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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2002
 
OR

For the transition period from __________ to __________
 
Commission file number 0-25135

REDDING BANCORP

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 [   ]

Outstanding shares of Common Stock, no par value, as of September 30, 2002: 2,648,122

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REDDING BANCORP & SUBSIDIARIES

Index to Form 10-Q

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PART I. FINANCIAL INFORMATION

REDDING BANCORP & SUBSIDIARIES
Consolidated Condensed Balance Sheets (Unaudited)
(Dollar amounts in thousands)

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)

See notes to consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Nine months ended September 30, 2002 and 2001

See notes to consolidated financial statements

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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements

1. Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Redding Bancorp (“the Company”), its subsidiaries Redding Bank of Commerce (“RBC”) and Redding Service Corporation and all operating divisions. All significant inter-company balances and transactions have been eliminated. All such adjustments are of a normal recurring nature. 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. The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 results of operations and cash flows for the three and nine months ended September 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 nine months ended September 30, 2002 and 2001.

(Dollars in thousands, except per share data)

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3. Comprehensive Income

     The Company’s total comprehensive earnings were as follows:

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:

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 reserved for grant under the Plan.

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

6. Recent 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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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 September 30, 2002. Also discussed are significant trends and changes in the Company’s results of operations for the three and nine months ended September 30, 2002, compared to the same period in 2001. The consolidated financial statements and related notes appearing elsewhere in this report are condensed and unaudited. The following discussion and analysis is intended to provide greater detail of the Company’s financial condition and results.

General

Redding Bancorp (“the Company”) is a financial holding company (“FHC”) with one subsidiary bank, Redding Bank of Commerce, and Redding Service Corporation, which currently engages in processing trust deeds for real estate transactions. The Company has its principal offices in Redding, California. A financial 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 Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The services offered by the Company include 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, lockbox services, telephone and Internet banking including commercial cash management.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

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, and models strategies to meet or exceed such goals.

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, 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 uses in its accounting include the expected useful lives of depreciable assets, such as buildings, building improvements, equipment, and furniture. The useful lives of various technological 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 provides 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

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. Accounting principles generally accepted in the United States of America (GAAP), itself may change over time, having impact over 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.

RESULTS OF OPERATIONS

The following table summarizes income, income per share and key financial ratios for the periods indicated using two measurements:

Net Income

The Company reported earnings of $1,113,000, for the quarter ended September 30, 2002. The quarterly earnings represent an 11.7% increase from the $996,000 reported for the same quarterly period of 2001. Diluted earnings per share for the third quarter of 2002 were $0.39, compared to $0.33 for the same period of 2001. Earnings for the nine-month period ended September 30, 2002, were $2,701,000 a 12.8% decrease compared with $3,099,000 for the nine months ended September 30, 2001. Diluted earnings per share for the nine months ended September 30, 2002 was $0.95, compared to $1.04 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 decreasing interest rate pressure on interest bearing liabilities offset by yields on earning assets, resulted in an increase of $602,000 or 7.1% in net interest income for the nine month period ended September 30, 2002 from the same period in 2001. Net interest margin decreased 33 basis points to 4.07% from 4.40% for the same period a year ago. Yields on earning assets dropped to 6.11% compared with 8.09% a year ago. Funding costs dropped to 2.44% compared with 4.41% a year ago. Per plan, the increased volume of earning assets has mitigated 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Growth

The Company continues to experience exceptional growth in assets; $66.1 million or 20.7% 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 $17.9 million during the third quarter or 7.1% and $53.8 million or 24.8% since December 31, 2001. Loan growth is funded by sales of investment securities, federal funds sold, increases in deposit balances, and short term borrowings.

The Business Development division has started an aggressive marketing program focused on increasing the deposit market share of the Company. The program is supported by newspaper ads, a mailing piece, direct call, an officer visit to the customer’s place of business and a special offer for financial services. The results of these efforts culminate in core deposit increases of $10.9 million or 7.2% during the third quarter, $32.1 million or 24.4% year-to-date. Core deposits are non-interest-bearing demand, interest bearing demand and savings accounts.

Liquidity

The Company’s consolidated liquidity position remains adequate to meet future contingencies. At September 30, 2002 the Company’s liquidity ratio was 25.0% 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.

During the third quarter, the Company borrowed $10.0 million from the Federal Home Loan Bank to support loan growth and an additional $18.0 million was borrowed and leveraged into investment securities, available for sale, with an income spread of at least 2.25%. The average cost of the borrowings is 1.79% with staged maturities through August 2003.

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 $295,000 were provided for the nine months ended September 30, 2002 compared with $255,000 for the same period of 2001. Redding Bancorp’s allowance for loan losses was 1.26% of total loans at September 30, 2002 and 1.46% at September 30, 2001, while its ratio of non-performing assets to total assets was 0.09% at September 30, 2002, compared to 0.33% at September 30, 2001. Year-to-date net charge-offs of $10,000 compare favorably to net charge-offs of $102,000 in the same period last year.

Non-interest income

Non-interest income increased $53,000 or 10.4% for the quarter over September 2001 and decreased $462,000 or 24.0% over the prior year to date. Service charge income increased $16,000 or 30.2% for the quarter over September 2001 and $58,000 or 36.5% 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

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 credit card 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 $108,000 compared with $120,000 representing at 10.0% decrease over the same quarterly period in 2001. Earnings for the nine-month period were $317,000 compared with $839,000 representing a 62.2% decrease over the same nine-month period in 2001.

Management is pursuing various strategies to offset the decline in revenues, including the expansion of the Roseville Bank of Commerce, a division of the bank, an aggressive loan growth and core deposit focused business development program, and a recently expanded mortgage division.

In September 2002, the Company began to offer Image data capturing services for other financial service companies. One contract is in place and is expected to add fee income of $5,000 per month, net of expenses beginning in October 2002.

Also in September 2002, the Company repositioned its investment portfolio selling $10.0 million in U.S. Government Agency investments with scheduled call dates. The sales of these investments resulted in net gains to income of $123,000 for the period.

Non-interest expense

Non-interest expense increased $364,000 or 19.5% for the quarter over September 2001 and $877,000 or 16.7% over the prior year to date.

Salaries and benefits have increased $214,000 (20.0%) for the quarter over September 2001 and $489,000 or 16.7% over the prior year reflective of additions to staff to support new markets and volume increases coupled with a 77% increase in workers compensation insurance expense, reflective of the current market for insurance coverage.

Occupancy expense has increased $68,000 or 22.0% for the quarter over September 2001 and $262,000 or 32.3% over the prior year to date. The increase in occupancy and premise expense is attributed to the relocation and expansion of the Roseville Bank of Commerce, a division of the bank. Fixed asset increases include the addition of five courier vehicles to support both markets. Data processing increases are reflective of the support of the Roseville market in lockbox operations.

All other expenses show modest increases over prior periods, reflective of growth.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

The following table presents the Company’s daily average balance sheet information together with interest income and yields earned on average interest-bearing assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.