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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-25135
REDDING BANCORP
(Exact name of Registrant as specified in its charter)
California 94-2823865
(State or other jurisdiction of incorporation or (I.R.S. Employer
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. April 30, 1999: 2,690,103
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REDDING BANCORP
AND
SUBSIDIARIES
INDEX
PART I. Financial Information Page:
Item 1. Financial Statements
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998.............................3
Consolidated Balance Sheets
Three months ended March 31, 1999 and 1998.............................4
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998.............................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.....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...............................19
SIGNATURES....................................................................19
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
Three months Three months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Interest Income:
Interest & Fees on Loans $ 3,381 $ 2,977
Interest on Investments $ 509 $ 853
Interest on Federal Funds Sold $ 189 $ 81
---------- ----------
Total Interest Income $ 4,079 $ 3,911
---------- ----------
Interest Expense:
Interest on Demand Checking $ 119 $ 116
Interest on Savings Accounts $ 162 $ 167
Interest on Time Deposits $ 1,197 $ 1,161
---------- ----------
Total Interest Expense $ 1,478 $ 1,444
---------- ----------
Net Interest Income: $ 2,601 $ 2,467
Provision for Loan Losses: $ 25 $ 145
---------- ----------
Net Interest Income After Provision $ 2,576 $ 2,322
---------- ----------
Noninterest Income:
Service Charges $ 73 $ 53
Credit Card Income, net $ 415 $ 450
Other Income $ 193 $ 0
Gain (loss) Sale Investments $ 0 $ 177
---------- ----------
Total Other Income $ 681 $ 680
---------- ----------
Noninterest Expense:
Salaries & Benefits $ 963 $ 818
Occupancy & Equipment $ 229 $ 204
DP & Other Professional $ 223 $ 157
Other Expense $ 353 $ 323
---------- ----------
Total Other Expense $ 1,768 $ 1,502
---------- ----------
Income before Income Taxes $ 1,489 $ 1,500
Provision for Income Taxes $ 590 $ 548
---------- ----------
Net Income available for common
stock shareholders: $ 899 $ 952
========== ==========
Basic Earnings Per Share $ 0.33 $ 0.35
Weighted Average Shares 2,690,103 2,684,103
Diluted Earnings Per Share $ 0.31 $ 0.35
Weighted Average Shares 2,879,799 2,690,103
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REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three months The year
Ended Ended
March 31, 1999 December 31, 1998
-------------- -----------------
Assets:
Cash & Due From Banks $ 8,756 $ 10,010
Federal Funds Sold $ 14,150 $ 16,790
--------- ---------
Cash and cash equivalents $ 22,906 $ 26,800
Investment Securities:
Available for sale (at market) $ 35,086 $ 24,519
Held to maturity (market value of
$6,889 and $8,835) $ 6,809 $ 8,038
--------- ---------
$ 41,895 $ 32,557
Portfolio Loans:
Real Estate - Construction $ 31,591 $ 29,470
Real Estate - Commercial $ 69,675 $ 69,742
Commercial & Financial $ 47,584 $ 46,890
Installment Loans $ 317 $ 298
Other Loans $ 2,139 $ 2,225
--------- ---------
Total Gross Loans $ 151,306 $ 148,625
Deferred loan fees $( 363) $( 423)
Less allowance for loan losses $( 3,210) $( 3,235)
--------- ---------
Net Loans $ 147,733 $ 144,967
Premise & Equipment $ 5,657 $ 5,604
Other Assets $ 5,181 $ 6,157
--------- ---------
Total Assets $ 223,372 $ 216,085
========= =========
Liabilities:
Demand Accounts $ 42,111 $ 39,709
NOW & Money Market $ 40,485 $ 42,810
Savings Accounts $ 14,128 $ 13,083
Time Accounts $ 98,356 $ 93,019
--------- ---------
Total Deposits $ 195,080 $ 188,621
Other Liabilities $ 2,816 $ 2,810
Shareholders Equity:
Common Stock $ 4,725 $ 4,714
Retained Earnings $ 19,818 $ 18,748
Current Earnings $ 899 $ 1,070
Accumulated other comprehensive income $ 34 $ 122
--------- ---------
Total Shareholders Equity $ 25,476 $ 24,654
Total Liabilities & Equity $ 223,372 $ 216,085
========= =========
See notes to financial statements.
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REDDING BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three months Three months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Cash flows from operating activities:
Net Income $ 899 $ 952
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 25 145
Provision for depreciation 114 88
Compensation associated with stock options 11 --
Amortization of investment premiums and
Accretion of discounts, net (84) (18)
Gain on sale of loans 29 9
Proceeds from sales of loans 518 1,027
Loans originated for sale (547) (1,036)
Decrease in other assets 976 244
Increase in deferred loan fees 58 (106)
Increase in other liabilities 6 31
-------- --------
Net cash provided by operating activities 1,106 384
-------- --------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 10,746 9,955
Purchases of available for sale securities (20,088) 0
Loan origination's, net of principal repayments (2,849) (4,178)
Purchases of premises and equipment (167) 0
Proceeds from sale of equipment -- --
-------- --------
Net cash (used) provided (12,358) 5,777
by investing activities -------- --------
Cash flows from financing activities:
Net increase in demand deposits and savings 1,122 (1,993)
Net (decrease) increase in certificates of deposit 5,337 (422)
Cash dividends -- --
Common stock transactions -- --
-------- --------
Net cash (used) provided by financing activities 6,459 (2,415)
-------- --------
Net (decrease) increase in cash and cash equivalents (3,894) 4,698
Cash and cash equivalents at beginning of year 26,800 18,331
-------- --------
Cash and case equivalents at end of year $ 22,906 $ 23,029
======== ========
Supplemental disclosures:
Cash paid during the period for:
Income taxes 71 65
Interest 1,464 1,522
Non-cash investing and financing activities:
Transfer from loans to other real estate owned 212 19
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REDDING BANCORP & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 1998 Annual Report to Shareholders. The statements include the
accounts of Redding Bancorp ("Redding"), and its wholly owned subsidiary,
Redding Bank of Commerce ("RBC"). 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, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
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 months ended March 31, 1999 and
1998.
Three Months ended
March 31,
1999 1998
---------- ----------
Basic EPS Calculation:
Numerator (net income) $ 899 $ 952
Denominator (average common shares Outstanding) 2,690,103 2,684,103
Basic Earnings per share $ 0.33 $ 0.35
Diluted EPS Calculation:
Numerator (net income) $ 899 $ 952
Denominator :
Average common stock outstanding 2,690,103 2,684,103
Options 189,696 6,000
---------- ----------
2,879,799 2,690,103
Diluted Earnings per share $ 0.31 $ 0.35
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3. COMPREHENSIVE INCOME
The Company's total comprehensive earnings were as follows:
Three Months Ended
March 31,
1999 1998
---- ----
Net income as reported $ 899 $ 952
Other comprehensive income (net of tax):
Change in unrealized holding gain (losses)
on available for sale securities (88) (8)
Reclassification adjustment -- --
----- -----
Total comprehensive income $ 811 $ 944
===== =====
4. COMMON STOCK DIVIDEND
No dividends were declared in the first quarter of 1999. The last dividend the
Board of Directors declared was on September 15, 1998. An annual cash dividend
of 50 cents per share on the Company's Common Stock was paid to shareholders of
record as of October 1, 1998 and was paid on October 22, 1998.
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 Butte, El Dorado, Placer, Shasta, and Sacramento, California. The
principal commercial banking activities include a full-array of deposit accounts
and related services and commercial lending for businesses and their interests.
Credit card services are limited to those revenues and data processing costs
associated with its agreement with an ISO, pursuant to which the Bank provides
credit and debit card processing services for merchants solicited by the ISO or
the Bank who accept credit and debit cards as payments for goods and services.
The following table presents financial information about the Company's
reportable segments:
Three months ended
March 31,
1997 1998
------ ------
Net income before taxes allocated to:
Commercial banking $1,074 $1,050
Credit card services 415 450
--------------------
$1,489 $1,500
====================
In 1998, the Company adopted SFAS No. 131, Disclosures About Segments Of An
Enterprise And Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
This statement does not change the Company's consolidated financial position,
results of operations or cash flows. The Company has two reportable segments:
commercial banking and credit card services. Commercial banking includes all
services to the Company's customers except credit card services.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The Company undertakes no obligation to revise or publicly release the results
of any revision to these forward-looking statements. 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, 1998.
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 1998
to March 31, 1999, and significant trends and changes in the Company's results
of operations for the three months ended March 31, 1999, compared to the same
period in 1998. The 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 Butte, El Dorado, Placer, Shasta, and
Sacramento, California. The Company considers Shasta County to be the Company's
major market area. The Company conducts its business through the Bank, its
principal subsidiary. The services offered by the Company include those
traditionally offered by commercial banks of similar size and character in
California, such as checking, interest-bearing checking ("NOW") and savings
accounts, money market deposit accounts, commercial, construction, real estate,
personal, home improvement, automobile and other installment and term loans,
travelers checks, safe deposit boxes, collection services, and telephone
transfers. The primary focus of the Company is to provide service to the
business and professional community of its major market area including Small
Business Administration ("SBA") loans, and payroll and accounting packages and
billing programs. The Company does not offer trust services or international
banking services and does not plan to do so in the near future.
The Company derives its income from two principal sources: (i) net
interest income, which is the difference between the interest income it receives
on interest-earning assets and the interest expense it pays on interest-bearing
liabilities, and (ii) fee income, which includes fees earned on deposit
services, income from SBA lending, electronic-based cash management services and
merchant credit card processing services.
Management considers the business of the Company to be divided into two
segments: (i) commercial banking and (ii) credit card services. Credit card
services are limited to those revenues, net of related data processing costs,
associated with the Merchant Services Agreement and the Bank's agreement to
provide credit and debit card processing services for merchants solicited by the
Bank who accept credit and debit cards as payments for goods and services.
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RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net income for the three months ended March 31, 1999, was $899 thousand
($0.31 per share, diluted), representing a decrease of $53,000 or 5.6%, over net
income of $952 thousand ($0.35 per share, diluted) for the three months ended
March 31, 1998. The decrease in net income is attributed to professional fee
expenses related to the filing of our registration statement with the Securities
and Exchange Commission and preparation for the Form 10-K. The expenses incurred
in the first three months of 1999 related to these filings totaled $114
thousand.
NET INTEREST INCOME
The primary source of income for the Bank is derived from net interest
income, which is the difference between the interest earned from loans and
investments less the interest paid on deposit accounts and borrowings. Net
interest income increased from $2.5 million in the three months of 1998 to $2.6
million in the three months of 1999, representing a 5.4% increase. Net interest
income increases in 1999 over 1998 were primarily the result of loan growth,
which increased the volume of earning assets and improved the Bank's interest
income through reinvestment of maturing securities into higher yielding loans.
Total interest expense increased $34,000 from $1.4 million in the first
three months of 1998 to $1.5 million in the first three months of 1999, a 2.3%
increase. The increase in total interest expense in the first three months 1999
is attributed to the growth in higher yielding time certificates of deposit.
The Company's net interest margin (net interest income divided by
average earning assets) was 5.20% in the first three months of 1999, versus
5.51% for the first three months of 1998. The decrease in the Company's net
interest margin for the first three months of 1999 versus 1998 can be attributed
to the volume in higher yielding certificates of deposit and an increasing
competitive pricing market for loan production.
The following is an analysis of net interest margin for the periods indicated:
Three months ended Three months ended
March 31, 1999 March 31, 1998
---------------------------------- ----------------------------------
(Dollars in thousands) Average % Average %
Balance Interest Yield Balance Interest Yield
-------- -------- -------- -------- -------- --------
Earning assets(1) $204,738 $ 4,105 8.13% $183,190 $ 3,935 8.71%
Interest bearing liabilities $152,917 $ 1,482 3.93% $141,008 $ 1,445 4.16%
-------- --------
Net interest income $ 2,623 $ 2,490
Net interest income to earning assets 5.20% 5.51%
- --------
(1) Nonaccrual loans are included in the calculation of average balance of
earning assets, and interest is not included in the earnings.
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The following table sets forth the Company's daily average balance sheet,
related interest income or expense and yield or rate paid for the periods
indicated. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
FIRST QUARTER ENDED
MARCH 31, MARCH 31,
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Portfolio Loans $ 148,058 $ 3,381 9.26% $ 117,382 $ 2,977 10.29%
Tax Exempt Securities 5,840 63 4.38% 10,512 97 3.74%
US Government 28,102 404 5.83% 45,402 727 6.49%
Federal Funds Sold 17,693 190 4.36% 6,165 80 5.26%
Other Securities 5,045 67 5.39% 3,729 54 5.87%
--------- --------- --------- --------- --------- ---------
Average Earning Assets $ 204,738 $ 4,105 8.13% $ 183,190 $ 3,935 8.71%
--------- ---------
Cash & Due From Banks $ 10,536 $ 10,455
Bank Premises 5,681 5,790
Allowance for Loan Losses (3,251) (2,895)
Other Assets 2,530 3,286
--------- ---------
Average Total Assets $ 220,234 $ 199,826
========= =========
INTEREST BEARING LIABILITIES
Demand Interest Bearing $ 39,660 $ 182 1.86% $ 41,373 $ 191 1.87%
Savings Deposits 14,871 100 2.73% 13,409 92 2.78%
Certificates of Deposit 98,386 1,200 4.95% 86,226 1,162 5.47%
--------- --------- --------- --------- --------- ---------
152,917 1,482 3.93% 141,008 1,445 4.16%
--------- ---------
Non interest Demand 40,506 35,405
Other Liabilities 2,498 2,049
Shareholder Equity 24,313 21,364
--------- ---------
Average Liabilities and
Shareholders Equity $ 220,234 $ 199,826
========= =========
Net Income and Net Interest
Margin $ 2,623 5.20% $ 2,490 5.51%
========= =========
- ---------------------------------------------------------------------------------------------------------------------
The Company's average total assets increased to $220.2 million in the
first three months of 1999 from $199.8 million in the first three months of
1998, representing a 10.2% increase. In the first quarter of 1999, the Company's
average loan portfolio increased by $30.6 million, a 26.1% increase over the
first quarter 1998. In addition, the Company's average noninterest-bearing
demand deposits increased from $35.4 million in 1998 to $40.5 million in the
first three months of 1999, representing an 14.4% increase over the like period
in 1998. Average savings deposits increased from $13.4 million in 1998 to $14.8
million in the first three months of 1999, representing a 10.9% increase and
certificates of deposit grew from $86.2 million in 1998 to $98.3 million in the
first quarter of 1999, representing a 14.0% increase.
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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) MARCH 31, 1999 OVER MARCH 31, 1998
Volume Rate Total
------- ------- -------
Increase(Decrease) In
Interest Income
Portfolio loans $ 3,849 $(1,202) $ 2,647
Tax exempt securities (27) 66 (39)
US Government securities 526 (301) 225
Federal Funds Sold 226 (56) 170
Other Securities 72 (18) 54
------- ------- -------
Total Increase / (Decrease) $ 4,646 $(1,511) $ 3,135
------- ------- -------
Increase(Decrease) In
Interest Expense
Interest Bearing Demand $ 140 $ (5) $ 135
Savings Deposits 85 (7) 78
Certificates of Deposit 1,360 (447) 913
------- ------- -------
Total Increase / (Decrease) $ 1,585 $ (459) $ 1,126
------- ------- -------
Net Increase/ (Decrease) $ 3,061 $(1,052) $ 2,009
======= ======= =======
NONINTEREST INCOME
The Company's noninterest income consists primarily of service charges
on deposit accounts and processing fees for merchants who accept credit and
debit cards as payment for goods and services. Noninterest income also includes
ATM fees earned at various locations. For the period ended March 31, 1999,
noninterest income represented 14.3% of the Company's revenues, versus 14.8% for
the same period in 1998. Under the card association rules, fees that can be
charged on monthly credit card sales above $93 million are significantly less
than the fees that can be charged on monthly credit card sales below $93
million. During 1998, the Bank has exceeded the $93 million threshold, future
growth of fee income will be significantly less than historical growth.
The following table sets forth a summary of noninterest income for the periods
indicated.
FIRST QUARTER 1999
-----------------------
(Dollars in thousands)
March 31, March 31,
1999 1998
--------- ---------
Noninterest Income
Service Charges $ 73 $ 53
Credit Card Income, net 415 450
Other Income 193 177
Gain(loss) sale of investment securities 0 0
------ ------
Total Noninterest Income $ 681 $ 680
====== ======
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NONINTEREST EXPENSE
Noninterest expense consists of salaries and related employee benefits,
occupancy and equipment expense and other operating expenses. For the period
ended March 31, 1999, noninterest expense totaled $1.7 million versus $1.5
million for the same period in 1998 or a 17.7% increase.
The increase in noninterest expense is attributable to the expenses related to
the Company's decision to register its Common Stock under the Exchange Act in
order to increase shareholder value by improving liquidity and increasing public
information about the Company. These professional fees totaled $114 thousand in
the first quarter of 1999. During 1998, and early 1999 additional staff was
added to expand the accounting team and the loan production office in Roseville,
representing a 17.7% increase in salaries and benefits.
The following table sets forth a summary of noninterest expense for the
periods indicated.
(Dollars in thousands) FIRST QUARTER 1999
-----------------------
Noninterest Expense March 31, March 31,
1999 1998
--------- ---------
Salaries and Benefits $ 963 $ 818
Occupancy & Equipment 229 204
DP & Professional Fees 223 157
Other Expenses 353 323
------ ------
Total Noninterest Expense $1,768 $1,502
====== ======
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.
FIRST QUARTER ENDED
----------------------------
March 31, March 31,
1999 1998
--------- ---------
Tax provision $ 590 $ 548
Effective Tax Rate 39.6% 36.5%
Increases in the Company's tax provision is attributable to increases in
the Company's net income and the non-deductibility of certain professional fees
in connection with the preparation of the Company's registration statement, and
a 44% reduction in investments held in tax-exempt municipal securities
portfolio.
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 Butte, El Dorado, Placer,
Sacramento and Tehama counties through its loan production offices. Portfolio
loans have increased $2.7 million in the first quarter of 1999, or 1.9%. The
increases are primarily in the real estate construction segment.
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The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
(Dollars in thousands) FIRST QUARTER ENDED
---------------------------
March 31, December 31,
1999 1998
--------- ---------
Commercial & Financial $ 47,584 $ 46,890
Real Estate-Construction 31,591 29,470
Real Estate-Commercial 69,675 69,742
Installment 317 298
Other Loans 2,139 2,225
Less:
Deferred Loan Fees and Costs (363) (423)
Allowance for Loan Losses (3,210) (3,235)
--------- ---------
Total Net Loans $ 147,733 $ 144,967
========= =========
The Company's practice is to place an asset on nonaccrual status when
one of the following events occurs: (i) any installment of principal or interest
is 90 days or more past due (unless in management's opinion the loan is well
secured and in the process of collection). (ii) Management determines the
ultimate collection of principal or interest to be unlikely or (iii) the terms
of the loan have been renegotiated due to a serious weakening of the borrower's
financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past
due and still accruing or have been restructured.
The following table sets forth a summary of the Company's nonperforming
assets as of the dates indicated:
(Dollars in thousands) FIRST QUARTER ENDED
--------------------------
March 31, December 31,
1999 1998
--------- ------------
Nonaccrual loans $661 $942
90 days and still accruing 0 46
Restructured loans in compliance
with modified terms -- --
Other Real Estate Owned 278 66
The Company's nonaccrual loans decreased from $942 thousand to $661
thousand in the first three months of 1999, a 29.8% decrease. OREO properties
increased by $212 thousand in the same period. The increase in OREO properties
is attributable to one loan and since March 31, 1999 has been sold.
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.
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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 Bank's ALLL decreased to $3,210,000 in the first three months of
1999 from $3,235,000 at December 1998. The reduction in the amount of ALLL for
this period is a direct result of the Company's ongoing efforts to increase the
effectiveness of its collection efforts and the related decrease in net losses.
Loans that are deemed to have a greater risk are managed in a more active manner
to increase the likelihood that the Bank will receive payment in full. Greater
emphasis on problem loan management has also reduced the Bank's overall level of
higher risk rated credits.
Net charge-offs were $50,000 or .03% of average loans for the first
quarter of 1999.
The following table summarizes the activity in the ALLL reserves for the
periods indicated.
(dollars in thousands) FIRST QUARTER ENDED
----------------------------
March 31, March 31,
1999 1998
--------- ---------
Beginning balance for Loan Losses $ 3,235 $ 2,819
Provision for Loan Losses 25 145
Charge offs:
Commercial (0) (8)
Real Estate (33) (16)
Other (22) (8)
------- -------
Total Charge offs (55) (32)
------- -------
Recoveries:
Commercial 5 3
Real Estate 0 --
Other 0 4
------- -------
Total Recoveries 5 7
------- -------
Ending Balance $ 3,210 $ 2,939
======= =======
ALLL to total loans 2.17% 2.50%
------- -------
Net Charge offs to average loans 0.03% 0.02%
------- -------
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INVESTMENT PORTFOLIO
Total investment securities increased 9.3 million in the first three
months of 1999 or 28.6%. The increase is entirely in US Government and Agency
securities and can be directly attributed to the increase in deposits during
this same period.
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 Bank's liquidity needs may vary from actual
needs, the Bank maintains a substantial amount of liquid assets to absorb short
term increases in loans or reductions in deposits. The Company's liquid assets
(cash and due from banks, federal funds sold and available-for-sale investment
securities) totaled $57.9 million, or 25.9% of total assets, at March 31, 1999
compared to $51.3 million or 23.8% of total assets at December 31, 1998.
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 Bank's capital ratios as of the first
quarter 1999.
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Total Risk-Based Capital 16.61% 15.58%
Tier 1 Capital to Risk-Based Assets 14.85% 14.33%
Tier 1 Capital to Average Assets 10.92% 10.95%
(Leverage ratio)
YEAR 2000
Redding Bank of Commerce recognized the critical importance of Year 2000 system
compliance and began addressing this issue in 1996. A Y2K Contingency team was
formed comprised of senior management, operating officers and selected
representatives. This team serves as the formal sponsor of the Year 2000
project, providing financial and operational support.
Results are regularly reported to the Board of Directors.
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YEAR 2000 OVERVIEW
Thirty years ago, computer memory was costly. To conserve space, computer
programmers used only two digits to record dates. On December 31, 1999, when
"99" rolls over to "00" on January 1, 2000, systems that have not been fixed
could create service interruptions or errors because they could read "00" as
1900 instead of 2000. Programmers worldwide are working on the Year 2000
challenge to allow computer systems to move effortlessly from December 31, 1999
to January 1, 2000.
Redding Bank of Commerce has placed the highest priority on the Year 2000
project so that we're ready for business as usual as the new millennium
approaches. We are committed to providing exceptional service to our customers,
now and after Year 2000.
YEAR 2000 STRATEGY
The Y2K Contingency Team has developed a comprehensive plan for achieving
compliance. The five-step process consists of the following:
- - Awareness - creating and maintaining awareness of the Bank's Year 2000
effort at all levels of the company. This step has been completed.
- - Assessment - Determining which operating systems, computers, applications
and facilities need to be fixed and prioritizing remediation efforts. This
step has been completed.
- - Renovation - The "fix-it" stage of the process. This step has been completed
for all of the Company's mission critical software systems.
- - Validation - The testing and certification stage of the process. Testing of
our mission-critical systems was substantially completed in 1998.
- - Implementation - Renovated and validated fixes will be put into production
well before 2000 so that we can test interfaces with customers, business
partners, government institutions and others.
Redding Bank of Commerce's Year 2000 efforts is managed from the top. The Y2K
team is headed by an Executive Vice President and key Senior Management. Regular
reports on the status of the Bank's Year 2000 efforts are provided to the Board
of Directors.
SCOPE
A complete inventory of the Banks hardware, software, telecommunications
resources, including mainframe and personal computers, ATM's and servers has
been completed. Our inventory of software covers our operating systems, network
systems, application software and data storage systems. In addition to our own
internal systems, our inventory process includes all hardware and software
vendors and service providers to determine their Year 2000 compliance status,
testing timeframes and expected Year 2000 readiness dates.
We have also inventoried our environmental systems such as elevators, vault
timers, security systems, and climate control systems.
RENOVATION AND TESTING FOR YEAR 2000
Renovation and testing efforts were substantially completed by December 31,
1998. The testing of the mission critical system applications for core banking
product provided by the Bank's primary vendor was completed and results
certified during November and December 1998. The core banking product includes
solutions for checking, savings, time certificates of deposit, general ledger,
accounts payable, automated clearing house, individual retirement accounts,
commercial, mortgage and installment loans, proof of deposit and ancillary
supporting products. Redding Bank of Commerce has accomplished its goal to have
substantially completed by December 31, 1998, the programming changes and
internal testing of its information technology systems.
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CONTINGENCY PLANNING
Our goal for Year 2000 activities is business as usual in the Year 2000. Redding
Bank of Commerce has developed a written contingency plan that addresses minor
problems, significant emergencies and major Y2K disasters. Although it would be
impossible to second-guess the actual results of operating a business in the new
millennium we are able to anticipate some possibilities and take planning action
for such possibilities. Steps have been established to enable operations to
continue with some power outages over which we have no control, including
additional staffing, heightened security and alternative procedures. Testing of
our contingency planning is well underway, with results to be reported to our
primary regulator as of June 30, 1999.
SAFEGUARDING INVESTORS INTERESTS
As the Year 2000 approaches, we are confident that the following factors will
ensure that the safety and service to our customers will remain intact:
- - Year 2000 is a top priority and our most important technology initiative
- - Remediation, testing and certification of our mission critical systems was
substantially completed in 1998
- - All Year 2000 efforts of financial institutions are being carefully reviewed
by federal regulatory agencies. Redding Bank of Commerce completed an FDIC
Y2K examination in January 1999 with positive results.
- - The Federal Reserve Bank has ordered an additional $50 billion in currency
to cover any increase in demand, and you will have access to your money.
- - The Federal Deposit Insurance Corporation (FDIC) has issued notices to
remind all insured depositors that the Year 2000 will not affect their
$100,000 deposit insurance coverage.
- - Even though we have every confidence in our Year 2000 efforts, written
contingency plans are in place to address challenges that may arise.
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 Bank's operations. As a result, all
significant interest rate risk management procedures are performed at the Bank
level.
Based upon the nature of its operations, the Bank is not subject to
foreign currency exchange or commodity price risk. The 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.
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
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interest rates.
Because the Bank is asset sensitive, the Company is adversely affected
by declining rates rather than rising rates. This effect is partially offset in
the short-term by the fact that the Company is liability sensitive through the
cumulative GAP period of one year or less. During a period of declining rates,
such liabilities may be repriced to provide a short-term advantage to the
Company; however, this benefit may not be sustainable over the long-term.
To estimate the effect of interest rate shocks on the Company's net
interest income, management uses a model to prepare an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income given
a change in the federal funds rate of 100 basis points up or down. All changes
are measured in dollars and are compared to projected net interest income. At
March 31, 1999 the estimated annualized reduction in net interest income
attributable to a 100 basis point decline in the federal funds rate was $363,000
with a similar and opposite result attributable to a 100 basis point increase in
the federal funds rate. At December 31, 1998, the estimated annualized reduction
in net interest income attributable to a 100 basis point decline in the federal
funds rate was $543,000 with a similar and opposite result attributable to a 100
basis point increase in the federal funds rate. 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 in excess of 100 basis
points. The model's primary benefit to management is its assistance in
evaluating the impact that future strategies with respect to the Bank's mix and
level of rate-sensitive assets and liabilities will have on the Company's net
interest income.
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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
There have been no changes in securities of the Company during the first quarter
of 1999. The authorized Common Stock of the Company consists of 10,000,000
shares no par value. As of March 31, 1999, there were issued and outstanding
2,690,103 shares of Common Stock.
ITEM #3. DEFAULTS UPON SENIOR SECURITIES
N/A.
ITEM #4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A.
ITEM #5. OTHER INFORMATION
N/A.
ITEM #6A. EXHIBITS
27. FINANCIAL DATA SCHEDULE FOR PERIOD ENDED MARCH 31, 1999.
ITEM #6B. REPORTS ON FORM 8-K
N/A.
SIGNATURES
Pursuant to 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 30, 1999 /s/ Linda J. Miles
-----------------------------
Linda J. Miles
Executive Vice President &
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule