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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 --
For the fiscal year ended December 31, 1999
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, California 96002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (530) 224-3333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference to Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $36,782,047 as of March 1, 2000, which was
calculated based on the last reported sale of the Company's Common Stock
prior to March 1, 2000. This calculation does not reflect a determination
that certain persons are affiliates of the Registrant for any other
purpose.
As of March 1, 2000, there were 2,629,813 shares of the Registrant's
Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11 and 12 of Part III incorporate by
reference information from the Registrant's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Registrant's 2000 Annual Meeting of
Shareholders.
PART I
ITEM 1. BUSINESS.
This report includes forward-looking statements within the meaning
of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements
are based on management's beliefs and assumptions, and on information 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 all referenced to the "Company"
refer to Redding Bancorp, a California corporation, and its consolidated
subsidiaries.
GENERAL
Redding Bancorp (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and was
incorporated in California on January 21, 1982, for the purpose of organizing,
as a wholly owned subsidiary, Redding Bank of Commerce (the "Bank"). As a 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 its business operations in two geographic
market areas, Redding and Roseville, California and within two industry
segments, general banking and credit card processing.
The Bank was incorporated as a California banking corporation on
November 25, 1981, and received its certificate of authority to begin banking
operations on October 22, 1982. The Bank operates two full service branches and
two loan production offices. The Company established its first full service
branch at 1177 Placer Street, Redding, California, and opened for business on
October 22, 1982. On November 1, 1988, the Bank received a certificate of
authority to establish and maintain a loan production office in Citrus Heights,
California. On September 1, 1998, the Company relocated the loan production
office to 2400 Professional Drive in Roseville, California. On March 1, 1994,
the Bank received a certificate of authority to open a second full service
branch at 1951 Churn Creek Road in Redding, California. On June 29, 1995, the
Bank received a certificate of authority to open a second loan production office
at 676 East First Avenue in Chico, California. This second loan production
office was closed effective December 31, 1999. 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 El Dorado, Placer, Shasta, and Sacramento, California. The Company
considers Shasta County, California to be the Bank's major market area.
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The services offered by the Bank include those traditionally offered
by commercial banks of similar size and character in California, such as
checking, interest-bearing checking ("NOW") and savings accounts, money market
deposit accounts, commercial, real estate, construction, personal, home
improvement, automobile and other installment and term loans, travelers checks,
safe deposit boxes, collection services and telephone transfers. The primary
focus of the Bank is to provide services to the business and professional
community of its major market area, including Small Business Administration
loans, and payroll and accounting packages. The Bank does not offer trust
services or international banking services and does not plan to do so in the
near future.
Most of the Bank's customers are small to medium sized businesses,
professionals and other individuals with medium to high net worth, and most of
the Bank's deposits are obtained from such customers. The Bank 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-occupied
properties and investor properties. The Bank's underwriting criteria for loans
to investors is generally more conservative and such loans constitute a smaller
percentage of the Bank's commercial and residential real estate loan portfolio.
The principal source of repayment of the Bank's real estate loans is the
Borrower's operating cash flow.
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Similar to commercial loans, the principal factors affecting the
Bank's risk of loss in real estate mortgage lending include the borrower's
ability to manage its business affairs and cash flows, local and general
economic conditions and real estate values in the Bank's service area. The Bank
manages its credit risk associated with real estate mortgage lending primarily
by establishing maximum loan-to-value ratios and using strategies to match the
borrower's cash flow to loan repayment terms. Approximately 95% of the Bank's
residential real estate mortgage loans are sold in the secondary market.
The Bank's specific underwriting standards and methods for each of
its principal lines of lending include industry-accepted analysis and modeling
and certain proprietary techniques. The Bank's underwriting criteria is designed
to comply with applicable regulatory guidelines, including required
loan-to-value ratios. The Bank's credit administration policies contain
mandatory lien position and debt service coverage requirements, and the Bank
generally requires a guarantee from 20% or more owners of its corporate
borrowers.
In April 1993, the Bank entered into an agreement (the "Merchant
Services Agreement") with Cardservice International, Inc. ("CSI"), an
independent sales organization ("ISO") and nonbank merchant credit card
processor, pursuant to which the Bank has agreed to provide credit and debit
card processing services for merchants solicited by CSI who accept credit and
debit cards as payment for goods and services. Pursuant to the Merchant Services
Agreement, the Bank acts as a clearing bank for CSI and processes credit or
debit card transactions into the Visa(R) or MasterCard(R) system for presentment
to the card issuer. As a result of the Merchant Services Agreement, the Bank has
acquired electronic credit and debit card processing relationships with
merchants in various industries on a nationwide basis. The Merchant Services
Agreement with CSI was renewed in 1997 for a period of four years, which expires
on April 1, 2001, and will automatically renew for additional four-year periods
unless terminated in advance of the renewal period by CSI upon 90 days written
notice or by the Bank upon 30 days prior written notice. Although CSI has not
terminated the Merchant Services Agreement, the Company and CSI are
renegotiating the terms of the Merchant Services Agreement for the four-year
period commencing April 1, 2001. If the Company and CSI are unable to reach
agreement with respect to the renewal terms of the Merchant Services Agreement,
the Company expects that CSI will terminate the Merchant Services Agreement.
Termination of the Merchant Services Agreement would result in a significant
decline in revenues from merchant credit card processing and have a material
adverse affect on the Company results of operations. See "--Risk Factors That
May Affect Results - Merchant Credit Card 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, 1999, the Bank had 760 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 7.6% of the Bank's total
deposits as of December 31, 1999.
The fee income from merchant processing services represented
approximately 9.4%, 9.2% and 9.8% of the Company's consolidated revenues in
1999, 1998 and 1997, 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.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA"), which
becomes effective on March 11, 2000. The FSA amends certain portions of the
BHCA, subject to conditions. See "Recently Enacted Legislation" below for more
information.
The Company is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and the Bank are
subject to examination by, and may be required to file reports with, the
California Commissioner of Financial Institutions (the "Commissioner").
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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, 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.
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Comprehensive amendments to Regulation Y became effective in 1997,
and are intended to improve the competitiveness of bank holding companies by,
among other things: (i) expanding the list of permissible nonbanking activities
in which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further change in bank control or in bank directors or
officers after an earlier approved change. These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank holding company to qualify as "well-run," both it and the insured
depository institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank 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 non-member of the Federal
Reserve System, the Bank's primary federal regulator is the FRB. The regulations
of these agencies affect most aspects of the Bank's business and prescribe
permissible types of loans and investments, the amount of required reserves,
requirements for branch offices, the permissible scope of the Bank's activities
and various other requirements.
The Bank is also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by federal
banking law. In addition, the Bank is subject to certain regulations of the FRB
dealing primarily with check-clearing activities, establishment of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and
Equal Credit Opportunity (Regulation B).
Under California law, a state chartered bank is subject to various
restrictions on, and requirements regarding, its operations and administration
including the maintenance of branch offices and automated teller machines,
capital and reserve requirements, deposits and borrowings, shareholder rights
and duties, and investment and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the Commissioner is
required to order the bank to correct such impairment. If a bank is unable to
correct the impairment, the bank is required to levy and collect an assessment
upon its common shares. If such assessment becomes delinquent, the common shares
are to be sold by the bank.
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.
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The FDIC rules on activities generally permit subsidiaries of banks,
without prior specific FDIC authorization, to engage in those that have been
approved by the FRB for bank holding companies because such activities are so
closely related to banking to be a proper incident thereto. Other activities
generally require specific FDIC prior approval, and the FDIC may impose
additional restrictions on such activities on a case-by-case basis in approving
applications to engage in otherwise impermissible activities.
CAPITAL STANDARDS
The federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
In determining the capital level a bank is required to maintain, the
federal banking agencies do not, in all respects, follow generally accepted
accounting principles ("GAAP") and have special rules which have the effect of
reducing the amount of capital that will be recognized for purposes of
determining the capital adequacy of a bank.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, non-cumulative perpetual preferred stock,
other types of qualifying preferred stock and minority interests in certain
subsidiaries, less most other intangible assets and other adjustments. Net
unrealized losses on available-for-sale equity securities with readily
determinable fair value must be deducted in determining Tier 1 capital. For Tier
1 capital purposes, deferred tax assets that can only be realized if an
institution earns sufficient taxable income in the future are limited to the
amount that the institution is expected to realize within one year, or ten
percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off
balance sheet items of 4%.
On October 1, 1998, the FDIC adopted two rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first rule makes risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and requires different amounts of capital for
different risk positions in asset securitization transactions. The second rule
permits limited amounts of unrealized gains on debt and equity securities to be
recognized for risk-based capital purposes as of September 1, 1998. The FDIC
rules also provide that a qualifying institution that sells small business loans
and leases with recourse must hold capital only against the amount of recourse
retained. In general, a qualifying institution is one that is well-capitalized
under the FDIC's prompt corrective action rules. The amount of recourse that can
receive the preferential capital treatment cannot exceed 15% of the
institution's total risk-based capital.
In addition to the risked-based guidelines, 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.
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As of December 31, 1999, 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, 1999 (amounts in
thousands except percentage amounts).
<TABLE>
<CAPTION>
The Company
-------------------------------------------------------
Actual
------------------------ Capitalized
Capital Ratio Requirement Capital
------- ----- ----------- -------
<S> <C> <C> <C> <C>
Leverage ............. $26,299,757 11.31% 5.0% 4.0%
Tier 1 Risk-Based .... 26,299,757 14.33 6.0 4.0
Total Risk-Based ..... 28,555,971 15.58 10.0 8.0
</TABLE>
<TABLE>
<CAPTION>
Redding Bank of Commerce
-------------------------------------------------------
Actual Well
------------------------ Capitalized Minimum
Capital Ratio Requirement Capital
------- ----- ----------- -------
<S> <C> <C> <C> <C>
Leverage ............. $24,859,547 10.44% 5.0% 4.0%
Tier 1 Risk-Based .... 24,859,547 13.59 6.0 4.0
Total Risk-Based ..... 27,115,760 14.85 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.
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>
<S> <C>
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less
than 2%.
</TABLE>
8
<PAGE> 9
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on
transactions and required federal banking regulators to adopt overall safety and
soundness standards for depository institutions related to internal control,
loan underwriting and documentation and asset growth.
Among other things, FDICIA limits the interest rates paid on
deposits by undercapitalized institutions, restricts the use of brokered
deposits, limits the aggregate extensions of credit by a depository institution
to an executive officer, director, principal shareholder or related interest,
and reduces deposit insurance coverage for deposits offered by undercapitalized
institutions for deposits by certain employee benefits accounts.
The federal banking agencies may require an institution to submit to
an acceptable compliance plan as well as have the flexibility to pursue other
more appropriate or effective courses of action given the specific circumstances
and severity of an institution's noncompliance with one or more standards.
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.
9
<PAGE> 10
Regulators also have authority to prohibit a depository institution
from engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
The Bank has its deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. The FDIC is authorized to borrow up to $30 billion
from the United States Treasury; up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the Federal Financing Bank;
and from depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each $100
of insured deposits. FDICIA also provides authority for special assessments
against insured deposits. No assurance can be given at this time as to what the
future level of premiums will be.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
RECENTLY ENACTED LEGISLATION
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA") which
becomes 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 FRB and declare that it chooses to
become a FHC. After the certification and declaration is filed, the FHC may
engage either de novo or though an acquisition in any activity that has been
determined by the FRB to be financial in nature or incidental to such financial
activity. BHCs may engage in financial activities without prior notice to the
FRB if those activities qualify under the BHCA. However, notice must be given to
the FRB within 30 days after a FHC has commenced one or more of the financial
activities.
Under the FSA, FDIC-insured state banks, subject to various
requirements (and national banks) are permitted to engage through "financial
subsidiaries" in certain financial activities permissible for affiliates of
FHCs. However, to be able to engage in such activities the state bank must also
be well-capitalized and well-managed and receive at least a "satisfactory"
rating in its most recent Community Reinvestment Act examination. The Company
cannot be certain of the effect of the foregoing recently enacted legislation on
its business, although there is likely to be consolidation among financial
services institutions and increased competition for the company.
PENDING LEGISLATION AND REGULATIONS
Certain pending legislative proposals include bills to let banks pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, and to give judges the authority to force high-income borrowers to
repay their debts rather than cancel them through bankruptcy.
10
<PAGE> 11
COMPETITION
In the past, an independent bank's principal competitors for
deposits and loans have been other banks (particularly major banks), savings and
loan associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
Among the competitive advantages that major banks have is their
ability to finance wide ranging advertising campaigns and to allocate their
investment assets into investments of higher yield and demand. Such institutions
offer certain services such as trust services and international banking services
that are not offered directly by the Bank (but are offered indirectly through
correspondent relationships). Because of their greater total capitalization,
major banks have substantially higher legal lending limits than the Bank.
In order to compete with major banks and other competitors in its
primary service areas, the Bank relies upon the experience of its executive and
senior officers in serving business clients, and upon its specialized services,
local promotional activities and the personal contacts made by its officers,
directors and employees. For customers whose loan demand exceeds the Bank's
legal lending limit, the Bank may arrange for such loans on a participation
basis with correspondent banks.
The recent enactment of Federal and California interstate banking
legislation will likely increase competition within California. Regulatory
reform, as well as other changes in federal and California law will also affect
competition. While the impact of these changes, and of other proposed changes,
cannot be predicted with certainty, it is clear that the business of banking in
California will remain highly competitive.
Competitive pressures in the banking industry significantly increase
changes in the interest rate environment, reducing net interest margins, and
less than favorable economic conditions can result in a deterioration of credit
quality and an increase in the provisions for loan losses.
With respect to its 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, 1999, the Company employed 86 persons. None of
the Company's employees are represented by a labor union and the Company
considers its employee relations to be good.
11
<PAGE> 12
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, 1999, 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 commercial
real estate, construction and, to a lesser extent, commercial lending. At
December 31, 1999, commercial real estate and construction loans comprised
approximately 45% and 22%, respectively, of the total loans in the Bank's
portfolio. At December 31, 1999, 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."
12
<PAGE> 13
INTEREST RATE RISK
The income of the Bank depends to a great extent on "interest rate
differentials" and the resulting net interest margins (i.e., the difference
between the interest rates earned on the Bank's interest-earning assets such as
loans and investment securities, and the interest rates paid on the Bank's
interest-bearing liabilities such as deposits and borrowings). These rates are
highly sensitive to many factors which are beyond the Company's control,
including general economic conditions and the policies of various governmental
and regulatory agencies, in particular, the FRB. Because of the Bank's capital
position and non-interest-bearing demand deposit accounts, the Bank is asset
sensitive. As a result, the Company is generally adversely affected by declining
interest rates. In addition, changes in monetary policy, including changes in
interest rates, influence the origination of loans, the purchase of investments
and the generation of deposits and affect the rates received on loans and
investment securities and paid on deposits, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Quantitative and Qualitative Disclosure About Market Risk."
MERCHANT CREDIT CARD PROCESSING SERVICES
The Bank's fee income from merchant processing services represented
approximately 9.4%, 9.2% and 9.8% of the Company's consolidated revenues in
1999, 1998 and 1997, respectively. In addition, contract deposit relationships
with the merchants in the Bank's portfolio and CSI represented approximately
7.6% of the Bank's total deposits as of December 31, 1999. The Merchant Services
Agreement was renewed in 1997 for a period of four year which expires on April
1, 2001, and will automatically renew for additional four-year periods unless
terminated. The agreement may be terminated by CSI upon 90 days written notice
or by the Bank upon written notice 30 days prior to the expiration of any
renewal period. In the event the Merchant Services Agreement is terminated or
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. Loss of the processing contract will result in a
significant decline in merchant credit card income. Although CSI has not
terminated the Merchant Services Agreement, the Company and CSI are
renegotiating the terms of the Merchant Services Agreement for the four-year
period commencing April 1, 2001. There is no assurance that the Company will be
successful in renegotiating the Merchant Services Agreement. If the Company and
CSI are unable to reach agreement with respect to the renewal terms of the
Merchant Services Agreement, the Company expects that CSI will terminate the
Merchant Services Agreement. 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"), fees that can be charged on monthly credit card sales
above $93 million are significantly less than the fees that can be charged on
monthly credit card sales below $93 million. Further, the Visa(R) bylaws limit
the amount of quarterly Visa(R) credit card sales that the Bank may process to
four times the Bank's equity capital unless additional collateral is pledged by
the Bank. The Company's ability to sustain or increase fee income from merchant
processing relationships is also affected by other factors, many of which are
beyond the Company's control, such as (i) competition from other banks, ISOs and
other nonbank processors, (ii) continuation of the requirement that ISOs and
other nonbank processors access the Visa(R) and MasterCard(R) payment system
through banks, (iii) the ability to avoid losses through various contractual
methods, including indemnification by the ISO, reserve balances controlled by
the Bank and insurance and (iv) the ability to continue to grow both locally and
nationally. No assurance can be given that the Company will be able to sustain
its growth from fee income from merchant processing services. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Noninterest Income-Merchant Processing Services Income."
13
<PAGE> 14
CHARGEBACKS AND PAYMENT RISKS ASSOCIATED WITH MERCHANT PROCESSING
SERVICES
The Bank is subject to the Card Association Rules in processing
credit and debit card transactions. In the event of certain types of billing
disputes between a cardholder and a merchant, the processor of the transaction
assists the merchant in investigating and resolving the dispute. If the dispute
is not resolved in favor of the merchant, the transaction is "charged back" to
the merchant and that amount is credited or otherwise refunded to the
cardholder. If the processor is unable to collect such amounts from the
merchant's account, and if the merchant refuses or is unable due to bankruptcy
or other reasons to reimburse the processor for the chargeback, the processor
bears the loss for the amount of the refund paid to the cardholder. Pursuant to
the Merchant Services Agreement, CSI has agreed to indemnify the Bank against
losses incurred in connection with credit card transactions generated by
merchants in CSI's portfolio. In addition, pursuant to the Merchant Services
Agreement, CSI is required to maintain a 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, 1999, approximately 21.9% 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."
14
<PAGE> 15
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, 1999, 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 mudslides,
which are typically not covered by the standard hazard insurance policies
maintained by borrowers. Uninsured disasters may make it difficult or impossible
for borrowers to repay loans made by the Bank. 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.
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<PAGE> 16
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
$2.9 million, or 1.7% of total loans, and 20.2% of total nonperforming loans at
December 31, 1999. Material future additions to the allowance for estimated
losses on loans may be necessary if material adverse changes in economic
conditions occur and the performance of the Bank's loan portfolio deteriorates.
In addition, future additions to the Bank's allowance for losses on other real
estate owned may also be required in order to reflect changes in the markets for
real estate in which the Bank's other real estate owned is located and other
factors which may result in adjustments which are necessary to ensure that the
Bank's foreclosed assets are carried at the lower of cost or fair value, less
estimated costs to dispose of the properties. Moreover, the FDIC and the DFI, as
an integral part of their examination process, periodically review the Bank's
allowance for estimated losses on loans and the carrying value of its assets.
The Bank was most recently examined by the FDIC and the DFI in this regard
during the first quarter of 1999. Increases in the provisions for estimated
losses on loans and foreclosed assets would adversely affect the Bank's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Asset Quality" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Allowance for Loan and Lease Losses (ALLL)."
CERTAIN OWNERSHIP RESTRICTIONS UNDER CALIFORNIA AND FEDERAL LAW
Federal law prohibits a person or group of persons "acting in
concert" from acquiring "control" of a bank holding company unless the FRB has
been given 60 days prior written notice of such proposed acquisition and within
that time period the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days, the period during which such
a disapproval may be issued. An acquisition may be made prior to the expiration
of the disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttal presumption established by the FRB, the
acquisition of more than 10% of a class of voting stock of a bank with a class
of securities registered under Section 12 of the Exchange Act (such as the
Common Stock), would, under the circumstances set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the FRB under the BHCA, before acquiring 25%
(5% in the case of an acquiror that is, or is deemed to be, a bank holding
company) or more of the outstanding shares of the Company's Common Stock, or
such lesser number of shares as constitute control. See "-Supervision and
Regulation-Regulation and Supervision of Bank Holding Companies."
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of the Company and the Bank
under this state law if such person, directly or indirectly, has the power (i)
to vote 25% or more of the voting power of the Company or (ii) to direct or
cause the direction of the management and policies of the Company. For purposes
of this law, a person who directly or indirectly owns or controls 10% or more of
the Common Stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company.
16
<PAGE> 17
SHARES ELIGIBLE FOR FUTURE SALE
As of March 1, 2000, the Company had 2,629,813 shares of Common
Stock outstanding, of which approximately 1,741,162 shares are eligible for sale
in the public market without restriction. Approximately 888,651 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 15.41% of the outstanding shares of
Common Stock at exercise prices ranging from $9.07 to $19.00 have been issued to
directors and certain employees of the Company under the Company's 1998 Stock
Option Plan, and options to acquire up to an additional five percent of the
outstanding shares at an exercise price of not less than 85% of the market value
of the Company's Common Stock on the date of grant are reserved for issuance
under the plan. No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on the
market price of the Company's Common Stock.
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
credit card processing services require the use of advanced computer hardware
and software technology and rapidly changing customer and regulatory
requirements. The Company's ability to compete depends on its ability to
continue to adapt its technology on a timely and cost-effective basis to meet
these requirements. In addition, the Bank's business and operations are
susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to
cause disruptions or failures of the Bank's data processing systems.
The Company did not experience any significant operating problems
associated with the transition of its information systems to the Year 2000.
However, although it is past January 1, 2000, no assurance can be given that the
Company and its suppliers and customers have not been affected in a manner that
is not yet apparent. As a result, the Company expects to continue to monitor its
Year 2000 compliance and the compliance of its suppliers and customers.
ENVIRONMENTAL RISKS
The Bank, in its ordinary course of business, acquires real property
securing loans that are in default, and there is a risk that hazardous substance
or waste, contaminants or pollutants could exist on such properties. The Bank
may be required to remove or remediate such substances from the affected
properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Bank may not have adequate remedies against
the prior owners or other responsible parties to recover its costs. Finally, the
Bank may find it difficult or impossible to sell the affected properties either
prior to or following any such removal. In addition, the Bank may be considered
liable for environmental liabilities in connection with its borrowers'
properties, if, among other things, it participates in the management of its
borrowers' operations. The occurrence of such an event could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
17
<PAGE> 18
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, 2000, the Company had outstanding options
to purchase an aggregate of 377,950 shares of Common Stock at exercise prices
ranging from $9.07 to $19.00 per share, or a weighted average exercise price per
share of $10.45. 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 uses 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.
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.
18
<PAGE> 19
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 Hoefer &
Arnett. The quotations reflect the price that would be received by the seller
without retail mark-up, mark-down or commissions and may not have represented
actual transactions.
<TABLE>
<CAPTION>
Sales Price Per Share
---------------------
Quarter Ended: High Low Volume
- -------------- ---- --- ------
<S> <C> <C> <C>
March 31, 1999 $20.00 $19.00 33,100
June 30, 1999 $21.50 $19.38 45,650
September 30, 1999 $24.00 $22.50 9,520
December 31, 1999 $23.00 $22.00 9,800
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, 1999, the Company paid a $.60 per share cash dividend
to shareholders of record on October 1, 1999. On October 22, 1998, the Company
paid a $.50 per share cash dividend to shareholders of record as of October 1,
1998. 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, 2000, there were approximately 293 holders of record
of the Company's Common Stock.
19
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected condensed consolidated financial data set forth below
for the five years ended December 31, 1999, have been derived from the Company's
audited financial statements. The selected condensed consolidated financial data
set forth below as of December 31, 1997, 1996 and 1995, and for the two years
ended December 31, 1996, 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Total Interest Income $ 17,270 $ 16,322 $ 15,764 $ 15,565 $ 15,121
Net Interest Income 10,835 10,436 9,430 8,767 8,739
Provision for Loan Losses 120 500 1,024 2,160 1,045
Total Other Income 2,790 2,539 2,364 2,079 1,699
Net Income 4,370 4,054 3,658 2,615 2,931
BALANCE SHEETS:
Total Assets 232,519 216,085 204,820 192,389 185,995
Total Loans 172,817 148,202 113,410 111,353 115,668
Allowance for Loan Losses (ALLL) 2,972 3,235 2,819 2,294 2,053
Total Deposits 198,323 188,621 180,673 171,368 166,869
Shareholders' Equity $ 26,059 $ 24,654 $ 21,825 $ 19,180 $ 17,266
PERFORMANCE RATIOS:
Return on Average Assets 1.91% 1.98% 1.83% 1.35% 1.74%
Return on Average Equity 17.60% 18.04% 18.27% 14.41% 18.45%
Dividend Payout 21.75% 33.18% 24.62% 25.83% 23.04%
Average Equity to Average Assets 10.86% 10.97% 10.03% 9.35% 9.42%
Tier 1 Risk-Based Capital-Bank 13.59% 14.33% 14.91% 13.70% 13.40%
Total Risk-Based Capital - Bank 14.85% 15.58% 16.16% 14.90% 14.60%
Net Interest Margin 5.15% 5.57% 5.20% 4.96% 5.62%
Earning Assets to Total Assets 92.10% 91.48% 90.90% 91.10% 92.30%
Nonperforming Assets to Total Assets .28% .53% .52% 3.46% 1.82%
Annualized Net Charge-offs .24% .06% .44% 1.64% .64%
ALLL to Total Loans 1.72% 2.18% 2.49% 2.06% 1.77%
Nonperforming Loans to ALLL 20.19% 33.69% 25.40% 190.98% 164.69%
SHARE DATA 2,643 2,690 2,684 2,700 2,700
Book Value Per Share $ 10.99 $ 10.37 $ 9.18 $ 7.95 $ 7.15
Basic Earnings Per Share $ 1.64 $ 1.51 $ 1.36 $ 0.97 $ 1.08
Diluted Earnings Per Share $ 1.52 $ 1.42 $ 1.35 $ 0.97 $ 1.08
Cash Dividends Per Share $ 0.60 $ 0.50 $ 0.33 $ 0.25 $ 0.25
</TABLE>
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this report. All statements other than statements of
historical fact included in the following discussion are forward-looking
statements within the meaning of the Exchange Act. These statements are based on
management's beliefs and assumptions, and on information currently available to
management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company and also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading "Risk Factors That May Affect Results" and elsewhere in this
report. The Company's future results and shareholder values may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values, including those discussed
under the heading "Risk Factors That May Affect Results," are beyond the
Company's ability to control or predict. Investors are cautioned not to put
undue reliance on any forward-looking statements. In addition, the Company does
not have any intention or obligation to update forward-looking statements after
the filing of this report, even if new information, future events or other
circumstances have made them incorrect or misleading.
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"). Its principal offices are in Redding, California. The Company engages
in a general commercial banking business in Redding and maintains a loan
production office in Roseville, California. The company services the counties of
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 including 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 wire transfers. 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,
merchant credit card processing, payroll and benefit 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.
Most of the Bank's customers are small to medium sized
businesses, professionals, and other individuals with medium to high net
worth, and most of the Bank's deposits are obtained from such customers. The
Bank emphasizes servicing the needs of local businesses and professionals and
individuals requiring special services.
The Company derives its income from two principal sources: (i) Net
interest income, which is the difference between the interest income it receives
on interest-earning assets and the interest expense it pays on interest-bearing
liabilities, and (ii) fee income, which includes fees earned on deposit
services, income from SBA lending, electronic-based cash management services and
merchant credit card processing services.
Management considers the business of the Company to be divided into
two segments: (i) commercial banking and (ii) credit card services. Credit card
services are limited to those revenues, net of related data processing costs,
associated with the Merchant Services Agreement and the Bank's agreement to
provide credit and debit card processing services for merchants solicited by the
Bank who accept credit and debit cards as payment for goods and services.
21
<PAGE> 22
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31,
1998
Net income for the year ended December 31, 1999, was $4.4 million,
representing an increase of $316,000, or 7.8%, over net income of $4.1 million
for the year ended December 31, 1998. Factors contributing to the increase in
net income include an increase in net interest income contributed by loan
volume, partially offset by the increase in salaries & benefits representing
additional staffing used to expand the corporate accounting department and the
loan production office in Roseville, California. The provision for loan loss was
reduced by $380,000 over the prior year reflecting the Company's ongoing efforts
to increase the effectiveness of its collection efforts, and a reduction in
classified assets.
Return on average assets (ROA) was 1.91% and return on average
common equity (ROE) was 17.60% in 1999 compared with 1.98% and 18.04%
respectively in 1998. Diluted earnings per share for 1999 and 1998 were $1.52
and $1.42, respectively, an increase of 7% from 1998 to 1999.
The Company's average total assets increased to $228.5 million in
1999 or 11.6% from $204.8 million in 1998. As a result of the expansion of the
Company's loan production office in Roseville, California and continued loan
demand in the Company's major market area, net loans increased to $169.8 million
over $144.9 million in 1998, an increase of $24.8 million or 17.1%.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,
1997
Net income for the year ended December 31, 1998, was $4.1 million,
an increase of $396,000, or 10.8%, over net income of $3.7 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
NET INTEREST INCOME
The primary source of income for the Bank is derived from net
interest income. Net interest income represents the excess of interest and fees
earned on interest-earning assets (loans, securities and federal funds sold)
over the interest paid on deposits and borrowed funds. Net interest margin is
net interest income expressed as a percentage of average earning assets.
Net interest income increased to $10.8 million in 1999 versus $10.4
million in 1998 and $9.4 million in 1997, representing a 3.8% increase in 1999
over 1998, and a 10.7% increase in 1998 over 1997. The average balance of total
earning assets increased to $210.5 million or 12.3%. Average loan balances
outstanding increased $29.4 million or 22.5% in 1999, while average balances of
investments and federal funds sold decreased $6.3 million or 11.0% in 1999. The
average yields on loans and federal funds sold in 1999 were lower by 85 and 13
basis points respectively, while the average yield on U.S. government securities
fell 67 basis points. The decrease in average yields on loans is attributed to
an increasingly competitive pricing market for quality loan production. The
overall yield on average earning assets fell 51 basis points to 8.20% from 8.71%
for the same period a year ago.
Total interest expense increased to $6.4 million in 1999, from $5.9
million in 1998, representing a 9.3% increase for 1999 over 1998, and a 7.1%
decrease in 1998 over 1997. Average balances of interest-bearing liabilities
increased to $157.3 million over $142.7 million for the year ended December 31,
1998, or 10.2%. Included in the increase is a borrowing from the Federal Home
Loan Bank used to offset fixed rate loan growth.
The volume of interest-bearing certificates of deposit increased to
$101.3 million in 1999 from $87.8 million in 1998, a 15.4% increase. The average
rate paid on certificates of deposit dropped 24 basis points, while the overall
average rate paid on interest bearing deposits and borrowings decreased 03 basis
points to 4.09% from 4.12% for the same period a year ago.
The Company's net interest margin (net interest income divided by
average earning assets) 5.57% in 1998 and 5.15% in 1999. The combined effect of
the increase in volume of earning assets and decrease in yield on earning
assets, coupled with stable funding sources resulted in an increase of $399,000
(3.8%) in net interest income for the year ended December 31, 1999 over 1998.
The decrease in the Company's net interest margin from 1998 to 1999 is
attributed to an increasingly competitive pricing market for loan production and
the mix of interest-bearing liabilities. The increase in the Company's net
interest margin from 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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
----------------- ---------------------- --------------------
- ------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Portfolio Loans $159,855 $14,605 9.14% $130,454 $13,030 9.99% $113,030 $11,519 10.19%
Tax Exempt Securities 5,601 240 4.28% 9,116 406 4.45% 6,142 292 4.75%
US Government 30,273 1,714 5.66% 35,833 2,267 6.33% 47,583 3,009 6.32%
Federal Funds Sold 11,868 551 4.64% 9,511 454 4.77% 10,825 569 5.26%
Other Securities 2,889 160 5.54% 2,486 164 6.60% 3,875 375 9.68%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Average Earning Assets $210,486 $17,270 8.20% $187,400 $16,322 8.71% $181,455 $15,764 8.69%
------- ------- -------
Cash & Due From Banks $ 10,824 $9,860 $10,149
Bank Premises 5,591 5,688 5,781
Other Assets 1,648 1,897 2,211
-------- -------- --------
Average Total Assets $228,549 $204,845 $199,596
======== ======== ========
INTEREST BEARING LIABILITIES
Demand Interest Bearing $ 41,442 $ 717 1.73% $ 42,185 $ 791 1.88% $ 42,911 $ 857 2.00%
Savings Deposits 12,874 352 2.73% 12,717 349 2.74% 11,802 343 2.91%
Certificates of Deposit 101,289 5,240 5.17% 87,805 4,746 5.41% 88,701 5,134 5.79%
Other Borrowings 1,710 126 7.37% 0 0 - 0 0 -
-------- ------- ----- -------- ------- ----- -------- ------- -----
157,315 6,435 4.09% 142,707 5,886 4.12% 143,414 6,334 4.42%
------- ------- -------
Noninterest Demand 43,548 37,315 34,299
Other Liabilities 2,857 2,353 1,864
Shareholder Equity 24,829 22,470 20,019
-------- -------- --------
Average Liabilities and
Shareholders Equity $228,549 $204,845 $199,596
======== ======== ========
Net Income and Net Interest
Margin $ 10,835 5.15% $10,436 5.57% $ 9,430 5.20%
======== ======= ========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest income on loans includes fee income of $492,000, $562,000
and $423,000 for the years ended December 31, 1999, 1998, and 1997 respectively.
The Company's average total assets increased from $199.6 million in
1997 to $204.8 in 1998 and $228.5 in 1999, representing a 2.61% increase 1998
over 1997, and 11.6% increase in 1999 over 1998. Portfolio loans increased to
$130.4 million in 1998 and $159.9 million in 1998, representing a increase of
15.4% and 22.5%, respectively. In addition the Company's average non-interest
bearing demand deposits increased from $34.3 million in 1997 to $37.3 in 1998
and $43.5 million in 1999, representing an increase of 8.8% and 16.7%,
respectively, as a result of expansion of the Bank's commercial banking
activities.
24
<PAGE> 25
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. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1999 OVER 1998 1998 OVER 1997
- -------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
In Interest Income:
- -------------------
Portfolio Loans $2,686 $(1,111) $1,575 $1,740 $(229) $1,511
Tax-exempt securities (151) (15) (166) 132 (18) 114
US Government securities (312) (242) (554) (744) 3 (741)
Federal Funds sold 110 (13) 97 (63) (52) (115)
Other investment securities 22 (26) (4) (92) (119) (211)
------ -------- ------ ----- ------ -----
Total Increase(Decrease) $2,355 $(1,407) $ 948 $973 $(415) $558
------ -------- ------ ----- ------ ----
Increase(Decrease)
In Interest Expense:
- --------------------
Interest-bearing Demand (13) (61) (74) $(14) $(52) $(66)
Savings Deposits 4 (1) 3 25 (19) 6
Certificates of Deposit 698 (204) 494 (48) (340) (388)
Other Borrowings 126 0 126 0 0 0
------ -------- ------ ----- ------ -----
Total Increase(Decrease) $815 $(266) $549 $(37) $(411) $(448)
------ -------- ------ ----- ------ -----
Net Increase(Decrease) $1,540 $(1,141) $399 $1,010 $(4) $1,006
====== ======== ==== ====== ==== ======
- -------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
The Company's noninterest income consists primarily of processing
fees for merchants who accept credit card payments for goods and services,
service charges on deposit accounts, and other service fees. Noninterest income
also includes ATM fees earned at various locations. For the year ended December
31, 1999, noninterest income represented 13.9% of the Company's revenues versus
13.4% in 1998, and 13.0% in 1997. 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 to $2.8 million in 1999 over $2.5
million in 1998, and $2.4 million in 1997, representing an increase of 9.9% and
7.4% respectively. Factors contributing to the increase include pricing
adjustments on overdraft processing services, moderate transaction volume
increases in credit card processing, service fee increases attributed to
additional offsite ATM installations, and gains of $78,500 on sales of SBA loans
to qualified brokers.
MERCHANT SERVICES PROCESSING INCOME
Pursuant to the Merchant Services Agreement, the Bank acts as a
clearing bank for an Independent Sales Organization (ISO), a nonbank merchant
credit card processor. The Bank processes credit or debit card transactions into
the Visa(R) or MasterCard(R) system for presentment to the card issuer.
25
<PAGE> 26
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, 1999
and 1998, the ISO portfolio consisted of approximately 46,000 and 40,000
merchants, respectively. Contract deposit relationships with the merchants and
ISO represented approximately 33% of the Bank's capital as of December 31, 1999.
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 upon 90 days written notice, or the bank upon 30 days written notice.
Although CSI has not terminated the Merchant Services Agreement, the Company and
CSI are renegotiating the terms of the Merchant Services Agreement for the
four-year period commending April 1, 2001. If the Company and CSI are unable to
reach agreement with respect to the renewal terms of the Merchant Services
Agreement, the Company expects that CSI will terminate the Merchant Services
Agreement. Termination of the Merchant Services Agreement would result in a
significant decline in revenues from merchant card processing and have a
material adverse affect on the Company's results of operations.
The Merchant Services Agreement provides for indemnification of the
Bank by the ISO against losses incurred by the Bank in connection with either
the processing of credit/debit card transactions for covered merchants or any
alleged violations by the ISO of the Card Association Rules. The ISO maintains a
merchant specific reserve of approximately $8.7 million. These reserves are held
in accounts with the Bank with activity authorized only by certain Bank
personnel. The Bank has been granted a security interest in the reserve accounts
to secure the ISO's obligations under the agreement.
The ability of the Bank to increase the level of fee income
currently being generated by merchant processing relationships is limited. Under
the Card Association Rules, fees that can be charged on monthly credit card
sales above $93 million are significantly less than the fees that can be charged
on monthly credit card sales below $93 million. Further, the Visa(R) bylaws
limit the amount of quarterly Visa(R) credit card sales that the Bank may
process to four times the Bank's equity capital unless additional collateral is
pledged by the Bank. During 1999 the Bank has exceeded the $93 million
threshold, future growth in the level of fee income will be significantly less
than historical growth. 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 factors include: (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, 1999 and 1998, the Bank had 760 and 793 merchants, respectively, in its
portfolio. The income generated from the Bank's local merchant portfolio is
substantially less than that generated from the ISO portfolio because of the
lower volume of transactions. The bank maintains reserves for possible credit
card losses based upon chargeback history.
Merchant services processing income, net of processing costs was
$1.8 million in 1997, $1.7 in 1998 and $1.9 in 1999 representing an decrease of
2.8% in 1998 over 1997, and an increase of 8.9% in 1999 over 1998. The decrease
in merchant services processing 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. The increase in merchant services processing income from
1998 to 1999 is primarily attributable to volume growth, the addition of pricing
analysis adjustments and minimum monthly transaction fee.
26
<PAGE> 27
The following table sets forth a summary of noninterest income for
the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
- ----------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income:
Service Charges $ 251 $ 215 $ 212
Other Income 715 503 370
Net realized Gains (Losses) on Sale of
Investment Securities available-for-sale (58) 93 5
Credit Card Income, net 1,882 1,728 1,777
------- ------- -------
Total Noninterest Income $ 2,790 $ 2,539 $ 2,364
======= ======= =======
- ----------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense consists of salaries and related employee
benefits, occupancy and equipment expenses, data processing fees, professional
fees, directors' fees and other operating expenses. Noninterest expense for 1999
was $6.4 million compared to $6.0 million for 1998 and $5.0 million in 1997,
representing an increase of $459,000, or 7.7% for 1999 over 1998, and $992,000
or 19.8% for 1998 over 1997. Increases in salaries and benefits are indicative
of the additions to staff to expand the corporate accounting department and the
loan production office in Roseville, California. The increase in noninterest
expense from 1997 to 1998 was primarily the result of growth in the Company's
loan portfolio and earning assets. The increase in professional services over
the same period is 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>
YEARS ENDED, DECEMBER 31
(Dollars in thousands)
- ----------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Expense:
Salaries & Benefits $3,805 $3,422 $3,024
Occupancy & Equipment 924 838 796
FDIC Assessments 16 26 41
Data Processing &
Professional Services 504 360 283
Stationery & Supplies 176 173 161
Postage 80 78 83
Directors Expenses 198 203 146
Other Expense 731 875 449
------ ------ ------
Total Non-Interest Expenses $6,434 $5,975 $4,983
====== ====== ======
- ----------------------------------------------------------------
</TABLE>
27
<PAGE> 28
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>
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Tax Provision $ 2,701 $ 2,446 $ 2,129
Effective Tax Rate 38.2% 37.6% 36.8%
- ------------------------------------------------------------------
</TABLE>
ASSET QUALITY
The Company concentrates its lending activities primarily within
Shasta County, California, and the location of the Bank's two full service
offices. The Company also makes loans to borrowers in El Dorado, Placer, and
Sacramento counties through its loan production office in Roseville, California.
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 collateral.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial & Financial $ 53,383 $ 46,890 $ 41,432 $ 37,592 $ 36,248
Real Estate-Construction 37,859 29,470 16,393 32,474 42,784
Real Estate-Commercial 78,842 69,742 54,533 40,067 35,299
Installment 294 298 72 241 69
Other Loans 2,811 2,225 1,274 1,284 1,699
Less:
Deferred Loan Fees and Costs (372) (423) (294) (305) (430)
Allowance for Loan and Lease Losses
(2,971) (3,235) (2,819) (2,294) (2,053)
--------- --------- --------- --------- ---------
Total Net Loans $ 169,846 $ 144,967 $ 110,591 $ 109,059 $ 113,616
========= ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net portfolio loans increased $24.9 million or 17.2%, to $169.8
million at December 31, 1999 over $144.9 at December 31, 1998. The strategic
plan adopted in 1999 provided for significant increases in loan growth, offset
by decreasing investment securities and additions of wholesale borrowing
arrangements from the Federal Home Loan Bank, designed to improve yields over
investment activities. The 9.14% yield during 1999 on portfolio loans decreased
over 9.99% yield during 1998; and reflects the current competitive market.
Commercial and financial loans increased $6.5 million or 13.8%, real estate
construction projects increased $8.4 million or 28.4%, and Commercial real
estate increased $9.1 million or 13.0% from 1998 to 1999. The portfolio mix
remains stable with the mix of 1998, with commercial and financial loans of
approximately 31%, real estate construction of 22% and commercial real estate at
46%.
28
<PAGE> 29
The Company's practice is to place an asset on nonaccrual status
when one of the following events occurs:(i) Any installment of principal or
interest is 90 days or more past due (unless in management's opinion the loan is
well-secured and in the process of collection), (ii) management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing or have been restructured.
The following table sets forth a summary of the Company's nonperforming loans
and other assets as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in Thousands) AS OF DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 394 $ 942 $ 500 $1,734 $3,381
90 days past and still accruing interest 0 46 173 540 347
Restructured loans in compliance with
modified terms -- -- 2,450 --
Other Real Estate Owned 40 66 352 2,268 229
- -----------------------------------------------------------------------------------------------------
</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 a significant 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 $942,000 to $394,000
during 1999 and is comprised of one loan. Other real estate owned ("OREO")
decreased to $40,000 in 1999 from $66,000 in 1998, and at December 31, 1999,
consisted of one property.
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, 1999,
which, based on remaining scheduled repayments of principal, were due within the
periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------
After One through
Within One Year Five Years After Five Years Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Loans $17,314 $22,092 $13,977 $53,383
Real Estate Construction Loans
$27,341 $ 8,431 $ 2,087 $37,859
------- ------- ------- -------
Total $44,655 $30,523 $16,064 $91,242
======= ======= ======= =======
Loans due after one year with:
Fixed Rates $ 9,949 $ 3,938 $13,887
Variable Rates $20,574 $12,126 $32,700
------- ------- -------
Total $30,523 $16,064 $46,587
======= ======= =======
- ----------------------------------------------------------------------------------------------------
</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 credit
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
judgement basis by management based on consideration of (i) economic conditions,
(ii) borrowers' financial condition, (iii) loan impairment, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans which are
contractually current as to payment terms but demonstrate a higher degree of
risk as identified by management, (vii) continuing evaluation of the performing
loan portfolio, (viii) monthly review and evaluation of problem loans identified
as having a loss potential, (ix) quarterly review by the Board of Directors, (x)
off balance sheet risks and (xi) assessments by regulators and other third
parties. Management and the Board of Directors evaluate the allowance and
determine its desired level considering objective and subjective measures, such
as knowledge of the borrowers' business, valuation of collateral, the
determination of impaired loans and exposure to potential losses.
The ALLL is a general reserve available against the total loan
portfolio and off balance sheet credit exposure. It is maintained without any
interallocation to the categories of the loan portfolio, and the entire
allowance is available to cover loan losses.
30
<PAGE> 31
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions and other qualitative factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's ALLL. Such agencies may require the Bank to
provide additions to the allowance based on their judgement of information
available to them at the time of their examination. There is uncertainty
concerning future economic trends. Accordingly it is not possible to predict the
effect future economic trends may have on the level of the provision for
possible loan losses in future periods.
Because the principal factor effecting the adequacy of the ALLL is
the credit risk rating factor, the bank does not allocate the ALLL by loan
category. The banks principal lines of lending are (i) commercial, (ii) real
estate construction and (iii) commercial and residential real estate. The
primary sources of repayment of the Bank's commercial loans are the borrowers'
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 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 period reviews by a consultant of the Bank's credit administration policies.
The principal source of repayment of the Bank's real estate
construction loans is the sale of the underlying collateral or the availability
of permanent financing from the Bank or other lending source. The principal
risks associated with real estate construction lending include project cost
overruns that absorb the borrower's ability in the project and deterioration of
real estate values as a result of various factors, including competitive
pressures and economic downturns. The Bank manages its credit risk associated
with real estate construction lending by establishing loan-to-value ratios on
projects on an as-completed basis, inspecting project status in advance of
controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of not more than 80% on
single family residential construction loans.
The principal source of repayment of the Bank's real estate mortgage
loans is the Borrowers' operating cash flow. Similar to commercial loans, the
principal factors affecting the Bank's risk of loss in real estate mortgage
lending include each borrowers' ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank manages its credit risk associated with real
estate mortgage lending primarily by establishing maximum loan-to-value ratios
and using strategies to match the borrower's cash flow to loan repayment terms.
The Bank's specific underwriting standards and methods for each of
its principal lines of lending include industry-accepted analysis and modeling
and certain proprietary techniques. The Bank's underwriting criteria are
designed to comply with applicable regulatory guidelines, including required
loan-to-value ratios. The Bank's credit administration policies contain
mandatory lien position and debt service coverage requirements, and the Bank
generally requires a guarantee from 20% or more 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 adequacy of the ALLL is calculated upon three components. First
is the credit risk rating of the loan portfolio, including all outstanding loans
and leases, off balance sheet items, and commitments to lend. Every extension of
credit has been assigned a risk rating based upon a comprehensive definition
intended to measure the inherent risk of lending money. Each rating has an
assigned risk factor expressed as a reserve percentage. Central to this assigned
risk factor is the historical loss record of the bank. Secondly, established
specific reserves are available for individual loans currently on management's
watch and high-grade loan lists. These are the estimated potential losses
associated with specific borrowers based upon the collateral and event(s)
causing the risk ratings. The third component is unallocated. This reserve is
for qualitative factors that may effect the portfolio as a whole, such as those
factors described above.
Management believes the assigned risk grades and our methods for
managing changes are satisfactory.
31
<PAGE> 32
Watch list and high-grade loans decreased 10.88% from 1998 to 1999,
primarily due to improved economic conditions for borrowers and strong account
management by the lenders.
The provision for loan losses decreased to $120,000 for 1999 versus
$500,000 in 1998. The reduction in the amount of the provision is a direct
result of the Company's ongoing efforts to increase the effectiveness of its
collection efforts, the decrease in net losses, and lower delinquencies and
adversely graded loans. Net charge-offs were $383,090 or .24% of average loans
during 1999. Management does not believe that there were any trends indicated by
the detail of the aggregate charge-offs for any of the periods discussed.
The following table summarizes the activity in the ALLL reserves for
the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Balance: $ 3,235 $ 2,819 $ 2,294 $ 2,053 $ 1,730
Provision for loan losses 120 500 1,024 2,160 1,045
Charge-offs:
Commercial (355) (139) (393) (1,074) (510)
Real Estate (103) (54) (209) (916) (273)
Other (2) (16) (3) (--) (--)
------- ------- ------- ------- -------
Total Charge-offs (460) (209) (605) (1,990) (783)
------- ------- ------- ------- -------
Recoveries:
Commercial 37 114 60 37 61
Real Estate 40 11 46 34 --
------- ------- ------- ------- -------
Total Recoveries 77 125 106 71 61
------- ------- ------- ------- -------
Ending Balance $ 2,972 $ 3,235 $ 2,819 $ 2,294 $ 2,053
======= ======= ======= ======= =======
ALLL to total loans 1.72% 2.18% 2.49% 2.06% 1.77%
Net Charge-offs to average loans
.24% .06% .44% 1.64% .64%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT PORTFOLIO
The Company classifies its investment securities as
"held-to-maturity" or "available-for-sale" at the time of investment purchase.
Generally, all securities are purchased with the intent and ability to hold the
security for long-term investment, and the Company has both the ability and
intent to hold "held-to-maturity" investments to maturity. The Company does not
engage in trading activities.
Investment securities held-to-maturity are carried at cost adjusted
for the accretion of discounts and amortization of premiums. Securities
available-for-sale may be sold to implement the Company's asset/liability
management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market
value and unrealized gains or losses, net of income taxes, are reported as
accumulated other comprehensive income, in a separate component of shareholder's
equity. Gain or loss on sale of investment securities is based on the specific
identification method.
Investment securities held-to-maturity, exclusive of FHLB stock at
December 31, 1999, consisted of mortgage-backed securities totaling $5.4 million
with a remaining contractual maturity of ten years and a weighted-average yield
of 6.73%, and mortgage-backed securities totaling $500,000 with a remaining
contractual maturity of one to five years and a weighted-average yield of 5.97%.
The following table summarizes the contractual maturities of the
Company's investment securities held as available-for-sale at their amortized
cost basis and their weighted-average yields at December 31, 1999. The yield on
tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
32
<PAGE> 33
<TABLE>
<CAPTION>
After One through After Five through
Within One Five Ten
Year Years Years Total
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government & Agencies $ 7,045 4.74% $11,050 5.29% $ 3,000 6.66% $21,095 5.98%
Obligations of State and Political
Subdivisions
1,174 4.01% 3,313 4.26% 185 5.13% 4,672 4.21%
------- ---- ------- ---- ------- ---- ------- ----
Total $ 8,219 4.63% $14,363 5.05% $ 3,185 6.54% $25,767 5.66%
======= ==== ======= ==== ======= ==== ======= ====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the amortized cost of the Company's
available for sale investment securities held on the dates indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government & Agencies $21,095 $14,509 $36,968
Municipal Obligations 4,672 5,855 10,525
Corporate and Other Bonds 6,769 12,002 17,081
------- ------- -------
Total $32,536 $32,366 $64,574
======= ======= =======
- ------------------------------------------------------------------
</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>
(Dollars in thousands) YEARS ENDED DECEMBER 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 28,315 1.60% $ 26,423 1.87% $ 23,554 1.99%
Savings Accounts $ 12,874 2.73% $ 12,717 2.74% $ 11,802 2.91%
Money Market Accounts $ 13,127 2.00% $ 15,762 1.94% $ 19,357 2.06%
Certificates of Deposit $101,289 5.17% $ 87,805 5.41% $ 88,701 5.79%
</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, 1999.
DEPOSIT MATURITY SCHEDULE
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------
1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Three Months or less $19,239 $16,434
Over three through six months $ 9,927 $ 9,802
Over six through twelve months $ 8,603 $ 9,965
Over twelve months $ 4,093 $ 6,074
------- -------
Total $41,862 $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. This process is managed not by
formally monitoring the cash flows from operations, investing and financing
activities as described in the Company's statement of cash flows, but through an
understanding principally of depositor and borrower needs. As loan demand
increases, the Bank can use asset liquidity from maturing investments along with
deposit growth to fund the new loans.
With respect to assets, liquidity is provided by cash and money
market investments such as interest-bearing time deposits, federal-funds sold,
available-for-sale investment securities, and principal and interest payments on
loans. With respect to liabilities, 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 need of the Bank may vary from
actual needs, the Bank maintains a substantial amount of liquid assets to absorb
short-term increases in loans or reductions in deposits. As loan demand
decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity. Therefore, there
is some correlation between financing activities associated with deposits and
investing activities associated with lending. The Bank's liquid assets (cash and
due from banks, federal funds sold, and available-for-sale investment
securities) totaled $44.5 million or 19.1% of total assets at December 31, 1999,
$51.3 million or 23.8% of total assets at December 31, 1998 and, $74.1 million
or 36.2% of total assets at December 31, 1997. The Company expects that its
primary source of liquidity will be supported by earnings of the company,
acquisition of core deposits, and wholesale borrowing arrangements.
CAPITAL ADEQUACY
Capital adequacy is a measure of the amount of capital needed to
sustain asset growth and 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).
34
<PAGE> 35
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.
Management believes, as of December 31, 1999, that the Bank meets
and exceeds all capital adequacy requirements to which it is subject. As of
December 31, 1999 and 1998, the most recent notification by the Federal Deposit
Insurance Corporation (FDIC) categorized the bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must meet the minimum ratios as set forth below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The following table sets forth the Company's and Bank's capital
ratios for the periods indicated.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ ------------------ For Bank to
Bank Company Bank Company be well capitalized
---- ------- ---- ------- -------------------
<S> <C> <C> <C> <C> <C>
Total Risk-Based Capital 14.85% 15.58% 15.58% 16.50% >10.00%
Tier 1 Capital to Risk-Based Assets 13.59% 14.33% 14.33% 15.25% > 6.00%
Tier 1 Capital to Average Assets 10.44% 11.31% 10.95% 11.58% > 5.00%
(Leverage ratio)
</TABLE>
The Company paid a dividend of 60 cents per share on the Company's
Common Stock paid to shareholders of record as of October 1, 1999. This
dividend, financed with dividends from the Bank, and coupled with the
significant growth in the loan portfolio has decreased the Bank's leverage ratio
at December 31, 1999 to 10.44% from 10.95%. 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.
While US government investments may have a zero weight attached,
portfolio loans have a 100 percent weight attached. This reclassification of
earning assets attributes to the decline in total risk-based capital ratio to
14.85% from 15.58% at December 31, 1998.
The Board of Directors of Redding Bancorp approved a repurchase
program for Redding Bancorp stock.
The purpose of the Treasury Stock Repurchase program is to provide greater
liquidity for investor's and to mitigate the dilutive effects of the Redding
Bancorp 1998 Stock Option Plan. The program establishes a systematic buyback
approach with a goal of providing sufficient shares to fund the stock option
plan over a seven-year period.
The program authorized the buyback of up to 411,000 shares of
Treasury stock over the next seven years. At December 31, 1999, the Company has
repurchased 57,881 shares. These shares have been retired.
IMPACT OF INFLATION
Inflation affects the Company's financial position as well as its
operating results. It is management's opinion that the effects of inflation on
the financial statements have not been material.
YEAR 2000 STATE OF READINESS
The Company's mission critical systems successfully responded to
the century date change. Accordingly, the Company's core banking systems,
including the application software for its deposit, loan and merchant card
computer systems, as well as the electronic funds transfers system with the
Federal Reserve, are fully operational and accurately processing customer
information and transactions. The Company will continue to monitor its systems
and those of its vendors and suppliers over the coming months.
35
<PAGE> 36
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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 National Association of Securities Dealers' Electronic
Bulletin Board. There is no established public trading market for the Company's
Common Stock.
The following table, which summarizes trading activity during the
Company's last two fiscal years, is based on information provided by Hoefer &
Arnett. The quotations reflect the price that would be received by the seller
without retail mark-up, mark-down or commissions and may not have represented
actual transactions.
<TABLE>
<CAPTION>
Sales Price
-----------
Quarter Ended: High Low Volume
- -------------- ---- --- ------
<S> <C> <C> <C>
March 31, 1999 $ 20.00 $ 19.00 33,100
June 30, 1999 $ 21.50 $ 19.375 45,650
September 30, 1999 $ 24.00 $ 22.50 9,520
December 31, 1999 $ 23.00 $ 22.00 9,800
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, 1999, the Company paid a $.60 per share cash dividend
to shareholders of record on October 1, 1999.
The Company's ability to pay dividends is subject to certain
regulatory requirements. The Federal Reserve Board ("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.
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.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") prohibits insured depository institutions from paying management fees
to any controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Superintendent 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.
36
<PAGE> 37
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.
As of March 1, 2000, there were approximately 293 holders of record
of the Company's Common Stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuation in interest rates will ultimately impact both the level
of interest income and interest expense recorded on a large portion of the
Company's assets and liabilities, and the fair market value of interest earning
assets and interest-bearing liabilities, other than those which possess a short
term to maturity. Because the Company's interest-bearing liabilities and
interest-earning assets are with the Bank, the Company's interest rate risk
exposure is in connection with the Bank's operations.
As a result, all significant interest rate risk management
procedures are performed at the Bank level. Based upon the nature of its
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Company does not own any trading assets.
The fundamental objective of the Company's management of its assets
and liabilities is to enhance the economic value of the Company while
maintaining adequate liquidity and an exposure to interest rate risk deemed
acceptable by the Company's management.
The Company manages its exposure to interest rate risk through
adherence to maturity, pricing and asset mix policies and procedures designed to
mitigate the impact of changes in market interest rates. The Bank's
profitability is dependent to a large extent upon its net interest income, which
is the difference between its interest income on interest-earning assets, such
as loans and securities, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings.
The formal policies and practices adopted by the Bank to monitor and
manage interest rate risk exposure measure risk in two ways: (i) repricing
opportunities for earning assets and interest-bearing liabilities and (ii)
changes in net interest income for declining interest rate shocks of 100 basis
points. The following table sets forth, as of December 31, 1999, the
distribution of repricing opportunities for the Company's earning assets and
interest-bearing liabilities. It also reports 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>
(Dollars in thousands) AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------
Within 3 3 Months to One Year to Five Years Total
Months One Year Five Years Plus
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Securities held to maturity $ - $ - $ 500 $ 6,269 $ 6,769
Investment Securities
Available for Sale $ 998 $ 7,162 $ 14,148 $ 3,066 $ 25,374
Federal Funds Sold $ 7,560 -- -- -- $ 7,560
Loans, net $ 96,680 $ 16,434 $ 27,434 $ 29,297 $169,845
-------- -------- -------- -------- --------
Total Earning Assets $105,238 $ 23,596 $ 42,082 $ 38,632 $209,548
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
<TABLE>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES
Demand Deposits $ 43,176 $ - $ - $ - $ 43,176
Savings Deposits $ 11,577 $ - $ - $ - $ 11,577
Time Deposits $ 41,778 $ 49,538 $ 11,872 $ - $103,188
Other Borrowings $ 0 $ 1,800 $ 3,000 $ - $ 4,800
-------- -------- -------- ------ --------
Total Interest-bearing Liabilities
$ 96,531 $ 51,338 $ 14,872 $ - $162,741
======== ======== ======== ====== ========
GAP 8,707 (27,742) 27,210 38,632 46,807
Cumulative GAP (19,035) 8,175 46,807
RSA/RSL 1.09 .46 2.83 -- 1.29
Cumulative GAP to Total Average Assets
0.04 (0.08) 0.04 0.20
- -------------------------------------------------------------------------------------------------------------
</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 effected by declining rates rather than rising rates.
To estimate the effect of interest rate shocks on the Company's net
interest income, management uses a model to prepare an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income given
a change in the federal funds rate of 100 basis points up or down. All changes
are measured in dollars and are compared to projected net interest income. At
December 31, 1999, the estimated annualized reduction in net interest income
attributable to a 100 basis point decline in the federal funds rate was $359,000
with a similar and opposite result attributable to a 100 basis point increase in
the federal fund rate.
The model utilized by management to create the analysis described in
the preceding paragraph uses balance sheet simulation to estimate the impact of
changing rates on the annual net interest income of the Bank. The model
considers a number of factors, including (i) change in customer and management
behavior in response to the assumed rate shock, (ii) the ratio of the amount of
rate change for each interest-bearing asset or liability to assumed changes in
the federal funds rate based on local market conditions for loans and core
deposits and national market conditions for other assets and liabilities and
(iii) timing factors related to the lag between the rate shock and its effect on
other interest-bearing assets and liabilities. Actual results will differ when
actual customer and management behavior and ratios differ from the assumptions
utilized by management in its model. In addition, the model has limited
usefulness for the measurement of the effect on annual net interest income
resulting from rate changes other than 100 basis points. Management believes
that the short duration of its rate-sensitive assets and liabilities contributes
to its ability to reprice a significant amount of its rate-sensitive assets and
liabilities and mitigate the impact of rate changes in excess of 100 basis
points. The model's primary benefit to management is its assistance in
evaluating the impact that future strategies with respect to the bank's mix and
level of rate-sensitive assets and liabilities will have on the Company's net
interest income.
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ....................................................................... 40
Independent Auditors' Report ....................................................................... 40
Consolidated Balance Sheets as of December 31, 1999 and 1998 ....................................... 41
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 ............. 42
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 43
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 ......... 44
Notes to Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997 .... 45
</TABLE>
39
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1997 of
Redding Bancorp and subsidiaries (the Company). 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 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 results of Redding Bancorp and
subsidiaries, operations and their cash flows for the year ended December 31,
1997, 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
40
<PAGE> 41
Deloitte & Touche, LLP
400 Capitol Mall, Suite 2000
Sacramento, California 95814-4424
Telephone: (916) 498-7100
Facsimile: (916) 444-7963
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Redding Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Redding Bancorp
and Subsidiaries (the Company) as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years 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 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
January 21, 2000
41
<PAGE> 42
REDDING BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks (note 3) $ 11,605,368 $ 10,010,339
Federal funds sold 7,560,000 16,790,000
Investment securities available-for-sale, at market (note 4) 25,374,494 24,518,750
Investment securities held-to-maturity, at cost (aggregate market
value of $6,721,999 in 1999 and $8,207,512 in 1998) (note 4) 6,769,395 8,038,378
Loans, net of the allowance for loan losses of $2,971,747 in 1999
and $3,234,837 in 1998 (note 5) 169,845,642 144,966,909
Bank premises and equipment, net (note 6) 5,473,896 5,603,739
Other assets (note 7) 5,890,482 6,156,880
------------- -------------
TOTAL ASSETS $ 232,519,277 $ 216,084,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - noninterest bearing $ 40,381,025 $ 39,708,911
Demand - interest bearing 43,176,325 42,810,171
Savings 11,577,452 13,083,097
Certificates of deposits (note 8) 103,188,500 93,018,519
------------- -------------
198,323,302 188,620,698
198,323,303 188,620,698
Other borrowings 4,800,000 0
Other liabilities (note 9) 3,336,580 2,810,420
------------- -------------
Total liabilities 206,459,882 191,431,118
------------- -------------
Commitments and contingencies (note 15)
Stockholders' equity (notes 11, 12, and 16):
Preferred stock, no par value; 2,000,000 authorized;
no shares issued and outstanding in 1999 and 1998
Common stock, no par value; 10,000,000 shares
authorized; 2,642,522 shares issued and outstanding in 1999
and 2,690,103 shares issued and outstanding in 1998 4,808,938 4,684,721
Retained earnings 21,490,819 19,847,035
Accumulated other comprehensive income, net of tax (240,362) 122,121
------------- -------------
Total stockholders' equity 26,059,395 24,653,877
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 232,519,277 $ 216,084,995
============= =============
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 43
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 14,605,200 $ 13,030,535 $ 11,519,475
Interest on tax exempt securities 240,431 405,746 292,038
Interest on U.S. government securities 1,713,736 2,267,663 3,008,859
Interest on federal funds sold 551,090 454,515 568,784
Interest on other securities 159,890 163,585 375,446
------------ ------------ ------------
Total interest income 17,270,347 16,322,044 15,764,602
------------ ------------ ------------
Interest expense:
Interest on demand deposits 716,618 790,557 856,979
Interest on savings deposits 352,362 349,353 342,839
Interest on time deposits 5,239,604 4,745,951 5,134,417
Other Borrowings 126,200 0 0
------------ ------------ ------------
Total interest expense 6,434,784 5,885,861 6,334,235
------------ ------------ ------------
Net interest income 10,835,563 10,436,183 9,430,367
Provision for loan losses (note 5) 120,000 500,000 1,023,500
------------ ------------ ------------
Net interest income after provision for loan losses 10,715,563 9,936,183 8,406,867
------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 250,944 215,114 212,034
Other income 714,904 503,070 369,537
Net Gains (losses) on sale of
investment securities available for sale (Note 4) (58,357) 92,828 4,807
Credit card service income 1,882,305 1,727,849 1,777,571
------------ ------------ ------------
Total other income 2,789,796 2,538,861 2,363,949
------------ ------------ ------------
Noninterest expenses:
Salaries and related benefits 3,804,621 3,421,719 3,024,280
Net occupancy and equipment expense 923,589 837,602 796,085
FDIC insurance premium 16,358 26,517 40,799
Data processing and professional services 503,627 360,062 283,296
Directors expenses 197,816 202,822 145,979
Other expenses 988,102 1,125,952 692,941
------------ ------------ ------------
Total other expenses 6,434,113 5,974,674 4,983,380
------------ ------------ ------------
Income before income taxes 7,071,246 6,500,370 5,787,436
Provision for income taxes (note 10) 2,701,243 2,446,261 2,129,741
------------ ------------ ------------
Net Income $ 4,370,003 $ 4,054,109 $ 3,657,695
============ ============ ============
Basic earnings per share (note 2) $1.64 $1.51 $1.36
===== ===== =====
Diluted earnings per share (note 2) $1.52 $1.42 $1.35
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 44
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 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)
Purchase and retirement
of common stock (17,313) (29,236) (145,222) (174,458)
--------- ---------- ----------- --------- -----------
Balance at December 31, 1997 2,684,103 4,532,585 17,138,072 153,928 21,824,585
Comprehensive income:
Net income $ 4,054,109 4,054,109 4,054,109
Other comprehensive income:
Unrealized holding gains arising
during period, net of tax 26,118
Less: reclassification adjustment
for gains included in net
income, net of tax 57,925
-------------
Other comprehensive 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 $4,684,721 $19,847,035 $ 122,121 $24,653,877
Comprehensive income:
Net income $ 4,370,003 4,370,003 4,370,003
Other comprehensive income:
Unrealized holding losses arising
during period, net of tax (398,197)
Add: reclassification adjustment
for losses included in net
income, net of tax 35,714
------------
Other comprehensive income $ (362,483) (362,483) (362,483)
------------
Comprehensive income $ 4,007,520
============
Purchase and retirement of common stock (57,881) (100,798) (1,142,296) (1,243,094)
Compensation expense associated with stock options 77,865 77,865
Cash dividends ($0.60 per share) (1,583,923) (1,583,923)
Stock options exercised 10,300 147,150 147,150
--------- ---------- ----------- --------- -----------
Balance at December 31, 1999 2,642,522 $4,808,938 $21,490,819 (240,362) $26,059,395
========= ========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 45
REDDING BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,370,003 $ 4,054,109 $ 3,657,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120,000 500,000 1,023,500
Provision for depreciation 471,655 433,910 405,597
Compensation expense associated with stock options 77,865 130,136 --
Amortization of investment premiums and accretion
of discounts, net 29,545 (474,554) (295,446)
(Gain) loss on sale of loans (136,336) (47,089) (30,285)
Proceeds from sale of loans 5,509,108 3,851,050 3,972,000
Loans originated for sale (5,639,444) (3,898,139) (4,002,285)
Deferred income taxes, net 274,735 (283,013) (362,950)
(Increase) decrease in other assets 343,733 (577,690) 1,848,770
(Increase) decrease in deferred loan fees (50,994) 128,875 (11,400)
Increase (decrease) in other liabilities 395,169 428,919 429,728
------------ ------------ ------------
Net cash provided by operating activities 5,765,039 4,246,514 6,634,924
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 19,658,319 32,953,547 39,136,648
Proceeds from sale of available for sale securities 13,359,055 10,403,936 2,275,042
Purchases of available for sale securities (33,217,242) (10,653,638) (47,824,174)
Purchases of mortgage-backed securities held-to-maturity -- -- (5,996,255)
Loan originations, net of principal repayments (24,681,067) (34,910,401) (2,483,454)
Purchase of premises and equipment (398,833) (424,424) (392,385)
Proceeds from sale of equipment 57,021 229,154 --
------------ ------------ ------------
Net cash used by investing activities (25,222,747) (2,401,826) (15,284,578)
------------ ------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits and savings accounts (467,377) 1,830,406 13,780,306
Net increase (decrease) in certificates of deposit 10,169,981 6,117,017 (4,475,000)
Net increase in other borrowings 4,800,000 -- --
Cash dividends (1,583,923) (1,345,146) (900,472)
Common stock transactions, net (1,095,944) 22,000 (174,458)
------------ ------------ ------------
Net cash provided by financing activities 11,822,737 6,624,277 8,230,376
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (7,634,971) 8,468,965 (419,278)
Cash and cash equivalents at beginning of year 26,800,339 18,331,374 18,750,652
------------ ------------ ------------
Cash and cash equivalents at end of year $ 19,165,368 $ 26,800,339 $ 18,331,374
============ ============ ============
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 2,391,269 $ 2,630,000 $ 2,441,600
Interest 6,409,765 5,865,880 6,267,812
Non-cash investing and financing activities:
Transfer from loans to other real estate owned $ 40,000 $ 70,997 $ 38,705
</TABLE>
See notes to consolidated financial statements.
45
<PAGE> 46
REDDING BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 ("BHCA"), 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 a loan
production office located in Roseville, California.
The Bank conducts a general commercial banking business in the
counties of 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.
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.
46
<PAGE> 47
Investment securities designated 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 designated
available-for-sale may be sold to implement the Company's
asset/liability management strategies and in response to changes in
interest rates, prepayment rates and similar factors. Securities
designated 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, based on current information and events,
management believes it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the
loan agreement. Impairment is measured based upon the present value
of future cash flows discounted at the loan's effective rate, the
loan's observable market price, or the fair value of collateral if
the loan is collateral dependent. Interest on impaired loans is
recognized on a cash basis, and only when the principal is not
considered to be impaired.
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.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is
established through a provision charged to expense. Loans are
charged off against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans, standby letters of credit,
overdrafts and commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, commitments, and current economic conditions
that may affect the borrowers' ability to pay.
47
<PAGE> 48
Material estimates relating to the determination of the allowance
for loan losses are particularly susceptible to significant change
in the near term. Management believes that the allowance for loan
losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, the
FDIC and DFI, as an integral part of their examination process,
periodically reviews the Bank's allowance for loan losses. The FDIC
may require the Bank to recognize additions to the allowance based
on their judgment about information available to them at the time of
their examination.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated
at cost less accumulated depreciation. Provisions for depreciation
included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the related assets.
Expenditures for major renewals and improvements are capitalized and
those for maintenance and repairs are charged to expense as
incurred.
OTHER BORROWINGS - During 1999, the Company obtained advances from
the Federal Home Loan Bank for $1,800,000 at 5.83% maturing
September 2000, $2,000,000 at 6.05% maturing April 2001, and
$1,000,000 at 6.13% maturing September 2001.
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>
1999 1998 1997
<S> <C> <C> <C>
BASIC EPS CALCULATION
Numerator (net income) $4,370,003 $4,054,109 $3,657,695
---------- ---------- ----------
Denominator (average common shares
outstanding) 2,662,675 2,685,603 2,698,530
---------- ---------- ----------
Basic EPS $1.64 $1.51 $1.36
===== ===== =====
DILUTED EPS CALCULATION
Numerator (net income) $4,370,003 $4,054,109 $3,657,695
---------- ---------- ----------
Denominator:
Average common stock outstanding 2,662,675 2,685,603 2,698,530
Options 215,273 159,513 3,957
---------- ---------- ----------
2,877,948 2,845,116 2,702,487
---------- ---------- ----------
Diluted EPS $1.52 $1.42 $1.35
===== ===== =====
</TABLE>
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.
48
<PAGE> 49
Gain recognition on the disposition of real estate is dependent upon
the transaction meeting certain criteria relating to the nature of
the property sold and the terms of the sale. This includes the
buyer's initial and continuing investment, the degree of continuing
involvement by the Bank with the property after the sale, and other
matters. Under certain circumstances, revenue recognition may be
deferred until these criteria are met.
INCOME TAXES - The Company accounts for income taxes under the asset
and liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using 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 - 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.
SEGMENT REPORTING -The Company has two reportable segments:
commercial banking and credit card services. Commercial banking
includes all services to the Company's customers except credit card
services.
Credit card services are limited to those revenues, net of related
data processing costs, associated with the Bank's agreement to
provide credit and debit card processing services for merchants
solicited by an ISO or the Bank who accept credit and debit cards as
payments for goods and services.
49
<PAGE> 50
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 will be effective
for the Company beginning January 1, 2001. 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, 1999 and 1998 was approximately
$3,575,154 and $1,328,000, respectively. In addition, the Bank
maintains compensating balances with the Federal Reserve Bank, which
totaled $1,600,000 and $25,000 at December 31, 1999 and 1998,
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, 1999
---------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities ands
obligation of U.S. agencies $ 21,095,085 $ 0 $ (397,818) $ 20,697,267
Obligations of state and political
subdivisions 4,672,157 14,491 (9,421) 4,677,227
------------ ------------ ------------ ------------
$ 25,767,242 $ 14,491 $ (407,239) $ 25,374,494
============ ============ ============ ============
</TABLE>
<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>
50
<PAGE> 51
The amortized cost and estimated market value of investment
securities held-to-maturity at December 31, 1999 and 1998, which
have contractual maturities of one to five years consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage backed securities $ 5,918,595 $ 10,336 $ (57,732) $ 5,871,199
Federal Home Loan Bank Stock 850,800 -- -- 850,800
----------- ----------- ----------- -----------
$ 6,769,395 $ 10,336 $ (57,732) $ 6,721,999
=========== =========== =========== ===========
</TABLE>
<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>
The amortized cost and estimated market value of investment
securities, excluding FHLB stock, at December 31, 1999 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 $ 8,219,240 $ 8,159,808
Due after one year through five years 14,363,289 14,147,729 $ 499,764 $ 491,250
Due after five years through ten years 3,184,713 3,066,957 5,418,831 5,379,949
----------- ----------- ----------- -----------
$25,767,242 $25,374,494 $ 5,918,595 $ 5,871,199
=========== =========== =========== ===========
</TABLE>
At December 31, 1999, the Bank has pledged $1,000,000 of investment
securities for treasury, tax and loan accounts, and $4,000,000 for
deposits of public funds.
Gross realized gains and gross realized losses on available-for-sale
securities were $18,079 and $76,436 in 1999, $96,020 and $3,192 in
1998, and $15,555 and $10,748 in 1997.
51
<PAGE> 52
5. LOANS
Outstanding loan balances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
<S> <C> <C>
Commercial and financial loans $ 53,382,597 $ 46,890,207
Real estate - construction loans 37,859,258 29,469,989
Real estate - commercial 78,842,238 69,741,702
Installment loans 293,505 297,430
Other 2,811,385 2,225,006
------------ ------------
173,188,983 148,624,334
Less:
Deferred loan fees and costs 371,594 422,588
Allowance for loan losses 2,971,747 3,234,837
------------ ------------
$169,845,642 $144,966,909
============ ============
</TABLE>
Included in total loans are nonaccrual loans of approximately
$394,176 and $941,668 at December 31, 1999 and 1998, respectively.
If interest on nonaccrual loans had been accrued, such income would
have approximated $84,060, $45,565, $31,940 during the years ended
December 31, 1999, 1998 and 1997, 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 $394,176 and $941,668 in impaired loans that had
impairment allowances of $315,341 and $464,960 as of December 31,
1999 and 1998, respectively. The average outstanding balance of
impaired loans were $612,411, and $1,884,744, for the years ended
1999, and 1998 respectively.
The Bank services, for others, loans and participation of loans that
are sold of approximately $3,515,109 and $2,176,198 as of December
31, 1999 and 1998, respectively.
The Bank's lending activities are with customers primarily located
within Shasta County, with residential and commercial 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,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 3,234,837 $ 2,819,039 $ 2,294,146
Provision for loan losses 120,000 500,000 1,023,500
Loans charged off (460,363) (208,823) (604,846)
Recoveries of loans previously charged off 77,273 124,621 106,239
----------- ----------- -----------
Balance at end of year $ 2,971,747 $ 3,234,837 $ 2,819,039
=========== =========== ===========
</TABLE>
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -----------------------------
LIVES 1999 1998
<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 2,693,770 2,398,764
----------- -----------
7,963,425 7,668,419
Less accumulated depreciation (2,544,081) (2,120,346)
----------- -----------
5,419,344 5,548,073
Construction in progress 54,552 55,666
----------- -----------
$ 5,473,896 $ 5,603,739
=========== ===========
</TABLE>
Depreciation expense, included in net occupancy and equipment
expense, is $471,655, $433,910, and $405,597 for the years ended
December 31, 1999, 1998 and 1997, respectively.
7. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
Cash surrender value of life insurance
policies (note 14) $1,931,870 $1,846,611
Deferred tax assets (note 10) 2,008,552 1,931,217
Accrued interest on loans 925,112 756,011
Accrued interest on investment securities 419,898 384,633
Other real estate owned 40,000 66,000
Other 565,050 1,172,408
---------- ----------
$5,890,482 $6,156,880
========== ==========
</TABLE>
53
<PAGE> 54
8. DEPOSITS
Time certificates of deposit of $100,000 or more totaled $41,862,073
and $42,275,241 at December 31, 1999 and 1998, respectively.
Interest expense on such deposits was $2,116,417, $1,878,254 and
$1,981,657 during 1999, 1998 and 1997, respectively.
At December 31, 1999, the scheduled maturities for time deposits are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $ 86,134,243
2001 15,333,726
2002 1,630,433
2003 90,098
------------------
Total $ 103,188,500
==================
</TABLE>
9. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
Deferred compensation (note 14) $1,795,819 $1,737,327
Employee incentive payable 519,575 330,058
Accrued interest payable 296,005 270,986
Deferred tax liability (note 10) 511,182 380,191
Other 213,999 91,858
---------- ----------
$3,336,580 $2,810,420
========== ==========
</TABLE>
10. INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 1,941,187 $ 2,210,608 $ 1,988,106
State 485,321 518,666 504,585
----------- ----------- -----------
2,426,508 2,729,274 2,492,691
----------- ----------- -----------
Deferred:
Federal 210,068 (230,101) (290,325)
State 64,667 (52,912) (72,625)
----------- ----------- -----------
274,735 (283,013) (362,950)
----------- ----------- -----------
$ 2,701,243 $ 2,446,261 $ 2,129,741
=========== =========== ===========
</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
-------------------------------
1999 1998 1997
<S> <C> <C> <C>
Income tax at the Federal statutory rate 34.00% 34.00% 34.00%
State franchise tax, net of Federal tax benefit 7.15 7.08 7.01
Tax-exempt interest (3.60) (3.77) (4.37)
Other .65 .32 .16
----- ----- -----
38.20% 37.63% 36.80%
===== ===== =====
</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, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
State franchise taxes $ 163,268 $ 72,298
Deferred compensation 804,829 720,664
Loan loss reserves 871,979 1,049,002
Unrealized securities losses 152,386 0
Other 16,090 89,253
----------- -----------
Total deferred tax assets 2,008,552 1,931,217
----------- -----------
Deferred tax liabilities:
Depreciation (284,616) (299,195)
Unrealized securities gains (0) (68,693)
Deferred loan origination costs (132,750) (12,303)
Deferred State taxes (93,816) 0
----------- -----------
Total deferred tax liabilities (511,182) (380,191)
----------- -----------
Net deferred taxes $ 1,497,370 $ 1,551,026
=========== ===========
</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 non-statutory stock
options ("NSOs") to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan
may not be granted at less than 100% of fair market value of the
Company's common stock on the date of the grant. NSOs may not be
granted at less than 85% of the fair market value of the common
stock on the date of the grant. The purpose of the plan is to
promote the long-term success of the Company and the creation of
stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the
Company to attract and retain key personnel and (c) linking key
personnel directly to stockholder interests through increased stock
ownership. A total of 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.
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, 1996 and 1997 6,000 $ 3.67
Granted 411,000 $ 9.62
Exercised (6,000) $ 3.67
------
Options outstanding, December 31, 1998 411,000 $ 9.62
Granted 4,500 $19.00
Exercised (10,300) $ 9.87
------
Options outstanding, December 31, 1999 405,200 $10.45
======
</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 1999, 1998 and 1997 related to the
Plan was $77,865, $130,000, and $0 respectively.
The Company uses an option-pricing model to compute grant-date fair
value of options granted for purposes of disclosing pro forma net
income and net income per share. In computing the grant-date fair
value of options granted during the period for disclosure purposes,
the Company used an option-pricing model that takes into account the
stock price at the grant date ($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 $.05 per share per year) and the risk-free interest rate
over the expected life of the option (6.68%). Under these
assumptions, no additional compensation cost would be accrued under
this fair value based model than that computed under the intrinsic
value based method. Therefore, the pro forma disclosures are not
required.
56
<PAGE> 57
12. CAPITAL STOCK
On May 18, 1999, the Board of Directors authorized the purchase in
the open market or in private transactions up to 411,000 shares of
its outstanding common stock over a seven-year period. During 1999,
57,881 shares were purchased and retired. Shares purchased are
retired by a charge to common stock for the cost. On April 20, 1999,
the Board of Directors authorized 2,000,000 shares of preferred
stock. As of December 31, 1999 no shares have been issued.
13. PROFIT-SHARING PLAN
In 1985, the Bank adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the Bank's earnings. The employees'
contributions are limited to the maximum amount allowable under IRS
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 $38,104, $31,892, and $28,181 for the
years ended December 31, 1999, 1998 and 1997, respectively. The Bank
made a discretionary contribution of $25,000, $0, and $25,000 for
1999, 1998 and 1997 respectively.
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,
--------------------------
1999 1998
<S> <C> <C>
Balance at beginning of year $ 457,114 $ 474,776
New loan additions 863,060 394,209
Principal repayments (381,865) (411,871)
--------- ---------
Balance at end of year $ 938,309 $ 457,114
========= =========
</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,
----------------------------
1999 1998
<S> <C> <C>
Off-balance sheet commitments:
Commitments to extend credit $47,848,820 $34,820,097
Standby letters of credit 1,618,830 1,262,852
</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 customer's creditworthiness, but
may include cash and securities.
Commitments to extend credit and standby letters of credit bear
similar credit risk characteristics as outstanding loans.
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
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, 1999 and 1998, 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, 1999:
COMPANY
Leverage capital (to average assets) $26,299,757 11.31% $ 9,088,079 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 26,299,757 14.33% 7,191,262 4.00% n/a n/a
Total capital (to risk-weighted assets) 28,594,607 15.58% 14,382,525 8.00% n/a n/a
BANK
Leverage capital (to average assets) $24,859,547 10.44% $ 9,141,919 4.00% $11,905,107 5.00%
Tier 1 Capital (to risk-weighted assets) 24,859,547 13.59% 7,191,262 4.00% 11,015,280 6.00%
Total capital (to risk-weighted assets) 27,154,397 14.85% 14,382,525 8.00% 18,358,800 10.00%
At December 31, 1998:
COMPANY
Leverage capital (to average assets) $24,531,756 11.58% $ 8,472,262 4.00% n/a n/a
Tier 1 Capital (to risk-weighted assets) 24,531,756 15.25% 6,432,789 4.00% n/a n/a
Total capital (to risk-weighted assets) 26,542,003 16.50% 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% 9,649,184 6.00%
Total capital (to risk-weighted assets) 25,062,799 15.58% 12,865,578 8.00% 16,081,973 10.00%
</TABLE>
The principal sources of cash for the Company are dividends from the
Bank. Dividends from the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings or the
Bank's net income for the latest three fiscal years, less dividends
previously declared during that period, or, with the approval of
California Superintendent of Banks, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal
year, or the net income of the Bank for its current fiscal year. As
of December 31, 1999 the maximum amounts available for dividend
distribution under this restriction were approximately $8,252,266.
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 1999 or 1998.
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 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 the agreement
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
inter-segment transactions.
The following table presents financial information about the
Company's reportable segments:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income before income taxes:
Commercial banking $5,188,941 $4,772,521 $4,009,865
Credit card services 1,882,305 1,727,849 1,777,571
-------------------------------------------------------------
$7,071,246 $6,500,370 $5,787,436
==============================================================
</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
charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligation with the counterparties at
the reporting date.
60
<PAGE> 61
DEPOSIT LIABILITIES - The fair values disclosed for demand deposits
(e.g., interest and noninterest checking, passbook savings, and
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair
value.
OTHER BORROWINGS - The fair value of other borrowings is estimated
by discounting the contractual cash flows under outstanding
borrowings at rates prevailing in the marketplace today for similar
borrowings, rates and collateral.
LIMITATIONS - Fair value estimates are made at a specific point in
time, based on relevant market information and other information
about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one
time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
61
<PAGE> 62
Fair value estimates are based on current on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, deferred tax
assets and liabilities, and property, plant and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the
estimates.
The estimated fair values of the Bank's financial instruments are
approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 19,165,368 $ 19,165,368
Investment securities 32,143,889 32,096,493
Loans receivable, net 169,845,642 168,418,851
Financial liabilities:
Demand and savings $ 95,134,802 $ 95,134,802
Fixed rate certificates 88,002,231 87,826,000
Variable certificates 15,186,269 15,186,269
Short term borrowings 4,800,000 4,800,000
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
<S> <C> <C> <C>
Off balance sheet financial instruments:
Commitments to extend credit $47,848,820 - $ 956,976
Standby letters of credit 1,618,830 - 32,377
</TABLE>
<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 receivable, net 144,966,909 145,548,648
Financial liabilities:
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
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
<S> <C> <C> <C>
Off balance sheet financial instruments:
Commitments to extend credit $34,820,097 - $ 696,402
Standby letters of credit 1,262,852 - 25,257
</TABLE>
62
<PAGE> 63
19. REDDING BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
<S> <C> <C>
BALANCE SHEETS
Assets:
Cash $ 163,080 $ 159,894
Time deposit with subsidiary 1,015,000 1,090,000
Investment in subsidiaries 24,881,315 23,403,983
----------- -----------
Total assets $26,059,395 $24,653,877
=========== ===========
Other liabilities $ -- $ --
Stockholders' Equity 26,059,395 24,653,877
----------- -----------
Total liabilities and stockholders' equity $26,059,395 $24,653,877
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on time deposit $ 42,259 $ 13,719 $ 8,531
Dividend from subsidiary 2,840,272 2,000,000 1,600,000
---------- ---------- ----------
2,882,531 2,013,719 1,608,531
Expenses 297,414 292,651 17,881
---------- ---------- ----------
Income before income taxes and net
equity in undistributed net income
of subsidiaries 2,585,117 1,721,068 1,590,650
Provision for income taxes(2) 800 800 800
---------- ---------- ----------
Income before equity in undistributed
net income of subsidiaries 2,584,317 1,720,268 1,589,850
Equity in undistributed net income of
subsidiaries 1,785,686 2,333,841 2,067,844
---------- ---------- ----------
Net income $4,370,003 $4,054,109 $3,657,694
========== ========== ==========
</TABLE>
- ----------
(2) Under the Company's intercompany tax allocation policy, all tax benefits
resulting from net losses before dividends from subsidiaries are allocated to
the Bank.
63
<PAGE> 64
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
STATEMENTS OF CASH FLOWS
------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,370,003 $ 4,054,109 3,657,694
Adjustments to reconcile net income to
net cash provided by operating activities:
Compensation associated with stock options 77,865 130,136 --
Equity in undistributed net income of
subsidiaries (1,785,686) (2,333,841) (2,067,844)
----------- ----------- -----------
Net cash provided by operating activities 2,662,182 1,850,404 1,589,851
----------- ----------- -----------
Financing activities:
Purchase of common stock (1,243,094) -- (174,458)
Common stock issued 93,021 22,000 --
Cash dividends (1,583,923) (1,345,146) (900,472)
----------- ----------- -----------
Net cash used by financing activities (2,733,996) (1,323,146) (1,074,930)
----------- ----------- -----------
Decrease in cash and cash equivalents (71,814) 527,258 514,921
Cash and cash equivalents at beginning of year 1,249,894 722,636 207,715
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,178,080 $ 1,249,894 $ 722,636
=========== =========== ===========
</TABLE>
64
<PAGE> 65
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 to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Shareholders (the "Proxy
Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 1,
2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Russell L. Duclos........................ 60 President, Chief Executive Officer and Director
Linda J. Miles........................... 46 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Michael C. Mayer......................... 43 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.
The remainder of the information required by this section is
incorporated by reference to the information in the section entitled "Election
of Directors " and "Executive Compensation" in the Proxy Statement.
65
<PAGE> 66
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this section is incorporated by
reference to the information in the sections entitled "Election of
Directors--Directors' Compensation" and "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is incorporated by
reference to the information in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal shareholders of the
Company and their associates were customers of and had banking transactions with
the Bank in the ordinary course of the Bank's business during 1998 and the Bank
expects to have such transactions in the future. All loans and commitments to
loans included in such transactions were made in compliance with the applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
of similar creditworthiness, and in the opinion of the Company, did not involve
more than a normal risk of collectibility or present other unfavorable features.
66
<PAGE> 67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial
Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits:
<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 47 ).*
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 67 )
27.1 Financial Data Schedule.
</TABLE>
---------------------
* Filed with the Company's Registration Statement on
Form 10.
(b) Reports on Form 8-K:
None.
67
<PAGE> 68
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,
2000.
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 Director March 21, 2000
- ------------------------------------- (Principal Executive Officer)
Russell L. Duclos
/s/ LINDA J. MILES Executive Vice President and Chief Financial Officer March 21, 2000
- ------------------------------------- and Assistant Secretary (Principal Financial Officer
Linda J. Miles and Accounting Officer)
/s/ ROBERT C. ANDERSON Chairman of the Board March 21, 2000
- -------------------------------------
Robert C. Anderson
/s/ WELTON L. CARREL Director March 21, 2000
- -------------------------------------
Welton L. Carrel
/s/ JOHN C. FITZPATRICK Director March 21, 2000
- -------------------------------------
John C. Fitzpatrick
/s/ KENNETH R. GIFFORD, JR. Director March 21, 2000
- -------------------------------------
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C> <C>
Kenneth R. Gifford, Jr.
/s/ HARRY L. GRASHOFF, JR. Director March 21, 2000
- -------------------------------------
Harry L. Grashoff, Jr.
/s/ EUGENE L. NICHOLS Director March 21, 2000
- -------------------------------------
Eugene L. Nichols
/s/ DAVID H. SCOTT Director March 21, 2000
- -------------------------------------
David H. Scott
</TABLE>
69
<PAGE> 70
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 47 ).*
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 67 ).
27.1 Financial Data Schedule.
</TABLE>
---------------------
* Filed with the Company's Registration Statement on
Form 10.
70
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
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 statements of income,
stockholders' equity and cash flows for the year ended December 31, 1997, which
report appears in the December 31, 1999 annual report on Form 10-K of Redding
Bancorp.
/s/ KPMG LLP
Sacramento, California
March 20, 2000
<PAGE> 1
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 21, 2000,
appearing in this Annual Report on Form 10-K of Redding Bancorp for the year
ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Sacramento, California
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary Financial information extracted from the
Company's Consolidated Balance sheets and Consolidated Statements of Operations
found on pages 2,3,4 and 5 of the Company's Financial statements for the
year-to-date of each period and is qualified in its entirety by reference to
such financial information.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,165
<SECURITIES> 32,143
<RECEIVABLES> 0
<ALLOWANCES> 2,972
<INVENTORY> 0
<CURRENT-ASSETS> 221,155
<PP&E> 5,474
<DEPRECIATION> 0
<TOTAL-ASSETS> 232,519
<CURRENT-LIABILITIES> 198,323
<BONDS> 0
0
0
<COMMON> 4,809
<OTHER-SE> 21,491
<TOTAL-LIABILITY-AND-EQUITY> 232,519
<SALES> 0
<TOTAL-REVENUES> 20,060
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,434
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 6,434
<INCOME-PRETAX> 7,071
<INCOME-TAX> 12,701
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,370
<EPS-BASIC> 1.64
<EPS-DILUTED> 1.52
</TABLE>
