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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  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, 2004 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
  California
(State or other jurisdiction of incorporation or organization)
1951 Churn Creek Road Redding,
California
(Address of principal executive offices)
    
    94-2823865
(I.R.S. Employer Identification No.)
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 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 March 31, 2004: 2,724,558 1




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REDDING BANCORP & SUBSIDIARIES Index to Form 10-Q Page:PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets March 31, 2004, December 31, 2003 and March 31, 2003
    
    
    3Condensed Consolidated Statements of Income Three months ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Corporate Overview
    
    
    11Executive Overview
    
    
    13Sources of Income
    
    
    14Financial Highlights - Results of Operations
    
    
    14Net Interest Income and Net Interest Margin
    
    
    14Liquidity
    
    
    15Capital Management
    
    
    15Short term borrowings
    
    
    15Provision for loan losses
    
    
    16Factors that may affect future results
    
    
    16Specific risks to operations in California
    
    
    17Critical accounting policies
    
    
    17Average balances, Interest Income/Expense and yields/rates paid
    
    
    20Analysis of changes in net interest income and interest expense
    
    
    21Noninterest Income
    
    
    22Noninterest Expense
    
    
    22Income taxes
    
    
    23Asset quality
    
    
    23Allowance for loan losses (ALL)
    
    
    24Securities portfolio
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    29Item 2.
    
    Changes in Securities, Use of Proceeds and Issuers, Purchases of Equity Securities
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits and Report on Form 8-K
    
    
    29SIGNATURES
    
    
    29EXHIBITS
    
    
    30, 31, 32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements
 REDDING BANCORP & SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (Unaudited)
 Dollars in thousands
    
    March 31, 2004
    
    Dec. 31, 2003
    
    March 31, 2003ASSETSCash and due from banks
    
    $
    23,036
    
    
    $
    23,844
    
    
    $
    19,499Federal funds sold and securities purchased under agreements to
resell
    
    
    10,125
    
    
    
    8,195
    
    
    
    22,380Cash and cash equivalents
    
    
    33,161
    
    
    
    32,039
    
    
    
    41,879Securities available-for-sale (including pledged collateral of
$17,262 at March 31, 2004 and $14,046 at March 31, 2003)
    
    
    55,634
    
    
    
    70,034
    
    
    
    26,096Securities held-to-maturity, at cost (estimated fair value of $829
at March 31, 2004, $1,460 at Dec. 31, 2003
and $2,277 at March 31, 2003)
    
    
    769
    
    
    
    1,391
    
    
    
    2,138Loans, net of the allowance for loan losses of $3,870 at March
31, 2004, $3,675 at Dec. 31, 2003 and $3,963 at
March 31, 2003
    
    
    288,651
    
    
    
    278,204
    
    
    
    284,445Bank premises and equipment, net
    
    
    5,693
    
    
    
    5,813
    
    
    
    5,331Other assets
    
    
    10,777
    
    
    
    13,677
    
    
    
    10,385TOTAL ASSETS
    
    $
    394,685
    
    
    $
    401,158
    
    
    $
    370,274LIABILITIES AND STOCKHOLDERS EQUITYDemand - noninterest bearing
    
    $
    63,502
    
    
    $
    71,222
    
    
    $
    55,694Demand - interest bearing
    
    
    91,876
    
    
    
    94,051
    
    
    
    89,945Savings
    
    
    21,707
    
    
    
    22,197
    
    
    
    22,174Certificates of deposit
    
    
    139,067
    
    
    
    140,069
    
    
    
    147,697Total deposits
    
    
    316,152
    
    
    
    327,539
    
    
    
    315,510Securities sold under agreements to repurchase
    
    
    10,239
    
    
    
    3,749
    
    
    
    3,783Federal Home Loan Bank borrowings
    
    
    25,000
    
    
    
    30,000
    
    
    
    13,000Other liabilities
    
    
    6,012
    
    
    
    4,359
    
    
    
    4,283Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000Total Liabilities
    
    
    362,403
    
    
    
    370,647
    
    
    
    341,576Commitments and contingencies (note 6)Stockholders Equity:Preferred stock, no par value, 2,000,000 authorized
no shares issued and outstanding in 2004 and 2003
    
    
    
    
    
    
    
    
    
    
    Common stock , no par value, 10,000,000 shares
authorized; 2,724,558 shares issued and
outstanding
at March 31, 2004, 2,710,058 at Dec. 31, 2003
and 2,654,466 at March 31, 2003
    
    
    9,734
    
    
    
    9,540
    
    
    
    8,764Retained earnings
    
    
    22,348
    
    
    
    21,236
    
    
    
    19,805Accumulated other comprehensive income (loss), net of tax
    
    
    200
    
    
    
    (265
    )
    
    
    129Total stockholders equity
    
    
    32,282
    
    
    
    30,511
    
    
    
    28,698TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    394,685
    
    
    $
    401,158
    
    
    $
    370,274
 See accompanying notes to condensed consolidated financial statements. 3




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REDDING BANCORP & SUBSIDIARIES 
 Condensed Consolidated Statements of Income (Unaudited)
 Three months ended March 31, 2004 and 2003
 Three Months EndedDollars in thousands, except for per share data
    
    March 31, 2004
    
    March 31, 2003Interest income:Interest and fees on loans
    
    $
    4,347
    
    
    $
    4,505Interest on tax exempt securities
    
    
    56
    
    
    
    13Interest on U.S. government securities
    
    
    477
    
    
    
    215Interest on federal funds sold and
securities purchased under agreements to resell
    
    
    17
    
    
    
    51Interest on other securities
    
    
    7
    
    
    
    3Total interest income
    
    
    4,904
    
    
    
    4,787Interest expense:Interest on demand deposits
    
    
    102
    
    
    
    110Interest on savings deposits
    
    
    29
    
    
    
    36Interest on time deposits
    
    
    723
    
    
    
    1,082Securities sold under agreements to repurchase
    
    
    2
    
    
    
    4Interest on FHLB and other borrowings
    
    
    67
    
    
    
    69Interest on junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    56
    
    
    
    0Total interest expense
    
    
    979
    
    
    
    1,301Net interest income
    
    
    3,925
    
    
    
    3,486Provision for loan losses
    
    
    192
    
    
    
    175Net interest income after provision for loan losses
    
    
    3,733
    
    
    
    3,311Noninterest income:Service charges on deposit accounts
    
    
    99
    
    
    
    68Payroll and benefit processing fees
    
    
    97
    
    
    
    84Earnings on cash surrender value -
Bank owned life insurance
    
    
    54
    
    
    
    59Net gain on sale of securities available-for-sale
    
    
    0
    
    
    
    23Net gain on sale of loans
    
    
    35
    
    
    
    9Merchant credit card service income, net
    
    
    97
    
    
    
    95Mortgage brokerage fee income
    
    
    16
    
    
    
    53Other income
    
    
    97
    
    
    
    100Total noninterest income
    
    
    495
    
    
    
    491Noninterest expense:Salaries and related benefits
    
    
    1,393
    
    
    
    1,299Occupancy and equipment expense
    
    
    369
    
    
    
    372FDIC insurance premium
    
    
    13
    
    
    
    12Data processing fees
    
    
    44
    
    
    
    32Professional service fees
    
    
    146
    
    
    
    168Deferred compensation expense
    
    
    67
    
    
    
    61Stationery and supplies
    
    
    54
    
    
    
    61Postage
    
    
    21
    
    
    
    31Directors expense
    
    
    89
    
    
    
    56Other expenses
    
    
    268
    
    
    
    224Total noninterest expense
    
    
    2,464
    
    
    
    2,316Income before income taxes
    
    
    1,764
    
    
    
    1,486Provision for income taxes
    
    
    652
    
    
    
    560Net income
    
    $
    1,112
    
    
    $
    926Basic earnings per share
    
    $
    0.41
    
    
    $
    0.35Weighted
average shares - basic
    
    
    2,711
    
    
    
    2,644Diluted earnings per share
    
    $
    0.39
    
    
    $
    0.33Weighted
average shares - diluted
    
    
    2,843
    
    
    
    2,777
 See accompanying notes to condensed consolidated financial statements. 4




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REDDING BANCORP & SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Three months ended March 31, 2004 and 2003
 Dollars in thousands
    
    March 31, 2004
    
    March 31, 2003Cash flows from operating activities:Net income
    
    $
    1,112
    
    
    $
    926Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    192
    
    
    
    175Provision for depreciation and amortization
    
    
    163
    
    
    
    142Compensation expense associated with stock options
    
    
    0
    
    
    
    6Gain on sale of securities available-for-sale
    
    
    0
    
    
    
    (23
    )Amortization of investment premiums and accretion of
discounts, net
    
    
    23
    
    
    
    144Gain on sale of loans
    
    
    (35
    )
    
    
    (9
    )Gain on sale of fixed assets
    
    
    0
    
    
    
    0Proceeds from sale of loans
    
    
    635
    
    
    
    605Loans originated for sale
    
    
    (600
    )
    
    
    (596
    )Effect of changes in:Other assets
    
    
    2,576
    
    
    
    2,271Deferred loan fees
    
    
    0
    
    
    
    (12
    )Other liabilities
    
    
    1,652
    
    
    
    666Net cash provided by operating activities
    
    
    5,718
    
    
    
    4,295Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    15,442
    
    
    
    3,419Proceeds from sales of available-for-sale securities
    
    
    0
    
    
    
    4,181Proceeds from maturities of held-to-maturity securities
    
    
    623
    
    
    
    270Purchases of available-for-sale securities
    
    
    (276
    )
    
    
    (1,500
    )Loan origination, net of principal repayments
    
    
    (10,640
    )
    
    
    (4,521
    )Purchases of Bank premises and equipment, net
    
    
    (43
    )
    
    
    (107
    )Net cash used in investing activities
    
    
    5,106
    
    
    
    1,742Cash flows from financing activities:Net (decrease) increase in deposits
    
    
    (11,386
    )
    
    
    1,063Net increase in securities sold under agreement to repurchase
    
    
    6,490
    
    
    
    78Proceeds from Federal Home Loan Bank advances
    
    
    35,000
    
    
    
    10,000Repayments of Federal Home Loan Bank advances
    
    
    (40,000
    )
    
    
    (15,000
    )Junior subordinated debt payable to unconsolidated subsidiary
grantor trust
    
    
    0
    
    
    
    5,000Equity transactions, net
    
    
    194
    
    
    
    109Net cash provided by financing activities
    
    
    (9,702
    )
    
    
    1,250Net increase in cash and cash equivalents
    
    
    1,122
    
    
    
    7,287Cash and cash equivalents, beginning of period
    
    
    32,039
    
    
    
    34,592Cash and cash equivalents, end of period
    
    $
    33,161
    
    
    $
    41,879Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    0
    
    
    $
    0Interest
    
    
    960
    
    
    
    1,227
 See accompanying notes to condensed consolidated financial statements. 5




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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) Bank of Commerce Mortgage and Redding Bancorp
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 preparation of 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 2003 Annual Report on Form 10-K. The
results of operations and cash flows for the 2004 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.  2.
    
    Recent Accounting pronouncements Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51(the Interpretation) -In January 2003, the Financial
Accounting Standards Board (FASB) issued Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51(the
Interpretation),FASB Interpretation No. 46 (FIN 46).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. 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. As of November 30, 2003, the Companys subsidiary,
which issued trust notes, has been de-consolidated. No entities were
consolidated upon adoption. Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity- In May 2003, the FASB issued SFAS 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 entered into or modified after May
31, 2003 and is otherwise effective at the beginning, 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. The adoption of the standards of this Statement has no impact on the
Companys financial position or results of operations. Accounting for Guarantors and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others- In November 2002, the FASB
issued FASB Interpretation no. (FIN) 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of 6




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Others.FIN 45 expands on the accounting guidance of Statements No. 5, 57, and
107 and incorporates without change the provisions of FIN34, which it
superseded. FIN 45 elaborates on the existing disclosure requirements for most
guarantees and requires that guarantors recognize a liability for the fair
value of guarantees at inception. The disclosure requirements of FIN 45 are
effective for financial statement periods ending after December 31, 2002. The
adoption of the measurement provisions of this Interpretation has no impact on
the Companys financial position or results of operations. 7




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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 months ended March 31, 2004 and 2003. Three Months Ended(Dollars in thousands, except per share data)
    
    March 31, 2004
    
    March 31, 2003Basic EPS calculation:Numerator (net income)
    
    $
    1,112
    
    
    $
    926Denominator (average common
shares outstanding)
    
    
    2,711
    
    
    
    2,644Basic EPS
    
    $
    0.41
    
    
    $
    0.35Diluted EPS calculation:Numerator (net income)
    
    $
    1,112
    
    
    $
    926Denominator:Average common shares outstanding
    
    
    2,711
    
    
    
    2,644Dilutive effect of stock options
    
    
    132
    
    
    
    133Adjusted weighted average common shares outstanding
    
    
    2,843
    
    
    
    2,777Diluted EPS
    
    $
    0.39
    
    
    $
    0.33
  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 Compensationas 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. 8




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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited) Net income before option expense less compensation expense associated with stock options Three Months EndedMarch 31, 2004
    
    March 31, 2003Net income as reported
    
    $
    1,112
    
    
    $
    926Deduct:Total stock-based employee
compensation
expense determined
under fair value based method
for all awards, net of
tax
    
    
    (18
    )
    
    
    (19
    )Pro forma net income
    
    $
    1,094
    
    
    $
    907Earnings per share:Basic  as reported
    
    $
    0.41
    
    
    $
    0.35Basic  pro forma
    
    $
    0.40
    
    
    $
    0.34Diluted  as reported
    
    $
    0.39
    
    
    $
    0.33Diluted  pro forma
    
    $
    0.38
    
    
    $
    0.33
  5.
    
    Comprehensive Income The Companys total comprehensive income was as follows: Three Months Ended(Dollars in thousands)
    
    March 31, 2004
    
    March 31, 2003Net income as reported
    
    $
    1,112
    
    
    $
    926Other comprehensive income,
net of tax:Unrealized holding (loss) gain
on
securities available for
sale
    
    
    464
    
    
    
    5Reclassification adjustment for
gain on available for sale
securities, net of tax
    
    
    (0
    )
    
    
    (14
    )Total other comprehensive (loss) income
    
    
    464
    
    
    
    (9
    )Total comprehensive income
    
    $
    1,576
    
    
    $
    917
  6.
    
    Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor
Trust During 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 Notes). These debentures qualify as Tier 1 capital under Federal
Reserve Board guidelines. The proceeds from the issuance of the Trust Notes
were transferred from the subsidiary grantor trust to the Holding Company and
from the Holding Company to the Bank as additional capital. The Trust Notes
accrue and pay distributions on a quarterly basis at 3 month London Interbank
Offered Rate (LIBOR) plus 3.30%. The rate at March 31, 2004 was 4.42%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The
final maturity on the Trust Notes is March 18, 2033, and the debt allows for
prepayment after five years on the quarterly payment date. 9




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REDDING BANCORP & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)  7.
    
    Commitments and Contingent Liabilities  Lease Commitments The Company leases certain facilities at which
it conducts its operations. Future minimum lease commitments under all
non-cancelable operating leases as of March 31, 2004 are below: (Dollars in thousands)2004
    
    $
    2532005
    
    $
    2532006
    
    $
    2622007
    
    $
    2622008
    
    $
    262Thereafter
    
    $
    697Total
    
    $
    1,989Minimum rental due in the future
Under noncancellable subleases
    
    $
    16
  Legal Proceedings The Company is involved in various pending and
threatened legal actions arising in the ordinary course of business. The
Company maintains reserves for losses from legal actions, which are both
probable and estimable. In the opinion of management, the disposition of
claims, currently pending will not have a material adverse affect on the
Companys financial position or results of operations.FHLB Advances -Included in other borrowings are advances from the Federal
Home Loan Bank of San Francisco (FHLB) totaling $25,000,000 as of March
31, 2004 and $13,000,000 as of March 31, 2003. The FHLB advances bear
fixed rates of interest ranging from 1.08% to 1.39%. Interest is payable
on a monthly basis. FHLB advances due as follows: $10,000,000 maturing
April 21, 2004 at 1.08%, $10,000,000 maturing February 04, 2005 at 1.39%
and $5,000,000 maturing April 26, 2004 at 1.09%. These borrowings are
secured by an investment in FHLB stock and certain real estate mortgage
loans which have been specifically pledged to the FHLB pursuant to their
collateral requirements. Based upon the level of FHLB advances, the
Company was required to hold a minimum investment in FHLB stock of
$1,512,300 and to pledge $32,354,509 of its real estate mortgage loans to
the FHLB as collateral as of March 31, 2004.Off-Balance Sheet Financial Instruments- In the ordinary course of
business, the Company enters various types of transactions, which involve
financial instruments with off-balance sheet risk. These instruments
include commitments to extend credit and standby letter of credits, which
are not reflected in the accompanying consolidated balance sheets. These
transactions may involve, to varying degrees, credit and interest rate
risk more than the amount, if any recognized in the consolidated balance
sheets. 10




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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, 2003 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,
2003 to March 31, 2004. Also discussed are significant trends and changes in
the Companys results of operations for the three months ended March 31, 2004,
compared to the same period in 2003. 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. 
 Corporate 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 Redding Bank of Commerce, Bank of Commerce Mortgage, a California
corporation (formerly Redding Service Corporation), and for other banking or
banking-related subsidiaries which the Holding Company may establish or acquire
(collectively the Company). The Holding Company also has an unconsolidated
subsidiary, Redding Bancorp Trust. During 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 Notes). These debentures
qualify as Tier 1 capital under Federal Reserve Board guidelines. 11




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 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 branch facilities. 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 Banking of Commerce. On June 15, 2001, the Bank acquired the deposit liabilities of FirstPlus Bank
at Citrus Heights, California and has 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. On February 16, 2004, Redding Service Corporation, an affiliate of Redding Bank
of Commerce and a wholly-owned subsidiary of the Holding Company, changed its
name to Bank of Commerce Mortgage (the Mortgage Company), an affiliate of
Redding Bank of Commerce. The principal business of the subsidiary is mortgage
brokerage services. Before the formation of the subsidiary, mortgage banking
services were performed as a department of the Bank. 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 bankofcommercemortgage.com. 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. Through the Bank and mortgage subsidiaries, the Company provides a wide range
of financial services and products. The services offered by the Bank include
those traditionally offered by commercial banks of similar size and character
in California. Products such as checking, interest-bearing checking (NOW) and
savings accounts, money market deposit accounts, commercial, 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 currently does not offer
trust services or international banking services. The services offered by the
Mortgage Company include single and multi-family residential residence new
financing, refinancing and equity lines of credit. 12




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 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 2003 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. 
 Executive Overview Our Company was established to make a profitable return while serving the
financial needs of the business and professional communities of our markets. We
are in the financial services business, and no line of financial services is
beyond our charter as long as it serves the needs of businesses and
professionals in our communities. The mission of our Company is to provide its
stockholders with a safe, profitable return on their investment, over the long
term. Management will attempt to minimize risk to our stockholders by making
prudent business decisions, will maintain adequate levels of capital and
reserves, and will maintain effective communications with stockholders. Our Companys most valuable asset is its customers. We will consider their
needs first when we design our products. High-quality customer service is an
important mission of our Company, and how well we accomplish this mission will
have a direct influence on our profitability. Our vision is to embrace changes in the industry and develop profitable
business strategies that allow us to maintain our customer relationships and
build new ones. Our competitors are no longer just banks. We must compete with
financial powerhouses that want our core business. The flexibility provided by
the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and
products that can be delivered to our customers efficiently and profitably.
Producing quality returns is, as always, a top priority. The Companys long term success rests on the shoulders of the leadership team
to effectively work to enhance the performance of the Company. As a financial
services company, we are in the business of taking risk. Whether we are
successful depends largely upon whether we take the right risks and get paid
appropriately for the risks we take. Our governance structure enables us to
manage all major aspects of the Companys business effectively through an
integrated process that includes financial, strategic, risk and leadership
planning. We define risks to include not only credit, market and liquidity risk  the
traditional concerns for financial institutions  but also operational risks,
including risks related to systems, processes or external events, as well as
legal, regulatory and reputation risks. Our management processes, structures
and policies help to ensure compliance with laws and regulations and provide
clear lines for decision-making and accountability. Results are important, but
equally important is how we achieve those results. Our core values and
commitment to high ethical standards is material to sustaining public trust and
confidence in our Company. 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, 2003 under
the heading Risk Management. 13




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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 first quarter of 2004 totaled $1,112,000 an increase of
20.1% from the $926,000 reported for the same quarterly period of 2003. On the
same basis, diluted earnings per common share for the first quarter of 2004
were $0.39, compared to $0.33 for the same period of 2003, a 18.2% increase.
Return on average assets (ROA) and return on average equity (ROE) for the first
quarter of 2004 were 1.15% and 14.45%, respectively, compared with 1.01% and
13.41%, respectively, for the first quarter of 2003. 
 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 March 31, 2004 was $3,925,000 compared with $3,486,000 for
the same period in 2003 an increase of 12.6%. Average earning assets for the three-months ended March 31, 2004 increased
$17.0 million or 5.0% compared with the same period in the prior year. Loans,
the largest component of earning assets, decreased $886,000 or 0.31% on average
compared with the prior year period. Average securities increased $9.9 million
or 19.6% over the prior year period. Overall, the yield on earning assets
decreased to 5.52% for the three-month period ended March 31, 2004 compared to
5.66% for the same three-month period in the prior year, primarily due to
declining interest rates in the loan portfolio. The decrease was due to
variable loan repricing as well as new loan production at lower rates in the
first three-months of 2004 compared with the same three-month period of 2003. The overall cost of interest-bearing liabilities (funding costs) for the first
three months of 2004 was $979,000 compared with $1,301,000 for the first three
months of 2003, a 24.8% decrease. The decrease in funding costs was primarily a
result of increases in core deposits and a reduction in time deposit funding as
well as rates paid on time deposits and lower cost short-term borrowings. The
net effect of the changes discussed above resulted in an increase of $439,000
or 12.6% in net interest income for the three-month period ended March 31, 2004
from the same period in 2003. Net interest margin increased 30 basis points to
4.42% from 4.12% for the same period a year ago. 14




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 
 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 March 31, 2004, the Company
had overnight investments of $33.2 million and available lines of credit of at
the Federal Home Loan bank of approximately $75.3 million, and a Federal Funds
borrowing line with a correspondent financial institution of $10.0 million. To accommodate future growth and business needs, the Company develops an annual
capital expenditure budget during strategic planning sessions. The Company
expects that the earnings of the Bank, acquisition of core deposits and
wholesale borrowing arrangements are sufficient to support liquidity needs in
2004. 
 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 notes. Total stockholders equity increased by $3.6 million to $32.3 million at March
31, 2004 over March 31, 2003. Well
    
    MinimumActual
    
    Capitalized
    
    CapitalCapital
    
    Ratio
    
    Requirement
    
    RequirementThe CompanyLeverage
    
    $
    37,081,840
    
    
    
    9.44
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    37,081,840
    
    
    
    11.18
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    41,224,680
    
    
    
    12.43
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of CommerceLeverage
    
    $
    35,722,546
    
    
    
    9.20
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    35,722,546
    
    
    
    10.77
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    39,865,386
    
    
    
    12.02
    %
    
    
    10.00
    %
    
    
    8.0
    %
 15




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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 March 31, 2004, all of the Companys FHLB advances were fixed
rate and fixed term borrowings without call or put option features. During the three months ended March 31, 2004, the average balance of short-term
FHLB advances was $22.2 million and the average interest rates during the
period was 1.25%. The maximum outstanding at any month-end during the three
months ended March 31, 2004 was $30.0 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. Provision for loan losses of $192,250 were provided for the three-months ended
March 31, 2004 compared with $175,000 for the same period of 2003. The
Companys allowance for loan losses was 1.32% of total loans at March 31, 2004
and 1.37% at March 31, 2003, while its ratio of non-performing assets to total
assets was 1.15% at March 31, 2004, compared to 1.06% at March 31, 2003.
Year-to-date net recoveries of $2,358 compare favorably to net charge-offs of
$7,639 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. 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. 16




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 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 2003 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
2003 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 2004 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. We can offer no
assurances that the critical impact of the California economic and change in
leadership will not have a material adverse effect on our customers or on our
business, financial condition and results of operations. 
 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 2003 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 2003 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. 17




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 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 2003 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 allowance for loan losses is managements best estimate of the probable
losses that may be sustained in our loan portfolio. The allowance is based on
two basic principles of accounting. (1) SFAS No.5 which requires that losses be
accrued when they are probable of occurring and estimable and (2) SFAS No. 114,
which requires that losses be accrued based on the differences between that
value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance. The Company performs
periodic and systematic detailed evaluations of its lending portfolio to
identify and estimate the inherent risks and assess the overall collectibility.
These evaluations include general conditions such as the portfolio composition,
size and maturities of various segmented portions of the portfolio such as
secured, unsecured, construction, and Small Business Administration (SBA). Additional factors include concentrations of borrowers, industries,
geographical sectors, loan product, loan classes and collateral types; volume
and trends of loan delinquencies and non-accrual; criticized and classified
assets and trends in the aggregate in significant credits identified as watch
list items. There are several components to the determination of the adequacy
of the ALL. Each of these components is determined based upon estimates that
can and do change when the actual events occur. The Company estimates the SFAS
No. 5 portion of the ALL based on the segmentation of its portfolio. For those
segments that require an ALL, the Company estimates loan losses on a monthly
basis based upon its ongoing loan review process and analysis of loan
performance. The Company follows a systematic and consistently applied approach
to select the most appropriate loss measurement methods and support its
conclusions and rationale with written documentation. One method of estimating
loan losses for groups of loans is through the application of loss rates to the
groups aggregate loan balances. Such rates typically reflect historical loss
experience for each group of loans, adjusted for relevant economic factors over
a defined period of time. The Company evaluates and modifies its loss
estimation model as needed to ensure that the resulting loss estimate is
consistent with GAAP. For individually impaired loans, SFAS No. 114 provides guidance on the
acceptable methods to measure impairment. Specifically, SFAS No. 114 states
that when a loan is impaired, the Company should measure impairment based on
the present value of expected future principal and interest cash flows
discounted at the loans effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loans observable
market price or the fair value of collateral, if the loan is collateral
dependent. When developing the estimate of future cash flows for a loan, the
Company considers all available information reflecting past events and current
conditions, including the effect of existing environmental factors. 18




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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 2003 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. 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 $18,000 and $19,000 for the
three-months ended March 31, 2004 and 2003, respectively. There would have been
$0.01 per share decrease in diluted earnings per share in 2004 and $0.01 per
share decrease in 2003. The amount of the reduction for the fiscal years 2001 through 2003 is disclosed
in Note 13 to the Consolidated Financial Statements contained in the Companys
2003 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 12 of the NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS in the Companys 2003 Annual Report on Form 10-K. 19




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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)
 Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateEarning AssetsPortfolio Loans
    
    $
    285,983
    
    
    $
    4,347
    
    
    
    6.08
    %
    
    $
    286,869
    
    
    $
    4,505
    
    
    
    6.28
    %Tax-exempt Securities
    
    
    6,506
    
    
    
    56
    
    
    
    3.44
    %
    
    
    1,191
    
    
    
    13
    
    
    
    4.37
    %US Government Securities
    
    
    20,830
    
    
    
    149
    
    
    
    2.86
    %
    
    
    11,754
    
    
    
    70
    
    
    
    2.38
    %Mortgage backed Securities
    
    
    33,024
    
    
    
    328
    
    
    
    3.97
    %
    
    
    20,108
    
    
    
    145
    
    
    
    2.88
    %Federal Funds Sold
    
    
    7,722
    
    
    
    17
    
    
    
    0.88
    %
    
    
    17,412
    
    
    
    51
    
    
    
    1.17
    %Other Securities
    
    
    1,537
    
    
    
    7
    
    
    
    1.82
    %
    
    
    1,237
    
    
    
    3
    
    
    
    0.97
    %Average Earning Assets
    
    $
    355,602
    
    
    $
    4,904
    
    
    
    5.52
    %
    
    $
    338,571
    
    
    $
    4,787
    
    
    
    5.66
    %Cash & Due From Banks
    
    $
    19,757
    
    
    
    
    
    
    
    
    
    
    $
    19,546Bank Premises
    
    
    5,762
    
    
    
    
    
    
    
    
    
    
    
    5,328Allowance for Loan Losses
    
    
    (3,763
    )
    
    
    
    
    
    
    
    
    
    
    (3,881
    )Other Assets
    
    
    11,025
    
    
    
    
    
    
    
    
    
    
    
    8,792Average Total Assets
    
    $
    388,383
    
    
    
    
    
    
    
    
    
    
    $
    368,356Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    94,723
    
    
    $
    102
    
    
    
    0.43
    %
    
    $
    89,954
    
    
    $
    110
    
    
    
    0.49
    %Savings Deposits
    
    
    21,723
    
    
    
    29
    
    
    
    0.53
    %
    
    
    21,504
    
    
    
    36
    
    
    
    0.67
    %Certificates of Deposit
    
    
    140,156
    
    
    
    723
    
    
    
    2.06
    %
    
    
    149,404
    
    
    
    1,082
    
    
    
    2.90
    %Borrowings
    
    
    25,383
    
    
    
    125
    
    
    
    1.97
    %
    
    
    20,336
    
    
    
    73
    
    
    
    1.44
    %281,985
    
    
    $
    979
    
    
    
    1.39
    %
    
    
    281,198
    
    
    $
    1,301
    
    
    
    1.85
    %Noninterest bearing demand
    
    
    66,292
    
    
    
    
    
    
    
    
    
    
    
    54,991Other Liabilities
    
    
    4,319
    
    
    
    
    
    
    
    
    
    
    
    4,550Stockholders Equity
    
    
    35,787
    
    
    
    
    
    
    
    
    
    
    
    27,617Average Liabilities and
Stockholders Equity
    
    $
    388,383
    
    
    
    
    
    
    
    
    
    
    $
    368,356Net Interest Income and Net Interest Margin
    
    $
    3,925
    
    
    
    4.42
    %
    
    
    
    
    
    $
    3,486
    
    
    
    4.12
    %
 20




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) The following tables set forth changes in interest income and interest 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. 
 Table 2.
    Analysis of Changes in Net Interest Income and Interest Expense
 March 31, 2004 over March 31, 2003(Dollars in thousands)
    
    Volume
    
    Rate
    
    TotalIncrease (Decrease) In
Interest IncomePortfolio Loans
    
    $
    420
    
    
    $
    (578
    )
    
    $
    (158
    )Tax-exempt Securities
    
    
    54
    
    
    
    (11
    )
    
    
    43US Government Securities
    
    
    23
    
    
    
    56
    
    
    
    79Mortgage back Securities
    
    
    (36
    )
    
    
    219
    
    
    
    183Federal Funds Sold
    
    
    17
    
    
    
    (51
    )
    
    
    (34
    )Other Securities
    
    
    (7
    )
    
    
    11
    
    
    
    4Total Increase
(Decrease)
    
    $
    471
    
    
    $
    (354
    )
    
    $
    117Increase (Decrease) In
Interest ExpenseInterest Bearing Demand
    
    $
    45
    
    
    $
    (53
    )
    
    $
    (8
    )Savings Deposits
    
    
    22
    
    
    
    (29
    )
    
    
    (7
    )Certificates of Deposit
    
    
    886
    
    
    
    (1,245
    )
    
    
    (359
    )Borrowings
    
    
    (57
    )
    
    
    109
    
    
    
    52Total Increase
(Decrease)
    
    $
    896
    
    
    $
    (1,218
    )
    
    $
    (322
    )Net Increase
    
    $
    (425
    )
    
    $
    864
    
    
    $
    439
 Net interest income was $3.9 million for the first three-months of 2004
compared with $3.5 million for the same period in 2003, a 12.6% increase
(Tables 1 and 2). The primary reason for the increase was an increase in the
volume of earning assets. Average earning assets for the first three-months of
2004 were $355.6 million compared with $338.6 million for the same period in
2003, an increase of $17.0 million or 5.0%. The single largest component of
increased earning assets was in the securities portfolio. Securities increased
$27.3 million or 82.6% over the same three-month period in 2003. With the
increase in securities portfolio activity the average yield on earning assets
decreased to 5.52% in 2004 from 5.66% in 2003. Average interest bearing liabilities experienced a modest increase during the
period, to $282.0 million for the first three-months of 2004 compared with
$281.2 million for the same period in 2003. The cost of interest bearing
liabilities or funding decreased from 1.85% in 2003 to 1.39% in 2004, a
reduction to interest expense of $322,000 or 24.8%. The decrease in the cost of interest bearing liabilities was due to increases
in core deposits, repricing of interest bearing checking and savings accounts
as well as the rollover of maturing certificates of deposits at lower rates. As
a result of these changes, the interest spread (the difference between the
yield on earning assets and the cost of interest bearing liabilities) increased
30 basis points to 4.42% for the three-months ended March 31, 2004 compared
with 4.12% for the same three-month period in the prior year. 21




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued) 
 Noninterest Income The Companys noninterest income consists of service charges on deposit
accounts, other fee income, processing fees for credit card payments and gains
or losses on security sales. The following table sets forth a summary of
noninterest income for the periods indicated. Three Months Ended(Dollars in thousands)
    
    March 31, 2004
    
    March 31, 2003Noninterest incomeService charges on deposit accounts
    
    $
    99
    
    
    $
    68Payroll and benefit processing fees
    
    
    97
    
    
    
    84Earnings on cash surrender value -
Bank owned life insurance
    
    
    54
    
    
    
    59Net gain on sale of securities available-for-sale
    
    
    0
    
    
    
    23Net gain on sale of loans
    
    
    35
    
    
    
    9Merchant credit card service income, net
    
    
    97
    
    
    
    95Mortgage brokerage fee income
    
    
    16
    
    
    
    53Other income
    
    
    97
    
    
    
    100Total noninterest income
    
    $
    495
    
    
    $
    491
 Noninterest income increased $4,000 or 0.8% for the quarter ended March 31,
2004 over March 31, 2003. Service charges on deposit accounts increased 45.6%
or $31,000 due to growth in core deposits and implementation of account
analysis fees. Net gain on sale of loans increased $26,000 over the prior years
quarter of $9,000 due to increased sales of SBA loans during the quarter. There
were no securities sales during the first quarter resulting in $0 gains
compared with $23,000 in the prior year. Mortgage brokerage fee income
decreased by 70.0% or $37,000 for the first quarter 2004 over the same period
in 2003, due to reductions in mortgage loan volume. 
 Noninterest Expense Three Months Ended(Dollars in thousands)
    
    March 31, 2004
    
    March 31, 2003Noninterest expenseSalaries and related benefits
    
    $
    1,393
    
    
    $
    1,299Occupancy and equipment expense
    
    
    369
    
    
    
    372FDIC insurance premium
    
    
    13
    
    
    
    12Data processing fees
    
    
    44
    
    
    
    32Professional service fees
    
    
    146
    
    
    
    168Deferred compensation expense
    
    
    67
    
    
    
    61Stationery and supplies
    
    
    54
    
    
    
    61Postage
    
    
    21
    
    
    
    31Directors expense
    
    
    89
    
    
    
    56Other expenses
    
    
    268
    
    
    
    224Total noninterest expense
    
    $
    2,464
    
    
    $
    2,316
 Noninterest expense for the quarter ended March 31, 2004 was $2.5 million, an
increase of $148,000 or 6.4% over the same period a year ago. Salaries and
employee benefits increased $94,000 or 7.3% over the same period a year ago.
Increases to benefits include a 34% increase in workers compensation insurance
expense. California workers compensation insurance increases are reflective of
the current economic market for insurance coverage in California. 22




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued) 
 Income Taxes The Companys effective tax rate varies with changes in the relative amounts of
its non-taxable income and non-deductible expenses. The increase in the
Companys tax provision is attributable to decreases in non-taxable income
related to a reduction in the municipal security portfolio and reclassification
of enterprise zone qualified credits. The following table reflects the Companys tax provision and the related
effective tax rate for the periods indicated. (Dollars in thousands) Three Months EndedIncome Taxes
    
    March 31, 2004
    
    March 31, 2003Tax provision
    
    $
    652
    
    
    $
    560Effective tax rate
    
    
    37.0
    %
    
    
    37.7
    %
 The Companys provision for income taxes includes both federal and state income
taxes and reflects the application of federal and state statutory rates to the
Companys net income before taxes. The principal difference between statutory
tax rates and the Companys effective tax rate is the benefit derived from
investing in tax-exempt securities and enterprise zone qualifying loans.
Increases and decreases in the provision for taxes reflect changes in the
Companys net income before tax. 
 Asset Quality The Company concentrates its lending activities primarily within in El Dorado,
Placer, Sacramento and Shasta Counties, California, and the location of the
Banks four full service branches, specifically identified as Upstate
California. The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and
credit monitoring practices. Although the Company has a diversified loan
portfolio, a significant portion of its borrowers ability to repay the loans
is dependent upon the professional services and commercial 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, 2004
    
    December 31, 2003Commercial and financial loans
    
    $
    101,420
    
    
    $
    104,508Real estate-construction loans
    
    
    70,235
    
    
    
    66,742Real estate-commercial
    
    
    111,638
    
    
    
    102,952Real estate-mortgage
    
    
    8,270
    
    
    
    7,086Installment
    
    
    458
    
    
    
    452Other loans
    
    
    995
    
    
    
    633Less:Net deferred loan fees
    
    
    (495
    )
    
    
    (494
    )Allowance for loan losses
    
    
    (3,870
    )
    
    
    (3,675
    )Total net loans
    
    $
    288,651
    
    
    
    278,204
 23




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued) The Companys practice is to place an asset on nonaccrual status when one of
the following events occur: (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 $10.4 million or 3.8% at March 31, 2004 over
December 31, 2003. The portfolio mix reflects a decrease in commercial real
estate reflective of managements strategy to reduce the dependence on
commercial real estate through pay downs. The balance of the portfolio remains
relatively consistent with the mix at December 31, 2003, with commercial and
financial loans of approximately 35%, real estate construction of approximately
24% and commercial real estate of approximately 39%. Impaired loans are loans
for which it is probable that the Company will not be able to collect all
amounts due and payable. The Company had outstanding balances of $4,180,000 and
$3,931,000 in impaired loans that had impairment allowances of $960,000 and
$837,000 as of March 31, 2004 and December 31, 2003, respectively. 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, 2004
    
    December 31, 2003Nonaccrual loans
    
    $
    4,180
    
    
    $
    3,93190 days past due and still accruing
interest
    
    
    0
    
    
    
    0Total nonaccrual loans
    
    
    4,180
    
    
    
    3,931Other Real Estate Owned
    
    
    0
    
    
    
    0Total non performing assets
    
    $
    4,180
    
    
    $
    3,931
 
 Allowance for Loan Losses (ALL) The allowance for loan losses is managements estimate of the amount of
probable loan losses in the loan portfolio. The Company determines the
allowance for loan losses based on an ongoing evaluation. The evaluation is
inherently subjective because it requires material estimates, including the
amounts and timing of cash flows expected to be received on impaired loans.
Those estimates may be susceptible to significant change. The Company makes
provisions to the ALL 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. The Companys allowance for loan losses is the accumulation of various
components that are calculated based upon independent methodologies. All
components of the allowance for loan losses represent an estimation performed
pursuant to either SFAS No. 5, Accounting for Contingenciesor SFAS No. 114,
Accounting by Creditors for Impairment of a Loan.Managements estimate of each
SFAS No. 5 Accounting for Contingenciescomponent is based on certain
observable data that management believes is the most reflective of the
underlying loan losses being estimated. Changes in the amount of each component
of the allowance for loan losses are directionally consistent with changes in
the observable data, taking into account the interaction of the SFAS No. 5
components over time. An essential element of the methodology for determining the allowance for loan
losses is the Companys loan risk evaluation process, which includes loan risk
grading individual commercial, construction, commercial real estate and most
consumer loans. Loans are assigned loan risk grades based on the Companys
assessment of conditions that affect the borrowers ability to meet its
contractual obligations under the loan agreement. That process includes
reviewing borrowers current financial information, historical payment
experience, loan documentation, public information, and other information
specific to each individual borrower. Loans are reviewed on an annual or
rotational basis or as management becomes aware of information affecting the
borrowers ability to fulfill its obligations. Loan risk grades carry a dollar
weighted risk percentage. 24




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) The ALL is a general reserve available against the total loan portfolio. 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 the examination
process, periodically review the Companys ALL. Such agencies may require the
Company to provide additions to the allowance based on their judgment of
information available to them at the time of their examination. Accordingly, it
is not possible to predict the effect future economic trends may have on the
level of the provision for loan losses in future periods. In addition to the
ALL, an allowance for unfunded loan commitments and letters of loan is
determined using estimates of the probability of funding. This reserve is
carried as a liability on the condensed consolidated balance sheet. The ALL should not be interpreted as an indication that charge-offs in future
periods will occur in the stated amounts or proportions. The following table summarizes the activity in the ALL reserves for the periods
indicated. (Dollars in thousands) Allowance for Loan Losses
    
    March 31, 2004
    
    March 31, 2003Beginning balance for Loan Losses
    
    $
    3,675
    
    
    $
    3,793Provision for Loan Losses
    
    
    192
    
    
    
    175Charge offs:Commercial
    
    
    (0
    )
    
    
    (7
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )Other
    
    
    (0
    )
    
    
    (0
    )Total Charge offs
    
    
    (0
    )
    
    
    (7
    )Recoveries:Commercial
    
    
    3
    
    
    
    2Real Estate
    
    
    0
    
    
    
    0Total Recoveries
    
    
    3
    
    
    
    2Ending Balance
    
    $
    3,870
    
    
    $
    3,963ALL to total loans
    
    
    1.32
    %
    
    
    1.37
    %Net Charge offs to average loans
    
    
    0.00
    %
    
    
    0.01
    %
 25




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) 
 Securities Portfolio The securities portfolio is comprised of U.S. Treasury securities, U.S. Agency
securities, mortgage-backed securities, and obligations of states and political
subdivisions. Securities classified as available for sale are recorded at fair
value, while securities classified as held to maturity are recorded at cost.
Unrealized gains or losses on available for sale securities, net of the
deferred tax effect, are reported as increases or decreases in stockholders
equity. Portions of the securities portfolio are used for pledging requirements
for deposits of state and local subdivisions, securities sold under repurchase
agreements, and FHLB advances. The Company does not include federal funds sold
as securities. These investments are included in cash and cash equivalents. Total available-for-sale securities decreased $14.4 million or 20.6% for the
three-months of 2004. There were no purchases or sales during the period. The
decreases were scheduled maturities and calls of securities. As of March 31, 2004, the Company has pledged $1.0 million of securities for
treasury, tax and loan accounts, $5.9 million for deposits of public funds and
approximately $10.2 million for collateralized repurchase agreements. The following table summarizes the amortized cost of the Companys
available-for-sale securities held on the dates indicated. as of March 31, 2004Amortized
    
    Unrealized
    
    Unrealized
    
    Estimated(Dollars in thousands)
    
    Costs
    
    Gains
    
    Losses
    
    Fair ValueU.S. government & agencies
    
    $
    17,507
    
    
    $
    126
    
    
    $
    (221
    )
    
    $
    17,412Obligations of state and
political subdivisions
    
    
    6,718
    
    
    
    126
    
    
    
    (8
    )
    
    
    6,836Mortgage backed securities
    
    
    31,069
    
    
    
    317
    
    
    
    0
    
    
    
    31,386Total
    
    $
    55,294
    
    
    $
    569
    
    
    $
    (229
    )
    
    $
    55,634
 as of March 31, 2003Amortized
    
    Unrealized
    
    Unrealized
    
    Estimated(Dollars in thousands)
    
    Costs
    
    Gains
    
    Losses
    
    Fair ValueU.S. government & agencies
    
    $
    13,109
    
    
    $
    65
    
    
    $
    0
    
    
    $
    13,174Obligations of state and
political subdivisions
    
    
    1,191
    
    
    
    60
    
    
    
    0
    
    
    
    1,251Mortgage backed securities
    
    
    11,588
    
    
    
    83
    
    
    
    0
    
    
    
    11,671Total
    
    $
    25,888
    
    
    $
    208
    
    
    $
    0
    
    
    $
    26,096
 26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company considers interest rate, credit and operation risk as the most
significant risks affecting the Company. Other types of market risk, such as
foreign exchange risk and commodity price risk, do not affect the Company in
the normal course of operations. Fluctuation in interest rates will ultimately affect both the level of interest
income and interest expense recorded as revenue. 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. To estimate the effect of interest rate shock 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, 2004, the estimated annualized reduction in net interest income
attributable to a 50 and 100 basis point decline in the federal funds rate was
$388,000 and $762,000, respectively. At March 31, 2004, the estimated annual
increase in net interest income attributable to a 100 and 200 basis point
increase in the federal funds rate was $675,000 and $1,350,000. At December 31,
2003, the estimated annualized reduction in net interest income attributable to
a 100 and 200 basis point decline in the federal funds rate was $575,000 and
$1,149,000, respectively, with a similar and opposite result attributable to a
100 basis point increase in the federal funds rate. 27




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES As required by SEC rules, within 90 days prior to the date of this Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys President
and Chief Executive Officer and with the Companys Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures, pursuant to Exchange Act Rule 13a-14. As part of the disclosure controls and procedures, management has formed the
SEC Disclosure Committee. This committee reviews the quarterly filing to a
disclosure checklist to ensure that all functional areas of the Company have
participated in the disclosure review. In addition, operational and accounting
audits are performed ongoing throughout the year by the Companys internal
auditors to support the control structure. Based upon that evaluation, the Companys President and Chief Executive Officer
along with the Companys Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in this Form 10-Q. There have been no significant changes in the Companys internal controls, or
in other factors, which would significantly affect internal controls subsequent
to the date the Company carried out its evaluation. 28




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##### Table of Contents



PART II. Other Information 
 Item 1. Legal proceedings The Company is involved in various pending and threatened legal actions arising
in the ordinary course of business. The Company maintains reserves for losses
from legal actions, which are both probable and estimable. In the opinion of
management, the disposition of claims, currently pending will not have a
material adverse affect on the Companys financial position or results of
operations. 
 Item 2. Changes in securities and use of proceeds N/A 
 Item 3. Defaults upon Senior Securities N/A. 
 Item 4. Submission of Matters to a vote of Security Holders N/A 
 Item 5. Other Information N/A 
 Item 6A. Exhibits (31) Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of
2002 (32) Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of
2002 
 Item 6B. Reports on Form 8-K March 29, 2004 8-K/A changes in registrants certifying accountants were due to
dismissal by Company March 19, 2004 8-K announcing changes in registrants certifying accountants March 18, 2004 8-K press announcement Bank of Commerce Mortgage name change and
preferred lender status 
 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 11, 2004 /s/ Linda J. Miles
Linda J. Miles
Executive Vice President &
Chief Financial Officer 29