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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, 2001
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 Identification No.)
incorporation or organization)
1951 Churn Creek Road
Redding, California 96002
(Address of principal executive offices) (Zip Code)
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 $39,298,646 as of December 31, 2001 which was
calculated based on the last reported sale of the Company's Common Stock prior
to December 31, 2001. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purpose.
As of December 31, 2001, there were 2,703,457 shares of the Registrant's common
stock outstanding.
1
Documents Incorporated By Reference
Items numbered 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 2002 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 financial services holding
company ("FHC") registered under the Bank Holding Company Act of 1956, as
amended, 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"). The Company elected to change to a FHC in 2000. As a financial services
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 ("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 three full service branches
and one focused-service deposit facility. 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 Redding Banking of Commerce. On June 15,
2001 the Bank acquired the deposit liabilities of FirstPlus Bank at Citrus
Heights, California and has renamed the facility Roseville Banking Center at
Sunrise, a division of Redding Bank of Commerce. On February 22, 2002, the
Eureka office will locate to its permanent location at 1504 Eureka Road, Suite
100, Roseville, California. At this time the office will be renamed Roseville
Bank of Commerce. 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 Upstate California to be the major market area
of the Bank.
2
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 primary business strategy of the Bank 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 loans of the Bank are direct loans made to
individuals and small businesses in the major market area of the Bank and are
secured by real estate. See "-Risk Factors That May Affect Results-Dependence on
Real Estate." A relatively small portion of the loan portfolio of the Bank
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 commercial loan portfolio of the Bank 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
commercial loans of the Bank 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 credit administration policies of the Bank.
The real estate construction loan portfolio of the Bank consists of
a mix of commercial and residential construction loans, which are principally
secured by the underlying project. The real estate construction loans of the
Bank 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 commercial and residential real estate mortgage loan portfolio
of the Bank 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 real estate loans of the Bank is the
Borrower's operating cash flow.
3
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 90% of the
residential real estate mortgage loans originated at the Bank are sold in the
secondary market.
The specific underwriting standards of the Bank 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 credit administration policies of the Bank 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 April 2001 for a period of four years.
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 contract renewal represents a significant decline in revenues from merchant
credit card processing. The Company has been successful in pursuing various
strategies to offset the decline in revenues, including expansion of the
Roseville Bank of Commerce at Eureka, acquisition of the Sunrise location 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 complied
with the Visa requirement. Other Visa changes announced included the requirement
that total processing volume in certain high-risk categories (as defined by
Visa) is less than 20% of total processing volume.
4
Supervision and Regulation
Regulation and Supervision of Bank Holding Companies
The Company is financial services holding company subject to the
Financial Holding Company Act ("FHCA"). 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.
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 FHCA, 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 financial services 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 financial services 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 state 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 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 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.
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).
5
Subject to certain limitations, depository institution subsidiaries
of financial services 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 more than
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 financial services 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 financial services 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
institutions 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 primary federal regulator of the Bank 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.
6
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 bank
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 accounting principles
generally accepted in the United States of America ("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.
7
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.
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 the 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, 2001, 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, 2001.
The Company
---------------------------------------------------------
Actual Minimum Capital Requirement
-------------------------- ----------------------------
Leverage ............. $27,247,887 9.38% 4.0%
Tier 1 Risk-Based .... 27,247,887 11.08 4.0
Total Risk-Based ..... 30,323,015 12.33 8.0
Redding Bank of Commerce
--------------------------------------------------------------
Actual Well Minimum
------------------------- Capitalized Capital
Capital Ratio Requirement Requirement
----------- ----- ----------- -----------
Leverage ............. $26,883,167 9.38% 5.0% 4.0%
Tier 1 Risk-Based .... 26,883,167 10.93 6.0 4.0
Total Risk-Based ..... 29,958,295 12.18 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 is 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 banks capital adequacy.
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).
8
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.
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.
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.
9
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, 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.
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 of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the affiliation provisions of the
Glass-Steagall Act: Section 20, that restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, that restricts officer, director or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, The Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit a holding company system to engage in a
full range of financial activities through a new entity known as a Financial
Services Holding Company.
10
The law also:
- - broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
- - provides an enhanced framework for protecting the privacy of the
consumer information;
- - adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
- - modifies the laws governing the implementation of the Community
Reinvestment Act; and
- - addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
The Company does not expect the Financial Services Modernization Act
to have a material effect on operations. To the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience even further consolidation. The Financial Services
Modernization Act is intended to grant community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
This act may have the results of increasing the amount of competition from
larger institutions and other types of companies offering financial products.
The Company filed for and was approved as a Financial Services
Holding Company in April 2000. Financial Services Holding Companies may
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature or are complementary to activities that
are financial in nature. "Financial in nature" activities include: securities
underwriting; dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agencies; merchant banking; and activities
that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines from time to time to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Privacy
Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations will require disclosure of
privacy policies to consumers and, in some circumstances, will allow consumers
to prevent disclosure of certain personal information to a nonaffiliated third
party.
Federal banking regulators issued final rules on May 10, 2000. Pursuant to the
rules, financial institutions must provide:
- - initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
- - annual notices of their privacy policies to current customers; and
- - a reasonable method for customers to "opt-out" of disclosures to
nonaffiliated third parties.
The rules wee effective November 13, 2000, but compliance was
optional until July 1, 2001. These privacy provisions will affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors. There has been no material impact on the Company's financial
condition or results of operations as a result of compliance with the privacy
provisions.
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.
11
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 credit card 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, 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.
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, 2001, the Company employed 103 persons. None of
the Company's employees are represented by a labor union and the Company
considers its employee relations to be good.
12
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 business strategy of the Bank 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, 2001, approximately 80% of the loans of the Bank
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 Upstate
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, 2001, commercial real estate and construction loans comprised
approximately 44% and 21%, respectively, of the total loans in the portfolio of
the Bank. At December 31, 2001, 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 the loan portfolio of
the Bank and its holdings of other real estate owned if economic conditions in
Upstate California deteriorate in the future. Deterioration of the real estate
market in Upstate California would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-Economic Conditions and Geographic Concentration."
13
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 4.1%, 8.2% and 9.4% of the Company's consolidated revenues in
2001, 2000 and 1999, respectively. In addition, contract deposit relationships
with the merchants in the portfolio of the Bank and CSI represented
approximately 3.3% of the Bank's total deposits as of December 31, 2001.
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 on April 1, 2001. 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 contract renewal represents a
significant decline in revenues from merchant credit card processing.
The Company has been successful in pursuing various strategies to
offset the decline in revenues, including expansion of the Roseville Bank of
Commerce, acquisition of the Citrus Heights office, 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."
14
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 general account with the Bank and has
granted the Bank a security interest in such account to secure CSI's obligations
under the Merchant Services Agreement.
The balances required to be maintained by CSI in 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, 2001, time certificates of deposit in excess of
$100,000 represented approximately 25% of the dollar value of the total deposits
of the Bank. As such, these deposits are considered volatile and could be
subject to withdrawal. Withdrawal of a material amount of such deposits would
adversely affect the liquidity of the Bank, 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 profitability, growth and capital needs of the Bank. 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."
15
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 do. 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 borrowers of the Bank 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" page 12
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
provides for renewal at frequent periodic intervals and, therefore, 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"- page 12
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
Upstate 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, 2001, approximately 80% of the Bank's loan portfolio consisted
of real estate related loans, all of which were related to collateral located in
Upstate California. A change in California economic and business conditions may
adversely affect the performance of these loans. Deterioration in economic
conditions could have a material adverse effect on the quality of the loan
portfolio of the Bank 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.
16
Uninsured disasters may make it difficult or impossible for
borrowers to repay loans made by the Bank.
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, 2001, the Company and its subsidiaries employed
in the aggregate 103 employees. The Company considers employee relations to be
excellent. A collective bargaining group represents none of the employees of the
Company or its subsidiaries. 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 maintain life
insurance with respect to two of its officers with regard to a salary
continuation plan.
Adequacy of Allowance for Loan and Other Real Estate Losses
The Bank's allowance for estimated losses on loans was approximately
$3.2 million, or 1.5% of total loans, and 10.97% of total nonperforming loans at
December 31, 2001. Material future additions to the allowance for estimated
losses on loans might be necessary if material adverse changes in economic
conditions occur and the performance of the loan portfolio of the Bank
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 second quarter of 2001. 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 Losses (ALL)."
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 before 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.
17
Shares Eligible for Future Sale
As of December 31, 2001, the Company had 2,703,457 shares of Common
Stock outstanding, of which 1,827,844 shares are eligible for sale in the public
market without restriction. 875,613 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 427,850 shares of the outstanding shares of Common Stock at
exercise prices ranging from $8.25 to $20.00 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, approximately 135,000
shares 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 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.
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
before or following any such removal.
In addition, the Bank may be considered liable for environmental
liabilities concerning 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 equal to 85% of the fair market value of the Company's
Common Stock on the date of grant. As of December 31, 2001, the Company had
outstanding options to purchase an aggregate of 427,850 shares of Common Stock
at exercise prices ranging from $8.25 to $20.00 per share, or a weighted average
exercise price per share of $9.87. 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
authorizes a systematic approach to repurchasing shares over a seven-year ramp.
18
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 Bank of Commerce 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. The
Company's Roseville Banking Center at Sunrise office is a free standing building
with approximately 4,982 square feet of space located at 6950 Sunrise Boulevard,
Citrus Heights. The Company subleases the space from Wells Fargo Bank expiring
on March 5, 2009.
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.
19
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. 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 obtained from the OTC
Bulletin Board. 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.
Sales Price Per Share
------------------------------------
Quarter Ended: High Low Volume
------ ------ --------
March 31, 2001 $17.00 $14.00 13,401
June 30, 2001 $17.25 $15.50 161,942
September 30, 2001 $21.15 $18.00 304,585
December 30, 2001 $24.50 $21.00 121,066
March 31, 2000 $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
As of December 31, 2001, there were approximately 350 shareholders
of record of the Company's Common Stock and the market price on that date was
$21.50 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.
On October 22, 2001, a cash dividend of $0.65 per share was paid to
shareholders of record as of October 1, 2001.
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
20
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the
five years ended December 31, 2001, 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) 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Statements of Income
Total Interest Income $ 20,216 $ 20,177 $ 17,270 $ 16,322 $ 15,764
Net Interest Income $ 11,190 $ 11,455 $ 10,835 $ 10,436 $ 9,430
Provision for Loan Losses $ 255 $ 142 $ 120 $ 500 $ 1,024
Total Non-interest Income $ 2,823 $ 2,807 $ 2,790 $ 2,539 $ 2,364
Total Non-interest Expense $ 7,143 $ 6,458 $ 6,434 $ 5,975 $ 4,983
Total Revenues $ 23,039 $ 22,984 $ 20,060 $ 18,861 $ 18,128
Net Income $ 4,274 $ 4,812 $ 4,370 $ 4,054 $ 3,658
Balance Sheets
Total Assets $ 318,686 $ 255,107 $ 232,008 $ 216,085 $ 204,820
Total Loans $ 219,876 $ 194,295 $ 172,817 $ 148,202 $ 113,410
Allowance for Loan Losses $ 3,180 $ 2,974 $ 2,972 $ 3,235 $ 2,819
Total Deposits $ 281,436 $ 218,036 $ 198,323 $ 188,621 $ 180,673
Stockholders Equity $ 27,240 $ 28,754 $ 26,059 $ 24,654 $ 21,824
Performance Ratios
Return on Average Assets 1.49% 1.98% 1.91% 1.98% 1.83%
Return on Average Equity 15.43% 17.95% 17.60% 18.04% 18.27%
Dividend Payout 41.94% 35.31% 21.75% 33.18% 24.62%
Average Equity to Average Assets 9.67% 11.02% 10.86% 10.97% 10.03%
Tier 1 Risk-Based Capital-Bank 10.93% 12.86% 13.59% 14.33% 14.91%
Total Risk-Based Capital-Bank 12.18% 14.11% 14.85% 15.58% 16.16%
Net Interest Margin 4.24% 5.16% 5.15% 5.57% 5.20%
Earning Assets to Total Assets 92.15% 91.34% 92.10% 91.48% 90.90%
Nonperforming Assets to Total Assets .11% .31% .28% .53% .52%
Annualized Net Charge-offs to Total Loans .02% .08% .24% .06% .44%
ALL to Total Loans 1.45% 1.53% 1.72% 2.18% 2.49%
Nonperforming Loans to ALL 10.97% 26.94% 20.19% 33.69% 25.40%
Share Data
Common Shares Outstanding - basic 2,703 2,884 2,907 2,959 2,952
Common Shares Outstanding - diluted 2,856 3,035 3,144 2,858 2,850
Book Value Per Common Share $ 10.08 $ 9.97 $ 8.97 $ 8.34 $ 7.40
Basic Earnings Per Common Share $ 1.52 $ 1.67 $ 1.49 $ 1.37 $ 1.23
Diluted Earnings Per Common Share $ 1.44 $ 1.59 $ 1.38 $ 1.30 $ 1.23
Cash Dividends Per Common Share $ 0.65 $ 0.59 $ 0.55 $ 0.45 $ 0.33
21
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.
I. Critical Accounting Policies
A. General
Redding Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss factors to determine the inherent loss that may be present in
our loan portfolio. Actual losses could differ significantly from the historical
factors that we use. Other estimates that we use are expected useful lives of
our depreciable assets. In addition GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may
be sustained in our loan and lease portfolio. The allowance is based on two
basic principles of accounting. (1) Statement of Financial Accountings Standards
(SFAS) No. 5 "Accounting for Contingencies", which requires that losses be
accrued when they are probable of occurring and estimable and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which requires that losses
be accrued based on the differences between that value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
Our allowance for loan losses has three basic components: the
formula allowance, the specific allowance and the unallocated allowance. Each of
these components is determined based upon estimates that can and do change when
the actual events occur. The formula allowance uses an historical loss view as
an indicator of future losses and as a result could differ from the loss
incurred in the future. However, since this history is updated with the most
recent loss information, the errors that might otherwise occur are mitigated.
The specific allowance uses various techniques to arrive at an estimate of loss.
Historical loss information, and fair market value of collateral are used to
estimate those losses. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates. The unallocated
allowance captures losses that are attributable to various economic events,
industry or geographic sectors whose impact on the portfolio have occurred but
have yet to be recognized in either the formula or specific allowances. For
further information regarding our allowance for credit losses, see page 30.
22
THE COMPANY
Redding Bancorp ("the Company") is a financial service 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
currently engages in a general commercial banking business in Redding and
Roseville and the counties of Butte, El Dorado, Placer, Shasta, and Sacramento,
California.
The Company considers Upstate 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 Bank of Commerce,
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The Company reported net income of $4.3 million for the year ended
December 31, 2001, representing a decrease of approximately $500,000 or 10.4%,
over net income of $4.8 million for the year ended December 31, 2000. Factors
contributing to the decrease in net income include a significant decrease in net
interest income resulting from multiple interest rate reductions partially
offset by increased loan volume and repricing of deposit liabilities. The
provision for loan loss was increased by $113,000 over the prior year reflecting
the Company's growth in the 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 1.49% and return on average
common equity (ROE) was 15.43% in 2000 compared with 1.98% and 17.95%
respectively in 2000. Diluted earnings per share for 2001 and 2000 were $1.44
and $1.59, respectively, a decrease of 9.4% in 2001 over 2000. The Company's
average total assets increased to $286.6 million in 2001 or 17.8% from $243.3
million in 2000. As a result of the expansion of the Company's Roseville Bank of
Commerce at Eureka and continued loan demand in the Redding market area, net
loans, at December 31, 2001 increased to $216.7 million over $191.3 million in
2000, an increase of $25.4 million or 13.3%.
23
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 Bank of
Commerce 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%.
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 decreased to $11.2 million in 2001 versus $11.5
million in 2000 and $10.8 million in 1999, representing a 2.6% decrease in 2001
over 2000, and a 6.5% increase in 2000 over 1999. The average balance of total
earning assets increased to $264.1 million or 18.9% over 2000. Average loan
balances outstanding increased $26.4 million or 14.8% in 2001, while average
balances of investments and federal funds sold decreased $15.6 million or 35.6%
in 2001. The average yields on loans decreased by 135 basis points and
investment income decreased by 120 basis points. The resulting yield on interest
earning assets decreased to 7.65% for 2001 compared with 9.08% for 2000. The
decrease in net interest margin from a year ago is attributed to a 4.75% drop in
the prime lending rate. The Federal Reserve has cut rates to 40-year lows in an
effort to fend off a recession. The Company's financial models indicate that in
periods of falling interest rates its net interest margin is expected to
decrease. This decrease of net interest margin is magnified by the fact that the
Company's assets reprice at a more rapid rate than liabilities.
Total interest expense increased to $9.0 million in 2001, from $8.7
million in 2000 and $6.4 million in 1999, representing a 3.5% increase for 2001
over 2000, and a 35.5% increase in 2000 over 1999. Average balances of
interest-bearing liabilities increased to $221.3 million over $176.9 million for
the year ended December 31, 2001, or 25.1%. Yields on deposits dropped 85 basis
points, from 4.93% to 4.08% in 2001, partially offset by the volumes attributed
to the acquisition of the Sunrise office. Included in the deposit yields are
$4.7 million in brokered deposits at an average yield of 6.75% maturing in March
2002. These deposits were purchased with the specific intent to raise liquidity
to support the growth in the Roseville Bank of Commerce, and the Company has
sufficient liquidity to repay the deposits without further borrowings.
The Company's net interest margin was 4.24% in 2001 and 5.16% in
2000. The combined effect of the increase in volume of earning assets and
liabilities coupled with a substantial decrease in yields, resulted in an
decrease of $265,000 (2.3%) in net interest income for the year ended December
31, 2001 over 2000.
24
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) 2001 2000 1999
---------------------------- -------------------------------- --------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ -------- -------- --------- -------- -------- ---------
EARNING ASSETS
Portfolio Loans $204,861 $17,459 8.52% $178,486 $17,622 9.87% $159,855 $14,605 9.14%
Tax Exempt Securities 4,428 200 4.52% 3,129 138 4.41% 5,601 240 4.28%
US Government Securities 30,960 1,645 5.31% 23,052 1,305 5.66% 30,273 1,714 5.66%
Federal Funds Sold and
Securities purchased
under agreements to
resell 23,170 833 3.60% 16,861 1,050 6.23% 11,868 551 4.64%
Other Securities 683 79 11.57% 639 62 9.70% 2,889 160 5.54%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Average Earning Assets $264,102 $20,216 7.65% $222,167 $20,177 9.08% $210,486 $17,270 8.20%
------- ------- -------
Cash & Due From Banks 12,346 10,783 10,824
Bank Premises 5,276 5,397 5,591
Other Assets 4,887 4,992 1,648
------- ------- -------
Average Total Assets $286,611 $ 243,339 $228,549
======== ========= ========
INTEREST BEARING LIABILITIES
Interest Bearing Demand $ 57,288 $ 909 1.59% $ 43,569 $ 1,122 2.58% $ 41,442 $ 717 1.73%
Savings Deposits 14,925 340 2.28% 13,426 428 3.19% 12,874 352 2.73%
Certificates of Deposit 142,651 7,584 5.32% 115,640 6,881 5.95% 101,289 5,240 5.17%
Other Borrowings 6,461 193 2.99% 4,237 291 6.87% 1,710 126 7.37%
-------- ------- ---- -------- ------- ---- -------- ------- ----
221,325 9,026 4.08% 176,872 8,722 4.93% 157,315 6,435 4.09%
------- ------- -------
Non-interest Bearing Demand 34,259 36,579 43,548
Other Liabilities 3,321 3,084 2,857
Shareholder Equity 27,706 26,804 24,829
-------- -------- ------
Average Liabilities and
Shareholders Equity $286,611 $243,339 $228,549
======== ======== ========
Net Interest Income and
Net Interest Margin $11,190 4.24% $11,455 5.16% $10,835 5.15%
------- ------- -------
Interest income on loans includes fee income of $285,000, $369,000
and $492,000 for the years ended December 31, 2001, 2000, and 1999 respectively.
The Company's average total assets increased to $286.6 million in
2001 to $243.3 in 2000 and $228.5 in 1999, representing a 17.8% increase 2001
over 2000, and 6.5% increase in 2000 over 1999. Portfolio loans increased to
$204.8 million in 2001 and $178.5 million in 2000, representing an increase of
14.7% and 11.7%, respectively.
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 has
been allocated to volume. The yield on tax-exempt securities has not been
adjusted to a tax-equivalent yield basis.
25
Analysis of Changes in Net Interest Income
Years ended December 31,
(Dollars in thousands) 2001 OVER 2000 2000 OVER 1999
-------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Increase (Decrease)
In Interest Income:
Portfolio Loans $ 1,645 $(1,808) $ (163) $ 1,839 $ 1,178 $ 3,017
Tax-exempt securities 60 2 62 (109) 7 (102)
US Government securities 400 (60) 340 (409) (0) (409)
Federal Funds sold 116 (333) (217) 311 188 499
Other investment securities 8 9 17 (218) 120 (98)
------- ------- ------- ------- ------- -------
Total Increase (Decrease) $ 2,229 $(2,190) $ 39 $ 1,414 $ 1,493 $ 2,907
======= ======= ======= ======= ======= =======
Increase (Decrease)
In Interest Expense:
Interest-bearing Demand 110 (323) (213) 55 350 405
Savings Deposits 4 (92) (88) 18 58 76
Certificates of Deposit 1,253 (550) 703 854 787 1,641
Other Borrowings 25 (123) (98) 174 (9) 165
------- ------- ------- ------- ------- -------
Total Increase (Decrease) $ 1,392 $(1,088) $ 304 $ 1,101 $ 1,186 $ 2,287
------- ------- ------- ------- ------- -------
Net Increase (Decrease) $ 837 $(1,102) $ (265) $ 313 $ 307 $ 620
======= ======= ======= ======= ======= =======
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, 2001, non-interest income represented 12.3% of the Company's revenues
(interest income plus non-interest income) versus 12.2% in 2000 and 13.9% in
1999. 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 2001 was $2.8 million, unchanged from
$2.8 million in 2000 and in 1999. The decrease of $935,000 in merchant credit
card processing was offset primarily by a $616,000 increase in gains taken on
sales of investment securities, and $326,000 in other fee income.
Securities were sold to shorten and reposition the duration of the
investment portfolio and the proceeds from the sales were immediately reinvested
in similar securities with shorter maturities. With investment rates at a
40-year low, as announced by the Federal Reserve Board, management felt
repositioning in the fourth quarter would better poise the Company to take
advantage of rising rates in the following year.
26
The following table sets forth a summary of non-interest income for
the periods indicated.
Years Ended December 31,
--------------------------------
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Non-interest Income:
Service Charges on deposit accounts $ 222 $ 214 $ 251
Other Income 1,104 778 715
Net realized (Loss) Gain on Sale of
Securities available-for-sale 557 (59) (58)
Credit Card service income, net 940 1,875 1,882
------- ------- -------
Total Non-interest Income $ 2,823 $ 2,808 $ 2,790
======= ======= =======
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, 2001
and 2000, the ISO portfolio consisted of approximately 35,000 and 36,000
merchants, respectively.
The Merchant Services Agreement was renewed on April 1, 2001.
Effective April 1, 2001, pricing of the contract is .002% of transaction
processing and one-half of the earnings on the deposit relationship. The Company
was successful in pursuing various strategies to offset the decline in revenues,
including expansion of the Roseville Banking Center, acquisition of the Citrus
Heights office and projecting aggressive growth in the loan markets.
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 Bank has been
granted a security interest in the deposit 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 high-risk volume chargeback ratios be no greater than three
times the national average of 5% of equity capital.
Redding Bank of Commerce's high-risk chargeback ratio was met and is
in compliance with the Visa requirement at 3% as of December 31, 2001. 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, 2001 the Bank's total Visa transactions within these
certain high-risk categories were 14% 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. The
Company's ISO has set the industry standards for fraud control and electronic
detection, reporting significantly lower than industry standard losses. By
contract, the ISO indemnifies the Company from losses associated with fraudulent
activities.
Merchant services processing is one of the Bank's two reportable
segments. See additional information in Note 18 to the consolidated financial
statements (page 59-60).
27
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
2001 increased to $7.1 million compared to $6.4 million for 2000 and $6.4
million in 1999, representing an increase of $685,000 or 10.6% in 2001.
Occupancy expenses reflect the acquisition of the Sunrise office as well as
relocation and expansion of the Roseville office at Eureka Road. Professional
fees reflect one time charges associated with the acquisition of the Sunrise
office. Salaries and benefits increased $195,000 or 5.2% reflecting staff
additions in the Roseville market.
The following table sets forth a summary of non-interest expense for the
periods indicated.
Years Ended December 31,
------------------------------------
(Dollars in thousands) 2001 2000 1999
------ ------ ------
Salaries & Related Benefits $3,948 $3,753 $3,805
Net Occupancy & Equipment 1,117 985 924
FDIC Insurance Premium 45 41 16
Data Processing &
Professional Services 528 465 504
Stationery & Supplies 193 215 176
Postage 101 83 80
Directors' Expenses 271 189 198
Other Expense 940 727 731
------ ------ ------
Total Non-Interest Expense $7,143 $6,458 $6,434
====== ====== ======
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) 2001 2000 1999
-------- -------- --------
Income Tax Provision $ 2,342 $ 2,851 $ 2,701
Effective Tax Rate 35.4% 37.2% 38.2%
Asset Quality
The Company concentrates its lending activities primarily within
Butte, Shasta, El Dorado, Placer and Sacramento counties, California, and the
locations of the offices of the Bank. 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 Upstate
California and are expected to be repaid from cash flows of the borrower or
proceeds from the sale of collateral.
28
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
(Dollars in thousands) As of December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Commercial & Financial $ 76,913 $ 61,069 $ 53,383 $ 46,890 $ 41,432
Real Estate-Construction 45,331 37,531 37,859 29,470 16,393
Real Estate-Commercial 96,617 94,111 78,842 69,742 54,533
Installment 440 430 294 298 72
Other Loans 709 1,396 2,811 2,225 1,274
Less:
Deferred Loan Fees and Costs (134) (241) (372) (423) (294)
Allowance for Loan losses (3,180) (2,974) (2,972) (3,235) (2,819)
--------- --------- --------- --------- ---------
Total Net Loans $ 216,696 $ 191,322 $ 169,845 $ 144,967 $ 110,591
========= ========= ========= ========= =========
Net portfolio loans increased $25.4 million or 13.3%, to $216.7
million at December 31, 2001 over $191.3 million at December 31, 2000. During
2001, commercial and financial loans increased $15.8 million or 25.9% and real
estate projects increased $10.3 million or 7.8%. The portfolio mix remains
consistent with the mix of 2000, with commercial and financial loans of
approximately 35%, real estate construction of 21% and commercial real estate at
44%.
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 impaired loans that 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. Nonperforming loans may be 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,
--------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Nonaccrual loans $ 59 $ 801 $ 394 $ 942 $ 500
90 days past and still accruing interest 290 0 0 46 173
------ ------ ------ ------ ------
349 801 394 988 673
Total Non performing loans
Other Real Estate Owned 0 0 40 66 352
------ ------ ------ ------ ------
Total Non performing assets 349 801 434 1,054 1,025
The Company's nonaccrual loans decreased from $801,000 to $59,000
during 2001 and are comprised of one borrowing facility. If interest on
nonaccrual loans had been accrued during 2001, such interest would have
approximated $2,000. Interest recorded on such loans in 2001 was approximately
$14,000.
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.
29
The following table sets forth the maturity distribution of the
Company's commercial and real estate construction loans outstanding as of
December 31, 2001, which, based on remaining scheduled repayments of principal,
were due within the periods indicated.
After One
Within through After
(Dollars in thousands) One Year Five Years Five Years Total
-------- ---------- ---------- --------
Commercial & Financial $32,602 $ 27,107 $ 17,204 $ 76,913
Real Estate -
Construction $37,914 $ 561 $ 6,856 $ 45,331
------- -------- -------- --------
Total $70,516 $ 27,668 $ 24,060 $122,244
======= ======== ======== ========
Loans due after one year with:
Fixed Rates $ 8,418 $ 2,092 $ 10,510
Variable Rates $ 19,250 $ 21,968 $ 41,218
-------- -------- --------
Total $ 27,668 $ 24,060 $ 51,728
======== ======== ========
Allowance for Loan Losses (ALL)
In determining the amount of the Company's ALL, 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 ALL. 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 ALL 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 ALL
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 ALL is a general reserve available against the total loan
portfolio and loan commitment 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 ALL. 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 ALL is
the credit risk-rating factor, the bank does not allocate the ALL by loan
category. The banks principal lines of lending are (i) commercial, (ii) real
estate construction and (iii) commercial and residential real estate.
30
The primary sources of repayment of the commercial loans of the Bank
are operating cash flows 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 credit administration policies of
the Bank.
The principal source of repayment of the real estate construction
loans of the Bank 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 real estate mortgage loans
of the Bank 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 specific underwriting standards of the Bank and methods for each
of its principal lines of lending include industry-accepted analysis and
modeling and certain proprietary techniques. The underwriting criteria of the
Bank are designed to comply with applicable regulatory guidelines, including
required loan-to-value ratios. The credit administration policies of the Bank
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 ALL 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 ALL 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 23.0% during 2001 over
2000, primarily due to strong account management by the lenders.
The provision for loan losses increased to $255,000 for 2001 versus
$142,000 in 2000. The increase for 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 $49,000 or .02% of average loans during 2001. Management does
not believe that there
31
were any trends indicated by the detail of the aggregate charge-offs for any of
the periods discussed.
The following table summarizes the activity in the ALL reserves for
the periods indicated.
(Dollars in thousands) Years Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Beginning Balance: $ 2,974 $ 2,972 $ 3,235 $ 2,819 $ 2,294
Provision for loan losses 255 142 120 500 1,024
Charge-offs:
Commercial & Financial (191) (200) (355) (139) (393)
Real Estate (345) (3) (103) (54) (209)
Other (0) (1) (2) (16) (3)
------- ------- ------- ------- -------
Total Charge-offs (536) (204) (460) (209) (605)
------- ------- ------- ------- -------
Recoveries:
Commercial & Financial 35 62 37 114 60
Real Estate 452 2 40 11 46
------- ------- ------- ------- -------
Total Recoveries 487 64 77 125 106
------- ------- ------- ------- -------
Ending Balance $ 3,180 $ 2,974 $ 2,972 $ 3,235 $ 2,819
======= ======= ======= ======= =======
ALL to total loans 1.45% 1.53% 1.72% 2.18% 2.49%
Net Charge-offs to average loans .02% .08% .24% .06% .44%
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 is 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, 2001, 2000 and 1999
consisted of mortgage-backed securities with an amortized cost of $4.1, $5.0 and
$5.9 million, respectively. At December 31, 2001, all such securities have a
remaining contractual maturity of five through ten years and a weighted-average
yield of 6.25%.
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, 2001. The yield on tax-exempt
securities has not been adjusted to a tax-equivalent yield basis.
Within One After One through After Five through
(Dollars in thousands) Year Five Years Ten Years Total
---------------- ---------------- ------------------ ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- ------- -----
U.S. Government & Agencies $ 1,000 6.42% $30,945 3.78% $ 4,225 5.13% $36,170 5.11%
Obligations of State and Political
Subdivisions 723 4.47% 581 4.94% 3,034 4.09% 4,338 4.41%
Corporate Bonds 0 0.00% 403 7.54% 0 0.00% 403 7.54%
------- ----- ------- ----- ------- ----- ------- -----
Total $ 1,723 5.47% $31,929 5.42% $ 7,259 6.66% $40,911 5.75%
======= ==== ======= ==== ======= ==== ======= ====
32
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,
---------------------------------
2001 2000 1999
------- ------- -------
U.S. Government & Agencies $36,170 $17,413 $21,095
Obligations of State and Political Subdivisions 4,338 2,317 4,672
Corporate and Other Bonds 403 1,129 0
------- ------- -------
Total $40,911 $20,859 $25,767
======= ======= =======
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,
2001 2000 1999
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
NOW Accounts $ 32,682 1.59% $ 28,894 1.95% $ 28,315 1.60%
Savings Accounts $ 14,925 2.28% $ 13,426 3.19% $ 12,874 2.73%
Money Market Accounts $ 24,604 2.45% $ 14,675 3.80% $ 13,127 2.00%
Certificates of Deposit $142,651 5.32% $115,640 5.95% $101,289 5.17%
The following table sets forth the remaining maturities of
certificates of deposit in amounts of $100,000 or more as of December 31, 2001:
Deposit Maturity Schedule
(Dollars in thousands)
2001
-------
Three Months or less $29,144
Over three through six months $16,677
Over six through twelve months $19,570
Over twelve months $ 4,996
-------
Total $70,387
=======
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.
33
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.
In March 2000, the Company purchased brokered deposits in the amount
of $4.7 million with a maturity date of March 2002, at a cost of 6.75%. The
purpose of the borrowing was to provide ample liquidity to supplement the
development of the Roseville Banking Center from a loan production office to a
full-service banking facility. Management believes the Bank has adequate
liquidity from other sources so that the Bank's ability to make loans will not
be diminished when these deposits are repaid.
On June 15, 2001, the Company executed a Branch Purchase and
Assumption Agreement, which provided for the purchase of the deposit liabilities
of a bank branch office located in Citrus Heights, California. The purchase
consisted of approximately 875 deposit accounts of which 172 are savings and the
balance are time certificates of deposit totaling $31 million. These funds
significantly added to the liquidity of the Company by increasing market share
and providing additional cross-sell opportunities to the Citrus Heights
customers. Although certificates of deposit are considered to be more volatile
than demand accounts, the Company does not expect the maturity of these accounts
to have a negative impact on the Company, and , in fact has seen an increase in
core deposits related to these customers.
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
$81.8 million or 25.6% of total assets at December 31, 2001, $46.6 million or
18.2% of total assets at December 31, 2000 and, $44.5 million or 19.1% of total
assets at December 31, 1999. The Company expects that earnings of the Company,
acquisition of core deposits, and wholesale borrowing arrangements will support
its primary source of liquidity.
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 regulators of the Bank 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 ALL).
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 ALL.
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, 2001 and 2000, that the Company
and the Bank met capital adequacy requirements to which they are subject.
34
As of December 31, 2001, 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, 2001 and 2000 are also presented
in the table.
December 31, 2001 December 31, 2000
------------------ ----------------- For Bank to be
Bank Company Bank Company well capitalized
------ ------- ------ ------- ----------------
Total Risk-Based Capital 12.18% 12.33% 14.11% 15.01% > 10.00%
Tier 1 Capital to Risk-Based Assets 10.93% 11.08% 12.86% 13.75% > 6.00%
Tier 1 Capital to Average Assets 9.38% 9.38% 11.02% 11.52% > 5.00%
(Leverage ratio)
The Company paid a cash dividend of $0.65 cents per share on the
Company's Common Stock paid to shareholders of record as of October 1, 2001.
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 purpose of offsetting the
dilution with respect to stock options issued. Additionally, in 2001 the Board
of Directors authorized a second common stock repurchase of up to 5% or
approximately 114,000 shares. For the years ended December 31, 2001 and 2000,
the Company has repurchased 193,839 and 66,067 shares, respectively. Shares
repurchased are retired by a charge to common stock and retained earnings for
the cost.
The purpose of the Treasury Stock Repurchase program was to provide
an opportunity for odd-lot shareholders to choose a tax preferred method of
liquidation. Direct buybacks are eligible for capital gains treatment versus
cash dividends that are taxable as ordinary income. All transactions were
structured to comply with the Securities and Exchange Commission Rule 10b-18 and
all shares repurchased under the program were retired. The Company repurchased
113,839 shares through December 31, 2001.
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.
35
ITEM 7-A. 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 concerning the operations of the Bank.
Consequently, 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 affected 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, 2001, the estimated annualized reduction in net interest
income attributable to a 100 or 200 basis point decline in the federal funds
rate was $837,000 and $1,673,000, respectively, with a similar and opposite
result attributable to a 100 or 200 basis point increase in the federal fund
rate.
36
The following table sets forth, as of December 31, 2001, 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, 2001
-------------------------------------------------------------------
Within 3 3 Months to One Year to Five Years
Months One Year Five Years Plus Total
--------- ------------ ----------- ---------- ---------
Interest Earning Assets
Securities held-to-maturity $ -- $ -- $ -- $ 4,117 $ 4,117
Securities available-for-sale $ 1,000 $ 723 $ 31,916 $ 7,259 $ 40,898
Federal Funds Sold $ 25,430 -- -- -- $ 25,430
Loans, net $ 132,416 $ 14,085 $ 52,940 $ 17,255 $ 216,696
--------- --------- --------- --------- ---------
Total Interest-earning Assets $ 158,846 $ 14,808 $ 84,856 $ 28,631 $ 287,141
========= ========= ========= ========= =========
Interest Bearing Liabilities
Demand Deposits $ 69,892 $ -- $ -- $ -- $ 69,892
Savings Deposits $ 17,034 $ -- $ -- $ -- $ 17,034
Time Deposits $ 40,394 $ 82,827 $ 26,763 $ -- $ 149,984
Other Borrowings $ 6,780 $ -- $ -- $ -- $ 6,780
--------- --------- --------- --------- ---------
Total Interest-bearing Liabilities $ 134,100 $ 82,827 $ 26,763 $ -- $ 243,690
========= ========= ========= ========= =========
GAP 24,746 (68,019) 58,093 28,631 43,451
Cumulative GAP (43,273) 14,820 14,820
RSA/RSL 1.19 .18 3.17 100.0 1.18
Cumulative GAP to Total Assets 0.16 (2.93) 0.18 0.52
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.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report.............................................................................. 39
Consolidated Balance Sheets as of December 31, 2001 and 2000.............................................. 40
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999.................... 41
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999...... 42
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999................ 43
Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999........... 45
38
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, 2001, and 2000 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
Sacramento, California
January 18, 2002
39
REDDING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 15,527,910 $ 12,602,510
Federal funds sold and securities purchased under agreements to resell 25,430,000 13,010,000
Securities available-for-sale 40,898,239 20,997,380
Securities held-to-maturity, at cost (estimated fair value of $4,192,596 in 2001
and $4,972,409 in 2000) 4,116,935 5,006,831
Loans, net of the allowance for loan losses of $3,179,782 in 2001 and
$2,973,593 in 2000) 216,696,198 191,321,906
Bank premises and equipment, net 5,339,112 5,287,153
Other assets 10,677,957 6,881,002
------------- -------------
TOTAL ASSETS $ 318,686,351 $ 255,106,782
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - noninterest bearing $ 44,525,539 $ 37,391,626
Demand - interest bearing 69,891,956 47,394,283
Savings 17,034,475 12,496,167
Certificates of deposits 149,983,574 120,754,081
------------- -------------
Total Deposits 281,435,544 218,036,157
Securities sold under agreements to repurchase 6,780,232 5,267,472
Other liabilities 3,230,726 3,048,884
------------- -------------
Total liabilities 291,446,502 226,352,513
------------- -------------
Stockholders' equity:
Preferred stock, no par value; 2,000,000 authorized;
no shares issued and outstanding in 2001 and 2000
Common stock, no par value; 10,000,000 shares
authorized; 2,703,457 shares issued and outstanding in 2001
and 2,884,181 shares issued and outstanding in 2000 8,850,826 9,370,979
Retained earnings 18,397,061 19,296,510
Accumulated other comprehensive income (loss), net of tax (8,038) 86,780
------------- -------------
Total stockholders' equity 27,239,849 28,754,269
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 318,686,351 $ 255,106,782
============= =============
See notes to consolidated financial statements.
40
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 17,459,219 $ 17,622,229 $ 14,605,200
Interest on tax exempt securities 199,520 137,858 240,431
Interest on U.S. government securities 1,644,870 1,305,315 1,713,736
Interest on federal funds sold and securities purchased
under agreement to resell 832,960 1,049,994 551,090
Interest on other securities 79,293 61,498 159,890
------------ ------------ ------------
Total interest income 20,215,862 20,176,894 17,270,347
------------ ------------ ------------
Interest expense:
Interest on demand deposits 909,488 1,121,827 716,618
Interest on savings deposits 340,245 427,807 352,362
Interest on time deposits 7,583,718 6,880,739 5,239,604
Securities sold under agreement to repurchase 192,702 291,248 126,200
------------ ------------ ------------
Total interest expense 9,026,153 8,721,621 6,434,784
------------ ------------ ------------
Net interest income 11,189,709 11,455,273 10,835,563
Provision for loan losses 255,000 142,000 120,000
------------ ------------ ------------
Net interest income after provision for loan losses 10,934,709 11,313,273 10,715,563
------------ ------------
Non-interest income:
Service charges on deposit accounts 221,959 213,683 250,944
Other income 1,104,302 777,652 714,904
Net gain (loss) on sale of
securities available-for-sale 556,993 (59,313) (58,357)
Credit card service income, net 940,234 1,875,433 1,882,305
------------ ------------ ------------
Total non-interest income 2,823,488 2,807,455 2,789,796
------------ ------------ ------------
Non-interest expense:
Salaries and related benefits 3,948,301 3,752,610 3,804,621
Net occupancy and equipment expense 1,116,634 985,277 923,589
FDIC insurance premium 44,791 40,695 16,358
Data processing and professional services 483,043 464,815 503,627
Directors' expenses 270,756 189,465 197,816
Other expenses 1,279,285 1,024,806 988,102
------------ ------------ ------------
Total non-interest expense 7,142,810 6,457,668 6,434,113
------------ ------------ ------------
Income before income taxes 6,615,387 7,663,060 7,071,246
Provision for income taxes 2,341,725 2,851,291 2,701,243
------------ ------------ ------------
Net Income $ 4,273,662 $ 4,811,769 $ 4,370,003
============ ============ ============
Basic earnings per share $ 1.52 $ 1.67 $ 1.49
============ ============ ============
Diluted earnings per share $ 1.44 $ 1.59 $ 1.38
============ ============ ============
See notes to consolidated financial statements.
41
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
COMPREHENSIVE ---------------------- RETAINED INCOME,
INCOME SHARES AMOUNT EARNINGS NET OF TAX TOTAL
------------ --------- ---------- ----------- -------------- ------------
Balance at January 1, 1999 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 $ 5,138,911
============
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 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
--------- ---------- ----------- --------- ------------
Comprehensive income:
Net income $ 4,273,662 4,273,662 4,273,662
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 264,832
Less: reclassification adjustment
for gains included in net
income, net of tax (359,650)
------------
Other comprehensive loss (94,818) (94,818) (94,818)
------------
Comprehensive income $ 4,178,845
============
Cash dividends ($0.65 per share) (1,792,391) (1,792,391)
Compensation expense associated
with stock options 67,200 67,200
Stock options exercised 13,115 42,625 81,126 123,751
Purchase and retirement of common stock (193,839) (629,978) (3,461,846) (4,091,824)
Balance at December 31, 2001 2,703,457 $8,850,826 $18,397,061 $ (8,038) $ 27,239,849
========= ========== =========== ========= ============
See notes to the consolidated financial statements.
42
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 4,273,662 $ 4,811,769 $ 4,370,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 255,165 142,000 120,000
Provision for depreciation and amortization 550,009 507,458 471,655
Compensation expense associated with stock options 67,200 67,200 77,865
(Gain) loss on sale of securities available-for-sale (556,993) 59,313 58,357
Amortization of investment premiums and accretion
of discounts, net (230,797) 340,516 (28,812)
Gain on sale of loans (118,018) (129,859) (136,336)
Proceeds from sale of loans 6,221,668 5,680,593 5,509,108
Loans originated for sale (6,339,686) (5,810,452) (5,639,444)
Deferred income taxes, net (361,654) 120,065 274,735
Effect of changes in:
Other assets (3,435,301) (1,464,688) 343,733
Deferred loan fees (105,915) (130,717) (50,994)
Other liabilities 181,842 373,407 395,169
------------ ------------ ------------
Net cash provided by operating activities (3,872,480) 4,566,605 5,765,039
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 25,085,086 7,951,547 19,658,319
Proceeds from sale of available-for-sale securities 25,509,556 4,419,671 13,359,055
Purchases of available-for-sale securities (68,912,632) (6,611,227) (33,217,242)
Loan origination, net of principal repayments (25,287,506) (21,227,829) (24,681,067)
Purchase of premises and equipment (601,968) (332,515) (398,833)
Proceeds from sale of equipment 0 11,800 57,021
------------ ------------ ------------
Net cash used by investing activities (44,207,464) (15,788,553) (25,222,747)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits and savings accounts 34,169,894 2,147,274 (467,377)
Net increase in certificates of deposit 29,229,493 17,565,581 10,169,981
Net increase in other borrowings 1,512,760 467,472 4,800,000
Cash dividends (1,792,392) (1,699,627) (1,583,923)
Common stock transactions, net (3,968,073) (811,610) (1,095,944)
------------ ------------ ------------
Net cash provided by financing activities 59,151,682 17,669,090 11,822,737
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,345,400 6,447,142 (7,634,971)
Cash and cash equivalents at beginning of year 25,612,510 19,165,368 26,800,339
------------ ------------ ------------
Cash and cash equivalents at end of year $ 40,957,910 $ 25,612,510 $ 19,165,368
============ ============ ============
Supplemental disclosures: Cash paid during the period for:
Income taxes $ 2,704,145 $ 2,590,200 $ 2,391,269
Interest 9,103,849 8,553,444 6,409,765
43
RECONCILIATION TO AMOUNTS REPORTED IN CONSOLIDATED BALANCE SHEETS:
Cash and due from banks $15,527,910 $12,602,510 $11,605,368
Federal funds sold and securities purchased under
agreements to resell 25,430,000 13,010,000 7,560,000
----------- ----------- -----------
CASH AND EQUIVALENTS, End of year $40,957,910 $25,612,510 $19,165,368
=========== =========== ===========
Supplemental Schedule of Non Cash Investing and Financing Activities
Transfer from loans to other real estate owned $ 0 $ 0 $ 40,000
Stock Dividend $ 0 $ 4,104,765 $
See notes to consolidated financial statements.
44
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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, 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 Upstate 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.
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.
RECLASSIFICATIONS: Certain amounts in the 2000 and 1999 financial
statements have been reclassified to conform with the 2001 presentation.
45
CASH AND CASH EQUIVALENTS - Cash equivalents include amounts due from
banks, federal funds sold and securities purchased under agreements to
resell. Generally, federal funds sold are for a one-day period and
securities purchased under agreements to resell are for no more than a 90
day period.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The Bank enters into
purchases of securities under agreements to resell substantially identical
securities. Securities purchased under agreements to resell at December
31, 2001 consist of U.S. Treasury and Agency securities. The amounts
advanced under these agreements are reflected as assets in the
consolidated balance sheet. It is the Bank's policy to take possession of
securities purchased under agreements to resell. Agreements with third
parties specify the Bank's rights to request additional collateral, based
on its monitoring of the fair value of the underlying securities on a
daily basis. The securities are delivered by appropriate entry into the
Bank's account maintained at the Federal Reserve Bank or into a
third-party custodian's account designated by the Bank under a written
custodial agreement that explicitly recognizes the Bank's interest in the
securities. At December 31, 2001, these agreements matured within 90 days
and no material amount of agreements to resell securities purchased was
outstanding with any individual dealer.
SECURITIES - At the time of purchase, 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.
46
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 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 review 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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - At December 31, 2001,
securities sold under agreements to repurchase 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. These securities are held as collateral
for non-FDIC insured deposits.
CORE DEPOSIT INTANGIBLES - In June 2001, the Company purchased a branch.
As a result of this acquisition the Company recorded core deposit
intangibles which are being amortized over 7 years by the straight line
method. Amortization expense charged to operations for the year ended
December 31, 2001 was $54,936.
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.
47
2001 2000 1999
---------- ---------- ----------
BASIC EPS CALCULATION
Numerator (net income) $4,273,662 $4,811,769 $4,370,003
---------- ---------- ----------
Denominator (weighted average common shares
outstanding) 2,813,629 2,882,339 2,928,943
---------- ---------- ----------
Basic EPS $ 1.52 $ 1.67 $ 1.49
========== ========== ==========
DILUTED EPS CALCULATION
Numerator (net income) $4,273,662 $4,811,769 $4,370,003
---------- ---------- ----------
Denominator:
Weighted average common shares outstanding 2,813,629 2,882,339 2,928,943
Options 152,922 151,221 236,800
---------- ---------- ----------
2,966,551 3,033,560 3,165,743
========== ========== ==========
Diluted EPS $ 1.44 $ 1.59 $ 1.38
========== ========== ==========
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.
48
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.
NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended, establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company adopted SFAS 133 as of 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.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS 140). This statement
replaces Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's
provisions without reconsideration. This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The adoption of SFAS 140 has
not had an impact on the Company's financial position and results of
operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (SFAS 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). SFAS 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination. SFAS 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. As the Company does
have intangible assets with finite lives recorded in the financial
statements, but does not have any goodwill recorded, the Company does not
expect the adoption of SFAS 142 for its fiscal year beginning January 1,
2002 to have a material effect on its financial statements. The Company
will continue to amortize the core deposit intangible over a period of
seven years.
49
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
Statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and the normal operation of a long-lived asset, except for
certain obligations of lessees. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset. This Statement is
effective for financial statements issued for fiscal years beginning after
June 15, 2002.
The Company does not expect the adoption of this statement to have a
material impact on its financial position and results of operations.
In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which requires that one accounting model
be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation
of discontinued operations to include more disposal transactions. In
addition, this Statement resolves implementation issues of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does not expect the
adoption of this statement to have a material impact on its financial
position and results of operations.
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, 2001 and 2000 was approximately $1,441,000 and
$2,693,000, respectively. In addition, the Bank maintains compensating
balances with the Federal Reserve Bank, which totaled $1,600,000 at
December 31, 2001 and 2000.
4. SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale are summarized as follows:
DECEMBER 31, 2001
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
U.S. Treasury securities and
obligations of U.S. agencies $ 36,170,219 $ 123,829 $ (131,334) $ 36,162,714
Obligations of state and political
subdivisions 4,337,920 42,575 (70,018) 4,310,477
Corporate bonds, Commercial Paper
and Bankers Acceptances 402,546 22,502 (0) 425,048
------------ ------------ ------------ ------------
$ 40,910,685 $ 188,906 $ (201,352) $ 40,898,239
============ ============ ============ ============
50
DECEMBER 31, 2000
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR 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
============ ============ ============ ============
The amortized cost and estimated fair value of securities held-to-maturity
at December 31, 2001 and 2000, which have contractual maturities of five
through ten years consist of the following:
DECEMBER 31, 2001
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
Mortgage backed securities $ 4,116,935 $ 84,704 $ (9,043) $ 4,192,596
============ ============ ============ ============
DECEMBER 31, 2000
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
Mortgage backed securities $ 5,006,831 $ 746 $ (35,168) $ 4,972,409
============ ============ ============ ============
The amortized cost and estimated fair value of securities at December 31,
2001 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
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
Due in one year or less $ 1,722,696 $ 1,743,028 $ 0 $ 0
Due after one year through five years 31,929,030 31,965,850 0 0
Due after five years through ten years 7,258,959 7,189,361 4,116,935 4,192,596
----------- ----------- ----------- -----------
$40,910,685 $40,898,239 $ 4,116,935 $ 4,192,596
=========== =========== =========== ===========
At December 31, 2001, the Bank has pledged $1,000,000 of securities for
treasury, tax and loan accounts, and $7,000,000 for deposits of public
funds.
Gross realized gains and gross realized losses, respectively on the sale
of available-for-sale securities were $558,243 and $1,250 in 2001. Gross
realized gains and gross realized losses, respectively, on
available-for-sale securities were $0 and $59,313 in 2000 and were $18,079
and $76,436 in 1999. There were no gains or losses recognized in
securities held-to-maturity in 2001, 2000 and 1999.
51
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding loan balances consist of the following:
DECEMBER 31,
----------------------------
2001 2000
------------ ------------
Commercial and financial loans $ 76,913,260 $ 61,068,838
Real estate - construction loans 45,331,492 37,530,906
Real estate - commercial 96,617,350 94,110,859
Installment loans 439,610 430,208
Other 709,230 1,395,565
------------ ------------
220,010,942 194,536,376
Less:
Deferred loan fees and costs 134,962 240,877
Allowance for loan losses 3,179,782 2,973,593
------------ ------------
$216,696,198 $191,321,906
============ ============
Included in total loans are nonaccrual loans of $59,489 and $801,246 at
December 31, 2001 and 2000, respectively. If interest on nonaccrual loans
had been accrued, such interest income would have approximated $2,389,
$199,528, $84,060 during the years ended December 31, 2001, 2000 and 1999,
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 $349,139 and $801,246 in
impaired loans that had impairment allowances of $13,603 and $318,382 as
of December 31, 2001 and 2000, respectively. The average outstanding
balance of impaired loans were $187,277, and $622,153, for the years ended
December 31, 2001, and 2000 respectively. There was interest of $18,333
recognized on impaired loans during the year ended December 31, 2001, and
no interest recognized during 2000.
The Bank services, for others, loans and participation of loans that are
sold of approximately $3,183,871 and $5,666,188 as of December 31, 2001
and 2000, respectively.
The Bank concentrates its lending activities primarily within Shasta, El
Dorado, Placer and Sacramento counties, in Upstate 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.
52
Changes in the allowance for loan losses consist of the following:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 2,973,593 $ 2,971,747 $ 3,234,837
Provision for loan losses 255,000 142,000 120,000
Loans charged off (535,179) (204,402) (460,363)
Recoveries of loans previously charged off 486,368 64,248 77,273
----------- ----------- -----------
Balance at end of year $ 3,179,782 $ 2,973,593 $ 2,971,747
=========== =========== ===========
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
DECEMBER 31,
ESTIMATED ---------------------------
LIVES 2001 2000
----------- -----------
Land $ 1,507,628 $ 1,595,808
Bank Buildings 31.5 years 3,680,047 3,680,047
Furniture, fixtures and equipment 3 - 7 years 3,572,577 2,979,915
----------- -----------
8,760,252 8,255,770
Less accumulated depreciation (3,559,166) (3,016,977)
----------- -----------
5,201,086 5,238,793
Construction in progress 138,026 48,360
----------- -----------
$ 5,339,112 $ 5,287,153
=========== ===========
Depreciation expense, included in net occupancy and equipment expense, is
$550,009, $507,458, and $471,655 for the years ended December 31, 2001,
2000 and 1999, respectively.
7. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
Cash surrender value of life insurance
policies $ 4,187,382 $ 2,019,420
Deferred tax asset, net 1,535,191 1,173,537
Accrued interest on loans 1,045,893 1,266,751
Accrued interest on investment securities 527,090 336,597
Sweep account receivable 2,001,522 1,377,943
Federal Home Loan Bank Stock 326,100 307,000
Core Deposit Intangible, net of accumulated
amortization of $54,936 714,209 0
Other 340,570 399,754
----------- -----------
$10,677,957 $ 6,881,002
=========== ===========
53
8. DEPOSITS
Time certificates of deposit of $100,000 or more totaled $70,386,783 and
$51,621,931 at December 31, 2001 and 2000, respectively. Interest expense
on such deposits was $3,114,739, $3,849,404 and $2,116,417 during 2001,
2000 and 1999, respectively.
At December 31, 2001, the scheduled maturities for time deposits are as
follows:
YEAR ENDING
DECEMBER 31,
------------
2002 $134,849,994
2003 12,753,284
2004 2,088,234
2005 292,062
------------
Total $149,983,574
============
9. OTHER LIABILITIES
Other liabilities consist of the following:
DECEMBER 31,
--------------------------
2001 2000
---------- ----------
Deferred compensation $2,328,182 $1,990,711
Employee incentive payable 274,495 437,004
Accrued interest payable 386,486 464,182
Other 241,563 156,987
---------- ----------
$3,230,726 $3,048,884
========== ==========
10. INCOME TAXES
Provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Current:
Federal $ 2,197,404 $ 2,305,780 $ 1,941,187
State 397,186 425,446 485,321
----------- ----------- -----------
2,594,590 2,731,226 2,426,508
----------- ----------- -----------
Deferred:
Federal (220,321) 99,082 210,068
State (32,543) 20,983 64,667
----------- ----------- -----------
(252,864) 120,065 274,735
----------- ----------- -----------
$ 2,341,725 $ 2,851,291 $ 2,701,243
=========== =========== ===========
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
----------------------------
2001 2000 1999
------ ------ ------
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 7.15
Tax-exempt interest (4.11) (3.10) (3.60)
Other (1.64) (.84) .65
------ ------ ------
35.40% 37.21% 38.20%
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 consist of the following:
2001 2000
----------- -----------
Deferred tax assets:
State franchise taxes $ 136,130 $ 129,429
Deferred compensation 1,043,957 892,635
Loan loss reserves 936,467 812,576
Unrealized securities losses 4,410 0
Other 31,916 0
----------- -----------
Total deferred tax assets 2,152,880 1,834,640
----------- -----------
Deferred tax liabilities:
Depreciation (222,560) (260,301)
Unrealized securities gains (0) (51,382)
Deferred loan origination costs (297,382) (216,111)
Deferred State taxes (97,747) (86,682)
Other (0) (46,627)
----------- -----------
Total deferred tax liabilities (617,689) (661,103)
----------- -----------
Net deferred tax asset $ 1,535,191 $ 1,173,537
=========== ===========
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 1,782,000 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, 1999 452,100 $ 8.75
Granted 4,950 $17.27
Exercised (11,330) $ 8.97
-------
Options outstanding, December 31, 1999 445,720 $ 9.50
Expired (3,300) $ 9.70
Exercised (43,505) $ 8.97
-------
Options outstanding, December 31, 2000 398,915 $ 8.91
Granted 42,050 $18.98
Exercised (13,115) $ 9.34
-------
Options outstanding, December 31, 2001 427,850 $ 9.87
=======
At December 31, 2001, 1,282,900 shares were available for future grants
under the plan. As of December 31, 2001, 2000 and 1999, respectively,
225,827, 188,800 and 249,828 shares were available to be exercised.
56
Additional information regarding options outstanding as of December 31,
2001 is as follows:
Weighted Avg.
Remaining
Exercise Options Contractual Options
Prices Outstanding Life (Years) Exercisable
-------- ----------- -------------- -----------
$ 8.25 236,995 7 158,400
$ 9.70 143,855 7 65,447
$17.27 4,950 8 1,980
$16.25 14,250 9 0
$20.00 27,800 9 0
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 2001, 2000 and 1999 was
$67,200, $67,200, and $77,865 respectively.
The Company applies Accounting Principles Board Opinions No. 25,
"Accounting for Stock Issues to Employees" (APB 25) and related
interpretations in accounting for its plan. Accordingly, no compensation
cost has been recognized for the plan. Had compensation cost for the plan
been determined based on the fair value at the grant dates for awards
under the plan consistent with the method prescribed by SFAS 123
"Accounting for Stock Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
Year Ended December 31
------------------------------------------
2001 2000 1999
---------- ---------- ----------
Net income
As reported $4,273,662 $4,811,769 $4,370,003
Pro forma 4,124,322 4,710,093 4,268,327
Basic earnings per share
As reported $ 1.52 $ 1.67 $ 1.49
Pro forma 1.47 1.63 1.46
Diluted earning per share
As reported $ 1.44 $ 1.59 $ 1.38
Pro forma 1.39 1.55 1.35
The fair value of the options granted during 2001 and 1999, is estimated
as $47,600 and $5,200 on the date of grant using a binomial option-pricing
model with the following assumptions: volatility of 29.55% and 27.52%,
risk-free interest rate of 4.92% and 6.61%, expected increase in dividends
of $0.05 per share per year, annual dividend rate of 3.01% and 3.55%,
assumed forfeiture rate of zero and an expected life of 7 years. There
were no options granted in 2000. The fair value per share of the 2001 and
1999 awards was $5.67 and $5.77.
57
12. CAPITAL STOCK
On May 18, 1999, the Board of Directors authorized the purchase in the
open market of up to 452,100 shares of its outstanding common stock over a
seven-year period. The purpose of this buyback is to offset the dilution
of stock options that are outstanding. The number of shares is adjusted on
an annual basis to coincide with new issues and forfeitures.
On August 24, 2001, the Board of Directors authorized a common stock
repurchase of up to 5% or approximately 114,000 shares of the Company's
Common Stock.
During 2001, 2000 and 1999, 193,839, 66,067 and 63,669 shares were
purchased . Under the two plans approximately 239,000 shares remain
available for repurchase. Shares purchased are retired by a charge to
common stock and retained earnings for the cost.
On October 22, 2001 a cash dividend of $0.65 per share was paid to
shareholders of record as of October 1, 2001.
On April 20, 1999, the Board of Directors authorized 2,000,000 shares of
preferred stock. As of December 31, 2000 no preferred shares had been
issued.
All share and per share amounts have been restated to reflect the 2000 10%
stock dividend.
13. RETIREMENT BENEFITS
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 Section 402(G). The Bank's contributions include a matching
contribution of 100% of the first 3% of salary deferred and 50% of the
next 2% of salary deferred. Discretionary contributions are also
permitted. The Bank made matching contributions aggregating $100,000,
$42,610, and $38,104 for the years ended December 31, 2001, 2000 and 1999,
respectively. The Bank made a discretionary contribution of $25,000 in
1999. No discretionary contributions were made in 2001 or 2000.
SALARY CONTINUATION PLAN - In April 2001, the Board of Directors approved
the implementation of the Executive Salary Continuation Plan (SCP), which
is a non-qualified executive benefit plan in which the Bank agrees to pay
the executives covered by the SCP plan additional benefits in the future
in return for continued satisfactory performance by the executives.
Benefits under the salary continuation plan include a benefit generally
payable commencing upon a designated retirement date for a fixed period of
twenty years, disability or termination of employment, and a death benefit
for the participants designated beneficiaries. Key-man life insurance
policies were purchased as an investment to provide for the Bank's
contractual obligation to pay pre-retirement death benefits and to recover
the Bank's cost of providing benefits. The executive is the insured under
the policy, while the Bank is the owner and beneficiary. The insured
executive has no claim on the insurance policy, its cash value or the
proceeds thereof.
The retirement benefit is derived from accruals to a benefit account
during the participant's employment. At the end of the executive's period
of service, the aggregate amount accrued should equal the then present
value of the benefits expected to be paid to the executive. Accrued
compensation payable and compensation expense under the salary
continuation plan totaled $79,578 for 2001.
58
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:
DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Balance at beginning of year $ 1,554,264 $ 938,309
New loan additions 584,946 1,017,051
Principal repayments (1,218,135) (401,096)
----------- -----------
Balance at end of year $ 921,075 $ 1,554,264
=========== ===========
As of December 31, 2001 and 2000 there were no related party loans which
were past due or classified.
15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases certain facilities at which it
conducts its operations. Future minimum lease commitments under all
non-cancelable operating leases as of December 31, 2001 are below:
(Dollars in thousands)
Years Ended December 31,
-------------------------
2002 $ 254,340
2003 $ 254,340
2004 $ 254,340
2005 $ 254,340
2006 $ 254,340
Thereafter $1,247,805
----------
Total $2,519,505
==========
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.
59
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,
----------------------------
2001 2000
----------- -----------
Off-balance sheet commitments:
Commitments to extend credit $61,847,400 $55,764,726
Standby letters of credit 1,917,339 1,605,120
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.
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 sheet 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, 2001 and 2000, that
the Company and the Bank met all capital adequacy requirements to which
they are subject.
As of December 31, 2001 and 2000, 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, 2001 and
2000 are also presented in the table.
60
TO BE
CATEGORIZED AS
WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION
---------------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ ---------- ----- ---------- ------
At December 31, 2001:
COMPANY
Leverage capital (to average assets) $27,247,887 9.38% $11,624,400 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 27,247,887 11.08% 9,840,410 4.00% n/a n/a
Total capital (to risk-weighted assets) 30,323,015 12.33% 19,680,820 8.00% n/a n/a
BANK
Leverage capital (to average assets) $26,883,167 9.38% $11,464,430 4.00% $14,530,500 5.00%
Tier 1 Capital (to risk-weighted assets) 26,883,167 10.93% 9,840,410 4.00% 14,760,615 6.00%
Total capital (to risk-weighted assets) 29,958,295 12.18% 19,680,820 8.00% 20,880,675 10.00%
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% $11,905,107 5.00%
Tier 1 Capital (to risk-weighted assets) 26,804,948 12.86% 8,352,270 4.00% 11,015,280 6.00%
Total capital (to risk-weighted assets) 29,415,033 14.11% 16,704,540 8.00% 18,358,800 10.00%
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, 2001 the maximum amount available
for dividend distribution under this restriction was approximately
$8,379,492.
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
2001 or 2000.
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.
61
The Company evaluates performance of its commercial banking business based
on the overall profitability of the Company, including merchant card
processing activities. 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:
2001 2000 1999
---------- ---------- ----------
Income before income taxes:
Commercial banking $5,675,153 $5,787,627 $5,188,941
Credit card services 940,234 1,875,433 1,882,305
---------- ---------- ----------
$6,615,387 $7,663,060 $7,071,246
========== ========== ==========
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.
62
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value of
securities purchased under agreements to resell 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.
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, 2001
-------------------------------------------
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
----------- ------------ ------------
Financial assets:
Cash and short-term investments $ 40,957,910 $ 40,957,910
Securities 45,015,174 45,090,835
Loans receivable, net 216,696,198 217,497,282
Financial liabilities:
Demand and savings $131,451,970 $131,451,970
Fixed rate certificates 143,543,830 142,049,046
Variable certificates 6,439,744 6,439,744
Securities sold under agreements to repurchase 6,780,232 6,780,232
Off balance sheet financial instruments:
Commitments to extend credit $61,847,400 $ 1,241,348
Standby letters of credit 1,917,339 38,347
63
DECEMBER 31, 2000
-------------------------------------------
CONTRACT CARRYING FAIR
AMOUNT 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
Securities sold under agreements to repurchase 5,267,472 5,267,472
Off balance sheet financial instruments:
Commitments to extend credit $55,764,726 $ 1,115,295
Standby letters of credit 1,605,120 32,102
19. BRANCH ACQUISITION
On June 15, 2001, the Company executed a Branch Purchase and Assumption
Agreement which provided for the purchase of deposit liabilities,
assumption of the lease, and purchase of certain fixed assets at net book
value of a banking office located in Citrus Heights, California.
The Company received approximately $31,438,000 in cash from the seller,
recorded intangible assets of approximately $769,000, and recorded
liabilities, consisting of deposits, of approximately $32,252,000.
64
20. REDDING BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
BALANCE SHEETS
Assets:
Cash $ 26,229 $ 184,282
Time deposit with subsidiary 140,000 1,490,000
Investment in subsidiaries 27,073,620 27,079,987
----------- -----------
Total assets $27,239,849 $28,754,269
=========== ===========
Stockholders' Equity 27,239,849 28,754,269
----------- -----------
Total liabilities and stockholders' equity $27,239,849 $28,754,269
=========== ===========
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
STATEMENTS OF INCOME
Income:
Interest on time deposit $ 45,582 $ 33,655 $ 42,259
Dividend from subsidiary 4,303,000 3,247,731 2,840,272
---------- ---------- ----------
4,348,582 3,281,386 2,882,531
Expenses 161,579 203,616 297,414
---------- ---------- ----------
Income before income taxes and
equity in undistributed net income
of subsidiaries 4,268,095 3,077,770 2,585,117
Provision for income taxes(2) 800 800 800
---------- ---------- ----------
Income before equity in undistributed
net income of subsidiaries 4,267,295 3,076,970 2,584,317
Equity in undistributed net income of
subsidiaries 6,367 1,734,799 1,785,686
---------- ---------- ----------
Net income $4,273,662 $4,811,769 $4,370,003
========== ========== ==========
- ------------
(2) Under the Company's intercompany tax allocation policy, all tax benefits
resulting from net losses before dividends from subsidiaries are allocated
to the Bank.
65
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 4,273,662 $ 4,811,769 4,370,003
Adjustments to reconcile net income to
net cash provided by operating activities:
Compensation associated with stock options 67,200 67,200 77,865
Equity in undistributed net income of
subsidiaries (88,450) (1,871,530) (1,839,815)
----------- ----------- -----------
Net cash provided by operating activities 4,252,412 3,007,439 2,608,053
----------- ----------- -----------
Cash flows from financing activities:
Purchase of common stock (4,091,824) (1,307,116) (1,243,094)
Proceeds from issuance of common stock 123,751 495,506 147,150
----------- ----------- -----------
Common stock transactions, net (3,968,073) (811,610) (1,095,944)
Cash dividends (1,792,392) (1,699,627) (1,583,923)
----------- ----------- -----------
Net cash used by financing activities (5,760,465) (2,511,237) (2,679,867)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (1,508,053) 496,202 (71,814)
Cash and cash equivalents at beginning of year 1,674,282 1,178,080 1,249,894
----------- ----------- -----------
Cash and cash equivalents at end of year $ 166,229 $ 1,674,282 $ 1,178,080
=========== =========== ===========
66
QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
(Dollars in thousands)
Q1 Q2 Q3 Q4
2001 2001 2001 2001
------- ------- ------- -------
Net interest income $ 2,856 $ 2,738 $ 2,828 $ 2,768
Provision for loan losses (158) (149) 52 (0)
Non-interest income 732 684 512 895
Non-interest expense (1,660) (1,719) (1,864) (1,900)
------- ------- ------- -------
Income before taxes 1,770 1,554 1,528 1,763
Provision for income tax (639) (582) (532) (588)
------- ------- ------- -------
Net Income $ 1,131 $ 972 $ 996 $ 1,175
======= ======= ======= =======
Per common share:
Basic earnings per share $ 0.39 $ 0.34 $ 0.36 $ 0.43
Diluted earnings per share $ 0.38 $ 0.33 $ 0.33 $ 0.41
Dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.65
(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 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:
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 per share $ 0.00 $ 0.00 $ 0.00 $ 0.59
67
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 2002 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 February
19, 2002, are as follows:
Name Age Position(s)
---- --- -----------
Michael C. Mayer.............. 45 President, Chief Executive Officer Redding
Bank of Commerce and Director
Linda J. Miles................ 48 Executive Vice President, Chief Financial
Officer and Assistant Secretary
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 25 years of professional banking experience, prior to joining the
Company, Ms. Miles served as Senior Vice President and Chief Financial Officer
for another Upstate 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.
68
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.
69
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__)
---------------------
* Previously filed with the Company's Registration Statement on
Form 10.
(b) Reports on Form 8-K:
On October 16, 2001, the Company filed a Form 8-K reporting third
quarter financial results. On February 4, 2002, the Company filed a Form 8-K
reporting 2001 year-end financial results.
70
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 February
19, 2002.
REDDING BANCORP
By /s/ Michael C. Mayer
-------------------------------------
Michael C. Mayer
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 Michael C. Mayer 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/ Michael C. Mayer President, Chief Executive Officer February 19, 2002
- ------------------------------- Redding Bank of Commerce and Director
Michael C. Mayer
/s/ Linda J. Miles Executive Vice President and Chief February 19, 2002
- ------------------------------- Financial Officer and Assistant
Linda J. Miles Secretary (Principal Financial Officer
and Accounting Officer)
/s/ Robert C. Anderson Chairman of the Board February 19, 2002
- -------------------------------
Robert C. Anderson
/s/ Welton L. Carrel Director February 19, 2002
- -------------------------------
Welton L. Carrel
/s/ Russell L. Duclos Director February 19, 2002
- -------------------------------
Russell L. Duclos
/s/ John C. Fitzpatrick Director February 19, 2002
- -------------------------------
John C. Fitzpatrick
/s/ Kenneth R. Gifford, Jr. Director February 19, 2002
- -------------------------------
Kenneth R. Gifford, Jr.
/s/ Harry L. Grashoff, Jr. Director February 19, 2002
- -------------------------------
Harry L. Grashoff, Jr.
/s/ Eugene L. Nichols Director February 19, 2002
- -------------------------------
Eugene L. Nichols
/s/ David H. Scott Director February 19, 2002
- -------------------------------
David H. Scott
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 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__)
- ---------------------
* Previously filed with the Company's Registration Statement on Form 10 and SEC
Form 10-K.