<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-25135
REDDING BANCORP
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2823865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date. March 31, 2000: 2,618,553
1
<PAGE> 2
REDDING BANCORP & SUBSIDIARIES
INDEX TO FORM 10-Q
================================================================================
<TABLE>
<S> <C>
PART I. Financial Information Page:
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ............................ 3
Consolidated Statements of Income
Three months ended March 31. 2000 and 1999 ...................... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 ...................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis Of
Financial Condition and Results of Operations ............. 8
Item 3. Quantitative and Qualitative Disclosure
about Market Risk ......................................... 16
PART II. Other Information
Item 1. Legal proceedings ......................................... 17
Item 2. Changes in Securities and use of proceeds ................. 17
Item 3. Defaults Upon Senior Securities ........................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....... 18
Item 5. Other Information ......................................... 18
Item 6. Exhibits and Report on Form 8-K ........................... 18
SIGNATURES ................................................................. 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets:
Cash & Due From Banks $ 11,236 $ 11,605
Federal Funds Sold 18,140 7,560
--------- ---------
Cash and cash equivalents 29,376 19,165
Investment Securities:
Available for sale (amortized cost $20,269 and $25,767) 19,884 25,375
Held to maturity (market value of $6,656 and $6,722) 6,726 6,769
--------- ---------
26,610 32,144
Portfolio Loans:
Real Estate - Construction 39,034 37,859
Real Estate - Commercial 83,286 78,842
Commercial & Financial 52,665 53,383
Installment Loans 312 294
Other Loans 1,956 2,812
--------- ---------
Total Gross Loans 177,253 173,190
Deferred loan fees (385) (372)
Less allowance for loan losses (2,975) (2,972)
--------- ---------
Net Loans 173,893 169,846
Premise & Equipment 5,433 5,474
Other Assets 5,706 5,890
--------- ---------
Total Assets $ 241,018 $ 232,519
========= =========
Liabilities:
Demand Accounts $ 35,151 $ 40,381
NOW & Money Market 43,528 43,176
Savings Accounts 14,665 11,577
Time Accounts 112,256 103,189
--------- ---------
Total Deposits 205,600 198,323
Borrowed Funds 4,800 4,800
Other Liabilities 4,201 3,337
--------- ---------
Total Liabilities 214,601 206,460
Stockholders' Equity:
Common Stock 5,142 4,809
Retained Earnings 21,513 21,491
Accumulated other comprehensive income (238) (241)
--------- ---------
26,417 26,059
--------- ---------
Total Liabilities & Stockholders' Equity $ 241,018 $ 232,519
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Interest Income:
Interest & Fees on Loans $ 4,136 $3,381
Interest on Investments 406 500
Interest on Federal Funds Sold 145 190
------- ------
Total Interest income 4,687 4,071
------- ------
Interest Expense:
Interest on Checking 192 182
Interest on Savings 106 100
Interest on Time Deposits 1,432 1,200
Interest on Borrowed Funds 79 0
------- ------
Total Interest Expense 1,809 1,482
------- ------
Net Interest Income 2,878 2,589
Provision for Loan Losses 0 25
------- ------
Net Interest Income After Provision
for loan losses 2,878 2,564
------- ------
Noninterest Income:
Service Charges 53 73
Credit Card Income, net 470 415
Other Income 212 193
Gain (loss) sale of Investment
Securities available for sale (59) 0
------- ------
Total Other Income: 676 681
------- ------
Noninterest Expense:
Salaries & Benefits 900 963
Occupancy & Equipment 268 229
Data Processing & Other Professional 134 223
Other Expense 350 341
------- ------
Total Other Expense 1,652 1,756
------- ------
Income before Income Taxes 1,902 1,489
Provision for Income Tax 737 590
------- ------
Net Income $ 1,165 $ 899
======= ======
Basic Earnings per Share $ 0.44 $ 0.33
Weighted Average Shares 2,631 2,690
Diluted Earnings per Share $ 0.41 $ 0.31
Weighted Average Shares 2,819 2,870
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, 2000 March 31,1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,165 $ 899
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 0 25
Provision for depreciation 121 114
Compensation associated with stock options 17 11
Amortization of investment premiums and
Accretion of discounts, net 26 (84)
(Gain) loss on sale of loans (56) 29
Proceeds from sales of loans 2,062 518
Loans originated for sale (2,118) (547)
Decrease in other assets 185 976
Increase in deferred loan fees 13 58
Increase in other liabilities 986 6
-------- --------
Net cash provided by operating activities 1,236 1,106
-------- --------
Cash flows from investing activities:
Proceeds from maturities of available for sale investment
securities 1,031 10,746
Proceeds from sale of available for sale investment securities 4,420 0
Loss on sale of available for sale investment securities 59 --
Purchases of available for sale investment securities 0 (20,088)
Loan origination's, net of principal repayments (3,949) (2,849)
Purchases of premises and equipment (80) (167)
-------- --------
Net cash provided (used) by investing activities 1,481 (12,358)
-------- --------
Cash flows from financing activities:
Net change in demand deposits and savings (1,791) 1,122
Net change in certificates of deposit 9,068 5,337
Common stock repurchase transactions (1,143) --
Common stock options exercised 195 --
-------- --------
Net cash provided by financing activities 6,329 6,459
-------- --------
Net increase (decrease) in cash and cash equivalents 10,211 (3,894)
Cash and cash equivalents at beginning of period 19,165 26,800
-------- --------
Cash and cash equivalents at end of period $ 29,376 $ 22,906
======== ========
Supplemental disclosures:
Cash paid during the period for:
Income taxes 102 71
Interest 1,768 1,464
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
REDDING BANCORP & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements should be read in
conjunction with the financial statements and related notes contained in Redding
Bancorp's 1999 Annual Report to Shareholders. The statements include the
accounts of Redding Bancorp ("the Company"), and its wholly owned subsidiaries,
Redding Bank of Commerce ("RBC") and Redding Service Corporation. All
significant inter-company balances and transactions have been eliminated. The
financial information contained in this report reflects all adjustments that in
the opinion of management are necessary for a fair presentation of the results
of the interim periods. All such adjustments are of a normal recurring nature.
The results of operations and cash flows for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and repurchase agreements.
Federal funds sold and repurchase agreements are generally for one day periods.
2. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. The following table displays the
computation of earnings per share for the three ended March 31, 2000 and 1999.
(Dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
------ ------
<S> <C> <C>
Basic EPS Calculation:
Numerator (net income) $1,165 $ 899
Denominator (average common
shares outstanding) 2,631 2,690
Basic earnings per Share $ 0.44 $ 0.33
Diluted EPS Calculation:
Numerator (net income) $1,165 $ 899
Denominator:
Average common shares outstanding 2,631 2,690
Options 188 190
------ ------
2,819 2,880
Diluted earnings per Share $ 0.41 $ 0.31
====== ======
</TABLE>
6
<PAGE> 7
3. COMPREHENSIVE INCOME
The Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
------- ------
<S> <C> <C>
Net Income as reported $ 1,165 $ 899
Other comprehensive income (net of tax):
Change in unrealized holding
gain (loss) on available for sale securities (33) (88)
Reclassification adjustment 35 --
------- ------
Total comprehensive income $ 1,167 $ 811
======= ======
</TABLE>
4. COMMON STOCK DIVIDEND
No dividends were declared in the first quarter of 2000. The last dividend the
Board of Directors declared was on September 21, 1999. An annual cash dividend
of 60 cents per share on the Company's Common Stock was paid to shareholders of
record as of October 1, 1999.
5. SEGMENT REPORTING
The Company has two reportable segments: commercial banking and credit card
services. The Company conducts a general commercial banking business in the
counties of El Dorado, Placer, Shasta, and Sacramento, California. The principal
commercial banking activities include a full-array of deposit accounts and
related services and commercial lending for businesses and their interests.
Credit card services are limited to those revenues and data processing costs
associated with its agreement with an Independent Sales Organization (ISO),
pursuant to which the Bank provides credit and debit card processing services
for merchants solicited by the ISO or the Bank who accept credit and debit cards
as payments for goods and services.
The following table presents financial information about the
Company's reportable segments:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
------ ------
<S> <C> <C>
Net income before taxes allocated to:
Commercial Banking $1,432 $1,074
Credit card services 470 415
------ ------
$1,902 $1,489
====== ======
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and hedging activities. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. The effective date for the statement has been postponed
until the year 2001. The Company is in the process of determining the impact of
SFAS No. 133 on the Company's financial statements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT.
This quarterly report on Form 10-Q includes forward-looking information, which
is subject to the "safe harbor" created by the Securities Act of 1933, and
Securities Act of 1934. These forward-looking statements (which involve the
Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
- - Competitive pressure in the banking industry and changes in the regulatory
environment.
- - Changes in the interest rate environment and volatility of rate sensitive
deposits.
- - The health of the economy declines nationally or regionally which could
reduce the demand for loans or reduce the value of real estate collateral
securing most of the Company's loans.
- - Credit quality deteriorates which could cause an increase in the provision
for loan losses.
- - Losses in the Company's merchant credit card processing business.
- - Asset/Liability matching risks and liquidity risks.
- - Changes in the securities markets.
For additional information concerning risks and uncertainties related to the
Company and its operations please refer to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 under the heading "Risk factors that
may affect results". Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 1999
to March 31, 2000. Also discussed are significant trends and changes in the
Company's results of operations for the three months ended March 31, 2000,
compared to the same period in 1999. The consolidated financial statements and
related notes appearing elsewhere in this report are condensed and unaudited.
GENERAL
The Company is a bank holding company with its principal offices in
Redding, California. The Company engages in a general commercial banking
business in Redding and the counties of El Dorado, Placer, Shasta, and
Sacramento, California. The Company considers Shasta County to be the Company's
major market area. The Company conducts its business through the Bank, its
principal subsidiary. The services offered by the Company include those
traditionally offered by commercial banks of similar size and character in
California, such as checking, interest-bearing checking ("NOW") and savings
accounts, money market deposit accounts, commercial, construction, real estate,
personal, home improvement, automobile and other installment and term loans,
travelers checks, safe deposit boxes, collection services, and telephone
transfers. The Company has had a loan production office in the Sacramento area
since 1988. On March 15, 2000, the Company filed applications with the Federal
Deposit Insurance Corporation and the California Department of Financial
Institutions to convert the Sacramento loan production office to a full service
banking facility. On March 29, 2000, the Company received notification from the
Federal Deposit Insurance Corporation approving the new facility effective April
10, 2000.
The primary focus of the Company is to provide service to the business and
professional community of its major market area including Small Business
Administration ("SBA") loans, and payroll and accounting packages and billing
programs. The Company does not offer trust services or international banking
services and does not plan to do so in the near future.
8
<PAGE> 9
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA") which
became effective on March 11, 2000. The FSA repeals provisions of the
Glass-Steagall Act, which had prohibited commercial banks and securities firms
from affiliating with each other and engaging in each other's businesses. Thus,
many of the barriers prohibiting affiliations between commercial banks and
securities firms have been eliminated.
The BHCA is also amended by the FSA, to allow new "financial holding
companies" ("FHC") to offer banking, insurance, securities and other financial
products to consumers. Specifically, the FSA amends section 4 of the BHCA in
order to provide for a framework for the engagement in new financial activities.
Bank holding companies ("BHC") may elect to become a financial holding company
if all its subsidiary depository institutions are well-capitalized and
well-managed. If these requirements are met, a BHC may file a certification to
that effect with the 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. On March 15, 2000
the Company filed the necessary certification and declarations to become a
financial holding company. On March 28, 2000 the Company received notification
from the Federal Reserve Board that the election to become a financial holding
company will be effective on April 22. 2000.
The Company derives its income from two principal sources: (i) net interest
income, which is the difference between the interest income it receives on
interest-earning assets and the interest expense it pays on interest-bearing
liabilities, and (ii) fee income, which includes fees earned on deposit
services, income from SBA lending, electronic-based cash management services and
merchant credit card processing services. Management considers the business of
the Company to be divided into two segments: (i) commercial banking and (ii)
credit card services. Credit card services are limited to those revenues, net of
related data processing costs, associated with the Merchant Services Agreement
and the Bank's agreement to provide credit and debit card processing services
for merchants solicited by the Bank who accept credit and debit cards as
payments for goods and services.
RESULTS OF OPERATIONS
The Company reported earnings of $1,165,000, for the quarter ended March
31, 2000. The quarterly earnings represent a 29.6% increase over the $899,000
reported for the same period of 1999. Diluted earnings per share for the first
quarter of 2000 were $0.41, compared to $0.31 for the same period of 1999.
Factors contributing to the increase in operating results include an
increase in the volume of earning assets, an increase in net interest rate
spread and margin, coupled with a decrease in other non-interest expense
representing the closing of the Chico loan production office, and a reduction in
professional legal expensES.
NET INTEREST INCOME
Net interest income is the primary source of income for the Bank. Net
interest income represents the excess of interest and fees earned on
interest-earning assets (loans, investments and Federal Funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
For the three months ended March 31, 2000, interest income increased
$616,000 (15.1%) over the same period in 1999. Interest expense on deposit
accounts and borrowings increased $327,000 (22.1%) over the same three-month
period in 1999. During this quarter, the Company obtained brokered deposits of
$4,700,000 due in March 2002, at a yield of 7.03% intended to stabilize
liquidity and assist in the development of the Roseville Banking Center. The
strategy is to replace the brokered deposits with core deposits developed at the
new location.
The combined effect of the increase in volume of earning assets and
increase in yield on earning assets, coupled with increases in cost of funding
sources resulted in an increase of $289,000 (11.2%) in net interest income for
the three month period ended March 31, 2000 over the same period in 1999. Net
interest margin increased 25 basis points to 5.35% from 5.10% for the same
period a year ago. The increase is a result of the current rising interest rate
environment.
9
<PAGE> 10
The following table sets forth the Company's daily average balance sheet,
related interest income or expense and yield or rate paid for the periods
indicated. Tax-exempt investment yields have not been adjusted to a
tax-equivalent yield basis.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
March 31, 2000 March 31, 1999
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Portfolio Loans $175,875 $4,136 9.41% $148,058 $3,381 9.13%
Tax Exempt Securities 3,641 40 4.39% 5,840 63 4.32%
US Government 18,567 254 5.47% 28,102 404 5.75%
Federal Funds Sold 10,471 145 5.54% 17,693 190 4.30%
Other Securities 6,750 112 6.64% 3,187 33 4.14%
-------- ------ ----- -------- ------ -----
Average Earning Assets $215,304 $4,687 8.71% $202,880 $4,071 8.03%
------ ------
Cash & Due From Banks $ 10,940 $ 10,536
Bank Premises 5,459 5,681
Allowance for Loan Losses (2,973) (3,251)
Other Assets 4,927 4,388
-------- --------
Average Total Assets $233,657 $220,234
======== ========
Interest Bearing Liabilities
Demand Interest Bearing $ 39,869 $ 192 1.93% $ 39,660 $ 182 1.81%
Savings Deposits 15,037 106 2.82% 14,871 100 2.69%
Certificates of Deposit 107,518 1,432 6.58% 98,386 1,200 4.88%
Borrowings 4,800 79 0 0 --
-------- ------ ----- -------- ------ -----
5.33%
-----
167,224 $1,809 4.33% 152,917 1,482 3.88%
------ ------
Non interest Demand 37,745 40,506
Other Liabilities 2,979 2,498
Shareholder Equity 25,709 24,313
------ --------
Average Liabilities and
Shareholders Equity $233,657 $220,234
======== ========
Net Income and Net
Interest Margin $2,878 5.35% $2,589 5.10%
====== ======
</TABLE>
10
<PAGE> 11
The following tables set forth changes in interest income and expense for each
major category of earning assets and interest-bearing liabilities, and the
amount of change attributable to volume and rate changes for the periods
indicated. Changes attributable to rate/volume have been allocated to volume
changes.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 2000 over March 31, 1999
Volume Rate Total
------ ------ ------
<S> <C> <C> <C>
Increase(Decrease) In
Interest Income
Portfolio loans $ 654 $ 101 $ 755
Tax exempt securities (24) 1 (23)
US Government securities (130) (20) (150)
Federal Funds Sold (100) 55 (45)
Other Securities 59 20 79
------ ------ ------
Total Increase $ 459 $ 157 $ 616
------ ------ ------
Increase(Decrease) In
Interest Expense
Interest Bearing Demand $ 1 $ 9 $ 10
Savings Deposits 1 5 6
Certificates of Deposit 122 110 232
Borrowings 79 0 79
------ ------ ------
Total Increase $ 203 $ 124 $ 327
------ ------ ------
Net Increase $ 256 $ 33 $ 289
====== ====== ======
</TABLE>
NONINTEREST INCOME
The Company's noninterest income consists of processing fees for merchants
who accept credit card payments for goods and services, service charges on
deposit accounts, and other service fees. 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.
For the three months ended March 31, 2000, noninterest income decreased a
modest $5,000 over the same period in 1999. Credit card processing income
increased $55,000 (13.3%) while service charge income declined $20,000 (27.4%)
over the same period 1999.
11
<PAGE> 12
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.
Contributing to the decrease in noninterest income are losses on sales of
investment securities sold for liquidity purposes. Management determined the
sales of investment securities to be more cost effective than increasing
borrowings.
The following table sets forth a summary of noninterest income for the periods
indicated.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
2000 1999
---- ----
(Dollars in
Thousands)
<S> <C> <C>
Noninterest Income
Service Charges $ 53 $ 73
Credit Card Income, net 470 415
Other Income 212 193
Gain (loss) sale of investment securities (59) 0
---- ----
Total noninterest income $676 $681
==== ====
</TABLE>
NONINTEREST EXPENSE
Noninterest expenses consist of salaries and related employee benefits,
occupancy and equipment expenses, data processing fees, professional fees,
directors' fees and other operating expenses.
For the three months ended March 31, 2000, noninterest expense decreased
$116,000 over the same period in 1999. Salaries and benefits decreased $63,000
(6.5%) indicative of the closure of the Chico loan production office, increases
in the deferral portion of loan costs used to offset salaries, and a reduction
in the accrual for profit sharing.
The following table sets forth a summary of noninterest expense for the
periods indicated.
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
------ ------
<S> <C> <C>
Noninterest Expense
Salaries and Benefits $ 900 $ 963
Occupancy & Equipment 268 229
Data Processing Fees 18 41
Professional Fees 133 182
Directors Expenses 58 64
Other Expenses 275 289
------ ------
Total Noninterest expense $1,652 $1,768
====== ======
</TABLE>
INCOME TAXES
The Company's provision for income taxes includes both federal and state
income taxes and reflects the application of federal and state statutory rates
to the Company's net income before taxes. The principal difference between
statutory tax rates and the Company's effective tax rate is the benefit derived
from investing in tax-exempt securities. Increases and decreases in the
provision for taxes reflect changes in the Company's net income before tax.
The following table reflects the Company's tax provision and the related
effective tax rate for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Income Taxes
Tax provision $737 $590
Effective tax rate 38.8% 39.6%
</TABLE>
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and non-deductible expenses. The increase in
the Company's tax provision is attributable to increases in the Company's net
income.
12
<PAGE> 13
ASSET QUALITY
The Company concentrates its lending activities primarily within Shasta
County, California, and the location of the Bank's two full service branches.
The Company also makes loans to borrowers in El Dorado, Placer, and Sacramento
counties through its Roseville loan production office.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from the cash flows of the borrower or proceeds from the
sale of collateral.
The following table sets forth the amounts of loans outstanding by category
as of the dates indicated:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Portfolio Loans
Commercial & Financial $ 52,665 $ 53,383
Real Estate-Construction 39,034 37,859
Real Estate-Commercial 83,286 78,842
Installment 312 294
Other Loans 1,956 2,812
Less:
Deferred Loan Fees and Costs (385) (372)
Allowance for Loan Losses (2,975) (2,972)
--------- ---------
Total Net Loans $ 173,893 $ 169,846
========= =========
</TABLE>
The Company's practice is to place an asset on nonaccrual status when one
of the following events occurs: (i) any installment of principal or interest is
90 days or more past due (unless in management's opinion the loan is well
secured and in the process of collection). (ii) Management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing or have been restructured.
Net portfolio loans increased $4,047,000 or 2.4% at March 31, 2000 over
$169.8 million at December 31, 1999. The portfolio mix remains stable with the
mix at December 31, 1999, with commercial and financial loans of approximately
30%, real estate construction of 22% and commercial real estate at 48%.
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 $369,176
and $394,176 in impaired loans that had impairment allowances of $295,341 and
$315,341 as of March 31, 2000 and December 31, 1999, respectively.
The following table sets forth a summary of the Company's nonperforming
assets as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Non performing assets
Nonaccrual loans $369 $394
Other Real Estate Owned 22 40
---- ----
</TABLE>
The Company's nonaccrual loans decreased from $394,000 to $369,000 in the
first three months of 2000. OREO properties decreased from $40,000 to $22,000
through write down of property values, and consists of one property.
13
<PAGE> 14
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The Company makes provisions to the ALLL on a regular basis through charges
to operations that are reflected in the Company's statements of income as a
provision for loan losses. When a loan is deemed uncollectible, it is charged
against the allowance. Any recoveries of previously charged-off loans are
credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio.
Similarly, the adequacy of the ALLL and the level of the related provision
for possible loan losses is determined on a judgment basis by management based
on consideration of (i) economic conditions, (ii) borrowers' financial
condition, (iii) loan impairment, (iv) evaluation of industry trends, (v)
industry and other concentrations, (vi) loans which are contractually current as
to payment terms but demonstrate a higher degree of risk as identified by
management, (vii) continuing evaluation of the performing loan portfolio, (viii)
monthly review and evaluation of problem loans identified as having loss
potential, (ix) quarterly review by the Board of Directors, (x) off balance
sheet risks and (xi) assessments by regulators and other third parties.
Management and the Board of Directors evaluate the allowance and determine its
desired level considering objective and subjective measures, such as knowledge
of the borrowers' business, valuation of collateral, the determination of
impaired loans and exposure to potential losses.
The ALLL is a general reserve available against the total loan portfolio
and off balance sheet credit exposure. It is maintained without any
interallocation to the categories of the loan portfolio, and the entire
allowance is available to cover loan losses. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's ALLL. Such agencies may require the Bank to
provide additions to the allowance based on their judgment of information
available to them at the time of their examination. There is uncertainty
concerning future economic trends. Accordingly, it is not possible to predict
the effect future economic trends may have on the level of the provision for
possible loan losses in future periods.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions.
The adequacy of the ALLL is calculated upon three components. First is the
dollar weighted risk rating of the loan portfolio, including all outstanding
loans and leases, off balance sheet items, and commitments to lend. Every
extension of credit has assigned a risk rating based upon a comprehensive
definition intended to measure the inherent risk of lending money. Each rating
has an assigned a risk factor expressed as a reserve percentage. Central to this
assigned risk (reserve) factor is the five-year historical loss record of the
bank.
Secondly, established specific reserves are available for individual loans
currently on management watch and high-grade loan lists. These are the estimated
potential losses associated with specific borrowers based upon the collateral
and event(s) causing the risk rating.
The third component is unallocated. This reserve is for qualitative factors
that may effect the portfolio as a whole, such as those factors described above.
Management believes the assigned risk grades and our methods for managing
changes are satisfactory. Management believes the loan portfolio performance has
improved as reflected by the stable and low delinquency ratio. Watch list and
high-grade loans have increased somewhat o ver the past year, primarily due to a
greater acceptance to move more susceptible although performing accounts to
attention. This minimal increase does not suggest a trend.
14
<PAGE> 15
The following table summarizes the activity in the ALLL reserves for the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
------- -------
(Dollars in thousands)
<S> <C> <C>
Allowance for Loan & Lease Losses
Beginning balance for Loan Losses $ 2,972 $ 3,235
Provision for Loan Losses 0 25
Charge offs:
Real Estate (0) (33)
Other (0) (22)
------- -------
Total Charge offs (0) (55)
Recoveries:
Commercial 2 5
Real Estate 1 0
------- -------
Total Recoveries 3 5
Ending Balance $ 2,975 $ 3,210
ALLL to total loans 1.68% 1.85%
Net Charge offs to average loans (0.01%) 0.14%
======= =======
</TABLE>
INVESTMENT PORTFOLIO
Total investment securities decreased $5,534,000 in the first three months
of 2000 or 17.2%. The decrease represents maturities of $1,030,000 and sales of
$4,435,000. Proceeds from the sales of investment securities were used to fund
loan commitments.
LIQUIDITY
With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal-funds sold,
investment securities available-for-sale and principal and interest payments on
loans. With respect to liabilities, the Company's core deposits, shareholders'
equity and the ability of the Bank to borrow funds and to generate deposits,
provide asset funding.
Because estimates of the liquidity 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.
The Company's liquid assets (cash and due from banks, federal funds sold
and available-for-sale investment securities) totaled $49,260,000, or 20.4% of
total assets, at March 31, 2000 compared to $44,539,000 or 19.1% of total assets
at December 31, 1999.
During the current period, the Company obtained brokered deposits totaling
$4,700,000 due in March 2002, at a discounted yield of 7.03%. The purpose of the
deposits is to provide a stable liquidity source to assist in the development of
the Roseville Banking Center. The development of core deposits will replace this
borrowing at maturity.
15
<PAGE> 16
CAPITAL ADEQUACY
Overall capital adequacy is monitored on a day-to-day basis by the
Company's management and reported to the Company's Board of Directors on a
monthly basis. The Bank's regulators measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1" capital
(defined as principally comprising shareholders' equity) and "Tier 2" capital
(defined as principally comprising the qualifying portion of the ALLL).
The minimum ratio of total risk-based capital to risk-adjusted assets, including
certain off-balance sheet items, is 8%. At least one-half (4%) of the total
risk-based capital (Tier 1) is to be comprised of common equity; the balance may
consist of debt securities and a limited portion of the ALLL.
The following table sets forth the Company's capital ratio as of the dates
indicated.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------- -------------------
Capital Ratio's Bank Company Bank Company
- --------------- ----- ------- ----- -------
<S> <C> <C> <C> <C>
Total Risk-Based Capital 15.42% 15.64% 14.85% 15.58%
Tier 1 Capital to Risk-Based Assets 13.82% 14.02% 13.59% 14.33%
Tier 1 Capital to Average Assets 11.20% 11.01% 10.44% 11.31%
(Leverage ratio)
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary component of market risk is interest rate volatility.
Fluctuation in interest rates will ultimately impact both the level of interest
income and interest expense recorded on a large portion of the Company's assets
and liabilities, and the fair market value of interest earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Because the Company's interest-bearing liabilities and
interest-earning assets are with the Bank, the Company's interest rate risk
exposure is in connection with the operations of the Bank. Consequently, all
significant interest rate risk management procedures are performed at the Bank
level.
Based upon the nature of its operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The fundamental objective of the
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 and 200
basis points.
16
<PAGE> 17
Because of the Bank's capital position and noninterest-bearing demand
deposit accounts, the Bank is asset sensitive. As a result, management
anticipates that, in a declining interest rate environment, the Company's net
interest income and margin would be expected to decline, and, in an increasing
interest rate environment, the Company's net interest income and margin would be
expected to increase. However, no assurance can be given that under such
circumstances the Company would experience the described relationships to
declining or increasing interest rates.
Because the Bank is asset sensitive, the Company is adversely affected by
declining rates rather than rising rates. This effect is partially offset in the
short-term by the fact that the Company is liability sensitive through the
cumulative GAP period of one year or less. During a period of declining rates,
such liabilities may be repriced to provide a short-term advantage to the
Company; however, this benefit may not be sustainable over the long-term.
To estimate the effect of interest rate shocks on the Company's net
interest income, management uses a model to prepare an analysis of interest rate
risk. 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 March
31, 2000, the estimated annualized reduction in net interest income attributable
to a 100 and 200 basis point decline in the federal funds rate was $441,500 and
$883,000, respectively. A similar and opposite result attributable to a 100
basis point increase in the federal funds rate. At December 31, 1999, the
estimated annualized reduction in net interest income attributable to a 100 and
200 basis point decline in the federal funds rate was $359,000 and $718,000,
respectively, with a similar and opposite result attributable to a 100 basis
point increase in the federal funds rate. Management does not believe that the
change from in the first quarter is significant or represents a known trend
toward more interest rate risk sensitivity in the Company's financial position.
The model utilized by management to create the analysis described in the
preceding paragraph uses balance sheet simulation to estimate the impact of
changing rates on the annual net interest income of the Bank. The model
considers a number of factors, including (i) change in customer and management
behavior in response to the assumed rate shock, (ii) the ratio of the amount of
rate change for each interest-bearing asset or liability to assumed changes in
the federal funds rate based on local market conditions for loans and core
deposits and national market conditions for other assets and liabilities and
(iii) timing factors related to the lag between the rate shock and its effect on
other interest-bearing assets and liabilities. Actual results will differ when
actual customer and management behavior and ratios differ from the assumptions
utilized by management in its model. In addition, the model has limited
usefulness for the measurement of the effect on annual net interest income
resulting from rate changes other than 100 basis points. Management believes
that the short duration of its rate-sensitive assets and liabilities contributes
to its ability to reprice a significant amount of its rate-sensitive assets and
liabilities and mitigates the impact of rate changes more than 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal actions arising
in the ordinary course of business. The Company believes that the ultimate
disposition of all currently pending matters will not have a material adverse
effect on the Company's financial condition or results of operations.
ITEM #2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM #3. DEFAULTS UPON SENIOR SECURITIES
N/A.
17
<PAGE> 18
ITEM #4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A.
ITEM #5. OTHER INFORMATION
N/A.
ITEM #6A. EXHIBITS
Ex-27.1. Financial Data table for the period ended March 31, 2000.
ITEM #6B. REPORTS ON FORM 8-K
Form 8-K dated April 14, 2000 announcing first quarter 2000 earnings.
SIGNATURES
Following the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REDDING BANCORP
(Registrant)
Date: April 26, 2000 /s/ Linda J. Miles
-----------------------------------------
Linda J. Miles
Executive Vice President &
Chief Financial Officer
18
<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 3,4 and 5 of the Company's Form 10-Q 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 29,376
<SECURITIES> 26,610
<RECEIVABLES> 0
<ALLOWANCES> 2,975
<INVENTORY> 0
<CURRENT-ASSETS> 229,879
<PP&E> 5,433
<DEPRECIATION> 0
<TOTAL-ASSETS> 241,018
<CURRENT-LIABILITIES> 205,600
<BONDS> 0
5,142
0
<COMMON> 0
<OTHER-SE> 21,513
<TOTAL-LIABILITY-AND-EQUITY> 241,018
<SALES> 0
<TOTAL-REVENUES> 5,363
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,809
<INCOME-PRETAX> 1,902
<INCOME-TAX> 737
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,165
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.41
</TABLE>
