2000 the
Bank received a certificate of authority to convert the loan production office
in Roseville to a full service banking facility under the name Roseville Banking
Center, a division of the Bank.
The Bank is principally supervised and regulated by the California
Department of Financial Institutions ("DFI") and the Federal Deposit Insurance
Corporation ("FDIC"), and conducts a general commercial banking business in the
counties of El Dorado, Placer, Shasta, and Sacramento, California. The Company
considers Northern California to be the Bank's major market area.
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The services offered by the Bank include those traditionally offered by
commercial banks of similar size and character in California, such as checking,
interest-bearing checking ("NOW") and savings accounts, money market deposit
accounts, commercial, real estate, construction, personal, home improvement,
automobile and other installment and term loans, travelers checks, safe deposit
boxes, collection services and telephone transfers. The primary focus of the
Bank is to provide services to the business and professional community of its
major market area, including Small Business Administration loans, and payroll
and accounting packages. The Bank does not offer trust services or international
banking services and does not plan to do so in the near future.
Most of the Bank's customers are small to medium sized businesses,
professionals and other individuals with medium to high net worth, and most of
the Bank's deposits are obtained from such customers. The Bank emphasizes
servicing the needs of local businesses and professionals and individuals
requiring specialized services. The Bank's business strategy is to focus on its
lending activities. The Bank's principal lines of lending are (i) commercial,
(ii) real estate construction and (iii) commercial and residential real estate.
The majority of the Bank's loans are direct loans made to individuals and small
businesses in the Bank's major market area and are secured by real estate. See
"-Risk Factors That May Affect Results-Dependence on Real Estate." A relatively
small portion of the Bank's loan portfolio consists of loans to individuals for
personal, family or household purposes. The Bank accepts real estate, listed and
unlisted securities, savings and time deposits, automobiles, machinery and
equipment as collateral for loans.
The Bank's commercial loan portfolio consists of a mix of revolving
credit facilities and intermediate term loans. The loans are generally made for
working capital, asset acquisition and business expansion purposes and are
generally secured by a lien on the borrowers' assets. The Bank also makes
unsecured loans to borrowers who meet the Bank's underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its
borrowers' payment performance and their respective financial condition and
makes periodic and appropriate adjustments, if necessary, to the risk grade
assigned to each loan in the portfolio. The primary sources of repayment of the
Bank's commercial loans are the borrower's conversion of short-term assets to
cash and operating cash flow. The net assets of the borrower or guarantor are
usually identified as a secondary source of repayment.
The principal factors affecting the Bank's risk of loss from commercial
lending include each borrower's ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank manages risk through its underwriting criteria,
which includes strategies to match the borrower's cash flow to loan repayment
terms, and periodic evaluations of the borrower's operations. The Bank's
evaluations of its borrowers are facilitated by management's knowledge of local
market conditions and periodic reviews by a consultant of the Bank's credit
administration policies.
The Bank's real estate construction loan portfolio consists of a mix of
commercial and residential construction loans, which are principally secured by
the underlying project. The Bank's real estate construction loans are
predominately made for projects which are intended to be owner occupied. The
Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Bank's construction loans are sale of the
underlying collateral or permanent financing provided by the Bank or another
lending source.
The principal risks associated with real estate construction lending
include project cost overruns that absorb the borrower's equity in the project
and deterioration of real estate values as a result of various factors,
including competitive pressures and economic downturns. See "-Risk Factors That
May Affect Results-Lending Risks Associated with Commercial Banking and
Construction Activities." The Bank manages its credit risk associated with real
estate construction lending by establishing maximum loan-to-value ratios on
projects on an as-completed basis, inspecting project status in advance of
controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of no more than 80% on
single-family residential construction loans.
The Bank's commercial and residential real estate mortgage loan
portfolio consists of loans secured by a variety of commercial and residential
real property. The Bank makes real estate mortgage loans for both owner-occupied
properties and investor properties. The Bank's underwriting criteria for loans
to investors is generally more conservative and such loans constitute a smaller
percentage of the Bank's commercial and residential real estate loan portfolio.
The principal source of repayment of the Bank's real estate loans is the
Borrower's operating cash flow.
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Similar to commercial loans, the principal factors affecting the Bank's
risk of loss in real estate mortgage lending include the borrower's ability to
manage its business affairs and cash flows, local and general economic
conditions and real estate values in the Bank's service area. The Bank manages
its credit risk associated with real estate mortgage lending primarily by
establishing maximum loan-to-value ratios and using strategies to match the
borrower's cash flow to loan repayment terms. Approximately 95% of the Bank's
residential real estate mortgage loans are sold in the secondary market.
The Bank's specific underwriting standards and methods for each of its
principal lines of lending include industry-accepted analysis and modeling and
certain proprietary techniques. The Bank's underwriting criteria is designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
In April 1993, the Bank entered into an agreement (the "Merchant
Services Agreement") with Cardservice International, Inc. ("CSI"), an
independent sales organization ("ISO") and nonbank merchant credit card
processor, pursuant to which the Bank has agreed to provide credit and debit
card processing services for merchants solicited by CSI who accept credit and
debit cards as payment for goods and services. Pursuant to the Merchant Services
Agreement, the Bank acts as a clearing bank for CSI and processes credit or
debit card transactions into the Visa(R) or MasterCard(R) system for presentment
to the card issuer. As a result of the Merchant Services Agreement, the Bank has
acquired electronic credit and debit card processing relationships with
merchants in various industries on a nationwide basis. The Merchant Services
Agreement with CSI was renewed in 1997 for a period of four years, which expires
on April 1, 2001. CSI and the Company have recently reached an agreement on the
renewal of the contract. Effective April 1, 2001, pricing of the contract
renewal is .002 percent of transaction processing and one-half of the earnings
on the deposit relationship. The current pricing of the contract in effect is
.135 percent of transaction processing and the full earnings on the deposit
relationship. The contract renewal represents a significant decline in revenues
from merchant credit card processing. If the new pricing had been in effect for
the twelve months ended December 31, 2000, credit card service income, net would
have been $876,000 less than the actual amount recorded. The Company is pursuing
various strategies to offset the decline in revenues, including expansion of the
Roseville Banking Center, enhancing the merchant credit card sales team in the
Roseville and Redding markets, and projecting aggressive growth in the loan
markets.
Merchant bankcard processing services are highly regulated by credit
card associations such as Visa. In order to participate in the credit card
program, Redding Bank of Commerce must comply with the credit card association's
rules and regulations that may change from time to time. During November 1999,
Visa adopted several rule changes to reduce the risk profile in high-risk
acquiring programs and these rule changes affect the Bank's Merchant Services
business segment. These changes include a requirement that an acquiring
processor's reported fraud ratios be no greater than three times the national
average.
Redding Bank of Commerce's overall fraud ratio met and was in
compliance with the Visa requirement. Other Visa changes announced included the
requirement that total processing volume in certain high-risk categories (as
defined by Visa) be less than 20% of total processing volume.
At December 31, 2000, the Bank's total Visa transactions within these
certain high-risk categories were 15% of Visa total processing volume. Although
these merchants are categorized as high-risk, precautions have been taken such
as requiring higher deposit reserves, daily monitoring and aggressive fraud
control, indemnification of the ISO portfolio, and to date the Bank has not seen
significant losses in these categories.
Additionally Visa announced a requirement that weekly average Visa
volumes be less than 60% of an institutions tangible equity capital, and a
requirement that the aggregate charge-backs for the previous six months be less
than 5% of the institutions tangible equity capital. Previous guidelines allowed
the weekly average Visa volumes to be four times equity capital.
At December 31, 2000, the Bank's average weekly Visa volume was 76% of
tangible equity capital, slightly above the prior guidelines, and aggregate
charge-backs for the previous six months were 10% of tangible equity capital. A
written plan has been submitted and approved by Visa to allow for attrition to
bring the processing volumes into line with the new guidelines by April 2001. In
the event the bank exceeds average weekly volumes after April 2001, a pledge of
collateral will be required by Visa to cover the difference.
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SUPERVISION AND REGULATION
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the BHCA. The Company
reports to, registers with, and may be examined by, the FRB. The FRB also has
the authority to examine the Company's subsidiaries. The costs of any
examination by the FRB are payable by the Company.
On November 12, 1999, former President Clinton signed into law
the Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA"),
which became effective on March 11, 2000. The FSA amends certain portions of the
BHCA, subject to conditions. See "Recently Enacted Legislation" below for more
information.
The Company is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and the Bank are
subject to examination by, and may be required to file reports with, the
California Commissioner of Financial Institutions (the "Commissioner"). The FRB
has significant supervisory and regulatory authority over the Company and its
affiliates. The FRB requires the Company to maintain certain levels of capital.
See "Capital Standards." The FRB also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations or conditions imposed in writing
by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is required
to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company. Any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the prior approval of the FRB.
A bank holding company may acquire banks in states other than its home
state without regard to the permissibility of such acquisitions under state law,
but subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of deposits of
insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
Banks may also merge across states lines, therefore creating interstate
branches. Furthermore, a bank is now able to open new branches in a state in
which it does not already have banking operations if the laws of such state
permit such de novo branching.
Under California law, (a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first acquire an
existing five year old California bank or industrial loan company by merger or
purchase; (b) California state-chartered banks are empowered to conduct various
authorized branch-like activities on an agency basis through affiliated and
unaffiliated insured depository institutions in California and other states and
(c) the Commissioner is authorized to approve an interstate acquisition or
merger which would result in a deposit concentration exceeding 30% if the
Commissioner finds that the transaction is consistent with public convenience
and advantage. However, a state bank chartered in a state other than California
may not enter California by purchasing a California branch office of a
California bank or industrial loan company without purchasing the entire entity
or by establishing a de novo California bank.
The FRB generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position.
The FRB's policy is that a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. See "-Restrictions on Dividends and Other Distributions"
for additional restrictions on the ability on the Company and the Bank to pay
dividends.
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Transactions between the Company and the Bank are subject to a number
of other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and
are intended to improve the competitiveness of bank holding companies by, among
other things: (i) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further change in bank control or in bank directors or
officers after an earlier approved change. These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank holding company to qualify as "well-run," both it and the insured
depository institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank must, on a consolidated
basis: (i) maintain a total risk-based capital ratio of 10% or greater, (ii)
maintain a Tier 1 risk-based capital ratio of 6% or greater and (iii) not be
subject to any order by the FRB to meet a specified capital level. Its lead
insured depository institution must be well-capitalized (as that term is defined
in the capital adequacy regulations of the applicable bank regulator), 80% of
the total risk-weighted assets held by its insured depository institutions must
be held by institutions that are well-capitalized, and none of its insured
depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of its lead depository
institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory, (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
BANK REGULATION AND SUPERVISION
The Bank is a California chartered bank insured by the Federal Deposit
Insurance Corporation (the "FDIC"), and as such is subject to regulation,
supervision and regular examination by the California Department of Financial
Institutions ("DFI") and the FDIC. As a non-member of the Federal Reserve
System, the Bank's primary federal regulator is the FRB. The regulations of
these agencies affect most aspects of the Bank's business and prescribe
permissible types of loans and investments, the amount of required reserves,
requirements for branch offices, the permissible scope of the Bank's activities
and various other requirements.
The Bank is also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by federal
banking law. In addition, the Bank is subject to certain regulations of the FRB
dealing primarily with check-clearing activities, establishment of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and
Equal Credit Opportunity (Regulation B).
Under California law, a state chartered bank is subject to various
restrictions on, and requirements regarding, its operations and administration
including the maintenance of branch offices and automated teller machines,
capital and reserve requirements, deposits and borrowings, shareholder rights
and duties, and investment and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the Commissioner is
required to order the bank to correct such impairment. If a bank is unable to
correct the impairment, the bank is required to levy and collect an assessment
upon its common shares. If such assessment becomes delinquent, the common shares
are to be sold by the bank.
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California law permits a state chartered bank to invest in the stock
and securities of other corporations, subject to a state chartered bank
receiving either general authorization or, depending on the amount of the
proposed investment, specific authorization from the Commissioner. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), however,
imposes limitations on the activities and equity investments of state chartered,
federally insured banks. FDICIA also prohibits a state bank from engaging as a
principal in any activity that is not permissible for a national bank, unless
the bank is adequately capitalized and the FDIC approves the activity after
determining that such activity does not pose a significant risk to the deposit
insurance fund.
The FDIC rules on activities generally permit subsidiaries of banks,
without prior specific FDIC authorization, to engage in those that have been
approved by the FRB for bank holding companies because such activities are so
closely related to banking to be a proper incident thereto. Other activities
generally require specific FDIC prior approval, and the FDIC may impose
additional restrictions on such activities on a case-by-case basis in approving
applications to engage in otherwise impermissible activities.
CAPITAL STANDARDS
The federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
In determining the capital level a bank is required to maintain, the
federal banking agencies do not, in all respects, follow generally accepted
accounting principles ("GAAP") and have special rules which have the effect of
reducing the amount of capital that will be recognized for purposes of
determining the capital adequacy of a bank.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, non-cumulative perpetual preferred stock,
other types of qualifying preferred stock and minority interests in certain
subsidiaries, less most other intangible assets and other adjustments. Net
unrealized losses on available-for-sale equity securities with readily
determinable fair value must be deducted in determining Tier 1 capital. For Tier
1 capital purposes, deferred tax assets that can only be realized if an
institution earns sufficient taxable income in the future are limited to the
amount that the institution is expected to realize within one year, or ten
percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off
balance sheet items of 4%. The Company exceeds the minimum requirements.
On October 1, 1998, the FDIC adopted two rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first rule makes risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and requires different amounts of capital for
different risk positions in asset securitization transactions. The second rule
permits limited amounts of unrealized gains on debt and equity securities to be
recognized for risk-based capital purposes as of September 1, 1998.
The FDIC rules also provide that a qualifying institution that sells
small business loans and leases with recourse must hold capital only against the
amount of recourse retained. In general, a qualifying institution is one that is
well-capitalized under the FDIC's prompt corrective action rules. The amount of
recourse that can receive the preferential capital treatment cannot exceed 15%
of the institution's total risk-based capital.
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In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. It is improbable, however, that an
institution with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
As of December 31, 2000, the Company's and the Bank's capital ratios
exceeded applicable regulatory requirements. The following tables present the
capital ratios for the Company and the Bank, compared to the standards for
well-capitalized depository institutions, as of December 31, 2000.
The Company
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Actual Minimum Capital Requirement
------------------------- ---------------------------
Leverage....................................$ 28,667,489 11.52% 4.0%
Tier 1 Risk-Based............................ 28,667,489 13.75 4.0
Total Risk-Based............................. 31,277,573 15.01 8.0
Redding Bank of Commerce
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Actual Well Minimum
------------------------ Capitalized Captial
Capital Ratio Requirement Requirement
------- ----- ----------- -----------
Leverage....................................$ 26,804,948 11.02% 5.0% 4.0%
Tier 1 Risk-Based............................ 26,804,948 12.86 6.0 4.0
Total Risk-Based............................. 29,415,033 14.11 10.0 8.0
Banking agencies must take into consideration concentrations of credit
risk and risks from non-traditional activities, as well as an institution's
ability to manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies must also consider interest
rate risk (when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet position)
in evaluation of a bank's capital adequacy.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
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Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
"Well capitalized" - Bank only "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions
and required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth.
Among other things, FDICIA limits the interest rates paid on deposits
by undercapitalized institutions, restricts the use of brokered deposits, limits
the aggregate extensions of credit by a depository institution to an executive
officer, director, principal shareholder or related interest, and reduces
deposit insurance coverage for deposits offered by undercapitalized institutions
for deposits by certain employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
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RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner in an amount not exceeding the greatest of
the bank's retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution
from engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
The Bank has its deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC is authorized to borrow up to $30 billion
from the United States Treasury; up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the Federal Financing Bank;
and from depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each $100
of insured deposits. FDICIA also provides authority for special assessments
against insured deposits. No assurance can be given at this time as to what the
future level of premiums will be.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
RECENTLY ENACTED LEGISLATION
On November 12, 1999 former President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA") which
became effective on March 11, 2000. The FSA repeals provisions of the
Glass-Steagall Act, which had prohibited commercial banks and securities firms
from affiliating with each other and engaging in each other's businesses. Thus,
many of the barriers prohibiting affiliations between commercial banks and
securities firms have been eliminated. The company filed and was approved as a
financial services holding company in April 2000.
The BHCA is also amended by the FSA, to allow new "financial services
holding companies" ("FHC") to offer banking, insurance, securities and other
financial products to consumers. Specifically, the FSA amends section 4 of the
BHCA in order to provide for a framework for the engagement in new financial
activities. Bank holding companies ("BHC") may elect to become a financial
holding company if all its subsidiary depository institutions are
well-capitalized and well-managed. If these requirements are met, a BHC may file
a certification to that effect with the FRB and declare that it chooses to
become a FHC. After the certification and declaration is filed, the FHC may
engage either de novo or though an acquisition in any activity that has been
determined by the FRB to be financial in nature or incidental to such financial
activity.
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11
BHCs may engage in financial activities without prior notice to the FRB
if those activities qualify under the BHCA. However, notice must be given to the
FRB within 30 days after a FHC has commenced one or more of the financial
activities.
Under the FSA, FDIC-insured state banks, subject to various
requirements (and national banks) are permitted to engage through "financial
subsidiaries" in certain financial activities permissible for affiliates of
FHCs. However, to be able to engage in such activities the state bank must also
be well-capitalized and well-managed and receive at least a "satisfactory"
rating in its most recent Community Reinvestment Act examination.The Company
cannot be certain of the effect of the foregoing recently enacted legislation on
its business, although there is likely to be consolidation among financial
services institutions and increased competition for the Company.
PENDING LEGISLATION AND REGULATIONS
Certain pending legislative proposals include bills to let banks pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, and to give judges the authority to force high-income borrowers to
repay their debts rather than cancel them through bankruptcy.
COMPETITION
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
Among the competitive advantages that major banks have is their ability
to finance wide ranging advertising campaigns and to allocate their investment
assets into investments of higher yield and demand. Such institutions offer
certain services such as trust services and international banking services that
are not offered directly by the Bank (but are offered indirectly through
correspondent relationships). Because of their greater total capitalization,
major banks have substantially higher legal lending limits than the Bank.
In order to compete with major banks and other competitors in its
primary service areas, the Bank relies upon the experience of its executive and
senior officers in serving business clients, and upon its specialized services,
local promotional activities and the personal contacts made by its officers,
directors and employees. For customers whose loan demand exceeds the Bank's
legal lending limit, the Bank may arrange for such loans on a participation
basis with correspondent banks.
The recent enactment of Federal and California interstate banking
legislation will likely increase competition within California. Regulatory
reform, as well as other changes in federal and California law will also affect
competition. While the impact of these changes, and of other proposed changes,
cannot be predicted with certainty, it is clear that the business of banking in
California will remain highly competitive.
Competitive pressures in the banking industry significantly increase
changes in the interest rate environment, reducing net interest margins, and
less than favorable economic conditions can result in a deterioration of credit
quality and an increase in the provisions for loan losses.
With respect to its merchant processing services, the Bank competes
with other banks, independent sales organizations ("ISOs") and other nonbank
processors. Many of these competitors are substantially larger than the Bank.
The bank competes on the basis of price, the availability of products and
services, the quality of customer service and support, and transaction
processing speed. The majority of the Bank's contracts with merchants are
cancelable at will or on short notice or provide for renewal at frequent
periodic intervals and, accordingly, the Bank regularly rebids such contracts.
This competition may influence the prices that can be charged by the Bank and
require aggressive cost control or increase transaction volume in order to
maintain acceptable profit margins. Further, because of tightening margins,
there has been a trend toward consolidation in the merchant processing industry.
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12
Consolidation will enable certain of the Company's competitors to have
access to significant capital, management, marketing and technological resources
that are equal to or greater than those of the Company.
EMPLOYEES
As of December 31, 2000, the Company employed 87 persons. None of the
Company's employees are represented by a labor union and the Company considers
its employee relations to be good.
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13
RISK FACTORS THAT MAY AFFECT RESULTS
This report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include
the information concerning possible or assumed future results of operations of
the Company set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's actual future results and shareholder values may differ
materially from those anticipated and expressed in these forward-looking
statements. Many of the factors that will determine these results and values,
including those discussed under the heading "Risk Factors That May Affect
Results," are beyond the Company's ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or and assumes no obligation
to update forward-looking statements after the date of the filing of this
report, even if new information, future events or other circumstances have made
such statements incorrect or misleading. Except as specifically noted herein all
referenced to the "Company" refer to Redding Bancorp, a California corporation,
and its consolidated subsidiaries.
LENDING RISKS ASSOCIATED WITH COMMERCIAL BANKING AND CONSTRUCTION
ACTIVITIES
The Bank's business strategy is to focus on commercial and multi-family
real estate loans, construction loans and commercial business loans. Loans
secured by commercial real estate are generally larger and involve a greater
degree of credit and transaction risk than residential mortgage (one-to-four
family) loans. Because payments on loans secured by commercial and multi-family
real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. Moreover, real estate construction financing is generally
considered to involve a higher degree of credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development compared to the estimated
cost (including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project which, when completed, has
a value which is insufficient to assure full repayment of the construction loan.
Although the Bank manages lending risks through its underwriting and
credit administration policies, no assurance can be given that such risks would
not materialize, in which event the Company's financial condition, results of
operations, cash flows and business prospects could be materially adversely
affected.
DEPENDENCE ON REAL ESTATE
At December 31, 2000, approximately 69% of the Bank's loans were
secured by real estate. The value of the Bank's real estate collateral has been,
and could in the future continue to be, adversely affected by any economic
recession and any resulting adverse impact on the real estate market in Northern
California such as that experienced during the early years of this decade. See
"-Economic Conditions and Geographic Concentration."
The Bank's primary lending focus has historically been commercial real
estate, construction and, to a lesser extent, commercial lending. At December
31, 2000, commercial real estate and construction loans comprised approximately
49% and 20%, respectively, of the total loans in the Bank's portfolio. At
December 31, 2000, all of the Bank's real estate mortgage and construction
loans, and approximately 40% of its commercial loans, were secured fully or in
part by deeds of trust on underlying real estate. The Bank's dependence on real
estate increases the risk of loss in both the Bank's loan portfolio and its
holdings of other real estate owned if economic conditions in Northern
California deteriorate in the future. Deterioration of the real estate market in
Northern California would have a material adverse effect on the Company's
business, financial condition and results of operations. See "-Economic
Conditions and Geographic Concentration."
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CALIFORNIA ENERGY CRISIS
The recent California energy crisis has resulted in higher energy costs
to consumers, who have also seen disruptions in service and face uncertainty
about the future availability and cost of power. Various legislative, regulatory
and legal remedies to the California crisis are being pursued, but their outcome
is uncertain and far reaching and the solution is not likely to be immediate.
Continued deterioration of the California energy resources in California could
have a material adverse effect on the Company's customers, resulting in material
adverse effects on the Company's business, financial condition and results of
operations.
INTEREST RATE RISK
The income of the Bank depends to a great extent on "interest rate
differentials" and the resulting net interest margins (i.e., the difference
between the interest rates earned on the Bank's interest-earning assets such as
loans and investment securities, and the interest rates paid on the Bank's
interest-bearing liabilities such as deposits and borrowings). These rates are
highly sensitive to many factors which are beyond the Company's control,
including general economic conditions and the policies of various governmental
and regulatory agencies, in particular, the FRB. Because of the Bank's capital
position and non-interest-bearing demand deposit accounts, the Bank is asset
sensitive. As a result, the Company is generally adversely affected by declining
interest rates. In addition, changes in monetary policy, including changes in
interest rates, influence the origination of loans, the purchase of investments
and the generation of deposits and affect the rates received on loans and
investment securities and paid on deposits, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Quantitative and Qualitative Disclosure About Market Risk."
MERCHANT CREDIT CARD PROCESSING SERVICES
The Bank's fee income from merchant processing services represented
approximately 8.2%, 9.4% and 9.2% of the Company's consolidated revenues in
2000, 1999 and 1998, respectively. In addition, contract deposit relationships
with the merchants in the Bank's portfolio and CSI represented approximately
4.8% of the Bank's total deposits as of December 31, 2000.
In April 1993, the Bank entered into an agreement (the "Merchant
Services Agreement") with Cardservice International, Inc. ("CSI"), an
independent sales organization ("ISO") and nonbank merchant credit card
processor, pursuant to which the Bank has agreed to provide credit and debit
card processing services for merchants solicited by CSI who accept credit and
debit cards as payment for goods and services. Pursuant to the Merchant Services
Agreement, the Bank acts as a clearing bank for CSI and processes credit or
debit card transactions into the Visa(R) or MasterCard(R) system for presentment
to the card issuer. As a result of the Merchant Services Agreement, the Bank has
acquired electronic credit and debit card processing relationships with
merchants in various industries on a nationwide basis. The Merchant Services
Agreement with CSI was renewed in 1997 for a period of four years, which expires
on April 1, 2001. CSI and the Company have recently reached an agreement on the
renewal of the contract.
Effective April 1, 2001, pricing of the contract renewal is .002
percent of transaction processing and one-half of the earnings
on the deposit relationship. The current pricing of the contract in effect is
.135 percent of transaction processing and the full earnings on the deposit
relationship. The contract renewal represents a significant decline in revenues
from merchant credit card processing. If the new pricing had been in effect for
the twelve months ended December 31, 2000, revenue would have been $876,000 less
than the actual amount recorded. The change in transaction processing fees
coupled with the loss of one-half of the deposit relationship earnings will have
a material adverse effect on the Company's financial condition and results of
operations.
The Company is pursuing various strategies to offset the decline in
revenues, including expansion of the Roseville Banking Center, enhancing the
merchant credit card sales team in the Roseville and Redding markets, and
projecting aggressive growth in the loan markets.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Noninterest Income-Merchant Processing Services Income."
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CHARGEBACKS AND PAYMENT RISKS ASSOCIATED WITH MERCHANT PROCESSING SERVICES
The Bank is subject to the Card Association Rules in processing credit
and debit card transactions. In the event of certain types of billing disputes
between a cardholder and a merchant, the processor of the transaction assists
the merchant in investigating and resolving the dispute. If the dispute is not
resolved in favor of the merchant, the transaction is "charged back" to the
merchant and that amount is credited or otherwise refunded to the cardholder. If
the processor is unable to collect such amounts from the merchant's account, and
if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse the processor for the chargeback, the processor bears the loss for the
amount of the refund paid to the cardholder. Pursuant to the Merchant Services
Agreement, CSI has agreed to indemnify the Bank against losses incurred in
connection with credit card transactions generated by merchants in CSI's
portfolio. In addition, pursuant to the Merchant Services Agreement, CSI is
required to maintain a reserve account and a general account with the Bank and
has granted the Bank a security interest in such accounts to secure CSI's
obligations under the Merchant Services Agreement.
The balances required to be maintained by CSI in the reserve account
and general account constitute a small percentage of the dollar volume of
transactions processed by the Bank each month. In the event that the funds in
accounts maintained by CSI are not sufficient to cover chargebacks and refund
payments to cardholders and CSI is unable to reimburse the Bank for such
deficiencies, the Bank would bear the loss which could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Noninterest Income-Merchant Processing Services Income."
Chargeback exposure can also result from fraudulent credit card
transactions initiated by merchant customers. Examples of merchant fraud include
logging fictitious sales transactions and falsification of transaction amounts
on actual sales. The Bank conducts a background review of its merchant customers
at the time the relationship is established with the merchant. The Bank also can
withhold or delay a merchant's daily settlement if fraudulent activity is
suspected, thereby mitigating exposure to loss. However, there can be no
assurance that the Bank will not experience significant amounts of merchant
fraud, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The degree of exposure to
chargebacks may also be adversely affected by the development of new transaction
delivery channels, such as the Internet, which have yet to be fully evaluated.
The Company is not exposed to card issuer credit losses unassociated
with a dispute between the cardholder and the merchant.
POTENTIAL VOLATILITY OF DEPOSITS
At December 31, 2000, approximately 23.7% of the dollar value of the
Bank's total deposits was represented by time certificates of deposit in excess
of $100,000. As such, these deposits are considered volatile and could be
subject to withdrawal. Withdrawal of a material amount of such deposits would
adversely impact the Bank's liquidity, profitability, business prospects,
results of operations and cash flows.
DIVIDENDS
Because the Company conducts no other significant activity than the
management of its investment in the Bank, the Company is dependent on the Bank
for income. The ability of the Bank to pay cash dividends in the future depends
on the Bank's profitability, growth and capital needs. In addition, the
California Financial Code restricts the ability of the Bank to pay dividends. No
assurance can be given that the Company or the Bank will pay any dividends in
the future or, if paid, such dividends will not be discontinued.
See "-Supervision and Regulation-Supervision and Regulation of Bank Holding
Companies" and "-Supervision and Regulation-Restrictions on Dividends and Other
Distributions."
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COMPETITION
In California generally, and in the Company's primary market area
specifically, major banks and brokerage firms dominate the financial services
industry. By virtue of their larger capital bases, such institutions have
substantially greater lending limits than those of the Bank. In obtaining
deposits and making loans, the Bank competes with these larger commercial banks
and other financial institutions, such as savings and loan associations and
credit unions, which offer many services which traditionally were offered only
by banks. In addition, the Bank competes with other institutions such as money
market funds, brokerage firms, and even retail stores seeking to penetrate the
financial services market. During periods of declining interest rates,
competitors with lower costs of capital may solicit the Bank's customers to
refinance their loans. Furthermore, during periods of economic slowdown or
recession, the Bank's borrowers may face financial difficulties and be more
receptive to offers from the Bank's competitors to refinance their loans. No
assurance can be given that the Bank will be able to compete with these lenders.
See "-Competition."
Competition in the merchant processing industry is intense. The Bank
competes with other banks, ISOs and other nonbank processors. Many of these
competitors are substantially larger than the Bank. The Bank competes on the
basis of price, the availability of products and services, the quality of
customer service and support and transaction processing speed. The majority of
the Bank's contracts with merchants are cancelable at will or on short notice or
provide for renewal at frequent periodic intervals and, as a result, the Bank
regularly rebids such contracts.
This competition may influence the prices that can be charged by the
Bank and require aggressive cost control or increased transaction volume in
order to maintain acceptable profit margins. If the Bank is not able to maintain
acceptable profit margins, it could be forced to discontinue merchant processing
services which would have a material adverse effect on the Company's results of
operations and cash flows. Further, because of tightening margins, there has
been a trend toward consolidation in the merchant processing industry.
Consolidation will enable certain of the Bank's competitors to have access to
significant capital, management, marketing and technological resources that are
equal to or greater than those of the Bank. No assurance can be given that the
Bank or any ISO for which the Bank performs clearing bank services will be able
to compete successfully for merchant processing business in the future. See
"-Competition."
GOVERNMENT REGULATION AND LEGISLATION
The Company and the Bank are subject to extensive state and federal
regulation, supervision and legislation which govern almost all aspects of the
operations of the Company and the Bank. The business of the Company is
particularly susceptible to being affected by the enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities or enhancing the competitive
position of other financial institutions. Such laws are subject to change from
time to time and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any
presently contemplated or future changes in the laws or regulations or their
interpretations would have on the business and prospects of the Company, but it
could be material and adverse. See "-Supervision and Regulation."
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are located and concentrated primarily in
Northern California, particularly the counties of Butte, El Dorado, Placer,
Shasta and Sacramento, and are likely to remain so for the foreseeable future.
At December 31, 2000, approximately 69% of the Bank's loan portfolio consisted
of real estate related loans, all of which were related to collateral located in
Northern California. The performance of these loans may be adversely affected by
changes in California's economic and business conditions. A deterioration in
economic conditions could have a material adverse effect on the quality of the
Bank's loan portfolio and the demand for its products and services. In addition,
during periods of economic slowdown or recession, the Bank may experience a
decline in collateral values and an increase in delinquencies and defaults. A
decline in collateral values and an increase in delinquencies and defaults
increase the possibility and severity of losses. California real estate is also
subject to certain natural disasters, such as earthquakes, floods and mudslides,
which are typically not covered by the standard hazard insurance policies
maintained by borrowers.
Uninsured disasters may make it difficult or impossible for borrowers
to repay loans made by the Bank.
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The recent California energy crisis has resulted in higher energy costs
to consumers, who have also seen disruptions in service and face uncertainty
about the future availability and cost of power. Various legislative, regulatory
and legal remedies to the California crisis are being pursued, but their outcome
is uncertain and far reaching and the solution is not likely to be immediate.
Continued deterioration of the California energy resources in California could
have a material adverse effect on the Company's customers, resulting in material
adverse effects on the Company's business, financial condition and results of
operations.
RELIANCE ON KEY EMPLOYEES AND OTHERS
As of December 31, 2000, the Company and its subsidiaries employed in
the aggregate 87 employees. The Company considers employee relations to be
excellent. None of the employees of the Company or its subsidiaries are
represented by a collective bargaining group. Failure of the Company to attract
and retain qualified personnel could have an adverse effect on the Company's
business, financial condition and results of operations. The Company does not
maintain any life insurance with respect to any of its officers or directors,
except with regard to a nonqualified deferred compensation plan.
ADEQUACY OF ALLOWANCE FOR LOAN AND OTHER REAL ESTATE LOSSES
The Bank's allowance for estimated losses on loans was approximately
$2.9 million, or 1.5% of total loans, and 26.9% of total nonperforming loans at
December 31, 2000. Material future additions to the allowance for estimated
losses on loans may be necessary if material adverse changes in economic
conditions occur and the performance of the Bank's loan portfolio deteriorates.
In addition, future additions to the Bank's allowance for losses on
other real estate owned may also be required in order to reflect changes in the
markets for real estate in which the Bank's other real estate owned is located
and other factors which may result in adjustments which are necessary to ensure
that the Bank's foreclosed assets are carried at the lower of cost or fair
value, less estimated costs to dispose of the properties. Moreover, the FDIC and
the DFI, as an integral part of their examination process, periodically review
the Bank's allowance for estimated losses on loans and the carrying value of its
assets. The Bank was most recently examined by the FDIC and the DFI in this
regard during the first quarter of 2000. Increases in the provisions for
estimated losses on loans and foreclosed assets would adversely affect the
Bank's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Asset
Quality" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Allowance for Loan and Lease Losses (ALLL)."
CERTAIN OWNERSHIP RESTRICTIONS UNDER CALIFORNIA AND FEDERAL LAW
Federal law prohibits a person or group of persons "acting in concert"
from acquiring "control" of a bank holding company unless the FRB has been given
60 days prior written notice of such proposed acquisition and within that time
period the FRB has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days, the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttal presumption established by the FRB, the
acquisition of more than 10% of a class of voting stock of a bank with a class
of securities registered under Section 12 of the Exchange Act (such as the
Common Stock), would, under the circumstances set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the FRB under the BHCA, before acquiring 25%
(5% in the case of an acquiror that is, or is deemed to be, a bank holding
company) or more of the outstanding shares of the Company's Common Stock, or
such lesser number of shares as constitute control. See "-Supervision and
Regulation-Regulation and Supervision of Bank Holding Companies."
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of the Company and the Bank
under this state law if such person, directly or indirectly, has the power (i)
to vote 25% or more of the voting power of the Company or (ii) to direct or
cause the direction of the management and policies of the Company. For purposes
of this law, a person who directly or indirectly owns or controls 10% or more of
the Common Stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company.
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18
SHARES ELIGIBLE FOR FUTURE SALE
As of March 1, 2001, the Company had 2,884,181 shares of Common Stock
outstanding, of which approximately 1,906,665 shares are eligible for sale in
the public market without restriction. Approximately 977,516 shares are eligible
for sale in the public market pursuant to Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). Future sales of substantial amounts of
the Company's Common Stock, or the perception that such sales could occur, could
have a material adverse effect on the market price of the Common Stock. In
addition, options to acquire up to 13.8% of the outstanding shares of Common
Stock at exercise prices ranging from $8.25 to $17.27 have been issued to
directors and certain employees of the Company under the Company's 1998 Stock
Option Plan, and options to acquire up to an additional five percent of the
outstanding shares at an exercise price of not less than 85% of the market value
of the Company's Common Stock on the date of grant are reserved for issuance
under the plan. No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on the
market price of the Company's Common Stock.
TECHNOLOGY AND COMPUTER SYSTEMS
Advances and changes in technology can significantly impact the
business and operations of the Company. The Bank faces many challenges including
the increased demand for providing computer access to bank accounts and the
systems to perform banking transactions electronically. The Bank's merchant
credit card processing services require the use of advanced computer hardware
and software technology and rapidly changing customer and regulatory
requirements. The Company's ability to compete depends on its ability to
continue to adapt its technology on a timely and cost-effective basis to meet
these requirements. In addition, the Bank's business and operations are
susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to
cause disruptions or failures of the Bank's data processing systems.
The Company did not experience any significant operating problems
associated with the transition of its information systems to the Year 2000.
ENVIRONMENTAL RISKS
The Bank, in its ordinary course of business, acquires real property
securing loans that are in default, and there is a risk that hazardous substance
or waste, contaminants or pollutants could exist on such properties. The Bank
may be required to remove or remediate such substances from the affected
properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Bank may not have adequate remedies against
the prior owners or other responsible parties to recover its costs. Finally, the
Bank may find it difficult or impossible to sell the affected properties either
prior to or following any such removal.
In addition, the Bank may be considered liable for environmental
liabilities in connection with its borrowers' properties, if, among other
things, it participates in the management of its borrowers' operations. The
occurrence of such an event could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
DILUTION
The Company has issued options to purchase shares of the Company's
Common Stock at prices below the fair market value of the Company's Common Stock
on the date of grant. As of December 31, 2000, the Company had outstanding
options to purchase an aggregate of 398,915 shares of Common Stock at exercise
prices ranging from $8.25 to $17.27 per share, or a weighted average exercise
price per share of $8.91. To the extent such options are exercised, shareholders
of the Company will experience dilution. The Company established a Treasury
Repurchase program to mitigate the effects of dilution. The program establishes
a systematic approach to repurchasing shares over a seven year ramp. See "Market
for the Company's Common Equity and Related Shareholder Matters."
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19
ITEM 2. PROPERTIES.
The Company's principal offices and the Bank's main office are housed
in a two-story building with approximately 21,000 square feet of space located
at 1951 Churn Creek Road, Redding, California, 96002. The Bank owns the building
and the 1.25 acres of land on which the building is situated. The Bank also owns
the land and building located at 1177 Placer Street, Redding, California, 96002,
in which the Bank uses approximately 11,650 square feet of space for its banking
operations.
The Company's Roseville Banking Center office is located on the first
floor of a three-story building with approximately 4,656 square feet of space
located at 1548 Eureka Road, Roseville, California. The Company leases the space
pursuant to a triple net lease expiring in November 30, 2005.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in various legal actions
arising in the ordinary course of business. The Company believes that the
ultimate disposition of all currently pending matters will not have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Trades in the Company's common stock are made through Hoefer & Arnett
located at 353 Sacramento Street, 10th Floor, San Francisco, California 94111,
Van Kasper & Company located at 600 California street, Suite 1700, San
Francisco, California 94108 and Morgan Stanley Dean Witter located at 310
Hemsted Drive, Suite 100 Redding, California 96002. The Company's common stock
is traded on the OTC Bulletin Board under the symbol, "RDDB".
The following table, which summarizes trading activity during the
Company's last two fiscal years, is based on information provided by Hoefer &
Arnett. The quotations reflect the price that would be received by the seller
without retail mark-up, mark-down or commissions and may not have represented
actual transactions. All share and per share amounts have been adjusted to give
retroactive effect to the 10% stock dividend paid on October 22, 2000.
Sales Price Per Share
----------------------------------------
Quarter Ended: High Low Volume
-------------- ---- --- ------
March 31, 2000(2) $17.45 $14.87 54,890
June 30, 2000 $13.85 $13.23 6,930
September 30, 2000 $14.36 $13.23 40,480
December 30, 2000 $15.70 $13.00 30,451
March 31, 1999 $16.53 $15.70 36,410
June 30, 1999 $17.77 $16.01 51,315
September 30, 1999 $19.84 $18.59 10,472
December 31, 1999 $19.01 $18.18 10,780
- --------
(2) All share and per share amounts have been adjusted to give retroactive
effect to the 10% stock dividend paid on October 22, 2000.
On October 22, 2000, the Company paid a $.59 per share cash dividend
and a 10% stock dividend to shareholders of record on October 1, 2000. On
October 22, 1999, the Company paid a $.55 per share cash dividend to
shareholders of record as of October 1, 1999. For restrictions on the Company's
ability to pay dividends, see "Business-Supervision and Regulation-Supervision
and Regulation of Bank Holding Companies" and "Business-Supervision and
Regulation-Restrictions on Dividends and Other Distributions."
As of March 1, 2001, there were approximately 295 shareholders of
record of the Company's Common Stock and the market price on that date was
$15.50 per share.
The Company's ability to pay dividends is subject to certain regulatory
requirements. The Federal Reserve Board ("FRB") generally prohibits a financial
services holding company from declaring or paying a cash dividend which would
impose undue pressure on the capital of subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect a financial
services holding company's financial position. The FRB's policy is that a
financial services holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. The power
of the board of directors of an insured depository institution to declare a cash
dividend or other distribution with respect to capital is subject to statutory
and regulatory restrictions which limit the amount available for such
distribution depending upon the earnings, financial condition and cash needs of
the institution, as well as general business conditions.
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21
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") prohibits insured depository institutions from paying management fees
to any controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner of Financial Institutions in an amount not
exceeding the greatest of the bank's retained earnings, the bank's net income
for its last fiscal year, or the bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution
from engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the five
years ended December 31, 2000, have been derived from the Company's audited
consolidated financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's audited financial statements and notes thereto,
included elsewhere in this report.
As of and for the years ended December 31,
-------------------------------------------------------
In Thousands (Except Per Share Data) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statements of Income
Total Interest Income $20,177 $17,270 $16,322 $15,764 $15,565
Net Interest Income $11,455 $10,835 $10,436 $9,430 $8,767
Provision for Loan Losses $ 142 $ 120 $ 500 $1,024 $2,160
Total Non-interest Income $2,807 $2,790 $2,539 $2,364 $2,079
Total Revenues $22,984 $20,060 $18,861 $18,128 $17,644
Net Income $4,812 $4,370 $4,054 $3,658 $2,615
Balance Sheets
Total Assets $255,107 $232,008 $216,085 $204,820 $192,389
Total Loans $194,295 $172,817 $148,202 $113,410 $111,353
Allowance for Loan & Lease Losses $ 2,974 $ 2,972 $ 3,235 $ 2,819 $ 2,294
Total Deposits $218,036 $198,323 $188,621 $180,673 $171,368
Shareholders(3) Equity $28,754 $26,059 $24,654 $21,824 $19,180
Performance Ratios
Return on Average Assets 1.98% 1.91% 1.98% 1.83% 1.35%
Return on Average Equity 17.95% 17.60% 18.04% 18.27% 14.41%
Dividend Payout 35.31% 21.75% 33.18% 24.62% 25.83%
Average Equity to Average Assets 11.02% 10.86% 10.97% 10.03% 9.35%
Tier 1 Risk-Based Capital-Bank 12.86% 13.59% 14.33% 14.91% 13.70%
Total Risk-Based Capital-Bank 14.11% 14.85% 15.58% 16.16% 14.90%
Net Interest Margin 5.16% 5.15% 5.57% 5.20% 4.96%
Earning Assets to Total Assets 91.34% 92.10% 91.48% 90.90% 91.10%
Nonperforming Assets to Total Assets .31% .28% .53% .52% 3.46%
Annualized Net Charge-offs to Total Loans .08% .24% .06% .44% 1.64%
ALLL to Total Loans 1.53% 1.72% 2.18% 2.49% 2.06%
Nonperforming Loans to ALLL 26.94% 20.19% 33.69% 25.40% 190.98%
Share Data(3)
Common Shares Outstanding 2,884 2,907 2,959 2,952 2,970
(in thousands)
Book Value Per Common Share $9.97 $9.88 $9.42 $8.33 $7.23
Basic Earnings Per Common Share $1.67 $1.49 $1.37 $1.23 $0.88
Diluted Earnings Per Common Share $1.59 $1.38 $1.30 $1.23 $0.88
Cash Dividends Per Common Share $0.59 $0.55 $0.45 $0.33 $0.25
- --------
(3) All share and per share amounts have been adjusted to give retroactive
effect to the 10% stock dividend paid on October 22, 2000.
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23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this report. All statements other than statements of
historical fact included in the following discussion are forward-looking
statements within the meaning of the Exchange Act. These statements are based on
management's beliefs and assumptions, and on information currently available to
management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company and also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's future results and shareholder values may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values, including those discussed
under the heading "Risk Factors That May Affect Results," are beyond the
Company's ability to control or predict. Investors are cautioned not to put
undue reliance on any forward-looking statements. In addition, the Company does
not have any intention or obligation to update forward-looking statements after
the filing of this report, even if new information, future events or other
circumstances have made them incorrect or misleading.
THE COMPANY
Redding Bancorp ("the Company") is a financial services holding company
("FHC") with its principal offices in Redding, California. A financial services
holding company may engage in commercial banking, insurance and securities
business and offer other financial products to customers. The Company currently
engages in a general commercial banking business in Redding and Roseville and
the counties of El Dorado, Placer, Shasta, and Sacramento, California.
The Company considers Northern California to be the Company's major
market area. The Company conducts its business through the Redding Bank of
Commerce ("The Bank"), its principal subsidiary and Roseville Banking Center, a
division of the Bank. The services offered by the Company include those
traditionally offered by commercial banks of similar size and character in
California, such as checking, interest-bearing checking ("NOW") and savings
accounts, money market deposit accounts, commercial, construction, real estate,
personal, home improvement, automobile and other installment and term loans,
travelers checks, safe deposit boxes, collection services, telephone and
Internet banking.
The primary focus of the Company is to provide financial services to
the business and professional community of its major market area including Small
Business Administration ("SBA") loans, commercial building financing, payroll
and benefit accounting packages and merchant credit card acquisition. The
Company does not offer trust services or international banking services and does
not plan to do so in the near future.
The Company derives its income from two principal sources: (i) Net
interest income, which is the difference between the interest income it receives
on interest-earning assets and the interest expense it pays on interest-bearing
liabilities, and (ii) fee income, which includes fees earned on deposit
services, income from SBA lending, electronic-based cash management services and
merchant credit card processing services.
Management considers the business of the Company to be divided into two
segments: (i) commercial banking and (ii) credit card services. Credit card
services are limited to those revenues, net of related data processing costs,
associated with the Merchant Services Agreement and the Bank's agreement to
provide credit and debit card processing services for merchants solicited by the
Bank who accept credit and debit cards as payment for goods and services.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The Company reported net income of $4.8 million for the year ended
December 31, 2000, representing an increase of $442,000, or 10%, over net income
of $4.4 million for the year ended December 31, 1999. Factors contributing to
the increase in net income include an increase in net interest income resulting
from increased loan volume, partially offset by the higher costs of funding. The
provision for loan loss was increased by $22,000 over the prior year reflecting
the Company's increased loan portfolio, ongoing efforts to increase the
effectiveness of its collection efforts, as well as, a reduction in classified
assets.
Return on average assets (ROA) was 1.98% and return on average common
equity (ROE) was 17.95% in 2000 compared with 1.91% and 17.60% respectively in
1999. Diluted earnings per share for 2000 and 1999 were $1.59 and $1.38,
respectively, an increase of 15% in 2000 over 1999. The Company's average total
assets increased to $243.3 million in 2000 or 6.5% from $228.5 million in 1999.
As a result of the expansion of the Company's Roseville Banking Center in
Roseville, California and continued loan demand in the Redding market area, net
loans, at December 31, 2000 increased to $191.3 million over $169.8 million in
1999, an increase of $21.5 million or 12.7%.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net income for the year ended December 31, 1999, was $4.4 million,
representing an increase of $316,000, or 7.8%, over net income of $4.1 million
for the year ended December 31, 1998. Factors contributing to the increase in
net income include an increase in net interest income contributed by loan
volume, partially offset by the increase in salaries & benefits representing
additional staffing used to expand the corporate accounting department and the
loan production office in Roseville, California. The provision for loan loss was
reduced by $380,000 over the prior year reflecting the Company's ongoing efforts
to increase the effectiveness of its collection efforts, and a reduction in
classified assets.
Return on average assets (ROA) was 1.91% and return on average common
equity (ROE) was 17.60% in 1999 compared with 1.98% and 18.04% respectively in
1998. Diluted earnings per share for 1999 and 1998 were $1.38 and $1.30,
respectively, an increase of 6% from 1998 to 1999.
The Company's average total assets increased to $228.5 million in 1999
or 11.6% from $204.8 million in 1998. As a result of the expansion of the
Company's loan production office in Roseville, California and continued loan
demand in the Company's major market area, net loans at December 31, 1999
increased to $169.8 million over $144.9 million in 1998, an increase of $24.8
million or 17.1%.
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NET INTEREST INCOME
The primary source of income for the Bank is derived from net
interest income. Net interest income represents the excess of interest and fees
earned on assets (loans, securities and federal funds sold) over the interest
paid on deposits and borrowed funds. Net interest margin is net interest income
expressed as a percentage of average earning assets.
Net interest income increased to $11.5 million in 2000 versus
$10.8 million in 1999 and $10.4 million in 1998, representing a 6.5% increase in
2000 over 1999, and a 3.8% increase in 1999 over 1998. The average balance of
total earning assets increased to $222.2 million or 5.5% over 1999. Average loan
balances outstanding increased $18.6 million or 11.6% in 2000, while average
balances of investments and federal funds sold decreased $7.0 million or 13.7%
in 2000. The average yields on loans increased by 73 basis points while
investment income increased by 147 basis points. The increases are attributed to
pricing opportunities on loans and improvement in the economic rate environment
for securities and federal funds sold. The resulting yield on interest earning
assets increased to 9.08% for 2000 compared with 8.20% for 1999.
Total interest expense increased to $8.7 million in 2000, from
$6.4 million in 1999 and $5.9 million in 1998, representing a 36% increase for
2000 over 1999, and a 9.3% increase in 1999 over 1998. Average balances of
interest-bearing liabilities increased to $176.9 million over $157.3 million for
the year ended December 31, 2000, or 12.5%. The rise in interest yields on
deposits and borrowings is indicative of the higher cost to attract funding to
support asset growth. Included in the deposit yields are $4.7 million in
brokered deposits at an average yield of 7.05% maturing in March 2002. These
deposits were purchased with the specific intent to raise liquidity to support
the growth in the Roseville Banking Center. The overall average yield on
interest bearing deposits and borrowings increased 84 basis points to 4.93% from
4.09% for the same period a year ago.
The Company's net interest margin was 5.16% in 2000 and 5.15%
in 1999. The combined effect of the increase in volume of earning assets and
increase in yield on funding costs, resulted in an increase of $620,000 (5.7%)
in net interest income for the year ended December 31, 2000 over 1999. The
decrease in the Company's net interest margin from 1998 to 1999 of $399,000 is
attributed to an increasingly competitive pricing market for loan production and
stable funding cost to support the asset growth.
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The following table sets forth the Company's daily average balance
sheet, related interest income or expense and yield or rate paid for the
periods indicated. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Portfolio Loans $178,486 $17,622 9.87% $159,855 $14,605 9.14% $ 130,454 $13,030 9.99%
Tax Exempt Securities 3,129 138 4.41% 5,601 240 4.28% 9,116 407 4.45%
US Government Securities 23,052 1,305 5.66% 30,273 1,714 5.66% 35,833 2,267 6.33%
Federal Funds Sold 16,861 1,050 6.23% 11,868 551 4.64% 9,511 454 4.77%
Other Securities 639 62 9.70% 2,889 160 5.54% 2,486 165 6.60%
-------- ------- ----- -------- ------- ----- --------- -------
Average Earning Assets $222,167 $20,177 9.08% $210,486 $17,270 8.20% $187,400 $ 16,322 8.71%
-------- ------- ------- --------
Cash & Due From Banks 10,783 10,824 9,860
Bank Premises 5,397 5,591 5,688
Other Assets 4,992 1,648 1,897
-------- -------- -------
Average Total Assets $243,339 $228,549 $204,845
======== ======== ========
INTEREST BEARING LIABILITIES
Interest Bearing Demand $ 43,569 $ 1,122 2.58% $ 41,442 $717 1.73% $42,185 $ 791 1.88%
Savings Deposits 13,426 428 3.19% 12,874 352 2.73% 12,717 349 2.74%
Certificates of Deposit 115,640 6,881 5.95% 101,289 5,240 5.17% 87,805 4,746 5.41%
Other Borrowings 4,237 291 6.87% 1,710 126 7.37% 0 0 0
-------- ------- ----- -------- ------- ----- --------- ------- -----
176,872 8,722 4.93% 157,315 6,435 4.09% 142,707 5,886 4.12%
------- ------- -------
Non-interest Bearing Demand 36,579 43,548 37,315
Other Liabilities 2,857 2,353
Shareholder Equity 26,804 24,829 22,470
-------- -------- ---------
Average Liabilities and
Shareholders Equity $243,339 $228,549 $204,845
======== ======== ========
Net Interest Income and Net
Interest Margin $11,455 5.16% $10,835 5.15% $ 10,436 5.57%
======= ======= ========
- --------------------------------------------------------------------------------------------------------------------------
Interest income on loans includes fee income of $369,000, $492,000 and
$562,000 for the years ended December 31, 2000, 1999, and 1998 respectively.
The Company's average total assets increased to $243.3 million in 2000
to $228.5 in 1999 and $204.8 in 1998, representing a 6.5% increase 2000 over
1999, and 11.6% increase in 1999 over 1998. Portfolio loans increased to $178.5
million in 2000 and $160.0 million in 1999, representing an increase of 11.7%
and 22.5%, respectively.
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The following tables set forth changes in interest income and expense
for each major category of earning assets and interest-bearing liabilities, and
the amount of change attributable to volume and rate changes for the periods
indicated. Changes not solely attributable to rate or volume have been allocated
to volume. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 2000 OVER 1999 1999 OVER 1998
- ----------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
Increase (Decrease)
In Interest Income:
Portfolio Loans $1,839 $1,178 $ 3,017 $2,686 $(1,111) $ 1,575
Tax-exempt securities (109) 7 (102) (151) (15) (166)
US Government securities (409) (0) (409) (312) (242) (554)
Federal Funds sold 311 188 499 110 (13) 97
Other investment securities (218) 120 (98) 22 (26) (4)
------ ------ ------- ------ -------- -------
Total Increase (Decrease) $1,414 $1,493 $ 2,907 $2,355 $(1,407) $ 948
------ ------ ------- ------ -------- -------
Increase (Decrease)
In Interest Expense:
Interest-bearing Demand 55 350 405 (13) (61) (74)
Savings Deposits 18 58 76 4 (1) 3
Certificates of Deposit 854 787 1,641 698 (204) 494
Other Borrowings 174 (9) 165 126 0 126
------ ------ ------- ------ -------- -------
Total Increase (Decrease) $1,101 $1,186 $2,287 $815 $ (266) $549
------ ------ ------- ------ -------- -------
Net Increase (Decrease) $313 $ 307 $ 620 $1,540 $(1,141) $ 399
====== ====== ======= ====== ======== =======
- ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
The Company's non-interest income consists primarily of processing fees
for merchants who accept credit card payments for goods and services, service
charges on deposit accounts, and other service fees. Non-interest income also
includes ATM fees earned at various locations. For the year ended December 31,
2000, non-interest income represented 12.2% of the Company's revenues versus
13.9% in 1999, and 13.4% in 1998. Historically, the Company's service charges on
deposit accounts have lagged peer levels for similar services. This is
consistent with the Company's philosophy of allowing customers to pay for
services through an analysis of compensating balances and the emphasis on
certificates of deposit as a significant funding source.
Total noninterest income in 2000 was $2.8 million, unchanged from $2.8
million in 1999, and $2.5 million in 1998, representing an increase of 12% in
1999 over 1998. The flat non-interest income results between 2000 and 1999
reflect a decline in merchant bankcard activities and a contractual cap on
opportunity for growing the ISO portfolio credit card service income with our
current ISO relationship.
The following table sets forth a summary of non-interest income for the
periods indicated.
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Non-interest Income:
Service Charges on deposit accounts $ 214 $ 251 $ 215
Other Income 778 715 503
Net realized (Loss) Gain on Sale of
Securities available-for-sale (59) (58) 93
Credit Card service income, net 1,875 1,882 1,728
------ ------ ------
Total Non-interest Income $2,808 $2,790 $2,539
====== ====== ======
- ---------------------------------------------------------------------------------------------------------
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MERCHANT SERVICES PROCESSING INCOME
Pursuant to the Merchant Services Agreement, the Bank acts as a
clearing bank for an Independent Sales Organization (ISO), a nonbank merchant
credit card processor. The Bank processes credit or debit card transactions into
the Visa(R) or MasterCard(R) system For presentment to the card issuer.
As a result of the Merchant Services Agreement, the Bank has acquired
electronic credit and debit card processing relationships with merchants in
various industries on a nationwide basis. As of December 31, 2000 and 1999, the
ISO portfolio consisted of approximately 36,000 and 46,000 merchants,
respectively.
The Merchant Services Agreement was renewed in 1997 for a period of
four years, which expires on April 1, 2001. The ISO and the Company have
recently reached an agreement on the renewal of the contract. Effective April 1,
2001, pricing of the contract is .002% of transaction processing and one-half of
the earnings on the deposit relationship. The current contract in effect is
0.135% of transaction processing and the full earnings on the deposit
relationship. The contract renewal represents a significant decline in merchant
credit card processing income. If the new pricing had been in effect for the
twelve months ended December 31, 2000, credit card service income, net would
have been $876,000 less than the actual amount recorded. The Company plans to
offset the decline in revenues by increasing the volumes in the local portfolio,
including a merchant credit card sales team in the Roseville market, expanding
other fee generating services and promoting aggressive growth in our core
business segments.
The Merchant Services Agreement provides for indemnification of the
Bank by the ISO against losses incurred by the Bank in connection with either
the processing of credit/debit card transactions for covered merchants or any
alleged violations by the ISO of the Card Association Rules. The ISO maintains a
merchant specific reserve of approximately $6.1 million. These reserves are held
in accounts with the Bank with activity authorized only by certain Bank
personnel. The Bank has been granted a security interest in the reserve accounts
to secure the ISO's obligations under the agreement.
Merchant bankcard processing services are highly regulated by credit
card associations such as Visa(R). In order to participate in the credit card
program, Redding Bank of Commerce must comply with the credit card association's
rules and regulations, which may change from time to time. During November 1999,
Visa adopted several rule changes to reduce the risk profile in high-risk
acquiring programs and these rule changes affect the Bank's Merchant Services
business segment. These changes include a requirement that an acquiring
processor's reported fraud ratios be no greater than three times the national
average.
Redding Bank of Commerce's overall fraud ratio was met and was in
compliance with the Visa requirement. Other Visa changes included the
requirement that total processing volume in certain high-risk categories (as
defined by Visa) is less than 20% of total processing volume. At December 31,
2000 the Bank's total Visa transactions within these certain high-risk
categories were 15% of Visa total processing volume. Although these merchants
are categorized high-risk, precautions have been taken to mitigate these risks,
including requiring higher deposit reserves, daily monitoring and aggressive
fraud control, indemnification of the ISO, and to date the Company has not seen
significant losses in these categories.
Additionally, Visa announced a requirement that the weekly average Visa
volumes be less than 60% of an institutions tangible equity capital, and a
requirement that the aggregate charge-backs for the previous six months be less
than 5% of the institutions tangible equity capital. Previous guidelines allowed
the weekly average Visa volumes to be 400% equity capital. At December 31, 2000
the bank's average weekly Visa volume was 76% of tangible equity capital,
slightly above the new guidelines, and aggregate charge-backs for the previous
six months were 10% of tangible equity capital. A written plan has been
submitted and reviewed by Visa to allow for attrition and reduction in high
charge-back merchants to bring the processing volumes into line with the new
guidelines by April 2001. In the event the bank exceeds average weekly volumes
after April 2001, a pledge of collateral will be required by Visa to cover the
difference.
Merchant Services processing income, net of processing costs was $1.9
million in 2000 and $1.8 in 1999 and $1.7 in 1998 representing an increase of
5.6% for 2000 over 1999, and an increase of 5.9% in 1999 over 1998.
28
29
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and related employee
benefits, occupancy and equipment expenses, data processing fees, professional
fees, directors' fees and other operating expenses. Non-interest expense for
2000 was flat at $6.4 million compared to $6.4 million for 1999 and $6.0 million
in 1998, representing an increase of $459,000, or 7.7% for 1999 over 1998.
Increases in 1999 were representative of additions to staff to expand the
Roseville operations and attributed to the professional support provided in
filing the Company's SEC registration statement.
The following table sets forth a summary of non-interest expense for the
periods indicated.
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------
Non-interest Expense: 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Salaries & Related Benefits $3,753 $3,805 $3,422
Net Occupancy & Equipment 985 924 838
FDIC Insurance Premium 41 16 26
Data Processing &
Professional Services 465 504 360
Stationery & Supplies 215 176 173
Postage 83 80 78
Directors' Expenses 189 198 203
Other Expense 727 731 875
------ ------ ------
Total Non-Interest Expense $6,458 $6,434 $5,975
====== ====== ======
- ------------------------------------------------------------------------------------------------------
INCOME TAXES
The Company's provision for income taxes includes both federal and
state income taxes and reflects the application of federal and state statutory
rates to the Company's net income before taxes. The principal difference between
statutory tax rates and the Company's effective tax rate is the benefit derived
from investing in tax-exempt securities. Increases and decreases in the
provision for taxes reflect changes in the Company's income before tax.
The following table reflects the Company's tax provision and the
related effective tax rate for the periods indicated.
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Income Tax Provision $2,851 $2,701 $2,446
Effective Tax Rate 37.2% 38.2% 37.6%
- ------------------------------------------------------------------------------------------------------------
ASSET QUALITY
The Company concentrates its lending activities primarily within
Shasta, El Dorado, Placer and Sacramento counties, California, and the locations
of the Bank's three full service offices. The Company manages its credit risk
through diversification of its loan portfolio and the application of
underwriting policies and procedures and credit monitoring practices. Although
the Company has a diversified loan portfolio, a significant portion of its
borrowers' ability to repay the loans is dependent upon the professional
services and residential real estate development industry sectors. Generally,
the loans are secured by real estate or other assets located in Northern
California and are expected to be repaid from cash flows of the borrower or
proceeds from the sale of collateral.
29
30
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
AS OF DECEMBER 31,
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Commercial & Financial $ 61,069 $ 53,383 $ 46,890 $ 41,432 $37,592
Real Estate-Construction 37,531 37,859 29,470 16,393 32,474
Real Estate-Commercial 94,111 78,842 69,742 54,533 40,067
Installment 430 294 298 72 241
Other Loans 1,396 2,811 2,225 1,274 1,284
Less:
Deferred Loan Fees and Costs (241) (372) (423) (294) (305)
Allowance for Loan and Lease losses (2,974) (2,972) (3,235) (2,819) (2,294)
------- ------- ------- ------- -------
Total Net Loans $191,322 $169,845 $144,967 $110,591 $109,059
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
Net portfolio loans increased $21.5 million or 12.6%, to $191.3 million
at December 31, 2000 over $169.8 million at December 31, 1999. During 2000
commercial and financial loans increased $7.7 million or 14.4% and real estate
projects increased $14.9 million or 12.8%. The portfolio mix remains consistent
with the mix of 1999, with commercial and financial loans of approximately 31%,
real estate construction of 19% and commercial real estate at 50%.
The Company's practice is to place an asset on nonaccrual status when
one of the following events occurs:(i) Any installment of principal or interest
is 90 days or more past due (unless in management's opinion the loan is
well-secured and in the process of collection), (ii) management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing, or have been restructured.
The following table sets forth a summary of the Company's nonperforming
loans and other assets as of the dates indicated:
(Dollars in Thousands) AS OF DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $801 $ 394 $ 942 $500 $1,734
90 days past and still accruing interest 0 0 46 173 540
Restructured loans in compliance with
modified terms 0 0 0 0 2,450
Other Real Estate Owned 0 40 66 352 2,268
- --------------------------------------------------------------------------------------------------------------------
The Company's nonaccrual loans increased from $394,000 to $801,000
during 2000 and is comprised of two borrowing facilities. Other real estate
owned ("OREO") was disposed of during 2000.
The Company assigns all loans a credit risk rating and monitors ratings
for accuracy. The aggregate credit risk ratings are used to determine the
allowance for loan losses. Primary account officers and credit administration
assign the initial credit risk rating, and provide ongoing monitoring for
changes in the risk rating.
The Company employs a Credit Review Officer that reports directly to the Audit
Committee of the Board of Directors. The Credit Review Officer has the authority
to independently initiate a change in individual credit risk ratings as deemed
appropriate. This enables management to effect corrective actions when necessary
and provided for independent evaluation of the risk of an individual credit.
The following table sets forth the maturity distribution of the
Company's commercial and real estate construction loans outstanding as of
December 31, 2000, which, based on remaining scheduled repayments of principal,
were due within the periods indicated.
30
31
- --------------------------------------------------------------------------------------------------------------------
After One
(Dollars in thousands) Within One Year through Five Years After Five Years Total
- --------------------------------------------------------------------------------------------------------------------
Commercial Loans $ 42,654 $ 20,920 $ 614 $ 64,188
Real Estate Construction
Loans $ 27,114 $6,361 $ 937 $ 34,412
-------- ------ ------- --------
Total $ 69,768 $ 27,281 $ 1,551 $ 98,600
======== ======== ======= ========
Loans due after one year with:
Fixed Rates $7,689 $ 372 $ 8,061
Variable Rates $19,592 $1,179 $ 20,771
------- ------ --------
Total $27,281 $1,551 $ 28,832
======= ====== ========
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
In determining the amount of the Company's ALLL, management assesses
the diversification of the portfolio. Each credit is assigned a credit risk
rating factor, and this factor, multiplied by the dollars associated with the
credit risk rating, is used to calculate one component of the ALLL. In addition,
management estimates the probable loss on individual credits that are receiving
increased management attention due to actual or perceived increases in credit
risk.
The Company makes provisions to the ALLL on a regular basis through
charges to operations that are reflected in the Company's consolidated
statements of income as a provision for loan losses. When a loan is deemed
uncollectible, it is charged against the allowance. Any recoveries of previously
charged-off loans are credited back to the allowance. There is no precise method
of predicting specific losses or amounts that ultimately may be charged-off on
particular categories of the loan portfolio. Similarly, the adequacy of the ALLL
and the level of the related provision for possible loan losses is determined on
a judgmental basis by management based on consideration of (i) economic
conditions, (ii) borrowers' financial condition, (iii) loan impairment, (iv)
evaluation of industry trends, (v) industry and other concentrations, (vi) loans
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (vii) continuing evaluation of the
performing loan portfolio, (viii) monthly review and evaluation of problem loans
identified as having a loss potential, (ix) quarterly review by the Board of
Directors, (x) off balance sheet risks, and (xi) assessments by regulators and
other third parties. Management and the Board of Directors evaluate the
allowance and determine its desired level considering objective and subjective
measures, such as knowledge of the borrowers' business, valuation of collateral,
the determination of impaired loans and exposure to potential losses.
The ALLL is a general reserve available against the total loan
portfolio and off balance sheet credit exposure. It is maintained without any
interallocation to the categories of the loan portfolio, and the entire
allowance is available to cover loan losses.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions and other qualitative factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's ALLL. Such agencies may require the Bank to
provide additions to the allowance based on their judgement of information
available to them at the time of their examination. There is uncertainty
concerning future economic trends. Accordingly it is not possible to predict the
effect future economic trends may have on the level of the provision for
possible loan losses in future periods.
Because the principal factor effecting the adequacy of the ALLL is the
credit risk rating factor, the bank does not allocate the ALLL by loan category.
The banks principal lines of lending are (i) commercial, (ii) real estate
construction and (iii) commercial and residential real estate.
31
32
The primary sources of repayment of the Bank's commercial loans are
operating cash flow and the borrowers' conversion of short-term assets to cash.
The net assets of the borrower or guarantor are usually identified as a
secondary source of repayment. The principal factors affecting the Bank's risk
of loss from commercial lending include each borrower's ability to manage its
business affairs and cash flows, local and general economic conditions and real
estate values in the Bank's service area. The Bank manages its commercial loan
portfolio by monitoring its borrowers' payment performance and their respective
financial condition and makes periodic adjustments, if necessary, to the risk
grade assigned to each loan in the portfolio. The Bank's evaluations of its
borrowers are facilitated by management's knowledge of local market conditions
and periodic reviews by a consultant of the Bank's credit administration
policies.
The principal source of repayment of the Bank's real estate
construction loans is the sale of the underlying collateral or the availability
of permanent financing from the Bank or other lending source. The principal
risks associated with real estate construction lending include project cost
overruns that absorb the borrower's ability in the project and deterioration of
real estate values as a result of various factors, including competitive
pressures and economic downturns.
The Bank manages its credit risk associated with real estate
construction lending by establishing loan-to-value ratios on projects on an
as-completed basis, inspecting project status in advance of controlled
disbursements and matching maturities with expected completion dates. Generally,
the Bank requires a loan-to-value ratio of not more than 80% on single family
residential construction loans.
The principal source of repayment of the Bank's real estate mortgage
loans is the borrowers' operating cash flow. Similar to commercial loans, the
principal factors affecting the Bank's risk of loss in real estate mortgage
lending include each borrowers' ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank manages its credit risk associated with real
estate mortgage lending primarily by establishing maximum loan-to-value ratios
and using strategies to match the borrower's cash flow to loan repayment terms.
The Bank's specific underwriting standards and methods for each of its
principal lines of lending include industry-accepted analysis and modeling and
certain proprietary techniques. The Bank's underwriting criteria are designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more of the owners of the borrowing entity.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions.
The adequacy of the ALLL is calculated upon three components. First is
the credit risk rating of the loan portfolio, including all outstanding loans
and leases, off balance sheet items, and commitments to lend. Every extension of
credit has been assigned a risk rating based upon a comprehensive definition
intended to measure the inherent risk of lending money. Each rating has an
assigned risk factor expressed as a reserve percentage. Central to this assigned
risk factor is the historical loss record of the bank.
Secondly, established specific reserves are available for individual
loans currently on management's watch and high-grade loan lists. These are the
estimated potential losses associated with specific borrowers based upon the
collateral and event(s) causing the risk ratings. The third component is
unallocated. This reserve is for qualitative factors that may effect the
portfolio as a whole, such as those factors described above.
Management believes the assigned risk grades and our methods for
managing changes are satisfactory.
Watch list and high-grade loans decreased 3.5% from 1999 to 2000,
primarily due to economic conditions for borrowers and strong account management
by the lenders.
The provision for loan losses increased to $142,000 for 2000 versus
$120,000 in 1999. The increase in the amount of the provision is a result of the
portfolio growth and not representative of a decrease in the quality of the
portfolio. Net charge-offs were $140,000 or .08% of average loans during 2000.
Management does not believe that there were any trends indicated by the detail
of the aggregate charge-offs for any of the periods discussed.
32
33
The following table summarizes the activity in the ALLL reserves for
the periods indicated.
(Dollars in thousands) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Beginning Balance: $2,972 $3,235 $2,819 $2,294 $2,053
Provision for loan losses 142 120 500 1,024 2,160
Charge-offs:
Commercial (200) (355) (139) (393) (1,074)
Real Estate (3) (103) (54) (209) ( 916)
Other (1) (2) (16) ( 3) ( - )
------- ------- ------- ------- -------
Total Charge-offs ( 204) ( 460) ( 209) ( 605) (1,990)
------- ------- ------- ------- -------
Recoveries:
Commercial 62 37 114 60 37
Real Estate 2 40 11 46 34
------- ------- ------- ------- -------
Total Recoveries 64 77 125 106 71
------- ------- ------- ------- -------
Ending Balance $2,974 $2,972 $3,235 $2,819 $2,294
======= ======= ======= ======= =======
ALLL to total loans 1.53% 1.72% 2.18% 2.49% 2.06%
Net Charge-offs to average loans
.08% .24% .06% .44% 1.64%
- --------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
The Company classifies its securities as "held-to-maturity" or
"available-for-sale" at the time of investment purchase. Generally, all
securities are purchased with the intent and ability to hold the security for
long-term investment, and the Company has both the ability and intent to hold
"held-to-maturity" investments to maturity. The Company does not engage in
trading activities.
Securities held-to-maturity are carried at cost adjusted for the
accretion of discounts and amortization of premiums. Securities
available-for-sale may be sold to implement the Company's asset/liability
management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market
value and unrealized gains or losses, net of income taxes, are reported as a
component of accumulated other comprehensive income, in a separate component of
stockholder's equity. Gain or loss on sale of securities is based on the
specific identification method.
Securities held-to-maturity at December 31, 2000 consisted of
mortgage-backed securities totaling $5.0 million with a remaining contractual
maturity of five through ten years and a weighted-average yield of 6.79%.
The following table summarizes the contractual maturities of the
Company's securities held as available-for-sale at their amortized cost basis
and their weighted-average yields at December 31, 2000. The yield on tax-exempt
securities has not been adjusted to a tax-equivalent yield basis.
After One through After Five through
Within One Five Ten
Year Years Years Total
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government & Agencies $ 7,008 5.01% $ 8,444 6.52% $ 6.66% $17,413 5.77%
Obligations of State and
Political Subdivisions 1,009 4.20% 1,308 4.83% 0.00% 4.41%
Corporate Bonds 0 0.00% 1,129 7.06% 0 0.00% 1,129 7.06%
- ----- - -----
Total $ 8,017 4.61% $10,881 6.14% $ 1,961 6.66% $20,859 5.75%
======= ===== ======= ===== ======= ===== ======= =====
- -------------------------------------------------------------------------------------------------------------------------
33
34
The following table summarizes the amortized cost of the Company's
available-for-sale securities held on the dates indicated.
(Dollars in thousands) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
U.S. Government & Agencies $17,413 $21,095 $ 14,509
Obligations of State and Political
Subdivisions 2,317 4,672 5,855
Corporate and Other Bonds 1,129 0 3,964
------- ------- --------
Total $20,859 $25,767 $ 24,328
======= ======= ========
- --------------------------------------------------------------------------------------------------------------------
DEPOSIT STRUCTURE
The Company primarily obtains deposits from local businesses and
professionals as well as through certificates of deposits, savings and checking
accounts.
The following table sets forth the distribution of the Company's
average daily deposits for the periods indicated.
(Dollars in thousands) YEARS ENDED DECEMBER 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------
NOW Accounts $28,894 1.95% $28,315 1.60% $26,423 1.87%
Savings Accounts $13,426 3.19% $12,874 2.73% $12,717 2.74%
Money Market Accounts $14,675 3.80% $13,127 2.00% $15,762 1.94%
Certificates of Deposit $115,640 5.95% $101,289 5.17% $87,805 5.41%
- --------------------------------------------------------------------------------------------------------------------
The following table sets forth the remaining maturities of certificates
of deposit in amounts of $100,000 or more as of December 31, 2000:
DEPOSIT MATURITY SCHEDULE
(Dollars in thousands)
- -----------------------------------------------------------------------------------------
2000
- -----------------------------------------------------------------------------------------
Three Months or less $ 22,296
Over three through six months $ 14,141
Over six through twelve months $ 13,072
Over twelve months $ 2,113
--------
Total $ 51,622
- -----------------------------------------------------------------------------------------
LIQUIDITY
The purpose of liquidity management is to ensure efficient and
economical funding of the Bank's assets consistent with the needs of the Bank's
depositors and, to a lesser extent, shareholders. This process is managed
through an understanding of depositor and borrower needs. As loan demand
increases, the Bank can use asset liquidity from maturing investments along with
deposit growth to fund the new loans.
34
35
With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal-funds sold,
available-for-sale securities, and principal and interest payments on loans.
With respect to liabilities, core deposits, stockholders' equity and the ability
of the Bank to borrow funds and to generate deposits, provide asset funding.
Because estimates of the liquidity need of the Bank may vary from
actual needs, the Bank maintains a substantial amount of liquid assets to absorb
short-term increases in loans or reductions in deposits. As loan demand
decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity. Therefore, there
is some correlation between financing activities associated with deposits and
investing activities associated with lending. The Bank's liquid assets (cash and
due from banks, federal funds sold, and available-for-sale securities) totaled
$46.6 million or 18.2% of total assets at December 31, 2000, $44.5 million or
19.1% of total assets at December 31, 1999 and, $51.3 million or 23.8% of total
assets at December 31, 1998. The Company expects that its primary source of
liquidity will be supported by earnings of the Company, acquisition of core
deposits, and wholesale borrowing arrangements.
CAPITAL ADEQUACY
Capital adequacy is a measure of the amount of capital needed to
sustain asset growth and enhances the Company's ability to absorb losses.
Capital protects depositors and the deposit insurance fund from potential losses
and is a source of funds for the investments the Company needs to remain
competitive. Historically, capital has been generated principally from the
retention of earnings, net of cash dividends.
Overall capital adequacy is monitored on a day-to-day basis by the
Company's management and reported to the Company's Board of Directors on a
monthly basis. The Bank's regulators measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1"
capital (defined as principally comprising shareholders' equity) and "Tier 2"
capital (defined as principally comprising the qualifying portion of the ALLL).
The minimum ratio of total risk-based capital to risk-adjusted assets,
including certain off-balance sheet items, is 8%. At least one-half (4%) of the
total risk-based capital (Tier 1) is to be comprised of common equity; the
balance may consist of debt securities and a limited portion of the ALLL.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets and of Tier 1 capital to average
assets. Management believes as of December 31, 2000 and 1999, that the Company
and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the Bank's category. The Company's and the Bank's actual
capital amounts and ratios as of December 31, 2000 and 1999 are also presented
in the table.
35
36
December 31, 2000 December 31, 1999 For Bank to be
----------------- ----------------- well capitalized
----------------
Bank Company Bank Company
Total Risk-Based Capital 14.11% 15.01% 14.85% 15.58% > 10.00%
Tier 1 Capital to Risk-Based Assets 12.86% 13.75% 13.59% 14.33% > 6.00%
Tier 1 Capital to Average Assets 11.02% 11.52% 10.44% 11.31% > 5.00%
(Leverage ratio)
The Company paid a cash dividend of $0.65 cents per share ($0.59 per
share after adjusting for the 10% stock dividend) and a ten percent stock
dividend on the Company's Common Stock paid to shareholders of record as of
October 1, 2000. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
During 1998, the Board of Directors of Redding Bancorp approved a
repurchase program for Redding Bancorp stock. The purpose of the Treasury Stock
Repurchase program is to provide greater liquidity for investor's and to
mitigate the dilutive effects of the Redding Bancorp 1998 Stock Option Plan. The
program establishes a systematic buyback approach with a goal of providing
sufficient shares to fund the stock option plan over a seven-year period.
The program authorized the buyback of up to 452,100 shares of Treasury
stock over the next seven years. For the years ended December 31, 2000 and 1999,
the Company has repurchased 66,067 and 63,669 shares, respectively. These shares
have been retired.
IMPACT OF INFLATION
Inflation affects the Company's financial position as well as its
operating results. It is management's opinion that the effects of inflation on
the financial statements have not been material.
36
37
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk arises from exposure to changes in interest rates, exchange
rates, commodity prices, and other relevant market rate or price risk. The
Company does not operating a trading account, does not hold any financial
derivatives and does not hold a position with exposure to foreign currency
exchange. The Company faces market risk through interest rate volatility.
Fluctuation in interest rates will ultimately impact both the level of interest
income and interest expense recorded on a large portion of the Company's assets
and liabilities, and the fair market value of interest earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Because the Company's interest-bearing liabilities and
interest-earning assets are with the Bank, the Company's interest rate risk
exposure is in connection with the Bank's operations.
As a result, all significant interest rate risk management procedures
are performed at the Bank level. The Company uses financial modeling techniques
to identify potential changes in income under a variety of interest rate
scenarios. Financial institutions, by their nature, bear interest rate and
liquidity risk as a necessary part of the business of managing financial assets
and liabilities.
The fundamental objective of the Company's management of its assets and
liabilities is to enhance the economic value of the Company while maintaining
adequate liquidity and an exposure to interest rate risk deemed acceptable by
the Company's management.
The Company manages its exposure to interest rate risk through
adherence to maturity, pricing and asset mix policies and procedures designed to
mitigate the impact of changes in market interest rates. The Bank's
profitability is dependent to a large extent upon its net interest income, which
is the difference between its interest income on interest-earning assets, such
as loans and securities, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. The model used includes measures
of the expected repricing characteristics of administered rate (NOW, savings and
money market accounts) and non-related products (demand deposit accounts, other
assets and other liabilities). These measures recognize the relative
insensitivity of these accounts to changes in market interest rates, as
demonstrated through current and historical experiences, recognizing the timing
differences of rate changes.
The formal policies and practices adopted by the Bank to monitor and
manage interest rate risk exposure measure risk in two ways: (i) repricing
opportunities for earning assets and interest-bearing liabilities and (ii)
changes in net interest income for declining interest rate shocks of 100 to 200
basis points.
Because of the Bank's predisposition to variable rate pricing and
non-interest bearing demand deposit accounts, the Bank is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment,
the Company's net interest income and margin would be expected to decline, and,
in an increasing interest rate environment, the Company's net interest income
and margin would be expected to increase. However, no assurance can be given
that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Bank is
asset sensitive, the Company is adversely effected by declining rates rather
than rising rates.
To estimate the effect of interest rate shocks on the Company's net
interest income, management uses a model to prepare an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income given
a change in the federal funds rate of 100 or 200 basis points up or down. All
changes are measured in dollars and are compared to projected net interest
income. At December 31, 2000, the estimated annualized reduction in net interest
income attributable to a 100 or 200 basis point decline in the federal funds
rate was $413,000 and $826,000, respectively, with a similar and opposite result
attributable to a 100 or 200 basis point increase in the federal fund rate.
37
38
The following table sets forth, as of December 31, 2000, the
distribution of repricing opportunities for the Company's earning assets and
interest-bearing liabilities. It also reports the GAP (different volumes of rate
sensitive assets and liabilities) repricing earning assets and interest-bearing
liabilities at different time intervals, the cumulative GAP, the ratio of rate
sensitive assets to rate sensitive liabilities for each repricing interval, and
the cumulative GAP to total assets.
(Dollars in thousands) AT DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Within 3 3 Months to One Year to Five Years Total
Months One Year Five Years Plus
- ------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Securities held-to-maturity $ 0 $ 0 $ 0 $5,007 $ 5,007
Securities available-for-sale $3,088 $ 4,915 $ 11,016 $1,978 $20,997
Federal Funds Sold $13,010 - - - $13,010
Loans, net $107,053 $15,637 $28,403 $40,229 $191,322
-------- ------- -------- ------- --------
Total Interest-earning Assets $123,151 $20,552 $39,419 $47,214 $230,336
======== ======= ======= ======= ========
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Demand Deposits $ 47,394 $ - $ - $ - $ 47,394
Savings Deposits $ 12,496 $ - $ - $ - $ 12,496
Time Deposits $ 45,388 $57,326 $ 17,600 $ 440 $120,754
Other Borrowings $ 5,267 $ - $ - $ - $ 5,267
------- ---- ---- ---- --------
Total Interest-bearing Liabilities
$ 110,545 $57,326 $ 17,600 $ 440 $ 185,911
========= ======= ======== ====== =========
GAP 12,606 (36,774) 21,819 46,774 44,425
Cumulative GAP (24,168) (2,349) 44,774
RSA/RSL 1.11 .36 2.24 107.30 1.24
Cumulative GAP to Total Assets 0.05 (0.10) (0.01) 0.19
- ------------------------------------------------------------------------------------------------------------------
The model utilized by management to create the analysis described in
the preceding paragraph uses balance sheet simulation to estimate the impact of
changing rates on the annual net interest income of the Bank. The model
considers a number of factors, including (i) change in customer and management
behavior in response to the assumed rate shock, (ii) the ratio of the amount of
rate change for each interest-bearing asset or liability to assumed changes in
the federal funds rate based on local market conditions for loans and core
deposits and national market conditions for other assets and liabilities and
(iii) timing factors related to the lag between the rate shock and its effect on
other interest-bearing assets and liabilities.
Actual results will differ from simulated results due to timing,
magnitude, and frequency of interest rate changes as well as changes in market
conditions and management strategies.
Management believes that the short duration of its rate-sensitive
assets and liabilities contributes to its ability to reprice a significant
amount of its rate-sensitive assets and liabilities and mitigate the impact of
rate changes in excess of 100 or 200 basis points. The model's primary benefit
to management is its assistance in evaluating the impact that future strategies
with respect to the bank's mix and level of rate-sensitive assets and
liabilities will have on the Company's net interest income.
38
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report..................................................................................... 40
Consolidated Balance Sheets as of December 31, 2000 and 1999..................................................... 41
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998........................... 42
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998............. 43
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... 44
Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999 and 1998.................. 45
39
40
[DELOITTE & TOUCHE LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Redding Bancorp
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, 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 Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Redding Bancorp and subsidiaries as
of December 31, 2000, and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Sacramento, California
January 26, 2001
40
41
REDDING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
- -------------------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
Cash and due from banks $ 12,602,510 $ 11,605,368
Federal funds sold 13,010,000 7,560,000
Securities available-for-sale 20,997,380 25,374,494
Securities held-to-maturity, at cost (estimated fair value of $4,972,409 in 2000
and $5,871,199 in 1999) 5,006,831 5,918,595
Loans, net of the allowance for loan losses of $2,973,593 in 2000 and
$2,971,747 in 1999 191,321,906 169,845,642
Bank premises and equipment, net 5,287,153 5,473,896
Other assets 6,881,002 6,230,100
-------------- --------------
TOTAL ASSETS $ 255,106,782 $ 232,008,095
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - noninterest bearing $ 37,391,626 $ 40,381,025
Demand - interest bearing 47,394,283 43,176,325
Savings 12,496,167 11,577,452
Certificates of deposits 120,754,081 103,188,500
----------- -----------
Total Deposits 218,036,157 198,323,302
198,323,303 188,620,698
Other borrowings 5,267,472 4,800,000
Other liabilities 3,048,884 2,825,398
-------------- --------------
Total liabilities 226,352,513 205,948,700
-------------- --------------
Commitments and contingencies (note 15)
Stockholders' equity :
Preferred stock, no par value; 2,000,000 authorized;
no shares issued and outstanding in 2000 and 1999
Common stock, no par value; 10,000,000 shares
authorized; 2,884,181 shares issued and outstanding in 2000
and 2,906,774 shares issued and outstanding in 1999 9,370,979 4,808,938
Retained earnings 19,296,510 21,490,819
Accumulated other comprehensive income (loss), net of tax 86,780 (240,362)
-------------- ---------------
Total stockholders' equity 28,754,269 26,059,395
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 255,106,782 $ 232,008,095
============== ==============
See notes to consolidated financial statements.
41
42
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income:
Interest and fees on loans $17,622,229 $14,605,200 $13,030,535
Interest on tax exempt securities 137,858 240,431 405,746
Interest on U.S. government securities 1,305,315 1,713,736 2,267,663
Interest on federal funds sold 1,049,994 551,090 454,515
Interest on other securities 61,498 159,890 163,585
------------ ----------- ------------
Total interest income 20,176,894 17,270,347 16,322,044
------------ ----------- ------------
Interest expense:
Interest on demand deposits 1,121,827 716,618 790,557
Interest on savings deposits 427,807 352,362 349,353
Interest on time deposits 6,880,739 5,239,604 4,745,951
Other Borrowings 291,248 126,200 0
------------ ----------- ------------
Total interest expense 8,721,621 6,434,784 5,885,861
------------ ----------- ------------
Net interest income 11,455,273 10,835,563 10,436,183
Provision for loan losses 142,000 120,000 500,000
------------ ----------- ------------
Net interest income after provision for loan losses 11,313,273 10,715,563 9,936,183
------------ ----------- ------------
Non-interest income:
Service charges on deposit accounts 213,683 250,944 215,114
Other income 777,652 714,904 503,070
Net (loss) gain on sale of
securities available-for-sale (59,313) (58,357) 92,828
Credit card service income, net 1,875,433 1,882,305 1,727,849
------------ ----------- ------------
Total non-interest income 2,807,455 2,789,796 2,538,861
------------ ----------- ------------
Non-interest expense:
Salaries and related benefits 3,752,610 3,804,621 3,421,719
Net occupancy and equipment expense 985,277 923,589 837,602
FDIC insurance premium 40,695 16,358 26,517
Data processing and professional services 464,815 503,627 360,062
Directors' expenses 189,465 197,816 202,822
Other expenses 1,024,806 988,102 1,125,952
------------ ----------- ------------
Total non-interest expense 6,457,668 6,434,113 5,974,674
------------ ----------- ------------
Income before income taxes 7,663,060 7,071,246 6,500,370
Provision for income taxes 2,851,291 2,701,243 2,446,261
------------ ----------- ------------
Net Income $ 4,811,769 $ 4,370,003 $ 4,054,109
============ =========== ============
Basic earnings per share $1.67 $1.49 $1.37
===== ===== =====
Diluted earnings per share $1.59 $1.38 $1.30
===== ===== =====
See notes to consolidated financial statements.
42
43
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE COMMON STOCK RETAINED COMPREHENSIVE
INCOME SHARES AMOUNT EARNINGS INCOME, NET OF TAX TOTAL
Balance at January 1, 1998 2,952,482 $4,532,585 $17,138,072 $153,928 $21,824,585
Comprehensive income:
Net income $4,054,109 4,054,109 4,054,109
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 26,118
Less: reclassification adjustment
for gains included in net
income, net of tax 57,925
----------
Other comprehensive loss (31,807) (31,807) (31,807)
----------
Comprehensive income: $4,022,302
==========
Cash dividends ($0.45 per share) (1,345,146) (1,345,146)
Compensation expense associated with stock options 130,136 130,136
Stock options exercised 6,600 22,000 22,000
---------- --------- ---------- --------- ----------
Balance at December 31, 1998 2,959,082 4,684,721 19,847,035 122,121 24,653,877
Comprehensive income:
Net income $4,370,003 4,370,003 4,370,003
Other comprehensive income:
Unrealized holding losses arising
during period, net of tax (398,197)
Add: reclassification adjustment
for losses included in net
income, net of tax 35,714
----------
Other comprehensive loss (362,483) (362,483) (362,483)
-----------
Comprehensive income $4,007,520
==========
Cash dividends ($0.55 per share) (1,583,923) (1,583,923)
Compensation expense associated with stock options 77,865 77,865
Stock options exercised 11,330 147,150 147,150
Purchase and retirement of common stock (63,669) (100,798) (1,142,296) (1,243,094)
---------- ---------- ---------- --------- ----------
Balance at December 31, 1999 2,906,743 4,808,938 21,490,819 (240,362) 26,059,395
Comprehensive income:
Net income $4,811,769 4,811,769 4,811,769
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 291,062
Add: reclassification adjustment
for losses included in net
income, net of tax 36,080
----------
Other comprehensive income 327,142 327,142 327,142
----------
Comprehensive income $5,138,910
==========
Cash dividends ($0.59 per share) (1,699,627) (1,699,627)
Compensation expense associated with stock options 67,200 67,200
Stock options exercised 43,505 358,775 358,775
Purchase and retirement of common stock (66,067) (105,430) (1,201,686) (1,307,116)
Tax benefit on exercise of stock options 136,731 136,731
10 % Stock Dividend 4,104,765 (4,104,765) 0
---------- ---------- ------------ -------- -----------
Balance at December 31, 2000 2,884,181 $9,370,979 $19,296,510 $ 86,780 $28,754,269
========== ========== =========== ==-===== ===========
All share and per share amounts have been adjusted to give retroactive effect to
the 10% stock dividend paid on October 22, 2000. See notes to consolidated
financial statements.
43
44
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Net income $ 4,811,769 $ 4,370,003 $ 4,054,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 142,000 120,000 500,000
Provision for depreciation 507,458 471,655 433,910
Compensation expense associated with stock options 67,200 77,865 130,136
(Gain) loss on sale of securities available-for-sale 59,313 58,357 (92,828)
Amortization of investment premiums and accretion
of discounts, net 340,516 (28,812) (381,726)
Gain on sale of loans (129,859) (136,336) (47,089)
Proceeds from sale of loans 5,680,593 5,509,108 3,851,050
Loans originated for sale (5,810,452) (5,639,444) (3,898,139)
Deferred income taxes, net 120,065 274,735 (283,013)
Effect of changes in:
Other assets (1,464,688) 343,733 (577,690)
Deferred loan fees (130,717) (50,994) 128,875
Other liabilities 373,407 395,169 428,919
------------- ------------ ------------
Net cash provided by operating activities 4,566,605 5,765,039 4,246,514
------------- ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 7,951,547 19,658,319 32,953,547
Proceeds from sale of available-for-sale securities 4,419,671 13,359,055 10,403,936
Purchases of available-for-sale securities (6,611,227) (33,217,242) (10,653,638)
Loan origination, net of principal repayments (21,227,829) (24,681,067) (34,910,401)
Purchase of premises and equipment (332,515) (398,833) (424,424)
Proceeds from sale of equipment 11,800 57,021 229,154
------------- ------------ ------------
Net cash used by investing activities (15,788,553) (25,222,747) (2,401,826)
------------- ------------- ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits and savings accounts 2,147,274 (467,377) 1,830,406
Net increase in certificates of deposit 17,565,581 10,169,981 6,117,017
Net increase in other borrowings 467,472 4,800,000 0
Cash dividends (1,699,627) (1,583,923) (1,345,146)
Common stock transactions, net (811,610) (1,095,944) 22,000
-------------- ------------- ------------
Net cash provided by financing activities 17,669,090 11,822,737 6,624,277
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,447,142 (7,634,971) 8,468,965
Cash and cash equivalents at beginning of year 19,165,368 26,800,339 18,331,374
------------- ------------ ------------
Cash and cash equivalents at end of year $ 25,612,510 $ 19,165,368 $ 26,800,339
============= ============ ============
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 2,590,200 $ 2,391,269 $ 2,630,000
Interest 8,553,444 6,409,765 5,865,880
Non-cash investing and financing activities:
Transfer from loans to other real estate owned $ 0 $ 40,000 $ 70,997
Stock Dividend $ 4,104,765 $ 0 $ 0
See notes to consolidated financial statements.
44
45
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. THE BUSINESS OF THE COMPANY
Redding Bancorp ("Bancorp," and with its subsidiaries, the
"Company"), is a financial services holding company ("FHC") with its
principal offices in Redding, California. A financial service holding
company may engage in commercial banking, insurance and securities
business and offer other financial products to customers. The Company
received notification from the Federal Reserve Board approving the
election to change to a financial service holding company on April 22,
2000. The election to change to a financial service holding company has
had no impact to date on the operations of the Company. As a financial
service holding company, the Company is subject to the Financial
Holding Company Act and to supervision by the Board of Governors of the
Federal Reserve System (the "FRB"). Bancorp's wholly-owned subsidiaries
are Redding Bank of Commerce (the "Bank") and Redding Service
Corporation. The Bank is principally supervised and regulated by the
California Department of Financial Institutions ("DFI") and the Federal
Deposit Insurance Corporation ("FDIC"). Substantially all of the
Company's activities are carried out through the Bank. The Bank was
incorporated as a California banking corporation on November 25, 1981.
The Bank operates three full service branches in Redding and Roseville,
California.
The Bank conducts a general commercial banking business in the
counties of El Dorado, Placer, Shasta, and Sacramento, California. The
Company considers Northern California to be the Bank's major market
area. The services offered by the Bank include those traditionally
offered by commercial banks of similar size and character in
California, including checking, interest-bearing ("NOW") and savings
accounts, money market deposit accounts; commercial, real estate,
construction, personal, home improvement, automobile and other
installment and term loans; and travelers checks, safe deposit boxes,
collection services and electronic transfers. The primary focus of the
Bank is to provide services to the business and professional community
of its major market area, including Small Business Administration
loans, and payroll and accounting packages and billing programs. The
Bank does not offer trust services or international banking services
and does not plan to do so in the near future. Most of the Bank's
customers are small to medium sized businesses and individuals with
medium to high net worth. The Bank has also entered into an agreement
to provide credit and debit card processing services for merchants,
solicited by an independent sales organization ("ISO"), who accept
credit and debit cards as payment for goods and services. The Bank acts
as a clearing bank for the ISO and processes debit and credit card
transactions into the VISA(R) or MasterCard(R) system for presentment
to the card issuer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of
America and general practices within the banking industry. In preparing
the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and
expenses for the period. Actual results could differ from those
estimates. The more significant accounting and reporting policies and
estimates applied in the preparation of the accompanying consolidated
financial statements are discussed below.
45
46
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, the Bank and Redding Service
Corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
STOCK DIVIDEND: On October 22, 2000, the Company paid a 10% stock
dividend. All share and per share amounts have been adjusted to give
retroactive effect to the stock dividend.
RECLASSIFICATIONS: certain amounts in the 1999 and 1998 financial
statements have been reclassified to conform with the 2000
presentation.
CASH EQUIVALENTS - Cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds sold are for a one-day
period.
SECURITIES - At the time of purchase of a security, the Bank designates
the security as held-to-maturity or available-for-sale, based on its
investment objectives, operational needs and intent to hold. The Bank
does not engage in trading activity.
Securities designated as held-to-maturity are carried at cost adjusted
for the accretion of discounts and amortization of premiums. The
Company has the ability and intent to hold these securities to
maturity. Securities designated as available-for-sale may be sold to
implement the Company's asset/liability management strategies and in
response to changes in interest rates, prepayment rates and similar
factors. Securities designated as available-for-sale are recorded at
market value and unrealized gains or losses, net of income taxes, are
reported as part of accumulated other comprehensive income, a separate
component of stockholders' equity. Gains or losses on sale of
securities is based on the specific identification method.
LOANS - Loans are stated at the principal amounts outstanding less
deferred loan fees and costs and the allowance for loan losses.
Interest on commercial, installment and real estate loans is accrued
daily based on the principal outstanding.
Loan origination and commitment fees and certain origination costs are
deferred and, if material, the net amount is amortized over the
contractual life of the loans as an adjustment of their yield.
A loan is impaired when, based on current information and events,
management believes it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured based upon the present value of
future cash flows discounted at the loan's effective rate, the loan's
observable market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized on a
cash basis, and only when the principal is not considered to be
impaired. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest
or principal or when a loan becomes contractually past-due by ninety
days or more with respect to principal or interest. Loans on which the
accrual of interest has been discontinued are designated as nonaccrual
loans. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period
income. Accruals are resumed on loans only when they are brought fully
current with respect to interest and principal and when, in the
judgment of management, the loan is estimated to be fully collectible.
Restructured loans are those loans on which concessions in terms have
been granted because of the borrower's financial or legal difficulties.
Interest is generally accrued on such loans in accordance with the new
terms.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is
established through a provision charged to expense. Loans are charged
off against the allowance for loan losses when
46
47
management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans, standby letters
of credit, overdrafts and commitments to extend credit based on
evaluations of collectibility and prior loss experience. The
evaluations take into consideration such factors as changes in the
nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current
economic conditions that may affect the borrowers' ability to pay.
Material estimates relating to the determination of the allowance for
loan losses are particularly susceptible to significant change in the
near term. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, the FDIC and DFI,
as an integral part of their examination process, periodically reviews
the Bank's allowance for loan losses. The FDIC may require the Bank to
recognize additions to the allowance based on their judgment about
information available to them at the time of their examination.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at
cost less accumulated depreciation. Provisions for depreciation
included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the related assets.
Expenditures for major renewals and improvements are capitalized and
those for maintenance and repairs are charged to expense as incurred.
OTHER BORROWINGS - During 1999, the Company obtained advances from the
Federal Home Loan Bank for $1,800,000 at 5.83% maturing September 2000,
$2,000,000 at 6.05% maturing April 2001, and $1,000,000 at 6.13%
maturing September 2001. All borrowings were repaid before maturity in
October 2000. At December 31, 2000, other borrowings consist of
commercial repurchase agreements, where the bank has an agreement with
the depositor to sell and repurchase, on a daily basis, a proportionate
interest in US Government and Agency securities.
EARNINGS PER SHARE - Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share is
computed by dividing net income by the sum of the weighted-average
number of common shares outstanding for the period plus the dilutive
effect that could occur if the Company's outstanding stock options were
exercised and converted into common stock, net of estimated shares that
could be reacquired with proceeds from the exercise of such options.
The following table reconciles the numerator and denominator used in
computing both basic earnings per share and diluted earnings per share
for the years ended December 31. All share and per share amounts have
been restated to give retroactive effect to the 10% stock dividend paid
on October 22, 2000.
2000 1999 1998
BASIC EPS CALCULATION
Numerator (net income) $ 4,811,769 $ 4,370,003 $ 4,054,109
----------- ----------- -----------
Denominator (weighted average common shares
outstanding) 2,882,339 2,928,943 2,954,163
----------- ----------- -----------
Basic EPS $1.67 $1.49 $1.37
===== ===== =====
DILUTED EPS CALCULATION
Numerator (net income) $ 4,811,769 $ 4,370,003 $ 4,054,109
----------- ----------- -----------
Denominator:
Weighted average common shares outstanding 2,882,339 2,928,943 2,954,163
Options 151,221 236,800 175,464
----------- ----------- -----------
3,033,560 3,165,743 3,129,627
----------- ----------- -----------
Diluted EPS $1.59 $1.38 $1.30
===== ===== =====
47
48
OTHER REAL ESTATE OWNED - Real estate acquired by foreclosure, is
carried at the lower of the recorded investment in the property or its
fair value less estimated selling costs. Prior to foreclosure, the
value of the underlying loan is written down to the fair value of the
real estate to be acquired, less costs to sell, by a charge to the
allowance for loan losses, if necessary. Fair value of other real
estate is generally determined based on an appraisal of the property.
Any subsequent write-downs are charged against operating expenses.
Operating expenses of such properties, net of related income, and gains
and losses on their disposition are included in other expenses.
Gain recognition on the disposition of real estate is dependent upon
the transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale. This includes the buyer's
initial and continuing investment, the degree of continuing involvement
by the Bank with the property after the sale, and other matters. Under
certain circumstances, revenue recognition may be deferred until these
criteria are met.
INCOME TAXES - The Company accounts for income taxes under the asset
and liability method. Under 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 existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using currently enacted tax rates applied to such 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.
STOCK OPTION PLAN - The Company accounts for its stock option plan
under the intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. As required
by the Statement of Financial Accounting Standards, ("SFAS ") No. 123,
Accounting for Stock-Based Compensation, the Company provides pro forma
net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied.
COMPREHENSIVE INCOME - Comprehensive income includes net income and
other comprehensive income. The Company's only source of other
comprehensive income is derived from unrealized gains and losses on
securities held-for-sale. Reclassification adjustments result from
gains or losses on securities that were realized and included in net
income of the current period that also had been included in other
comprehensive income as unrealized holding gains or losses in the
period in which they arose. They are excluded from comprehensive income
of the current period to avoid double counting.
SEGMENT REPORTING -The Company has two reportable segments: commercial
banking and credit card services. Commercial banking includes all
services to the Company's customers except credit card services. Credit
card services are limited to those revenues, net of related data
processing costs, associated with the Bank's agreement to provide
credit and debit card processing services for merchants solicited by an
ISO or the Bank who accept credit and debit cards as payments for goods
and services.
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49
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998 and amended
by SFAS No.138, issued in June 2000. The requirements of SFAS No. 133,
as amended, will be effective for the Company in the first quarter of
the fiscal year beginning January 1, 2001. The standard establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities. Under the standard, certain contracts that
were not formerly considered derivatives may now meet the definition of
a derivative. The Company adopted the standard effective January 1,
2001. The Company has determined SFAS 133 to have no impact on the
Company's financial position and results of operations because the
Company has no derivative activity.
SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, was issued in September
2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities. Most of the provisions of SFAS No. 125 were carried
forward to SFAS No. 140 without reconsideration by the Financial
Accounting Standards Board ("FASB"), and some were changed only in
minor ways. In issuing SFAS No. 140, the FASB included issues and
decisions that had been addressed and determined since the original
publication of SFAS No. 125. SFAS No. 140 is effective for transfers
after March 31, 2001. Management does not expect the adoption of SFAS
No. 140 to have a significant impact on the financial position or
results of operations of the Company.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The average amount of these reserve balances for
the years ended December 31, 2000 and 1999 was approximately $2,693,000
and $3,575,000, respectively. In addition, the Bank maintains
compensating balances with the Federal Reserve Bank, which totaled
$1,600,000 at December 31, 2000 and 1999.
4. SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale are summarized as follows:
DECEMBER 31, 2000
----------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Treasury securities and
obligations of U.S. agencies $ 17,413,621 $ 126,715 $ (31,687) $ 17,508,649
Obligations of state and political
subdivisions 2,316,871 21,290 (100) 2,338,061
Corporate bonds, Commercial Paper
and Bankers Acceptances 1,128,726 21,944 ( 0) 1,150,670
------------ ---------- --------- -----------
$ 20,859,218 $ 169,949 $(31,787) $ 20,997,380
============ ========== ========= ============
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50
DECEMBER 31, 1999
----------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Treasury securities and obligations
of U.S. agencies $ 21,095,085 $ 0 $(397,818) $ 20,697,267
Obligations of state and political
subdivisions 4,672,157 14,491 (9,421) 4,677,227
--------- ------ ------- ---------
$ 25,767,242 $ 14,491 $(407,239) $ 25,374,494
============ ========== ========== ============
The amortized cost and estimated fair value of securities
held-to-maturity at December 31, 2000 and 1999, which have contractual
maturities of after five through ten years consist of the following:
DECEMBER 31, 2000
-----------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage backed securities $ 5,006,831 $ 746 $(35,168) $ 4,972,409
=========== ========= ========= ===========
DECEMBER 31, 1999
------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Mortgage backed securities $ 5,918,595 $ 10,336 $(57,732) $ 5,871,199
=========== ========= ========= ===========
The amortized cost and estimated fair value of securities at December
31, 2000 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or repay obligations with or without call or prepayment
penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------- -----------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 8,017,606 $ 8,003,374 $ 0 $ 0
Due after one year through five years 10,880,881 11,016,131 $ 0 $ 0
Due after five years through ten years 1,960,731 1,977,875 5,006,831 4,972,409
------------ ------------- ----------- -----------
$ 20,859,218 $ 20,997,380 $ 5,006,831 $ 4,972,409
============ ============= =========== ===========
At December 31, 2000, the Bank has pledged $1,000,000 of securities for
treasury, tax and loan accounts, and $5,000,000 for deposits of public
funds.
Gross realized losses on the sale of available-for-sale securities were
$59,313 in 2000. No gains were realized on the sale of
available-for-sale securities in 2000. Gross realized gains and gross
realized losses, respectively, on available-for-sale securities were
$18,079 and $76,436 in 1999, and $96,020 and $3,192 in 1998. There were
no gains or losses recognized in securities held-to-maturity in 2000,
1999 and 1998.
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51
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding loan balances consist of the following:
DECEMBER 31,
--------------------------------------
2000 1999
Commercial and financial loans $ 61,068,838 $ 53,382,597
Real estate - construction loans 37,530,906 37,859,258
Real estate - commercial 94,110,859 78,842,238
Installment loans 430,208 293,505
Other 1,395,565 2,811,385
--------------- ----------------
194,536,376 173,188,983
Less:
Deferred loan fees and costs 240,877 371,594
Allowance for loan losses 2,973,593 2,971,747
--------------- ----------------
$ 191,321,906 $ 169,845,642
=============== ================
Included in total loans are nonaccrual loans of approximately $801,246
and $394,176 at December 31, 2000 and 1999, respectively. If interest
on nonaccrual loans had been accrued, such interest income would have
approximated $199,528, $84,060, $45,565 during the years ended December
31, 2000, 1999 and 1998, respectively.
A loan is impaired when, based on current information and events,
management believes it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The Bank had outstanding balances of $801,246 and $394,176
in impaired loans that had impairment allowances of $318,382 and
$315,341 as of December 31, 2000 and 1999, respectively. The average
outstanding balance of impaired loans were $622,153, and $612,411, for
the years ended December 31, 2000, and 1999 respectively. There was no
interest recognized on impaired loans during the years ended December
31, 2000, 1999 and 1998.
The Bank services, for others, loans and participation of loans that
are sold of approximately $5,666,188 and $3,515,109 as of December 31,
2000 and 1999, respectively.
The Bank concentrates its lending activities primarily within Shasta,
El Dorado, Placer and Sacramento counties, in Northern California, and
the location of the Bank's three full-service offices. Although the
Bank has a diversified loan portfolio, a significant portion of its
customers' ability to repay the loans is dependent upon the
professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other
assets and are expected to be repaid from cash flows of the borrower or
proceeds from the sale of the collateral. The Bank's exposure to credit
loss, if any, is the difference between the fair value of the
collateral and the outstanding balance of the loan.
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52
Changes in the allowance for loan losses consist of the following:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
Balance at beginning of year $ 2,971,747 $ 3,234,837 $ 2,819,039
Provision for loan losses 142,000 120,000 500,000
Loans charged off (204,402) (460,363) (208,823)
Recoveries of loans previously charged off 64,248 77,273 124,621
----------- ----------- -----------
Balance at end of year $ 2,973,593 $ 2,971,747 $ 3,234,837
=========== =========== ===========
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
ESTIMATED DECEMBER 31,
LIVES -----------------------------------
2000 1999
Land $ 1,595,808 $ 1,595,808
Bank Buildings 31.5 years 3,680,047 3,673,847
Furniture, fixtures and equipment 3 - 7 years 2,979,915 2,693,770
------------ ------------
8,255,770 7,963,425
Less accumulated depreciation (3,016,977) (2,544,081)
------------- ----------
5,238,793 5,419,344
Construction in progress 48,360 54,552
------------ ------------
$ 5,287,153 $ 5,473,896
============ ============
Depreciation expense, included in net occupancy and equipment expense,
is $507,458, $471,655, and $433,910 for the years ended December 31,
2000, 1999 and 1998, respectively.
7. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
-------------------------------
2000 1999
Cash surrender value of life insurance
policies $ 2,019,420 $ 1,931,870
Deferred tax asset, net 1,173,537 1,497,370
Accrued interest on loans 1,266,751 925,112
Accrued interest on investment securities 336,597 419,898
Other real estate owned 0 40,000
Sweep account receivable 1,377,943 356,926
Federal Home Loan Bank Stock 307,000 850,800
Other 399,754 208,124
------------ -------------
$ 6,881,002 $ 6,230,100
============ =============
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53
8. DEPOSITS
Time certificates of deposit of $100,000 or more totaled $51,621,931
and $41,862,073 at December 31, 2000 and 1999, respectively. Interest
expense on such deposits was $3,849,404, $2,116,417 and $1,878,254
during 2000, 1999 and 1998, respectively.
At December 31, 2000, the scheduled maturities for time deposits are as
follows:
YEAR ENDING
DECEMBER 31,
------------
2001 $ 99,943,572
2002 15,899,534
2003 1,442,651
2004 3,468,324
------------
Total $120,754,081
============
9. OTHER LIABILITIES
Other liabilities consist of the following:
DECEMBER 31,
----------------------------------
2000 1999
Deferred compensation $ 1,990,711 $ 1,795,819
Employee incentive payable 437,004 519,575
Accrued interest payable 464,182 296,005
Other 156,987 213,999
------------ -------------
$ 3,048,884 $ 2,825,398
============ =============
10. INCOME TAXES
Provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
Current:
Federal $ 2,305,780 $ 1,941,187 $ 2,210,608
State 425,446 485,321 518,666
------------ ------------ -------------
2,731,226 2,426,508 2,729,274
------------ ------------ -------------
Deferred:
Federal 99,082 210,068 (230,101)
State 20,983 64,667 (52,912)
------------ ------------ -------------
120,065 274,735 (283,013)
------------ ------------ -------------
$ 2,851,291 $ 2,701,243 $ 2,446,261
============ ============ =============
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54
Income tax expense attributable to income before income taxes differed
from the amounts computed by applying the U.S. federal income tax rate
of 34 percent to income before income taxes as a result of the
following:
% OF PRETAX INCOME
-------------------------------------
2000 1999 1998
Income tax at the Federal statutory rate 34.00% 34.00% 34.00%
State franchise tax, net of Federal tax benefit 7.15 7.15 7.08
Tax-exempt interest (3.10) (3.60) (3.77)
Other (.84) .65 .32
----- ----- -----
37.21% 38.20% 37.63%
====== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 consist of the following:
2000 1999
Deferred tax assets:
State franchise taxes $ 129,429 $ 163,268
Deferred compensation 892,635 804,829
Loan loss reserves 812,576 871,979
Unrealized securities losses 0 152,386
Other 0 16,090
------------ -------------
Total deferred tax assets 1,834,640 2,008,552
------------ -------------
Deferred tax liabilities:
Depreciation (260,301) (284,616)
Unrealized securities gains (51,382) (0)
Deferred loan origination costs (216,111) (132,750)
Deferred State taxes (86,682) (93,816)
Other (46,627) (0)
-------- --------------
Total deferred tax liabilities (661,103) (511,182)
------------ -------------
Net deferred tax asset $ 1,173,537 $ 1,497,370
============ =============
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55
11. STOCK OPTION PLAN
On February 17, 1998, the Board of Directors adopted the 1998 Stock
Option Plan (the "Plan") which was approved by the Company's
stockholders on April 21, 1998. The Plan provides for awards in the
form of options (which may constitute incentive stock options
("Incentive Options") under Section 422(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), or non-statutory stock options
("NSOs") to key personnel of the Company, including directors. The Plan
provides that Incentive Options under the Plan may not be granted at
less than 100% of fair market value of the Company's common stock on
the date of the grant. NSOs may not be granted at less than 85% of the
fair market value of the common stock on the date of the grant. The
purpose of the plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging key personnel
to focus on critical long range objectives, (b) increasing the ability
of the Company to attract and retain key personnel and (c) linking key
personnel directly to stockholder interests through increased stock
ownership. A total of 594,000 shares of the Company's common stock are
reserved for grant under the Plan.
The Plan provides that all options under the Plan shall vest at a rate
of at least 20% per year from the date of the grant. Vesting may be
accelerated in the event of an optionee's death, disability, retirement
or in the event of a change of control.
The following table presents the changes in outstanding stock options
for the periods indicated:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------ --------
Options outstanding, January 1, 1998 6,600 $ 3.34
Granted 452,100 $ 8.75
Exercised (6,600) $ 3.34
-------
Options outstanding, December 31, 1998 452,100 $ 8.75
Granted 4,950 $17.27
Exercised (11,330) $ 8.97
--------
Options outstanding, December 31, 1999 445,720 $ 9.50
Granted 0 $ 0.00
Expired 3,300 $ 9.70
Exercised (43,505) $ 8.97
-------
Options outstanding, December 31, 2000 398,915 $8.91
=======
At December 31, 2000, 188,800 shares were available for future grants
under the plan. As of December 31, 2000, 1999 and 1998, respectively,
249,828, 101,417 and 0 shares were available to be exercised.
Additional information regarding options outstanding as of December 31,
2000 is as follows:
- -------------------------------------------------------------------------------------------------------
Weighted Avg. Remaining
Exercise Prices Options Outstanding Contractual Life (Years) Options Exercisable
- -------------------------------------------------------------------------------------------------------
$ 8.25 242,495 8 188,250
$ 9.70 151,470 8 60,588
$17.27 4,950 9 990
- -------------------------------------------------------------------------------------------------------
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56
The Company uses the intrinsic value based method for measuring
compensation cost related to the Plan. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date over the amount an employee must pay
to acquire the stock. This cost is amortized on a straight-line basis
over the vesting period of the options granted. Compensation cost
related to the discount on non-qualified options recorded in 2000, 1999
and 1998 related to the Plan was $67,200, $77,865, and $130,000
respectively.
The Company uses an option-pricing model to compute grant-date fair
value of options granted for purposes of disclosing pro forma net
income and net income per share. In computing the grant-date fair value
of options granted during the period for disclosure purposes, the
Company used an option-pricing model that takes into account the stock
price at the grant date ($9.70), the exercise price (ranging from $8.25
to $17.27), the expected life of the option (seven years), the expected
dividends on the Company's common stock (increasing $.05 per share per
year) and the risk-free interest rate over the expected life of the
option (6.68%). Under these assumptions, no additional compensation
cost would be accrued under this fair value based model than that
computed under the intrinsic value based method. Therefore, the pro
forma disclosures are not required.
12. CAPITAL STOCK
On May 18, 1999, the Board of Directors authorized the purchase in the
open market or in private transactions up to 452,100 shares of its
outstanding common stock over a seven-year period. During 2000 and
1999, 66,067 and 63,669 shares were purchased and retired. Shares
purchased are retired by a charge to common stock and retained earnings
for the cost.
On October 22, 2000, the Company paid a $0.59 per share cash dividend
(as adjusted for the 10% stock dividend) coupled with a 10% stock
dividend to shareholders of record as of October 1, 2000.
On April 20, 1999, the Board of Directors authorized 2,000,000 shares
of preferred stock. As of December 31, 2000 no preferred shares have
been issued.
13. PROFIT-SHARING PLAN
In 1985, the Bank adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the Bank's earnings. The employees'
contributions are limited to the maximum amount allowable under IRS ss.
402(G). The Bank's contributions include a 50% matching contribution up
to a maximum of $900 per employee, and a discretionary contribution is
also permitted. The Bank made matching contributions aggregating
$42,610, $38,104, and $31,892 for the years ended December 31, 2000,
1999 and 1998, respectively. The Bank made a discretionary contribution
of $25,000 for 1999. No discretionary contributions were made in 1998
or 2000.
14. RELATED PARTY TRANSACTIONS
Certain directors and officers of the Bank and entities with which they
are associated are customers and have transactions with the Bank in the
ordinary course of business. All loans and commitments included in such
transactions are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than
normal risk of collectibility or present other unfavorable features. An
analysis of the activity in related party loans consists of the
following:
56
57
DECEMBER 31,
---------------------------------
2000 1999
Balance at beginning of year $ 938,309 $ 457,114
New loan additions 1,017,051 863,060
Principal repayments (401,096) (381,865)
------------ -----------
Balance at end of year $ 1,554,264 $ 938,309
=========== ===========
During 1990, the Bank established deferred compensation plans with two
Bank officers providing for annual payments on retirement or death
benefits over fifteen year periods. One of the officers retired during
1997. The remaining officer's plan is funded through salary deferrals
and the cash surrender value of a life insurance policy acquired by the
Bank. Amounts deferred earn interest at the bank's reference rate,
adjusted annually, plus one percent.
15. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of
business, the Bank enters into various types of transactions, which
involve financial instruments with off-balance sheet risk. These
instruments include commitments to extend credit and stand-by letters
of credit, which are not reflected in the accompanying consolidated
balance sheets. These transactions may involve, to varying degrees,
credit and interest rate risk in excess of the amount, if any,
recognized in the consolidated balance sheets. Management does not
anticipate any loss to result from these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and stand-by letters of credit.
The Bank applies the same credit standards to these contracts as it
uses for loans recorded on the balance sheet.
DECEMBER 31,
-----------------------------
2000 1999
Off-balance sheet commitments:
Commitments to extend credit $55,764,726 $47,848,820
Standby letters of credit 1,605,120 1,618,830
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed
expiration dates but may be terminated by the Bank if certain
conditions of the contract are violated. Although currently subject to
draw down, many of the commitments do not necessarily represent future
cash requirements. Collateral held relating to these commitments
varies, but generally includes real estate, securities and cash.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Credit risk arises in these transactions from the possibility that a
customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual
evaluation of each customer's creditworthiness, but may include cash
and securities.
Commitments to extend credit and standby letters of credit bear similar
credit risk characteristics as outstanding loans.
57
58
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements and initiate certain mandatory and possibly additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance items
as calculated under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Prompt corrective
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets and of Tier 1 capital to average assets.
Management believes as of December 31, 2000 and 1999, that the Company and the
Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2000 and 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
category. The Company's and the Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999 are also presented in the table.
TO BE
CATEGORIZED AS
WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION
-------------------- ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
At December 31, 2000:
COMPANY
Leverage capital (to average assets) $28,667,489 11.52% $ 9,957,499 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 28,667,489 13.75% 8,352,270 4.00% n/a n/a
Total capital (to risk-weighted assets) 31,277,573 15.01% 16,704,540 8.00% n/a n/a
BANK
Leverage capital (to average assets) $26,804,948 11.02% $ 9,733,543 4.00% $ 12,166,928 5.00%
Tier 1 Capital (to risk-weighted assets) 26,804,948 12.86% 8,352,270 4.00% 12,548,405 6.00%
Total capital (to risk-weighted assets) 29,415,033 14.11% 16,704,540 8.00% 20,880,675 10.00%
At December 31, 1999:
COMPANY
Leverage capital (to average assets) $26,299,757 11.31% $ 9,088,079 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 26,299,757 14.33% 7,191,262 4.00% n/a n/a
Total capital (to risk-weighted assets) 28,594,607 15.58% 14,382,525 8.00% n/a n/a
BANK
Leverage capital (to average assets) $24,859,547 10.44% $ 9,141,919 4.00% $ 11,905,107 5.00%
Tier 1 Capital (to risk-weighted assets) 24,859,547 13.59% 7,191,262 4.00% 11,015,280 6.00%
Total capital (to risk-weighted assets) 27,154,397 14.85% 14,382,525 8.00% 18,358,800 10.00%
58
59
The principal sources of cash for the Company are dividends from the
Bank. Dividends from the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings or the
Bank's net income for the latest three fiscal years, less dividends
previously declared during that period, or, with the approval of
California Superintendent of Banks, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal
year, or the net income of the Bank for its current fiscal year. As of
December 31, 2000 the maximum amounts available for dividend
distribution under this restriction were approximately $8,607,000.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates.
In particular, it is prohibited from lending to an affiliated company
unless the loans are secured by specific types of collateral. Such
secured loans and other advances from the subsidiaries are limited to
10 percent of the subsidiary's equity. No such loans or advances were
outstanding during 2000 or 1999.
17. SEGMENT REPORTING
The Company has two reportable segments: commercial banking and credit
card services. The Company conducts a general commercial banking
business in the counties of El Dorado, Placer, Shasta, and Sacramento,
California. The principal commercial banking activities include a
full-array of deposit accounts and related services and commercial
lending for businesses and their interests. Credit card services are
limited to those revenues and data processing costs associated with its
agreement with an independent sales organization ("ISO"). Pursuant to
the agreement, the Bank provides credit and debit card processing
services for merchants solicited by the ISO or the Bank who accept
credit and debit cards as payments for goods and services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance of its commercial banking business based on the
overall profitability of the Company, including merchant card
processing activities. Credit card services are evaluated through
analysis of related net fee income and the number of active merchants
in the program. An allocation of the Company's total assets is not
performed by reportable segment. There are no inter-segment
transactions.
The following table presents financial information about the Company's
reportable segments:
2000 1999 1998
Income before income taxes:
Commercial banking $ 5,787,627 $ 5,188,941 $ 4,772,521
Credit card services 1,875,433 1,882,305 1,727,849
------------------------------------------------------
$ 7,663,060 $ 7,071,246 $ 6,500,370
======================================================
Effective April 1, 2001, pricing of the credit card processing
agreement with the Bank's ISO changes from 0.135% of volume to 0.002%
of volumes processed and from the full earnings to one-half of the
earnings on the deposit relationship. The contract renewal represents a
significant decline in revenues from merchant credit card processing.
If the new pricing had been in effect for the twelve months ended
December 31, 2000, credit card service income, net would have been
$876,000 less than the actual amount recorded.
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60
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the
balance sheets for cash and short-term instruments are a reasonable
estimate of fair value.
SECURITIES - Fair values for 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.
LOANS RECEIVABLE - For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans (e.g., commercial real
estate and rental property mortgage loans, commercial and industrial
loans) are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair
value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates.
The fair value of letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligation with the counterparties at the
reporting date.
DEPOSIT LIABILITIES - The fair values disclosed for demand deposits
(e.g., interest and noninterest checking, passbook savings, and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The fair
values for fixed-rate 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 expected
monthly maturities on time deposits. The carrying amount of accrued
interest payable approximates its fair value.
OTHER BORROWINGS - The fair value of other borrowings is estimated by
discounting the contractual cash flows under outstanding borrowings at
rates prevailing in the marketplace today for similar borrowings, rates
and collateral.
LIMITATIONS - Fair value estimates are made at a specific point in
time, based on relevant market information and other information about
the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
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Fair value estimates are based on current on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the mortgage banking operation, deferred tax assets and
liabilities, and property, plant and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.
The estimated fair values of the Company's financial instruments are
approximately as follows:
DECEMBER 31, 2000
-------------------------------------
CARRYING FAIR
AMOUNT VALUE
Financial assets:
Cash and short-term investments $ 25,612,510 $ 25,612,510
Securities 26,004,211 25,969,789
Loans receivable, net 191,321,906 191,569,458
Financial liabilities:
Demand and savings $ 97,282,076 $ 97,282,076
Fixed rate certificates 112,561,043 108,983,372
Variable certificates 8,193,038 8,193,038
Other borrowings 5,267,472 5,267,472
CONTRACT FAIR
AMOUNT VALUE
Off balance sheet financial instruments:
Commitments to extend credit $55,764,726 $ 1,115,295
Standby letters of credit 1,605,120 32,102
DECEMBER 31, 1999
------------------------------------
CARRYING FAIR
AMOUNT VALUE
Financial assets:
Cash and short-term investments $ 19,165,368 $ 19,165,368
Securities 31,293,089 31,245,693
Loans receivable, net 169,845,642 168,418,851
Financial liabilities:
Demand and savings $ 95,134,802 $ 95,134,802
Fixed rate certificates 88,002,231 87,826,000
Variable certificates 15,186,269 15,186,269
Other borrowings 4,800,000 4,800,000
CONTRACT FAIR
AMOUNT VALUE
Off balance sheet financial instruments:
Commitments to extend credit $47,848,820 $ 956,976
Standby letters of credit 1,618,830 32,377
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19. REDDING BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
DECEMBER 31,
2000 1999
-----------------------------------
Balance Sheets
Assets:
Cash $ 184,282 $ 163,080
Time deposit with subsidiary 1,490,000 1,015,000
Investment in subsidiaries 27,079,987 24,881,315
---------- ----------
Total assets $ 28,754,269 $ 26,059,395
============== ==============
Stockholders' Equity 28,754,269 26,059,395
-------------- --------------
Total liabilities and stockholders' equity $ 28,754,269 $ 26,059,395
============== ==============
YEARS ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
STATEMENTS OF INCOME
Income:
Interest on time deposit $ 33,655 $ 42,259 $ 13,719
Dividend from subsidiary 3,247,731 2,840,272 2,000,000
------------ ------------ -------------
3,281,386 2,882,531 2,013,719
Expenses: 203,616 297,414 292,651
------------ ------------ -------------
Income before income taxes and
equity in undistributed net income
of subsidiaries 3,077,770 2,585,117 1,721,068
Provision for income taxes 800 800 800
------------ ------------ -------------
Income before equity in undistributed
net income of subsidiaries 3,076,970 2,584,317 1,720,268
Equity in undistributed net income of
subsidiaries 1,734,799 1,785,686 2,333,841
------------ ------------ -------------
Net income $ 4,811,769 $ 4,370,003 $ 4,054,109
============ ============ =============
- --------------------------------------------------
4 Under the Company's intercompany tax allocation policy, all tax benefits
resulting from net losses before dividends from subsidiaries are allocated to
the Bank.
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YEARS ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 4,811,769 $ 4,370,003 4,054,109
Adjustments to reconcile net income to
net cash provided by operating activities:
Compensation associated with stock options 67,200 77,865 130,136
Equity in undistributed net income of
subsidiaries (1,871,530) (1,839,815) (2,333,841)
------------ ------------ ---------
Net cash provided by operating activities 3,007,439 2,608,053 1,850,404
------------ ------------ -----------
Cash flows from financing activities:
Purchase of common stock (1,307,116) (1,243,094) 0
Proceeds from issuance of common stock 495,506 147,150 22,000
------- ------------ ------
Common stock transactions, net (811,610) (1,095,944) 22,000
Cash dividends (1,699,627) (1,583,923) (1,345,146)
------------ ------------ ---------
Net cash used by financing activities (2,511,237) (2,679,867) (1,323,146)
------------ ------------ ---------
Net increase (decrease) in cash and cash equivalents 496,202 (71,814) 527,258
Cash and cash equivalents at beginning of year 1,178,080 1,249,894 722,636
------------ ------------ -----------
Cash and cash equivalents at end of year $ 1,674,282 $ 1,178,080 $ 1,249,894
============ ============ ===========
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QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
(dollars in thousands)
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
Q1 Q2 Q3 Q4
2000 2000 2000 2000
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
Net interest income $2,878 $2,819 $2,829 $2,929
Provision for loan and lease losses (0) (56) (0) (86)
Non-interest income 676 715 730 686
Non-interest expense (1,652) (1,540) (1,639) (1,626)
------- ------- ------- -------
Income before taxes 1,902 1,938 1,920 1,903
Provision for income tax (737) (698) (695) (721)
----- ----- ----- -----
Net Income $1,165 $1,240 $1,225 $1,182
====== ====== ====== ======
Per common share(6):
Basic earnings per share $0.40 $0.43 $0.43 $0.41
Diluted earnings per share $0.38 $0.41 $0.41 $0.39
Dividends $0.00 $0.00 $0.00 $0.59
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
(dollars in thousands)
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
Q1 Q2 Q3 Q4
1999 1999 1999 1999
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
Net interest income $2,589 $2,709 $2,702 $2,836
Provision for loan and lease losses (25) (15) (10) (70)
Non-interest income 681 768 697 644
Non-interest expense (1,756) (1,658) (1,494) (1,527)
------- ------- ------- -------
Income before taxes 1,489 1,804 1,895 1,883
Provision for income tax (590) (670) (738) (703)
----- ----- ----- -----
Net Income $899 $1,134 $1,157 $1,180
==== ====== ====== ======
Per common share(5):
Basic earnings per share $0.30 $0.39 $0.40 $0.40
Diluted earnings per share $0.29 $0.36 $0.37 $0.36
Dividends $0.00 $0.00 $0.00 $0.55
- ------------------------------------- ---------------- ----------------- ---------------- -----------------
- ------------------------------
(5)All share and per share amounts have been adjusted to give retroactive effect
to the 10% stock dividend paid on October 22, 2000.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Certain information required by Part III is incorporated by reference
to the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 2000 Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 1,
2001, are as follows:
Name Age Position(s)
---- --- -----------
Russell L. Duclos.................................. 61 President, Chief Executive Officer Redding
Bancorp and Director
Michael C. Mayer................................... 44 President, Chief Executive Officer Redding Bank
of Commerce and Director
Linda J. Miles..................................... 47 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Russell L. Duclos has served as President, Chief Executive Officer and
a director of the Company since July 1997. From 1982 to July 1997, he served as
Chief Credit Officer of the Company. Mr. Duclos presently serves on the
executive, loan, marketing and long range planning committees of the Board of
Directors. Mr. Duclos will retire from President and Chief Executive Officer of
Redding Bancorp on April 30, 2001. He will continue as Director of the Company.
Michael C. Mayer joined the Company in April 1997 and has served as
Executive Vice President and Chief Credit Officer of the Company from July 1997
to September 1999. From September 1999 until January 2001, Mr. Mayer has served
as Executive Vice President and Chief Operating Officer. As of January 1, 2001
Mr. Mayer was promoted to President and Chief Executive Officer of Redding Bank
of Commerce and serves on the loan, executive, and asset/liability committees of
the Board of Directors.
Linda J. Miles has served as Executive Vice President, Chief Financial
Officer and Assistant Secretary of the Company since October 1989. With over 24
years of professional banking experience, prior to joining the Company, Ms.
Miles served as Senior Vice President and Chief Financial Officer for another
Northern California Independent Bank. Ms. Miles serves on the ALCO committee and
attends all committee meetings of the Board of Directors.
The remainder of the information required by this section is
incorporated by reference to the information in the section entitled "Election
of Directors" and "Executive Compensation" in the Proxy Statement.
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66
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this section is incorporated by reference
to the information in the sections entitled "Election of Directors--Directors'
Compensation" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is incorporated by reference
to the information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal shareholders of the
Company and their associates were customers of and had banking transactions with
the Bank in the ordinary course of the Bank's business during 1998 and the Bank
expects to have such transactions in the future. All loans and commitments to
loans included in such transactions were made in compliance with the applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
of similar creditworthiness, and in the opinion of the Company, did not involve
more than a normal risk of collectibility or present other unfavorable features.
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67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial
Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes
thereto.
(3) Exhibits:
Exhibit
Number Description of Document
3.1 Articles of Incorporation, as amended.*
3.2 Bylaws, as amended.
4.1 Specimen Common Stock Certificate.*
10.1 Office Building Lease by and between David and Maria Wong and Redding Bank of
Commerce dated June 10, 1998.*
10.2 Office Building Lease between Garian Partnership/First Avenue Square and
Redding Bank of Commerce dated July 16, 1998.*
10.3 1998 Stock Option Plan.*
10.4 Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan.*
10.5 Form of Nonstatutory Stock Option Agreement used in connection with 1998 Stock Option Plan.*
10.6 Employment Agreement between the Company and Russell L. Duclos dated June 17, 1997.*
10.7 Directors Deferred Compensation Plan.*
10.8 Form of Deferred Compensation Agreement Used In Connection With Directors Deferred
Compensation Plan.*
10.9 Merchant Services Agreement dated as of April 1, 1993, between Cardservice International,
Inc. and Redding Bank of Commerce, as amended.*
11.1 Statement re: Computation of Earnings Per Share (see page __49_).
16.1 Letter on Change in Certifying Accountants.*
21.1 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see page ___69__)
27.1 Financial Data Schedule.
---------------------
* Previously filed with the Company's Registration Statement on Form 10.
(b) Reports on Form 8-K:
On October 17, 2000, the Company filed a Form 8-K reporting
third quarter financial results. On January 2, 2001, the Company filed a Form
8-K announcing Michael C. Mayer, President and CEO of Redding Bank of Commerce.
On January 30, 2001, the Company filed a Form 8-K reporting 2000 year-end
financial results.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 1, 2001.
REDDING BANCORP
By: /s/ Russell L. Duclos
--------------------------------------
Russell L. Duclos
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Russell L. Duclos and Linda J. Miles, and
each of them, his or her true and lawful attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
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
Company and in the capacities and on the dates indicated:
Name Title Date
---- ----- -----
/s/ Russell L. Duclos
- -------------------------------------------- President, Chief Executive Officer and March 1, 2001
Russell L. Duclos Director (Principal Executive Officer)
/s/ Michael C. Mayer
- -------------------------------------------- President, Chief Executive Officer March 1, 2001
Michael C. Mayer Redding Bank of Commerce and Director
/s/ Linda J. Miles
- -------------------------------------------- Executive Vice President and Chief March 1, 2001
Linda J. Miles Financial Officer and Assistant
Secretary (Principal Financial Officer
and Accounting Officer)
/s/ Robert C. Anderson
- -------------------------------------------- Chairman of the Board March 1, 2001
Robert C. Anderson
/s/ Welton L. Carrel
- -------------------------------------------- Director March 1, 2001
Welton L. Carrel
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69
/s/ John C. Fitzpatrick
- -------------------------------------------- Director March 1, 2001
John C. Fitzpatrick
/s/ Kenneth R. Gifford, Jr.
- -------------------------------------------- Director March 1, 2001
Kenneth R. Gifford, Jr.
/s/ Harry L. Grashoff, Jr.
- -------------------------------------------- Director March 1, 2001
Harry L. Grashoff, Jr.
/s/ Eugene L. Nichols
- -------------------------------------------- Director March 1, 2001
Eugene L. Nichols
/s/ David H. Scott
- -------------------------------------------- Director March 1, 2001
David H. Scott
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EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
3.1 Articles of Incorporation, as amended.*
3.2 Bylaws, as amended.
4.1 Specimen Common Stock Certificate.*
10.1 Office Building Lease by and between David and Maria Wong a Redding Bank of Commerce dated June 10, 1998.*
10.2 Office Building Lease between Garian Partnership/First Avenue Square and Redding Bank of Commerce
dated July 16, 1998.*
10.3 1998 Stock Option Plan.*
10.4 Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan.*
10.5 Form of Nonstatutory Stock Option Agreement used in connection with 1998 Stock Option Plan.*
10.6 Employment Agreement between the Company and Russell L. Duclos dated June 17, 1997.*
10.7 Directors Deferred Compensation Plan.*
10.8 Form of Deferred Compensation Agreement Used In Connection With Directors Deferred Compensation
Plan.*
10.9 Merchant Services Agreement dated as of April 1, 1993, between Cardservice International, Inc. and
Redding Bank of Commerce, as amended.*
11.1 Statement re: Computation of Earnings Per Share (see page _49__).
16.1 Letter on Change in Certifying Accountants.*
21.1 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see page _69__).
27.1 Financial Data Schedule.
---------------------
* Previously filed with the Company's Registration Statement on Form 10.
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