Bank of Commerce (BOCH) 10-Q 2002 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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. March 31, 2002: 2,698,415

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets (Unaudited)
		Consolidated Statements of Income (Unaudited)
		Consolidated Statements of Cash Flows (Unaudited)
		Notes to Unaudited Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT.
	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
SIGNATURES

REDDING BANCORP & SUBSIDIARIES

Index to Form 10-Q

		Page:
PART I. Financial Information
	Item 1. Financial Statements
	Consolidated Balance Sheets March 31, 2002 , December 31, 2001 and March 31, 2001	3
	Consolidated Statements of Income Three months ended March 31, 2002 and 2001	4
	Consolidated Statements of Cash Flows Three months ended March 31, 2002 and 2001	5
	Notes to Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis Of Financial Condition and Results of Operations	8
	Item 3. Quantitative and Qualitative Disclosure about Market Risk	17
PART II. Other Information
	Item 1. Legal proceedings	19
	Item 2. Changes in Securities and use of proceeds	19
	Item 3. Defaults Upon Senior Securities	19
	Item 4. Submission of Matters to a Vote of Security Holders	19
	Item 5. Other Information	19
	Item 6. Exhibits and Report on Form 8-K	20
SIGNATURES		20

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

					March 31, 2002			Dec 31, 2001			March 31, 2001
ASSETS
Cash and due from banks					$	17,881		$	15,528		$	11,598
Federal funds sold and securities purchased under agreements to resell						13,930			25,430			24,270
Securities available-for-sale						34,640			40,898			24,570
Securities held to maturity, at cost (estimated fair value of $3,805 on March 31, 2002, $4,193 on December 31, 2001 and $5,910 on March 31, 2001)						3,707			4,117			5,861
Loans, net of the allowance for loan losses of $3,232 on March 31, 2002, $3,180 on December 31, 2001 and $2,645 on March 31, 2001						230,892			216,696			194,328
Bank premises and equipment, net						5,391			5,339			5,187
Other assets						10,899			10,678			7,417
				Total Assets	$	317,340		$	318,686		$	273,231
LIABILITIES AND STOCKHOLDERS’ EQUITY
	Demand — noninterest bearing				$	44,830		$	44,525		$	33,072
	Demand — interest bearing					73,409			69,892			53,921
	Savings					18,065			17,034			13,355
	Certificates of deposits					138,081			149,984			127,831
			Total Deposits			274,385			281,435			228,179
Securities sold under agreements to repurchase						11,867			6,780			11,272
Other Liabilities						3,293			3,231			3,902
			Total Liabilities			289,545			291,446			243,353
Stockholders’ Equity:
	Preferred stock, no par value, 2,000,000 authorized no shares issued and outstanding in 2001 and 2000
	Common Stock , no par value, 10,000,000 shares authorized; 2,698,415 shares issued and outstanding at March 31, 2002 and 2,703,457 at December 31, 2001					8,851			8,851			9,359
	Retained Earnings					19,042			18,397			20,330
	Accumulated other comprehensive income (loss), net of tax					(98	)		(8	)		189
						27,795			27,240			29,878
		Total Liabilities and Stockholders’ Equity			$	317,340		$	318,686		$	273,231

See notes to consolidated financial statements.

3

REDDING BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except share data)
Three months ended March 31, 2002 and 2001

			March 31, 2002			March 31, 2001
Interest income:
	Interest and fees on loans		$	3,707		$	4,552
	Interest on tax exempt securities			48			25
	Interest on US government securities			377			376
	Interest on federal funds sold and securities purchased under agreements to resell			63			228
		Total interest income		4,216			5,206
Interest expense:
	Interest on demand deposits			118			303
	Interest on savings deposits			37			95
	Interest on time deposits			1,435			1,872
	Securities sold under agreements to repurchase			10			80
		Total interest expense		1,600			2,350
Net interest income				2,616			2,856
Provision for loan losses				65			158
Net interest income after provision for loan losses				2,551			2,698
Non-interest income:
	Service charges on deposit accounts			72			51
	Other income			265			207
	Net loss sale of securities available-for-sale			(1	)		0
	Credit card service income, net			107			474
		Total non-interest Income:		443			732
Non-interest expense:
	Salaries and related benefits			1,022			969
	Net occupancy and equipment expense			353			225
	FDIC Insurance premium			12			10
	Data processing and professional services			120			105
	Directors’ expenses			60			46
	Other expense			318			305
		Total non-interest expense		1,885			1,660
Income before income taxes				1,109			1,770
	Provision for income taxes			368			639
		Net Income	$	741		$	1,131
Basic earnings per share			$	0.27		$	0.39
Weighted average shares — basic				2,703			2,876
Diluted earnings per share			$	0.26		$	0.38
Weighted average shares — diluted				2,873			3,008

See notes to consolidated financial statements.

4

REDDING BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Three months ended March 31, 2002 and 2001

				March 31, 2002			March 31, 2001
Cash flows from operating activities:
		Net Income		$	741		$	1,131
Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses			65			158
		Provision for depreciation			147			118
		Compensation expense associated with exercise of stock options			17			17
		Loss on sale of securities available-for-sale			1			0
		Amortization of investment premiums and accretion of discounts, net			(177	)		130
		Gain on sale of loans			(42	)		(14	)
		Proceeds from sales of loans			3,368			742
		Loans originated for sale			(3,410	)		(728	)
		Effect of changes in:
			Other assets		(221	)		(536	)
			Deferred loan fees		103			(38	)
			Other liabilities		63			853
			Net cash provided by operating activities		655			1,833
Cash flows from investing activities:
		Proceeds from maturities of available-for-sale securities			3,466			7,970
		Proceeds from sale of available-for-sale securities			6,839			0
		Purchases of available-for-sale securities			(3,550	)		(12,425	)
		Loan origination, net of principal repayments			(14,280	)		(3,126	)
		Purchases of premises and equipment			(200	)		(18	)
			Net cash (used) provided by investing activities		(7,725	)		(7,599	)
Cash flows from financing activities:
		Net increase (decrease) in demand deposits and savings			4,852			3,066
		Net increase in certificates of deposit			(11,903	)		7,077
		Net increase from other borrowings			5,087			6,004
		Common stock repurchase transactions			(113	)		(126	)
		Common stock options exercised			0			0
			Net cash provided by financing activities		(2,077	)		16,021
Net increase in cash and cash equivalents					(9,147	)		10,255
Cash and cash equivalents, beginning of period					40,958			25,613
Cash and cash equivalents, end of period				$	31,811		$	35,868
Supplemental disclosures:
	Cash paid during the period for:
			Income taxes		0			60
			Interest		1,677			2,417

See notes to consolidated financial statements.

5

REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Consolidated 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”), Roseville Bank of Commerce, a division of Redding Bank of Commerce 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 months ended March 31, 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 ended March 31, 2002 and 2001.

(Dollars in thousands, except per share data)

		Three Months Ended March 31,
		2002		2001
Basic EPS Calculation:
	Numerator (net income)	$	741	$	1,131
	Denominator (average common shares outstanding)		2,703		2,876
Basic earnings per Share		$	0.27	$	0.39
Diluted EPS Calculation:
	Numerator (net income)	$	741	$	1,131
	Denominator:
	Average common shares outstanding		2,703		2,876
	Options		170		132
			2,873		3,008
Diluted earnings per Share		$	0.26	$	0.38

6

3. Comprehensive Income

     The Company’s total comprehensive earnings were as follows:

	Three Months Ended March 31,
	2002			2001
Net Income as reported	$	741		$	1,131
Other comprehensive income (net of tax):
Unrealized holding gain (loss) on securities available-for-sale		(91	)		192
Reclassification adjustment for losses included in net income		1			0
Total other comprehensive income		(90	)		192
Total comprehensive income	$	651		$	1,323

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.

     The following table presents financial information about the Company’s reportable segments:

	Three Months Ended March 31,
Net income before taxes allocated to:	2002		2001
Commercial Banking	$	1,002	$	1,296
Credit card services		107		474
	$	1,109	$	1,770

5. New Accounting Pronouncements

Business Combinations and Goodwill and Other Intangible Assets

     Effective January 1, 2002, 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 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.

7

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.

8

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 March 31, 2002. Also discussed are significant trends and changes in the Company’s results of operations for the three months ended March 31, 2002, compared to the same period in 2001. 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 it’s 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 services offered by the Company include those traditionally offered by commercial banks of similar size and character in California, such as checking, interest-bearing checking (“NOW”) and savings accounts, money market deposit accounts, commercial, construction, real estate, personal, home improvement, automobile and other installment and term loans, travelers checks, safe deposit boxes, lock box collection services, telephone and Internet banking.

     The primary focus of the Company is to provide 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 and lock box collection programs. The Company does not offer trust services or international banking services and does not plan to do so in the immediate future.

9

     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.

10

     Results of Operations

     The Company reported earnings of $741,000 ($0.26 per diluted share) for the quarter ended March 31, 2002. The quarterly earnings represent a 34.5% decrease over the $1,131,000 ($0.38 per diluted share) reported for the same period of 2001. The decrease in earnings is related to the net interest margin and attributable to the 475 basis point decrease in prime-lending rates over the prior year, as well as the decrease in merchant services income attributable to the new merchant services agreement. The Federal Reserve has cut rates to 40-year lows in an effort to fend off a recession. 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.

     Diluted earnings per share for the first quarter of 2001 were $0.26, compared to $0.38 for the same period of 2001.

     Additional factors contributing to the decrease in net earnings include a 77.4% reduction in merchant credit card servicing income pursuant to new contract pricing, the purchase of fixed assets and lease expenses to move the Roseville Bank of Commerce, a division of Redding Bank of Commerce to its permanent facility coupled with expanding staffing expenses for the new office and to support the volume of loan growth during the period.

     Net Interest Income

     Net interest income is the primary source of income for the Bank. Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, investments and Federal Funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets.

     For the three months ended March 31, 2002, interest income decreased $990,000 (19.0%) over the same period in 2001. Interest expense on deposit accounts and borrowings decreased $750,000 (31.9%) over the same three-month period in 2001.

     The combined effect of the increase in volume of earning assets and decrease in yield on earning assets, resulted in a decrease of $240,000 (8.4%) in net interest income for the three month period ended March 31, 2002 from the same period in 2001. Net interest margin decreased 103 basis points to 3.72% from 4.75% for the same period a year ago. Yields on earning assets dropped to 5.99% compared with 8.66% a year ago. Funding costs dropped to 2.69% compared with 4.83% a year ago. The increased volume of earning assets has mitigated some of the effect of the rate reductions. 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. During the quarter $4.7 million of brokered deposits yielding 7.01% were repaid reducing overall interest expense.

11

     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)

	Three Months Ended
	March 31, 2002								March 31, 2001
						Yield/			Average					Yield/
	Average Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans	$	222,576		$	3,707		6.66	%	$	195,008		$	4,552		9.34	%
Tax Exempt Securities		4,281			48		4.48	%		2,257			25		4.43	%
US Government		38,625			377		3.90	%		24,781			376		6.07	%
Federal Funds Sold		15,224			63		1.66	%		16,945			228		5.38	%
Other Securities		780			21		10.77	%		1,437			25		6.96	%
Average Earning Assets	$	281,486		$	4,216		5.99	%	$	240,428		$	5,206		8.66	%
Cash & Due From Banks	$	18,307							$	10,431
Bank Premises		5,358								5,196
Allowance for Loan Losses		(3,192	)							(2,882	)
Other Assets		8,780								5,234
Average Total Assets	$	310,739							$	258,407
Interest Bearing Liabilities
Demand Interest Bearing	$	70,555		$	118		0.67	%	$	50,087		$	303		2.42	%
Savings Deposits		17,493			37		0.85	%		12,984			95		2.93	%
Certificates of Deposit		144,623			1,435		3.97	%		125,559			1,872		5.96	%
Borrowings		5,331			10		0.75	%		6,079			80		5.26	%
		238,002		$	1,600		2.69	%		194,709		$	2,350		4.83	%
Non interest Demand		43,758								32,877
Other Liabilities		2,542								3,210
Shareholder Equity		26,437								27,611
Average Liabilities and Shareholders Equity	$	310,739							$	258,407
Net Interest Income and Net Interest Margin				$	2,616		3.72	%				$	2,856		4.75	%

12

     The following tables set forth changes in interest income and expense for each major category of earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the periods indicated. Changes attributable to rate/volume have been allocated to volume changes.

Analysis of Changes in Net Interest Income
(Dollars in thousands)

			March 31, 2002 over March 31, 2001
Increase (Decrease) In Interest Income			Volume			Rate			Total
	Portfolio loans		$	459		$	(1,304	)	$	(845	)
	Tax exempt securities			23			0			23
	US Government securities			135			(134	)		1
	Federal Funds Sold			(7	)		(158	)		(165	)
	Other Securities			(18	)		14			(4	)
		Total Increase	$	592		$	(1,582	)	$	(990	)
Increase (Decrease) In Interest Expense
	Interest Bearing Demand		$	34		$	(219	)	$	(185	)
	Savings Deposits			10			(68	)		(58	)
	Certificates of Deposit			189			(626	)		(437	)
	Borrowings			(1	)		(69	)		(70	)
		Total Increase	$	232		$	(982	)	$	(750	)
Net Increase			$	360		$	(600	)	$	(240	)

Noninterest Income

     The Company’s noninterest income consists of processing fees for merchants who accept credit card payments for goods and services, service charges on deposit accounts, and other service fees. In April 1993, the Bank entered into an agreement (the “Merchant Services Agreement”) with Cardservice International, Inc. (“CSI”), an independent sales organization (“ISO”) and nonbank merchant credit card processor, pursuant to which the Bank has agreed to provide credit and debit card processing services for merchants solicited by CSI who accept credit and debit cards as payment for goods and services. Pursuant to the Merchant Services Agreement, the Bank acts as a clearing bank for CSI and processes credit or debit card transactions into the Visa® 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 with CSI 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 .002% effective May 1, 2001. During the first quarter of 2002, CSI was acquired by FDMS a division of First Data resources. The acquisition provides significant financial strength to CSI further reducing financial risk to the Company. Management does not expect any changes in the contract through this term.

     For the three months, ended March 31, 2002 noninterest income decreased $289,000 or 39.5% over the same period in 2001. Merchant credit card income dropped 77.4%, or $367,000 over the prior period. This reduction in income is the result of pricing drops from .135% to .002% of the volumes processed. The new pricing is indicative of the financial strength of CSI and the mitigated risk associated with processing volumes, and was anticipated by the Company. Strategies to reduce the dependence of merchant services fee income include substantial growth in the loan portfolio with a focus to volume increases in the Roseville market.

13

     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. Service charges increased 41.2% or $21,000 over the prior period reflective of volume increases in the deposit portfolio.

     The following table sets forth a summary of noninterest income for the periods indicated.

		Three Months Ended March 31,
(Dollars in Thousands)
Noninterest Income		2002			2001
	Service Charges	$	72		$	51
	Credit Card Income, net		107			474
	Other Income		265			207
	Loss on sale of securities available-for-sale		(1	)		0
Total noninterest income		$	443		$	732

Noninterest Expense

     Noninterest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, data processing fees, professional fees, directors’ fees and other operating expenses.

     For the three months ended March 31, 2002, noninterest expense increased $225,000 over the same period in 2001. Salaries and benefits increased $53,000 or 5.5% representing the acquisition of the Sunrise office coupled with the expansion of the Roseville Bank of Commerce. Occupancy and equipment expense increased $128,000 or 56.9% over the prior year and represents the investment in the Roseville Bank of Commerce facility and fixtures.

     The following table sets forth a summary of noninterest expense for the periods indicated.

		Three Months Ended March 31,
(Dollars in Thousands)
Noninterest Expense		2002		2001
	Salaries and Benefits	$	1,022	$	969
	Occupancy & Equipment		353		225
	Data Processing Fees		28		23
	Professional Fees		84		82
	Directors Expenses		60		47
	Other Expenses		338		314
Total Noninterest expense		$	1,885	$	1,660

Income Taxes

     The Company’s provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company’s net income before taxes. The principal difference between statutory tax rates and the Company’s effective tax rate is the benefit derived from investing in tax-exempt securities. Increases and decreases in the provision for taxes reflect changes in the Company’s net income before tax.

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

	Three Months Ended March 31,
(Dollars in thousands)
Income Taxes	2002			2001
Tax provision	$	368		$	639
Effective tax rate		33.2	%		36.1	%

     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 a decrease in taxable income.

14

Asset Quality

     The Company concentrates its lending activities primarily within in El Dorado, Placer, Sacramento and Shasta Counties, California, and the locations of the Bank’s four full service branches.

     The Company manages its credit risk through diversification of its loan portfolio and the application of underwriting policies and procedures and credit monitoring practices. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay the loans is dependent upon the professional services and residential real estate development industry sectors. Generally, the loans are secured by real estate or other assets and are expected to be repaid from the cash flows of the borrower or proceeds from the sale of collateral.

     The following table sets forth the amounts of loans outstanding by category as of the dates indicated:

(Dollars in thousands)
Portfolio Loans		March 31, 2002			December 31, 2001
Commercial & Financial		$	85,834		$	76,913
Real Estate-Construction			43,214			45,331
Real Estate-Commercial			104,127			96,617
Installment			443			440
Other Loans			744			709
Less:
	Deferred Loan Fees and Costs		(238	)		(134	)
	Allowance for Loan Losses		(3,232	)		(3,180	)
Total Net Loans		$	230,892		$	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 $14.2 million or 6.6% at March 31, 2002 compared with $216.7 million at December 31, 2001. The portfolio mix remains stable with the mix at December 31, 2001, with commercial and financial loans of approximately 37%, real estate construction of 18% and commercial real estate at 45%.

     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 $349,139 in impaired loans that had impairment allowances of $0 and $13,603 as of March 31, 2002 and December 31, 2001, respectively. The reduction in impaired loans during the first quarter 2002 was attributed to a foreclosure action that resulted in taking the property into OREO. A reserve of $18,000 has been established towards reducing the OREO property exposure.

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

(Dollars in thousands)
Non performing assets	March 31, 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

15

     Allowance for Loan and Lease Losses (ALLL)

     The Company makes provisions to the ALLL on a regular basis through charges to operations that are reflected in the Company’s statements of income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against the allowance. Any recoveries of previously charged-off loans are credited back to the allowance. There is no precise method of predicting specific losses or amounts that ultimately may be charged-off on particular categories of the loan portfolio.

     Similarly, the adequacy of the ALLL and the level of the related provision for possible loan losses is determined on a judgment basis by management based on consideration of (i) economic conditions, (ii) borrowers’ financial condition, (iii) loan impairment, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluation of the performing loan portfolio, (viii) monthly review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, (x) off balance sheet risks and (xi) assessments by regulators and other third parties. Management and the Board of Directors evaluate the allowance and determine its desired level considering objective and subjective measures, such as knowledge of the borrowers’ business, valuation of collateral, the determination of impaired loans and exposure to potential losses.

     The ALLL is a general reserve available against the total loan portfolio and off balance sheet credit exposure. It is maintained without any interallocation to the categories of the loan portfolio, and the entire allowance is available to cover loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ALLL. Such agencies may require the Bank to provide additions to the allowance based on their judgment of information available to them at the time of their examination. There is uncertainty concerning future economic trends. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provision for possible loan losses in future periods.

     The ALLL should not be interpreted as an indication that charge-offs in future periods will occur in the stated amounts or proportions.

     The adequacy of the ALLL is calculated upon three components. First is the dollar weighted risk rating of the loan portfolio, including all outstanding loans and leases, off balance sheet items, and commitments to lend. Every extension of credit has assigned a risk rating based upon a comprehensive definition intended to measure the inherent risk of lending money. Each rating has an assigned a risk factor expressed as a reserve percentage. Central to this assigned risk (reserve) factor is the five-year historical loss record of the bank.

     Secondly, established specific reserves are available for individual loans currently on management watch and high-grade loan lists. These are the estimated potential losses associated with specific borrowers based upon the collateral and event(s) causing the risk rating.

     The third component is unallocated. This reserve is for qualitative factors that may effect the portfolio as a whole, such as those factors described above.

     Management believes the assigned risk grades and our methods for managing changes are satisfactory. Management believes the loan portfolio performance has improved as reflected by the stable and low delinquency ratio. Watch list and high-grade loans have increased somewhat over the past year, primarily due to a greater tendency to move more susceptible, although performing, accounts to attention. This minimal increase does not suggest a trend.

16

     The following table summarizes the activity in the ALLL reserves for the periods indicated.

	Three Months Ended March 31,
(Dollars in thousands)
Allowance for Loan & Lease Losses	2002			2001
Beginning balance for Loan Losses	$	3,180		$	2,974
Provision for Loan Losses		65			158
Charge offs:
Commercial		(18	)		(488	)
Other		(0	)		(0	)
Total Charge offs		(18	)		(488	)
Recoveries:
Commercial		5			1
Real Estate		0			0
Total Recoveries		5			1
Ending Balance	$	3,232		$	2,645
ALLL to total loans		1.38	%		1.34	%
Net Charge offs to average loans		(0.02	%)		(0.25	%)

Investment Portfolio

     Total available-for-sale securities decreased $6,258,000 in the first three months of 2002 or 15.3%. The decrease represents sales and maturities in the portfolio used to fund loan growth during the period.

Liquidity

     With respect to assets, liquidity is provided by cash and money market investments such as interest-bearing time deposits, federal-funds sold, securities available-for-sale and principal and interest payments on loans. With respect to liabilities, the Company’s core deposits, shareholders’ equity and the ability of the Bank to borrow funds and to generate deposits, provide asset funding.

     Because estimates of the liquidity need of the Bank may vary from actual needs, the Bank maintains a substantial amount of liquid assets to absorb short term increases in loans or reductions in deposits.

     The Company’s liquid assets (cash and due from banks, federal funds sold and available-for-sale securities) totaled $66,451,000 or 20.9% of total assets, at March 31, 2002 compared to $81,856,000 or 25.7% of total assets at December 31, 2001. The 2002 plan calls for reduction in the investment portfolio and increases in the loan portfolio.

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.

17

     The following table sets forth the Company’s capital ratio as of the dates indicated.

	March 31, 2002						December 31, 2001
													For Bank to be well
Capital Ratio's	Bank			Company			Bank			Company			capitalized
Total Risk-Based Capital		11.17	%		12.04	%		12.18	%		12.33	%		> 10.00	%
Tier 1 Capital to Risk-Based Assets		9.92	%		10.79	%		10.93	%		11.08	%		> 6.00	%
Tier 1 Capital to Average Assets		8.26	%		8.88	%		9.38	%		9.38	%		> 5.00	%
(Leverage ratio)

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company’s primary component of market risk is interest rate volatility. Fluctuation in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the fair market value of interest earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Because the Company’s interest-bearing liabilities and interest-earning assets are with the Bank, the Company’s interest rate risk exposure is in connection with the operations of the Bank. Consequently, all significant interest rate risk management procedures are performed at the Bank level.

     Based upon the nature of its operations, the Bank is not subject to foreign currency exchange or commodity price risk. The fundamental objective of the Company’s management of its assets and liabilities is to enhance the economic value of the Company while maintaining adequate liquidity and an exposure to interest rate risk deemed acceptable by the Company’s management.

     The Company manages its exposure to interest rate risk through adherence to maturity, pricing and asset mix policies and procedures designed to mitigate the impact of changes in market interest rates. The Bank’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings.

     The formal policies and practices adopted by the Bank to monitor and manage interest rate risk exposure measure risk in two ways: (i) repricing opportunities for earning assets and interest-bearing liabilities and (ii) changes in net interest income for declining interest rate shocks of 100 and 200 basis points.

     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. This effect is partially offset in the short-term by the fact that the Company is liability sensitive through the cumulative GAP period of one year or less. During a period of declining rates, such liabilities may be repriced to provide a short-term advantage to the Company; however, this benefit may not be sustainable over the long-term.

     To estimate the effect of interest rate shocks on the Company’s net interest income, management uses a model to prepare an analysis of interest rate risk. Such analysis calculates the change in net interest income given a change in the federal funds rate of 100 basis points up or down. All changes are measured in dollars and are compared to projected net interest income. At March 31, 2002, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $545,000 and $1,090,000, respectively.

18

     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. Management does not believe that the change from in the first quarter is significant or represents a known trend toward more interest rate risk sensitivity in the Company’s financial position.

     The model utilized by management to create the analysis described in the preceding paragraph uses balance sheet simulation to estimate the impact of changing rates on the annual net interest income of the Bank. The model considers a number of factors, including (i) change in customer and management behavior in response to the assumed rate shock, (ii) the ratio of the amount of rate change for each interest-bearing asset or liability to assumed changes in the federal funds rate based on local market conditions for loans and core deposits and national market conditions for other assets and liabilities and (iii) timing factors related to the lag between the rate shock and its effect on other interest-bearing assets and liabilities. Actual results will differ when actual customer and management behavior and ratios differ from the assumptions utilized by management in its model. In addition, the model has limited usefulness for the measurement of the effect on annual net interest income resulting from rate changes other than 100 basis points. Management believes that the short duration of its rate-sensitive assets and liabilities contributes to its ability to reprice a significant amount of its rate-sensitive assets and liabilities and mitigates the impact of rate changes more than 100 basis points. The model’s primary benefit to management is its assistance in evaluating the impact that future strategies with respect to the Bank’s mix and level of rate-sensitive assets and liabilities will have on the Company’s net interest income.

19

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

On March 8, 2002, the Board of Directors authorized a stock repurchase program of approximately 3.45% or 90,000 shares. As of March 31, 2002 5,042 shares had been repurchased at an average price of $22.38.

Item 3. Defaults upon Senior Securities

     N/A.

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

     N/A.

Item 5. Other Information

Item 6A. Exhibits

     None.

Item 6B. Reports on Form 8-K

     Form 8-K dated February 25, 2002 announcing 2001 earnings.

     Form 8-K dated March 8, 2002 announcing a treasury repurchase program.

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: May 13, 2002	/s/ Linda J. Miles
	Linda J. Miles Executive Vice President & Chief Financial Officer

20