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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2003

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 [   ]

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act)

Yes [   ] No [X]

Outstanding shares of Common Stock, no par value, as of October 31, 2003: 2,708,058

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REDDING BANCORP & SUBSIDIARIES

Index to Form 10-Q

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDDING BANCORP & SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 2003 and 2002

See accompanying notes to condensed consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2003 and 2002

See accompanying notes to condensed consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

1.

Consolidation and Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Redding Bancorp (the “Holding Company”) and its subsidiaries Redding Bank of Commerce (“RBC” or the “Bank”) RBC Mortgage Services and RBC Trust (collectively the “Company”). 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. Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current financial statement presentation.

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. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Redding Bancorp’s 2002 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 2003 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements. Generally, federal funds are sold for a one-day period and securities purchased under agreements to resell are for no more than a 90-day period.

From 1999 through 2002, merchant credit card services were considered a segment of the Company for reporting purposes. Credit card services are limited to those revenues, net of related data processing costs, associated with the Bank’s agreement (“Merchant Services Agreement”) to provide credit and debit card processing services for merchants solicited by an independent sales organization (“ISO”) and nonbank merchant card processor. The Merchant Services Agreement is described in detail under Merchant Credit Card Processing Services in the Company’s 2002 Annual Report on Form 10-K. As previously reported, the 2001 renewal of the contract with our ISO represented a significant reduction to the earnings on this business segment. The Company is no longer accepting new merchant activity from the ISO and the segment is no longer managed separately from the local merchant activity of the Bank. Due to these changes, the Company no longer considers merchant credit card activity to be a business segment.

During the first quarter of 2003, the Company, through its RBC Mortgage Services subsidiary, has entered into an affiliated business arrangement with another entity to provide mortgage loans to customers of Redding Bank of Commerce, and Roseville Bank of Commerce, a division of Redding Bank of Commerce. RBC Mortgage Services and its affiliate provide mortgage brokerage services, and split all earnings, net of operating costs, equally. Before the formation of the subsidiary, mortgage banking services were performed as a department of the Bank.

2.

Recent Accounting pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51(the Interpretation). The purpose of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements.

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REDDING BANCORP & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

A company that holds variable interests in an entity will need to consolidate that entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and or receive a majority of the VIE’s expected residual returns, if they occur. New disclosure requirements are also prescribed by FIN 46. On October 9, 2003, the FASB issued FASB Staff Position (FSP) No. FIN 46-6 deferring the effective date for applying the provisions of FIN 46. The Company need not apply the provisions of FIN 46 to an interest held in a variable interest entity created before February 1, 2003 until December 31, 2003. As of September 30, 2003, the Company does not believe it has any VIE’s for which this interpretation would require consolidation. Additionally, under FIN 46, the Company’s subsidiary, which issued trust preferred securities, has not been deconsolidated awaiting further guidance from the FASB.

In July 2003, the Federal Reserve issued Supervisory Letter SR 03-13 addressing recent accounting interpretation guidance issued by the FASB regarding the consolidation of special purpose entities formed for the issuance of trust preferred securities. This specific issue raised by the new FASB interpretive guidance is whether or not the special purpose entities formed for the issuance of trust preferred securities qualify for consolidation under FIN 46. The Company currently has one such entity that is consolidated and included in the balance sheet as a liability described as “Guaranteed Preferential Beneficial Interests in Company’s Junior Subordinated Debentures (Trust Preferred Securities)”. One of the concerns raised regarding the potential deconsolidation of trust preferred special purpose entities is whether the current treatment of qualifying amounts of trust preferred securities as Tier 1 capital will change. Supervisory Letter SR 03-13 instructs bank holding companies to continue to report trust preferred securities in the same manner on periodic reports to the Federal Reserve (as a minority interest in consolidated subsidiaries) and to include, subject to limitation, trust preferred securities as Tier 1 capital until otherwise instructed.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how the Company should classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments beginning after June 15, 2003. The new standards for the classification and measurement of financial instruments should be applied retroactively. Any gain or loss resulting from the implementation of SFAS No. 150 will be reported as a cumulative effect of a change in accounting principle. Management believes that adoption of the standards of this Statement has no impact on the Company’s financial position or results of operations.

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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)

3.

Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS 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. Stock options are considered to be common stock equivalents. The following table displays the computation of earnings per share for the three and nine months ended September 30, 2003 and 2002.

(Dollars in thousands, except per share data)

4.

Stock Option Plans

The Company accounts for its stock option plan under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. As required by the Statement of Financial Accounting Standards, (“SFAS”) No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)

5.

Comprehensive Income

The Company’s total comprehensive income was as follows:

6.

Junior Subordinated Debentures (Trust Preferred Securities)

During the first quarter 2003, Redding Bancorp formed a wholly-owned Delaware statutory business trust, Redding Bancorp Trust, which issued $5.0 million of guaranteed preferred beneficial interests in Redding Bancorp’s junior subordinated debentures (the “Trust Preferred Securities”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Preferred Securities were transferred from the Holding Company to the Bank as surplus capital. The Trust Preferred Securities accrue and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at September 30, 2003 was 4.41%. The rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the Trust Preferred Securities is March 18, 2033, and the debt allows for prepayment after five years on the quarterly payment date.

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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)

7.

Commitments and Contingent Liabilities

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements and Risk Factors

This discussion and information in the accompanying financial statements contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company’s ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company’s ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and general trends in the banking and the regulatory environment, as they relate to the Company’s cost of funds and return on assets. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 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, 2002 to September 30, 2003. Also discussed are significant trends and changes in the Company’s results of operations for the three and nine-months ended September 30, 2003, compared to the same period in 2002. 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.

Overview

Redding Bancorp (the “Holding Company”) is a financial holding company (“FHC”) registered under the Bank Holding Company Act of 1956, as amended, and was incorporated in California on January 21, 1982, for the purpose of organizing, as a wholly owned subsidiary, Redding Bank of Commerce (the “Bank”). The Holding Company elected to change to a FHC in 2000. As a financial holding company, the Holding Company is subject to the Financial Holding Company Act and to supervision by the Board of Governors of the Federal Reserve System (“FRB”). The Holding Company’s principal business is to serve as a holding company for the subsidiaries, Redding Bank of Commerce, RBC Mortgage Services, a California corporation (formerly Redding Service Corporation), RBC Trust (collectively the “Company”) and for other banking or banking-related subsidiaries that the Holding Company may establish or acquire.

On January 2, 2003, Redding Service Corporation, a wholly-owned subsidiary of the Holding Company, changed its name to RBC Mortgage Services, an affiliate of Redding Bank of Commerce. The principal business of the subsidiary is mortgage brokerage services. The subsidiary has an affiliated business arrangement with the Bank of Walnut Creek (“BWC Mortgage Services”). Under the terms of the agreement, BWC Mortgage Services underwrites or brokers mortgage products and manages the independent contractors, supporting staff and broker relationships with various secondary market lenders. RBC Mortgage Services in turn provides office space, equipment and marketing support for the mortgage brokerage services. RBC Mortgage Services, through this agreement, offers a full array of single-family and multi-family residential real estate mortgages including equity lines. Earnings from the mortgage brokerage services, net of operating costs, are split equally between RBC Mortgage Services and BWC Mortgage Services. Before the formation of the subsidiary, mortgage banking services were performed as a department of the Bank.

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

The Holding Company’s principal source of income is dividends from its subsidiaries. The Holding Company conducts its corporate business operations at the administrative office of the Bank located at 1951 Churn Creek Road, Redding, California 96002. The Company conducts its business operations in two geographic market areas, Redding and Roseville, California. The Company considers Upstate California to be the major market area of the Bank. The three Internet addresses of the Company are reddingbankofcommerce.com, rosevillebankofcommerce.com, and rbcmortgageservices.com.

The Bank was incorporated as a California banking corporation on November 25, 1981, and received its certificate of authority to begin banking operations on October 22, 1982. The Bank operates four full service branches. The Bank established its first full service branch at 1177 Placer Street, Redding, California, and opened for business on October 22, 1982. On November 1, 1988, the Bank received a certificate of authority to establish and maintain a loan production office in Citrus Heights, California. On September 1, 1998, the Bank relocated the loan production office to 2400 Professional Drive in Roseville, California.

On March 1, 1994, the Bank received a certificate of authority to open a second full-service branch at 1951 Churn Creek Road in Redding, California. On June 30, 2000, the Bank received a certificate of authority to convert the loan production office in Roseville to a full service banking facility under the name Roseville Bank of Commerce, a division of Redding Bank of Commerce. On June 15, 2001, the Bank acquired the deposit liabilities of FirstPlus Bank at Citrus Heights, California and renamed the facility Roseville Bank of Commerce at Sunrise, a division of Redding Bank of Commerce. On February 22, 2002, the Roseville Bank of Commerce at Eureka Road, a division of Redding Bank of Commerce, relocated to its permanent location at 1504 Eureka Road, Suite 100, Roseville, California.

The Bank is principally supervised and regulated by the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”), and conducts a general commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento, California.

The services offered by the Bank include those traditionally offered by commercial banks of similar size and character in California, such as checking, interest-bearing checking (“NOW”) and savings accounts, money market deposit accounts, commercial, real estate, construction, and term loans, travelers checks, safe deposit boxes, collection services and electronic banking activities. The primary focus of the Bank is to provide services to the business and professional community of its major market area, including Small Business Administration loans, payroll and accounting packages, benefit administration and billing services. The Bank does not offer trust services or international banking services and does not plan to do so in the near future.

Most of the Bank’s customers are small to medium sized businesses, professionals and other individuals with medium to high net worth, and most of the Bank’s deposits are obtained from such customers. The Bank emphasizes servicing the needs of local businesses and professionals and individuals requiring specialized services. The primary business strategy of the Bank is to focus on its lending activities. The Bank’s principal lines of lending are (i) commercial, (ii) real estate construction and (iii) commercial and residential real estate. The majority of the loans of the Bank are direct loans made to individuals and small businesses in the major market area of the Bank and are secured by real estate. See “-Risk Factors That May Affect Results-Dependence on Real Estate” in the Company’s 2002 Annual Report on Form 10-K. A relatively small portion of the loan portfolio of the Bank consists of loans to individuals for personal, family or household purposes. The Bank accepts real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory as collateral for loans.

The Company’s goal is to be a premier provider of financial 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 performance by monitoring key operating ratios to high performing peer information on a national level, and model strategies to meet or exceed such goals.

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

Sources of Income

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, mortgage brokerage fee income and merchant credit card processing services. The income of the Company depends to a great extent on net interest income. These interest rate factors are highly sensitive to many factors, which are beyond the Company’s control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Because of the Company’s predisposition to variable rate pricing and non-interest bearing demand deposit accounts, the Company is considered asset sensitive. As a result, the Company is adversely affected by declining interest rates.

Financial Highlights - Results of Operations

Net income for the third quarter of 2003 totaled $1,254,000 an increase of 12.7% from the $1,113,000 reported for the same quarterly period of 2002. On the same basis, diluted earnings per common share for the third quarter of 2003 were $0.45, compared to $0.39 for the same period of 2002, a 15.4% increase. Return on average assets (ROA) and return on average equity (ROE) for the third quarter of 2003 were 1.29% and 14.51%, respectively, compared with 1.28% and 16.43%, respectively, for the third quarter of 2002.

Net income for the nine-month period ended September 30, 2003 totaled $3,065,000, an increase of 13.5% over net income reported for the same nine-month period ended September 30, 2002. On the same basis, diluted earnings per common share for the nine-months ended September 30, 2003 was $1.11, compared to $0.95 for the same nine-month period in 2002, a 16.9% increase. ROA was 1.08% and ROE was 12.80% for the first nine-months of 2003 compared with 1.10% and 13.55%, respectively, for the same nine-month period of 2002.

Net Interest Income and Net Interest Margin

Net interest income is the primary source of the Company’s income. Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and federal funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for the quarter ended September 30, 2003 was $3.7 million compared with $3.4 million for the same period in 2002 an increase of 11.0%. Net interest income for the nine-months ended September 30, 2003 was $10.8 million compared with $9.0 million for the same nine-month period in 2002, an increase of 19.6%.

Average earning assets for the nine-months ended September 30, 2003 increased $50.5 million or 17.0% compared with the same period in the prior year. Loans, the largest component of earning assets, increased $42.0 million or 17.2% on average compared with the prior year period. Average securities increased $8.5 million or 16.6% over the prior nine-month period. Overall, the yield on earning assets decreased to 5.52% for the nine-month period compared to 6.11% for the same period in the prior year, primarily due to declining interest rates. The decline was due to variable loan repricing as well as new loan production at lower rates in the first nine-months of 2003 compared with the same nine-month period of 2002.

Average interest-bearing liabilities for the nine-months ended September 30, 2003 increased $33.8 million or 13.6% compared with the prior year period. Of this increase, $19.4 million was in core deposit growth (interest-bearing demand and savings accounts), generally the least expensive deposit categories. Federal Home Loan Bank borrowings increased $10.2 million compared with the prior year period. The Company is using short-term Federal Home Loan Bank borrowings to supplement loan growth and to leverage into securities to improve the spread in the margin. Borrowings are repaid as core deposit growth increases.

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

The overall cost of interest-bearing liabilities for the first nine-months 2003 was 1.69% compared with 2.44% for the first nine-months of 2002, a 21.3% decrease. The decrease was primarily a result of decreases in rates paid on time deposits and low cost short-term borrowings. As time deposits and borrowings matured during the period, the Company was able to roll these investments over at lower rates. The net effect of the changes discussed above resulted in an increase of $1.8 million or 19.7% in net interest income for the nine-month period ended September 30, 2003 from the same period in 2002. Net interest margin increased 9 basis points to 4.15% from 4.06% for the same period a year ago.

Liquidity

The objective of liquidity management is to ensure that the Company can efficiently meet the borrowing needs of its customers, withdrawals of its depositors and other cash commitments under both normal operating conditions and under unforeseen and unpredictable circumstances of industry or market stress.

The Asset Liability Management Committee (“ALCO”) establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid resources of cash and due from banks and federal funds sold and securities purchased under agreements to resell, asset liquidity is supported by debt securities in the available-for-sale securities portfolio and wholesale lines of credit with the Federal Home Loan Bank and borrowing lines with other financial institutions. Customer core deposits have historically provided the Company with a source of relatively stable and low-cost funds. Management monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and repayments and maturities of loans and securities, the Company has the ability to sell securities under agreements to repurchase, obtain Federal Home Loan Bank advances or purchase overnight Federal Funds.

The Company’s consolidated liquidity position remains adequate to meet short-term and long-term future contingencies. At September 30, 2003, the Company had overnight investments of $23.4 million and available lines of credit of at the Federal Home Loan bank of approximately $76.6 million, and a Federal Funds borrowing line with a correspondent of $10.0 million.

To accommodate future growth and business needs, the Company develops an annual capital expenditure budget during strategic planning sessions. Capital expenditures for 2003 are expected to be about $746,000 for additional software and routine replacement of furniture and equipment. Approximately $710,000 has been spent through September 30, 2003, slightly over projections due to rescheduling 2004 installations into 2003. The Company expects that the earnings of the Bank, acquisition of core deposits and wholesale borrowing arrangements are sufficient to support liquidity needs in 2003.

Capital Management

The Company uses capital to fund organic growth, pay dividends and repurchase its shares. The objective of effective capital management is to produce above market long-term returns by using capital when returns are perceived to be high and issuing capital when costs are perceived to be low. The Company’s potential sources of capital include retained earnings, common and preferred stock issuance and issuance of subordinated debt and trust preferred securities. During the third quarter, a cash dividend of $0.65 per share was declared to shareholders of record as of October 1, 2003 due and payable on October 22, 2003.

Total stockholders’ equity increased from December 31, 2002 by $1.5 million to $29.2 million at September 30, 2003. The increase was a result of earnings of $3.1 million, $799,985 from exercises of stock options, including tax benefits, a dividend declaration of $1.7 million and a decrease in accumulated other comprehensive income (loss) of $566,000.

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

Short Term Borrowings

The Company actively uses Federal Home Loan Bank (“FHLB”) advances as a source of wholesale funding to support growth strategies as well as to provide liquidity. At September 30, 2003, all of the Company’s FHLB advances were fixed rate, fixed term borrowings without call or put option features.

During the nine months ended September 30, 2003 and the nine months ended September 30, 2002, the average balance of short-term FHLB advances was $15.1 million and $4.1 million, respectively, and the average interest rates during those periods were 1.17% and 1.29% respectively. The maximum outstanding at any month-end during the nine months ended September 30, 2003 and the year ended December 31, 2002 was $28.0 million. The FHLB advances are collateralized by loans and securities pledged to the FHLB.

Provision for Loan Losses

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 as discussed under “Asset Quality” and “Allowance for Loan Losses (ALL)” in this document.

During the first quarter 2003, one loan relationship became 90 days past due for interest payments. During the third quarter 2003, management began an impairment evaluation of the credit relationship and a specific reserve was established. Interest payments were brought current by the borrower. The credit in question totaled $2.9 million at September 30, 2003 and is collateralized by equipment and real estate. The Company has seven other loans to this borrower totaling approximately $1.6 million. These loans are performing in accordance with their original terms, are fully collateralized and the Company expects to collect all principal and interest due. However, in accordance with its policy, the Company has classified all seven loans to this borrower and its affiliates.

Provision for loan losses of $415,000 were provided for the nine-months ended September 30, 2003 compared with $295,000 for the same period of 2002. The Company’s allowance for loan losses was 1.41% of total loans at September 30, 2003 and 1.18% at September 30, 2002, while its ratio of non-performing assets to total assets was 0.89% at September 30, 2003, compared to 0.09% at September 30, 2002. Year-to-date net recoveries of $1,000 compare favorably to net charge-offs of $10,000 in the same period last year.

Factors that may affect future results

As a financial services company, our earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans.

Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the aftermath of the war with Iraq, could impact business conditions in the United States.

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

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold. Its policies can also affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in Federal Reserve Board policies are beyond our control and hard to predict or anticipate.

We operate in a highly competitive industry that could become even more competitive because of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can now merge creating a financial holding company that can offer virtually any type of financial service, including banking, securities underwriting, insurance (agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

The holding company, subsidiary bank and nonbank subsidiary are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not investors. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies including changes in interpretation and implementation could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer. Our failure to comply with the laws, regulations or policies could result in sanctions by regulatory agencies and damage our reputation. For more information, refer to the “Supervision and Regulation” section in the Company’s 2002 Annual Report on Form 10-K.

Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce our net interest margin and revenues from fee-based products and services. In addition, the widespread adoption of new technologies, including internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense.

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to the holding company. For more information, refer to “Dividends and Other Distributions” in the Company’s 2002 Annual Report on Form 10-K.

Specific risks to operations in California

Our operations are located entirely in California, which in recent years has experienced economic disruptions that are unique to the state. The state legislature has approved a compromised budget for the 2003-04 fiscal year. The compromise does not cut spending nor raise revenues sufficiently to balance the budget, but defers to borrowing to carry the deficit over. At the time this report is being prepared, the current governor of California has been recalled and a new governor elected on October 7, 2003. We can offer no assurances that the critical impact of the California economic and leadership crisis will not have a material adverse effect on our customer’s or on our business, financial condition and results of operations.

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

Critical Accounting Policies

The Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies”. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods.

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2002 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2002 Annual Report on Form 10-K require management to make difficult, subjective or complex judgements or estimates.

Preparation of financial statements

The preparation of these financial statements requires management to make estimates and judgements that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.

Use of estimates

These estimates result in judgements regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. Actual results may differ from these estimates under different assumptions or conditions.

Accounting Principles Generally Accepted in the United States of America

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 2002 Annual Report on Form 10-K.

The Company follows accounting policies typical to the commercial banking industry and in compliance with various regulations and guidelines as established by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”) and the Bank’s primary federal regulator, the FDIC. The following is a brief description of the Company’s current accounting policies involving significant management judgements.

Allowance for Loan Losses

The Company’s most significant management accounting estimate is the appropriate level for the allowance for loan losses. The allowance for loan losses is established to absorb known and inherent losses attributable to loans outstanding. The adequacy of the allowance is monitored on an on-going basis and is based on management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio, the trend in the loan portfolio’s risk ratings, current economic conditions, loan concentrations, loan growth rates, past-due and non-performing trends, evaluation of specific loss estimates for all significant problem loans, historical charge-off and recovery experience and other pertinent information.

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.

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

Revenue recognition

The Company’s primary sources of revenue are interest income. Interest income is recorded on an accrual basis. Note 2 to the Consolidated Financial Statements contained in the Company’s 2002 Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.

Fixed Assets

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.

Stock-based Compensation

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 FASB Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock Based Compensation, the Company’s net income and earnings per share would have been reduced. The reduction in the Company’s net income had compensation costs been determined in accordance with SFAS No. 123 would have been $57,000 and $126,000 for the nine-months ended September 30, 2003 and 2002, respectively. There would have been $0.02 per share decrease in diluted earnings per share in 2003 and $0.05 per share decrease in 2002.

The amount of the reduction for the fiscal years 2000 through 2002 is disclosed in Note 12 to the Consolidated Financial Statements contained in the Company’s 2002 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.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. The Company’s deferred tax assets are described further in Note 11 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2002 Annual Report on Form 10-K.

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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 earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.

Table 1. Average Balances, Interest Income/Expense and Yields/Rates Paid
(Unaudited, Dollars in thousands)