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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 1999
FILE NO. 0-25135
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM 10
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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REDDING BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-2823865
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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1951 CHURN CREEK ROAD
REDDING, CALIFORNIA 96002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (530) 224-3333
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SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
NONE NONE
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SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE PER SHARE
(TITLE OF CLASS)
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TABLE OF CONTENTS
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ITEM 1. BUSINESS.................................................... 1
ITEM 2. FINANCIAL INFORMATION....................................... 21
ITEM 3. PROPERTIES.................................................. 41
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................. 42
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS............................ 43
ITEM 6. EXECUTIVE COMPENSATION...................................... 45
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 49
ITEM 8. LEGAL PROCEEDINGS........................................... 49
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 49
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES..................... 51
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED.................................................. 51
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 52
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 53
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 90
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS........................... 90
SIGNATURES............................................................... 91
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ITEM 1. BUSINESS
This Registration Statement 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
currently available to management. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading "Financial Information-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 "Business-Risk Factors and Investment Considerations" and
elsewhere in this Registration Statement. 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 "Business-Risk
Factors and Investment Considerations," 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 effectiveness of
this Registration Statement, even if new information, future events or other
circumstances have made them incorrect or misleading.
Except as specifically noted herein (i) all references to the "Company"
refer to Redding Bancorp, a California corporation, and its consolidated
subsidiaries and (ii) all information herein has been adjusted to give effect to
a three-for-one stock split effected by the Company in July 1998.
GENERAL
Redding Bancorp (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and was
incorporated in California on January 21, 1982, for the purpose of organizing,
as a wholly owned subsidiary, Redding Bank of Commerce (the "Bank"). As a bank
holding company, the Company is subject to the BHCA and to supervision by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"). 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
business operations at the offices of the Bank located at 1951 Churn Creek Road,
Redding, California 96002. The Company conducts all of its business operations
within a single geographic area and within a single industry segment.
The Bank was incorporated as a California banking corporation on
November 25, 1981, and received its certificate of authority to begin banking
operations on October 22, 1982. The Bank operates two full service branches and
two loan production offices. The Company established its first full service
branch at 1177 Placer Street, Redding, California, and opened for business on
October 22, 1982. On November 1, 1988, the Bank received a certificate of
authority to establish
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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 29, 1995, the Bank received a
certificate of authority to open a second loan production office at 676 East
First Avenue in Chico, California. The Bank established an interactive marketing
website on July 31, 1998, at http://www.reddingbankofcommerce.com for the
purpose of making information about the Bank's products and services publicly
available.
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 Butte, El Dorado, Placer, Shasta, and Sacramento, California. The
Company considers Shasta County, 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, 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 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,
professionals and other individuals with medium to high net worth, and most of
the Bank's deposits are obtained from such customers. The Bank does not accept
brokered deposits or deposits outside of its market area. The Bank emphasizes
servicing the needs of local businesses and professionals and individuals
requiring specialized services. The Bank's business strategy is to focus on its
lending activities. The Bank's principal lines of lending are (i) commercial,
(ii) real estate construction and (iii) commercial and residential real estate.
The majority of the Bank's loans are direct loans made to individuals and small
businesses in the Bank's major market area and are secured by real estate. See
"-Risk Factors and Investment Considerations-Dependence on Real Estate." A
relatively small portion of the Bank's loan portfolio consists of loans to
individuals for personal, family or household purposes. The Bank accepts real
estate, listed and unlisted securities, savings and time deposits, automobiles,
machinery and equipment as collateral for loans.
The Bank's commercial loan portfolio consists of a mix of revolving
credit facilities and intermediate term loans. The loans are generally made for
working capital, asset acquisition and business expansion purposes and are
generally secured by a lien on the borrowers' assets. The Bank also makes
unsecured loans to borrowers who meet the Bank's underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its
borrowers' payment performance and their respective financial condition and
makes periodic and appropriate adjustments, if necessary, to the risk grade
assigned to each loan in the portfolio. The primary sources of repayment of the
Bank's commercial loans are the borrower's conversion of short-term assets to
cash and operating cash flow. The net
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assets of the borrower or guarantor are usually identified as a secondary source
of repayment.
The principal factors affecting the Bank's risk of loss from commercial
lending include each borrower's ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank manages risk through its underwriting criteria,
which includes strategies to match the borrower's cash flow to loan repayment
terms, and periodic evaluations of the borrower's operations. The Bank's
evaluations of its borrowers are facilitated by management's knowledge of local
market conditions and periodic reviews by a consultant of the Bank's credit
administration policies.
The Bank's real estate construction loan portfolio consists of a mix of
commercial and residential construction loans, which are principally secured by
the underlying project. The Bank's real estate construction loans are
predominately made for projects which are intended to be owner occupied. The
Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Bank's construction loans are sale of the
underlying collateral or permanent financing provided by the Bank or another
lending source.
The principal risks associated with real estate construction lending
include project cost overruns that absorb the borrower's equity in the project
and deterioration of real estate values as a result of various factors,
including competitive pressures and economic downturns. See "-Risk Factors and
Investment Considerations-Lending Risks Associated with Commercial Banking and
Construction Activities." The Bank manages its credit risk associated with real
estate construction lending by establishing maximum loan-to-value ratios on
projects on an as-completed basis, inspecting project status in advance of
controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of no more than 80% on
single-family residential construction loans.
The Bank's commercial and residential real estate mortgage loan
portfolio consists of loans secured by a variety of commercial and residential
real property. The Bank makes real estate mortgage loans for both owner-occupied
properties and investor properties. The Bank's underwriting criteria for loans
to investors is generally more conservative and such loans constitute a smaller
percentage of the Bank's commercial and residential real estate loan portfolio.
The principal source of repayment of the Bank's real estate loans is the
Borrower's operating cash flow.
Similar to commercial loans, the principal factors affecting the Bank's
risk of loss in real estate mortgage lending include the borrower's ability to
manage its business affairs and cash flows, local and general economic
conditions and real estate values in the Bank's service area. The Bank manages
its credit risk associated with real estate mortgage lending primarily by
establishing maximum loan-to-value ratios and using strategies to match the
borrower's cash flow to loan repayment terms. Approximately 95% of the Bank's
residential real estate mortgage loans are sold in the secondary market.
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The Bank's specific underwriting standards and methods for each of its
principal lines of lending include industry-accepted analysis and modeling and
certain proprietary techniques. The Bank's underwriting criteria is designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
In April 1993, the Bank entered into an agreement (the "Merchant
Services Agreement") with Cardservice International, Inc. ("CSI"), an
independent sales organization ("ISO"), pursuant to which the Bank has agreed to
provide credit and debit card processing services for merchants solicited by the
ISO 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, a nonbank merchant credit card processor, 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. Contract deposit
relationships with the Bank's merchants and CSI represented approximately 25% of
the Bank's capital as of September 30, 1998. The Merchant Services Agreement
with CSI was renewed in 1997 for a period of four years, which expires on April
1, 2001, and will automatically renew for additional four year periods unless
terminated in advance of the renewal period by CSI or the Bank upon 30 days
prior written notice. See "-Risk Factors and Investment Considerations-Ability
to Sustain Growth," "--Merchant Processing Services" and "--Chargebacks and
Payment Risks Associated with Merchant Processing Services."
In 1995, the Company established a sales team to market merchant
processing services to merchants in its major market area and, as of September
30, 1998, the Bank had 786 merchants in its portfolio. The fee income generated
from the Bank's local merchant portfolio is substantially less than that
generated from the CSI portfolio because of the lower volume of transactions.
The fee income from merchant processing services represented
approximately 11.1%, 9.3% and 7.5% of the Company's consolidated revenues in
1997, 1996 and 1995, respectively.
RISK FACTORS AND INVESTMENT CONSIDERATIONS
In addition to the other information in this Registration Statement,
investors should consider carefully the following risk factors in evaluating the
Company, its subsidiaries and Common Stock.
LENDING RISKS ASSOCIATED WITH COMMERCIAL BANKING AND CONSTRUCTION
ACTIVITIES
The Bank's business strategy is to focus on commercial and multi-family
real estate loans, construction loans and commercial business loans. Loans
secured by commercial real estate are generally larger and involve a greater
degree of credit and transaction risk than residential mortgage (one to four
family) loans. Because payments on loans secured by commercial and multi-family
real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a
greater extent to the then
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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 September 30, 1998, approximately 68% of the Bank's loans were
secured by real estate. The value of the Bank's real estate collateral has been,
and could in the future continue to be, adversely affected by any economic
recession and any resulting adverse impact on the real estate market in Northern
California such as that experienced during the early years of this decade.
See "-Economic Conditions and Geographic Concentration."
The Bank's primary lending focus has historically been real estate
mortgage, construction and, to a lesser extent, commercial lending. At September
30, 1998, commercial real estate mortgage and construction loans comprised
approximately 40% and 25%, respectively, of the total loans in the Bank's
portfolio. At September 30, 1998, all of the Bank's real estate mortgage and
construction loans, and approximately 10% of its commercial loans, were secured
fully or in part by deeds of trust on underlying real estate. The Bank's
dependence on real estate increases the risk of loss in both the Bank's loan
portfolio and its holdings of other real estate owned if economic conditions in
Northern California deteriorate in the future. Deterioration of the real estate
market in Northern California would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-Economic Conditions and Geographic Concentration."
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 Federal Reserve. 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
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Company's business, financial condition and results of operations. See
"Financial Information-Quantitative and Qualitative Disclosure About Market
Risk."
MERCHANT PROCESSING SERVICES
The Bank's fee income from merchant processing services represented
approximately 11.1%, 9.3% and 7.5% of the Company's consolidated revenues in
1997, 1996 and 1995, respectively. In addition, contract deposit relationships
with the merchants in the Bank's portfolio and CSI represented approximately 25%
of the Bank's capital as of September 30, 1998. The Merchant Services Agreement
was renewed in 1997 for a period of four years which expires on April 1, 2001,
and will automatically renew for additional four year periods unless terminated
by CSI or the Bank upon written notice 30 days prior to the expiration of any
renewal period. In the event the Merchant Services Agreement is not renewed by
the Bank, CSI may transfer the merchants in its portfolio to another financial
institution, the result of which would be that the Bank would lose the related
deposits. Termination of the Merchant Services Agreement and loss of the related
deposits would have a material adverse effect on the Company's financial
condition and results of operations. See "Financial Information-Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Noninterest Income-Merchant Processing Services Income."
ABILITY TO SUSTAIN GROWTH
A significant amount of the Company's growth in the recent past is
attributable to the fee income received by the Bank in connection with merchant
processing services provided pursuant to the Merchant Services Agreement and, to
a lesser extent, the Bank's own portfolio of local merchants. The ability of the
Bank to increase the level of fee income currently being generated by merchant
processing relationships is limited. Under the Visa(R) and MasterCard(R)
associations' rules that apply to a bank or other processing firm that acquires
a card transaction from a merchant and processes and enters the transaction into
the Visa(R) or MasterCard(R) system for presentment to the card issuer (the
"Card Association Rules"), fees that can be charged on monthly credit card sales
above $93 million are significantly less than the fees that can be charged on
monthly credit card sales below $93 million. Further, the Visa(R) bylaws limit
the amount of quarterly Visa(R) credit card sales that the Bank may process to
four times the Bank's equity capital unless additional collateral is pledged by
the Bank. The Company's ability to sustain or increase fee income from merchant
processing relationships is also affected by other factors, many of which are
beyond the Company's control, such as (i) competition from other banks, ISOs and
other nonbank processors, (ii) continuation of the requirement that ISOs and
other nonbank processors access the Visa(R) and MasterCard(R) payment system
through banks, (iii) the ability to avoid losses through various contractual
methods, including indemnification by the ISO, reserve balances controlled by
the Bank and insurance and (iv) the ability to continue to grow both locally and
nationally. No assurance can be given that the Company will be able to sustain
its growth from fee income from merchant processing services. See "Financial
Information-Management's Discussion and Analysis of Financial Condition and
Results of Operations-Noninterest Income-Merchant Processing Services Income."
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CHARGEBACKS AND PAYMENT RISKS ASSOCIATED WITH MERCHANT PROCESSING
SERVICES
The Bank is subject to the Card Association Rules in processing credit
and debit card transactions. In the event of certain types of billing disputes
between a cardholder and a merchant, the processor of the transaction assists
the merchant in investigating and resolving the dispute. If the dispute is not
resolved in favor of the merchant, the transaction is "charged back" to the
merchant and that amount is credited or otherwise refunded to the cardholder. If
the processor is unable to collect such amounts from the merchant's account, and
if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse the processor for the chargeback, the processor bears the loss for the
amount of the refund paid to the cardholder. Pursuant to the Merchant Services
Agreement, CSI has agreed to indemnify the Bank against losses incurred in
connection with credit card transactions generated by merchants in CSI's
portfolio. In addition, pursuant to the Merchant Services Agreement, CSI is
required to maintain a reserve account and a general account with the Bank and
has granted the Bank a security interest in such accounts to secure CSI's
obligations under the Merchant Services Agreement. The balances required to be
maintained by CSI in the reserve account and general account constitute a small
percentage of the dollar volume of transactions processed by the Bank each
month. In the event that the funds in accounts maintained by CSI are not
sufficient to cover chargebacks and refund payments to cardholders and CSI is
unable to reimburse the Bank for such deficiencies, the Bank would bear the loss
which could have a material adverse effect on the Company's financial condition,
results of operations and cash flows. See "Business-General" and "Financial
Information-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 September 30, 1998, 22% of the dollar value of the Bank's total
deposits was represented by time certificates of deposit in excess of $100,000.
As such, these deposits are considered volatile and could be subject to
withdrawal. Withdrawal of a material amount of such deposits would adversely
impact the Bank's liquidity, profitability, business prospects, results of
operations and cash flows.
DIVIDENDS
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Because the Company conducts no other significant activity than the
management of its investment in the Bank, the Company is dependent on the Bank
for income. The ability of the Bank to pay cash dividends in the future depends
on the Bank's profitability, growth and capital needs. In addition, the
California Financial Code restricts the ability of the Bank to pay dividends. No
assurance can be given that the Company or the Bank will pay any dividends in
the future or, if paid, such dividends will not be discontinued. See
"-Supervision and Regulation-Restrictions on Dividends and Other Distributions."
COMPETITION
In California generally, and in the Company's primary market area
specifically, major banks dominate the commercial banking industry. By virtue of
their larger capital bases, such institutions have substantially greater lending
limits than those of the Bank. In obtaining deposits and making loans, the Bank
competes with these larger commercial banks and other financial institutions,
such as savings and loan associations and credit unions, which offer many
services which traditionally were offered only by banks. In addition, the Bank
competes with other institutions such as money market funds, brokerage firms,
and even retail stores seeking to penetrate the financial services market.
During periods of declining interest rates, competitors with lower costs of
capital may solicit the Bank's customers to refinance their loans. Furthermore,
during periods of economic slowdown or recession, the Bank's borrowers may face
financial difficulties and be more receptive to offers from the Bank's
competitors to refinance their loans. No assurance can be given that the Bank
will be able to compete with these lenders. See "-Competition."
Competition in the merchant processing industry is intense. The Bank
competes with other banks, ISOs and other nonbank processors. Many of these
competitors are substantially larger than the Bank. The Bank competes on the
basis of price, the availability of products and services, the quality of
customer service and support and transaction processing speed. The majority of
the Bank's contracts with merchants are cancelable at will or on short notice or
provide for renewal at frequent periodic intervals and, as a result, the Bank
regularly rebids such contracts. This competition may influence the prices that
can be charged by the Bank and require aggressive cost control or increased
transaction volume in order to maintain acceptable profit margins. If the Bank
is not able to maintain acceptable profit margins, it could be forced to
discontinue merchant processing services which would have a material adverse
effect on the Company's results of operations and cash flows. Further, because
of tightening margins, there has been a trend toward consolidation in the
merchant processing industry. Consolidation will enable certain of the Bank's
competitors to have access to significant capital, management, marketing and
technological resources that are equal to or greater than those of the Bank. No
assurance can be given that the Bank or any ISO for which the Bank performs
clearing bank services will be able to compete successfully for merchant
processing business in the future. See "-Competition."
GOVERNMENT REGULATION AND LEGISLATION
The Company and the Bank are subject to extensive state and federal
regulation, supervision and legislation which govern almost all aspects of the
operations of the Company and the Bank. The business of the Company is
particularly susceptible to being affected by the enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities or enhancing the competitive
position of
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other financial institutions. Such laws are subject to change from time to time
and are primarily intended for the protection of consumers, depositors and the
deposit insurance funds and not for the protection of shareholders of the
Company. The Company cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on
the business and prospects of the Company, but it could be material and adverse.
See "-Supervision and Regulation."
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are located and concentrated primarily in
Northern California, particularly the counties of Butte, El Dorado, Placer,
Shasta and Sacramento, and are likely to remain so for the foreseeable future.
At September 30, 1998, approximately 64% of the Bank's loan portfolio consisted
of real estate related loans, all of which were related to collateral located in
Northern California. The performance of these loans may be adversely affected by
changes in California's economic and business conditions. A deterioration in
economic conditions could have a material adverse effect on the quality of the
Bank's loan portfolio and the demand for its products and services. In addition,
during periods of economic slowdown or recession, the Bank may experience a
decline in collateral values and an increase in delinquencies and defaults. A
decline in collateral values and an increase in delinquencies and defaults
increase the possibility and severity of losses. California real estate is also
subject to certain natural disasters, such as earthquakes, floods and mud
slides, which are typically not covered by the standard hazard insurance
policies maintained by borrowers. Uninsured disasters may make it difficult or
impossible for borrowers to repay loans made by the Bank. The occurrence of
adverse economic conditions or natural disasters in California could have a
material adverse effect on the Bank's financial condition, results of
operations, cash flows and business prospects.
RELIANCE ON KEY EMPLOYEES AND OTHERS
The Company is dependent upon the continued services of its key
employees, including Russell L. Duclos, President and Chief Executive Officer,
Michael C. Mayer, Executive Vice President and Chief Credit Officer, and Linda
J. Miles, Executive Vice President and Chief Financial Officer. The loss of the
services of any such employee, or the failure of the Company to attract and
retain other qualified personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has entered into a three-year employment agreement with Mr. Duclos which expires
on June 30, 2000. See "Executive Compensation-Employment Agreements."
The Company does not maintain any life insurance with respect to any of
its officers or directors, except with regard to a nonqualified deferred
compensation plan. See "Executive Compensation-Directors Deferred Compensation
Plan."
ADEQUACY OF ALLOWANCE FOR LOAN AND OTHER REAL ESTATE LOSSES
The Bank's allowance for estimated losses on loans was approximately
$3.02 million, or 2.09% of total loans, and 215% of total nonperforming loans at
September 30, 1998. Material future additions to the allowance for estimated
losses on loans may be necessary if material adverse changes in economic
conditions occur and the performance of the Bank's loan portfolio deteriorates.
In addition, future additions to the Bank's allowance for losses on other real
estate
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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 third quarter of 1997. 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 "Financial
Information-Management's Discussion and Analysis of Financial Condition and
Results of Operations-Asset Quality" and "--Allowance for Loan and Lease Losses
(ALLL)."
CERTAIN OWNERSHIP RESTRICTIONS UNDER CALIFORNIA AND FEDERAL LAW
Federal law prohibits a person or group of persons "acting in concert"
from acquiring "control" of a bank holding company unless the Federal Reserve
has been given 60 days prior written notice of such proposed acquisition and
within that time period the Federal Reserve has not issued a notice disapproving
the proposed acquisition or extending for up to another 30 days, the period
during which such a disapproval may be issued. An acquisition may be made prior
to the expiration of the disapproval period if the Federal Reserve issues
written notice of its intent not to disapprove the action. Under a rebuttal
presumption established by the Federal Reserve, 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 Federal Reserve 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 California Commissioner of Financial Institutions (the
"Commissioner") has approved such acquisition of control. A person would be
deemed to have acquired control of the Company 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 control the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1998, the Company had 2,684,103 shares of Common
Stock outstanding, of which approximately 1,959,207 shares are eligible for sale
in the public market without restriction. Approximately 724,896 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 16% of the shares of Common Stock
at
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<PAGE> 13
an exercise price equal to not less than 85% of the market value of the
Company's Common Stock on the date of grant are reserved for issuance to
directors and certain employees of the Company under the Company's 1998 Stock
Option 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. See "Market Price of and Dividends
on the Registrant's Common Equity and Related Stockholder Matters."
ABSENCE OF PUBLIC MARKET; VOLATILITY IN STOCK PRICE
There currently is no active trading market for the Company's Common
Stock. No assurance can be given that an active public trading market will
develop or that, if developed, it will be sustained. As a result of the lack of
a trading market, the market price of the Company's Common Stock may experience
fluctuations that are unrelated to the operating performance of the Company and
the Bank. In particular, the price of the Company's Common Stock may be affected
by general market price movements as well as developments specifically related
to the financial services sector, including interest rate movements, quarterly
variations, or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
financial services industry.
TECHNOLOGY AND COMPUTER SYSTEMS
Advances and changes in technology can significantly impact the
business and operations of the Company. The Bank faces many challenges including
the increased demand for providing computer access to bank accounts and the
systems to perform banking transactions electronically. The Bank's merchant
processing services require the use of advanced computer hardware and software
technology and rapidly changing customer and regulatory requirements. The
Company's ability to compete depends on its ability to continue to adapt its
technology on a timely and cost-effective basis to meet these requirements. In
addition, the Bank's business and operations are susceptible to negative impacts
from computer system failures, communication and energy disruption and unethical
individuals with the technological ability to cause disruptions or failures of
the Bank's data processing systems.
Many computer programs were designed and developed utilizing only two
digits in the date field, thereby creating the inability to recognize the year
2000 or years thereafter. This year 2000 issue creates risks for the Bank from
unforseen or unanticipated problems in its internal computer systems as well as
from computer systems of the Federal Reserve Bank of San Francisco,
correspondent banks, customers and vendors. Failures of these systems or
untimely corrections could have a material adverse impact on the Bank's ability
to conduct its business and results of operations. See "Financial
Information-Management's Discussion and Analysis of Financial Condition and
Results of Operations-Year 2000."
ENVIRONMENTAL RISKS
The Bank, in its ordinary course of business, acquires real property
securing loans that are in default, and there is a risk that hazardous
substances 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.
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<PAGE> 14
Furthermore, the Bank may not have adequate remedies against the prior owners or
other responsible parties to recover its costs. Finally, the Bank may find it
difficult or impossible to sell the affected properties either prior to or
following any such removal. In addition, the Bank may be considered liable for
environmental liabilities in connection with its borrowers' properties, if,
among other things, it participates in the management of its borrowers'
operations. The occurrence of such an event could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows.
DILUTION
The Company has issued options to purchase shares of the Company's
Common Stock at prices below the fair market value of the Company's Common Stock
on the date of grant. As of December 31, 1998, the Company had outstanding
options to purchase an aggregate of 411,000 shares of Common Stock at exercise
prices ranging from $9.07 to $10.67 per share, or a weighted average exercise
price per share of $9.62. To the extent such options are exercised, shareholders
of the Company will experience dilution. See "Market Price of and Dividends on
the Registrant's Common Equity and Related Stockholder Matters."
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Company are affected not only by local
market area factors and general economic conditions, but also by government
monetary and fiscal policies. For example, the Federal Reserve influences the
supply of money through its open market operations in United States government
securities and adjustments to the discount rates applicable to borrowings by
depository institutions and others. Such actions influence the growth of loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of future changes in such policies on
the business and earnings of the Company cannot be predicted. Additionally,
state and federal tax policies can impact banking organizations.
As a consequence of the extensive regulation of commercial banking
activities in the United States, 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. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.
SUPERVISION AND REGULATION
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the BHCA. The Company
reports to, registers with, and may be examined by, the Federal Reserve. The
Federal Reserve also has the authority to examine the Company's subsidiaries.
The costs of any examination by the Federal Reserve 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
Commissioner.
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<PAGE> 15
The Federal Reserve has significant supervisory and regulatory
authority over the Company and its affiliates. The Federal Reserve requires the
Company to maintain certain levels of capital. The Federal Reserve 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 Federal Reserve. See "-Prompt Corrective
Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of
the Federal Reserve 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 Federal Reserve before
it acquires, merges or consolidates with any bank or bank holding company; any
company seeking to acquire, merge or consolidate with the Company also would be
required to obtain the prior approval of the Federal Reserve.
The Company is generally prohibited under the BHCA from acquiring
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. However, a bank holding company may, with the
approval of the Federal Reserve, engage, or acquire the voting shares of
companies engaged, in activities that the Federal Reserve has determined to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. A bank holding company must demonstrate that the benefits to
the public of the proposed activity will outweigh the possible adverse effects
associated with such activity.
A bank holding company may acquire banks in states other than its home
state without regard to the permissibility of such acquisitions under state law,
but subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of deposits of
insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
Banks may also merge across states lines, therefore creating interstate
branches. Furthermore, a bank is now able to open new branches in a state in
which it does not already have banking operations, if the laws of such state
permit such de novo branching.
Under California law, (i) 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, (ii) 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
(iii) 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.
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<PAGE> 16
The Federal Reserve generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve'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 of the Company and the
Bank to pay dividends.
Transactions between the Company and the Bank are subject to a number
of other restrictions. Federal Reserve policies forbid the payment by bank
subsidiaries of management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market exists, actual
costs plus a reasonable profit). Subject to certain limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
The Federal Reserve has adopted comprehensive amendments to Regulation
Y in 1997 intended to improve the competitiveness of bank holding companies by,
among other things, (i) expanding the list of permissible nonbanking activities
in which well-run bank holding companies may engage without prior Federal
Reserve approval, (ii) streamlining the procedures for well-run bank holding
companies to obtain approval to engage in other nonbanking activities and (iii)
eliminating most of the anti-tying restrictions imposed upon bank holding
companies and their nonbank subsidiaries. Amended Regulation Y also provides for
a streamlined and expedited review process for bank acquisition proposals
submitted by well-run bank holding companies and eliminates certain duplicative
reporting requirements when there has been a further change in bank control or
in bank directors or officers after an earlier approved change. These changes to
Regulation Y are subject to numerous qualifications, limitations and
restrictions. In order for a bank holding company to qualify as "well-run," both
it and the insured depository institutions that it controls must meet the
"well-capitalized" and "well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company 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 Federal Reserve 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 the bank holding company, its
lead depository institution and its depository institutions holding 80% of the
total risk-weighted assets of all its depository institutions at their most
recent examination or review must have received a composite
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<PAGE> 17
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.
REGULATION AND SUPERVISION OF BANKS
The Bank is subject to regulation, supervision and regular examination
by the DFI and the FDIC. 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. While
the Bank is not a member of the Federal Reserve system, it is subject to certain
regulations of the Federal Reserve 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, the 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, stockholder rights and duties, and
investment and lending activities. Whenever it appears that the contributed
capital of a California bank is impaired, the Commissioner shall order the bank
to correct such impairment. If a bank is unable to correct the impairment, such
bank is required to levy and collect an assessment upon its common shares. If
such assessment becomes delinquent, such common shares are to be sold by the
bank.
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. Federal
banking laws, however, imposes limitations on the activities and equity
investments of state chartered, federally insured banks. The FDIC rules on
investments prohibit a state bank from acquiring an equity investment of a type,
or in an amount, not permissible for a national bank. The FDIC rules also
prohibit a state bank from engaging as a principal in any activity that is not
permissible for a national bank, unless the bank is adequately capitalized and
the FDIC approves the activity after determining that such activity does not
pose a significant risk to the deposit insurance fund. The FDIC rules on
activities generally permit subsidiaries of banks, without prior specific FDIC
authorization, to engage in those that have been approved by the Federal Reserve
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
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<PAGE> 18
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 United States government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
In determining the capital level a bank is required to maintain, the
federal banking agencies do not, in all respects, follow generally accepted
accounting principles ("GAAP") and have special rules which have the effect of
reducing the amount of capital it will recognize 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, noncumulative 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%.
On October 1, 1998, the FDIC adopted two rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first rule makes risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and requires different amounts of capital for
different risk positions in asset securitization transactions. The second rule
permits limited amounts of unrealized gains on debt and equity securities to be
recognized for risk-based capital purposes as of September 1, 1998. The FDIC
rules also provide that a qualifying institution that sells small business loans
and leases with recourse must hold capital only against the amount of recourse
retained. In general, a qualifying institution is one that is well-capitalized
under the FDIC's prompt corrective action rules. The amount of recourse that can
receive the preferential capital treatment cannot exceed 15% of the
institution's total risk-based capital.
In addition to the risked-based guidelines, the federal banking
agencies 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 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 since a strong capital
position is a significant part of the 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,
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<PAGE> 19
for all practical purposes, must be at least 4% or 5%. In addition to these
uniform risk-based capital guidelines and leverage ratios that apply across the
industry, the federal banking agencies 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, 1997, the Bank's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for the
Bank, compared to the standards for well-capitalized depository institutions, as
of December 31, 1997 (amounts in thousands except percentage amounts).
<TABLE>
<CAPTION>
Actual Well Minimum
------------------------ Capitalized Capital
Capital Ratio Ratio Requirement
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Leverage ................... $20,783 10.41% 5.0% 4.0%
Tier 1 Risk-Based .......... $20,783 14.91% 6.0 4.0
Total Risk-Based ........... $22,526 16.16% 10.0 8.0
</TABLE>
The federal banking agencies must take into consideration
concentrations of credit risk and risks from non-traditional activities, as well
as an institution's ability to manage those risks, when determining the adequacy
of an institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("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" "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%.
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<PAGE> 20
<TABLE>
<CAPTION>
"Undercapitalized" "Significantly undercapitalized"
- ------------------ --------------------------------
<S> <C>
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than 3%; or
or Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
- -----------------------------
Tangible equity to total assets less
than 2%.
</TABLE>
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.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal banking agencies 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.
As of December 31, 1997, the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions
and required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
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<PAGE> 21
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
The federal banking agencies 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.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner in an amount not exceeding the greatest of
the bank's retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect
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
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<PAGE> 22
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conversation and Recovery
Act to provide lenders and fiduciaries with greater protections from
environmental liability. In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the liability of lenders under
CERCLA as a result of the enactment of the Asset Conservation, Lender Liability
and Deposit Insurance Protection Act of 1996. California law provides that,
subject to numerous exceptions, a lender acting in the capacity of a lender
shall not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property.
In 1997, California adopted the Environmental Responsibility Acceptance
Act (Cal. Civil Code Sections 850-855) to facilitate (i) the notification
of government agencies and potentially responsible parties (e.g., for cleanup)
of the existence of contamination and (ii) the cleanup or other remediation of
contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
The Company has not ascertained the effect of the foregoing recently
enacted legislation on its business. To the extent that such legislation
provides lenders with greater protection from environmental liabilities, the
Company believes that the legislation could have a favorable impact on the
Company's business. However, no assurance can be given that the Company will not
be subject to environmental liabilities in connection with the exercise of its
rights as a secured creditor. See "-Risk Factors and Investment
Considerations-Environmental Risks."
PENDING LEGISLATION AND REGULATIONS
There are pending legislative proposals to reform the Glass-Steagall
Act to allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms. Certain other
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.
While the effect of such proposed legislation on the business of
financial institutions cannot be accurately predicted at this time, it seems
likely that a significant amount of consolidation in the banking industry will
continue to occur throughout the remainder of the decade.
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
20
<PAGE> 23
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 regions of higher yield and demand. Such institutions offer certain
services such as trust services and international banking services which are not
offered directly by the Bank (but are offered indirectly through correspondent
relationships). Because of their greater total capitalization, major banks have
substantially higher legal lending limits than the Bank.
In order to compete with major banks and other competitors in its
primary service areas, the Bank relies upon the experience of its executive and
senior officers in serving business clients, and upon its specialized services,
local promotional activities and the personal contacts made by its officers,
directors and employees. For customers whose loan demand exceeds the Bank's
legal lending limit, the Bank may arrange for such loans on a participation
basis with correspondent banks.
The recent enactment of Federal and California interstate banking
legislation will likely increase competition within California. Regulatory
reform, as well as other changes in federal and California law will also affect
competition. While the impact of these changes, and of other proposed changes,
cannot be predicted with certainty, it is clear that the business of banking in
California will remain highly competitive.
Competitive pressures in the banking industry significantly increase
changes in the interest rate environment, reducing net interest margins, and
less than favorable economic conditions can result in a deterioration of credit
quality and an increase in the provisions for loan losses.
With respect to its merchant processing services, the Bank competes
with other banks, ISOs and other nonbank processors. Many of these competitors
are substantially larger than the Bank. The bank competes on the basis of price,
the availability of products and services, the quality of customer service and
support, and transaction processing speed. The majority of the Bank's contracts
with merchants are cancelable at will or on short notice or provide for renewal
at frequent periodic intervals and, accordingly, the Bank regularly rebids such
contracts. This competition may influence the prices that can be charged by the
Bank and require aggressive cost control or increase transaction volume in order
to maintain acceptable profit margins. Further, because of tightening margins,
there has been a trend toward consolidation in the merchant processing industry.
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, 1998, the Company and its subsidiaries employed 71
persons. None of the Company's employees is represented by a labor union and the
Company considers its employee relations to be good.
21
<PAGE> 24
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The selected condensed consolidated financial data set forth below for
the five years ended December 31, 1997, have been derived from the Company's
audited financial statements. The selected condensed consolidated financial data
set forth below as of December 31, 1995, 1994 and 1993, and for the two years
ended December 31, 1994, have been derived from the Company's historical
financial statements not included in this Registration Statement. The selected
historical condensed financial data set forth below as of September 30, 1998,
and 1997 and for the nine month periods then ended are derived from the
unaudited condensed consolidated financial statements of the Company. The
unaudited condensed consolidated financial statements have been prepared on a
consistent basis with the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations of the Company for the periods covered thereby. The
Company's historical financial statements may not be indicative of future
performance. The results of operations and cash flows for the nine months ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The information set forth below
should be read in conjunction with "Financial Information-Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's historical financial statements and notes thereto, included
elsewhere in this Registration Statement.
22
<PAGE> 25
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Total Interest Income $ 12,041 $ 11,603 $ 15,764 $ 15,565 $ 15,122 $ 11,292 $ 9,116
Net Interest Income 7,720 6,908 9,430 8,767 8,740 6,966 5,699
Provision for Loan Losses 250 827 1,024 2,160 1,045 655 243
Total Other Income 2,334 1,917 2,636 2,079 1,698 843 508
Net Income 3,162 2,501 3,658 2,615 2,931 2,158 1,856
BALANCE SHEETS:
Total Assets 202,814 207,915 204,820 192,389 185,995 156,829 134,229
Total Loans 144,435 110,126 113,410 111,353 115,668 104,939 94,051
Allowance for Loan and
Lease Losses (ALLL) (3,019) (2,860) (2,819) (2,294) (2,053) (1,730) (1,127)
Total Deposits 176,654 184,322 180,673 171,368 166,869 140,824 119,716
Shareholders' Equity $ 22,497 $ 20,108 $ 21,825 $ 19,180 $ 17,266 $ 14,411 $ 13,351
PERFORMANCE RATIOS:
Return on Average Assets 2.08%(1) 1.70%(1) 1.83% 1.35% 1.74% 1.50% 1.55%
Return on Average Equity 18.88%(1) 16.79%(1) 18.27% 14.41% 18.45% 15.69% 15.04%
Dividend Payout 63.25% 63.97% 24.62% 25.83% 23.04% 26.08% 30.32%
Average Equity to Average
Assets 11.03% 10.12% 10.03% 9.35% 9.42% 9.58% 10.33%
Tier 1 Risk-Based Capital
Ratio 13.53% 14.88% 14.91% 13.70% 13.40% 13.25% 13.15%
Total Risk-Based Capital
Ratio 14.79% 16.14% 16.16% 14.90% 14.60% 14.45% 14.35%
Net Interest Margin 5.56%(1) 5.15%(1) 5.20% 4.96% 5.62% 5.21% 5.12%
Earning Assets to Total
Assets 92.1% 91.80% 90.90% 91.10% 92.30% 93.10% 93.30%
Nonperforming Assets to
Total Assets .69% .59% .50% 3.63% 1.64% .96% .40%
Annualized Net Charge-
offs .05%(1) .32%(1) .44% 1.64% .64% .05% .03%
ALLL to Total Loans 2.09% 2.60% 2.49% 2.06% 1.77% 1.65% 1.20%
Nonperforming Loans to
ALLL 46.60% 42.70% 23.90% 99.10% 137.40% 84.50% 48.00%
SHARE DATA:
Common Shares
Outstanding 2,684 2,697 2,697 2,700 2,700 2,700 2,700
Book Value Per Share $ 8.42 $ 7.49 $ 8.13 $ 7.10 $ 6.39 $ 5.34 $ 4.94
Basic Earnings Per Share $ 1.18 $ 0.93 $ 1.36 $ 0.97 $ 1.08 $ 0.80 $ 0.69
Diluted Earnings Per Share $ 1.15 $ 0.93 $ 1.35 $ 0.97 $ 1.08 $ 0.80 $ 0.69
Cash Dividends Per Share $ 0.50 $ 0.33 $ 0.33 $ 0.25 $ 0.25 $ 0.21 $ 0.21
</TABLE>
- ----------
(1) Annualized.
23
<PAGE> 26
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 as of
December 31, 1997, and 1996 and the years ended December 31, 1997, 1996 and
1995, and the Unaudited Condensed Consolidated Financial Statements of the
Company as of and for the nine months ended September 30, 1998, and 1997
appearing elsewhere in this Registration Statement. 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 "Business-Risk Factors and Investment Considerations" and
elsewhere in this Registration Statement. 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 "Business-Risk
Factors and Investment Considerations," 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 effectiveness of
this Registration Statement, even if new information, future events or other
circumstances have made them incorrect or misleading.
GENERAL
The Company is a bank holding company with its principal offices in
Redding, California. The Company engages in a general commercial banking
business in Redding and the counties of Butte, El Dorado, Placer, Shasta, and
Sacramento, California. The Company considers Shasta County to be the Company's
major market area. The Company conducts its business through the Bank, its
principal subsidiary. 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, and telephone
transfers. The primary focus of the Company is to provide service to the
business and professional community of its major market area including Small
Business Administration ("SBA") loans, and payroll and accounting packages and
billing programs. 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
24
<PAGE> 27
Net income for the nine months ended September 30, 1998, was $3.16
million, representing an increase of $661,000, or 26%, over net income of $2.50
million for the nine months ended September 30, 1997. The increase in net income
was primarily attributable to an increase in net interest income of $812,000 and
noninterest income of $417,000 and, to a lesser extent, a reduction in the
provision for loan losses of $577,000, which were partially offset by increases
in noninterest expense of $791,000 required to support asset and loan growth.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997, was $3.66 million,
representing an increase of $1.04 million, or 40%, over net income of $2.62
million for the year ended December 31, 1996. The increase in net income was
primarily the result of an increase in net interest income of $663,000 and
noninterest income of $536,000 and a decrease in the provision for loan losses
of $1,136,000, which were partially offset by an increase in noninterest expense
of $635,000 required to support asset and loan growth.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income for the year ended December 31, 1996, was $2.62 million,
representing a decrease of $316,000, or 11%, from net income of $2.93 million
for the year ended December 31, 1995. The decrease in net income was principally
the result of an increase in the provision for loan losses necessary to reserve
for increases in nonperforming assets in 1996.
NET INTEREST INCOME
The primary source of income for the Bank is derived from net interest
income, which is the difference between the interest earned from loans and
investments less the interest paid on deposit accounts and borrowings. Net
interest income increased from $8.74 million in 1995 to $8.77 million in 1996,
and to $9.43 million in 1997, representing a .3% increase in 1996 over 1995 and
a 7.6% increase in 1997 over 1996. Net interest income increased from $6.91
million for the nine months ended September 30, 1997, to $7.72 million for the
nine months ended September 30, 1998, representing an 11.8% increase. Net
interest income increases in 1997 over 1996 and the nine months ended September
30, 1998, over the comparable period in 1997 were primarily the result of loan
growth, which increased the volume of earning assets and improved the Bank's
interest income through reinvestment of maturing securities into higher yielding
loans.
Total interest expense increased from $6.38 million in 1995 to $6.80
million in 1996 and decreased to $6.33 million in 1997, representing a 6.5%
increase in 1996 over 1995 and a 6.8% decrease in 1997 over 1996. The decrease
in total interest expense in 1997 was primarily due to an $8.2 million reduction
in higher yielding certificates of deposit, and, to a lesser extent, a lower
cost of funds brought about by an increase in demand deposits. The decrease
reflects management's implementation of a plan to reposition the balance sheet
by decreasing higher yielding certificates of deposit and increasing demand
deposits.
Total interest expense decreased from $4.70 million for the nine months
ended September 30, 1997, to $4.32 million for the nine months ended September
30, 1998, representing an 8.0% decrease. This decrease is primarily attributable
to the decline in interest rates generally.
The Company's net interest margin (net interest income divided by
average earning assets) was 5.62% in 1995, 4.96% in 1996 and 5.20% in 1997. The
decrease in the net interest margin from 1995 to 1996 was primarily the result
of declining yields on the Bank's loan portfolio which were
25
<PAGE> 28
not fully offset by declining rates on interest-bearing liabilities. The
increase in the Company's net interest margin from 1996 to 1997 was primarily
attributable to the growth and change in mix of earning assets, which was funded
by growth of both interest-bearing and noninterest-bearing demand deposits. The
net interest margin increased to 5.56% for the nine months ended September 30,
1998, from 5.15% for the nine months ended September 30, 1997, primarily as a
result of (i) the overall growth and change in mix in the loan and investment
portfolios, which increased the yield on interest-earning assets, and, to a
lesser extent, (ii) the growth in noninterest-bearing demand deposits, which
increased earning assets without a corresponding increase in interest-bearing
liabilities.
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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ----------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ -------- -------- ------ -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Portfolio Loans(1) $113,030 $ 11,519 10.19% $117,021 $ 12,023 10.27% $112,366 $ 12,624 11.23%
Tax Exempt Securities 6,142 292 4.75% 7,960 367 4.61% 5,486 258 4.70%
US Government Securities 47,583 3,009 6.32% 36,982 2,320 6.27% 22,148 1,316 5.94%
Federal Funds Sold 10,825 569 5.26% 11,693 602 5.15% 12,011 699 5.82%
Other Securities 3,875 375 9.68% 3,276 253 7.72% 3,621 224 6.19%
------- -------- -------- -------- -------- --------
Average Earning Assets 181,455 15,764 8.69% 176,932 15,565 8.80% 155,632 15,121 9.72%
-------- -------- --------
Cash and Due From Banks 10,149 8,317 7,153
Bank Premises 5,781 5,975 3,893
Other Assets 2,211 2,899 1,997
-------- -------- --------
Average Total Assets $199,596 $194,123 $168,675
======== ======== ========
Interest-Bearing
Liabilities
Demand Interest-Bearing $ 42,911 $ 857 2.00% $ 35,887 $ 814 2.27% $ 31,886 $ 877 2.75%
Savings Deposits 11,802 343 2.91% 10,749 317 2.95% 9,541 314 3.29%
Certificates of Deposit 88,701 5,134 5.79% 96,979 5,667 5.84% 83,214 5,191 6.24%
-------- -------- -------- -------- -------- --------
143,414 6,334 4.42% 143,615 6,798 4.73% 124,641 6,382 5.12%
-------- -------- --------
Demand Noninterest
Bearing 34,299 30,542 26,397
Other Liabilities 1,864 1,818 1,747
Shareholder's Equity 20,019 18,148 15,890
-------- -------- --------
Average Liabilities and
Shareholders' Equity $199,596 $194,123 $168,675
======== ======== ========
Net Interest Income and Net
Interest Margin $ 9,430 5.20% $ 8,767 4.96% $ 8,739 5.62%
======== ========= ========
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Portfolio Loans(1) $124,279 $ 9,399 10.08% $112,200 $ 8,664 10.30%
Tax Exempt Securities 9,994 366 4.88% 6,052 215 4.74%
US Government Securities 40,106 1,912 6.36% 46,374 2,009 5.78%
Federal Funds Sold 8,330 304 4.87% 11,190 439 5.23%
Other Securities 2,319 60 3.45% 3,188 276 11.54%
-------- -------- -------- --------
Average Earning Assets $185,028 $ 12,041 8.68% $179,000 $ 11,603 8.64%
-------- -------- -------- --------
Cash and Due From
Banks $ 10,189 $ 9,819
Bank Premises 5,715 5,794
Other Assets 2,012 2,239
-------- --------
Average Total
Assets $202,944 $196,856
======== ========
Interest-Bearing
Liabilities
Demand Interest
Bearing $ 42,061 $ 590 1.87% $ 42,147 $ 598 1.89%
Savings Deposits 12,586 259 2.74% 11,763 302 3.42%
Certificates of
Deposit 86,843 3,472 5.33% 88,729 3,795 5.70%
-------- -------- -------- --------
$141,490 $ 4,321 4.07% $142,639 $ 4,695 4.39%
-------- --------
Demand Non
Interest-Bearing 36,725 32,594
Other Liabilities 2,340 1,702
Shareholders' Equity
22,389 19,921
-------- --------
Average Liabilities
& Shareholder Equity $202,944 $196,856
======== ========
Net Interest Income
and Net Interest
Margin $ 7,720 5.56% $ 6,908 5.15%
======== ========
</TABLE>
- ----------------
(1) Interest income on loans includes loan fee income of $332,000 and $330,000
for the nine months ended September 30, 1998, and 1997, respectively, and
$423,000, $686,000 and $836,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
The Company's average total assets increased from $194.1 million in
1996 to $199.6 million in 1997, representing a 2.8% increase. The Company's
average total assets increased from $196.9 million for the nine month period
ended September 30, 1997, to $202.9 million for the nine month period ended
September 30, 1998, representing a 3.1% increase. In 1997, the Company's average
loan portfolio decreased by $4.0 million while the investment portfolio
increased by $8.5 million, reflecting management's efforts to improve asset
quality rather than increase new loan production. In addition, the Company's
average demand deposits increased from $32.6 million for the nine months ended
September 30, 1997, to $36.7 million for the same period in 1998, representing a
12.7% increase, as a result of expansion of the Bank's commercial banking
activities and merchant processing services on both a local and national level.
In late 1997, the Company increased loan production by hiring
additional loan officers. As a result, average loans for the nine month period
ended September 30, 1998, increased by $12.1 million, or 10.8%, over the
comparable period in 1997. The increase has been funded through maturities and
sales of available-for-sale securities, increased earnings and an increase in
the Company's average demand deposits.
27
<PAGE> 30
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 attributable to rate/volume have been allocated to volume
changes.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED
1997 OVER 1996 1996 OVER 1995
----------------------------------- -----------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
in Interest Income
Portfolio Loans $ (407) $ (97) $ (504) $ 478 $(1,179) $ (601)
Tax Exempt Securities (86) 11 (75) 114 (5) 109
US Government
Securities 670 19 689 931 73 1,004
Federal Funds Sold (46) 13 (33) (16) (81) (97)
Other Securities 58 64 122 (27) 56 29
------- ------- ------- ------- ------- -------
Total Increase/
(Decrease) $ 189 $ 10 $ 199 $ 1,480 $(1,036) $ 444
======= ======= ======= ======= ======= =======
Increase (Decrease)
in Interest Expense
Demand Interest
Bearing $ 140 $ (97) $ 43 $ 91 $ (154) $ (63)
Savings Deposits 30 (5) 25 36 (33) 3
Certificates of Deposit (478) (54) (532) 804 (328) 476
======= ======= ======= ======= ======= =======
Total Increase/
(Decrease) $ (308) $ (156) $ (464) $ 931 $ (515) $ 416
======= ======= ======= ======= ======= =======
Net Increase/
(Decrease) $ 497 $ 166 $ 663 $ 549 $ (521) $ 28
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
Compared to Nine Months ended September 30, 1997
Volume Rate Total
------ ---- -----
(dollars in thousands)
<S> <C> <C> <C>
Increase(Decrease)
in Interest Income
Portfolio Loans $ 914 $(179) $ 735
Tax Exempt
Securities 144 7 151
US Government
Securities (299) 202 (97)
Federal Funds Sold (104) (31) (135)
Other Securities (22) (194) (216)
----- ----- -----
Total Increase/
(Decrease) $ 633 $(195) $ 438
===== ===== =====
Increase (Decrease)
in Interest Expense
Demand Interest
Bearing $ (1) $ (9) $ (8)
Savings Deposits 17 (60) (43)
Certificates of
Deposit (75) (248) (323)
===== ===== =====
Total Increase/
(Decrease) $ (59) $(315) $(374)
===== ===== =====
Net Increase/
(Decrease) $ 692 $ 120 $ 812
===== ===== =====
</TABLE>
28
<PAGE> 31
NONINTEREST INCOME
The Company's noninterest income consists primarily of service charges
on deposit accounts and processing fees for merchants who accept credit and
debit cards as payment for goods and services. Noninterest income also includes
ATM fees earned at various locations. For the year ended December 31, 1997,
noninterest income represented 14.3% of the Company's revenues. 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 with compensating balances and the emphasis on
certificates of deposit as a significant funding source.
Total noninterest income increased from $1.70 million in 1995 to $2.08
million in 1996 and to $2.64 million in 1997, representing a 22.4% increase in
1996 over 1995 and a 26.7% increase in 1997 over 1996. Noninterest income
increased from $1.92 million for the nine months ended September 30, 1997, to
$2.33 million for the nine months ended September 30, 1998, representing a 21.8%
increase. The increases in noninterest income in 1996, 1997 and for the nine
months ended September 30, 1998, were primarily the result of expansion of the
Bank's merchant processing services on both a local and national level and, to a
lesser extent, an increase in ATM fees earned at various locations.
MERCHANT PROCESSING SERVICES INCOME
Pursuant to the Merchant Services Agreement, the Bank acts as a
clearing bank for CSI, a nonbank merchant credit card processor, 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. As of September 30,
1998, the CSI portfolio consisted of 36,075 merchants. Contract deposit
relationships with the merchants and CSI represented approximately 25% of the
Bank's capital as of September 30, 1998.
The Merchant Services Agreement was renewed in 1997 for a period of
four years which expires on April 1, 2001, and will automatically renew for
additional four year periods unless terminated in advance of the renewal period
by CSI or the Bank upon 30 days prior written notice. In the event the Merchant
Services Agreement is not renewed by the Bank, CSI may transfer the merchants to
another financial institution.
The Merchant Services Agreement provides for indemnification of the
Bank by CSI 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 CSI of the Card Association Rules. CSI is required to
maintain a merchant specific reserve of approximately $6.44 million as well as a
general reserve equal to .75% of the net monthly processing volume. These
reserves are held in accounts with the Bank with activity authorized only by
certain Bank personnel. The Bank has been granted a security interest in the
reserve accounts to secure CSI's obligations under the Merchant Services
Agreement.
The ability of the Bank to increase the level of fee income currently
being generated by merchant processing relationships is limited. Under the Card
Association Rules, fees that can be charged on monthly credit card sales above
$93 million are significantly less than the fees that can be charged on monthly
sales credit card below $93 million. Further, the Visa(R) bylaws limit the
amount of quarterly Visa(R) credit card sales that the Bank may process to four
times the Bank's equity capital unless additional collateral is pledged by the
Bank. The Company's ability to sustain or increase fee income from merchant
processing relationships is also affected by other factors, some of which are
beyond the Company's control, such as (i) competition from other banks, ISOs
29
<PAGE> 32
and other nonbank processors, (ii) continuation of the requirement that ISOs and
other nonbank processors access the Visa(R) and MasterCard(R) payment system
through banks, (iii) the ability to avoid potential losses through various
contractual methods including indemnification by the ISO, reserve balances
controlled by the Bank and insurance, and (iv) the ability to continue to grow
both locally and nationally.
In 1995, the Company established a sales team to provide merchant
processing services to merchants in its major market area and, as of September
30, 1998, the Bank had 786 merchants in its portfolio. The income generated from
the Bank's local merchant portfolio is substantially less than that generated
from the CSI portfolio because of the lower volume of transactions.
Merchant processing services income was $1.3 million in 1995, $1.6
million in 1996 and $2.0 million in 1997, representing an increase of 30.6% from
1995 to 1996 and 25.0% from 1996 to 1997. Merchant processing services income
for the nine months ended September 30, 1998, was $1.8 million compared to $1.5
million for the nine months ended September 30, 1997, representing a 20.4%
increase. These increases are attributable to growth in the number of merchants
for whom the Bank provides processing services and the related increase in
volume of transactions processed.
The following table sets forth a summary of noninterest income for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest Income:
Service Charges $ 160 $ 161 $ 212 $ 187 $ 180
Other Income 370 276 370 311 263
Gain (Loss) on Sale of
Investment Securities 28 5 5 (58) --
Credit Card Service Income 1,776 1,475 2,049 1,639 1,255
------- ------- ------- ------- -------
Total Noninterest Income $ 2,334 $ 1,917 $ 2,636 $ 2,079 $ 1,698
======= ======= ======= ======= =======
</TABLE>
NONINTEREST EXPENSE
Noninterest expense consists of salaries and related employee benefits,
occupancy and equipment expense and other operating expenses. Noninterest
expense increased from $4.6 million in 1996 to $5.3 million in 1997,
representing an increase of $635,000, or 13.7%. Noninterest expense for the nine
months ended September 30, 1998, was $4.8 million compared to $4.0 million for
the nine months ended September 30, 1997, representing an increase of $791,000,
or 19.7%. The increases in noninterest expense were primarily the result of
growth in the Company's loan portfolio, earning assets and merchant processing
activities for merchants in the Company's major market area.
30
<PAGE> 33
The following table sets forth a summary of noninterest expense for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest Expense:
Salaries and Benefits $2,512 $2,262 $3,024 $2,754 $2,641
Occupancy and Equipment 623 591 796 814 646
FDIC Assessments 16 23 41 7 159
Data Processing and Professional
Services 262 206 283 256 250
Stationery and Supplies 138 130 161 128 172
Postage 57 66 83 85 69
Other Expense 1,208 747 867 576 774
------ ------ ------ ------ ------
Total Noninterest Expense $4,816 $4,025 $5,255 $4,620 $4,710
====== ====== ====== ====== ======
</TABLE>
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 net income before tax.
The following table reflects the Company's tax provision and the
related effective tax rate for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tax Provision $1,826 $1,472 $2,129 $1,451 $ 1,752
Effective Tax Rate 36.6% 37.1% 36.8% 35.5% 37.2%
</TABLE>
ASSET QUALITY
The Company concentrates its lending activities primarily within Shasta
County, California, the location of the Bank's two full service branches. The
Company also makes loans to borrowers in Butte, El Dorado, Placer, Sacramento
and Tehama counties through its loan production offices.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of the collateral.
31
<PAGE> 34
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- -----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
Financial Loans $ 49,297 $ 41,432 $ 37,592 $ 36,248 $ 31,967 $ 23,926
Real Estate -
Construction 36,572 16,393 32,474 42,784 40,746 36,403
Real Estate -
Commercial Mortgage 57,254 54,533 40,067 35,299 31,090 32,874
Installment Loans 224 72 241 69 489 832
Other 1,550 1,274 1,284 1,699 1,077 464
--------- --------- --------- --------- --------- ---------
144,897 113,704 111,658 116,099 105,369 94,499
Less:
Deferred Loan Fees
and Costs (461) (294) (305) (430) (430) (448)
Allowance for Loan
Losses (3,019) (2,819) (2,294) (2,053) (1,730) (1,127)
--------- --------- --------- --------- --------- ---------
Total Net Loans $ 141,417 $ 110,591 $ 109,059 $ 113,615 $ 103,210 $ 92,924
========= ========= ========= ========= ========= =========
</TABLE>
The Company's practice is to place an asset on nonaccrual status when
one of the following events occurs: (i) any installment of principal or interest
is 90 days or more past due (unless in management's opinion the loan is
well-secured and in the process of collection), (ii) management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past
due and still accruing or have been restructured.
The following table sets forth a summary of the Company's nonperforming
loans as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
------------- --------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $1,336 $ 500 $1,734 $3,381 $1,169 $ 336
90 days past due
and still accruing -- 173 540 347 293 205
Restructured loans
in compliance with
modified terms -- -- 2,450 -- -- --
Other real estate
owned 66 352 2,268 229 38 --
</TABLE>
32
<PAGE> 35
In addition to nonperforming loans, as of September 30, 1998, the Bank
has identified certain commercial loans in its portfolio with aggregate
principal balances outstanding of approximately $594,000, which management
believes could become nonaccrual loans.
As a result of the increase in the level of nonperforming assets at the
end of 1995 and 1996, management directed its attention to reducing the level of
nonperforming assets through intensified collection and rehabilitation efforts
and charge-offs of $1,269,287 in 1996 and $426,879 in 1995. As a result, the
Company did not experience loan growth during this period and deposit growth was
directed into investment assets. During the fourth quarter of 1997, management
believed that there had been sufficient improvement in asset quality as
evidenced by a reduction in charge-offs and a decrease in nonperforming assets
to warrant expansion of the Bank's loan origination activities, which was
effected by increasing the number of loan officers.
The Company's nonaccrual loans decreased from $1.73 million in 1996 to
$500,000 in 1997 primarily as a result of increased collection and liquidation
efforts in 1997 and increased quality of the Company's loan portfolio. The
increase in nonaccrual loans at September 30, 1998, is attributable to one loan
which is secured by real estate and equipment.
Other real estate owned ("OREO") decreased to $352,000 in 1997 from
$2.26 million in 1996, and at September 30, 1998, consisted of one property
totaling $66,000. Reductions in OREO balances are attributable to sales of OREO
in 1997.
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 and lease losses. 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 initiate a change in individual
credit risk ratings as deemed appropriate. This enables management to effect
corrective actions when necessary.
The following table sets forth the maturity distribution of the
Company's commercial and real estate loans outstanding as of December 31, 1997,
which, based on remaining scheduled repayments of principal, are due within the
periods indicated.
<TABLE>
<CAPTION>
After One
Within Through After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial Loans $25,006 $12,884 $ 3,542 $41,432
Real Estate
Construction Loans 16,393 16,393
------- ------- ------- -------
Total $41,399 $12,884 $ 3,542 $57,825
======= ======= ======= =======
Loans due after one year with:
Fixed Rates $ 1,031 $ 292 $ 1,323
Variable Rates 11,853 3,250 15,103
------- ------- -------
Total $12,884 $ 3,542 $16,426
======= ======= =======
</TABLE>
33
<PAGE> 36
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
In determining the amount of the Company's ALLL, management assesses
the diversification of the portfolio. Each credit is assigned a credit risk
rating factor, and this factor, multiplied by the dollars associated with the
credit risk rating, is used to calculate one component of the ALLL. In addition,
management estimates the probable loss on individual credits that are receiving
increased management attention due to actual or perceived increases in risk.
The Company makes provisions to the ALLL on a regular basis through
charges to operations that are reflected in the Company's statements of income
as a provision for loan losses. When a loan is deemed uncollectible, it is
charged against the allowance. Any recoveries of previously charged-off loans
are credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio. Similarly, the adequacy of the ALLL and the
level of the related provision for possible loan losses is determined on a
judgment 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 loss potential, (ix) quarterly review by the Board of Directors, (x)
off balance sheet risks and (xi) assessments by regulators and other third
parties. Management and the Board of Directors evaluate the allowance and
determine its desired level considering objective and subjective measures, such
as knowledge of the borrowers' business, valuation of collateral, the
determination of impaired loans and exposure to potential losses.
The ALLL is a general reserve available against the total loan
portfolio and off balance sheet credit exposure. It is maintained without any
interallocation to the categories of the loan portfolio and the entire allowance
is available to cover loan losses. While management uses available information
to recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's ALLL. Such agencies may require the Bank to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination. There is uncertainty concerning future economic trends.
Accordingly, it is not possible to predict the effect future economic trends may
have on the level of the provision for possible loan losses in future periods.
Because the principal factor effecting the adequacy of the ALLL is the
credit risk rating factor, the Bank does not allocate the ALLL by loan category.
The Bank's principal lines of lending are (i) commercial, (ii) real estate
construction and (iii) commercial and residential real estate. The primary
sources of repayment of the Bank's commercial loans are the borrower's
conversion of short-term assets to cash and operating cash flow. The net assets
of the borrower or guarantor are usually identified as a secondary source of
repayment. The principal factors affecting the Bank's risk of loss from
commercial lending include each borrower's ability to manage its business
affairs and cash flows, local and general economic conditions and real estate
values in the Bank's service area. The Bank manages 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 Bank's
evaluations of its borrowers are facilitated by management's knowledge of local
market conditions and periodic reviews by a consultant of the Bank's credit
administration policies.
The principal source of repayment of the Bank's real estate
construction loans is the sale of the underlying collateral or the availability
of permanent financing from the Bank or
34
<PAGE> 37
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. 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 not more than 80% on single family residential
construction loans.
The principal source of repayment of the Bank's real estate mortgage
loans is the Borrower's operating cash flow. Similar to commercial loans, the
principal factors affecting the Bank's risk of loss in real estate mortgage
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 credit risk associated with real
estate mortgage lending primarily by establishing maximum loan-to-value ratios
and using strategies to match the borrower's cash flow to loan repayment terms.
The Bank's specific underwriting standards and methods for each of its
principal lines of lending include industry-accepted analysis and modeling and
certain proprietary techniques. The Bank's underwriting criteria is designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
Net charge-offs were $499,000 or .44% of average loans during 1997. Net
charge-offs were $1.919 million or 1.64% of average loans during 1996. During
1995, the Company experienced net charge-offs of $722,000 or .64% of average
loans. The decrease in net charge-offs in 1997 as compared to 1996 resulted
primarily from improved credit quality of the overall loan portfolio. Management
does not believe there were any trends indicated by the detail of the aggregate
charge-offs for any of the periods discussed.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions.
The following table summarizes the activity in the ALLL reserves for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Balance: $ 2,819 $ 2,294 $ 2,294 $ 2,053 $ 1,730 $ 1,128 $ 915
Provision for ALLL 250 827 1,024 2,160 1,045 655 243
Charge-offs:
Commercial (118) (197) (393) (1,074) (510) (54) (40)
Real Estate (32) (129) (209) (916) (273) (18) (11)
Other (8) (39) (3) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Charge-offs (158) (365) (605) (1,990) (783) (72) (51)
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial 95 43 60 37 61 16 21
Real Estate 13 50 46 34 -- 3 --
------- ------- ------- ------- ------- ------- -------
Total Recoveries: 108 93 106 71 61 19 21
------- ------- ------- ------- ------- ------- -------
Ending Balance $ 3,019 $ 2,609 $ 2,819 $ 2,294 $ 2,053 $ 1,730 $ 1,128
======= ======= ======= ======= ======= ======= =======
ALLL to Total Loans 2.09% 2.60% 2.49% 2.06% 1.77% 1.65% 1.20%
</TABLE>
41
<PAGE> 38
INVESTMENT PORTFOLIO
The Company classifies its investment 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 Bank has both the ability and intent to hold
"held-to-maturity" securities to maturity. However, situations may arise which
necessitate selling some securities before maturity. Such situations include a
need for liquidity, increased loan demand, a change in the asset/liability mix
of the Company which requires some rebalancing in order to reduce the Company's
risk, a change in interest rates requiring either an increase or decrease in the
overall market risk of the securities portfolio, or a change in accounting
standards. Securities held as available-for-sale may be sold to implement the
Company's asset/liability management strategies.
The following table summarizes the contractual maturities of the
Company's investment securities available-for-sale at their amortized cost basis
and their weighted average yields at December 31, 1997. The yield on tax exempt
obligations of state and political subdivisions has not been computed on a tax
equivalent basis.
<TABLE>
<CAPTION>
Within After One After Five
One Year Through Five Years Through Ten Years Total
----------------------- ---------------------- --------------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Govern-
ment and
Agencies $14,452 6.14% $21,516 6.10% $1,000 7.55% $36,968 6.60%
Obligations
of State
and
Political
Subdivi-
sions 2,326 4.20% 5,929 4.10% 2,270 4.15% 10,525 4.13%
Other
Bonds 7,762 6.42% 283 4.98% 8,045 6.37%
Total $24,545 6.03% $27,725 5.12% $3,267 6.11% $55,538 5.80%
</TABLE>
Investment securities held-to-maturity at December 31, 1997, consisted
solely of mortgage-backed securities with a remaining contractual maturity
greater than ten years and a weighted average yield of 6.58%.
The following table summarizes the book value of the Company's
investment securities held on the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government and Agencies $36,968 $41,432 $28,151
Municipal Obligations $10,525 $ 6,529 $ 7,893
Corporate and Other Bonds $17,081 $ 3,944 $ 4,253
------- ------- -------
Total $64,574 $51,905 $40,297
======= ======= =======
</TABLE>
36
<PAGE> 39
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $23,554 1.99% $19,536 2.14% $15,492 1.98%
Savings Accounts $11,802 2.91% $10,749 2.95% $ 9,541 3.29%
Money Market Accounts $19,357 2.06% $16,351 2.38% $16,394 2.74%
Certificates of Deposit $88,701 5.79% $96,979 5.84% $83,214 6.24%
</TABLE>
The following table sets forth the remaining maturities of certificates
of deposit in amounts of $100,000 or more at December 31, 1997 (dollars are in
thousands).
<TABLE>
<S> <C>
3 months or less $21,373
Over 3 through 6 months $ 8,579
Over 6 through 12 months $ 2,294
Over 12 months $ 4,763
-------
Total $37,009
=======
</TABLE>
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. Liquidity management is not
effected by formally monitoring the cash flows from operations, investing and
financing activities as described in the Company's statement of cash flows, but
rather 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 new loans. As loan demand decreases or loans are paid
off, investment assets can absorb excess funds or deposit rates can be decreased
to deal with excess liquidity. Thus, there is some correlation between the
Bank's financing activities associated with deposits and investing activities
associated with lending.
With respect to assets, liquidity is provided by cash and short term
money market investments such as interest-bearing time deposits, federal funds
sold, investment securities available-for-sale and principal and interest
payments on loans. With respect to liabilities, the Company's core deposits,
shareholders' equity and the ability of the Bank to borrow funds and to generate
deposits, provide asset funding.
Because estimates of the Bank's liquidity needs 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. The Company's liquid assets
(cash and due from banks, federal funds sold and available-for-sale investment
securities) totaled $42.96 million, or 20.9% of total assets, at
38
<PAGE> 40
September 30, 1998, and $74.11 million, or 36.2% of total assets, at December
31, 1997, compared to $68.63 million or 35.67% of total assets, at December 31,
1996. The Company expects that its primary source of liquidity will be supported
by the earnings of the Company and the acquisition of core deposits. Core
deposits totaled $143.66 million and $133.54 million at December 31, 1997, and
1996, respectively.
CAPITAL ADEQUACY
Capital adequacy is a measure of the amount of capital needed to
sustain asset growth and act as a cushion for losses. Capital protects
depositors and the deposit insurance fund from potential losses and is a source
of funds for the investments the Company needs to remain competitive.
Historically, capital has been generated principally from the retention of
earnings, net of cash dividends.
Overall capital adequacy is monitored on a day-to-day basis by the
Company's management and reported to the Company's Board of Directors on a
monthly basis. The Bank's regulators measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight. This standard characterizes
an institution's capital as being "Tier 1" capital (defined as principally
comprising shareholders' equity) and "Tier 2" capital (defined as principally
comprising the qualifying portion of the ALLL). The minimum ratio of total
risk-based capital to risk-adjusted assets, including certain off-balance sheet
items, is 8%. At least one-half (4%) of the total risk-based capital (Tier 1) is
to be comprised of common equity; the balance may consist of debt securities and
a limited portion of the ALLL.
The following table sets forth the Bank's capital ratios as of
September 30, 1998, and December 31, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Total Risk-Based Capital 14.79% 16.16%
Tier 1 Capital to Risk-Based Assets 13.53% 14.91%
Tier 1 Capital to Average Assets 10.83% 10.41%
(Leverage ratio)
</TABLE>
The declines in each of the Bank's capital ratios as of September 30,
1998, compared to December 31, 1997, are principally the result of growth in the
Bank's loan portfolio, which requires greater percentages of capital than
investment securities under the risk-based capital standards.
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.
YEAR 2000
The "Year 2000 issue" relates to the fact that many computer programs
use only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such
39
<PAGE> 41
programs could incorrectly treat the Year 2000 as the year 1900. This issue has
grown in importance as the use of computers and microchips has become more
pervasive throughout the economy, and interdependencies between systems have
multiplied. The issue must be recognized as a business problem, rather than
simply a computer problem, because of the way its effects could ripple through
the economy. The Company could be materially and adversely affected either
directly or indirectly by the Year 2000 issue. This could happen if any of its
critical computer systems or equipment containing embedded logic fail, if the
local infrastructure (electric power, phone system, or water system) fails, if
its significant vendors are adversely impacted, or if its borrowers or
depositors are adversely impacted by their internal systems or those of their
customers or suppliers.
Failure of the Company to complete testing and renovation of its critical
systems on a timely basis could have a material adverse effect on the Company's
financial condition and results of operations, as could Year 2000 problems faced
by others with whom the Company does business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's internal controls and to identify whether
further corrective action may be necessary to assure an appropriate level of
attention to Year 2000 processing capabilities.
The Company has a written plan to address the Company's risks
associated with the impact of the Year 2000. The plan directs the Company's Year
2000 compliance efforts under the framework of a five-step program mandated by
the Federal Financial Institutions Examination Council ("FFIEC"). The FFIEC'S
five-step program consists of five phases: awareness, assessment, renovation,
validation and implementation. In the awareness phase, which the Company has
completed, the Year 2000 problem is defined and executive level support for the
necessary resources to prepare the Company for Year 2000 compliance is obtained.
In the assessment phase, which the Company has also completed, the size and
complexity of the problem and details of the effort necessary to address the
Year 2000 issues are assessed. Although the awareness and assessment phases are
completed, the Company continues to evaluate new issues as they arise. In the
renovation phase, which the Company has substantially completed, the required
incremental changes to hardware and software components are tested. In the
validation phase, which the Company has also substantially completed, the
hardware and software components are tested.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
The Company has identified 14 vendors and 58 software applications which
management believes are material to the Bank's operations. Based on information
received from its
40
<PAGE> 42
vendors and testing results, the Company believes approximately 79% of such
vendors are Year 2000 compliant as of December 31, 1998. Testing of the critical
system applications for the core banking product provided by the Company's
primary vendor was completed and the results verified during November and
December 1998. The core banking product includes software solutions for general
ledger, accounts payable, automated clearing house, certificates of deposit and
individual retirement accounts, commercial, mortgage and installment loans,
checking and savings accounts, proof of deposit applications and ancillary
support products.
The Company has identified three vendors which the Company does not
believe are fully Year 2000 compliant as of December 31, 1998. Each of these
vendors has advised the Company that it has completed the evaluation and
renovation stages of Year 2000 compliance and is scheduled to begin
implementation and validation in January 1999 and to complete the final
validation phase by June 30, 1999.
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000 problem. The
Company has sent Year 2000 correspondence to the Bank's significant deposit and
loan customers. A customer of the Bank is deemed significant if the customer
possesses any of the following characteristics:
- - Total indebtedness to the Bank of $750,000 or more.
- - Credit risk rating of five (substandard) or higher.
- - The customer's business is dependent on the use of high technology
and/or the electronic exchange of information.
- - The customer's business is dependent on third party providers of data
processing services or products.
- - An average ledger deposit balance greater than $50,000 and more than
12 transactions during a month.
The Company has amended its credit authorization documentation to include
consideration of the Year 2000 problem. The Company assesses its significant
customer's Year 2000 readiness and assigns the customer an assessment of "low,"
"medium" or "high" risk. Risk evaluation of the Bank's significant customers was
substantially completed by December 31, 1998. Any depositor determined to have a
high risk is scheduled for an evaluation by the Bank every 90 days until the
customer can be assigned a low risk assessment. Any depositor determined by the
Bank to have medium risk is scheduled for a follow-up evaluation by March 31,
1999.
Because of the range of possible issues and large number of variables
involved, it is impossible to quantify the total potential cost of Year 2000
problems or to determine the Company's worst-case scenario in the event the
Company's Year 2000 remediation efforts or the efforts of those with whom it
does business are not
41
<PAGE> 43
successful. In order to deal with the uncertainty associated with the Year 2000
problem, the Company has developed a contingency plan to address the possibility
that efforts to mitigate the Year 2000 risk are not successful either in whole
or part. These plans include manual processing of information for critical
information technology systems and increased cash on hand. The contingency plans
are expected to be completed by March 31, 1999, after which the appropriate
implementation training is scheduled to take place.
As of September 30, 1998, the Company has incurred $200,000 in Year
2000 costs, which have been expensed as incurred. Year 2000-related costs have
been funded from the continuing operations of the Company and, as of September
30, 1998, have constituted approximately 22% of the Company's information
systems budget for 1998. The Company estimates that its costs to complete Year
2000 compliance will be approximately $100,000. This estimate includes the cost
of purchasing hardware and licenses for software programming tools, the cost of
the time of internal staff and the cost of consultants. The estimate does not
include the time that internal staff are devoting to testing programming
changes. Testing is not expected to add significant incremental costs. Certain
information system projects at the Company have been deferred as a result of the
Company's Year 2000 compliance efforts. However, these deferrals are not
expected to have a material effect on the Company's business.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuation in interest rates will ultimately impact both the level
of interest income and interest expense recorded on a large portion of the
Company's assets and liabilities, and the fair market value of interest earning
assets and interest-bearing liabilities, other than those which possess a short
term to maturity. Because the Company's interest-bearing liabilities and
interest-earning assets are with the Bank, the Company's interest rate risk
exposure is in connection with the Bank's operations. As a result, all
significant interest rate risk management procedures are performed at the Bank
level. Based upon the nature of its operations, the Bank is not subject to
foreign currency exchange or commodity price risk. The Company does not own any
trading assets. See "-Asset Quality."
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 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 basis
points.
The following table sets forth, as of December 31, 1997, the
distribution of repricing opportunities for the Company's earning assets and
interest-bearing liabilities, the GAP between repricing earning assets and
interest-bearing liabilities, the cumulative GAP, the ratio of rate sensitive
assets to rate sensitive liabilities for each repricing interval, and the
cumulative GAP to total assets.
42
<PAGE> 44
<TABLE>
<CAPTION>
3 Months to One One to Five
Within 3 Months Year Years Five Plus Years Total
--------------- ----------- ------------ --------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Investment Securities
Available-for-Sale $ 0 $ 0 $ 0 $ 9,037 $ 9,037
Investments
8,675 6,901 32,718 7,487 55,781
Federal Funds Sold 6,900 0 0 0 6,900
Net Loans 83,730 4,250 12,940 9,671 110,591
------ ----- ------ ----- -------
Total Earning Assets 99,305 11,151 45,658 26,195 182,309
------ ------ ------ ------ -------
INTEREST-BEARING
LIABILITIES:
Demand Deposits 42,121 0 0 0 42,121
Savings Deposits 11,581 0 0 0 11,581
Time Deposits 58,853 20,314 7,734 0 86,901
------ ------ ------ ------ -------
Total Interest-Bearing
Liabilities 112,555 20,314 7,734 0 140,603
------- ------ ----- ------ -------
GAP $(13,250) $ (9,163) $37,924 $26,195 $41,706
========= ========= ======= ======= =======
Cumulative GAP $(13,250) $(22,413) $15,511 $41,706
========= ========= ======= =======
RSA/RSL .88 .55 5.90 1.30
Cumulative GAP to
Total Earning Assets (7.27)% (12.29)% 8.51% 22.88%
</TABLE>
Because of the Bank's capital position and noninterest-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 generally adversely effected by declining rates rather than rising
rates.
To estimate the effect of interest rate shocks on the Company's net
interest income, management uses a model to prepare an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income given
a change in the federal funds rate of 100 basis points up or down. All changes
are measured in dollars and are compared to projected net interest income. At
December 31, 1997, the estimated annualized reduction in net interest income
attributable to a 100 basis point decline in the federal fund rate was $369,000
with a similar and opposite result attributable to a 100 basis point increase in
the federal fund rate.
43
<PAGE> 45
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 when
actual customer and management behavior and ratios differ from the assumptions
utilized by management in its model. In addition, the model has limited
usefulness for the measurement of the effect on annual net interest income
resulting from rate changes other than 100 basis points. 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 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.
ITEM 3. 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 utilizes approximately 11,650 square feet of space for its
banking operations.
The Company's Roseville loan production office is located in a
one-story building with approximately 1,484 square feet of space located at 2400
Professional Drive, Roseville, California. The Company leases the space pursuant
to a triple net lease expiring in August 31, 2003.
The Company's Chico loan production office is located in a one-story
building with approximately 600 square feet of space located at 676 East First
Avenue, Chico, California, 95926. The Company leases the space pursuant to a
lease expiring in March 1999.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1998 by (i) each
person who is known by the Company to beneficially own more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers (as defined on page 45) and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares of
Name and Address of Common Stock
Beneficial Owner Beneficially Owned(1) Percent
---------------- --------------------- -------
<S> <C> <C>
Gilbert and Irene Goetz
P. O. Box 493130
Redding, CA 96049 ........ 150,240 5.59
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C> <C>
Robert C. Anderson(2)
1951 Churn Creek Road
Redding, CA 96002 ........ 144,600 5.38
John C. Fitzpatrick(3)
1951 Churn Creek Road
Redding, CA 96002 ........ 170,670 6.35
Harry L. Grashoff, Jr.(4)
1951 Churn Creek Road
Redding, CA 96002 ........ 143,220 5.33
Welton L. Carrel(5) ....... 77,040 2.87
Russell L. Duclos ......... 17,082 *
Kenneth R. Gifford, Jr .... 23,940 *
Richard W. Green(6) ....... 42,000 1.56
Charles E. Metro(7) ....... 66,000 2.45
Eugene L. Nichols(8) ...... 36,444 1.35
David H. Scott ............ 900 *
Michael C. Mayer .......... 3,000 *
All directors and executive
officers as a group
(12 persons) .............. 724,896 27.00
</TABLE>
- -------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Except as indicated by footnotes and subject to
community property laws, where applicable, the persons named above have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Consists of 144,600 shares held by the Anderson Family Revocable Living
Trust of which Mr. Anderson is a co-trustee and shares voting and
investment power with respect to such shares.
(3) Consists of 119,010 shares held by Pepsi Cola Bottling Company of
Northern California ("Pepsi") and 51,660 shares owned by the Pepsi
Profit Sharing Plan (the "Pepsi Plan"). Mr. Fitzpatrick is chief
executive officer of Carbonated Industries, Inc., a majority stockholder
of Pepsi, and may be deemed to share voting and investment power with
respect to such shares. Mr. Fitzpatrick is a participant in the Pepsi
Plan. Mr. Fitzpatrick disclaims beneficial ownership of such shares
except for those shares in which he has a pecuniary interest.
(4) Includes 129,720 shares held jointly with Mr. Grashoff's spouse and
5,640 shares held separately in his spouse's name.
(5) Consists of 76,860 shares held by the Carrel Family Living Trust of
which Mr. Carrel is a co-trustee and shares voting and investment power
with respect to such shares, and 180 shares held in Mr. Carrel's
spouse's name for their grandchildren.
(6) Includes 36,300 shares held in the Green Family Revocable Living Trust
of which Mr. Green is a co-trustee and shares voting and investment
power with respect to such shares.
(7) Includes 47,250 shares held by Charles E. Metro Investment Co. Profit
Sharing Plan (the "Profit Sharing Plan"). Mr. Metro is a trustee of the
Profit Sharing Plan and shares voting and investment power with respect
to such shares.
(8) Includes 1,500 shares held by Mr. Nichols' spouse.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
45
<PAGE> 47
The Company's directors and executive officers, and their ages as of
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Robert C. Anderson.................................... 65 Chairman of the Board
Russell L. Duclos..................................... 59 President and Chief Executive Officer
Michael C. Mayer...................................... 42 Executive Vice President and Chief
Credit Officer
Linda J. Miles........................................ 45 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Welton L. Carrel...................................... 61 Director
John C. Fitzpatrick................................... 63 Director
Kenneth R. Gifford, Jr................................ 53 Director
Harry L. Grashoff, Jr................................. 63 Director
Richard W. Green...................................... 69 Director
Charles E. Metro...................................... 69 Director
Eugene L. Nichols..................................... 64 Director
David H. Scott........................................ 54 Director
</TABLE>
Robert C. Anderson has served as Chairman of the Board of the Company
since the Company's incorporation in January 1982 and is a member of the loan,
marketing, executive compensation, asset/liability, audit, long range planning
and executive committees of the Board. Mr. Anderson is a member of the Redding
City Council.
Russell L. Duclos has served as President and Chief Executive Officer
of the Company since July 1997. From 1982 to July 1997, he served as Chief Loan
Officer of the Company. Mr. Duclos presently serves on the executive, loan,
marketing and long range planning committees of the Board of Directors.
Michael C. Mayer has served as Executive Vice President and Chief
Credit Officer of the Company since April 1997. From 1993 to April 1997, Mr.
Mayer was Senior Vice President and Senior Loan Officer of Mid Valley Bank, a
community bank located in Red Bluff, California. From 1990 to 1993, he was a
Vice President and Commercial Lender of River City Bank, a community bank in
Sacramento, California. Mr. Mayer serves on the loan, executive, asset/liability
and marketing 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. Ms. Miles
attends all meetings of committees of the Board of Directors. From 1980 to 1989,
she served as Chief Financial Officer of Scott Valley Bank, a community bank
located in Yreka, California.
Welton L. Carrel has served as a director of the Company since January
1982. Mr. Carrel is retired. From 1961 to 1989, he was President of Western
Business Equipment d.b.a. Carrel's Office Machines. Mr. Carrel serves as
chairman of the asset/liability committee and is a member of the audit, long
range planning and marketing committees of the Board of Directors.
John C. Fitzpatrick has been a director of the Company since January
1982. Mr. Fitzpatrick has served as President and Chief Executive Officer of
Pepsi Cola Bottling Company of
46
<PAGE> 48
Northern California since 1986 and Chief Executive Officer of Carbonated
Industries since its inception in 1986. From 1962 to 1985, Mr. Fitzpatrick was
President and Chief Executive Officer of McCall's Dairy Milk and Ice Cream. Mr.
Fitzpatrick also serves as Secretary of John Fitzpatrick & Sons, Inc., a
Property Investment Company. Mr. Fitzpatrick serves on the executive, long range
planning and audit committees of the Board of Directors.
Kenneth R. Gifford, Jr. has served as a director of the Company since
January 1998. Mr. Gifford has been a director, President and Chief Executive
Officer of Gifford Construction, Inc. since 1972. Mr. Gifford serves on the
audit, executive compensation, long range planning and marketing committees of
the Board of Directors.
Harry L. Grashoff, Jr. has served as a director of the Company since
January 1982. From 1982 to July 1997, Mr. Grashoff was President and Chief
Executive Officer of the Company. Mr. Grashoff serves on the executive, loan,
long range planning, asset/liability and marketing committees of the Board of
Directors.
Richard W. Green has been a director of the Company since January 1982.
Mr. Green has been retired since 1991. From 1955 to 1991, he served as Vice
President and General Manager of California-Oregon Broadcasting Company, Inc., a
television and radio broadcasting company. Mr. Green serves as chairman of the
loan committee and the marketing committee, and is a member of the executive,
long range planning, executive compensation and asset/liability committees of
the Board of Directors.
Charles E. Metro has been a director of the Company since January 1982.
Mr. Metro is President of Charles E. Metro Investment Co., a real estate
investment and development company, a position he has held for more than five
years. Mr. Metro serves on the loan and long range planning committees of the
Board of Directors.
Eugene L. Nichols has been a director of the Company since January
1982. He is a General Partner and Chief Executive Officer of Nichols, Melburg
and Rossetto and Associates, an architectural firm, a position he has held since
1981. Mr. Nichols serves on the audit, long range planning and marketing
committees of the Board of Directors.
David H. Scott has been a director of the Company since April 1997. He
is Managing Partner of D. H. Scott & Company, a public accounting firm, a
position he has held since 1986. Mr. Scott serves on the audit, asset/liability,
executive compensation and loan committees of the Board of Directors.
47
<PAGE> 49
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning
compensation paid to the Company's Chief Executive Officer and two other
officers who were serving as executive officers on December 31, 1997, and whose
aggregate salary and bonus exceeded $100,000 in fiscal 1997 (the "Named
Executive Officers") and for each of the fiscal years ended December 31, 1996,
and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation
-------------------------------------------------- Securities All Other
Underlying Compensa-
Name and Principal Position Year Salary ($) Bonus ($) Other ($)(3) Options (#) tion ($)(4)
--------------------------- ---- ---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Harry L. Grashoff, Jr. 1997 $130,263 -- $5,000 -- $2,342
President and Chief Executive 1996 $115,000 $116,000 $5,000 -- $2,342
Officer(1) 1995 $110,000 $110,000 $5,000 -- $2,342
Russell L. Duclos 1997 $100,000(2) $ 80,000 $5,000 -- $2,342
President and Chief Executive 1996 $ 77,500 $ 62,500 $5,000 -- $2,342
Officer 1995 $ 75,000 $ 57,000 $5,000 -- $2,342
Linda J. Miles 1997 $ 80,000 $ 70,000 $5,000 -- $2,342
Executive Vice President and 1996 $ 72,500 $ 62,500 $5,000 -- $2,342
Chief Financial Officer 1995 $ 70,000 $ 57,000 $5,000 -- $2,342
</TABLE>
- ---------------------
(1) Mr. Grashoff retired as President and Chief Executive Officer of the
Company on June 30, 1997 and was succeeded by Russell L. Duclos.
(2) Includes $15,400 deferred by Mr. Duclos pursuant to the Company's
Directors Deferred Compensation Plan.
(3) Represents an automobile for business use, for which the Company pays
all expenses, and membership expenses in connection with the use of a
private club for business purposes, particularly for the purpose of
entertaining the Bank's customers. The officers may have derived some
personal benefit from the use of such automobiles and membership. The
Company, after reasonable inquiry, believes that the value of any
personal benefit not directly related to job performance which is
derived from the personal use of such automobile and membership does
not exceed $5,000 per year in the aggregate for any single executive
officer.
(4) Represents health insurance premiums paid by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Company's Named Executive Officers during
the fiscal year ended December 31, 1997.
48
<PAGE> 50
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
TABLE
No options were exercised by the Named Executive Officers during the fiscal
year ended December 31, 1997, and none held unexercised options at December 31,
1997.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Russell L.
Duclos, the President and Chief Executive Officer of the Company. The agreement
may be terminated by either the Company or Mr. Duclos, with or without cause or
notice. Unless sooner terminated, the agreement shall automatically terminate on
June 30, 2000. Pursuant to the agreement, Mr. Duclos' initial base salary shall
be $100,000 per year and shall be reviewed and adjusted annually. The agreement
also provides that Mr. Duclos shall be eligible to receive profit sharing
compensation pursuant to the Company's Incentive Profit Sharing Plan. The
Company also agreed to provide Mr. Duclos with the following additional
benefits: (i) an automobile and payment of all necessary and customary expenses
therefor, (ii) a proprietary membership and monthly dues in the Riverview
Country Club for use by Mr. Duclos for business development and (iii) an annual
paid vacation of four weeks. In the event Mr. Duclos is terminated by the
Company for a reason other than cause, the Company is obligated to pay Mr.
Duclos an amount equal to twice his then annual base salary, which amount is
required to be paid over a period of one year.
COMPENSATION OF DIRECTORS
Each outside director of the Company receives $850 for each Board of
Directors meeting attended, $500 for each meeting not attended, $250 for each
loan committee meeting attended and $200 for each other committee meeting
attended. The Chairman of the Board is paid an additional $700 per month,
regardless of the number of meetings attended. Directors are eligible to
participate in the Company's 1998 Stock Option Plan, as determined by the
Executive Compensation Committee.
INCENTIVE PROFIT SHARING PLAN
The Board of Directors of the Company adopted an Incentive Profit Sharing
Plan in July 1983, which will remain in effect until terminated by the Board of
Directors. The Incentive Profit Sharing Plan provides that bonuses are computed
on the Company's profits after a 20% return to shareholders, before taxes, less
any gain on investment securities plus any loss on investment securities sold.
The bonus is paid on the first day of each calendar quarter as to 70% of the
bonus earned for the previous calendar quarter. Upon receipt of the certified
annual statement, the incentive bonus is adjusted and the remainder of the bonus
earned, if any, is paid to the recipients thereof.
The participants in the plan are the Company's President and Chief
Executive Officer, Russell L. Duclos, as to 3.05% of the profits as defined
above; Michael Mayer, Executive Vice President and Chief Credit Officer, as to
2.45% of such profits; and Linda J. Miles, Executive Vice President and Chief
Financial Officer as to 2.55% of such profits. The remainder of the Company's
employees may receive up to 12% of the profits at the discretion of the
President of the Company.
DIRECTORS DEFERRED COMPENSATION PLAN
Effective January 1993, the Board of Directors adopted the Directors
Deferred Compensation Plan (the "Deferred Compensation Plan") pursuant to which
each director of the Company may elect to defer all or any part of the
compensation to which such director would be entitled as a director such as
director's fees or committee fees. An election to defer compensation continues
in
49
<PAGE> 51
effect until revoked and deferred compensation, together with interest thereon,
is payable to the director or his or her beneficiary within 30 days after the
date of death or resignation unless the director has designated an optional
installment method of payment over a period of up to ten years. Pursuant to the
Deferred Compensation Plan, each director may designate one or more
beneficiaries to receive amounts due such director upon such director's death.
Interest on amounts deferred is credited on a monthly basis and compounded at a
rate equal to .5% above the Bank's reference rate, which is set on July 1 of
each year. If the Bank changes the method of computing its reference rate, then
the Deferred Compensation Plan provides that the Bank's reference rate will be
replaced by the prime rate published in the West Coast edition of the Wall
Street Journal. The Deferred Compensation Plan may be terminated by the Company
at any time with respect to compensation earned on or after the termination
date.
1998 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 shareholders 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 nonstatutory stock
options ("NSOs")) to key personnel of the Company, including the Directors of
the Company or any subsidiary. The Plan is not qualified under section 401(a) of
the Code or subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended. 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, which means the recipient receives no
benefit unless the Company's Common Stock price increases over the option term.
Under the terms of the Plan, 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
shareholder value by (i) encouraging key personnel to focus on critical long
range objectives, (ii) increasing the ability of the Company to attract and
retain key personnel and (iii) linking key personnel directly to shareholder
interests through increased stock ownership. A total of 540,000 shares of the
Company's Common Stock are available for grant under the Plan. If an option
granted under the Plan expires, is canceled, forfeited or terminates without
having been fully exercised, the unpurchased shares which were subject to that
option again become available for the grant of additional options under the
Plan.
The Plan is administered by the Executive Compensation Committee of the
Board of Directors. Subject to the terms of the Plan, the Executive Compensation
Committee determines the number of options in the award as well as the vesting
and all other conditions. 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, or
retirement, or in the event of a change in control. As of December 31, 1998, the
Company had outstanding options to purchase an aggregate of 411,000 shares of
the Company's Common Stock at exercises prices ranging from $9.07 to $10.67 per
share or a weighted average exercise price per share of $9.62.
INDEMNIFICATION MATTERS
The Company's bylaws provide for indemnification of the Company's
directors, officers, employees and other agents of the Company to the extent and
under the circumstances permitted by the California General Corporation Law. The
Company's bylaws also provide that the Company shall have the power to purchase
and maintain insurance covering its directors, officers and employees against
any liability asserted against any of them and incurred by any of them, whether
or not the Company would have the power to indemnify them against such liability
under the provisions of applicable law or the provisions of the Company's
bylaws.
50
<PAGE> 52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee of the Board of Directors consists of
five directors, none of whom is an officer or employee of the Company.
51
<PAGE> 53
REPORT ON EXECUTIVE COMPENSATION
The Company's compensation programs and policies applicable to its
executive officers are administered by the Executive Compensation Committee of
the Board of Directors. The Executive Compensation Committee is made up entirely
of nonemployee directors. The members of the Executive Compensation Committee
are Robert C. Anderson, John C. Fitzpatrick, Richard W.
Green, David H. Scott and Kenneth R. Gifford.
COMPENSATION PHILOSOPHY AND POLICIES
The Company's compensation programs and policies are designed to enhance
shareholder value by aligning the financial interests of the executive officers
of the Company with those of the Company's shareholders. The Company has
established an Executive Compensation Committee, which meets annually to review
the salaries of executive officers. It is the Committee's responsibility to
reestablish the base salary and propose adjustments to the incentive
compensation portion, and establish a discretionary bonus plan if all
performance objectives are met. Income arising under the Company's 1998 Stock
Option Plan currently does not qualify as performance-based compensation. The
Company intends to retain the flexibility necessary to provide total cash
compensation in line with competitive practice, the Company's compensation
philosophy and the Company's best interests, including compensation that may not
be deductible.
COMPONENTS OF EXECUTIVE OFFICER COMPENSATION
There are four primary components of executive compensation: base salary,
incentive bonus, discretionary bonus and, commencing in 1998, the Plan.
Base Salary
The annual base salaries of executive officers are reviewed by the
Executive Compensation Committee, taking into consideration the competitive
level of salaries in the industry, the overall performance of the Company, the
performance of the portfolio and department under the executive officer's
management control and the individual executive officer's contribution and
performance.
The base salary for the Chief Executive Officer was determined by (i)
examining the Company's performance against its preset goals, (ii) comparing the
Company's performance against its competitors, (iii) evaluating the
effectiveness and performance of the Chief Executive Officer and (iv) comparing
the base salary of the Chief Executive Officer to that of other chief executive
officers in the business banking industry.
Incentive Bonus Plan
The Company's 1997 Incentive Bonus Plan (the "Bonus Plan") was a cash-based
incentive bonus program. The Bonus Plan provides that bonuses are computed on
the Company's profit after a 20% return to shareholders, before income taxes,
less any gain on investments securities sold and plus any losses on investment
securities sold. The cash incentive is paid the first week of each calendar
quarter as to 70% of the incentive earned for the previous calendar quarter. The
corporation on its certified annual financial statement makes an adjustment of
the incentive bonuses upon receipt. Upon receipt of the statement, the incentive
bonus is adjusted, and the remainder of the bonus, if any, is paid to the
recipients thereof. The Company's President & Chief Executive Officer earns
3.05% of the profits as defined above, the Company's Executive Vice President
and Chief Credit Officer earns 2.45% of the profits, and the Company's Executive
Vice President and Chief Financial Officer earns 2.55% of the profits.
52
<PAGE> 54
Stock Options
Under the Company's compensation philosophy, ownership of the Company's
Common Stock is a key element of executive compensation. The grant of a stock
option is intended to retain and motivate key executives and to provide a direct
link with the interest of the shareholders of the Company. In general, stock
option grants are determined based on (i) prior award levels, (ii) total awards
received to date by the individual executives, (iii) the total stock award to be
made and the executive's percentage participation in that award, (iv) the
executive's direct ownership of Company Common Stock, (v) the number of options
vested and nonvested and (vi) the options outstanding as a percentage of total
shares outstanding.
Respectfully submitted,
Robert C. Anderson
John C. Fitzpatrick
Richard W. Green
David H. Scott
Kenneth R. Gifford
ITEM 7. 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 1997 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.
ITEM 8. 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 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is not listed on any stock exchange or quoted on
the NASDAQ and there is no established public trading market for the Company's
Common Stock. The Company is aware that Van Kasper & Company located at 600
California Street, Suite 1700, San Francisco, California 94108, handles trades
in the Company's Common Stock.
53
<PAGE> 55
The following table, which summarizes trading activity during the Company's
last two fiscal years and the nine month period ended September 30, 1998, is
based on information provided by Van Kasper & Company. 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.
<TABLE>
<CAPTION>
Sales Price
--------------------------
Quarter Ended: High Low Volume
- -------------- ---- --- ------
<S> <C> <C> <C>
March 31, 1996 $ 8.33 $ 8.00 18,450
June 30, 1996 $10.33 $10.33 600
September 30, 1996 -- -- --
December 31, 1996 $11.33 $10.67 14,130
March 31, 1997 $10.67 $10.67 2,175
June 30, 1997 $10.67 $10.67 32,280
September 30, 1997 $10.83 $10.33 19,914
December 31, 1997 $11.42 $10.00 26,223
March 31, 1998 $11.33 $10.67 4,440
June 30, 1998 $11.42 $10.75 648
September 30, 1998 $16.00 $16.00 426
</TABLE>
On October 22, 1998, the Company paid a $.50 per share cash dividend to
shareholders of record on October 1, 1998. On October 22, 1997, the Company paid
a $.33 per share cash dividend to shareholders of record as of October 1, 1997,
and on October 22, 1996, the Company paid a $.25 per share cash dividend to
shareholders of record as of October 1, 1996.
As of December 31, 1998, there were approximately 298 holders of record of
the Company's Common Stock.
As of December 31, 1998, the Company had options outstanding to purchase an
aggregate of 411,000 shares of Common Stock at exercise prices ranging from
$9.07 to $10.67 per share or a weighted average exercise price per share of
$9.62, and 540,000 shares reserved for issuance pursuant to the Company's 1998
Stock Option Plan.
As of December 31, 1998, the Company had issued and outstanding 2,684,103
shares of Common Stock, approximately 1,959,207 of which are eligible for sale
in the public market without restriction by persons other than affiliates of the
Company under the Securities Act, and 724,896 of which are eligible for sale in
the public market pursuant to Rule 144 under the Securities Act. In general,
under Rule 144 as currently in effect, if one year has elapsed since the later
of the date of acquisition of restricted securities from the Company or any
affiliate of the Company, a person (or persons whose shares are aggregated)
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of (i) 1% of the number of then outstanding shares
of Common Stock (26,841 shares as of December 31, 1998) and (ii) the average
weekly trading volume of Common Stock during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales
54
<PAGE> 56
under Rule 144 are also subject to certain manner of sales provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of restricted
securities from the Company or any affiliate of the Company, and the acquiror or
subsequent holder thereof is deemed not to have been an affiliate of the Company
at any time during the 90 days preceding a sale, such person (or persons whose
shares are aggregated) would be entitled to sell such shares in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, notice requirements and the availability of current public
information requirements. An "affiliate" of an entity is a person that directly,
or indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with such entity and may include officers and
directors, principal shareholders and certain shareholders with special
relationships. The foregoing is a summary of Rule 144 and is not intended to be
a complete description of it.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
In each of 1995 and 1998, outstanding options to purchase 6,000 shares of
the Company's Common Stock were exercised. The options were issued pursuant to
the Company's 1982 Stock Option Plan which was terminated in April 1992. As of
October 30, 1998, there were no options outstanding under the 1982 Stock Option
Plan.
The Company relied on the exemption provided by Section 3(a)(11) of the
Securities Act in connection with the exercise of outstanding options in 1995
and 1998. The persons who exercised the options were all residents of the State
of California and the Company is a California corporation doing business in the
State of California.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, no par value (the "Common Stock"). As of December 31, 1998,
there were issued and outstanding 2,684,103 shares of Common Stock.
VOTING RIGHTS
The holders of the Company's Common Stock are entitled to one vote per
share on all matters requiring shareholder action, except that in connection
with the election of directors, the shares may be voted cumulatively if a
nominee's or nominee's name(s) have been properly placed in nomination prior to
the voting and a shareholder present at the meeting has given notice of his or
her intention to vote his or her shares cumulatively. If a shareholder has given
such notice, then all shareholders entitled to vote for the election of
directors may cumulate their votes. Cumulative voting entitles a shareholder to
give one or more nominees as many votes as is equal to the number of directors
to be elected multiplied by the number of shares owned by such shareholder, or
to distribute his or her votes on the same principle between two or more
nominees as he or she sees fit.
The holders of Common Stock have no preemptive or other rights and there
are no redemption, sinking fund or conversion privileges applicable thereto. The
holders of Common Stock are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available therefore, subject to
the restrictions by its regulators. See "Business-Supervision and
Regulation-Restrictions on Dividends and Other Distributions." Upon liquidation,
dissolution or
55
<PAGE> 57
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities.
The Company's transfer agent is ChaseMellon Shareholder Services, 235
Montgomery Street, 23rd Floor, San Francisco, California.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law provides for the
indemnification of officers, directors and other corporate agents, subject to
limited exceptions, against liabilities arising by reason of their status or
services as an officer, director or corporate agent. The indemnification law of
the State of California generally allows indemnification in matters not
involving the right of the corporation, to an agent of the corporation if such
person acted in good faith and in a manner such person reasonably believed to be
in the best interests of the corporation, and in the case of a criminal matter,
had no reasonable cause to believe the conduct of such person was unlawful.
California law, with respect to matters involving the right of a corporation,
allows indemnification of an agent of the corporation, if such person acted in
good faith, in a manner such person believed to be in the best interests of the
corporation and its shareholders; provided that there shall be no
indemnification for (i) amounts paid in settling or otherwise disposing of a
pending action without court approval, (ii) expenses incurred in defending a
pending action which is settled or otherwise disposed of without court approval,
(iii) matters in which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which the proceeding
is or was pending shall determine that such person is entitled to be indemnified
or (iv) other matters specified in the California General Corporation Law.
Section 12 of Article III of the Company's bylaws (Exhibit 3.2 hereto)
provides for indemnification of the Company's directors, officers, employees and
other agents of the Company to the extent and under the circumstances permitted
by the California General Corporation Law. The Company's bylaws also provide
that the Company shall have the power to purchase and maintain insurance
covering its directors, officers and employees against any liability asserted
against any of them and incurred by any of them, whether or not the Company
would have the power to indemnify them against such liability under the
provisions of applicable law or the provisions of the Company's bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing, the Company has been informed that in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
56
<PAGE> 58
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT
AUDITORS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors' Report 54
Consolidated Balance Sheets 55
Consolidated Statements of Income 56
Consolidated Statements of Stockholders' Equity 57
Consolidated Statements of Cash Flows 58
Notes to Consolidated Financial Statements 59
</TABLE>
All schedules are omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the Consolidated Financial Statements or
Notes thereto.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets 83
Unaudited Condensed Statements of Income 84
Unaudited Condensed Statements of Shareholders' Equity 85
Unaudited Condensed Statements of Cash Flows 86
Notes to Unaudited Condensed Consolidated Financial Statements 87
</TABLE>
All schedules are omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the Unaudited Condensed Consolidated
Financial Statements thereto.
57
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Redding Bancorp
and subsidiaries (the Bank) as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Redding Bancorp and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
January 21, 1998, except as to note 12,
which is as of June 16, 1998
58
<PAGE> 60
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks (note 2) $ 11,431,374 11,970,652
Federal funds sold 6,900,000 6,780,000
Investment securities available-for-sale, at market (note 3) 55,780,926 49,883,352
Investment securities held-to-maturity, at cost
(aggregate market value of $9,081,482 in 1997 and
$2,111,613 in 1996) (note 3) 9,037,300 2,168,712
Loans, net (note 4) 110,591,206 109,059,282
Bank premises and equipment, net (note 5) 5,842,379 5,855,591
Other assets (note 6) 5,237,155 6,670,925
------------ ------------
Total assets $204,820,340 192,388,514
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand - noninterest bearing $ 40,069,672 31,116,937
Demand - interest bearing 42,121,317 36,418,044
Savings 11,580,784 12,456,486
Certificates of deposits (note 7) 86,901,502 91,376,502
------------ ------------
180,673,275 171,367,969
Other liabilities (note 8) 2,322,480 1,840,702
------------ ------------
Total liabilities 182,995,755 173,208,671
------------ ------------
Shareholders' equity (notes 10, 11, 12, 13 and 17):
Common stock, no par value; 10,000,000 shares
authorized; 2,684,103 shares issued and
outstanding in 1997 and 2,701,416 shares issued
and outstanding in 1996 4,561,821 4,561,821
Retained earnings 17,108,836 14,526,071
Accumulated other comprehensive income, net 153,928 91,951
------------ ------------
Total stockholders' equity 21,824,585 19,179,843
Commitments and contingencies (note 16)
------------ ------------
Total liabilities and stockholders' equity $204,820,340 192,388,514
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 61
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $11,519,475 12,023,193 12,624,135
Interest on tax exempt securities 292,038 367,189 258,253
Interest on U.S. government securities 3,008,859 2,319,742 1,316,215
Interest on federal funds sold 568,784 601,798 698,820
Interest on other securities 375,446 253,494 224,378
----------- ----------- -----------
Total interest income 15,764,602 15,565,416 15,121,801
----------- ----------- -----------
Interest expense:
Interest on demand deposits 856,979 813,823 876,768
Interest on savings deposits 342,839 317,479 314,379
Interest on time deposits 5,134,417 5,666,898 5,190,709
----------- ----------- -----------
Total interest expense 6,334,235 6,798,200 6,381,856
----------- ----------- -----------
Net interest income 9,430,367 8,767,216 8,739,945
Provision for loan losses (note 4) 1,023,500 2,160,000 1,045,000
----------- ----------- -----------
Net interest income after
provision for loan losses 8,406,867 6,607,216 7,694,945
----------- ----------- -----------
Other income:
Service charges on deposit accounts 212,034 187,150 180,531
Other income 369,537 310,891 262,672
Gain (loss) on sale of investment
securities 4,807 (58,280) --
Credit card service income 2,049,411 1,638,768 1,254,641
----------- ----------- -----------
Total other income 2,635,789 2,078,529 1,697,844
----------- ----------- -----------
Other expenses:
Salaries and related benefits 3,024,280 2,753,986 2,641,257
Net occupancy and equipment expense 796,085 813,619 645,721
FDIC insurance premium 40,799 7,638 158,667
Data processing and professional services 283,296 255,594 250,099
Other expenses 1,110,760 788,741 1,014,466
----------- ----------- -----------
Total other expenses 5,255,220 4,619,578 4,710,210
----------- ----------- -----------
Income before income taxes 5,787,436 4,066,167 4,682,579
Provision for income taxes (note 9) 2,129,741 1,450,863 1,751,828
----------- ----------- -----------
Net income $ 3,657,695 2,615,304 2,930,751
=========== =========== ===========
Basic earnings per share
(note 13) $ 1.36 0.97 1.08
=========== =========== ===========
Diluted earnings per share
(note 13) $ 1.35 0.97 1.08
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE> 62
REDDING BANCORP AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- COMPREHENSIVE
SHARES AMOUNT INCOME
---------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1994 2,701,416 $4,561,821
Comprehensive income:
Net income $ 2,930,751
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of
tax effect of $348,654 631,176
----------
Other comprehensive income 631,176
----------
Comprehensive income $ 3,561,927
===========
Cash dividends ($0.25 per share)
Stock options exercised 6,000 35,000
Redemption of common stock (6,000) (35,000)
---------- ----------
Balance at December 31, 1995 2,701,416 4,561,821
Comprehensive income:
Net income $ 2,615,304
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net of
tax effect of $12,835 (21,921)
Less: reclassification adjustment for losses included
in net income, net of tax effect of $10,790 (18,428)
----------
Other comprehensive income (3,493)
----------
Comprehensive income $ 2,611,811
==========
Cash dividends ($0.25 per share)
Stock options exercised 6,000 23,000
Redemption of common stock (6,000) (23,000)
---------- ----------
Balance at December 31, 1996 2,701,416 4,561,821
Comprehensive income:
Net income $ 3,657,695
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of
tax effect of $37,713 65,019
Less: reclassification adjustment for gains included
in net income, net of tax effect of $1,765 3,042
----------
Other comprehensive income 61,977
----------
Comprehensive income $ 3,719,672
==========
Cash dividends ($0.33 per share)
Repurchase and retirement of common stock (17,313)
---------- ----------
Balance at December 31, 1997 2,684,103 $ 4,561,821
========== ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME, NET TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 10,384,724 (535,732) 14,410,813
Comprehensive income:
Net income 2,930,751 2,930,751
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of
tax effect of $348,654
Other comprehensive income 631,176 631,176
Comprehensive income
Cash dividends ($0.25 per share) (675,354) (675,354)
Stock options exercised 35,000
Redemption of common stock (31,000) (66,000)
---------- ---------- ----------
Balance at December 31, 1995 12,609,121 95,444 17,266,386
Comprehensive income:
Net income 2,615,304 2,615,304
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net of
tax effect of $12,835
Less: reclassification adjustment for losses included
in net income, net of tax effect of $10,790
Other comprehensive income (3,493) (3,493)
Comprehensive income
Cash dividends ($0.25 per share) (675,354) (675,354)
Stock options exercised 23,000
Redemption of common stock (23,000) (46,000)
---------- ---------- ----------
Balance at December 31, 1996 14,526,071 91,951 19,179,843
Comprehensive income:
Net income 3,657,695 3,657,695
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of
tax effect of $37,713
Less: reclassification adjustment for gains included
in net income, net of tax effect of $1,765
Other comprehensive income 61,977 61,977
Comprehensive income
Cash dividends ($0.33 per share) (900,472) (900,472)
Repurchase and retirement of common stock (174,458) (174,458)
---------- ---------- ----------
Balance at December 31, 1997 17,108,836 153,928 21,824,585
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE> 63
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,657,695 2,615,304 2,930,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,023,500 2,160,000 1,045,000
Provision for depreciation 405,597 460,495 306,581
Amortization of investment premiums and
accretion of discounts, net (295,446) (162,213) 132,740
Gain on sale of loans (30,285) (37,379) (33,395)
Gain on sale of equipment -- -- (1,043)
Proceeds from sale of loans 3,972,000 5,479,675 5,244,808
Loans originated for sale (4,002,285) (5,517,054) (5,211,413)
Deferred income taxes, net (362,950) (118,980) (165,583)
Decrease (increase) in other assets 1,848,770 (1,929,039) (742,323)
(Decrease) increase in deferred loan fees (11,400) (125,150) 312
Increase (decrease) in other liabilities 429,728 (64,344) 224,064
------------ ------------ ------------
Net cash provided by operating
activities 6,634,924 2,761,315 3,730,499
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of available for sale
securities 39,136,648 25,036,404 14,276,000
Proceeds from sale of available for sale
securities 2,275,042 1,942,500 --
Purchases of available for sale securities (47,824,174) (35,158,493) (28,866,054)
Purchases of mortgage-backed securities
held-to-maturity (5,996,255) -- --
Loan originations, net of principal repayments (2,483,454) 2,595,788 (11,450,638)
Purchase of premises and equipment (392,385) (680,108) (2,904,066)
Proceeds from sale of equipment -- -- 44,583
------------ ------------ ------------
Net cash used by investing activities (15,284,578) (6,263,909) (28,900,175)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits and savings
accounts 13,780,306 8,235,542 2,842,426
Net (decrease) increase in certificates of
deposit (4,475,000) (3,736,080) 23,202,527
Cash dividends (900,472) (675,354) (675,354)
Common stock transactions (174,458) (23,000) (31,000)
------------ ------------ ------------
Net cash provided by financing
activities 8,230,376 3,801,108 25,338,599
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (419,278) 298,514 168,923
Cash and cash equivalents at beginning of year 18,750,652 18,452,138 18,283,215
------------ ------------ ------------
Cash and cash equivalents at end of year $ 18,331,374 18,750,652 18,452,138
============ ============ ============
</TABLE>
62
<PAGE> 64
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Redding Bancorp (the Company)
and its wholly owned subsidiaries, Redding Bank of Commerce (the Bank)
and Redding Service Corporation, conform with generally accepted
accounting principles 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.
(a) 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.
(b) INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
At the time of purchase of a security, the Bank designates the security
as held-to-maturity or available-for-sale, based on its investment
objectives, operational needs and ability and intent to hold. The Bank
does not engage in trading activity.
Held-to-maturity securities are recorded at amortized cost, adjusted for
amortization or accretion of premiums or discounts. Available-for-sale
securities are recorded at fair value with unrealized holding gains and
losses, net of the related tax effect, reported as a separate component
of stockholders' equity. For the year ended December 31, 1997, there were
no transfers between classifications.
A decline in market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a
charge to earnings and the corresponding establishment of a new cost
basis for the security. No such declines have occurred.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income are recognized
when earned. Realized gains and losses for securities
(Continued)
63
<PAGE> 65
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
classified as available-for-sale and held-to-maturity are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
(c) 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.
Impaired loans are 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.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. 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.
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. Renegotiated
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.
(d) SALE OF LOANS
The Bank has realized gain from the sale of the guaranteed portion of
Small Business Administration (SBA) loans. Gains or losses are recognized
upon completion of the sales (net of related commissions paid that are
directly attributable to the sale), and are based on the differences
between the net sales proceeds and the relative fair value of the portion
of the loans sold. The Bank carries these loans held for sale at the
lower of cost
(Continued)
64
<PAGE> 66
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or market value. The Bank had SBA loans available for sale totaling
$8,314,443 and $7,998,512 as of December 31, 1997 and 1996, respectively.
Certain adjustable rate and fixed rate real estate loans are originated
for sale. Such loans held for sale are carried at the lower of cost or
market at the balance sheet date or the date on which investors have
committed to purchase such loans. To the extent there are recourse
provisions, the Bank considers an accrual for all estimated adjustments
in connection with the recourse obligation to the buyer. The Bank had
real estate loans available for sale totaling $267,150 and $460,800 as of
December 31, 1997 and 1996, respectively.
(e) 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 and anticipated economic
conditions that may affect the borrowers' ability to pay. While
management uses these evaluations to recognize the provision for loan
losses, future provisions may be necessary based on changes in the
factors used in the evaluations.
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 Federal Deposit
Insurance Corporation (FDIC), as an integral part of its examination
process, periodically reviews the Bank's allowance for loan losses. The
FDIC may require the Bank to recognize additions to the allowance based
on their judgment about information available to them at the time of
their examination.
(f) GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS
In June, 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 125 is effective for
(Continued)
65
<PAGE> 67
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. In
addition, it requires that servicing assets and other retained interests
in transferred assets be measured by allocating the previous carrying
amount of the transferred assets between the assets sold, if any and
retained interests, if any, based on their relative fair value at the
date of transfer. Liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets are to be initially
measured at fair value. Servicing assets and liabilities are to be
subsequently amortized in proportion to and over the period of estimated
net servicing income or loss and assessed for asset impairment or
increased obligation based on fair value.
The Bank recognizes a gain and a related asset for the fair value of the
rights to service loans for others when loans are sold. In accordance
with SFAS No. 125, the fair value of the servicing assets is estimated
based upon the present value of the estimated expected future cash flows.
The Bank measures the impairment of the servicing asset based on the
difference between the carrying amount of the servicing asset and its
current fair value. As of December 31, 1997 and 1996, there was no
impairment in mortgage servicing asset.
A gain or loss is recognized to the extent that the sales proceeds and
the fair value of the servicing asset exceed or are less than the book
value of the loan. Additionally, a normal cost for servicing the loan is
considered in the determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at the
closing date to the extent that the sales proceeds, less costs to
complete the sale, exceed or are less than the carrying value of the
servicing rights held.
(g) 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 betterments
are capitalized and those for maintenance and repairs are charged to
expense as incurred.
(h) EARNINGS PER SHARE
(Continued)
66
<PAGE> 68
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings per Share. SFAS No. 128 replaces Accounting Principles Board
(APB) Opinion 15, Earnings per Share, and simplifies the computation of
earnings per share (EPS) by replacing the presentation of primary EPS
with a presentation of basic EPS. In addition, the statement requires
dual presentation of basic and diluted EPS by entities with complex
capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of
an entity, similar to fully diluted EPS. The computation of EPS will be
compatible with international standards, as the International Accounting
Standards Committee recently issued a comparable standard.
(i) CASH EQUIVALENTS
Cash equivalents include amounts due from banks and federal funds sold.
Generally, federal funds sold are for a one-day period.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
Market quotes for investments and borrowings were obtained from
representative over-the-counter quotations based on transactions from
major market publications. Fair value of loans and savings deposits was
calculated by estimating the net present value of future cash flows using
current market rates of interest. Prepayment assumptions were obtained
from standard industry publications.
(k) 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 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.
A net loss of $52,991, $27,974 and $3,907 was recorded for the years
ended December 31, 1997, 1996, and 1995, respectively. Loans transferred
to other real estate owned were $21,000, $3,947,199, and $428,425 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Revenue 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. Under certain circumstances,
revenue recognition may be deferred until these criteria are met.
(Continued)
67
<PAGE> 69
(l) 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 enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(m) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of the grant. SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide proforma net income and
proforma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the proforma
disclosure provisions of SFAS No. 123 for stock option grants. The
Company has not made any stock option grants since 1992, therefore, a
proforma disclosure is not required.
(n) YEAR 2000
In January 1997, the Company developed a plan to address the Year 2000
problem and began converting its computer systems to be Year 2000
compliant. The plan provides for the conversion efforts to be completed
by the end of 1998. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Most software used by the Company is vendor developed
software. Therefore, the Company's total direct cost of the project is
expected to be immaterial and will be funded through operating cash
flows. The Company will expense all costs associated with these system
changes as the costs are incurred. As of December 31, 1997, no costs had
been expended.
(Continued)
68
<PAGE> 70
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(o) CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income". This Statement requires that all items recognized
under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by
their nature in an annual financial statement. The Company's only source
of other comprehensive earnings is derived from unrealized gains and
losses on marketable securities classified as available-for-sale.
Reclassification adjustments result from gains or losses on investment
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 in the period in which they arose. They are
excluded from comprehensive income of the current period to avoid double
counting. The financial statements have been reclassified, as required.
(2) 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 year ended December 31, 1997 was approximately $1,126,000. In
addition, the Bank maintains compensating balances with the Federal
Reserve Bank, which totaled $2,338,000 at December 31, 1997.
(Continued)
69
<PAGE> 71
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of investment securities
available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
U.S. Treasury securities and
obligations of U.S.
agencies $36,968,171 175,976 (12,797) 37,131,350
Obligations of state and
political subdivisions 10,525,339 92,574 (7,349) 10,610,564
Corporate bonds/CMML &
Bankers Acceptance 8,044,204 71 (5,263) 8,039,012
----------- ----------- ----------- -----------
$55,537,714 268,621 (25,409) 55,780,926
=========== =========== =========== ===========
</TABLE>
At December 31, 1997, the Bank has pledged $1,000,000 of investment
securities for treasury, tax and loan accounts, and $3,000,000 for
deposits of public funds.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
U.S. Treasury securities and
obligations of U.S.
agencies $41,432,599 265,628 (143,499) 41,554,728
Obligations of state and
political subdivisions 6,529,536 42,594 (45,272) 6,526,858
Corporate bonds 1,774,824 27,222 (280) 1,801,766
----------- ----------- ----------- -----------
$49,736,959 335,444 (189,051) 49,883,352
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities
available-for-sale at December 31, 1997, 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.
(Continued)
70
<PAGE> 72
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ----------
<S> <C> <C>
Due in one year or less $ 15,076,158 15,085,113
Due after one year through five years 33,218,144 33,370,246
Due after five years through ten years 7,243,412 7,325,567
------------ ----------
$ 55,537,714 55,780,926
============ ==========
</TABLE>
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1997 and 1996 which have contractual
maturities of one to five years consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
HELD-TO-MATURITY:
Mortgage backed
securities $ 9,037,300 71,888 (27,706) 9,081,482
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
HELD-TO-MATURITY:
Mortgage backed
securities $ 2,168,712 -- (57,099) 2,111,613
=========== ======== ======== ===========
</TABLE>
The excess of market value over cost of investment securities
available-for-sale at December 31, 1997 resulted in a non-cash increase
of $243,211 in their carrying value and an increase in deferred tax
liabilities of $89,283.
(Continued)
71
<PAGE> 73
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS
Outstanding loan balances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commercial and financial loans $ 41,432,703 37,591,873
Real estate - construction loans 16,393,009 32,474,363
Real estate - commercial 54,533,058 40,067,445
Installment loans 71,573 240,657
Other 1,273,615 1,284,203
------------ ------------
113,703,958 111,658,541
Less:
Deferred loan fees and costs 293,713 305,113
Allowance for loan losses 2,819,039 2,294,146
------------ ------------
$110,591,206 109,059,282
============ ============
</TABLE>
Included in total loans are nonaccrual loans of approximately $499,563
and $1,733,861 at December 31, 1997 and 1996, respectively. If interest
on nonaccrual loans had been accrued, such income would have approximated
$31,940 and $120,399 during the years ended December 31, 1997 and 1996,
respectively.
Impaired loans are loans for which it is probable that the Bank will not
be able to collect all amounts due. The Bank had outstanding balances of
$2,758,325 and $2,699,532 in impaired loans which had allowances of
$861,484 and $881,786 as of December 31, 1997 and 1996, respectively. The
average outstanding balance of impaired loans were $2,728,928,
$3,232,000, and $2,275,174 for the years ended 1997, 1996 and 1995,
respectively.
The Bank services, for others, loans and participations that are sold of
approximately $2,639,841 and $3,616,055 as of December 31, 1997 and 1996,
respectively.
The Bank's lending activities are with customers primarily located within
Shasta County, with residential real estate construction lending
extending into El Dorado, Placer and Sacramento Counties and commercial
lending in Butte County. 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
(Continued)
72
<PAGE> 74
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
between the fair value of the collateral, if any, and the outstanding
balance of the loan.
Changes in the allowance for loan losses consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,294,146 2,053,259 1,729,786
Provision for loan losses 1,023,500 2,160,000 1,045,000
Loans charged off (604,846) (1,990,490) (782,723)
Recoveries of loans previously charged off 106,239 71,377 61,196
------------- ---------- ----------
Balance at end of year $ 2,819,039 2,294,146 2,053,259
============= ========== =========
</TABLE>
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------
LIVES 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Land -- $ 1,595,808 1,595,808
Building and leasehold improvements 31.5 years 3,673,847 3,693,657
Furniture, fixtures and equipment 3 - 7 years 2,316,767 2,219,735
----------- ----------
7,586,422 7,509,200
Less accumulated depreciation (1,904,006) (1,703,494)
----------- -----------
5,682,416 5,805,706
Construction in progress 159,963 49,885
----------- -----------
$ 5,842,379 5,855,591
=========== ===========
</TABLE>
Depreciation expense, included in net occupancy and equipment expense, is
$405,597, $460,495 and $306,581 for the years ended December 31, 1997,
1996 and 1995, respectively.
(Continued)
73
<PAGE> 75
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash surrender value of life insurance policies
(note 15) $1,761,490 1,677,879
Net deferred tax assets (note 9) 1,609,502 1,194,502
Accrued interest on loans 619,487 712,851
Accrued interest on investment securities 805,915 764,760
Other real estate owned 352,350 2,268,031
Other 88,411 52,902
---------- ----------
$5,237,155 6,670,925
========== ==========
</TABLE>
(7) DEPOSITS
Time certificates of deposit of $100,000 or more totaled $37,009,448 and
$37,823,821 at December 31, 1997 and 1996, respectively. Interest expense
on such deposits was $1,981,657, $2,327,922 and $1,836,334 during 1997,
1996 and 1995, respectively. The Bank paid $6,267,812, $6,789,002 and
$6,315,045 in interest on deposits during 1997, 1996 and 1995,
respectively.
At December 31, 1997, the aggregate maturities for time deposits in
excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 $ 69,939,138
1999 15,032,795
2000 766,519
2001 1,163,050
-----------
Total $ 86,901,502
===========
</TABLE>
(Continued)
74
<PAGE> 76
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred compensation $ 1,347,415 1,173,421
Employee incentive payable 287,705 129,250
Accrued interest payable 251,005 270,668
Deferred tax liability (note 9) 421,100 334,211
Other 15,255 (66,848)
---------- -----------
$ 2,322,480 1,840,702
========== ===========
</TABLE>
(9) INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,988,106 1,210,464 1,513,790
State 504,585 359,379 403,621
----------- ----------- -----------
2,492,691 1,569,843 1,917,411
----------- ----------- -----------
Deferred:
Federal (290,325) (59,748) (136,254)
State (72,625) (59,232) (29,329)
----------- ----------- -----------
(362,950) (118,980) (165,583)
----------- ----------- -----------
$ 2,129,741 1,450,863 1,751,828
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense 34.00% 34.00% 34.00%
State franchise tax, net of Federal
tax benefit 8.09 7.08 7.84
Tax-exempt interest (4.37) (8.13) (5.68)
Other (.92) 2.56 1.03
------- ------- ------
36.80% 35.51% 37.19%
======= ======= ======
</TABLE>
(Continued)
75
<PAGE> 77
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
State franchise taxes $ 268,012 194,964
Deferred compensation 604,180 531,559
Loan loss reserves 996,331 712,586
Other -- 14,414
----------- -----------
Total deferred tax assets 1,868,523 1,453,523
Less valuation allowance (259,021) (259,021)
----------- -----------
Net deferred tax assets 1,609,502 1,194,502
----------- -----------
Deferred tax liabilities:
Depreciation (305,087) (255,870)
Unrealized securities gains (89,283) (54,444)
Deferred loan origination costs (26,730) (23,897)
----------- -----------
Total deferred tax liabilities (421,100) (334,211)
----------- -----------
Net deferred taxes $ 1,188,402 860,291
=========== ===========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Management
believes that the valuation allowance is sufficient to cover that portion
that may not be fully recognized. Income tax payments of $2,441,600,
$1,573,500 and $1,913,000 were made by the Company during 1997, 1996 and
1995, respectively.
(10) STOCK OPTION PLAN
Under the incentive stock option plan adopted by the shareholders, a
maximum of 49,500 shares of common stock are reserved for issuance.
Options generally become exercisable in 20% increments during each year
subsequent to the date of grant. A significant number of the options
granted were exercisable at the date of grant. Stock options generally
expire upon termination of employment. Options are exercisable at
prices equal to the fair market value at the date of grant.
(Continued)
76
<PAGE> 78
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS OPTION PRICE
------- ------------
<S> <C> <C>
December 31, 1995 outstanding 12,000 $10.00 to $11.00
Exercised (6,000) $10.00
-------
December 31, 1996 and 1997 outstanding 6,000 $11.00
=======
</TABLE>
(11) COMMON STOCK
On September 16, 1997, the Board of Directors authorized the purchase in
the open market or in private transactions up to 63,000 shares of its
outstanding common stock. 17,313 shares were purchased during the year
ended December 31, 1997.
(12) STOCK SPLIT
On June 16, 1998, the Board of Directors declared a three-for-one stock
split of the Company's Common Stock effective for shareholders of record
on June 30, 1998. All share and per share data has been restated to give
effect to the stock split.
(13) EARNINGS PER SHARE (EPS)
The following reconciles the denominator used in the calculation of both
the basic and diluted earnings per share for each of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
BASIC EPS CALCULATION
<S> <C> <C> <C>
Numerator $ 3,657,695 2,615,304 2,930,751
----------- ----------- -----------
Denominator 2,698,530 2,701,416 2,701,416
----------- ----------- -----------
Basic EPS $ 1.36 0.97 1.08
=========== ============ ===========
DILUTED EPS CALCULATION
Numerator $ 3,657,695 2,615,304 2,930,751
----------- ----------- -----------
Denominator:
Common Stock Outstanding 2,698,530 2,701,416 2,701,416
Options 3,957 3,732 2,679
----------- ----------- -----------
2,702,487 2,705,148 2,704,095
----------- ----------- -----------
Diluted EPS $ 1.35 0.97 1.08
=========== ============ ===========
</TABLE>
(Continued)
77
<PAGE> 79
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) 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 50% matching
contribution up to a maximum of $900 per employee, and a discretionary
contribution is also permitted. The Bank made matching contributions
aggregating $28,181, $25,791 and $11,267 for the years ended December 31,
1997, 1996 and 1995, respectively. The Bank made a discretionary
contribution of $25,000 in 1997.
(15) 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:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Balance at beginning of year $ 548,960 601,494
New loan additions 401,413 338,795
Principal repayments (475,597) (391,329)
------------ ------------
Balance at end of year $ 474,776 548,960
============ ============
</TABLE>
(16) COMMITMENTS AND CONTINGENCIES
(a) DEFERRED COMPENSATION PLAN
During 1990, the Bank established deferred compensation plans with two
Bank officers providing for annual payments on retirement or death
benefits over fifteen year periods. One of the officers retired during
the current year. The bank intends to hold the life insurance policy on
this retired officer. The remaining officer's plan is funded through
salary deferrals and the cash surrender value of a life insurance policy
acquired by the Bank.
(Continued)
78
<PAGE> 80
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank enters into various types of
transactions which involve financial instruments with off-balance sheet
risk. These instruments include commitments to extend credit and stand-by
letters of credit which are not reflected in the accompanying
consolidated balance sheets. These transactions may involve, to varying
degrees, credit and interest rate risk in excess of the amount, if any,
recognized in the consolidated balance sheets. Management does not
anticipate any loss to result from these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and stand-by letters of credit.
The Bank applies the same credit standards to these contracts as it uses
for loans recorded on the balance sheet.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Off-balance sheet commitments:
Commitments to extend credit $ 25,768,674 21,932,361
Standby letters of credit 1,573,700 2,206,770
</TABLE>
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 customers' creditworthiness, but may include cash and securities.
Commitments to extend credit and standby letters of credit bear similar
credit risk characteristics as outstanding loans.
As of December 31, 1997, the Company has no off-balance sheet derivatives
requiring additional disclosure.
(Continued)
79
<PAGE> 81
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) CAPITAL ADEQUACY AND RESTRICTION ON DIVIDENDS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve,
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below).
First, a bank must meet a minimum Tier I (as defined in the regulations)
Capital ratio ranging from 3% to 5% based upon the bank's CAMEL (capital
adequacy, asset quality, management, earnings and liquidity) rating.
Second, a bank must meet minimum Total Risk-Based Capital to
risk-weighted assets ratio of 8%. Risk-based capital and asset guidelines
vary from Tier I capital guidelines by redefining the components of
capital, categorizing assets into different risk classes, and including
certain off-balance sheet items in the calculation of the capital ratio.
The effect of the risk-based capital guidelines is that banks with high
exposure will be required to raise additional capital while institutions
with low risk exposure could, with the concurrence of regulatory
authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I Capital to average assets
ratio.
Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject. As of December 31,
1997, the most recent notification, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must meet the minimum ratios as set forth
above. There are no conditions or events since that notification that
management believes have changed the institution's category.
(Continued)
80
<PAGE> 82
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------------- ---------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based
Capital (to Risk
Weighted Assets) $22,526,322 16.16% $11,152,837 8.0% $13,941,046 10.0%
Tier I Capital (to
Risk Weighted
Assets) $20,783,322 14.91% $ 5,576,418 4.0% $ 8,364,628 6.0%
Tier I Capital (to
Average Assets) $20,783,322 10.41% $ 7,983,860 4.0% $ 9,979,825 5.0%
</TABLE>
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, 1997
the maximum amounts available for dividend distribution under this
restriction were approximately $6,253,000.
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and
short-term instruments are a reasonable estimate of fair value.
Investment securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
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
(Continued)
81
<PAGE> 83
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
industrial loans) are estimated using discounted cash flow analyses,
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.
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 existing 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
(Continued)
82
<PAGE> 84
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Bank's financial instruments are
approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 18,331,374 18,331,374
============= =============
Investment securities $ 64,818,226 64,862,408
============= =============
Loans:
Fixed rate:
Commercial and financial loans $ 8,187,199 8,812,108
Real estate - construction loans 7,140,442 7,838,704
Real estate - commercial 16,072,258 17,524,300
Installment loans 4,844 5,280
Other 90,674 90,674
------------- -------------
Total fixed rate 31,495,417 34,271,066
Variable rate 82,208,541 90,380,197
Less allowance for loan losses (2,819,039) (2,819,039)
Net deferred origination fees (293,713) (293,713)
------------- -------------
Net loans $ 110,591,206 121,538,511
============= =============
Financial liabilities:
Deposits:
Demand $ 93,771,773 93,771,773
Fixed rate certificates 47,750,657 49,523,798
Variable certificates 39,150,845 39,150,845
------------- -------------
Total deposits $ 180,673,275 182,446,416
============= =============
</TABLE>
(Continued)
83
<PAGE> 85
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
------ ------ -----
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $25,768,674 -- 515,373
Standby letters of credit 1,573,700 -- 31,474
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
CARRYING FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 18,750,652 18,750,652
============= =============
Investment securities $ 52,052,064 51,994,965
============= =============
Loans:
Fixed rate:
Commercial and financial loans $ 2,300,291 2,584,621
Real estate - construction loans 13,190,982 14,450,707
Real estate - commercial 6,140,978 6,720,818
Installment loans 224,628 248,213
Other 1,284,203 1,411,206
------------- -------------
Total fixed rate 23,141,082 25,415,565
Variable rate 88,517,459 88,517,459
------------- -------------
111,658,541 113,933,024
Less allowance for loan losses (2,294,146) (2,294,146)
Net deferred origination fees (305,113) (305,113)
------------- -------------
Net loans $ 109,059,282 111,333,765
============= =============
Financial liabilities:
Deposits:
Demand $ 79,991,467 79,991,467
Fixed rate certificates 51,312,703 53,375,131
Variable certificates 40,063,799 40,063,799
------------- -------------
Total deposits $ 171,367,969 173,430,397
============= =============
</TABLE>
(Continued)
84
<PAGE> 86
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
------ ------ -----
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $21,932,361 -- 438,647
Standby letters of credit 2,206,770 -- 44,135
</TABLE>
(19) REDDING BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS DECEMBER 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Cash $ 532,636 7,715
Time deposit with subsidiary 190,000 200,000
Investment in subsidiaries 21,101,949 18,972,128
----------- -----------
Total assets $21,824,585 19,179,843
=========== ===========
Shareholders' Equity:
Common stock $ 4,561,821 4,561,821
Retained earnings 17,108,836 14,526,071
Accumulated other comprehensive
income, net 153,928 91,951
----------- -----------
Total shareholders' equity $21,824,585 19,179,843
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Interest on time deposit $ 8,531 9,592 10,665
Dividend from subsidiary 1,600,000 675,354 675,354
----------- ----------- -----------
1,608,531 684,946 686,019
Expenses 17,984 16,862 12,114
----------- ----------- -----------
Income before income taxes and net
equity in undistributed net income of
subsidiaries 1,590,547 668,084 673,905
Benefit (provision) for income taxes (800) (800) 800
----------- ----------- -----------
Income before equity in undistributed
net income of subsidiaries 1,589,747 667,284 674,705
Equity in undistributed net income of
subsidiaries 2,067,948 1,948,020 2,256,046
----------- ----------- -----------
Net income $ 3,657,695 2,615,304 2,930,751
=========== =========== ===========
</TABLE>
(Continued)
85
<PAGE> 87
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,657,695 2,615,304 2,930,751
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred taxes 104 (696) (800)
Equity in undistributed net income of
subsidiaries (2,067,948) (1,948,020) (2,256,046)
----------- ----------- -----------
Net cash provided by operating
activities 1,589,851 666,588 673,905
Financing activities:
Redemption of common stock, net of
issuances (174,458) (23,000) (31,000)
Cash dividends (900,472) (675,354) (675,354)
----------- ----------- -----------
Net cash used by financing
activities (1,074,930) (698,354) (706,354)
----------- ----------- -----------
Decrease in cash and cash equivalents 514,921 (31,766) (32,449)
Cash and cash equivalents at beginning of
year 207,715 239,481 271,930
----------- ----------- -----------
Cash and cash equivalents at end of year $ 722,636 207,715 239,481
=========== =========== ===========
</TABLE>
86
<PAGE> 88
REDDING BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (in thousands except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1998 1997
<S> <C> <C>
Cash and due from banks $ 9,293 $ 11,431
Federal funds sold 3,210 6,900
Investment securities available-for-sale, at market 30,466 55,781
Investment securities held-to-maturity, at cost (aggregate market value
of $8,310 in 1998 and $9,081 in 1997) 8,119 9,037
Loans, net of allowance for loan losses of $3,019 in 1998 and $2,819 in 1997 141,417 110,591
Bank premises and equipment, net 5,596 5,842
Other assets 4,713 5,237
-------- --------
Total assets $202,814 $204,820
======== ========
Liabilities and Shareholders' Equity
Deposits:
Demand - noninterest-bearing $ 34,690 $ 40,070
Demand - interest-bearing 41,455 42,121
Savings 13,701 11,581
Certificates of deposits 86,808 86,901
-------- --------
176,654 180,673
Other liabilities 2,483 2,322
-------- --------
Total liabilities 179,137 182,995
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 10,000,000 shares authorized;
2,684,103 shares issued and outstanding in 1998 and 1997
4,562 4,562
Retained earnings 18,926 17,109
Accumulated other comprehensive income:
Unrealized gains on securities available-for-sale, net of tax 189 154
-------- --------
Total shareholders' equity 23,677 21,825
-------- --------
Total liabilities and shareholders' equity $202,814 $204,820
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
87
<PAGE> 89
REDDING BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest income:
Interest and fees on loans $ 9,399 $ 8,664
Interest on tax exempt securities 366 215
Interest on U.S. government securities 1,912 2,009
Interest on federal funds sold 304 439
Interest on other securities 60 276
------- -------
Total interest income 12,041 11,603
------- -------
Interest expense:
Interest on demand deposits 590 598
Interest on savings deposits 259 302
Interest on time deposits 3,472 3,795
------- -------
Total interest expense 4,321 4,695
------- -------
Net interest income 7,720 6,908
Provision for loan losses 250 827
------- -------
Net interest income after provision for loan losses 7,470 6,081
------- -------
Other income:
Service charges on deposit accounts 160 161
Other income 370 276
Gain on sale of investment securities 28 5
Credit card service income 1,776 1,475
------- -------
Total other income 2,334 1,917
------- -------
Other expenses:
Salaries and related benefits 2,512 2,262
Net occupancy and equipment expense 623 591
FDIC insurance premium 16 23
Data processing and professional services 262 206
Other expenses 1,403 943
------- -------
Total other expenses 4,816 4,025
------- -------
Income before income taxes 4,988 3,973
Provision for income taxes 1,826 1,472
------- -------
Net income $ 3,162 $ 2,501
======= =======
Basic earnings per share $ 1.18 $ .93
Diluted earnings per share $ 1.15 $ .93
</TABLE>
See notes to unaudited condensed consolidated financial statements
88
<PAGE> 90
REDDING BANCORP AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (in thousands except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income:
Unrealized
Gains On
Securities
Available-For-
Common Stock Retained Sale,
Shares Amount Earnings Net of Tax Total
------ ------ -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,684,103 $4,562 $17,109 $ 154 $ 21,825
Net income 3,162 3,162
Cash dividend ($.50 per share) (1,345) (1,345)
Change in unrealized gain on
available-for-sale securities, net
of tax 35 35
--------- ---------- ------- ----------- ---------
Balance, September 30, 1998 2,684,103 $4,562 $18,926 $ 189 $ 23,677
========= ========== ======= =========== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
89
<PAGE> 91
REDDING BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,162 $ 2,501
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 250 827
Provision for depreciation 325 350
Amortization of investment premiums and accretion of discounts, (43) (151)
net
Gain on sale of loans (23) (26)
Loss on sale of equipment -- 14
Proceeds from sale of loans 2,007 3,439
Loans originated for sale (2,030) (3,465)
Decrease in other assets 525 1,711
Increase (decrease) in deferred loan fees 168 (43)
Increase in other liabilities 161 1,644
-------- --------
Net cash provided by operating activities 1,340 4,300
-------- --------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 24,024 29,834
Proceeds from sale of available-for-sale securities 8,029 2,275
Purchases of available-for-sale securities (5,741) (48,105)
Loan originations, net of principal repayments (31,198) 1,061
Purchase of premises and equipment (79) (193)
-------- --------
Net cash used by investing activities (4,965) (15,128)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in demand deposits and savings accounts
(3,926) 14,340
Net decrease in certificates of deposit (94) (1,425)
Cash dividends (1,345) (1,600)
-------- --------
Net cash (used) provided by financing activities (5,365) 11,355
-------- --------
Net (decrease) increase in cash and cash equivalents (5,828) 2,983
Cash and cash equivalents at beginning of period 18,331 18,751
-------- --------
Cash and cash equivalents at end of period $ 12,503 $ 21,734
======== ========
Supplemental cash flow information:
Income taxes paid $ 1,798 $ 1,796
Interest paid $ 4,328 $ 4,710
</TABLE>
See notes to unaudited condensed consolidated financial statements.
90
<PAGE> 92
REDDING BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes of Redding Bancorp and subsidiaries as of December 31, 1997.
The statements include the accounts of Redding Bancorp ("Redding"), and its
wholly owned subsidiaries, Redding Bank of Commerce ("RBC") and Redding
Service Corporation. All significant inter-company balances and transactions
have been eliminated. The financial information contained in this report
reflects all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of the interim periods. All such
adjustments are of a normal recurring nature. The results of operations and
cash flows for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold and repurchase
agreements. Federal funds sold and repurchase agreements are generally for
one day periods.
2. 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 reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The following
table displays the computation of earnings per share for the nine months
ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Basic earnings per share:
Net income $3,162 $2,501
====== ======
Weighted average common shares outstanding 2,684 2,697
====== ======
Basic earnings per share $ 1.18 $ .93
====== ======
Diluted earnings per share:
Net income $3,162 $2,501
====== ======
Weighted average common shares outstanding 2,684 2,697
Effect of outstanding stock options 57 6
------ ------
Weighted average common shares outstanding 2,741 2,703
------ ------
Diluted earnings per share $ 1.15 $ .93
====== ======
</TABLE>
91
<PAGE> 93
3. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
This Statement requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. The Company's only source of other comprehensive earnings is
derived from unrealized gains and losses on marketable securities classified
as available-for-sale. Reclassification adjustments result from gains or
losses on investment 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 in the period in which they
arose. They are excluded from comprehensive income of the current period to
avoid double counting. Annual financial statements for prior periods will be
reclassified, as required.
The Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
<S> <C> <C>
Net income as reported $ 3,162 $ 2,501
Other comprehensive income (net of tax):
Change in unrealized holding gain (losses) on
available-for-sale securities 53 27
Reclassification adjustment (18) (4)
------- -------
Total comprehensive income $ 3,197 $ 2,524
======= =======
</TABLE>
4. COMMON STOCK
On June 16, 1998 the Board of Directors declared a three for one stock split
for shareholders of record as of June 30, 1998 and distributed on July 10,
1998. All per share data has been restated to give effect to the stock
split. On September 15, 1998, the Board of Directors declared an annual cash
dividend of 50 cents per share on the Company's Common Stock. The dividend
is payable to shareholders of record as of October 1, 1998 and was paid on
October 22, 1998.
5. STOCK BASED COMPENSATION
On February 17, 1998, the Board of Directors adopted the 1998 Stock Option
Plan (the "Plan") which was approved by the Company's shareholders 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
nonstatutory 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 and that 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 shareholder 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
92
<PAGE> 94
personnel and (c) linking key personnel directly to shareholder interests
through increased stock ownership. A total of 540,000 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.
During the nine months ended September 30, 1998, stock options were granted
for 411,000 shares of common stock with a weighted average exercise price of
$9.62 per share, none of which were exercisable at September 30, 1998.
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.
The Company uses an option-pricing model to compute grant-date fair value of
options granted for purposes of disclosing pro forma net income and net
income per share. In computing the grant-date fair value of options granted
during the period for disclosure purposes, the Company used an
option-pricing model that takes into account the stock price at the grant
date ($10.67), the exercise price (ranging from $9.07 to $10.67), the
expected life of the option (seven years), the expected dividends on the
Company's common stock (increasing $.08 per share per year) and the
risk-free interest rate over the expected life of the option (5.625%). Had
the Company recognized compensation expense according to the provisions of
FAS 123, earnings per share as reported would not have changed.
6. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures About
Segments Of An Enterprise And Related Information, which establishes annual
and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas, and
major customers. This statement will not impact the Company's consolidated
financial position, results of operations or cash flows. Interim reporting
standards of the statement are not applicable to interim reports in the year
of adoption. Management is currently evaluating the effect this standard
will have on disclosures of financial performance.
In June, 1998 the Financial Accounting Standards Board issued SFAS No. 133
Accounting For Derivative Instruments And Hedging Activities. The statement
establishes accounting and reporting standards for derivative instruments
and hedging activities. The statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company is in the process
of determining the impact of SFAS No. 133 on the Company's financial
statements, which is not expected to be material.
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ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective April 1, 1998, Deloitte & Touche LLP was engaged as the Company's
principal independent auditors to audit the Company's consolidated financial
statements for the year ended December 31, 1998, and KPMG LLP was dismissed. The
decision to change independent auditors was approved by the Audit Committee of
the Company's Board of Directors. In the period from December 31, 1992, through
December 31, 1997, KPMG LLP issued no audit report which was qualified or
modified as to uncertainty, audit scope or accounting principles, or which
contained adverse opinions or disclaimers of opinion on any of the Company's
financial statements and, during the period from December 31, 1992, through
March 31, 1998, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3.1 Articles of Incorporation, as amended.*
3.2 Bylaws of the Registrant, 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 Registrant 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 Pages 73 and 87).
16.1 Letter on Change in Certifying Accountants.
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule.*
- ----------
* previously filed.
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
REDDING BANCORP
DATE: January 20, 1999 By /s/ Russell L. Duclos
----------------------------------
Russell L. Duclos
President, Chief Executive
Officer and Director
95
<PAGE> 1
EXHIBIT 16.1
KPMG
400 Capitol Mall
Sacramento, CA 95814
January 19, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Redding Bancorp and subsidiaries
and, under the date of January 21, 1998, except as to note 12, which is as of
June 16, 1998, we reported on the consolidated financial statements of Redding
Bancorp and subsidiaries as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997. On April 1, 1998, our
appointment as principal accountants was terminated. We have read Redding
Bancorp and subsidiaries' statements included under Item 14 of its Form 10 and
we agree with such statements.
Very truly yours,
/s/ KPMG LLP
