<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-25135
REDDING BANCORP
(Exact name of Registrant as specified in its charter)
California 94-2823865
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1951 Churn Creek Road
Redding, Bancorp 96002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (530) 224-3333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $38,419,371 as of March 1, 1999, which was
calculated based on the last reported sale of the Company's Common Stock prior
to March 1, 1999. This calculation does not reflect a determination that certain
persons are affiliates of the Registrant for any other purpose.
As of March 1, 1999, there were 2,690,103 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11 and 12 of Part III incorporate by reference
information from the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 1999 Annual Meeting of Shareholders.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
This report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's actual future results and shareholder values may differ
materially from those anticipated and expressed in these forward-looking
statements. Many of the factors that will determine these results and values,
including those discussed under the heading "Risk Factors That May Affect
Results," are beyond the Company's ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or obligation to update
forward-looking statements after the filing of this report, even if new
information, future events or other circumstances have made them incorrect or
misleading.
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 ("FRB") of the Federal Reserve System. 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 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
-2-
<PAGE> 3
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 That May Affect Results-Dependence on Real Estate." A relatively
small portion of the Bank's loan portfolio consists of loans to individuals for
personal, family or household purposes. The Bank accepts real estate, listed and
unlisted securities, savings and time deposits, automobiles, machinery and
equipment as collateral for loans.
The Bank's commercial loan portfolio consists of a mix of revolving
credit facilities and intermediate term loans. The loans are generally made for
working capital, asset acquisition and business expansion purposes and are
generally secured by a lien on the borrowers' assets. The Bank also makes
unsecured loans to borrowers who meet the Bank's underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its
borrowers' payment performance and their respective financial condition and
makes periodic and appropriate adjustments, if necessary, to the risk grade
assigned to each loan in the portfolio. The primary sources of repayment of the
Bank's commercial loans are the borrower's conversion of short-term assets to
cash and operating cash flow. The net assets of the borrower or guarantor are
usually identified as a secondary source of repayment.
The principal factors affecting the Bank's risk of loss from commercial
lending include each borrower's ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank manages risk through its underwriting criteria,
which includes strategies to match the borrower's cash flow to loan repayment
terms, and periodic evaluations of the borrower's operations. The Bank's
evaluations of its borrowers are facilitated by management's knowledge of local
market conditions and periodic reviews by a consultant of the Bank's credit
administration policies.
The Bank's real estate construction loan portfolio consists of a mix of
commercial and residential construction loans, which are principally secured by
the underlying project. The Bank's real estate construction loans are
predominately made for projects which are intended to be owner occupied. The
Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Bank's construction loans are sale of the
underlying collateral or permanent financing provided by the Bank or another
lending source.
The principal risks associated with real estate construction lending
include project cost overruns that absorb the borrower's equity in the project
and deterioration of real estate values as a result of various factors,
including competitive pressures and economic downturns. See "-Risk Factors That
May Affect Results-Lending Risks Associated with Commercial Banking and
Construction Activities." The Bank manages its credit risk associated with real
estate construction lending by establishing maximum loan-to-value ratios on
projects on an as-completed basis, inspecting project status in advance of
controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of no more than 80% on
single-family residential construction loans.
The Bank's commercial and residential real estate mortgage loan
portfolio consists of loans secured by a variety of commercial and residential
real property. The Bank makes real estate mortgage loans for both owner-
-3-
<PAGE> 4
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.
The Bank's specific underwriting standards and methods for each of its
principal lines of lending include industry-accepted analysis and modeling and
certain proprietary techniques. The Bank's underwriting criteria is designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
In April 1993, the Bank entered into an agreement (the "Merchant
Services Agreement") with Cardservice International, Inc. ("CSI"), an
independent sales organization ("ISO") and nonbank merchant credit card
processor, pursuant to which the Bank has agreed to provide credit and debit
card processing services for merchants solicited by CSI who accept credit and
debit cards as payment for goods and services. Pursuant to the Merchant Services
Agreement, the Bank acts as a clearing bank for CSI and processes credit or
debit card transactions into the Visa(R) or MasterCard(R) system for presentment
to the card issuer. As a result of the Merchant Services Agreement, the Bank has
acquired electronic credit and debit card processing relationships with
merchants in various industries on a nationwide basis. The Merchant Services
Agreement with CSI was renewed in 1997 for a period of four years, which expires
on April 1, 2001, 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 That May Affect Results-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 December
31, 1998, the Bank had 793 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.
Contract deposit relationships with the Bank's merchants and CSI pursuant to the
Merchant Services Agreement represented approximately 3.5% of the Bank's total
deposits as of December 31, 1998.
The fee income from merchant processing services represented
approximately 9.2%, 9.8% and 8.9% of the Company's consolidated revenues in
1998, 1997 and 1996, respectively.
SUPERVISION AND REGULATION
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the BHCA. The Company
reports to, registers with, and may be examined by, the FRB. The FRB also has
the authority to examine the Company's subsidiaries. The costs of any
examination by the FRB are payable by the Company.
The Company is a bank holding company within the meaning of Section 3700
of the California Financial Code. As such, the Company and the Bank are subject
to examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
-4-
<PAGE> 5
The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain certain
levels of capital. See "Capital Standards." The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is required
to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company. Any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the prior approval of the FRB.
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, with the
approval of the FRB, may engage, or acquire the voting shares of companies
engaged, in activities that the FRB 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, (a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first acquire an
existing five year old California bank or industrial loan company by merger or
purchase; (b) California state-chartered banks are empowered to conduct various
authorized branch-like activities on an agency basis through affiliated and
unaffiliated insured depository institutions in California and other states and
(c) the Commissioner is authorized to approve an interstate acquisition or
merger which would result in a deposit concentration exceeding 30% if the
Commissioner finds that the transaction is consistent with public convenience
and advantage. However, a state bank chartered in a state other than California
may not enter California by purchasing a California branch office of a
California bank or industrial loan company without purchasing the entire entity
or by establishing a de novo California bank.
The FRB generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition. See "-Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability on the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are subject to a number of
other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of,
-5-
<PAGE> 6
an affiliate, provided that the aggregate of such transactions with affiliates
may not exceed 10% of the capital stock and surplus of the institution, and the
aggregate of such transactions with all affiliates may not exceed 20% of the
capital stock and surplus of such institution. The Company may only borrow from
depository institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the loan. Further,
the Company may not sell a low-quality asset to a depository institution
subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and
are intended to improve the competitiveness of bank holding companies by, among
other things: (i) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Regulation Y, as amended, 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 FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized (as that term
is defined in the capital adequacy regulations of the applicable bank
regulator), 80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of 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 rating, rating for
management and rating for compliance which were at least satisfactory, (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
BANK REGULATION AND SUPERVISION
The Bank is a California chartered bank insured by the Federal Deposit
Insurance Corporation (the "FDIC"), and as such is subject to regulation,
supervision and regular examination by the California Department of Financial
Institutions ("DFI") and the FDIC. As a member of the Federal Reserve System,
the Bank's primary federal regulator is the FRB. The regulations of these
agencies affect most aspects of the Bank's business and prescribe permissible
types of loans and investments, the amount of required reserves, requirements
for branch offices, the permissible scope of the Bank's activities and various
other requirements.
The Bank is also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by federal
banking law. In addition, the Bank is subject to certain regulations of the FRB
dealing primarily with check-clearing activities, establishment of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and
Equal Credit Opportunity (Regulation B).
Under California law, a state chartered bank is subject to various
restrictions on, and requirements regarding, its operations and administration
including the maintenance of branch offices and automated teller machines,
capital and reserve requirements, deposits and borrowings, shareholder rights
and duties, and investment and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the Commissioner is
required to order the bank to correct such impairment. If a bank is unable to
correct the
-6-
<PAGE> 7
impairment, the bank is required to levy and collect an assessment upon its
common shares. If such assessment becomes delinquent, the common shares are to
be sold by the bank.
California law permits a state chartered bank to invest in the stock and
securities of other corporations, subject to a state chartered bank receiving
either general authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner. The Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), however, imposes
limitations on the activities and equity investments of state chartered,
federally insured banks. FDICIA also prohibits a state bank from engaging as a
principal in any activity that is not permissible for a national bank, unless
the bank is adequately capitalized and the FDIC approves the activity after
determining that such activity does not pose a significant risk to the deposit
insurance fund. The FDIC rules on activities generally permit subsidiaries of
banks, without prior specific FDIC authorization, to engage in those that have
been approved by the FRB for bank holding companies because such activities are
so closely related to banking to be a proper incident thereto. Other activities
generally require specific FDIC prior approval, and the FDIC may impose
additional restrictions on such activities on a case-by-case basis in approving
applications to engage in otherwise impermissible activities.
CAPITAL STANDARDS
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level a bank is required to maintain, the
federal banking agencies do not, in all respects, follow generally accepted
accounting principles ("GAAP") and have special rules which have the effect of
reducing the amount of capital that will be recognized for purposes of
determining the capital adequacy of a bank.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, 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,
-7-
<PAGE> 8
a qualifying institution is one that is well-capitalized under the FDIC's prompt
corrective action rules. The amount of recourse that can receive the
preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. It is improbable, however, that an
institution with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
As of December 31, 1998, the Company's and the Bank's capital ratios
exceeded applicable regulatory requirements. The following tables present the
capital ratios for the Company and the Bank, compared to the standards for
well-capitalized depository institutions, as of December 31, 1998 (amounts in
thousands except percentage amounts).
<TABLE>
<CAPTION>
The Company
---------------------------------------------------------------
Actual Well Minimum
-------------------------- Capitalized Capital
Capital Ratio Ratio Requirement
----------- ----- ---------------- -----------
<S> <C> <C> <C> <C>
Leverage ................. $24,401,620 11.52% 5.0% 4.0%
Tier 1 Risk-Based ........ 24,401,620 15.17 6.0 4.0
Total Risk-Based ......... 26,411,867 16.42 10.0 8.0
</TABLE>
<TABLE>
<CAPTION>
Redding Bank of Commerce
------------------------------------------------------
Actual Well Minimum
--------------------------- Capitalized Capital
Capital Ratio Ratio Requirement
------------- ----- ----------- -----------
<S> <C> <C> <C> <C>
Leverage............................. $ 23,052,552 10.95% 5.0% 4.0%
Tier 1 Risk-Based ................... 23,052,552 14.33 6.0 4.0
Total Risk-Based .................... 25,062,799 15.58 10.0 8.0
</TABLE>
Banking agencies must take into consideration concentrations of credit
risk and risks from non-traditional activities, as well as an institution's
ability to manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies must also consider interest
rate risk (when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet position)
in evaluation of a bank's capital adequacy.
-8-
<PAGE> 9
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
<TABLE>
<CAPTION>
"Well capitalized" "Adequately capitalized"
- ------------------ ------------------------
<S> <C>
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; Tier 1 risk-based capital of 4%; and
and Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized"
- ------------------ "Significantly undercapitalized"
Total risk-based capital less than 8%; --------------------------------
Tier 1 risk-based capital less than 4%; or Total risk-based capital less than 6%;
Leverage ratio less than 4%. Tier 1 risk-based capital less than 3%; or
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 regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions
and required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
-9-
<PAGE> 10
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution
to declare a cash dividend or other distribution with respect to capital is
subject to statutory and regulatory restrictions which limit the amount
available for such distribution depending upon the earnings, financial condition
and cash needs of the institution, as well as general business conditions.
FDICIA prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Commissioner in an amount not exceeding the greatest of
the bank's retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
The Bank has its deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC is authorized to borrow up to $30 billion
from the United States Treasury; up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the Federal Financing Bank;
and from depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each $100
of insured deposits. FDICIA also provides authority for special assessments
against insured deposits. No assurance can be given at this time as to what the
future level of premiums will be.
The FDIC may make limited adjustments to its rate schedule not to exceed
an increase or decrease of 5 basis points without public notice and comment
rulemaking. The amount of an adjustment adopted by the Board is to be determined
by the following considerations: (a) the amount of assessment revenue necessary
to maintain the reserve ratio at the designated reserve ratio and (b) the
assessment schedule that would generate such amount of assessment revenue
considering the risk profile of BIF members. In determining the relevant amount
of assessment revenue, the Board is to consider BIF's expected operating
expenses, case resolution expenditures and income, the effect of assessments on
BIF members' earnings and capital, and any other factors the Board may deem
appropriate.
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.
-10-
<PAGE> 11
RECENTLY ENACTED LEGISLATION
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 Section 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 cannot be certain of 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 That May Affect
Results-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.
COMPETITION
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
Among the competitive advantages that major banks have is their ability
to finance wide ranging advertising campaigns and to allocate their investment
assets into investments of higher yield and demand. Such institutions offer
certain services such as trust services and international banking services 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.
-11-
<PAGE> 12
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 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.
-12-
<PAGE> 13
RISK FACTORS THAT MAY AFFECT RESULTS
This report includes 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 set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Forward-looking statements also include statements in which words
such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions, including the risks discussed below and elsewhere in this report.
The Company's actual future results and shareholder values may differ materially
from those anticipated and expressed in these forward-looking statements. Many
of the factors that will determine these results and values, including those
below, are beyond the Company's ability to control or predict.
LENDING RISKS ASSOCIATED WITH COMMERCIAL BANKING AND CONSTRUCTION
ACTIVITIES
The Bank's business strategy is to focus on commercial and multi-family
real estate loans, construction loans and commercial business loans. Loans
secured by commercial real estate are generally larger and involve a greater
degree of credit and transaction risk than residential mortgage (one to four
family) loans. Because payments on loans secured by commercial and multi-family
real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. Moreover, real estate construction financing is generally
considered to involve a higher degree of credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development compared to the estimated
cost (including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project which, when completed, has
a value which is insufficient to assure full repayment of the construction loan.
Although the Bank manages lending risks through its underwriting and
credit administration policies, no assurance can be given that such risks would
not materialize, in which event the Company's financial condition, results of
operations, cash flows and business prospects could be materially adversely
affected.
DEPENDENCE ON REAL ESTATE
At December 31, 1998, approximately 67% 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 December
31, 1998, commercial real estate mortgage and construction loans comprised
approximately 47% and 20%, respectively, of the total loans in the Bank's
portfolio. At December 31, 1998, all of the Bank's real estate mortgage and
construction loans, and approximately 40% of its commercial loans, were secured
fully or in part by deeds of trust on underlying real estate. The Bank's
dependence on real estate increases the risk of loss in both the Bank's loan
portfolio and its holdings of other real estate owned if economic conditions in
Northern California deteriorate in the future. Deterioration of the real estate
market in Northern California would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-Economic Conditions and Geographic Concentration."
-13-
<PAGE> 14
INTEREST RATE RISK
The income of the Bank depends to a great extent on "interest rate
differentials" and the resulting net interest margins (i.e., the difference
between the interest rates earned on the Bank's interest-earning assets such as
loans and investment securities, and the interest rates paid on the Bank's
interest-bearing liabilities such as deposits and borrowings). These rates are
highly sensitive to many factors which are beyond the Company's control,
including general economic conditions and the policies of various governmental
and regulatory agencies, in particular, the FRB. Because of the Bank's capital
position and non-interest-bearing demand deposit accounts, the Bank is asset
sensitive. As a result, the Company is generally adversely affected by declining
interest rates. In addition, changes in monetary policy, including changes in
interest rates, influence the origination of loans, the purchase of investments
and the generation of deposits and affect the rates received on loans and
investment securities and paid on deposits, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Quantitative and Qualitative Disclosure About Market Risk."
MERCHANT PROCESSING SERVICES
The Bank's fee income from merchant processing services represented
approximately 9.2%, 9.8% and 8.9% of the Company's consolidated revenues in
1998, 1997 and 1996, respectively. In addition, contract deposit relationships
with the merchants in the Bank's portfolio and CSI represented approximately
3.5% of the Bank's total deposits as of December 31, 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 "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"), the 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 and the Bank has recently reached
this $93 million threshhold. 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Noninterest Income-Merchant Processing Services Income."
-14-
<PAGE> 15
CHARGEBACKS AND PAYMENT RISKS ASSOCIATED WITH MERCHANT PROCESSING
SERVICES
The Bank is subject to the Card Association Rules in processing credit
and debit card transactions. In the event of certain types of billing disputes
between a cardholder and a merchant, the processor of the transaction assists
the merchant in investigating and resolving the dispute. If the dispute is not
resolved in favor of the merchant, the transaction is "charged back" to the
merchant and that amount is credited or otherwise refunded to the cardholder. If
the processor is unable to collect such amounts from the merchant's account, and
if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse the processor for the chargeback, the processor bears the loss for the
amount of the refund paid to the cardholder. Pursuant to the Merchant Services
Agreement, CSI has agreed to indemnify the Bank against losses incurred in
connection with credit card transactions generated by merchants in CSI's
portfolio. In addition, pursuant to the Merchant Services Agreement, CSI is
required to maintain a reserve account and a general account with the Bank and
has granted the Bank a security interest in such accounts to secure CSI's
obligations under the Merchant Services Agreement. The balances required to be
maintained by CSI in the reserve account and general account constitute a small
percentage of the dollar volume of transactions processed by the Bank each
month. In the event that the funds in accounts maintained by CSI are not
sufficient to cover chargebacks and refund payments to cardholders and CSI is
unable to reimburse the Bank for such deficiencies, the Bank would bear the loss
which could have a material adverse effect on the Company's financial condition,
results of operations and cash flows. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Noninterest Income-Merchant
Processing Services Income."
Chargeback exposure can also result from fraudulent credit card
transactions initiated by merchant customers. Examples of merchant fraud include
logging fictitious sales transactions and falsification of transaction amounts
on actual sales. The Bank conducts a background review of its merchant customers
at the time the relationship is established with the merchant. The Bank also can
withhold or delay a merchant's daily settlement if fraudulent activity is
suspected, thereby mitigating exposure to loss. However, there can be no
assurance that the Bank will not experience significant amounts of merchant
fraud, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The degree of exposure to
chargebacks may also be adversely affected by the development of new transaction
delivery channels, such as the Internet, which have yet to be fully evaluated.
The Company is not exposed to card issuer credit losses unassociated
with a dispute between the cardholder and the merchant.
POTENTIAL VOLATILITY OF DEPOSITS
At December 31, 1998, approximately 22.4% of the dollar value of the
Bank's total deposits was represented by time certificates of deposit in excess
of $100,000. As such, these deposits are considered volatile and could be
subject to withdrawal. Withdrawal of a material amount of such deposits would
adversely impact the Bank's liquidity, profitability, business prospects,
results of operations and cash flows.
DIVIDENDS
Because the Company conducts no other significant activity than the
management of its investment in the Bank, the Company is dependent on the Bank
for income. The ability of the Bank to pay cash dividends in the future depends
on the Bank's profitability, growth and capital needs. In addition, the
California Financial Code restricts the ability of the Bank to pay dividends. No
assurance can be given that the Company or the Bank will pay any dividends in
the future or, if paid, such dividends will not be discontinued. See
"-Supervision and Regulation-Supervision and Regulation of Bank Holding
Companies" and "-Supervision and Regulation-Restrictions on Dividends and Other
Distributions."
-15-
<PAGE> 16
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 other financial institutions. Such laws are subject to change from
time to time and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any
presently contemplated or future changes in the laws or regulations or their
interpretations would have on the business and prospects of the Company, but it
could be material and adverse. See "-Supervision and Regulation."
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are located and concentrated primarily in
Northern California, particularly the counties of Butte, El Dorado, Placer,
Shasta and Sacramento, and are likely to remain so for the foreseeable future.
At December 31, 1998, approximately 67% 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
-16-
<PAGE> 17
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.
The Company does not maintain any life insurance with respect to any of
its officers or directors, except with regard to a nonqualified deferred
compensation plan.
ADEQUACY OF ALLOWANCE FOR LOAN AND OTHER REAL ESTATE LOSSES
The Bank's allowance for estimated losses on loans was approximately
$3.2 million, or 2.2% of total loans, and 327.4% of total nonperforming loans at
December 31, 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 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Asset Quality" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Allowance for Loan and Lease Losses (ALLL)."
CERTAIN OWNERSHIP RESTRICTIONS UNDER CALIFORNIA AND FEDERAL LAW
Federal law prohibits a person or group of persons "acting in concert"
from acquiring "control" of a bank holding company unless the FRB has been given
60 days prior written notice of such proposed acquisition and within that time
period the FRB has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days, the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttal presumption established by the FRB, the
acquisition of more than 10% of a class of voting stock of a bank with a class
of securities registered under Section 12 of the Exchange Act (such as the
Common Stock), would, under the circumstances set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the FRB under the BHCA, before acquiring 25%
(5% in the case of an acquiror that is, or is deemed to be, a bank holding
company) or more of the outstanding shares of the Company's Common Stock, or
such lesser number of shares as constitute control. See "-Supervision and
Regulation-Regulation and Supervision of Bank Holding Companies."
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of the Company and the Bank
under this state law if such person, directly or indirectly, has the power (i)
to vote 25% or more of the voting power of the Company or (ii) to direct or
cause the direction of the management and policies of the Company. For purposes
of this law, a person
-17-
<PAGE> 18
who directly or indirectly owns or controls 10% or more of the Common Stock
would be presumed to direct or cause the direction of the management and
policies of the Company and thereby control the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 1, 1999, the Company had 2,690,103 shares of Common Stock
outstanding, of which approximately 1,957,675 shares are eligible for sale in
the public market without restriction. Approximately 732,428 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 outstanding shares of Common Stock
at exercise prices ranging from $9.07 to $10.67 have been issued to directors
and certain employees of the Company under the Company's 1998 Stock Option Plan,
and options to acquire up to an additional four percent at an exercise price of
not less than 85% of the market value of the Company's Common Stock on the date
of grant are reserved for issuance under the plan. No prediction can be made as
to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price of the Company's Common
Stock.
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 "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. Furthermore, the Bank may not have adequate remedies
against the prior owners or
-18-
<PAGE> 19
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 March 1, 1999, 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 for the Company's Common Equity
and Related Shareholder Matters."
ITEM 2. PROPERTIES.
The Company's principal offices and the Bank's main office are housed in
a two-story building with approximately 21,000 square feet of space located at
1951 Churn Creek Road, Redding, California, 96002. The Bank owns the building
and the 1.25 acres of land on which the building is situated. The Bank also owns
the land and building located at 1177 Placer Street, Redding, California, 96002,
in which the Bank 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 on July 31, 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in various legal actions
arising in the ordinary course of business. The Company believes that the
ultimate disposition of all currently pending matters will not have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-19-
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER 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, and
Hoefer & Arnett, Incorporated located at 353 Sacramento Street, 10th Floor, San
Francisco, California 94111, handle trades in the Company's Common Stock. Trades
may be reported on the OTC Bulletin Board under the symbol "RDDB."
The following table, which summarizes trading activity during the
Company's last two fiscal years, is based on information provided by 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 Per Share
------------------------------
Quarter Ended: High Low Volume
-------------- --------- --------- ------
<S> <C> <C> <C>
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
December 31, 1998 $ 17.50 $ 17.50 1,288
</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. For restrictions on the Company's
ability to pay dividends, see "Business- Supervision and Regulation-Supervision
and Regulation of Bank Holding Companies" and "Business-Supervision and
Regulation-Restrictions on Dividends and Other Distributions."
As of March 1, 1999, there were approximately 298 holders of record of
the Company's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected condensed consolidated financial data set forth below for
the five years ended December 31, 1998, have been derived from the Company's
audited financial statements. The selected condensed consolidated financial data
set forth below as of December 31, 1996, 1995 and 1994, and for the two years
ended December 31, 1995, have been derived from the Company's historical
financial statements not included in this report. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's audited
financial statements and notes thereto, included elsewhere in this report.
-20-
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Total Interest Income $ 16,322 $ 15,764 $ 15,565 $ 15,122 $ 11,292
Net Interest Income 10,436 9,430 8,767 8,740 6,966
Provision for Loan Losses 500 1,024 2,160 1,045 655
Total Other Income 2,539 2,364 2,008 1,698 843
Net Income 4,054 3,658 2,615 2,931 2,158
BALANCE SHEETS:
Total Assets 216,085 204,879 192,389 185,995 156,829
Total Loans 148,202 $113,410 111,353 115,668 104,939
Allowance for Loan and
Lease Losses (ALLL) (3,235) (2,819) (2,294) (2,053) (1,730)
Total Deposits 188,621 180,673 $171,368 166,869 140,824
Shareholders' Equity $ 24,654 $ 21,825 $ 19,180 $ 17,266 $ 14,411
PERFORMANCE RATIOS:
Return on Average Assets 1.98% 1.83% 1.35% 1.74% 1.50%
Return on Average Equity 18.04% 18.27% 14.41% 18.45% 15.69%
Dividend Payout 33.18% 24.62% 25.83% 23.04% 26.08%
Average Equity to
Average Assets 10.97% 10.03% 9.35% 9.42% 9.58%
Tier 1 Risk-Based
Capital Ratio - Bank 14.33% 14.91% 13.70% 13.40% 13.25%
Total Risk-Based Capital
Ratio - Bank 15.58% 16.16% 14.90% 14.60% 14.45%
Net Interest Margin 5.57% 5.20% 4.96% 5.62% 5.21%
Earning Assets to Total Assets 91.48% 90.90% 91.10% 92.30% 93.10%
Nonperforming Assets to
Total Assets .49% .50% 3.63% 1.64% .96%
Annualized Net Charge-offs .06% .44% 1.64% .64% .05%
ALLL to Total Loans 2.18% 2.49% 2.06% 1.77% 1.65%
Nonperforming Loans to ALLL 30.54% 23.90% 99.10% 137.40% 84.50%
SHARE DATA:
Common Shares
Outstanding (in
thousands) 2,690 2,684 2,700 2,700 2,700
Book Value Per Share $ 9.12 $ 8.13 $ 7.10 $ 6.39 $ 5.34
Basic Earnings Per Share $ 1.51 $ 1.36 $ 0.97 $ 1.08 $ 0.80
Diluted Earnings Per Share $ 1.42 $ 1.35 $ 0.97 $ 1.08 $ 0.80
Cash Dividends Per Share $ 0.50 $ 0.33 $ 0.25 $ 0.25 $ 0.21
</TABLE>
-21-
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this report. All statements other than statements of
historical fact included in the following discussion are forward-looking
statements within the meaning of the Exchange Act. These statements are based on
management's beliefs and assumptions, and on information currently available to
management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company and also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's future results and shareholder values may differ
materially from those expressed in these forward- looking statements. Many of
the factors that will determine these results and values, including those
discussed under the heading "Risk Factors That May Affect Results," are beyond
the Company's ability to control or predict. Investors are cautioned not to put
undue reliance on any forward-looking statements. In addition, the Company does
not have any intention or obligation to update forward-looking statements after
the filing of this report, even if new information, future events or other
circumstances have made them incorrect or misleading.
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.
Management considers the business of the Company to be divided into two
segments: (i) commercial banking and (ii) credit card services. Credit card
services are limited to those revenues, net of related data processing costs,
associated with the Merchant Services Agreement and the Bank's agreement to
provide credit and debit card processing services for merchants solicited by the
Bank who accept credit and debit cards as payments for goods and services.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net income for the year ended December 31, 1998, was $4.05 million,
representing an increase of $397,000, or 10.9%, over net income of $3.66 million
for the year ended December 31, 1997. The increase in net income is principally
attributable to management's efforts to reduce the Bank's lower yielding
investments and increase loans, and, to a lesser extent, an increase in overall
credit quality, all of which resulted in increased net interest income and
noninterest income and a reduction in the provision for loan losses of $524,000.
-22-
<PAGE> 23
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 $356,000 and a reduction in the provision for loan losses
of $1,136,000, which were partially offset by an increase in noninterest expense
of $434,000 required to support asset and loan growth. As a result of the
increase in net income before taxes, the provision for taxes was increased to
$678,000 for 1997.
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 $8.77 million in 1996 to $9.43 million in 1997,
and to $10.4 million in 1998, representing a 7.6% increase in 1997 over 1996,
and a 10.7% increase in 1998 over 1997. Net interest income increases in 1998
over 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 decreased from $6.80 million in 1996 to $6.33
million in 1997, and to $5.89 million in 1998, representing a 6.8% decrease in
1997 over 1996 and a 7.1% decrease in 1998 over 1997. 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 through the development of an officer sales program. The decrease in
total interest expense in 1998 is primarily attributable to a decline in the
average volume of the Bank's interest bearing liabilities and the decline in
interest rates generally.
The Company's net interest margin (net interest income divided by
average earning assets) was 4.96% in 1996, 5.20% in 1997 and 5.57% in 1998. The
increases in the Company's net interest margin from 1996 to 1997 and 1997 to
1998 were 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. These increases in the net interest margin were primarily the 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 and (iii) declining rates paid on interest-bearing deposits.
-23-
<PAGE> 24
The following table sets forth the Company's daily average balance
sheet, related interest income or expense and yield or rate paid for the periods
indicated. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------------ -----------------------------------
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) $130,454 $13,030 9.99% $113,030 $ 11,519 10.19% $117,021 $12,023 10.27%
Tax Exempt Securities 9,116 406 4.45% 6,142 292 4.75% 7,960 367 4.61%
US Government Securities 35,833 2,267 6.33% 47,583 3,009 6.32% 36,982 2,320 6.27%
Federal Funds Sold 9,511 455 4.77% 10,825 569 5.26% 11,693 602 5.15%
Other Securities 2,486 164 6.60% 3,875 375 9.68% 3,276 253 7.72%
-------- ------- ---- -------- -------- ----- -------- ------- -----
Average Earning Assets $187,400 $16,322 8.71% 181,455 $ 15,764 8.69% $176,932 $15,565 8.80%
------- -------- -------
Cash and Due From Banks $ 9,860 $ 10,149 $ 8,317
Bank Premises 5,688 5,781 5,975
Other Assets 1,897 2,211 2,899
-------- -------- --------
Average Total Assets $204,845 $199,596 $194,123
======== ======== ========
Interest-Bearing
Liabilities
Demand Interest-Bearing $ 42,185 $ 791 1.88% $ 42,911 $ 857 2.00% $ 35,887 $ 814 2.27%
Savings Deposits 12,717 349 2.74% 11,802 343 2.91% 10,749 317 2.95%
Certificates of Deposit 87,805 4,746 5.41% 88,701 5,134 5.79% 96,979 5,667 5.84%
-------- ------- ---- -------- -------- -------- -------
142,707 5,886 4.12% 143,414 6,334 4.42% 143,615 6,798 4.73%
-------- -------
Demand Noninterest
Bearing 37,315 34,299 30,542
Other Liabilities 2,353 1,864 1,818
Shareholder's Equity 22,470 20,019 18,148
-------- -------- --------
Average Liabilities and
Shareholders' Equity $204,845 $199,596 $194,123
======== ======== ========
Net Interest Income and
Net Interest Margin $10,436 5.57% $ 9,430 5.20% $ 8,767 4.96%
======== =======
</TABLE>
- ---------
(1) Interest income on loans includes fee income of $562,000, $423,000 and
$686,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company's average total assets increased from $194.1 million in 1996
to $199.6 million in 1997, and to $204.8 million in 1998, representing a 2.8%
increase in 1997 over 1996 and a 2.6% increase in 1998 over 1997. 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.
-24-
<PAGE> 25
In addition, the Company's average noninterest-bearing demand deposits increased
from $34.3 million in 1997 to $37.3 million for 1998, representing an 8.1%
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 and early 1998, the Company increased loan production by
hiring additional loan officers. As a result, average loans for 1998 increased
by $17.4 million, or 15.4%, over 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.
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
1998 OVER 1997 1997 OVER 1996
-------------------- ------- --------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) (dollars in thousands)
in Interest Income
Portfolio Loans $ 1,740 $ (229) $ 1,511 $ (407) $ (97) $ (504)
Tax Exempt Securities 132 (18) 114 (86) 11 (75)
US Government
Securities (744) 3 (741) 670 19 689
Federal Funds Sold (63) (52) (115) (46) 13 (33)
Other Securities (92) (119) (211) 58 64 122
------- ------- ------- ------- ------- -------
Total Increase/
(Decrease) 973 (415) 558 189 10 199
------- ------- ------- ------- ------- -------
Increase (Decrease) in
Interest Expense
Demand Interest
Bearing (14) (52) (66) 140 (97) 43
Savings Deposits 25 (19) 6 30 (5) 25
Certificates of Deposit (48) (340) (388) (478) (54) (532)
------- ------- ------- ------- ------- -------
Total Increase/
(Decrease) (37) (411) (448) (308) (156) (464)
------- ------- ------- ------- ------- -------
Net Increase/
(Decrease) $ 1,010 $ (4) $ 1,006 $ 497 $ 166 $ 663
======= ======= ======= ======= ======= =======
</TABLE>
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, 1998,
noninterest income represented 16.2% 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 $2.01 million in 1996 to $2.36
million in 1997, and to $2.54 million in 1998, representing a 17.7% increase in
1997 over 1996 and a 7.4% increase in 1998 over 1997. The increases in
noninterest income in 1997 and 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.
-25-
<PAGE> 26
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 December 31, 1998,
the CSI portfolio consisted of 40,000 merchants.
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 $6.8 million as well as a
general reserve equal to .25% 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, the 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 and the Bank has recently reached
this $93 million threshhold. 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 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 December
31, 1998, the Bank had 793 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. Contract
deposit relationships with the merchants in the Bank's portfolio and CSI
represented approximately 3.5% of the Bank's total deposits as of December 31,
1998.
Merchant processing services income, net of processing costs, was $1.57
million, $1.78 million and $1.73 million in 1996, 1997 and 1998, respectively,
representing an increase of 13.4% from 1996 to 1997 and a decrease of 2.8% from
1997 to 1998. The increase in merchant processing services income from 1996 to
1997 is 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 decrease in merchant processing services income from 1997 to 1998
is primarily attributable to increased processing costs and the Bank reaching
the $93 million threshold for monthly Visa(R) transactions processed, at which
point fee income significantly declines.
-26-
<PAGE> 27
The following table sets forth a summary of noninterest income for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
Noninterest Income: (dollars in thousands)
<S> <C> <C> <C>
Service Charges $ 215 $ 212 $ 187
Other Income 503 370 311
Gain (Loss) on Sale of Investment
Securities 93 5 (58)
Credit Card Service Income 1,728 1,777 1,568
------- ------- -------
Total Noninterest Income $ 2,539 $ 2,364 $ 2,008
======= ======= =======
</TABLE>
NONINTEREST EXPENSE
Noninterest expense consists of salaries and related employee benefits,
occupancy and equipment expense and other operating expenses. Noninterest
expense increased from $4.55 million in 1996 to $4.98 million in 1997, and to
$5.98 million in 1998, representing an increase of $434,000, or 9.5% in 1997
over 1996, and an increase of $992,000, or 19.9% in 1998 over 1997. The increase
in noninterest expense from 1996 to 1997 and 1997 to 1998 was primarily the
result of growth in the Company's loan portfolio and earning assets. The
increase in noninterest expense from 1997 to 1998 was also attributable to the
expenses related to the Company's decision to register its Common Stock under
the Exchange Act in order to increase shareholder liquidity.
The following table sets forth a summary of noninterest expense for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
Noninterest Expense: (dollars in thousands)
<S> <C> <C> <C>
Salaries and Benefits $ 3,422 $ 3,024 $ 2,754
Occupancy and Equipment 838 796 814
FDIC Assessments 26 41 7
Data Processing and Professional
Services 360 283 256
Stationery and Supplies 173 161 128
Postage 78 83 85
Other Expense 875 449 370
Directors' Expense 203 146 135
------- ------- -------
Total Noninterest Expense $ 5,975 $ 4,983 $ 4,549
======= ======= =======
</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.
-27-
<PAGE> 28
The following table reflects the Company's tax provision and the related
effective tax rate for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Tax Provision $ 2,446 $ 2,129 $ 1,451
Effective Tax Rate 37.6% 36.8% 35.7%
</TABLE>
Increases in the Company's tax provision from 1996 to 1997 and from 1997
to 1998 are primarily attributable to increases in the Company's net income.
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.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and Financial Loans $ 46,890 $ 41,432 $ 37,592 $ 36,248 $ 31,967
Real Estate - Construction 29,470 16,393 32,474 42,784 40,746
Real Estate - Commercial Mortgage 69,742 54,533 40,067 35,299 31,090
Installment Loans 298 72 241 69 489
Other 2,225 1,274 1,284 1,699 1,077
--------- --------- --------- --------- ---------
148,625 113,704 111,658 116,099 105,369
Less:
Deferred Loan Fees and Costs (423) (294) (305) (430) (430)
Allowance for Loan Losses (3,235) (2,819) (2,294) (2,053) (1,730)
--------- --------- --------- --------- ---------
Total Net Loans $ 144,967 $ 110,591 $ 109,059 $ 113,615 $ 103,210
========= ========= ========= ========= =========
</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.
-28-
<PAGE> 29
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
assets as of the dates indicated:
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 942 $ 500 $1,734 $3,381 $1,169
90 days past due and still accruing 46 173 540 347 293
Restructured loans in compliance
with modified terms -- -- 2,450 -- --
Other real estate owned 66 352 2,268 229 38
</TABLE>
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 an increase in collection and
liquidation efforts in 1997 and the overall quality of the Company's loan
portfolio. Nonaccrual loans increased to $942,000 in 1998 as a result of 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 December 31, 1998, consisted of one property
totaling $66,000. Reductions in OREO balances are attributable to sales of OREO
in 1997 and 1998.
The Company assigns all loans a credit risk rating and monitors ratings
for accuracy. The aggregate credit risk ratings are used to determine the
allowance for loan losses. 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.
-29-
<PAGE> 30
The following table sets forth the maturity distribution of the
Company's commercial and real estate loans outstanding as of December 31, 1998,
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 $14,873 $19,319 $12,698 $46,890
Real Estate
Construction Loans 18,509 9,956 1,005 29,470
------- ------- ------- -------
Total $33,382 $29,275 $13,703 $76,360
======= ======= ======= =======
Loans due after one year with:
Fixed Rates $ 9,961 $ 9,894 $19,855
Variable Rates 19,314 3,809 23,123
------- ------- -------
Total $29,275 $13,703 $42,978
======= ======= =======
</TABLE>
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.
-30-
<PAGE> 31
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 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 are designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions.
The Bank's provision decreased to $500,000 in 1998 from $1.02 million in
1997 and $2.16 million in 1996. The reduction in the amount of the provision
from 1996 to 1997, and from 1997 to 1998 is a direct result of the Company's
ongoing efforts to increase the effectiveness of its collection efforts and the
related decrease in net losses. Loans which are deemed to have a greater risk
are managed in a more active manner to increase the likelihood that the Bank
will receive payment in full. Greater emphasis on problem loan management has
also reduced the Bank's overall level of higher risk rated credits.
Net charge-offs were $84,000 or .06% of average loans during 1998. Net
charge-offs were $499,000 or .44% of average loans during 1997. During 1996, the
Company experienced net charge-offs of $1.92 million or 1.64% of average loans.
The decrease in net charge-offs in 1998 as compared to 1997 and 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 Company expects net
charge-offs to be approximately $300,000 in 1999. Actual charge-offs in 1999 may
differ materially.
-31-
<PAGE> 32
The following table summarizes the activity in the ALLL reserves for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance: $ 2,819 $ 2,294 $ 2,053 $ 1,730 $ 1,128
Provision for ALLL 500 1,024 2,160 1,045 655
Charge-offs:
Commercial (139) (393) (1,074) (510) (54)
Real Estate (54) (209) (916) (273) (18)
Other (16) (3) -- -- --
------- ------- ------- ------- -------
Total Charge-offs (209) (605) (1,990) (783) (72)
------- ------- ------- ------- -------
Recoveries:
Commercial 114 60 37 61 16
Real Estate 11 46 34 -- 3
------- ------- ------- ------- -------
Total Recoveries: 125 106 71 61 19
------- ------- ------- ------- -------
Ending Balance $ 3,235 $ 2,819 $ 2,294 $ 2,053 $ 1,730
======= ======= ======= ======= =======
ALLL to Total Loans 2.18% 2.49% 2.06% 1.77% 1.65%
Net Charge-offs to
average loans .06% .44% 1.64% .64% .05%
</TABLE>
INVESTMENT PORTFOLIO
At the time of purchase of an investment security, the Company
designates the security as held-to-maturity or available-for-sale, based on its
investment objectives, operational needs and intent to hold. The Company does
not engage in trading activity.
Investment securities held-to-maturity are carried at cost adjusted for
the accretion of discounts and amortization of premiums. The Company has the
ability and intent to hold these investment securities to maturity. Securities
available-for-sale may be sold to implement the Company's asset/liability
management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market
value and unrealized gains or losses, net of income taxes, are reported as
accumulated other comprehensive income, a separate component of shareholders'
equity. Gain or loss on sale of investment securities is based on the specific
identification method.
-32-
<PAGE> 33
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, 1998. 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. Government and Agencies $12,005 5.93% $2,504 6.24% -- -- $14,509 6.08%
Obligations of State and
Political Subdivisions 1,164 4.16% 4,059 4.12% 632 4.85% 5,855 4.37%
Other Bonds 3,964 5.19% -- -- -- -- 3,964 5.58%
------- ---- ------- ---- ------ ----- ------- ----
Total $17,133 5.59% $6,563 5.44% $632 4.85% $24,328 5.43%
======= ==== ======= ==== ====== ===== ======= ====
</TABLE>
Investment securities held-to-maturity at December 31, 1998, consisted
solely of mortgage-backed securities with a remaining contractual maturity
greater than ten years and a weighted average yield of 6.81%.
The following table summarizes the book value of the Company's
investment securities held on the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government and Agencies $14,509 $36,968 $41,432
Municipal Obligations $ 5,855 $10,525 $ 6,529
Corporate and Other Bonds $12,002 $17,081 $ 3,944
------- ------- -------
Total $32,366 $64,574 $51,905
======= ======= =======
</TABLE>
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,
1998 1997 1996
-------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $26,423 1.87% $23,554 1.99% $19,536 2.14%
Savings Accounts $12,717 2.74% $11,802 2.91% $10,749 2.95%
Money Market Accounts $15,762 1.94% $19,357 2.06% $16,351 2.38%
Certificates of Deposit $87,805 5.41% $88,701 5.79% $96,979 5.84%
</TABLE>
-33-
<PAGE> 34
The following table sets forth the remaining maturities of certificates
of deposit in amounts of $100,000 or more at December 31, 1998 (dollars are in
thousands).
<TABLE>
<S> <C>
3 months or less $16,434
Over 3 through 6 months $ 9,802
Over 6 through 12 months $ 9,965
Over 12 months $ 6,074
-------
Total $42,275
=======
</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 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 $51.3 million, or 23.83% of total assets, at December 31,
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 $146.3 million and $143.6 million at December 31, 1998, and 1997,
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.
-34-
<PAGE> 35
The following table sets forth the Bank's capital ratios as of December
31, 1998, and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Total Risk-Based Capital 15.58% 16.16%
Tier 1 Capital to Risk-Based Assets 14.33% 14.91%
Tier 1 Capital to Average Assets 10.95% 10.41%
(Leverage ratio)
</TABLE>
The declines in the Bank's risk-based capital ratios as of December 31,
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 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 being made. In the
validation phase, which the Company has also substantially completed, the
hardware and software components are tested.
-35-
<PAGE> 36
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 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 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 December 31, 1998, the Company has incurred approximately $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
December 31, 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.
-36-
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
-37-
<PAGE> 38
The following table sets forth, as of December 31, 1998, 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.
<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:
Held-to-Maturity $ 0 $ 0 $ 0 $ 8,038 $ 8,038
Available-for-Sale 10,118 7,015 7,063 323 24,519
Federal Funds Sold 16,790 0 0 0 16,790
Net Loans 69,351 9,806 27,711 38,099 144,967
-------- -------- -------- -------- --------
Total Earning Assets $ 96,259 $ 16,821 $ 34,774 $ 46,460 $194,314
======== ======== ======== ======== ========
INTEREST-BEARING
LIABILITIES:
Demand Deposits 42,810 0 0 0 42,810
Savings Deposits 0 13,083 0 0 13,083
Time Deposits 49,585 31,647 11,787 0 93,019
-------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities $ 92,395 $ 47,611 $ 11,787 $ 0 $148,912
======== ======== ======== ======== ========
GAP 3,864 (27,909) 22,987 46,460 45,402
Cumulative GAP 3,864 (24,045) (1,058) 45,502
RSA/RSL 1.04 .38 2.95 -- 1.30
Cumulative GAP to
Total Earning Assets 1.79% (11.13%) (0.49%) 21.01%
</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 adversely affected by declining rates rather than rising rates. This
effect is partially offset in the short-term by the fact that the Company is
liability sensitive through the cumulative GAP period of one year or less.
During a period of declining rates, such liabilities may be repriced to provide
a short-term advantage to the Company; however, this benefit may not be
sustainable over the long-term.
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, 1998, the estimated annualized
-38-
<PAGE> 39
reduction in net interest income attributable to a 100 basis point decline in
the federal funds rate was $543,000 with a similar and opposite result
attributable to a 100 basis point increase in the federal funds rate. At
December 31, 1997, the estimated annualized reduction in net interest income
attributable to a 100 basis point decline in the federal funds rate was $369,000
with a similar and opposite result attributable to a 100 basis point increase in
the federal funds rate. Management does not believe that the change from year to
year is significant or represents a known trend toward more interest rate risk
sensitivity in the Company's financial position.
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 mitigates 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................. 40
Independent Auditors' Report................................................. 41
Consolidated Balance Sheets as of
December 31, 1998 and 1997................................................ 42
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................................... 43
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................................... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................... 45
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996.......................................... 46
</TABLE>
-39-
<PAGE> 40
Deloitte & Touche LLP
400 Capitol Mall, Suite 2000
Sacramento, California 95814
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Redding Bancorp
and subsidiaries (the Company) as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Sacramento, California
January 22, 1999
-40-
<PAGE> 41
KPMG LLP
400 Capitol Mall, Suite 800
Sacramento, California 95814
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Redding Bancorp
and subsidiaries (the Company) as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1997 and 1996. 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 that 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 the results of their operations and
their cash flows for the years December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Sacramento, California
January 21, 1998, except as to the first paragraph of note 12,
which is as of June 16, 1998
-41-
<PAGE> 42
Consolidated Balance Sheets
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks (note 3) $ 10,010,339 $ 11,431,374
Federal funds sold 16,790,000 6,900,000
Investment securities available-for-sale, at market (note 4) 24,518,750 55,780,926
Investment securities held-to-maturity, at cost (aggregate market
value of $8,207,512 in 1998 and $9,081,482 in 1997) (note 4) 8,038,378 9,037,300
Loans, net of the allowance for loan losses of $3,234,837 in 1998
and $2,819,039 in 1997 (note 5) 144,966,909 110,591,206
Bank premises and equipment, net (note 6) 5,603,739 5,842,379
Other assets (note 7) 6,156,880 5,296,176
------------ ------------
TOTAL ASSETS $216,084,995 $204,879,361
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - noninterest bearing $ 39,708,911 $ 40,069,672
Demand - interest bearing 42,810,171 42,121,317
Savings 13,083,097 11,580,784
Certificates of deposits (note 8) 93,018,519 86,901,502
------------ ------------
188,620,698 180,673,275
Other liabilities (note 9) 2,810,420 2,381,501
------------ ------------
Total liabilities 191,431,118 183,054,776
------------ ------------
Commitments and contingencies (note 15)
Stockholders' equity (notes 11, 12, and 16):
Common stock, no par value; 10,000,000 shares
authorized; 2,690,103 shares issued and outstanding in 1998
and 2,684,103 shares issued and outstanding in 1997 4,713,957 4,561,821
Retained earnings 19,817,799 17,108,836
Accumulated other comprehensive income, net of tax 122,121 153,928
------------ ------------
Total stockholders' equity 24,653,877 21,824,585
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $216,084,995 $204,879,361
============ ============
</TABLE>
See notes to consolidated financial statements.
-42-
<PAGE> 43
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,030,535 $ 11,519,475 $ 12,023,193
Interest on tax exempt securities 405,746 292,038 367,189
Interest on U.S. government securities 2,267,663 3,008,859 2,319,742
Interest on federal funds sold 454,515 568,784 601,798
Interest on other securities 163,585 375,446 253,494
------------ ------------ ------------
Total interest income 16,322,044 15,764,602 15,565,416
------------ ------------ ------------
Interest expense:
Interest on demand deposits 790,557 856,979 813,823
Interest on savings deposits 349,353 342,839 317,479
Interest on time deposits 4,745,951 5,134,417 5,666,898
------------ ------------ ------------
Total interest expense 5,885,861 6,334,235 6,798,200
------------ ------------ ------------
Net interest income 10,436,183 9,430,367 8,767,216
Provision for loan losses (note 5) 500,000 1,023,500 2,160,000
------------ ------------ ------------
Net interest income after provision for loan losses 9,936,183 8,406,867 6,607,216
------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 215,114 212,034 187,150
Other income 503,070 369,537 310,891
Gain (loss) on sale of investment securities 92,828 4,807 (58,280)
Credit card service income 1,727,849 1,777,571 1,567,847
------------ ------------ ------------
Total other income 2,538,861 2,363,949 2,007,608
------------ ------------ ------------
Noninterest expenses:
Salaries and related benefits 3,421,719 3,024,280 2,753,986
Net occupancy and equipment expense 837,602 796,085 813,619
FDIC insurance premium 26,517 40,799 7,638
Data processing and professional services 360,062 283,296 255,594
Directors expenses 202,822 145,979 135,322
Other expenses 1,125,952 692,941 582,498
------------ ------------ ------------
Total other expenses 5,974,674 4,983,380 4,548,657
------------ ------------ ------------
Income before income taxes 6,500,370 5,787,436 4,066,167
Provision for income taxes (note 10) 2,446,261 2,129,741 1,450,863
------------ ------------ ------------
Net income $ 4,054,109 $ 3,657,695 $ 2,615,304
============ ============ ============
Basic earnings per share (note 2) $1.51 $1.36 $.97
===== ===== ====
Diluted earnings per share (note 2) $1.42 $1.35 $.97
===== ===== ====
</TABLE>
See notes to consolidated financial statements.
-43-
<PAGE> 44
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATIVE
COMMON STOCK OTHER
COMPREHENSIVE ------------------------ RETAINED COMPREHENSIVE
INCOME SHARES AMOUNT EARNINGS INCOME, NET TOTAL
----------- --------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,701,416 $ 4,561,821 $ 12,609,121 $ 95,444 $ 17,266,386
Comprehensive income:
Net income $ 2,615,304 2,615,304 2,615,304
Other comprehensive income:
Unrealized holding losses arising
during period,
net of tax (21,921)
Less: reclassification adjustment
for losses included in net
income, net of tax (18,428)
-----------
Other comprehensive income (3,493) (3,493) (3,493)
-----------
Comprehensive income $ 2,611,811
===========
Cash dividends ($0.25 per share) (675,354)
(675,354)
Stock options exercised 6,000 23,000 23,000
Redemption of common stock (6,000) (23,000) (23,000) (46,000)
--------- ----------- ------------ --------- ------------
Balance at December 31, 1996 2,701,416 4,561,821 14,526,071 91,951 19,179,843
Comprehensive income:
Net income $ 3,657,695 3,657,695 3,657,695
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 65,019
Less: reclassification adjustment
for gains included in net
income, net of tax 3,042
-----------
Other comprehensive loss 61,977 61,977 61,977
-----------
Comprehensive income: $ 3,719,672
===========
Cash dividends ($0.33 per share) (900,472) (900,472)
Repurchase and retirement
of common stock (17,313) (174,458) (174,458)
--------- ----------- ------------ --------- ------------
Balance at December 31, 1997 2,684,103 4,561,821 17,108,836 153,928 21,824,585
Comprehensive income:
Net income $ 4,054,109 4,054,109 4,054,109
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 26,118
Less: reclassification adjustment
for gains included in net
income, net of tax 57,925
-----------
Other comprehensive income (31,807) (31,807) (31,807)
-----------
Comprehensive income $ 4,022,302
===========
Compensation expense associated
with stock options 130,136 130,136
Cash dividends ($0.50 per share) (1,345,146) (1,345,146)
Stock options exercised 6,000 22,000 22,000
--------- ----------- ------------ --------- ------------
Balance at December 31, 1998 2,690,103 $ 4,713,957 $ 19,817,799 $ 122,121 $ 24,653,877
========= =========== ============ ========= ============
</TABLE>
See notes to consolidated financial statements.
-44-
<PAGE> 45
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,054,109 $ 3,657,695 $ 2,615,304
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 500,000 1,023,500 2,160,000
Provision for depreciation 433,910 405,597 460,495
Compensation expense associated with stock options 130,136
Amortization of investment premiums and accretion
of discounts, net (474,554) (295,446) (162,213)
Gain on sale of loans (47,089) (30,285) (37,379)
Proceeds from sale of loans 3,851,050 3,972,000 5,479,675
Loans originated for sale (3,898,139) (4,002,285) (5,517,054)
Deferred income taxes, net (283,016) (362,950) (118,980)
(Increase) decrease in other assets (577,688) 1,848,770 (1,929,039)
(Increase) decrease in deferred loan fees 128,875 (11,400) (125,150)
Increase (decrease) in other liabilities 428,919 429,728 (64,344)
------------ ------------ ------------
Net cash provided by operating activities 4,246,513 6,634,924 2,761,315
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 32,953,547 39,136,648 25,036,404
Proceeds from sale of available for sale securities 10,403,936 2,275,042 1,942,500
Purchases of available for sale securities (10,653,638) (47,824,174) (35,158,493)
Purchases of mortgage-backed securities held-to-maturity -- (5,996,255) --
Loan originations, net of principal repayments (34,910,400) (2,483,454) 2,595,788
Purchase of premises and equipment (424,424) (392,385) (680,108)
Proceeds from sale of equipment 229,154 -- --
------------ ------------ ------------
Net cash used by investing activities (2,401,825) (15,284,578) (6,263,909)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits and savings accounts 1,830,406 13,780,306 8,235,542
Net (decrease) increase in certificates of deposit 6,117,017 (4,475,000) (3,736,080)
Cash dividends (1,345,146) (900,472) (675,354)
Common stock transactions 22,000 (174,458) (23,000)
------------ ------------ ------------
Net cash provided by financing activities 6,624,277 8,230,376 3,801,108
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 8,468,965 (419,278) 298,514
Cash and cash equivalents at beginning of year 18,331,374 18,750,652 18,452,138
------------ ------------ ------------
Cash and cash equivalents at end of year $ 26,800,339 $ 18,331,374 $ 18,750,652
============ ============ ============
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 2,630,000 $ 2,441,600 $ 1,573,500
Interest 5,865,880 6,267,812 6,789,002
Noncash investing and financing activities:
Transfer from loans to other real estate owned $ 70,997 $ 38,705 $ 2,268,051
</TABLE>
See notes to consolidated financial statements.
-45-
<PAGE> 46
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. THE BUSINESS OF THE COMPANY
Redding Bancorp ("Bancorp," and with its subsidiaries, the "Company"),
is a one-bank holding company registered under the Bank Holding Company
Act of 1956 ("BCHA"), as amended, and was incorporated in California on
January 21, 1982. 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"). Bancorp's wholly-owned
subsidiaries are Redding Bank of Commerce (the "Bank") and Redding
Service Corporation. The Bank is principally supervised and regulated by
the California Department of Financial Institutions ("DFI") and the
Federal Deposit Insurance Corporation ("FDIC"). Substantially all of the
Company's activities are carried out through the Bank. The Bank was
incorporated as a California banking corporation on November 25, 1981.
The Bank operates two full service branches in Redding, California and
two loan production offices located in Chico, California, and Roseville,
California.
The Bank 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, including checking, interest-bearing ("NOW") and savings
accounts, money market deposit accounts; commercial, real estate,
construction, personal, home improvement, automobile and other
installment and term loans; and travelers checks, safe deposit boxes,
collection services and electronic transfers. The primary focus of the
Bank is to provide services to the business and professional community
of its major market area, including Small Business Administration loans,
and payroll and accounting packages and billing programs. The Bank does
not offer trust services or international banking services and does not
plan to do so in the near future. Most of the Bank's customers are small
to medium sized businesses and individuals with medium to high net
worth. The Bank has also entered into an agreement to provide credit and
debit card processing services for merchants solicited by an independent
sales organization ("ISO") who accept credit and debit cards as payment
for goods and services. The Bank acts as a clearing bank for the ISO and
processes debit and credit card transactions into the VISA(R) or
MasterCard(R) system for presentment to the card issuer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, the Bank and Redding Service
Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation. Reclassifications of previously
reported amounts have been made to conform to the current year's
presentation.
-46-
<PAGE> 47
CASH EQUIVALENTS - Cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds sold are for a one-day
period.
INVESTMENT SECURITIES - At the time of purchase of an investment
security, the Bank designates the security as held-to-maturity or
available-for-sale, based on its investment objectives, operational
needs and intent to hold. The Bank does not engage in trading activity.
Investment securities held-to-maturity are carried at cost adjusted for
the accretion of discounts and amortization of premiums. The Company has
the ability and intent to hold these investment securities to maturity.
Securities available-for-sale may be sold to implement the Company's
asset/liability management strategies and in response to changes in
interest rates, prepayment rates and similar factors. Securities
available-for-sale are recorded at market value and unrealized gains or
losses, net of income taxes, are reported as accumulated other
comprehensive income, a separate component of stockholders' equity. Gain
or loss on sale of investment securities is based on the specific
identification method.
LOANS - Loans are stated at the principal amounts outstanding less
deferred loan fees and costs and the allowance for loan losses. Interest
on commercial, installment and real estate loans is accrued daily based
on the principal outstanding.
Loan origination and commitment fees and certain origination costs are
deferred and, if material, the net amount is amortized over the
contractual life of the loans as an adjustment of their yield.
A loan is impaired when management believes it is probable that the Bank
will not receive contractual payments of principal and interest.
Impairment is measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable market
price, or the fair value of collateral if the loan is collateral
dependent. Interest on impaired loans is recognized on a cash basis.
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.
LOANS HELD FOR SALE - The Bank has realized gains 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 or market value.
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.
-47-
<PAGE> 48
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.
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.
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.
EARNINGS PER SHARE - Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is
computed by dividing net income by the sum of the weighted-average
number of common shares outstanding for the period plus the dilutive
effect that could occur if the Company's outstanding stock options were
exercised and converted into common stock, net of estimated shares that
could be reacquired with proceeds from the exercise of such options. The
following table reconciles the numerator and denominator used in
computing both basic earnings per share and diluted earnings per share
for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS CALCULATION
Numerator (net income) $4,054,109 $3,657,695 $2,615,304
---------- ---------- ----------
Denominator (average common shares
outstanding) 2,685,603 2,698,530 2,701,416
---------- ---------- ----------
Basic EPS $ 1.51 $ 1.36 $ .97
========== ========== ==========
DILUTED EPS CALCULATION
Numerator (net income) $4,054,109 $3,657,695 $2,615,304
---------- ---------- ----------
Denominator:
Average common stock outstanding 2,685,603 2,698,530 2,701,416
Options 159,513 3,957 3,732
---------- ---------- ----------
2,845,116 2,702,487 2,705,148
---------- ---------- ----------
Diluted EPS $1.42 $1.35 $.97
===== ===== ====
</TABLE>
-48-
<PAGE> 49
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.
Gain recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale including the buyer's initial
and continuing investment, the degree of continuing involvement with the
property after the sale, and other matters. Under certain circumstances,
revenue recognition may be deferred until these criteria are met.
INCOME TAXES - The Company accounts for income taxes under the asset and
liability method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using 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.
STOCK OPTION PLAN - The Company accounts for its stock option plan under
the intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. As required by
SFAS No. 123, Accounting for Stock-Based Compensation, the Company
provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied.
COMPREHENSIVE INCOME - On 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 income 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 income by their nature in an annual financial
statement. Comprehensive income includes net income and other
comprehensive income. The Company's only source of other comprehensive
income is derived from unrealized gains and losses on investment
securities held-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 or losses 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
all prior periods have been reclassified to present comprehensive
income.
SEGMENT REPORTING - In 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 did not change the Company's consolidated financial position,
results of operations or cash flows. The Company has two reportable
segments: commercial banking and credit card services. Commercial
banking includes all services to the Company's customers except credit
card services. Credit card services are limited to those
-49-
<PAGE> 50
revenues, net of related data processing costs, associated with the
Bank's agreement to provide credit and debit card processing services
for merchants solicited by an ISO or the Bank who accept credit and
debit cards as payments for goods and services.
NEW ACCOUNTING PRONOUNCEMENTS - 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.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The average amount of these reserve balances for
the years ended December 31, 1998 and 1997 was approximately $1,328,000
and $1,126,000, respectively. In addition, the Bank maintains
compensating balances with the Federal Reserve Bank, which totaled
$25,000 and $2,338,000 at December 31, 1998 and 1997, respectively.
4. 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, 1998
--------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. agencies $ 14,508,756 87,144 -- $ 14,595,900
Obligations of state and political
subdivisions 5,854,775 103,015 -- 5,957,790
Corporate bonds, Commercial Paper
and Bankers Acceptances 3,964,402 668 (10) 3,965,060
------------ ------------ ------------ ------------
$ 24,327,933 $ 190,827 $ (10) $ 24,518,750
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ands
obligation 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, Commercial Paper
and Bankers Acceptances 8,044,204 71 (5,263) 8,039,012
------------ ------------ ------------ ------------
$ 55,537,714 $ 268,621 $ (25,409) $ 55,780,926
============ ============ ============ ============
</TABLE>
-50-
<PAGE> 51
The amortized cost and estimated market value of investment securities
held-to-maturity at December 31, 1998 and 1997 which have contractual
maturities of one to five years consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage backed securities $ 7,415,778 $ 169,794 $ (660) $ 7,584,912
Federal Home Loan Bank Stock 622,600 -- -- 622,600
----------- ----------- ----------- -----------
$ 8,038,378 $ 169,794 $ (660) $ 8,207,512
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage backed securities $ 9,037,300 $ 71,888 $ (27,706) $ 9,081,482
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities,
excluding FHLB stock, at December 31, 1998 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.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- ----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $17,133,535 $17,198,598 00,000 00,000
Due after one year through five years 6,562,741 6,658,326 $ 499,697 $ 505,500
Due after five years through ten years 631,657 661,826 6,916,081 7,079,412
----------- ----------- ----------- -----------
$24,327,933 $24,518,750 $ 7,415,778 $ 7,584,912
=========== =========== =========== ===========
</TABLE>
At December 31, 1998, the Bank has pledged $2,000,000 of investment
securities for treasury, tax and loan accounts, and $3,000,000 for
deposits of public funds.
Gross realized gains and gross realized losses on available-for-sale
securities were $96,020 and $3,192 in 1998, $15,555 and $10,748 in 1997,
and gross realized losses were $58,280 in 1996.
-51-
<PAGE> 52
5. LOANS
Outstanding loan balances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Commercial and financial loans $ 46,890,206 $ 41,432,703
Real estate - construction loans 29,469,989 16,393,009
Real estate - commercial 69,741,702 54,533,058
Installment loans 297,430 71,573
Other 2,225,006 1,273,615
------------ ------------
148,624,334 113,703,958
Less:
Deferred loan fees and costs 422,588 293,713
Allowance for loan losses 3,234,837 2,819,039
------------ ------------
$144,966,909 $110,591,206
============ ============
</TABLE>
Included in total loans are nonaccrual loans of approximately $941,668
and $499,563 at December 31, 1998 and 1997, respectively. If interest on
nonaccrual loans had been accrued, such income would have approximated
$45,565, $31,940, $120,399 during the years ended December 31, 1998,
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
$1,011,163 and $2,758,325 in impaired loans that had impairment
allowances of $575,455 and $861,484 as of December 31, 1998 and 1997,
respectively. The average outstanding balance of impaired loans were
$1,884,744, $2,728,928, and $3,232,000 for the years ended 1998, 1997
and 1996, respectively.
The Bank services, for others, loans and participations that are sold of
approximately $2,176,198 and $2,639,841 as of December 31, 1998 and
1997, 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 between the
fair value of the collateral, if any, and the outstanding balance of the
loan.
-52-
<PAGE> 53
Changes in the allowance for loan losses consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,819,039 $ 2,294,146 $ 2,053,259
Provision for loan losses 500,000 1,023,500 2,160,000
Loans charged off (208,823) (604,846) (1,990,490)
Recoveries of loans previously charged off 124,621 106,239 71,377
----------- ----------- -----------
Balance at end of year $ 3,234,837 $ 2,819,039 $ 2,294,146
=========== =========== ===========
</TABLE>
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------------
LIVES 1998 1997
---------- -----------
<S> <C> <C> <C>
Land $1,595,808 $1,595,808
Bank Building 31.5 years 3,673,847 3,673,847
Furniture, fixtures and equipment 3 - 7 years 2,398,764 2,316,767
---------- ----------
7,668,419 7,586,422
Less accumulated depreciation (2,120,346) (1,904,006)
----------- ----------
5,548,073 5,682,416
Construction in progress 55,666 159,963
---------- ----------
$5,603,739 $5,842,379
========== ==========
</TABLE>
Depreciation expense, included in net occupancy and equipment expense,
is $433,910, $405,597, and $460,495 for the years ended December 31,
1998, 1997 and 1996, respectively.
7. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash surrender value of life insurance
policies (note 14) $1,846,611 $1,761,490
Net deferred tax assets (note 10) 1,931,217 1,668,523
Accrued interest on loans 756,011 619,487
Accrued interest on investment securities 384,633 805,915
Other real estate owned 66,000 352,350
Other 1,172,408 88,411
---------- ----------
$6,156,880 $5,296,176
========== ==========
</TABLE>
-53-
<PAGE> 54
8. DEPOSITS
Time certificates of deposit of $100,000 or more totaled $42,275,241 and
$37,009,448 at December 31, 1998 and 1997, respectively. Interest
expense on such deposits was $1,878,254, $1,981,657, and $2,327,922
during 1998, 1997 and 1996, respectively.
At December 31, 1998, the scheduled maturities for time deposits are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1999 $81,230,919
2000 9,512,484
2001 2,154,678
2002 120,438
-----------
Total $93,018,519
===========
</TABLE>
9. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred compensation (note 14) $1,737,327 $1,347,415
Employee incentive payable 330,058 287,705
Accrued interest payable 270,986 251,005
Deferred tax liability (note 10) 380,191 421,100
Other 91,858 74,276
---------- ----------
$2,810,420 $2,381,501
========== ==========
</TABLE>
10. INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,210,611 $ 1,988,106 $ 1,210,464
State 518,666 504,585 359,379
----------- ----------- -----------
2,729,277 2,492,691 1,569,843
----------- ----------- -----------
Deferred:
Federal (230,754) (290,325) (59,748)
State (52,262) (72,625) (59,232)
----------- ----------- -----------
(283,016) (362,950) (118,980)
----------- ----------- -----------
$ 2,446,261 $ 2,129,741 $ 1,450,863
=========== =========== ===========
</TABLE>
-54-
<PAGE> 55
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
-------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense 34.00% 34.00% 34.00%
State franchise tax, net of Federal tax benefit 7.08 7.01 7.08
Tax-exempt interest (3.77) (4.37) (8.13)
Other .32 .16 2.73
----- ----- -----
37.63% 36.80% 35.68%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
State franchise taxes $ 72,298 $ 68,012
Deferred compensation 720,664 604,180
Loan loss reserves 1,049,002 996,331
Other 89,253 --
----------- -----------
Total deferred tax assets 1,931,217 1,668,523
----------- -----------
Deferred tax liabilities:
Depreciation (299,192) (305,087)
Unrealized securities gains (68,696) (89,283)
Deferred loan origination costs (12,303) (26,730)
----------- -----------
Total deferred tax liabilities (380,191) (421,100)
----------- -----------
Net deferred taxes $ 1,551,026 $ 1,247,423
=========== ===========
</TABLE>
-55-
<PAGE> 56
11. STOCK OPTION PLAN
On February 17, 1998, the Board of Directors adopted the 1998 Stock
Option Plan (the "Plan") which was approved by the Company's
stockholders on April 21, 1998. The Plan provides for awards in the form
of options (which may constitute incentive stock options ("Incentive
Options") under Section 422(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonstatuatory 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 stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the
Company to attract and retain key personnel and (c) linking key
personnel directly to stockholder interests through increased stock
ownership. A total of 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. At December 31, 1998, no shares
were exercisable and the remaining contractual life of all options
outstanding is 9 years.
The following table presents the changes in outstanding stock options
for the periods indicated:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- ---------
<S> <C> <C>
Options outstanding, December 31, 1997 and 1996 6,000 $ 3.67
Granted 411,000 $ 9.62
Exercised (6,000) $ 3.67
-------
Options outstanding, December 31, 1998 411,000 $ 9.62
=======
</TABLE>
The Company uses the intrinsic value based method for measuring
compensation cost related to the Plan. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date over the amount an employee must pay to
acquire the stock. This cost is amortized on a straight-line basis over
the vesting period of the options granted. Compensation cost recorded in
1998 related to the Plan was $130,000. Estimated compensation cost to be
recorded over the remaining vesting period of approximately four years
is $302,000.
The fair value of options granted during 1998 is estimated to be
$432,000, which is derived solely from options whose exercise price was
less than the market price of the stock on the grant date. 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%).
Under these assumptions, no additional compensation cost would be
accrued under this fair value based model than that computed under the
intrinsic value based method. Therefore, the pro forma disclosures are
not required.
-56-
<PAGE> 57
12. COMMON STOCK
On June 16, 1998, the Board of Directors declared a three-for-one stock
split of the Company's common stock effective for stockholders of record
on June 30, 1998. All share and per share data has been restated to give
effect to the stock split.
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 and retired
during the year ended December 31, 1997. Shares purchased are retired by
a charge to retained earnings for the cost.
13. PROFIT-SHARING PLAN
In 1985, the Bank adopted a profit-sharing 401(k) plan for eligible
employees to be funded out of the Bank's earnings. The employees'
contributions are limited to the maximum amount allowable under IRS
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 $31,892, $28,181, and $25,791 for the years ended December
31, 1998, 1997 and 1996, respectively. The Bank made a discretionary
contribution of $25,000 in 1997.
14. RELATED PARTY TRANSACTIONS
Certain directors and officers of the Bank and entities with which they
are associated are customers and have transactions with the Bank in the
ordinary course of business. All loans and commitments included in such
transactions are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than
normal risk of collectibility or present other unfavorable features. An
analysis of the activity in related party loans consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 474,776 $ 548,960
New loan additions 394,209 401,413
Principal repayments (411,871) (475,597)
--------- ---------
Balance at end of year $ 457,114 $ 474,776
========= =========
</TABLE>
During 1990, the Bank established deferred compensation plans with two
Bank officers providing for annual payments on retirement or death
benefits over fifteen year periods. One of the officers retired during
1997. The remaining officer's plan is funded through salary deferrals and
the cash surrender value of a life insurance policy acquired by the Bank.
Amounts deferred earn interest at the bank's reference rate, adjusted
annually, plus one percent.
-57-
<PAGE> 58
15. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of
business, the Bank enters into various types of transactions which
involve financial instruments with off-balance sheet risk. These
instruments include commitments to extend credit and stand-by letters of
credit which are not reflected in the accompanying consolidated balance
sheets. These transactions may involve, to varying degrees, credit and
interest rate risk in excess of the amount, if any, recognized in the
consolidated balance sheets. Management does not anticipate any loss to
result from these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and stand-by letters of credit.
The Bank applies the same credit standards to these contracts as it uses
for loans recorded on the balance sheet.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Off-balance sheet commitments:
Commitments to extend credit $34,820,097 $25,768,674
Standby letters of credit 1,262,852 1,573,700
</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.
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. In
addition to these capital guidelines, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) required each federal
banking agency to implement a regulatory framework for prompt corrective
actions for insured depository institutions that are not adequately
capitalized. The Board of Governors of the Federal Reserve System and
FDIC have adopted such a system which became effective on December 19,
1992. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the
Company's financial statements. The regulations require the Company to
meet specific capital adequacy guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
-58-
<PAGE> 59
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain a minimum leverage ratio of
Tier 1 capital (as defined in the regulations) to adjusted assets (as
defined), and minimum ratios of Tier 1 and total capital (as defined) to
risk-weighted assets (as defined). As of December 31, 1998 and 1997, the
most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION
----------------------- ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
COMPANY
Leverage capital (to average assets) $24,401,620 11.52% $ 8,472,262 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 24,401,620 15.17% 6,432,789 4.00 n/a n/a
Total capital (to risk-weighted assets) 26,411,867 16.42% 12,865,578 8.00 n/a n/a
BANK
Leverage capital (to average assets) $23,052,552 10.95% $ 8,419,323 4.00% $10,524,154 5.00%
Tier 1 Capital (to risk-weighted assets) 23,052,552 14.33% 6,432,789 4.00 12,628,985 6.00
Total capital (to risk-weighted assets) 25,062,799 15.58% 12,865,578 8.00 21,048,308 10.00
At December 31, 1997:
COMPANY
Leverage capital (to average assets) $21,670,657 10.78% $ 8,039,860 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 21,670,657 15.55% 5,576,418 4.00 n/a n/a
Total capital (to risk-weighted assets) 23,413,657 16.80% 11,152,837 8.00 n/a n/a
BANK
Leverage capital (to average assets) $20,783,322 10.41% $ 7,983,860 4.00% $ 9,979,825 5.00%
Tier 1 Capital (to risk-weighted assets) 20,783,322 14.91% 5,576,418 4.00 8,364,628 6.00
Total capital (to risk-weighted assets) 22,526,322 16.16% 11,152,837 8.00 13,941,046 10.00
</TABLE>
The principal source of cash for the Company are dividends from the
Bank. Dividends from the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings or the
Bank's net income for the latest three fiscal years, less dividends
previously declared during that period, or, with the approval of
California Superintendent of Banks, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal
year, or the net income of the Bank for its current fiscal year. As of
December 31, 1998 the maximum amounts available for dividend
distribution under this restriction were approximately $7,620,000.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates. In
particular, it is prohibited from lending to an affiliated company
unless the loans are secured by specific types of collateral. Such
secured loans and other advances from the subsidiaries are limited to 10
percent of the subsidiary's equity. No such loans or advances were
outstanding during 1998 or 1997.
-59-
<PAGE> 60
17. SEGMENT REPORTING
The Company has two reportable segments: commercial banking and credit
card services. The Company conducts a general commercial banking
business in the counties of Butte, El Dorado, Placer, Shasta, and
Sacramento, California. The principal commercial banking activities
include a full-array of deposit accounts and related services and
commercial lending for businesses and their interests. Credit card
services are limited to those revenues and data processing costs
associated with its agreement with an ISO, pursuant to which the Bank
provides credit and debit card processing services for merchants
solicited by the ISO or the Bank who accept credit and debit cards as
payments for goods and services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance of its commercial banking business based on the overall
profitability of the Company, including merchant card processing
activities. Credit card services are evaluated through analysis of
related net fee income and the number of active merchants in the
program. An allocation of the Company's total assets is not performed by
reportable segment. There are no intersegment transactions.
The following table presents the allocation of income before income
taxes to the Company's reportable segments:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Commercial banking $4,772,521 $4,009,865 $2,498,320
Credit card services 1,727,849 1,777,571 1,567,847
---------- ---------- ----------
Income before income taxes $6,500,370 $5,787,436 $4,066,167
========== ========== ==========
</TABLE>
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 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
-60-
<PAGE> 61
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.
-61-
<PAGE> 62
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 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 26,800,339 $ 26,800,339
============= =============
Investment securities $ 32,557,128 $ 32,726,262
============= =============
Loans:
Fixed rate:
Commercial and financial loans $ 15,203,244 $ 15,206,000
Real estate - construction loans 8,504,587 8,499,000
Real estate - commercial 28,710,641 29,257,000
Installment loans 297,430 299,000
Other 2,224,359 2,261,000
Total fixed rate 54,940,261 55,522,000
Variable rate 93,684,073 93,684,073
Less allowance for loan losses (3,234,837) (3,234,837)
Net deferred origination fees (422,588) (422,588)
------------- -------------
Net loans $ 144,966,909 $ 145,548,648
============= =============
Financial liabilities:
Deposits:
Demand and savings $ 95,602,179 $ 95,602,179
Fixed rate certificates 69,924,317 69,952,000
Variable certificates 23,094,202 23,094,202
------------- -------------
Total deposits $ 188,620,698 $ 188,648,381
============= =============
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
----------- -------- --------
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $34,820,097 -- 696,402
Standby letters of credit 1,262,852 -- 25,257
</TABLE>
-62-
<PAGE> 63
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 $ 8,145,000
Real estate - construction loans 7,140,442 7,126,000
Real estate - commercial 16,072,258 16,053,000
Installment loans 4,844 5,280
Other 90,674 90,674
------------- -------------
Total fixed rate 31,495,417 31,419,954
Variable rate 82,208,541 82,208,541
Less allowance for loan losses (2,819,039) (2,819,039)
Net deferred origination fees (293,713) (293,713)
------------- -------------
Net loans $ 110,591,206 $ 110,515,743
============= =============
Financial liabilities:
Deposits:
Demand and savings $ 93,771,773 $ 93,771,773
Fixed rate certificates 47,750,657 47,789,000
Variable certificates 39,150,845 39,150,845
------------- -------------
Total deposits $ 180,673,275 $ 180,711,618
============= =============
</TABLE>
<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>
-63-
<PAGE> 64
19. REDDING BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE
SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
BALANCE SHEETS
Assets:
Cash $ 159,894 $ 532,636
Time deposit with subsidiary 1,090,000 190,000
Investment in subsidiaries 23,331,401 21,069,630
Other assets 72,582 32,319
----------- -----------
Total assets $24,653,877 $21,824,585
=========== ===========
Stockholders' Equity $24,653,877 21,824,585
----------- -----------
Total liabilities and stockholders' equity $24,653,877 $21,824,585
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on time deposit $ 13,719 $ 8,531 $ 9,592
Dividend from subsidiary 2,000,000 1,600,000 675,354
----------- ----------- -----------
2,013,719 1,608,531 684,946
Expenses 278,935 17,984 16,862
----------- ----------- -----------
Income before income taxes and net
equity in undistributed net income
of subsidiaries 1,734,784 1,590,547 668,084
Benefit (provision) for income taxes 57,554 (800) (800)
----------- ----------- -----------
Income before equity in undistributed
net income of subsidiaries 1,792,338 1,589,747 667,284
Equity in undistributed net income of
subsidiaries 2,261,771 2,067,947 1,948,020
----------- ----------- -----------
Net income $ 4,054,109 $ 3,657,694 $ 2,615,304
=========== =========== ===========
</TABLE>
-64-
<PAGE> 65
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Operating activities:
Net income $4,054,109 $3,657,694 2,615,304
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred taxes 58,066 104 (696)
Equity in undistributed net income of
subsidiaries (2,261,771) (2,067,947) (1,948,020)
---------- ---------- ----------
Net cash provided by operating activities 1,850,404 1,589,851 666,588
--------- ---------- ---------
Financing activities:
Common stock transactions 22,000 (174,458) (23,000)
Cash dividends (1,345,146) (900,472) (675,354)
---------- ---------- ---------
Net cash used by financing activities (1,323,146) (1,074,930) (698,354)
---------- ---------- ---------
Decrease in cash and cash equivalents 527,258 514,921 (31,766)
Cash and cash equivalents at
beginning of year 722,636 207,715 239,481
---------- ---------- ---------
Cash and cash equivalents at end of year $1,249,894 $722,636 $207,715
========== ========== =========
</TABLE>
.65-
<PAGE> 66
ITEM 9. 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.
PART III
Certain information required by Part III is incorporated by reference to
the Company's definitive Proxy Statement filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Company's 1999
Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 1,
1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Russell L. Duclos........................... 59 President, Chief Executive Officer and
Director
Linda J. Miles.............................. 45 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Michael C. Mayer............................ 42 Executive Vice President and Chief Credit
Officer
</TABLE>
Russell L. Duclos has served as President, Chief Executive Officer and a
director of the Company since July 1997. From 1982 to July 1997, he served as
Chief Credit Officer of the Company. Mr. Duclos presently serves on the
executive, loan, marketing and long range planning committees of the Board of
Directors.
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.
Michael C. Mayer joined the Company in April 1997 and has served as
Executive Vice President and Chief Credit Officer of the Company since July
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.
-66-
<PAGE> 67
The remainder of the information required by this section is
incorporated by reference to the information in the section entitled "Election
of Directors--Directors and Nominees for Directors" in the Proxy Statement. The
required information concerning executive officers of the Company is contained
in the section entitled "Executive Officers of the Registrant" in Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this section is incorporated by reference to
the information in the sections entitled "Election of Directors--Directors'
Compensation" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is incorporated by reference to
the information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal shareholders of the
Company and their associates were customers of and had banking transactions with
the Bank in the ordinary course of the Bank's business during 1998 and the Bank
expects to have such transactions in the future. All loans and commitments to
loans included in such transactions were made in compliance with the applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
of similar creditworthiness, and in the opinion of the Company, did not involve
more than a normal risk of collectibility or present other unfavorable features.
-67-
<PAGE> 68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial
Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
3.1 Articles of Incorporation, as amended.*
3.2 Bylaws, as amended.*
4.1 Specimen Common Stock Certificate.*
10.1 Office Building Lease by and between David and Maria
Wong and Redding Bank of Commerce dated June 10, 1998.*
10.2 Office Building Lease between Garian Partnership/First
Avenue Square and Redding Bank of Commerce dated July
16, 1998.*
10.3 1998 Stock Option Plan.*
10.4 Form of Incentive Stock Option Agreement used in
connection with 1998 Stock Option Plan.*
10.5 Form of Nonstatutory Stock Option Agreement used in
connection with 1998 Stock Option Plan.*
10.6 Employment Agreement between the Company and Russell L.
Duclos dated June 17, 1997.*
10.7 Directors Deferred Compensation Plan.*
10.8 Form of Deferred Compensation Agreement Used In
Connection With Directors Deferred Compensation Plan.*
10.9 Merchant Services Agreement dated as of April 1, 1993,
between Cardservice International, Inc. and Redding Bank
of Commerce, as amended.*
11.1 Statement re: Computation of Earnings Per Share (see
page 48).*
16.1 Letter on Change in Certifying Accountants.*
21.1 Subsidiaries of the Company.*
23.1 Consent of KPMG LLP.
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see page 69).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Filed with the Company's Registration Statement on Form
10.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during the
quarter ended December 31, 1998.
-68-
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 16, 1999.
REDDING BANCORP
By /s/ Russell L. Duclos
--------------------------------------
Russell L. Duclos
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Russell L. Duclos and Linda J. Miles, and
each of them, his or her true and lawful attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Russell L. Duclos President, Chief Executive Officer and March 16, 1999
- --------------------------- Director (Principal Executive Officer)
Russell L. Duclos
/s/ Linda J. Miles Executive Vice President and Chief March 16, 1999
- --------------------------- Financial Officer and Assistant
Linda J. Miles Secretary (Principal Financial Officer
and Accounting Officer)
/s/ Robert C. Anderson Chairman of the Board March 16, 1999
- ---------------------------
Robert C. Anderson
/s/ Welton L. Carrel Director March 16, 1999
- ---------------------------
Welton L. Carrel
/s/ John C. Fitzpatrick Director March 29, 1999
- ---------------------------
John C. Fitzpatrick
</TABLE>
-69-
<PAGE> 70
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Kenneth R. Gifford, Jr. Director March 16, 1999
- ---------------------------
Kenneth R. Gifford, Jr.
/s/ Harry L. Grashoff, Jr. Director March 16, 1999
- ---------------------------
Harry L. Grashoff, Jr.
/s/ Richard W. Green Director March 16, 1999
- ---------------------------
Richard W. Green
/s/ Charles E. Metro Director March 16, 1999
- ---------------------------
Charles E. Metro
/s/ Eugene L. Nichols Director March 16, 1999
- ---------------------------
Eugene L. Nichols
/s/ David H. Scott Director March 16, 1999
- ---------------------------
David H. Scott
</TABLE>
-70-
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
3.1 Articles of Incorporation, as amended.*
3.2 Bylaws, as amended.*
4.1 Specimen Common Stock Certificate.*
10.1 Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998.*
10.2 Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998.*
10.3 1998 Stock Option Plan.*
10.4 Form of Incentive Stock Option Agreement used in connection with
1998 Stock Option Plan.*
10.5 Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan.*
10.6 Employment Agreement between the Company and Russell L. Duclos
dated June 17, 1997.*
10.7 Directors Deferred Compensation Plan.*
10.8 Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan.*
10.9 Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as
amended.*
11.1 Statement re: Computation of Earnings Per Share (see page 48).*
16.1 Letter on Change in Certifying Accountants.*
21.1 Subsidiaries of the Company.*
23.1 Consent of KPMG LLP.
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see page 69).
27.1 Financial Data Schedule.
</TABLE>
- ------------------
* Filed with the Company's Registration Statement on Form 10.
-71-
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Redding Bancorp and subsidiaries
We consent to incorporation by reference in the registration statement dated
February 3, 1999 on Form S-8 of Redding Bancorp and subsidiaries of our report
dated January 21, 1998, except as to the first paragraph of note 12, which is
as of June 16, 1998, relating to the consolidated balance sheet of Redding
Bancorp and subsidiary as of December 31, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1997 and 1996, which report appears in the December 31, 1998
annual report on Form 10-K of Redding Bancorp.
Sacramento, California
March 24, 1999
<PAGE> 1
Deloitte & Touche LLP EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-71683 on Form S-8 of Redding Bancorp of our report dated January 22, 1999,
appearing in this Annual Report on Form 10-K of Redding Bancorp for the year
ended December 31, 1998.
DELOITTE & TOUCHE LLP
Sacramento, California
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 INCLUDED IN
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 10,010 11,431
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 16,790 6,900
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 24,519 55,781
<INVESTMENTS-CARRYING> 8,038 9,037
<INVESTMENTS-MARKET> 8,208 9,081
<LOANS> 148,202 113,410
<ALLOWANCE> 3,235 2,819
<TOTAL-ASSETS> 216,085 204,820
<DEPOSITS> 188,621 180,673
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 2,810 2,322
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 4,714 4,562
<OTHER-SE> 19,940 17,263
<TOTAL-LIABILITIES-AND-EQUITY> 216,085 204,820
<INTEREST-LOAN> 13,031 11,519
<INTEREST-INVEST> 2,673 3,301
<INTEREST-OTHER> 618 944
<INTEREST-TOTAL> 16,322 15,764
<INTEREST-DEPOSIT> 5,886 6,334
<INTEREST-EXPENSE> 5,886 6,334
<INTEREST-INCOME-NET> 10,436 9,430
<LOAN-LOSSES> 500 1,023
<SECURITIES-GAINS> 93 5
<EXPENSE-OTHER> 5,975 4,983
<INCOME-PRETAX> 6,500 5,787
<INCOME-PRE-EXTRAORDINARY> 6,500 5,787
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,054 3,658
<EPS-PRIMARY> 1.51 1.36
<EPS-DILUTED> 1.42 1.35
<YIELD-ACTUAL> 5.57 5.20
<LOANS-NON> 942 500
<LOANS-PAST> 46 173
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,819 2,294
<CHARGE-OFFS> 209 605
<RECOVERIES> 125 106
<ALLOWANCE-CLOSE> 3,235 2,819
<ALLOWANCE-DOMESTIC> 3,235 2,819
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
