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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, 2002
 
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
(State or other jurisdiction of incorporation or organization)
  94-2823865
(I.R.S. Employer Identification No.)
 
1951 Churn Creek Road
Redding, California
(Address of principal executive offices)
  96002
(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, 2002: 2,683,775

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Income
Consolidated Condensed Statements of Cash Flows
Notes to Unaudited Consolidated Condensed Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. Other Information
Item 1. Legal proceedings
Item 2. Changes in securities and use of proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a vote of Security Holders
Item 5. Other Information
Item 6A. Exhibits
Item 6B. Reports on Form 8-K
SIGNATURES


Table of Contents

REDDING BANCORP & SUBSIDIARIES

Index to Form 10-Q

                 
   
 
  Page:
   
 
 
PART I.
 
Financial Information
   
       
Item 1. Financial Statements
       
       
Consolidated Condensed Balance Sheets June 30, 2002, December 31, 2001 and June 30, 2001
    3  
       
Consolidated Condensed Statements of Income Three and six months ended June 30, 2002 and 2001
    4  
       
Consolidated Condensed Statements of Cash Flows Six months ended June 30, 2002 and 2001
    5  
       
Notes to Consolidated Condensed Financial Statements
    6  
       
Item 2. Management’s Discussion and Analysis Of Financial Condition and Results of Operations
    9  
       
Item 3. Quantitative and Qualitative Disclosure about Market Risk
    19  
PART II.
 
Other Information
   
       
Item 1. Legal proceedings
    21  
       
Item 2. Changes in Securities and use of proceeds
    21  
       
Item 3. Defaults Upon Senior Securities
    21  
       
Item 4. Submission of Matters to a Vote of Security Holders
    21  
       
Item 5. Other Information
    21  
       
Item 6. Exhibits and Report on Form 8-K
    21  
SIGNATURES     21  

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements

REDDING BANCORP & SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited)
(Dollar amounts in thousands)
                                               
            June 30, 2002   December 31, 2001   June 30, 2001
           
 
 
ASSETS
                       
Cash and due from banks
  $ 25,414     $ 15,528     $ 13,425  
Federal funds sold and securities purchased under agreements to resell
    7,500       25,430       15,630  
Securities available-for-sale
    28,084       40,898       38,515  
Securities held to maturity (estimated fair value of $3,564 at June 30, 2002, $4,193 at December 31, 2001 and $5,098 at June 30, 2001)
    3,394       4,117       5,054  
Loans, net of the allowance for loan losses of $3,359 at June 30, 2002, $3,180 at December 31, 2001 and $2,806 at June 30, 2001
    252,586       216,696       203,048  
Bank premises and equipment, net
    5,370       5,339       5,422  
Other assets
    8,837       10,899       8,429  
 
   
     
     
 
       
Total Assets
  $ 331,185     $ 318,686     $ 289,523  
 
   
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
   
Demand — noninterest bearing
  $ 51,102     $ 44,525     $ 26,079  
   
Demand — interest bearing
    83,873       69,892       50,523  
   
Savings
    17,615       17,034       15,766  
   
Certificates of deposits
    141,727       149,984       155,882  
 
   
     
     
 
       
Total Deposits
    294,317       281,435       248,250  
Securities sold under agreements to repurchase
    4,947       6,780       6,425  
Other Liabilities
    3,395       3,231       4,728  
 
   
     
     
 
       
Total Liabilities
    302,659       291,446       259,403  
Stockholders’ Equity:
                       
 
Preferred stock, no par value, 2,000,000 authorized no shares issued and outstanding in 2002 and 2001
                       
 
Common Stock, no par value, 10,000,000 shares authorized; 2,683,775 shares issued and outstanding at June 30, 2002, 2,703,457 at December 31, 2001 and 2,835,511 at June 30, 2001
    8,820       8,851       9,247  
   
Retained Earnings
    19,552       18,397       20,764  
   
Accumulated other comprehensive income gain (loss), net of tax
    154       (8 )     109  
 
   
     
     
 
 
    28,526       27,240       30,120  
 
   
     
     
 
     
Total Liabilities and Stockholders’ Equity
  $ 331,185     $ 318,686     $ 289,523  
 
   
     
     
 
 
See notes to consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)
(Dollars in thousands, except share data)
                                                 
        Three months ended   Six months ended
       
 
        June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
       
 
 
 
Interest income:
                               
 
Interest and fees on loans
  $ 4,156     $ 4,351     $ 7,863     $ 8,903  
 
Interest on tax exempt securities
    33       53       81       78  
 
Interest on US government securities
    271       424       669       825  
 
Interest on federal funds sold and securities purchased under agreements to resell
    48       175       111       403  
 
   
     
     
     
 
   
Total interest income
    4,508       5,003       8,724       10,209  
 
   
     
     
     
 
Interest expense:
                               
 
Interest on demand deposits
    158       229       276       532  
 
Interest on savings
    35       91       72       186  
 
Interest on time deposits
    1,264       1,890       2,699       3,762  
 
Securities sold under agreements to repurchase
    7       55       17       135  
 
   
     
     
     
 
   
Total interest expense
    1,464       2,265       3,064       4,615  
 
   
     
     
     
 
Net interest income
    3,044       2,738       5,660       5,594  
Provision for loan losses
    125       149       190       307  
 
   
     
     
     
 
Net interest income after provision for loan losses
    2,919       2,589       5,470       5,287  
 
   
     
     
     
 
Non-interest income:
                               
 
Service charges on deposit accounts
    76       55       148       106  
 
Credit card service income, net
    102       245       209       719  
 
Other income
    277       284       542       491  
 
Net gain (loss) on sale of securities available-for-sale
    3       100       2       100  
 
   
     
     
     
 
   
Total non-interest Income:
    458       684       901       1,416  
 
   
     
     
     
 
Non-interest expense:
                               
 
Salaries and related benefits
    1,120       898       2,142       1,867  
 
Net occupancy and equipment expense
    343       277       696       502  
 
Data processing and professional services
    111       150       231       255  
 
Other expense
    433       394       823       755  
 
   
     
     
     
 
   
Total non-interest expense
    2,007       1,719       3,892       3,379  
 
   
     
     
     
 
Income before income taxes
    1,370       1,554       2,479       3,324  
 
Provision for income taxes
    523       582       891       1,221  
 
   
     
     
     
 
   
Net Income
  $ 847     $ 972     $ 1,588     $ 2,103  
 
   
     
     
     
 
Basic earnings per share
  $ 0.32     $ 0.34     $ 0.59     $ 0.73  
Weighted average shares — basic
    2,682       2,849       2,693       2,863  
Diluted earnings per share
  $ 0.30     $ 0.33     $ 0.56     $ 0.70  
Weighted average shares — diluted
    2,848       2,978       2,863       2,985  
 
See notes to consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Six months ended June 30, 2002 and 2001
                                     
            June 30, 2002   June 30, 2001
           
 
Cash flows from operating activities:
               
     
Net Income
  $ 1,588     $ 2,103  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Provision for loan losses
    190       307  
   
Provision for depreciation and amortization
    305       247  
   
Compensation associated with stock options
    34       34  
   
(Gain) Loss on sale of securities available-for-sale
    (2 )     (100 )
   
Amortization of investment premiums and accretion of discounts, net
    (3 )     14  
   
Gain on sale of loans
    (96 )     (40 )
   
Proceeds from sales of loans
    4,087       2,246  
   
Loans originated for sale
    (4,183 )     (2,207 )
   
Effect of changes in:
               
       
Other assets
    1,840       (1,548 )
       
Deferred loan fees
    190       (30 )
       
Other liabilities
    164       1,679  
 
   
     
 
       
Net cash provided by operating activities
    2,526       602  
 
   
     
 
Cash flows from investing activities:
               
   
Proceeds from maturities of available-for-sale securities
    4,175       13,718  
   
Proceeds from sale of available-for-sale securities
    13,081       4,942  
   
Purchases of available-for-sale securities
    (3,550 )     (36,116 )
   
Loan origination, net of principal repayments
    (36,077 )     (12,003 )
   
Purchases of premises and equipment
    (337 )     (382 )
 
   
     
 
       
Net cash (used) by investing activities
    (22,708 )     (29,841 )
 
   
     
 
Cash flows from financing activities:
               
   
Net change in deposits and borrowings
    11,048       31,371  
   
Common stock repurchase transactions
    (536 )     (843 )
   
Common stock options exercised
    38       50  
 
   
     
 
       
Net cash provided by financing activities
    10,550       30,578  
Net (decrease) increase in cash and cash equivalents
    (8,044 )     3,442  
Cash and cash equivalents, beginning of period
    40,958       25,613  
 
   
     
 
Cash and cash equivalents, end of period
  $ 32,914     $ 29,055  
 
   
     
 
Supplemental disclosures:
               
 
Cash paid during the period for:
               
       
Income taxes
  $ 285     $ 1,006  
       
Interest
    3,072       4,585  
 
See notes to consolidated financial statements.

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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 2001 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, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

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 and six months ended June 30, 2002 and 2001.

                                             
(Dollars in thousands, except per share data)                        
      Three Months Ended   Six Months Ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
Basic EPS Calculation:
                               
 
Numerator (net income)
  $ 847     $ 972     $ 1,588     $ 2,103  
 
Denominator (average common shares outstanding)
    2,682       2,849       2,693       2,863  
Basic earnings per Share
  $ 0.32     $ 0.34     $ 0.59     $ 0.73  
Diluted EPS Calculation:
                               
 
Numerator (net income)
  $ 847     $ 972     $ 1,588     $ 2,103  
 
Denominator:
                               
 
Average common shares outstanding
    2,682       2,849       2,693       2,863  
 
Options
    166       129       170       122  
 
   
     
     
     
 
 
    2,848       2,978       2,863       2,985  
Diluted earnings per Share
  $ 0.30     $ 0.33     $ 0.56     $ 0.70  
 
   
     
     
     
 

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3.   Comprehensive Income

          The Company’s total comprehensive earnings were as follows:

                                               
      Three Months Ended   Six Months Ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
Net Income as reported
  $ 847     $ 972     $ 1,588     $ 2,103  
Other comprehensive income (net of tax):
                               
 
Unrealized holding gain (loss) on securities available-for-sale
    254       (79 )     163       109  
 
Less reclassification adjustment
    (2 )     0       (1 )     0  
 
   
     
     
     
 
Total other comprehensive income
    252       (79 )     162       109  
Total comprehensive income
  $ 1,099     $ 893     $ 1,750     $ 2,212  
 
   
     
     
     
 

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 .135% of transaction processing under the old agreement.

          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, 2002   June 30, 2001   June 30, 2002   June 30, 2001

 
 
 
 
Commercial Banking
  $ 1,268     $ 1,309     $ 2,270     $ 2,605  
Credit card services
    102       245       209       719  
 
   
     
     
     
 
 
  $ 1,370     $ 1,554     $ 2,479     $ 3,324  
 
   
     
     
     
 

5.   Stock Option Plans

The Company maintains the 1998 Stock Option Plan (“the Plan”) which was approved by the Company’s stockholders on April 21, 1998. The Plan provides for awards in the form of options (which may constitute incentive stock options “Incentive Options”) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the “Code”), or non-statutory options (“NSO’s”) to key personnel of the Company, including directors. The Plan provides that Incentive Options under the Plan may not be granted at less than 100% of the fair market value of the common stock on the date of the grant. The purpose of the plan is to promote the long-term success of the Company and the creation of stockholder value by (a) aligning key personnel to focus on critical long range objectives, (b) increasing the ability of the Company to attract and retain key personnel, and (c) linking key personnel directly to stockholder interests through increased stock ownership. Under the Plan, stock options typically vest over a five-year time period. Vesting may be accelerated in the event of an optionee’s death, disability, retirement or in the event of a change of control. A total of 594,000 shares of the Company’s common stock are reserve for grant under the Plan.

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The following table presents the changes in outstanding stock options for the periods indicated:

                   
            Weighted
    Number   Average
    of   Exercise
    Shares   Price
   
 
Options outstanding, March 31, 2002
    427,850     $ 9.87  
Options outstanding, June 30, 2002
    422,240     $ 9.87  

Activity during the three and six months ended June 30, 2002 included:

                   
    Three Months Ended   Six Months Ended
   
 
    June 30, 2002   June 30, 2002
   
 
Granted
  None   None
Canceled
    990       990  
Exercised
    4,620       4,620  
 
   
     
 

6.   New Accounting Pronouncements

Business Combinations and Goodwill and Other Intangible Assets

Effective June 30, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” which addresses the elimination of pooling accounting treatment in business combinations and the financial accounting and reporting for acquired goodwill and other intangible assets at acquisition, and adopted January 1, 2002 and SFAS No. 142, “Goodwill and Other Intangible Assets” which addresses financial accounting and reporting for acquired goodwill and other intangible assets at acquisition in transactions other than business combinations covered by SFAS No. 141, and the accounting treatment of goodwill and other intangible assets after acquisition and initial recognition in the financial statements. The adoption of these statements did not have any impact on the Company’s consolidated financial position, results of operations, or cash flows, as the Company had no goodwill as of January 1, 2002 and all of the Company’s intangible assets, comprised of core deposit intangibles, have finite lives and are continuing to be amortized.

Impairment or Disposal of Long-Lived Assets

Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting For The Impairment Or Disposal Of Long-Lived Assets”. SFAS No. 144 supersedes SFAS No. 121, “Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting The Results Of Operations – Reporting The Effects Of Disposal Of A Segment Of A Business, And Extraordinary, Unusual and Infrequently Occurring Events And Transactions”. SFAS No. 144 unifies the accounting treatment for various types of long-lived assets to be disposed of, and resolves implementation issues related to SFAS No. 121.

The adoption of SFAS No. 144 did not have any effect on the Company’s financial position, results of operations, or cash flows, as the Company had no long-lived assets that were considered impaired or that were to be disposed of as of January 1, 2002.

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 rescinds and amends these statements to eliminate any inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.

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SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions including clarification that gains or losses from normal extinguishments of debt need not be classified as extraordinary items. The Company adopted SFAS No. 145 as of April 1, 2002. The adoption did not have a significant impact on the Company’s financial position, results of operations, or cash flows.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

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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, 2001 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, 2001 to June 30, 2002. Also discussed are significant trends and changes in the Company’s results of operations for the three and six months ended June 30, 2002, compared to the same period in 2002. 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 Upstate California to be its major market area. The Company conducts its business through Redding Bank of Commerce (“the Bank”), its principal subsidiary, and Roseville Bank of Commerce, 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.

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The Company’s goal is to be a 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 Company measures premier by monitoring key operating ratios to high performing peer information on a national level.

The Company’s strength is in relationship banking to small and medium sized businesses and professionals, commercial real estate financing, with special attention to personalized service. The Company offers a host of financial services designed to compliment the small business and professional customer - including direct courier and online cash management and E-statement — so the professional never has to leave their office.

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.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s significant accounting policies are presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2001 Annual Report on Form 10-K. The Company follows accounting policies typical to the community commercial banking industry and in compliance with various regulations and guidelines as established by the Financial Accounting Standards Board (“FASB”) and the Bank’s primary federal regulator, the FDIC.

The Company’s most significant management accounting estimate is the appropriate level for the allowance for loan losses. The Company follows a methodology for calculating the appropriate level for the allowance for loan losses. However, various factors, many of which are beyond the control of the Company, could lead to significant revisions in the amount of allowance for loan losses in future periods, with a corresponding impact upon the results of operations. In addition, the calculation of the allowance for loan losses is by nature inexact, as the allowance represents Management’s best estimate of the loan losses inherent in the Company’s credit portfolios at the reporting date. These loan losses will occur in the future, and as such cannot be determined with absolute certainty at the reporting date.

Other estimates that the Company utilizes in its accounting include the expected useful lives of depreciable assets, such as buildings, building improvements, equipment, and furniture. The useful lives of various technology related hardware and software could be subject to change due to advances in technology and the general adoption of new standards for technology or interfaces among computer or telecommunication systems.

The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for stock options. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the amount the employee or director must pay to acquire the stock. Because the Company’s stock option Plans provide for the issuance of options at a price of no less than the fair market value at the date of grant, no compensation cost is required to be recognized for the stock option Plans.

Had compensation costs for the stock option Plans been determined based upon the fair value at the date of grant consistent with SFAS No. 123, “Accounting For Stock Based Compensation”, the Company’s net income and earnings per share would have been reduced. The amount of the reduction for the fiscal years 1999 through 2001 is disclosed in Note 11 to the Consolidated Financial Statements contained in the 2001 Annual Report on Form 10-K, based upon the assumptions listed therein. GAAP itself may change over time, impacting the reporting of the Company’s financial activity. Although the economic substance of the Company’s transactions would not change, alterations in GAAP could affect the timing or manner of accounting or reporting.

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Results of Operations

Net Income

The Company reported earnings of $847,000, for the quarter ended June 30, 2002. The quarterly earnings represent a 12.9% decrease from the $972,000 reported for the same quarterly period of 2001. Diluted earnings per share for the second quarter of 2002 were $0.30, compared to $0.33 for the same period of 2001. Earnings for the six-month period ended June 30, 2002, were $1,588,000 a 24.5% decrease compared with $2,103,000 for the six months ended June 30, 2001. Diluted earnings per share for the six months ended June 30, 2002 was $0.56, compared to $0.70 for the same period in 2001.

Net Interest Income and Net Interest Margin

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.

The net effect of the increase in volume of earning assets and decrease in yield on earning assets, resulted in an increase of $66,000 (1.2%) in net interest income for the six month period ended June 30, 2002 from the same period in 2001. Net interest margin decreased 64 basis points to 3.96% from 4.60% for the same period a year ago. Yields on earning assets dropped to 6.10% compared with 8.40% a year ago. Funding costs dropped to 2.55% compared with 4.62% a year ago. Per plan, the increased volume of earning assets has mitigated some of the effect of the 4.75% rate reductions that occurred during 2001.

The Company’s internal financial models indicate that in periods of falling interest rates the net interest margin is expected to decrease while in periods of rising interest rates its margin is expected to increase. The decrease of net interest margin is magnified by the fact that the Company’s assets reprice at a more rapid rate than liabilities. At the current low rates, any additional rate reductions will cause an additional reduction in interest margins.

Growth

The Company continues to experience exceptional growth in assets; $12.5 million or 3.9% since December 31, 2001. The focus has been centered on increasing loan volumes to mitigate the low interest rate environment while maintaining the quality of assets. As per plan, the growth has been funded by reallocating investments and federal funds sold into higher yielding loan products. Loans have grown $21.7 million during the second quarter or 9.4% and $35.9 million or 16.6% since December 31, 2001. Loan growth is funded by sales of investment securities, federal funds sold and increases in deposit balances.

During the quarter the Roseville Bank of Commerce, a division of Redding Bank of Commerce held its grand opening reception at the new location of 1504 Eureka Road, Suite 100, Roseville California. Two new loan officers were recruited to assist in the growth goals in the Roseville market.

The Redding region has started an aggressive marketing program focused on increasing the deposit market share of the Company. The program includes a mailing piece, direct call, an officer visit to the customer’s place of business and a special offer for financial services. Deposits have increased $19.9 million or 7.3% during the second quarter, $12.9 million or 4.6% year-to-date.

Liquidity

The Company’s consolidated liquidity position remains adequate to meet future contingencies. At June 30, 2002 the Company’s liquidity ratio was 18.4% of total assets. Per plan, Investment securities and federal funds sold have been reinvested in loan production improving overall yield. The Company develops liquidity through deposit growth, maturities and repayments of loans and investments, net interest income, fee income and access to borrowing lines. Loan growth has outpaced deposit growth during the quarter, as anticipated, as deposit relationships take longer to transition into the bank.

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During the second quarter the Company purchased $5.0 million in brokered deposits with a term of six-months at a cost of 2.30%, comparable to current certificate pricing. A line of credit was established at the Federal Home Loan Bank of approximately $28.0 million to take advantage of key pricing opportunities to support growth and implement strategies to support the net interest margin. No draws on the line occurred in the second quarter.

Credit Quality

Anchored to loan growth is the underwriting quality within the loan portfolio. The Company’s most significant management accounting estimate is the appropriate level for the allowance for loan losses. The Company follows a methodology for calculating the appropriate level for the allowance for loan losses. Provision for loan losses of $190,000 were provided for the six months ended June 30, 2002 compared with $307,000 for the same period of 2001. Redding Bancorp’s allowance for loan losses was 1.31% of total loans at June 30, 2002 and 1.36% at June 30, 2001, while its ratio of non-performing assets to total assets was 0.00% at June 30, 2002, compared to 0.11% at June 30, 2001. Year-to-date net charge-offs of $20,969 compare favorably to net charge-offs of $475,000 in the same period last year.

Non-interest income

Non-interest income decreased $226,000 (33.0%) for the quarter over June 2001 and $515,000 (36.4%)over the prior year to date. Service charge income increased $21,000 (38.2%) for the quarter over June 2001 and $42,000 (39.6%) over the prior year reflective of deposit growth.

Merchant bankcard processing services are highly regulated by credit card associations such as Visa. In order to participate in the credit card program, Redding Bank of Commerce must comply with the credit card association’s rules and regulations that may change from time to time. During November 1999, Visa adopted several rule changes to reduce the risk profile in high-risk acquiring programs and these rule changes affect the Bank’s Merchant Services business segment. These changes include a requirement that an acquiring processor’s reported fraud ratios be no greater than three times the national average.

Redding Bank of Commerce’s overall fraud ratio met and complied with the Visa requirement. Other Visa changes announced included the requirement that total processing volume in certain high-risk categories (as defined by Visa) is less than 20% of total processing volume.

Credit card income is significantly reduced both at the quarter and year-to-date reflective of new contract pricing that took effect on May 1, 2001 and the effect of Visa limitations of processing related to capital.

The new contract pricing is a reduction in fee pricing to 2 basis points from 13.5 basis points. Quarterly earnings were $102,000 compared with $245,000 representing at 58.4% decrease over the same quarterly period in 2001. Earnings for the six-month period were $209,000 compared with $719,000 representing a 70.9% decrease over the same six-month period in 2001.

Management is pursuing various strategies to offset the decline in revenues, including the expansion of the Roseville Bank of Commerce, aggressive loan growth in both markets, and a recently expanded mortgage division.

Non-interest expense

Non-interest expense increased $288,000 (16.8%) for the quarter over June 2001 and $513,000 (15.2%) over the prior year to date.

Salaries and benefits have increased $222,000 (24.7%) for the quarter over June 2001 and $275,000 (14.7%) over the prior year reflective of additions to staff to support the Roseville market and volume increases. Occupancy expense has increased $66,000 (23.8%) for the quarter over June 2001 and $194,000 (38.6%) over the prior year to date. The increase is reflective of the expansion and relocation of the Roseville Bank of Commerce to 1504 Eureka Road, Suite 100, Roseville, California. All other expenses show modest increases over prior periods.

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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. 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, 2002   June 30, 2001
   
 
    Average           Yield/   Average           Yield/
    Balance   Interest   Rate   Balance   Interest   Rate
   
 
 
 
 
 
Earning Assets
                                               
Portfolio Loans
  $ 234,829     $ 7,863       6.70 %   $ 196,693     $ 8,903       9.05 %
Securities — Tax Exempt
    3,898       81       4.16 %     3,604       78       4.33 %
Securities — US Government
    32,886       619       3.76 %     25,367       775       6.11 %
Federal Funds Sold
    13,318       111       1.67 %     16,373       403       4.92 %
Other Securities
    1,247       50       8.02 %     967       50       10.34 %
 
   
     
     
     
     
     
 
Average Earning Assets
  $ 286,178     $ 8,724       6.10 %   $ 243,004     $ 10,209       8.40 %
 
           
                     
         
Cash & Due From Banks
  $ 19,224                     $ 10,884                  
Bank Premises
    5,378                       5,196                  
Allowance for Loan Losses
    (3,247 )                     (2,810 )                
Other Assets
    8,698                       7,132                  
 
   
                     
                 
Average Total Assets
  $ 316,231                     $ 263,406                  
 
   
                     
                 
Interest Bearing Liabilities
                                               
Demand Interest Bearing
  $ 74,780     $ 276       0.74 %   $ 51,159     $ 532       2.08 %
Savings Deposits
    17,823       72       0.81 %     13,307       186       2.80 %
Certificates of Deposit
    142,648       2,699       3.78 %     129,395       3,762       5.81 %
Borrowings
    4,816       17       0.71 %     6,120       135       4.41 %
 
   
     
     
     
     
     
 
 
    240,067     $ 3,064       2.55 %     199,981     $ 4,615       4.62 %
 
           
                     
         
Non interest Demand
    46,969                       31,764                  
Other Liabilities
    2,890                       3,535                  
Shareholder Equity
    26,305                       28,126                  
 
   
                     
                 
Average Liabilities and Shareholders Equity
  $ 316,231                     $ 263,406                  
 
   
                     
                 
Net Interest Income and Net Interest Margin
          $ 5,660       3.96 %           $ 5,594       4.60 %
 
   
                     
                 

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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   Six Months Ended           Six Months Ended
(Dollars in thousands)   June 30, 2002   over   June 30, 2001

 
 
 
          Volume   Rate   Total
         
 
 
Increase (Decrease) In
Interest Income
                       
 
Portfolio loans
  $ 1,277     $ (2,317 )   $ (1,040 )
 
Securities— Tax exempt
    6       (3 )     3  
 
Securities — US Government
    142       (298 )     (156 )
 
Federal Funds Sold
    (25 )     (267 )     (292 )
 
Other Securities
    11       (11 )     0  
 
   
     
     
 
     
Total Increase
  $ 1,411     $ (2,896 )   $ (1,485 )
 
   
     
     
 
Increase (Decrease) In
Interest Expense
                       
 
Interest Bearing Demand
  $ 87     $ (343 )   $ (256 )
 
Savings Deposits
    18       (132 )     (114 )
 
Certificates of Deposit
    251       (1,314 )     (1,063 )
 
Borrowings
    (5 )     (113 )     (118 )
 
   
     
     
 
   
Total Increase
  $ 351     $ (1,902 )   $ (1,551 )
 
   
     
     
 
Net Increase
  $ 1,060     $ (994 )   $ 66  
 
   
     
     
 

Non-interest Income

The Company’s non-interest income consists of service charges on deposit accounts, other fee income and processing fees for merchants who accept credit card payments for goods and services. Service charges have increased $21,000 or 38.2% for the quarter ended and $42,000 or 39.6% over the prior year as a result of volume increases.

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® or MasterCard® 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 $102,000 compared with $245,000 representing at 58.4% decrease over the same quarterly period in 2001. Earnings for the six-month period were $209,000 compared with $719,000 representing a 70.9% decrease over the same six-month period in 2001. The earnings for this six-month period are representative of the earning expectations over the life of the new contract.

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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
     
 
Non-interest Income   June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001

 
 
 
 
 
Service Charges
  $ 76     $ 55     $ 148     $ 106  
 
Credit Card Income, net
    102       245       209       719  
 
Other Income
    277       264       542       491  
 
Gain (loss) on sale of securities available-for-sale
    3       100       2       100  
 
   
     
     
     
 
Total noninterest income
  $ 458     $ 684     $ 901     $ 1,416  
 
   
     
     
     
 

Non-interest Expense

Non-interest 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, 2002, non-interest expense increased $288,000 over the same period in 2001. Salaries and benefits increased $222,000 or 24.7% over the same period in 2001 reflective of additions to staffing to support the new Roseville Bank of Commerce offices. Occupancy expenses rose by $66,000 (23.8%) as a result of the expansion and relocation of the Roseville Bank of Commerce at Eureka Road in Roseville, California.

For the six months ended June 30, 2002, noninterest expense increased $513,000 (15.2%) over the same six-month period in 2001. Salaries and benefits increased $275,000 (14.7%) over the same six-month period in 2001, reflective of additions to staff to support growth in both markets. Occupancy expenses increased $194,000 (38.6%) over the same six-month period in 2001 as a result of the relocation and expansion of Roseville Bank of Commerce.

          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, 2002   June 30, 2001   June 30, 2002   June 30, 2001

 
 
 
 
 
Salaries and Benefits
  $ 1,120     $ 898     $ 2,142     $ 1,867  
 
Occupancy & Equipment
    343       277       696       502  
 
Data Processing Fees
    32       25       60       49  
 
Professional Fees
    87       124       171       206  
 
Directors Expenses
    54       51       114       97  
 
Other Expenses
    371       344       709       658  
 
   
     
     
     
 
Total Noninterest expense
  $ 2,007     $ 1,719     $ 3,892     $ 3,379  
 
   
     
     
     
 

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 and enterprise zone qualifying loans. Increases and decreases in the provision for taxes reflect changes in the Company’s net income before tax.

Income tax expense through the second quarter 2002 was $891,000 as compared to $1,221,000 for 2001. The decrease in tax expense is primarily attributed to lower income for the six-month period over 2001.

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The following table reflects the Company’s tax provision and the related effective tax rate for the periods indicated.

                                         
(Dollars in thousands)                        
    Three Months Ended   Six Months Ended
   
 
Income Taxes   June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001

 
 
 
 
Tax provision
  $ 523     $ 582     $ 891     $ 1,221  
Effective tax rate
    38.2 %     37.5 %     35.9 %     36.7 %
 
   
     
     
     
 

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, specifically identified as Upstate California.

The Company manages its credit risk through diversification of its loan portfolio and the application of underwriting policies and procedures and credit monitoring practices. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay the loans is dependent upon the professional services and residential real estate development industry sectors. Generally, the loans are secured by real estate or other assets and are expected to be repaid from 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)        
Portfolio Loans   June 30, 2002   December 31, 2001

 
 
Commercial & Financial
  $ 90,651     $ 76,913  
Real Estate — Construction
    34,930       45,331  
Real Estate — Commercial
    129,394       96,617  
Installment
    439       440  
Other Loans
    856       709  
Less:
               
 
Deferred Loan Fees and Costs
    (325 )     (134 )
 
Allowance for Loan Losses
    (3,359 )     (3,180 )
 
   
     
 
Total Net Loans
  $ 252,586     $ 216,696  
 
   
     
 

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 $35,890,000 or 16.6% at June 30, 2002 over $216,696,000 at December 31, 2001. The portfolio mix remains stable with the mix at June 30, 2002, with commercial and financial loans of approximately 36%, real estate construction of 13% and commercial real estate at 51%.

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 $0 and $349,000 in impaired loans that had impairment allowances of $0 and $18,000 as of June 30, 2002 and December 31, 2001, respectively.

OREO totaled $338,000 for the quarter and consists of one property expected to close escrow by the third quarter this year. No loss on the property is expected.

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          The following table sets forth a summary of the Company’s nonperforming assets as of the dates indicated:

                     
(Dollars in thousands)        
Non performing assets   June 30, 2002   December 31, 2001

 
 
Nonaccrual loans
  $ 0     $ 59  
90 days past and still accruing interest
    0       290  
 
   
     
 
 
    0       349  
 
   
         
Other Real Estate Owned
    338       0  
 
   
     
 
Total non performing assets
  $ 338     $ 349  
 
   
     
 

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, special mention, and substandard 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.

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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, special mention and substandard loan categories 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.

                                         
    Three Months Ended   Six Months Ended
(Dollars in thousands)  
 
Allowance for Loan & Lease Losses   June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001

 
 
 
 
Beginning balance for Loan Losses
  $ 3,232     $ 2,645     $ 3,180     $ 2,974  
Provision for Loan Losses
    125       149       190       307  
Charge offs:
                               
Commercial
    (3 )     (2 )     (3 )     (181 )
Real Estate
    (0 )     (0 )     (18 )     (309 )
Other
    (0 )     (0 )     (0 )     (0 )
 
   
     
     
     
 
Total Charge offs
    (3 )     (2 )     (21 )     (490 )
Recoveries:
                               
Commercial
    5       4       10       5  
Real Estate
    0       10       0       10  
 
   
     
     
     
 
Total Recoveries
    5       14       10       15  
Ending Balance
  $ 3,359     $ 2,806     $ 3,359     $ 2,806  
ALLL to total loans
    1.31 %     1.37 %     1.31 %     1.37 %
Net Charge offs to average loans
    0.01 %     0.25 %     0.01 %     0.25 %
 
   
     
     
     
 

Investment Portfolio

Total available-for-sale securities decreased $6,556,000 (18.9%) for the second quarter and $12,814,000 (31.3%) over the six months ending June 30, 2002. The decrease, per plan, was to fund significant loan growth providing higher yield. There were no purchases during the period and $11,075,000 in sales with a moderate gain of $1,617.

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. The Company develops liquidity through deposit growth, maturities and repayments of loans and investments, net interest income, fee income and access to borrowing lines.

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 $60,998,000, or 18.4% of total assets, at June 30, 2002 compared to $81,856,000 or 25.7% of total assets at December 31, 2001. Per plan, Investment securities and federal funds sold have been reinvested in significant loan production improving overall yield. Loan growth has outpaced deposit growth during the quarter, as anticipated, as deposit relationships take longer to transition into the bank. During the second quarter the Company purchased $5.0 million in brokered deposits with a term of six-months at a cost of 2.30%, which is comparable to current certificate pricing. A borrowing line of approximately $28 million has been established at the Federal Home Loan Bank to provide additional liquidity and enable yield-enhancing strategies.

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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, 2002   December 31, 2001        
   
 
  For Bank to be well
Capital Ratio's   Bank   Company   Bank   Company   capitalized

 
 
 
 
 
Total Risk-Based Capital
    10.82 %     11.48 %     12.18 %     12.33 %     > 10.00 %
Tier 1 Capital to Risk-Based Assets
    9.57 %     10.23 %     10.93 %     11.08 %     > 6.00 %
Tier 1 Capital to Average Assets
(Leverage ratio)
    8.40 %     8.87 %     9.38 %     9.38 %     > 5.00 %
 
   
     
     
     
     
 

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.

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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, 2002, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $652,000 and $1,305,000, respectively. A similar and opposite result attributable to a 100 basis point increase in the federal funds rate. At December 31, 2001, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $837,000 and $1,673,000, respectively, with a similar and opposite result attributable to a 100 basis point increase in the federal funds rate.

The model utilized by management to create the analysis described in the preceding paragraph uses balance sheet simulation to estimate the impact of changing rates on the annual net interest income of the Bank. The model considers a number of factors, including (i) change in customer and management behavior in response to the assumed rate shock, (ii) the ratio of the amount of rate change for each interest-bearing asset or liability to assumed changes in the federal funds rate based on local market conditions for loans and core deposits and national market conditions for other assets and liabilities and (iii) timing factors related to the lag between the rate shock and its effect on other interest-bearing assets and liabilities. Actual results will differ when actual customer and management behavior and ratios differ from the assumptions utilized by management in its model. The assumptions in the model are tested at least annually to actual results. 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, as proven during 2001 with rates dropping by 4.75% while the margin dropped 1.31% for the same period.

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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

N/A

Item 3.   Defaults upon Senior Securities

N/A.

Item 4.   Submission of Matters to a vote of Security Holders

The 2002 annual shareholder meeting of Redding Bancorp was held on Tuesday, May 21, 2002. 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 2,092,733 or 77% of the outstanding shares. The second item was the ratification of Deloitte & Touche, LLP as the company’s auditors for the year ended 2001. The ratification passed with 75% 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 July 29, 2002 announcing second quarter earnings.

SIGNATURES

Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

REDDING BANCORP
(Registrant)

Date: August 12, 2002
   
  /s/    Linda J. Miles

Linda J. Miles
Executive Vice President &
Chief Financial Officer

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Certification
of Redding Bancorp
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
regarding Quarterly Report on Form 10-Q for the quarter ended June 30, 2002

          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Redding Bancorp, a California Corporation (the “company”), does certify that:
            
  1.    The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and
 
  2.    Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of the Company.
     
          Dated:  August 12, 2002   /s/    Michael C. Mayer

Michael C. Mayer
President and Chief Executive Officer
 
    /s/    Linda J. Miles

Linda J. Miles
Executive Vice President &
Chief Financial Officer

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