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 June 30, 2001
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 incorporation (I.R.S. Employer
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. June 30, 2001: 2,835,511
1
2
REDDING BANCORP & SUBSIDIARIES
INDEX TO FORM 10-Q
================================================================================
Page:
PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 2001, December 31, 2000 and June 30, 2000 ............................3
Consolidated Condensed Statements of Income
Three and six months ended June 30, 2001 and 2000..............................4
Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 2001 and 2000........................................5
Notes to Consolidated Condensed 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...............17
PART II. Other Information
Item 1. Legal proceedings.......................................................19
Item 2. Changes in Securities and use of proceeds...............................19
Item 3. Defaults Upon Senior Securities.........................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................19
Item 5. Other Information.......................................................19
Item 6. Exhibits and Report on Form 8-K.........................................20
SIGNATURES..............................................................................20
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
June 30, 2001 Dec 31, 2000 June 30, 2000
------------- ------------ -------------
ASSETS
Cash and due from banks $ 13,425 $ 12,603 $ 12,606
Federal funds sold 15,630 13,010 12,120
Securities available-for-sale 38,515 20,997 19,857
Securities held to maturity (estimated fair value of
$5,098 at June 30, 2001, $4,972 at December 31, 2000
and $5,555 at June 30, 2000) 5,054 5,007 5,907
Loans, net of the allowance for loan losses of $2,806
at June 30, 2001, $2,973 at December 31, 2000 and
$3,034 at June 30, 2000 203,048 191,322 180,958
Bank premises and equipment, net 5,422 5,287 5,424
Other assets 8,429 6,881 5,822
-------- -------- ---------
Total Assets $289,523 $255,107 $ 242,694
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand - noninterest bearing $ 26,079 $ 37,392 $ 34,575
Demand - interest bearing 50,523 47,394 40,218
Savings 15,766 12,496 12,166
Certificates of deposits 155,882 120,754 119,368
-------- -------- ---------
Total Deposits 248,250 218,036 206,327
Other borrowings 6,425 5,268 4,800
Other Liabilities 4,728 3,049 3,906
-------- -------- ---------
Total Liabilities 259,403 226,353 215,033
Stockholders' Equity:
Preferred stock no par value, 2,000,000 authorized
no shares issued and outstanding in 2001 and 2000
Common Stock, no par value, 10,000,000 shares
authorized; 2,835,511 shares issued and outstanding at
June 30, 2001, 2,884,181 at December 31, 2000 and
2,877,333 at June 30, 2000 9,247 9,371 5,154
Retained Earnings 20,764 19,296 22,709
Accumulated other comprehensive income gain
(loss), net of tax 109 87 (202)
-------- -------- ---------
30,120 28,754 27,661
-------- -------- ---------
Total Liabilities and Stockholders' Equity $289,523 $255,107 $ 242,694
======== ======== =========
See notes to consolidated financial statements.
3
4
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Three months ended Six months ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Interest income:
Interest and fees on loans $4,351 $4,404 $ 8,903 $ 8,540
Interest on securities 477 377 903 783
Interest on federal funds sold 175 221 403 366
------ ------ ------- -------
Total interest income 5,003 5,002 10,209 9,689
------ ------ ------- -------
Interest expense:
Interest on demand deposits 229 252 532 444
Interest on savings 91 103 186 209
Interest on time deposits 1,890 1,748 3,762 3,180
Other borrowings 55 80 135 159
------ ------ ------- -------
Total interest expense 2,265 2,183 4,615 3,992
------ ------ ------- -------
Net interest income 2,738 2,819 5,594 5,697
Provision for loan losses 149 56 307 56
------ ------ ------- -------
Net interest income after provision for
loan losses 2,589 2,763 5,287 5,641
------ ------ ------- -------
Non-interest income:
Service charges on deposit accounts 55 57 106 110
Credit card service income, net 245 454 719 924
Other income 284 204 491 416
Net gain (loss) on sale of securities
available-for-sale 100 0 100 (59)
------ ------ ------- -------
Total non-interest Income: 684 715 1,416 1,391
------ ------ ------- -------
Non-interest expense:
Salaries and related benefits 898 922 1,867 1,822
Net occupancy and equipment expense 277 221 502 489
Data processing and professional services 150 134 255 268
Other expense 394 263 755 613
------ ------ ------- -------
Total non-interest expense 1,719 1,540 3,379 3,192
------ ------ ------- -------
Income before income taxes 1,554 1,938 3,324 3,840
Provision for income taxes 582 698 1,221 1,435
------ ------ ------- -------
Net Income $ 972 $1,240 $ 2,103 $ 2,405
====== ====== ======= =======
Basic earnings per share $ 0.34 $ 0.43 $ 0.73 $ 0.83
Weighted average shares - basic 2,849 2,878 2,863 2,886
Diluted earnings per share $ 0.33 $ 0.42 $ 0.70 $ 0.80
Weighted average shares - diluted 2,978 2,981 2,985 3,015
See notes to consolidated financial statements.
4
5
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
June 30, 2001 June 30, 2000
------------- -------------
Cash flows from operating activities:
Net Income $ 2,103 $ 2,405
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 307 56
Provision for depreciation 247 249
Compensation associated with stock options 34 34
Amortization of investment premiums and accretion of discounts, net 14 62
(Gain) Loss on sale of securities available-for-sale (100) 59
Gain on sale of loans (40) (83)
Proceeds from sales of loans 2,246 4,339
Loans originated for sale (2,207) (4,402)
Effect of changes in:
Other assets (1,548) 69
Deferred loan fees (30) (52)
Other liabilities 1,679 569
-------- --------
Net cash provided by operating activities 602 900
-------- --------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 13,718 1,876
Proceeds from sale of available-for-sale securities 4,942 4,420
Purchases of available-for-sale securities (36,116) 0
Loan origination, net of principal repayments (12,003) (10,970)
Purchases of premises and equipment (382) (212)
Proceeds from sales of equipment 0 12
-------- --------
Net cash (used) provided by investing activities (29,841) (4,874)
-------- --------
Cash flows from financing activities:
Net change in deposits 31,371 8,004
Common stock repurchase transactions (843) (1,187)
Common stock options exercised 50 313
-------- --------
Net cash provided by financing activities 30,578 7,130
Net increase in cash and cash equivalents 3,442 5,561
Cash and cash equivalents, beginning of period 25,613 19,165
-------- --------
Cash and cash equivalents, end of period $ 29,055 $ 24,726
======== ========
Supplemental disclosures:
Cash paid during the period for:
Income taxes 1,006 1,399
Interest 4,585 3,853
See notes to consolidated financial statements.
5
6
REDDING BANCORP & SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED 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 2000 Annual Report to Shareholders. The accounting and reporting
policies of the Company conform with accounting principles generally accepted in
the United States of America and general practices within the banking industry.
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 and six months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
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.
Certain amounts as previously reported have been reclassified to conform to the
three and six-months ended June 30, 2001 presentation.
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 months and six months ended June
30, 2001 and 2000.
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------------------------------------------------------------------------------------------------
Basic EPS Calculation:
Numerator (net income) $ 972 $1,240 $2,103 $2,405
Denominator (average common
shares outstanding) 2,849 2,878 2,863 2,886
Basic earnings per Share $ 0.34 $ 0.43 $ 0.73 $ 0.83
Diluted EPS Calculation:
Numerator (net income) $ 972 $1,240 $2,103 $2,405
Denominator:
Average common shares outstanding 2,849 2,878 2,863 2,886
Options 129 103 122 129
------ ------ ------ ------
2,978 2,981 2,985 3,015
Diluted earnings per Share $ 0.33 $ 0.42 $ 0.70 $ 0.80
--------------------------------------------------------------------------------------------------------
6
7
3. COMPREHENSIVE INCOME
The Company's total comprehensive earnings were as follows:
Three Months Ended Six Months Ended
-----------------------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
-----------------------------------------------------------------------------------------------------------
Net Income as reported $ 972 $1,240 $2,103 $2,405
Other comprehensive income (net of tax):
Change in unrealized holding
gain (loss) on securities (79) 36 109 4
available-for-sale
Reclassification adjustment 0 0 0 35
----- ------ ------ ------
Total other comprehensive income (79) 36 109 39
Total comprehensive income $ 893 $1,276 $2,212 $2,444
-----------------------------------------------------------------------------------------------------------
4. SEGMENT REPORTING
The Company has two reportable segments: commercial banking and credit
card services. The Company conducts a general commercial banking business in the
counties of El Dorado, Placer, Shasta, and Sacramento, California. The principal
commercial banking activities include a full-array of deposit accounts and
related services and commercial lending for businesses and their interests.
Credit card services are limited to those revenues and data processing costs
associated with its agreement with an Independent Sales Organization (ISO),
pursuant to which the Bank provides credit and debit card processing services
for merchants solicited by the ISO or the Bank who accept credit and debit cards
as payments for goods and services. Effective April 1, 2001, the Company has
signed a new agreement for credit card services with the ISO. The new pricing of
the agreement is .02% of transaction processing compared with the old contract
of .135% of transaction processing. The new pricing has taken effect on May 1,
2001.
The following table presents financial information about the
Company's reportable segments:
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------------------
Net income before taxes allocated to: June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2001
--------------------------------------------------------------------------------------------------------
Commercial Banking $1,309 $1,484 $2,605 $2,916
Credit card services 245 454 719 924
======= ====== ====== ======
$1,554 $1,938 $3,324 $3,840
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS
No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. The Company will adopt SFAS
No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS
142, the Company will stop the amortization of goodwill with an expected net
carrying value of $743,500 at the date of adoption and annual amortization of
$51,376 that resulted from business combinations completed prior to the adoption
of SFAS 141.
7
8
7. BRANCH ACQUISITION
During the first quarter 2001, the Company executed a Branch Purchase and
Assumption Agreement which provides for the purchase of deposit liabilities,
assumption of the lease and purchase of certain fixed assets at net book value
of a FirstPlus Bank branch located in Citrus Heights, California.
The purchase and assumption agreement was approved by the Federal Deposit
Insurance Corporation and Department of Financial Institutions on May 22, 2001.
The final closing was consummated on June 15, 2001.
The purchase consisted of approximately 828 deposit accounts of which 172 are
savings and the balances are time certificates of deposit, totaling $32,453,369
at June 15, 2001. The deposits are relationships in the common market area of
Citrus Heights and Roseville, California where Redding Bank of Commerce has
another full service office. The assumption includes a leased facility of
approximately 4,982 square feet and monthly rent of $3,240. The lease expires on
March 5, 2009.
The purchase includes a premium of 2.37% of the deposit liabilities on the date
of close. Management believes that the assumptions used to calculate the premium
were reasonable. The final pricing of the premium was $769,144.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR
STATEMENT.
This quarterly report on Form 10-Q includes forward-looking information, which
is subject to the "safe harbor" created by the Securities Act of 1933, and
Securities Act of 1934. These forward-looking statements (which involve the
Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
- 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, 2000 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, 2000
to June 30, 2001. Also discussed are significant trends and changes in the
Company's results of operations for the three and six months ended June 30,
2001, compared to the same period in 2000. The consolidated financial statements
and related notes appearing elsewhere in this report are condensed and
unaudited.
GENERAL
Redding Bancorp ("the Company") is a financial service holding company
("FHC") with its principal offices in Redding, California. A financial service
holding company may engage in a commercial banking, insurance and securities
business and offer other financial products to consumers. The Company currently
engages in a general commercial banking business in Redding and Roseville and
the counties of El Dorado, Placer, Shasta, and Sacramento, California.
The Company considers Northern California to be its major market area.
The Company conducts its business through Redding Bank of Commerce ("The Bank"),
its principal subsidiary, and Roseville Banking Center, a division of the Bank.
The Company has three full-service offices and one focused service office. The
focused service concentrates on stable deposit funding. The services offered by
the Company include those traditionally offered by commercial banks of similar
size and character in California, such as business checking, interest-bearing
checking ("NOW") and savings accounts, money market deposit accounts,
commercial, construction, real estate, SBA and line of credit loans travelers
checks, safe deposit boxes, collection services, telephone and Internet banking,
including commercial cash management.
9
10
The Company's goal is to be the premier provider of services to the
business and professional community of its major market area including Small
Business Administration ("SBA") loans, commercial building financing, credit
card services, payroll and accounting packages, lockbox and billing programs.
The emphasis is on relationship banking to small and medium sized businesses and
professionals with special attention to the asset side of the balance sheet.
Other offices may provide "focused" services targeting smaller markets, such as
retirement communities that provide a stable source of funding for the
commercial activities of the Company.
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 $972,000, for the quarter ended June
30, 2000. The quarterly earnings represent a 21.6% decrease over the $1,240,000
reported for the same quarterly period of 2000. Diluted earnings per share for
the second quarter of 2001 were $0.33, compared to $0.42 for the same period of
2000. Earnings for the six-month period ended June 30, 2001, were $2,103,000 a
12.6% decrease compared with $2,405,000 for the six months ended June 30, 2000.
Diluted earnings per share for the six months ended June 30, 2001 was $0.70,
compared to $0.80 for the same period in 2000.
The primary factors contributing to the decrease in operating results
are multiple drops in prevailing interest rates and higher costs of funding
which resulted in a decrease in net interest rate spread and margin. The
Company's internal financial models indicate that in periods of falling interest
rates its net interest margin is expected to decrease while in periods of rising
interest rates its margin is expected to increase. In periods of rapid interest
rate changes (such as the six declining changes since January 2001), this
decrease of net interest margin is magnified by the fact that the Company's
assets reprice at a more rapid rate than its liabilities. While the Company's
variable rate assets are repriced instantly its variable rate deposit
liabilities will reprice at the end of the calendar quarter and fixed rate
deposit liabilities will reprice at the next maturity averaging six months.
Provision for loan losses of $307,000 were provided for the six months
ended June 30, 2001 compared with $56,000 for the same period of 2000. Redding
Bancorp's allowance for loan losses was 1.36% of total loans at June 30, 2001
and 1.65% at June 30, 2000, while its ratio of non-performing assets to total
assets was 0.11% at June 30, 2001, compared to 0.22% at June 30, 2000. The
Company had year-to-date net loan charge-offs of $475,000 in 2001 compared to
net recoveries of $5,141 in the same period of 2000. Year-to-date net charge
offs are attributable to two credits are not believed to be an indication of
declining portfolio quality. All other internal measurements of credit quality
reflect an improvement in total portfolio credit quality.
New pricing became effective in the credit card service income on May 1,
2001. The new pricing is a reduction in fee pricing to 2 basis points from 13.5
basis points. Quarterly earnings were $245,000 compared with $454,000
representing at 46.0% decrease over the same quarterly period in 2000. Earnings
for the six-month period were $719,000 compared with $924,000 representing a
22.2% decrease over the same six-month period in 2000. Anticipated earnings for
2001 are $1,004,000 compared with actual earnings of $1,875,000 in 2000, a 46%
decrease.
Salary increases are related to the staff expansion of the Roseville
Banking Center at Eureka during the first quarter of 2001. The Roseville office
relocated to new facilities in Roseville, California in mid-December 2000. The
office was converted from a loan production facility to a full-service banking
facility in June 2000. The new staffing was procured to achieve deposit growth
goals and to formulate and introduce a business lock box product. The lock box
product is targeted specifically to large property management associations.
10
11
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.
Net interest income declined 2.9% to $2,738,000 in the second quarter
2001, compared with $2,819,000 for the second quarter 2000. Second quarter net
interest income was slightly lower than the $2,856,000 for the first quarter of
2001. This reduction in net interest income attributed to interest rate
reductions on earning assets (prime rate reductions) experienced during the
first half of 2001, coupled with the acquisition of higher cost certificates of
deposit. Net interest margin for the second quarter 2001 was 4.60%, compared
with 5.20% for the second quarter 2000. The decrease from a year ago is
attributable to the decrease in prime rate related earning assets and an
increase in the cost of funds over the prior year.
The combined effect of the increase in volume of earning assets and
decrease in yield on earning assets, coupled with increases in cost of funding
sources resulted in an decrease of $103,000 (1.81%) in net interest income for
the six month period ended June 30, 2001 from the same period in 2000.
11
12
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)
Six Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Earning Assets
Portfolio Loans $196,693 $ 8,903 9.05% $178,813 $8,540 9.55%
Tax Exempt Securities 3,604 78 4.33% 3,410 75 4.40%
US Government 25,367 775 6.11% 17,802 484 5.44%
Federal Funds Sold 16,373 403 4.92% 12,583 366 5.82%
Other Securities 967 50 10.34% 6,476 224 6.92%
-------- ------- ----- -------- ------ ----
Average Earning Assets $243,004 $10,209 8.40% $219,084 $9,689 8.85%
------- ------
Cash & Due From Banks $ 10,884 $ 10,578
Bank Premises 5,196 5,451
Allowance for Loan Losses (2,810) (2,985)
Other Assets 7,132 4,950
-------- --------
Average Total Assets $263,406 $237,078
======== ========
Interest Bearing Liabilities
Demand Interest Bearing $ 51,159 $ 532 2.08% $ 41,293 $ 444 2.15%
Savings Deposits 13,307 186 2.80% 14,187 209 2.95%
Certificates of Deposit 129,395 3,762 5.81% 111,265 3,180 5.72%
Borrowings 6,120 135 4.41% 4,803 159 6.62%
-------- ------- ----- -------- ------ ----
199,981 $ 4,615 4.62% 171,548 $3,992 4.65%
------- ------
Non interest Demand 31,764 36,082
Other Liabilities 3,535 3,026
Shareholder Equity 28,126 26,422
-------- --------
Average Liabilities and Shareholders Equity $263,406 $237,078
======== ========
Net Interest Income and Net Interest Margin $ 5,594 4.60% $5,697 5.20%
======= ======
12
13
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 Six Months Ended Six Months Ended
(Dollars in thousands) June 30, 2001 over June 30, 2000
Volume Rate Total
----- ----- -----
Increase(Decrease) In
Interest Income
Portfolio loans $ 809 $(446) $ 363
Tax exempt securities 4 (1) 3
US Government securities 231 60 291
Federal Funds Sold 93 (56) 37
Other Securities (285) 111 (174)
----- ----- -----
Total Increase $ 852 $(332) $ 520
----- ----- -----
Increase(Decrease) In
Interest Expense
Interest Bearing Demand $ 103 $ (15) $ 88
Savings Deposits (12) (11) (23)
Certificates of Deposit 527 55 582
Borrowings (130) 106 (24)
----- ----- -----
Total Increase $ 488 $ 135 $ 623
----- ----- -----
Net Increase $ 364 $(467) $ 103
===== ===== =====
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 was renewed on March 28, 2001 for a period of four
years, which expires on April 1, 2005, 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. The terms of the renewal represent a reduction in earnings on volume
from .135% to .02% effective May 1, 2001.
Credit card income quarterly earnings were $245,000 compared with
$454,000 representing at 46.0% decrease over the same quarterly period in 2000.
Earnings for the six-month period were $719,000 compared with $924,000
representing a 22.2% decrease over the same six-month period in 2000.
13
14
For the six months, ended June 30, 2001 noninterest income increased
$25,000 over the same period in 2000. The increase is attributable to an 18%
increase in fees collected from the sales of the Company's non-deposit
investment product. During the second quarter 2001, before the acquisition of
the Citrus Heights office, available-for-sale investments were sold for
liquidity purposes and a gain recognized of $100,000 for the period.
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.
The following table sets forth a summary of noninterest income for the periods
indicated.
Three Months Ended Six Months Ended
Noninterest Income June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------------------------------------------------------------------------------------------------------------
Service Charges $ 55 $ 57 $106 $ 110
Credit Card Income, net 245 454 719 924
Other Income 264 204 491 416
Gain (loss) on sale of securities available-for-sale 100 0 100 (59)
---- ---- ------ ------
Total noninterest income $684 $715 $1,416 $1,391
--------------------------------------------------------------------------------------------------------------------
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 quarter ended June 30, 2001, noninterest expense increased
$179,000 over the same period in 2000. Occupancy expenses rose by $56,000
(25.3%) as a result of the expansion of the Roseville Banking Center facilities.
Professional services increased by $32,000 (34.7%) and represents legal and
consulting services used in the purchase and assumption of the Citrus Heights
office of FirstPlus Bank.
For the six months ended June 30, 2001, noninterest expense increased
$187,000 over the same six-month period in 2000. Other expenses increased by
$148,000 (29.0%) and can be attributed to the additional operational expenses in
expanding the Roseville Banking Center, specifically courier, telephone and
business development costs.
The following table sets forth a summary of noninterest expense for the
periods indicated.
(Dollars in Thousands)
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------
Noninterest Expense June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------------------------------------------------------------------------------
Salaries and Benefits $ 898 $ 922 $1,867 $1,822
Occupancy & Equipment 277 221 502 489
Data Processing Fees 25 25 49 43
Professional Fees 124 92 206 225
Directors Expenses 51 45 97 103
Other Expenses 344 235 658 510
------ ------ ------ ------
Total Noninterest expense $1,719 $1,540 $3,379 $3,192
--------------------------------------------------------------------------------------
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.
14
15
(Dollars in thousands)
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------
Income Taxes June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------------------------------------------------------------------------------------
Tax provision $ 582 $ 698 $ 1,221 $ 1,435
Effective tax rate 37.5% 36.0% 36.7% 37.4%
--------------------------------------------------------------------------------------------
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and non-deductible expenses. The decrease in
the Company's tax provision is attributable to increases in non-taxable income.
ASSET QUALITY
The Company concentrates its lending activities primarily within in El
Dorado, Placer, Sacramento and Shasta Counties, California, and the location of
the Bank's three full service branches.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from the cash flows of the borrower or proceeds from the
sale of collateral.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
(Dollars in thousands) June 30, 2001 December 31, 2000
------------- -----------------
--------------------------------------------------------------------------------
Portfolio Loans
--------------------------------------------------------------------------------
Commercial & Financial $ 74,300 $ 61,069
Real Estate-Construction 37,099 37,531
Real Estate-Commercial 92,646 94,111
Installment 659 430
Other Loans 1,360 1,395
Less:
Deferred Loan Fees and Costs (210) (241)
Allowance for Loan Losses (2,806) (2,973)
-------- --------
Total Net Loans $203,048 $191,322
--------------------------------------------------------------------------------
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 $11,726,000 or 6.2% at June 30, 2001 over
$191,322,000 at December 31, 2000. The portfolio mix remains stable with the mix
at December 31, 2000, with commercial and financial loans of approximately 37%,
real estate construction of 18% and commercial real estate at 46%.
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 $33,221
and $801,246 in impaired loans that had impairment allowances of $16,610 and
$318,382 as of June 30, 2001 and December 31, 2000, respectively. The reduction
in impaired loans during the first quarter 2001 was attributed to payments and
recognizing the charge-off of one credit. Additionally, the Company recognized a
partial charge-off of a second impaired loan after sale of its underlying
collateral.
15
16
The following table sets forth a summary of the Company's nonperforming
assets as of the dates indicated:
(Dollars in thousands) June 30, 2001 December 31, 2000
------------- -----------------
----------------------------------------------------------------------------
Non performing assets
----------------------------------------------------------------------------
Nonaccrual loans $33 $801
Other Real Estate Owned 0 0
----------------------------------------------------------------------------
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.
16
17
Management believes the assigned risk grades and our methods for
managing changes are satisfactory. Management believes the loan portfolio
performance has improved as reflected by the stable and low delinquency ratio.
Watch list and high-grade loans have increased somewhat over the past year,
primarily due to a greater tendency to move more susceptible, although
performing, accounts to attention. This minimal increase does not suggest a
trend.
The following table summarizes the activity in the ALLL reserves for the
periods indicated.
(Dollars in thousands) Three Months Ended Six Months Ended
----------------------------------------------------------------------------------------------------------
Allowance for Loan & Lease Losses June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------------------------------
Beginning balance for Loan Losses $2,645 $2,975 $2,974 $2,972
Provision for Loan Losses 149 56 307 56
Charge offs:
Commercial (2) (0) (181) (0)
Real Estate (0) (0) (309) (0)
Other (0) (0) (0) (0)
------ ------ ------ ------
Total Charge offs (2) (0) (490) (0)
Recoveries:
Commercial 4 3 5 5
Real Estate 10 0 10 1
------ ------ ------ ------
Total Recoveries 14 3 15 6
Ending Balance $2,806 $3,034 $2,806 $3,034
ALLL to total loans 1.37% 1.65% 1.37% 1.65%
Net Charge offs to average loans 0.25% 0.00% 0.25% 0.00%
----------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
Total available-for-sale securities increased $17,518,000 in the six
months ending June 30, 2001 or 83.4%. The increase represents purchases of
$36,116,000 offset by maturities of $13,718,000 and sales of $4,942,000. The
significant purchase of available for sale securities was placed in June 2001 to
effectively utilize the increased deposits gained by the acquisition of the
Citrus Heights office, until such time as the funds can be deployed in business
loans. The investments are primarily short-term U.S. Government agencies and
seasoned mortgage backed product.
LIQUIDITY
With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal-funds sold,
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 securities) totaled $67,570,000, or 23.3% of total
assets, at June 30, 2001 compared to $46,610,000 or 18.3% of total assets at
December 31, 2000.
17
18
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.
June 30, 2001 December 31, 2000
------------- -----------------
Capital Ratio's Bank Company Bank Company For Bank to be
well capitalized
----------------------------------------------------------------------------------------------
Total Risk-Based Capital 13.64% 14.09% 14.11% 15.01% > 10.00%
Tier 1 Capital to Risk-Based 12.44% 12.89% 12.86% 13.75% > 6.00%
Assets
Tier 1 Capital to Average Assets 11.00% 11.39% 11.02% 11.52% > 5.00%
(Leverage ratio)
----------------------------------------------------------------------------------------------
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.
18
19
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. In periods of rapid interest rate
changes, such as the six prime rate reductions during 2001, the decrease of net
interest margin is temporarily magnified by the fact that the Company's assets
are repriced instantly while deposit liabilities reprice at the next maturity
date, averaging six months.
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 June
30, 2001, the estimated annualized reduction in net interest income attributable
to a 100 and 200 basis point decline in the federal funds rate was $542,000 and
$1,084,000, respectively. A similar and opposite result attributable to a 100
basis point increase in the federal funds rate. At December 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 $413,000 and $826,000,
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.
19
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal actions arising
in the ordinary course of business. The Company believes that the ultimate
disposition of all currently pending matters will not have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 annual shareholder meeting of Redding Bancorp was held on Tuesday, May
15, 2001. As previously reported in the preliminary and definitive proxy
materials, two items were presented for vote. The first was the reelection of
nine nominees for director. The directors passed with 2,452,186 or 85% of the
outstanding shares. The second item was the ratification of Deloitte & Touche,
LLP as the company's auditors for the year 2001. The ratification passed with
85% of outstanding shares voting in favor of.
ITEM 5. OTHER INFORMATION
N/A
ITEM 6A. EXHIBITS
N/A
ITEM 6B. REPORTS ON FORM 8-K
Form 8-K dated May 30, 2001, Acquisition of Citrus Heights office, FirstPlus
Bank Form 8-K dated April 6, 2001 Proposed acquisition of deposit liabilities of
FirstPlus Bank.
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: July 27, 2001 /s/ Linda J. Miles
Linda J. Miles
Executive Vice President &
Chief Financial Officer
20