<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
<TABLE>
<S> <C>
CALIFORNIA 94-2823865
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1951 CHURN CREEK ROAD
REDDING, CALIFORNIA 96002
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (530) 224-3333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date. September 30, 2000: 2,614,851
<PAGE> 2
REDDING BANCORP & SUBSIDIARIES
INDEX TO FORM 10-Q
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. Financial Information Page:
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999 ...................3
Consolidated Condensed Statements of Income (Unaudited)
Three and nine months ended September 30. 2000 and 1999.................4
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2000 and 1999...........................5
Notes to Consolidated Condensed Financial Statements.....................6
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations.............9
Item 3. Quantitative and Qualitative Disclosure about Market Risk........18
PART II. Other Information
Item 1. Legal proceedings................................................20
Item 2. Changes in Securities and use of proceeds........................20
Item 3. Defaults Upon Senior Securities..................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
Item 5. Other Information................................................20
Item 6. Exhibits and Report on Form 8-K..................................20
SIGNATURES.......................................................................21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets:
Cash & Due From Banks $ 11,438 $ 11,605
Federal Funds Sold 23,180 7,560
--------- ---------
Cash and cash equivalents 34,618 19,165
Investment Securities:
Available for sale (amortized cost
$19,865 in 2000 and $25,767 in 1999) 19,676 25,375
Held to maturity (market value of $5,513
in 2000 and $6,722 in 1999) 5,613 6,769
--------- ---------
25,289 32,144
Loans:
Real Estate - Construction 34,492 37,859
Real Estate - Commercial 88,124 78,842
Commercial & Financial 61,347 53,383
Installment Loans 430 294
Other Loans 2,973 2,812
--------- ---------
Total Loans 187,366 173,190
Deferred loan fees (240) (372)
Less allowance for loan losses (3,083) (2,972)
--------- ----------
Net Loans 184,043 169,846
Premise & Equipment 5,346 5,474
Other Assets 6,974 5,890
--------- ---------
Total Assets $ 256,270 $ 232,519
========= =========
Liabilities:
Demand Accounts $ 39,860 $ 40,381
NOW & Money Market 46,670 43,176
Savings Accounts 14,238 11,577
Time Accounts 118,853 103,189
--------- ---------
Total Deposits 219,621 198,323
Borrowed Funds 4,189 4,800
Other Liabilities 3,492 3,337
--------- ---------
Total Liabilities 227,302 206,460
Stockholders' Equity:
Common Stock 5,169 4,809
Retained Earnings 23,919 21,491
Accumulated other comprehensive income (120) (241)
--------- ---------
28,968 26,059
--------- ---------
Total Liabilities &
Stockholders' Equity $ 256,270 $ 232,519
========= =========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
3
<PAGE> 4
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest & Fees on Loans $ 4,483 $ 3,734 $ 13,023 $ 10,641
Interest on Investments 346 551 1,129 1,588
Interest on Federal Funds Sold 324 117 690 428
-------- -------- -------- --------
Total Interest income 5,153 4,402 14,842 12,657
-------- -------- -------- --------
Interest Expense:
Interest on Checking 319 180 763 525
Interest on Savings 111 82 320 263
Interest on Time Deposits 1,813 1,391 4,993 3,810
Interest on Borrowed Funds 81 47 240 47
-------- -------- -------- --------
Total Interest Expense 2,324 1,700 6,316 4,645
-------- -------- -------- --------
Net Interest Income 2,829 2,702 8,526 8,012
Provision for Loan Losses 0 10 56 50
-------- -------- -------- --------
Net Interest Income After Provision
for loan losses 2,829 2,692 8,470 7,962
-------- -------- -------- --------
Non-Interest Income:
Service Charges 56 55 166 200
Credit Card Income, net 482 510 1,406 1,396
Other Income 171 132 535 473
Gain (Loss) sale of Loans 21 0 73 77
Gain (Loss) on sale of Investment
securities available for sale 0 0 (59) 0
-------- -------- -------- --------
Total Other Income: 730 697 2,121 2,146
-------- -------- -------- --------
Non-Interest Expense:
Salaries & Benefits 972 1,030 2,794 2,885
Occupancy & Equipment 246 238 735 686
Data Processing & Other Professional 126 127 394 426
Other Expense 295 99 908 923
-------- -------- -------- --------
Total Other Expense 1,639 1,494 4,831 4,920
-------- -------- -------- --------
Income before Income Taxes 1,920 1,895 5,760 5,188
Provision for Income Tax 695 738 2,130 1,998
-------- -------- -------- --------
Net Income $ 1,225 $ 1,157 $ 3,630 $ 3,190
======== ======== ======== ========
Net income per Share- Basic* $ 0.43 $ 0.40 $ 1.26 $ 1.09
Weighted Average Shares 2,877 2,911 2,883 2,933
Net income per Share- Diluted* $ 0.41 $ 0.37 $ 1.19 $ 1.01
Weighted Average Shares 3,005 3,148 3,038 3,152
</TABLE>
* All share and per share amounts are restated to vie retroactive effect to
the 10% stock dividend. (See Note 1)
See notes to unaudited consolidated condensed financial statements.
4
<PAGE> 5
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,630 $ 3,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 56 50
Provision for depreciation 383 347
Compensation associated with stock options 50 50
Amortization of investment premiums and
accretion of discounts, net 175 (30)
Loss on sale of available for sale investment
securities 59 0
(Gain) loss on sale of loans (111) (120)
Proceeds from sales of loans 4,745 4,017
Loans originated for sale (4,856) (4,137)
(Increase) Decrease in other assets (1,084) 714
(Decrease) Increase in deferred loan fees (132) (69)
Increase (Decrease) in other liabilities 156 353
-------- --------
Net cash provided by operating activities 3,071 4,365
-------- --------
Cash flows from investing activities:
Proceeds from maturities of available for sale
investment securities 4,273 18,623
Proceeds from sale of available for sale investment
securities 4,420 4,516
Purchases of available for sale investment securities (1,952) (33,046)
Loan origination's, net of principal repayments (13,898) (19,784)
Purchases of premises and equipment (267) (287)
Proceeds from sales of equipment 12 16
-------- --------
Net cash provided (used) by investing activities (7,412) (29,962)
-------- --------
Cash flows from financing activities:
Net change in deposits and borrowings 20,687 21,517
Cash dividends
Common stock repurchase transactions (1,202) (1,081)
Common stock options exercised 309 3
-------- --------
Net cash provided by financing activities 19,794 20,439
-------- --------
Net increase (decrease) in cash and cash equivalents 15,453 (5,158)
Cash and cash equivalents at beginning of year 19,165 26,800
-------- --------
Cash and cash equivalents at end of period $ 34,618 $ 21,642
======== ========
Supplemental disclosures:
Cash paid during the period for
Income taxes 2,124 2,498
Interest 6,242 4,551
Non-cash Financing Activities
Dividends declared not paid 1,700 1,593
</TABLE>
See notes to unaudited consolidated condensed financial statements.
5
<PAGE> 6
REDDING BANCORP & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements should be
read in conjunction with the financial statements and related notes contained in
Redding Bancorp's 1999 Annual Report to Shareholders. The statements include the
accounts of Redding Bancorp ("the Company"), and its wholly owned subsidiaries,
Redding Bank of Commerce ("the Bank") and Redding Service Corporation. All
significant inter-company balances and transactions have been eliminated. The
financial information contained in this report reflects all adjustments that in
the opinion of management are necessary for a fair presentation of the results
of the interim periods. All such adjustments are of a normal recurring nature.
The results of operations and cash flows for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and repurchase agreements.
Federal funds sold and repurchase agreements are generally for one day periods.
On September 19, 2000, the Board of Directors declared a cash divided of .65
cents per share and a 10% stock dividend on the Company's Common Stock. Both the
cash and stock dividend will be paid on October 23, 2000 to shareholders of
record as of October 1, 2000. All share and per share amounts have been restated
to give retroactive effect to the 10% stock dividend.
2. NET INCOME PER SHARE
Basic net income per share excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. The following table displays the
computation of net income per share for the three and nine months ended
September 30, 2000 and 1999. All share and per share amounts have been restated
to give retroactive effect to the 10% stock dividend.
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share data) Three Months Ended Nine Months Ended
----------------------------------------------------------------------------------------------------
Basic EPS Calculation: Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator (net income) $1,225 $1,157 $ 3,630 $ 3,190
Denominator (average common
shares outstanding) 2,877 2,911 2,883 2,933
Basic net income per Share $ 0.43 $ 0.40 $1.26 $1.09
Diluted EPS Calculation:
Numerator (net income) $1,225 $ 1,157 $ 3,630 $3,190
Denominator:
Average common shares
outstanding 2,877 2,911 2,883 2,933
Options 128 237 155 219
------- ------ ------- ------
3,005 3,148 3,038 3,152
Diluted net income per Share $ 0.41 $ 0.37 $1.19 $ 1.01
</TABLE>
6
<PAGE> 7
3. COMPREHENSIVE INCOME
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------------------
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income as reported $ 1,225 $ 1,157 $3,630 $ 3,190
Other comprehensive income
(net of tax):
Change in unrealized holding
Gain (loss) on available for
sale securities 82 (118) 84 (419)
Reclassification adjustment 0 0 37 0
------- ------- ------ -------
Total comprehensive income $ 1,307 $ 1,039 $3,509 $ 2,771
</TABLE>
4. SEGMENT REPORTING
The Company has two reportable segments: commercial banking and credit
card services. The Company conducts a general commercial banking business in the
counties of El Dorado, Placer, Shasta, and Sacramento, California. The principal
commercial banking activities include a full-array of deposit accounts and
related services and commercial lending for businesses and their interests.
Credit card services are limited to those revenues and data processing costs
associated with its agreement with an Independent Sales Organization (ISO),
pursuant to 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 following table presents financial information about the Company's
reportable segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------------------
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Banking $ 1,438 $1,385 $ 4,354 $ 3,792
Credit card services 482 510 1,406 1,396
------- ------- ------- -------
$ 1,920 $ 1,895 $5,760 $ 5,188
</TABLE>
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. During the course of negotiations
the Company has determined that the continuation of the contract will be at
substantially reduced revenues. CSI and the Company have come to an agreement on
renewal terms of the contract. The pricing of the contract renewal is 2 basis
points of transaction processing and one-half of the earnings on the deposit
relationship. The contract renewal represents a significant decline in revenues
from merchant credit card processing .
Refer to management's discussion and analysis of financial condition and results
of operations.
7
<PAGE> 8
6. 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 effective date for the statement has been postponed
until the year 2001. The Company is in the process of determining the impact of
SFAS No. 133 on the Company's financial statements.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR
STATEMENT.
This quarterly report on Form 10-Q includes forward-looking information, which
is subject to the "safe harbor" created by the Securities Act of 1933, and
Securities Act of 1934. These forward-looking statements (which involve the
Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
o Competitive pressure in the banking industry and changes in the regulatory
environment.
o Changes in the interest rate environment and volatility of rate sensitive
deposits.
o The health of the economy declines nationally or regionally which could
reduce the demand for loans or reduce the value of real estate collateral
securing most of the Company's loans.
o Credit quality deteriorates which could cause an increase in the provision
for loan losses.
o Losses in the Company's merchant credit card processing business. ~ Loss
of the merchant credit card processing business.
o Asset/Liability matching risks and liquidity risks.
o Changes in the securities markets.
For additional information concerning risks and uncertainties related to the
Company and its operations please refer to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 under the heading "Risk factors that
may affect results". Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 1999
to September 30, 2000. Also discussed are significant trends and changes in the
Company's results of operations for the three and nine months ended September
30, 2000, compared to the same period in 1999. The consolidated financial
statements and related notes appearing elsewhere in this report are condensed
and unaudited.
GENERAL
Redding Bancorp ("The Company") is a financial services holding
company ("FHC") with its principal offices in Redding, California. A financial
services holding company may engage in a commercial banking, insurance,
securities business and offer other financial products to consumers. The Company
received notification from the Federal Reserve Board approving the election to
change to a financial holding company on April 22, 2000. The election to change
to a financial holding company has had no impact to date on the operations of
the Company. The Company engages in a general commercial banking business in
Redding and the counties of El Dorado, Placer, Shasta, and Sacramento,
California. The Company considers Northern California to be the Company's major
market area. The Company conducts its business through the Redding Bank of
Commerce ("The Bank"), its principal subsidiary. The services offered by the
Company include those traditionally offered by commercial banks of similar size
and character in California, such as checking, interest-bearing checking ("NOW")
and savings accounts, money market deposit accounts, commercial, construction,
real estate, personal, home improvement, automobile and other installment and
term loans, travelers checks, safe deposit boxes, collection services, telephone
and internet banking.
9
<PAGE> 10
The primary focus of the Company is to provide financial services to the
business and professional community of its major market area including Small
Business Administration ("SBA") loans, commercial building financing, payroll
and benefit accounting packages and merchant credit card acquisition. The
Company does not offer trust services or international banking services and does
not plan to do so in the near future.
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA") which
became effective on March 11, 2000. The FSA repeals provisions of the
Glass-Steagall Act, which had prohibited commercial banks and securities firms
from affiliating with each other and engaging in each other's businesses. Thus,
many of the barriers prohibiting affiliations between commercial banks and
securities firms have been eliminated.
The BHCA is also amended by the FSA, to allow new "financial holding
companies" ("FHC") to offer banking, insurance, securities and other financial
products to consumers. Specifically, the FSA amends section 4 of the BHCA in
order to provide for a framework for the engagement in new financial activities.
Bank holding companies ("BHC") may elect to become a financial holding company
if all its subsidiary depository institutions are well-capitalized and
well-managed. If these requirements are met, a BHC may file a certification to
that effect with the Federal Reserve Bank and declare that it chooses to become
a FHC. After the certification and declaration is filed, the FHC may engage
either de novo or though an acquisition in any activity that has been determined
by the FRB to be financial in nature or incidental to such financial activity.
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.
In April 1993, the Bank entered into an agreement (the "Merchant Services
Agreement") with Cardservice International, Inc. ("CSI"), an independent sales
organization ("ISO") and nonbank merchant credit card processor, pursuant to
which the Bank has agreed to provide credit and debit card processing services
for merchants solicited by CSI who accept credit and debit cards as payment for
goods and services. Pursuant to the Merchant Services Agreement, the Bank acts
as a clearing bank for CSI and processes credit or debit card transactions into
the Visa(R) or MasterCard(R) system for presentment to the card issuer. As a
result of the Merchant Services Agreement, the Bank has acquired electronic
credit and debit card processing relationships with merchants in various
industries on a nationwide basis. The Merchant Services Agreement with CSI was
renewed in 1997 for a period of four years, which expires on April 1, 2001. CSI
and the Company have recently reached an agreement on the renewal of the
contract. Effective April 1, 2001, pricing of the contract renewal is 2 basis
points of transaction processing and one-half of the earnings on the deposit
relationship. The current pricing of the contract in effect is 135 basis points
of transaction processing and the full earnings on the deposit relationship. The
contract renewal represents a significant decline in revenues from merchant
credit card processing. If the new pricing had been in effect for the nine
months ended September 30, 2000, revenue would have been $960,000 less than the
actual amount recorded of $1,247,000. The Company is pursuing various strategies
to offset the decline in revenues, including expansion of the Roseville Banking
Center, enhancing the merchant credit card sales team in the Roseville and
Redding markets, and projecting aggressive growth in the loan markets.
Merchant bankcard processing services are highly regulated by credit card
associations such as Visa. In order to participate in the credit card program,
Redding Bank of Commerce must comply with the credit card association's rules
and regulations that may change from time to time. During November 1999, Visa
adopted several rule changes to reduce the risk profile in high-risk acquiring
programs and these rule changes affect the Bank's Merchant Services business
segment. These changes include a requirement that an acquiring processor's
reported fraud ratios be no greater than three times the national average.
10
<PAGE> 11
Redding Bank of Commerce's overall fraud ratio was below the Visa
requirement. Other Visa changes announced included the requirement that total
processing volume in certain high-risk categories (as defined by Visa) be less
than 20% of total processing volume.
At September 30, 2000 the Bank's total Visa transactions within these
certain high-risk categories were 18% of Visa total processing volume. Although
these merchants are categorized as high-risk, precautions have been taken such
as requiring higher deposit reserves, daily monitoring and aggressive fraud
control, and to date has not seen extraordinary losses in these categories.
Additionally Visa announced a requirement that weekly average Visa volumes
be less than 60% of an institutions tangible equity capital, and a requirement
that the aggregate charge-backs for the previous six months be less than 5% of
the institutions tangible equity capital. Previous guidelines allowed the weekly
average Visa volumes to be four times equity capital.
At September 30, 2000 the Bank's average weekly Visa volume was 85% of
tangible equity capital, slightly above the prior guidelines, and aggregate
charge-backs for the previous six months were 11% of tangible equity capital. A
written plan has been submitted and approved by Visa to allow for attrition to
bring the processing volumes into line with the new guidelines.
Participants in the merchant bankcard acquiring program, such as the Bank,
must comply with these new Visa rules by filing a compliance plan with Visa by
February 12, 2000. The Bank met the deadline of February 12, 2000, and Visa has
accepted the plan to gradually reduce the concentration of high-risk merchant
processing.
CHANGES IN FINANCIAL CONDITION
Assets at the nine months ended September 30, 2000 totaled $256 million, a
$24 million or 10.2% increase over total assets at December 31, 1999. The growth
is centered in the loan portfolio, totaling $187 million at September 30, 2000
compared to $173 million at December 31, 1999, an 8.2% increase. The growth has
been funded in part by an increase in time deposits of 15.2% over December 31,
1999, and maturities of investment securities.
During the nine-month period ended September 30, 2000, deposits increased
$21 million or 10.1% to $219 million compared with $198 million at December 31,
1999. The increase in deposits is a result of increases in time deposits,
savings deposits and money market accounts partially offset by a decrease in
demand deposits. The increase in deposits is attributable to the full service
conversion of the Roseville Banking Center, and internal growth in the Redding
market. During the same period, total loans increased $14 million or 8.2%
compared with $173 million at December 31, 1999. The increase in loans is
primarily the result of increases in the commercial real estate portfolio, and
to a lesser degree in the commercial portfolio. The increases were partially
offset by decreases in the construction real estate portfolio.
Total Investment securities decreased $7 million or 21.3% to $25 million
at September 30, 2000 compared with $32 million at December 31, 1999, and
federal funds sold increased $16 million or 207% to $23 million at September 30,
2000 compared with $7 million at December 31, 1999. The decrease in investment
securities was the result of increased loan demand. The increase in federal
funds sold was the result of a planned build-up of federal funds for liquidity
purposes to assist in the growth of the Roseville Banking Center.
EARNINGS RESULTS
The Company reported earnings of $1,225,000 for the three months ended
September 30, 2000 ($0.41 per share diluted) compared to $1,157,000 ($0.37 per
share diluted) for the same period in 1999, representing an increase of 5.9%.
Earnings for the nine months ended September 30, 2000, was $3,630,000 ($1.19 per
share, diluted), compared to $3,190,000 ($1.01 per share, diluted) for the nine
months ended September 30, 1999.
Factors contributing to the increase in operating results include an
increase in the volume of earning assets, coupled with a decrease in other
non-interest expense, and partially offset by an increase in the cost of
funding.
11
<PAGE> 12
NET INTEREST INCOME
Net interest income is the primary source of income for the Bank. Net
interest income represents the excess of interest and fees earned on
interest-earning assets (loans, investments and Federal Funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. For the
three months ended September 30, 2000, interest income increased $751,000
(17.1%) over the same period in 1999. Interest expense on deposit accounts and
borrowings increased $624,000 (36.7%) over the same three-month period in 1999.
For the nine months ended September 30, 2000, interest income increased
$2,185,000 or 17.3% over the same nine-month period in 1999. For the nine months
ended September 30, 2000, interest expense on deposit accounts and borrowings
increased $1,671,000 or 36% over the same period in 1999.
The combined effect of the increase in volume of earning assets and
increase in yield on earning assets, coupled with increases in cost of funding
sources resulted in an increase of $514,000 (6.4%) in net interest income for
the nine month period ended September 30, 2000 over the same period in 1999. Net
interest margin decreased 03 basis points to 5.11% from 5.14% for the same
period a year ago. The net interest margin decrease is attributed to an
increased cost of funding where the average cost of funding has increased to
4.79% from 4.01% a year ago. The higher costs are primarily related to the
growth in higher yielding time certificates of deposit.
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. Tax-exempt investment yields have not been adjusted to a
tax-equivalent yield basis.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30, 2000 Sept 30, 1999
-------------------------- ------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Portfolio Loans $180,256 $ 13,023 9.63% $156,332 $10,641 9.08%
Tax Exempt Securities 3,271 108 4.40% 5,704 184 4.30%
US Government 23,154 978 5.63% 30,942 1,309 5.64%
Federal Funds Sold 15,096 690 6.09% 12,553 428 4.55%
Other Securities 540 43 10.62% 2,308 95 5.49%
-------- -------- ----- -------- -------- ----
Average Earning Assets $222,317 $ 14,842 8.90% $ 207,839 $ 12,657 8.12%
======== ========
Cash & Due From Banks $ 10,539 $ 10,249
Bank Premises 5,625
5,427
Allowance for Loan Losses (3,007) (3,248)
Other Assets 4,967 4,864
-------- --------
Average Total Assets $240,243 $225,329
======== ========
</TABLE>
12
<PAGE> 13
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
Sept 30, 2000 Sept 30, 1999
------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Liabilities
Demand Interest Bearing $ 40,764 $ 763 2.50% $ 40,830 $ 525 1.71%
Savings Deposits 13,654 320 3.12% 12,919 263 2.71%
Certificates of Deposit 116,649 4,993 5.71% 99,567 3,810 5.10%
Borrowings
4,755 240 6.73% 1,318 47 4.75%
-------- ------- ---- -------- ------- ----
175,822 $ 6,316 4.79% 154,634 4,645 4.01%
------- -------
Non interest Demand 36,314 43,540
Other Liabilities 1,164 2,188
Shareholder Equity 26,943 24,967
-------- --------
Average Liabilities and
Shareholders Equity $240,243 $225,329
======== ========
Net Income and Net Interest
Margin $ 8,526 5.11% $ 8,012 5.14%
======= =======
</TABLE>
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>
Nine months ended Nine months ended
Sept 30, 2000 over Sept 30, 1999
Volume Rate Total
-------- ------ -------
<S> <C> <C> <C>
Increase(Decrease) In
Interest Income
Portfolio loans $ 1,728 $ 654 $ 2,382
Tax exempt securities (80) 4 (76)
US Government securities (329) (2) (331)
Federal Funds Sold 116 146 262
Other Securities (141) 89 (52)
------- ------ -------
Total Increase $ 1,294 $ 891 $ 2,185
======= ====== =======
Increase (Decrease) In
Interest Expense
Interest Bearing Demand $ (1) $ 239 $ 238
Savings Deposits 17 40 57
Certificates of Deposit 731 452 1,183
Borrowings 173 20 193
------- ------ -------
Total Increase $ 920 $ 751 $ 1,671
======= ====== =======
Net Increase $ 374 $ 140 $ 514
======= ====== =======
</TABLE>
13
<PAGE> 14
NON-INTEREST INCOME
The Company's noninterest income consists of processing fees for merchants
who accept credit card payments for goods and services, service charges on
deposit accounts, and other service fees.
For the three months ended September 30, 2000, noninterest income
increased $33,000 over the same period in 1999. Credit card processing income
decreased $28,000 (5.5%) while other income increased $60,000 (45%) over the
same period in 1999. For the nine months ended September 30, 2000, noninterest
income decreased $25,000 (1.2%) over the same period in 1999. Service charges
decreased $34,000 (17%) over the same period in 1999, partially offset by
increases in credit card income of $10,000 (.7%) and other income of $58,000
(10.6%).
Contributing to the decrease in noninterest income are reductions in the
volume of overdraft processing resulting in a reduction of fee income collected
and losses on sales of investment securities. Contributing to the increase in
other income are increases in ATM fees collected of $36,000 or (30%) and
non-deposit investment fees of $20,828 (100%) over the same period in 1999.
Refer to footnote five, Segment reporting, and Management's discussion and
analysis for further information on credit card processing.
The following table sets forth a summary of noninterest income for the periods
indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Nine Months Ended
--------------------------------------------------------------------------------------------------
Noninterest Income Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Charges $56 $55 $166 $200
Credit Card Income, net 482 510 1,406 1,396
Other Income 171 132 535 473
Gain(loss) sale of loans 21 0 73 77
--
Gain(loss) sale of investment securities 0 0 (59) 0
Total noninterest income $ 730 $ 697 $ 2,121 $ 2,146
</TABLE>
NON-INTEREST EXPENSE
Noninterest expenses consist of salaries and related employee benefits,
occupancy and equipment expenses, data processing fees, professional fees,
directors' fees and other operating expenses.
For the three months ended September 30, 2000, noninterest expense
increased $145,000 (9.7%) over the same period in 1999. Recoveries of legal
expense during 1999 reduced expenses to $99,000 for the third quarter 1999. For
the nine months ended September 30, 2000, noninterest expense decreased $89,000
(1.8%) over the same nine months ended 1999. Salary and benefit expenses have
decreased $91,000 (3.2%) over the prior year and are attributable to increased
collection of loan costs offsetting salary expenses. Data processing and
professional fees have decreased $32,000 (8.1%), and insurance coverage costs
decreased $25,000 (42%) over the prior year.
The following table sets forth a summary of noninterest expense for the
periods indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------------
Noninterest Expense Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and Benefits $ 972 $1,030 $2,794 $2,885
Occupancy & Equipment 246 238 735 686
Data Processing &
Other professional 126 127 394 426
Other Expenses 295 99 908 923
------ ------- ------ -------
Total Noninterest expense $1,639 $ 1,494 $4,831 $ 4,920
</TABLE>
14
<PAGE> 15
INCOME TAXES
The Company's provision for income taxes includes both federal and state
income taxes and reflects the application of federal and state statutory rates
to the Company's net income before taxes. The principal difference between
statutory tax rates and the Company's effective tax rate is the benefit derived
from investing in tax-exempt securities. Increases and decreases in the
provision for taxes reflect changes in the Company's net income before tax.
The following table reflects the Company's tax provision and the related
effective tax rate for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Nine Months Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax provision $ 695 $ 738 $2,130 $ 1,998
Effective tax rate 36.2% 38.9% 37.0% 38.5%
--------------------------------------------------------------------------------------------
</TABLE>
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and non-deductible expenses. The increase in
the Company's tax provision is attributable to increases in the Company's
pre-tax income.
ASSET QUALITY
The Company concentrates its lending activities primarily within Shasta,
El Dorado, Placer and Sacramento Counties, California, and the location of the
Bank's three full service branches.
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 the cash flows of the borrower or proceeds from the
sale of collateral.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------
Loans
---------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate-Construction $ 34,492 $ 37,859
Real Estate-Commercial 88,124 78,842
Commercial & Financial 61,347 53,383
Installment 430 294
Other Loans 2,973 2,812
Less:
Deferred Loan Fees and Costs (240) (372)
Allowance for Loan Losses (3,083) (2,972)
---------------------------------------------------------------------------------------------
Total Net Loans $184,043 $169,846
---------------------------------------------------------------------------------------------
</TABLE>
The Company's practice is to place an asset on nonaccrual status when one
of the following events occurs: (i) any installment of principal or interest is
90 days or more past due (unless in management's opinion the loan is well
secured and in the process of collection). (ii) Management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing or have been restructured.
Net portfolio loans increased $14 million or 8.4% at September 30, 2000
over $169.8 million at December 31, 1999. The portfolio mix remains stable with
the mix at December 31, 1999, with commercial and financial loans of
approximately 33%, real estate construction of 19% and commercial real estate at
48%.
15
<PAGE> 16
Impaired loans are loans for which it is probable that the Bank will not
be able to collect all amounts due under the original terms of the contract. The
Bank had outstanding balances of $1,224,000 and $394,000 in impaired loans that
had impairment allowances of $456,547 and $315,000 as of September 30, 2000 and
December 31, 1999, respectively. The Bank had average balances of $693,685 and
$612,411 in impaired loans for the nine months ended as of September 30, 2000
and for the year ended December 31, 1999.
The following table sets forth a summary of the Company's nonperforming
assets as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------
Non performing assets
---------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $1,224 $394
Other Real Estate Owned 0 40
---------------------------------------------------------------------------------------------
</TABLE>
The Company's nonaccrual loans increased from $394,000 to $1,224,000 in
the first nine months of 2000. The increase is attributed to one credit placed
in nonaccrual status. OREO properties were sold during the second quarter 2000.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
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 any 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.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions.
The adequacy of the ALLL is calculated upon three components. First is
the dollar weighted risk rating of the loan portfolio, including all outstanding
loans and leases, off balance sheet items, and commitments to lend. Every
extension of credit is assigned a risk rating based upon a comprehensive
definition intended to measure the inherent risk of lending money. Each rating
has an assigned a risk factor expressed as a reserve percentage.
16
<PAGE> 17
Central to this assigned risk (reserve) factor is the five-year
historical loss record of the bank. Secondly, established specific
reserves are available for individual loans currently on management
watch and high-grade loan lists. These are the estimated potential losses
associated with specific borrowers based upon the collateral and event(s)
causing the risk rating.
The third component is unallocated. This reserve is for qualitative
factors that may effect the portfolio as a whole, such as those factors
described above.
Management believes the assigned risk grades and our methods for
managing changes are satisfactory. Management believes the loan portfolio
performance has improved as reflected by the stable and low delinquency ratio.
Watch list and high-grade loans have increased somewhat over the past year,
primarily due to management's plan to move more susceptible although performing
accounts to attention.
The following table summarizes the activity in the ALLL reserves for the
periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------------
Allowance for Loan & Lease Losses Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance for Loan Losses $ 3,034 $ 3,276 $2,972 $ 3,235
Provision for Loan Losses 0 10 56 50
Charge offs:
Commercial (0) (0) (0) (0)
Real Estate (0) (50) (0) (83)
Other (0) (1) (0) (23)
------- ------- ------ ------
Total Charge offs (0) (51) (0) (106)
Recoveries:
Commercial 47 7 53 12
Real Estate 2 0 2 40
Other 0 11 0 22
------- ------- ------ ------
Total Recoveries 49 18 55 74
Ending Balance $ 3,083 $ 3,253 $3,083 $ 3,253
ALLL to total loans 1.65% 1.97% 1.65% 1.97%
-------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT PORTFOLIO
Total investment securities decreased $7 million in the first nine months
of 2000 or 21.3%. The decrease represents maturities of $4.3 million, purchases
of $2.0 million and sales of $4.4 million. The Company recorded gross losses of
$59,000 in the nine months ended September 30, 2000 from sales of investment
securities. Proceeds from the sales of investment securities were used to fund
loan commitments.
LIQUIDITY
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 liquidity needs of the Bank may vary from actual
needs, the Bank maintains a substantial amount of liquid assets to absorb short
term increases in loans or reductions in deposits.
The Company's liquid assets (cash and due from banks, federal funds sold
and available-for-sale investment
17
<PAGE> 18
securities) totaled $54,294,000, or 21.2% of
total assets, at September 30, 2000 compared to $44,540,000 or 19.2% of total
assets at December 31, 1999.
In April 1993, the Bank entered into an agreement (the "Merchant Services
Agreement") with Cardservice International, In. ("CSI"), and 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 cards for payment of goods and
services. Pursuant to the Merchant Services Agreement, Cardservice
International, Inc. maintains demand deposit accounts of approximately
$12,000,000 or 41.4% of the Company's capital at September 30, 2000. The
Merchant Services Agreement with CSI was renewed in 1997 for a period of four
years, which expires on April 1, 2001. CSI and the Company have recently reached
an agreement on the renewal of the contract. Effective April 1, 2001, pricing of
the contract renewal is 2 basis points of transaction processing and one-half of
the earnings on the deposit relationship. The current pricing of the contract in
effect is 135 basis points of transaction processing and the full earnings on
the deposit relationship. The contract renewal represents a significant decline
in revenues from merchant credit card processing. If the new pricing had been in
effect for the nine months ended September 30, 2000, revenue would have been
$960,000 less than the actual amount recorded of $1,247,000. The Company is
pursuing various strategies to offset the decline in revenues, including
expansion of the Roseville Banking Center, enhancing the merchant credit card
sales team in the Roseville and Redding markets, and projecting aggressive
growth in the loan markets.
CAPITAL RESOURCES
Overall capital adequacy is monitored by the Company's management and
reported to the Company's Board of Directors on a monthly basis. The Bank's
regulators measure capital adequacy by using a risk-based capital framework and
by monitoring compliance with minimum leverage ratio guidelines. Under the
risk-based capital standard, assets reported on the Company's balance sheet and
certain off-balance sheet items are assigned to risk categories, each of which
is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1"
capital (defined as principally comprising shareholders' equity) and "Tier 2"
capital (defined as principally comprising the qualifying portion of the ALLL).
The minimum ratio of total risk-based capital to risk-adjusted assets,
including certain off-balance sheet items, is 8%. At least one-half (4%) of the
total risk-based capital (Tier 1) is to be comprised of common equity; the
balance may consist of debt securities and a limited portion of the ALLL.
The following table sets forth the Company's capital ratio as of the dates
indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
-----------------------------------------------------------------------------------------------
Capital Ratio's Bank Company Bank Company
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Risk-Based Capital 13.84% 15.51% 14.85% 15.58%
Tier 1 Capital to Risk-Based Assets 12.59% 14.26% 13.59% 14.33%
Tier 1 Capital to Average Assets 10.37% 11.70% 10.44% 11.31%
(Leverage ratio)
-----------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
ITEM 3. 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 operations of the Bank. Consequently, 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 fundamental objective of
the Bank'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 and 200
basis points.
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. During a period of declining rates,
short-term liabilities may be repriced to provide an advantage to the Company;
however, this benefit will 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. Such analysis calculates the change in net interest income given a change
in the federal funds rate of 100 or 200 basis points up or down. All changes are
measured in dollars and are compared to projected net interest income.
At September 30, 2000, the estimated annualized reduction in net interest
income attributable to a 100 and 200 basis point decline in the federal funds
rate was $373,000 and $740,000, respectively. A similar and opposite result
would be attributable to a 100 or 200 basis point increase in the federal funds
rate. At December 31, 1999, the estimated annualized reduction in net interest
income attributable to a 100 and 200 basis point decline in the federal funds
rate was $359,000 and $718,000, respectively, with a similar and opposite result
attributable to a 100 and 200 basis point increase in the federal funds rate.
Management does not believe that the change from year-end 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.
20
<PAGE> 20
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 or 200
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 more than 200 basis points. The model's primary benefit to
management is its assistance in evaluating the impact that future strategies
with respect to the Bank's mix and level of rate-sensitive assets and
liabilities will have on the Company's net interest income.
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6A. EXHIBITS
Ex-27.1. Financial Data table for the period ended September 30, 2000.
ITEM 6B. REPORTS ON FORM 8-K
Form 8-K dated October 17, 2000 Earnings Release
Form 8-K dated September 25,2000 Announcing Dividend
Form 8-K dated July 17, 2000 Announcing Second Quarter Earnings
SIGNATURES
Following the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REDDING BANCORP
(Registrant)
Date: October 31, 2000 /s/ Linda J. Miles
----------------------------
Linda J. Miles
Executive Vice President &
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
Ex-27.1. Financial Data table for the period ended September 30, 2000.
