Pacific State Bancorp (the “Company”) is a holding company with one bank subsidiary, Pacific State Bank, (the “Bank”), and two unconsolidated subsidiary grantor trusts, Pacific State Statutory Trusts II and III. Pacific State Bancorp commenced operations on June 24, 2002 after acquiring all of the outstanding shares of Pacific State Bank. The Bank is a California state chartered bank formed November 2, 1987. The Bank is a member of the Federal Reserve System. The Bank’s primary source of revenue is interest on loans to customers who are predominantly small to middle-market businesses and middle-income individuals. Pacific State Statutory Trusts II and III are unconsolidated, wholly owned statutory business trusts formed in March 2004 and June 2007, respectively for the exclusive purpose of issuing and selling trust preferred securities.
The Bank conducts a general commercial banking business, primarily in the five county region that comprises Alameda, Calaveras, San Joaquin, Stanislaus and Tuolumne counties. The Bank offers commercial banking services to residents and employers of businesses in the Bank’s service area, including professional firms and small to medium sized retail and wholesale businesses and manufacturers. The Company as of March 15, 2008 had 84 employees, including 26 officers. The Bank does not engage in any non-bank lines of business. The business of the Bank is not to any significant degree seasonal in nature. The Bank has no operations outside California and has no material amount of loans or deposits concentrated among any one or few persons, groups or industries. The Bank operates nine branches with its Administrative Office and one branch located at 1899 W. March Lane, in Stockton, California; additional branches are located in downtown Stockton and in the communities of Angels Camp, Arnold, Groveland, Lodi, Modesto, Tracy and Hayward, California.
Pacific State Bancorp common stock trades on the NASDAQ Global Market under the symbol of “PSBC”.
The focus of the Company’s business plan is to attract “Business Relationship” small, medium and large accounts, but not to the exclusion of any other business which the Company can reasonably and profitably attract. In order to provide a level of service to attract such customers, the Company has structured its specific services and charges on a basis which management believes to be profitable, taking into consideration other aspects of the account relationship. The Company offers a full range of banking services to its customers intended to attract the following specific types of accounts: relatively large consumer accounts; professional group and association accounts, including the accounts of groups or firms of physicians, dentists, attorneys and accountants; and accounts of small to medium-sized businesses engaged in retail, wholesale, light industrial, manufacturing, agricultural and service activities.
The Company during 2002, 2004, and 2007 established three subsidiary grantor trusts. Pacific State Statutory Trusts I, II and III (the “Trusts”). The Trusts were established for the sole purpose of issuing capital securities (“Capital Securities”) pursuant to declarations of trust (the “Declarations”). The proceeds from the sale of the Capital Securities were loaned to the Company as subordinated debentures (the “Debentures”) issued to the Trusts pursuant to indentures (the “Indentures”). Interest payments on the Debentures will flow through the Trusts to the Pooling Vehicles, which are the holders of the Capital Securities and similar securities issued by other financial institutions. Payments of distributions by the Trusts to the Pooling Vehicle are guaranteed by the Company. See Note 8 to the Company’s consolidated financial statements included with this report.
Proceeds from the issuance of the 2002 subordinated debentures were used to provide the Bank with an additional $4.5 million in capital in order to support the continued growth of the Bank. The remaining $500,000 was placed in the Company for general corporate purposes. Proceeds from the issuance of the 2004 subordinated debentures were used to provide the Bank with an additional $3.5 million in capital in order to support the continued growth of the Bank. Proceeds from the issuance of the 2007 subordinated debentures were used to retire the 2002 subordinated debenture issuance. Trust I was dissolved in 2007 following the retirement of the 2002 subordinated debentures. By refinancing the 2002 subordinated debenture issuance with the 2007 issuance, the Company was able to reduce interest expense related to the Trusts.
PRODUCT LINES AND SERVICES
The Bank currently offers the following general banking services at all of its branches: commercial, construction, agricultural and real estate loans and personal credit lines, interest on checking, U.S. Savings bond services, domestic and foreign drafts, banking by appointment, automatic transfer of funds between savings and checking accounts, business courier services, checking and savings accounts for personal and business purposes, domestic letters of credit, a depository for MasterCard and Visa drafts, federal depository services, cash management assistance, wire and telephone transfers, Individual Retirement Accounts, time certificates of deposit, courier service for non-cash deposits, Visa and MasterCard, revolving lines of credit to consumers secured by deeds of trust on private residences, unsecured overdraft protection credit lines attached to checking accounts, ATM cards and MasterMoney debit cards via the Star, Cirrus, Plus, MasterCard and Visa networks.
The Bank is not authorized to offer trust services. The Federal Reserve Bank of San Francisco is the Company’s primary correspondent relationship. The Bank currently also has correspondent relationships with City National Bank in Beverly Hills, California, First Tennessee Bank in Memphis, Tennessee, U. S. Bank, Minneapolis, Minnesota, Wells Fargo Bank, San Francisco, California and Pacific Coast Bankers Bank, San Francisco, California.
The Bank recognizes that, in order to be competitive, it must attract a certain number of consumer accounts. Individual Retirement Accounts, Visa and MasterCard, revolving lines of credit to consumers secured by deeds of trust on private residences, and unsecured overdraft protection credit lines attached to checking accounts currently offered by the Bank are designed to appeal particularly to consumers. Moreover, participation in large-scale ATM networks assists the Company in competing for consumer accounts.
The Bank is an approved Small Business Administration and 504 lender, FSA, USDA Business and Industry, USDA Part-time Farmer Program and FHA and VA lender. The Bank is a national leader in the underwriting of U.S. Department of Agriculture business and industry loans, as well as a Preferred Lender for this program.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
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CRITICAL ACCOUNTING POLICIES
General
Pacific State Bancorp’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our consolidated financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share Based Payment”; see information under the header “Share Based Compensation” in Note 2 to the consolidated financial statements included with this report. Other estimates that we use are related to the assumptions and estimates related to share based compensation, expected useful lives of our depreciable assets and the determination whether any impairment exists related to our investments and intangible and other long-lived assets. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
A critical accounting estimate is one that requires a company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. If different estimates that the company reasonably could have used for the accounting estimate in the current period were made, or if changes in the accounting estimate that are reasonably likely to occur from period to period occurred, they could have a material impact on the presentation of the company’s financial condition, changes in financial condition or results of operations.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accountings Standards (SFAS) No. 5 “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, which requires that losses on impaired loans be accrued and measured based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
38
Share Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment (“SFAS 123 (R)”). Under SFAS 123(R), compensation cost recognized for all awards that vest subsequent to the date of adoption based are on the grant-date fair value estimated in accordance with SFAS No. 123, Accounting for Stock-Based Compensation and SFAS 123(R). The grant-date fair value is estimated using the Black-Scholes option-pricing formula, which involves making estimates of the assumptions used, including the expected term of the option, expected volatility over the option term, expected dividend yield over the option term and risk-free interest rate. In addition, when determining the compensation expense to amortize over the vesting period, management makes estimates about the expected forfeiture rate of options.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net income for the year ended December 31, 2007, was $4,549,000 representing a decrease of $994,000 or 17.93% over net income of $5,543,000 for the year ended December 31, 2006. The primary cause of the decrease in net income was the increase in the provision for loan losses of $1,065,000 or $627,000 after the recorded tax effect, over 2006 levels. In addition to the increase in the provision for loan losses, noninterest expense increased by $637,000, or $375,000 after the recorded tax effect, over 2006 levels. The increase in noninterest expense is primarily attributable to the full year recognition of expenses in 2007 related to the opening of two new branches in late 2006. In 2007 the Company achieved strong growth in average earning assets, increasing by $63,105,000 or 21%. The average yield earned on average earning assets decreased by 23 basis points or 3%. In order to fund the growth in average earning assets, the Company increased its average interest bearing liabilities by $60,751,000 or 25%. The average rate paid on interest bearing liabilities increased by 78 basis points or 20%. The growth in average earning assets increased total interest earned by $4,747,000 or 18%, while the increase in interest bearing liabilities increased interest expense by $4,654,000, resulting in an increase of net interest income of $93,000. A more in depth discussion of average balances and the rates received or paid on those balances is presented in the section titled“Net Interest Income” below.
Return on average assets (ROA) decreased to 1.13% while the return on average equity (ROE) decreased to 14.22% in 2007 compared with 1.67% and 22.91%, respectively, in 2006. Diluted earnings per share for 2007 and 2006 were $1.14 and $1.41, respectively, a decrease of 19.15%. The decrease in earnings per share was primarily due to the decrease in net income of 17.93%.
The Company’s average total assets increased to $402.5 million in 2007 or 21.53% over $331.2 million in 2006. The Company’s total assets increased to $431.1 million as of December 31, 2007 or 11.46% over $386.8 million at December 31, 2006. Total gross loans increased in 2007 to $312.4 million from $289.8 million in 2006, an increase of $22.6 million or 7.80%. Total deposits grew to $341.8 million, or 0.23%, compared to $341.0 million in 2006. Total borrowings grew to $48.8 million, or 256.20%, compared to $13.7 million in 2006. The increases in the balance sheet and, particularly in loans and borrowings, were attributable to the continued growth of the bank.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net income for the year ended December 31, 2006, was $5,543,000 representing an increase of $1,257,000 or 29.33% over net income of $4,286,000 for the year ended December 31, 2005. The primary contributing factor to the increase in net income was an increase in net interest income of $3,771,000 as a result of an increase in both the volume of average earning assets and the rates earned on those assets, offset by the increase in average interest bearing liabilities and the rates paid on those liabilities. Overall the net interest margin increased 35 basis points in 2006 from 2005. This was offset by an increase in non-interest expense of $1,260,000 and mitigated by a slight increase in non-interest income of $102,000. The increase in non-interest expenses was primarily due to an increase in salaries and employee benefits of $737,000 and in other expenses of $317,000.
Return on average assets (ROA) improved to 1.67% while the return on average equity (ROE) decreased slightly to 22.91% in 2006 compared with 1.53% and 22.98%, respectively, in 2005. Diluted earnings per share for 2006 and 2005 were $1.41 and $1.10, respectively, an increase of 28.18%. The increase in earnings per share was primarily due to the increase in net income of 29.33%.
The Company’s average total assets increased to $331.2 million in 2006 or 18.16% over $280.3 million in 2005. In 2006 average earning assets increased to $300.4 million or 18.16% over $250.1 million in 2005. Average interest bearing liabilities increased to $241.0 million or 19.53% over $204.6 million in 2005. The increase in average assets is the result of increase market penetration and the opening of branches in new market areas.
39
The Company’s total assets increased to $386.8 million as of December 31, 2006 or 24.92% over $309.6 million at December 31, 2005. Total loans increased in 2006 to $289.8 million from $243.7 million in 2005, an increase of $46.1 million or 18.90%. Total Deposits grew to $341.0 million, or 24.86%, compared to $273.1 million in 2005. The increases in the balance sheet and, particularly in loans and deposits, were attributable to the continued growth of the bank.
Net Interest Income
The primary source of income for the Company is derived from net interest 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 increased $93 thousand or 0.54% to $17.4 million in 2007 from $17.3 million in 2006 and $3.8 million or 27.86% in 2006 from $13.5 million in 2005. Total average earning assets increased $63.1 million or 21.01% to $363.5 million from $300.4 million in 2006. Average loan balances outstanding during 2007 increased $30.8 million or 11.45%, while average balances of investments, federal funds sold and interest bearing deposits in banks increased by $32.3 million or 104.00%. The average yields on loans in 2007 increased by 5 basis points. The average yield on investments, federal funds sold and interest bearing deposits increased 14 basis points in 2007 compared to 2006. The slight increase in yields is related to fluctuating market conditions based on economic data, competition and the lagging effect of prior year interest rate cuts. As a result of the change in mix of earning assets, the overall yield on average earning assets during 2007 decreased 23 basis points to 8.59% from 8.82% for 2006.
Total interest expense increased $4.6 million or 50.65% to $13.8 million in 2007, from $9.2 million in 2006. Total interest expense increased $4.0 million or 76.92% to $9.2 million in 2006, from $5.2 million for 2005. In 2007 the average balance of interest-bearing liabilities increased $60.8 million or 25.21% to $301.8 million from $241.0 million for the year ended December 31, 2006. In 2006 the average balance of interest-bearing liabilities increased $39.4 million or 19.53% to $241.0 million from $201.6 million for the year ended December 31, 2005. Additionally, the average rate paid on interest-bearing liabilities increased to 4.59% from 3.81% in 2006 and 2.60% in 2005. The increase in the average interest rate paid on interest-bearing liabilities represents 78 basis points or 20.47% in 2007 and 121 basis points or 46.54% in 2006.
Average interest-bearing demand deposits decreased $12.6 million or 12.05% to $92.3 million in 2006 from $104.9 million in 2005. The average rate paid on these deposits during 2006 increased 37 basis points. Average certificates of deposit increased $48.4 million or 62.43% to $126.0 million in 2006 from $77.6 million in 2005. The average rate paid on certificates of deposit during 2006 increased 163 basis points. As a result of the increases in interest rates described above and overall changes in the mix of interest-bearing deposits, the average rate paid on all interest bearing deposits and borrowings increased 121 basis points for 2006 to 3.81% from 2.60% for 2005.
The Company’s net interest margin (net interest income divided by average earning assets) was 4.79% in 2007, down from 5.76% or 97 basis points in 2006. 2006 net interest margin increased 35 basis points from 5.41% in 2005. The increase in the volume of earning assets, coupled with the change in mix of and rates paid on interest-bearing liabilities resulted in an increase of $93 thousand or 0.54% in net interest income for the year ended December 31, 2007 compared to 2006. For the year ended December 31, 2006 compared to 2005, the combined effect of the increase in volume of and yield on earning assets, coupled with the change in mix and rates paid resulted in an increase of $3.8 million or 27.86% in net interest income over 2005.
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. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis. Average balances are based on daily averages.
40
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES PAID
Table 31: Net Interest Margin
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | For Year Ended December 31, | |
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|
|
|
|
|
|
|
|
(Dollars in thousands) | | 2007 | | 2006 | |
| |
| |
|
|
| | Average
Balance | | Interest
Income or
Expense | | Average
Yield or
Cost | | Average
Balance | | Interest
Income or
Expense | | Average
Yield or
Cost | |
| |
| |
| |
| |
| |
| |
| |
Assets: | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 300,239 | | $ | 27,902 | | | 9.29 | % | $ | 269,395 | | $ | 24,901 | | | 9.24 | % |
Investment securities | | | 37,089 | | | 2,033 | | | 5.48 | % | | 25,418 | | | 1,321 | | | 5.20 | % |
Federal funds sold | | | 25,115 | | | 1,285 | | | 5.12 | % | | 5,602 | | | 273 | | | 4.87 | % |
Interest Bearing Deposits in Banks | | | 1,077 | | | 22 | | | 2.04 | % | | — | | | — | | | 0.00 | % |
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|
| |
|
| | | | |
|
| |
|
| | | | |
Total average earning assets | | $ | 363,520 | | $ | 31,242 | | | 8.59 | % | $ | 300,415 | | | 26,495 | | | 8.82 | % |
| | | | | | | | | | | | | | | | | | | |
Non-earning assets: | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | | 15,398 | | | | | | | | | 13,655 | | | | | | | |
Bank premises and equipment | | | 12,940 | | | | | | | | | 10,609 | | | | | | | |
Other assets | | | 13,322 | | | | | | | | | 9,058 | | | | | | | |
Allowance for loan loss | | | (2,665 | ) | | | | | | | | (2,536 | ) | | | | | | |
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|
| | | | | | | |
|
| | | | | | | |
Total average assets | | $ | 402,515 | | | | | | | | $ | 331,201 | | | | | | | |
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| | | | | | | |
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| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest-bearing Demand | | $ | 81,898 | | $ | 2,231 | | | 2.72 | % | $ | 92,280 | | $ | 2,438 | | | 2.64 | % |
Savings | | | 5,352 | | | 46 | | | 0.86 | % | | 6,359 | | | 56 | | | 0.88 | % |
Time Deposits | | | 200,154 | | | 10,567 | | | 5.28 | % | | 125,994 | | | 5,608 | | | 4.45 | % |
Other borrowing | | | 14,359 | | | 998 | | | 6.95 | % | | 16,379 | | | 1,086 | | | 6.63 | % |
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|
| | | | |
|
| |
|
| | | | |
| | | | | | | | | | | | | | | | | | | |
Total average interest-bearing liabilities | | $ | 301,763 | | $ | 13,842 | | | 4.59 | % | $ | 241,012 | | $ | 9,188 | | | 3.81 | % |
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Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 64,242 | | | | | | | | | 64,593 | | | | | | | |
Other liabilities | | | 4,525 | | | | | | | | | 1,405 | | | | | | | |
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|
| | | | | | | |
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| | | | | | | |
Total average liabilities | | | 370,530 | | | | | | | | | 307,010 | | | | | | | |
Shareholders’ equity: | | | 31,986 | | | | | | | | | 24,191 | | | | | | | |
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| | | | | | | |
|
| | | | | | | |
Total average liabilities and shareholders’ equity | | $ | 402,516 | | | | | | | | $ | 331,201 | | | | | | | |
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| | | | | | | | | | | | | | | | | | | |
| | | | |
|
| | | | | | | |
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| | | | |
Net interest income | | | | | $ | 17,400 | | | | | | | | $ | 17,307 | | | | |
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|
| | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest margin | | | | | | | | | 4.79 | % | | | | | | | | 5.76 | % |
| | |
| 1) | Interest income and yields on loans include fee income of $1,623,000, $1,868,000 and $1,680,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The Company had one nonaccrual loan in the amount of $432,000 as of December 31, 2007. The Company did not have any nonaccrual loans for the years ended December 31, 2006 and 2005. |
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| | | | | | | | | | |
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| |
| | 2005 | |
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| |
| | Average
Balance | | Interest
Income or
Expense | | Average
Yield or
Cost | |
| |
| |
| |
| |
Assets: | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | |
Loans | | $ | 215,907 | | $ | 17,565 | | | 8.14 | % |
Investment securities | | | 19,694 | | | 707 | | | 3.59 | % |
Federal funds sold | | | 11,169 | | | 354 | | | 3.17 | % |
Interest Bearing Deposits in Banks | | | 3,299 | | | 156 | | | 4.73 | % |
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|
| |
|
| | | | |
Total average earning assets | | $ | 250,069 | | $ | 18,782 | | | 7.51 | % |
| | | | | | | | | | |
Non-earning assets: | | | | | | | | | | |
Cash and due from banks | | | 14,474 | | | | | | | |
Bank premises and equipment | | | 9,581 | | | | | | | |
Other assets | | | 8,511 | | | | | | | |
Allowance for loan loss | | | (2,346 | ) | | | | | | |
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|
| | | | | | | |
Total average assets | | $ | 280,289 | | | | | | | |
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|
| | | | | | | |
| | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | |
Deposits | | | | | | | | | | |
| | | | | | | | | | |
Interest-bearing Demand | | $ | 104,922 | | $ | 2,384 | | | 2.27 | % |
Savings | | | 6,307 | | | 36 | | | 0.57 | % |
Time Deposits | | | 77,567 | | | 2,190 | | | 2.82 | % |
Other borrowing | | | 12,845 | | | 636 | | | 4.95 | % |
| |
|
| |
|
| | | | |
| | | | | | | | | | |
Total average interest-bearing liabilities | | $ | 201,641 | | $ | 5,246 | | | 2.60 | % |
| | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | |
Demand deposits | | | 59,009 | | | | | | | |
Other liabilities | | | 986 | | | | | | | |
| |
|
| | | | | | | |
Total average liabilities | | | 261,636 | | | | | | | |
Shareholders’ equity: | | | 18,653 | | | | | | | |
| |
|
| | | | | | | |
Total average liabilities and shareholders’ equity | | $ | 280,289 | | | | | | | |
| |
|
| | | | | | | |
| | | | | | | | | | |
| | | | |
|
| | | | |
Net interest income | | | | | $ | 13,536 | | | | |
| | | | |
|
| | | | |
| | | | | | | | | | |
Net interest margin | | | | | | | | | 5.41 | % |
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The following table sets 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, rates and the combination of volume and rates (mix) for the periods indicated. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
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Table 32: Rate/Volume Table | | Years ended December 31,
2007 over 2006 | |
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| |
(In thousands) | | Net
Change | | Rate | | Volume | | Mix | |
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| |
| |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Interest Income: | | | | | | | | | | | | | |
Loans and leases | | $ | 3,001 | | $ | 135 | | $ | 2,851 | | $ | 15 | |
Investment securities | | | 712 | | | 72 | | | 607 | | | 33 | |
Federal funds sold | | | 1,012 | | | 14 | | | 951 | | | 47 | |
Interest Bearing Deposits in Banks | | | 22 | | | — | | | — | | | 22 | |
| |
|
| |
|
| |
|
| |
|
| |
Total interest income | | $ | 4,747 | | $ | 220 | | $ | 4,408 | | $ | 118 | |
| | | | | | | | | | | | | |
Interest Expense: | | | | | | | | | | | | | |
Interest-bearing Demand | | $ | (207 | ) | $ | 76 | | $ | (274 | ) | | (9 | ) |
Savings | | | (10 | ) | | (1 | ) | | (9 | ) | | — | |
Time Deposits | | | 4,959 | | | 1,044 | | | 3,301 | | | 614 | |
Other borrowing | | | (88 | ) | | 53 | | | (134 | ) | | (6 | ) |
Total interest expense | | $ | 4,654 | | $ | 1,171 | | $ | 2,884 | | $ | 600 | |
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|
| |
|
| |
|
| |
|
| |
Net interest income | | $ | 93 | | $ | (950 | ) | $ | 1,525 | | $ | (482 | ) |
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|
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|
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|
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|
| |
| | | | | | | | | | | | | |
Table 33: Rate/Volume Table | | Years ended December 31,
2006 over 2005 | |
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| |
(In thousands) | | Net
Change | | Rate | | Volume | | Mix | |
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| |
| |
| |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Interest Income: | | | | | | | | | | | | | |
Loans and leases | | $ | 7,336 | | $ | 2,392 | | $ | 4,351 | | $ | 593 | |
Investment securities | | | 614 | | | 317 | | | 205 | | | 92 | |
Federal funds sold | | | (81 | ) | | 190 | | | (176 | ) | | (95 | ) |
Interest Bearing Deposits in Banks | | | (156 | ) | | (156 | ) | | (156 | ) | | 156 | |
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|
| |
|
| |
|
| |
|
| |
Total interest income | | $ | 7,713 | | $ | 2,743 | | $ | 4,225 | | $ | 746 | |
| | | | | | | | | | | | | |
Interest Expense: | | | | | | | | | | | | | |
Interest-bearing Demand | | $ | 54 | | $ | 388 | | $ | (287 | ) | $ | (47 | ) |
Savings | | | 20 | | | 20 | | | — | | | — | |
Time Deposits | | | 3,418 | | | 1,263 | | | 1,367 | | | 788 | |
Other borrowing | | | 450 | | | 216 | | | 175 | | | 59 | |
Total interest expense | | $ | 3,942 | | $ | 1,886 | | $ | 1,255 | | $ | 801 | |
| |
|
| |
|
| |
|
| |
|
| |
Net interest income | | $ | 3,771 | | $ | 857 | | $ | 2,969 | | $ | (55 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | |
| 1. | The volume change in net interest income represents the change in average balance divided by the previous year’s rate. |
|
| 2. | The rate change in net interest income represents the change in rate divided by the previous year’s average balance. |
|
| 3. | The mix change in net interest income represents the change in average balance multiplied by the change in rate. |
43
NON-INTEREST INCOME
The Company’s non-interest income consists primarily of service charges on deposit accounts, gain on sale of loans and ATM and other service fees. For the year ended December 31, 2007, non-interest income represented 7.31% of the Company’s revenues versus 8.88% in 2006, and 11.67% in 2005.
Total non-interest income decreased slightly to $2.47 million in 2007 from $2.58 million in 2006 which was a slight increased from $2.48 million in 2005. Service charge income increased $25 thousand or 2.89% to $889 thousand in 2007. Service charge income increased $106 thousand in 2006 or 13.98% to $864 thousand, up from $758 thousand for the comparable period in 2005. The increase in service charge income is the result of the increase in deposit accounts as a result of the growth of the Company. The increase in service charges in 2007 and 2006 was offset by a decrease in gain on sales of loans of $144 thousand or 49.98% between 2007 and 2006 and $515 thousand or 63.66% between 2006 and 2005. The decrease in the gain on sale of loans in 2007 and 2006 are due to both the timing of the sale of the loans and the changes in the number and dollar amount of loans sold. Other income increased $1 thousand to $1.43 million in 2007 over 2006 and increased $511 thousand or 56.53% in 2006 from $914 thousand in 2005. Sources of other incomes remained constant in 2007 compared to 2006. The increase in 2006 over 2005 was primarily the result of an increase in fee income derived from the referral of commercial mortgage loans to third parties.
The following table sets forth a summary of non-interest income for the periods indicated.
| | | | | | | | | | |
Table 33: Noninterest Income | | Years Ended December 31, | |
| |
|
|
| | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
| | | | (In thousands) | | | |
Service charges | | $ | 889 | | $ | 864 | | $ | 758 | |
Gain on sale of loans | | | 150 | | | 294 | | | 809 | |
Other income | | | 1,426 | | | 1,425 | | | 914 | |
| |
| |
| |
| |
Total non-interest income | | $ | 2,465 | | $ | 2,583 | | $ | 2,481 | |
| |
| |
| |
| |
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and related employee benefits, occupancy and equipment expenses, professional fees, appraisal fees, directors’ fees, postage, stationery and supplies expenses, telephone expenses, data processing expenses, advertising and promotion expense and other operating expenses. Non-interest expense for 2007 was $11.0 million compared to $10.4 million for 2006 and $9.1 million in 2005, representing an increase of $0.6 million or 5.77% for 2007, and $1.3 million or 13.84% for 2006. The decrease in salary and benefits in 2007 over 2006 of $143,000 was primarily the result of staff turnover, efficiencies realized on upgraded systems and management focus on controlling increases in salaries and benefits. Increases in salaries and benefits in 2006 over 2005 are indicative of the continuing additions to staff the expanded branch operations in line with their growth over the two years ended December 31, 2006. In addition the Company began to recognize share based compensation expenses in 2006 resulting in $309 thousand of expense in 2007 and $229 thousand in 2006, as a result of adopting SFAS No. 123(R). For additional information related to the adoption of SFAS 123(R), please see notes 2 and 11 of the consolidated financial statements. The increase in occupancy and equipment expense of $236 thousand in 2007 over 2006 is attributable to the addition of the new branches in Lodi and Hayward in 2006. Data Processing expense increased by $205 thousand in 2007 over 2006 levels; the increase is primarily attributable to the costs associated with implementing electronic clearing of paper check items. Advertising expense increased in 2007 and 2006 due to a focus on increasing market share and increased costs associated with retaining customers. Other expense increased in 2007 over 2006 primarily due to correspondent bank charges and other costs associated with the growth of the Company. Other expenses decreased slightly in 2006 over 2005 as a result of decreased miscellaneous operating losses offset by slightly higher correspondent banking charges associated with volume of items processed.
44
The following table sets forth a summary of non-interest expense for the periods indicated.
Table 34: Noninterest Expense
| | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
| | (In thousands) | |
| | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
Salaries & benefits | | $ | 5,336 | | $ | 5,479 | | $ | 4,742 | |
Occupancy & equipment | | | 1,888 | | | 1,652 | | | 1,446 | |
Professional fees | | | 294 | | | 349 | | | 397 | |
Appraisal fees | | | 266 | | | 337 | | | 255 | |
Directors fees | | | 290 | | | 274 | | | 259 | |
Postage, stationery and supplies | | | 212 | | | 184 | | | 196 | |
Telephone | | | 251 | | | 210 | | | 190 | |
Data processing | | | 491 | | | 286 | | | 243 | |
Advertising and promotion | | | 545 | | | 365 | | | 127 | |
Other operating expenses | | | 1,424 | | | 1,224 | | | 1,245 | |
| |
|
| |
|
| |
|
| |
Total noninterest expense | | $ | 10,997 | | $ | 10,360 | | $ | 9,100 | |
| |
|
| |
|
| |
|
| |
PROVISION FOR INCOME TAXES
The Company’s provision for income taxes includes both federal income and state franchise 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 Company owned life insurance. Increases and decreases in the provision for taxes primarily 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.
The following table reflects the Company’s tax provision and the related effective tax rate for the periods indicated.
Table 35: Tax Provision
| | | | | | | | | | |
| | Years Ended December 31, | |
| |
| |
(Dollars in thousands) | | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
|
Tax Provision | | $ | 2,894 | | $ | 3,627 | | $ | 2,596 | |
Effective Tax Rate | | | 38.88 | % | | 39.56 | % | | 37.72 | % |
FINANCIAL CONDITION
Investment Securities
The Company classifies its investment securities as “held-to-maturity” or “available-for-sale” at the time of investment purchase. Generally, all securities are purchased with the intent and ability to hold them for long-term investment, and the Company has both the ability and intent to hold “held-to-maturity” investments to maturity. The Company does not engage in trading activities.
Investment securitiesheld-to-maturity are carried at cost adjusted for the accretion of discounts and amortization of premiums. Securitiesavailable-for-sale may be sold to implement the Company’s asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as accumulated other comprehensive income or loss, in a separate component of shareholder’s equity. Gain or loss on sale of investment securities is based on the specific identification method.
Investment securitiesheld-to-maturity at December 31, 2007, consisted of mortgage-backed securities totaling $58 thousand with a remaining contractual maturity of 7 to 14 years and a weighted-average yield to maturity of 7.11%.
45
The following table summarizes the contractual maturities of the Company’s investment securities at their carrying value and their weighted-average yields at December 31, 2007. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
Table 36: Investment Yields
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Within One Year | | One to Five
Years | | Five to Ten
Years | | Over Ten Years | | Total | |
| | | | | | | | | | | |
| | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | |
Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
US Government Agencies and Treasuries | | $ | 17,924 | | | 4.41 | % | $ | 996 | | | 5.00 | % | $ | — | | | — | % | $ | 1,450 | | | 6.22 | % | $ | 20,370 | | | 4.57 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal Obligations | | | 135 | | | 3.75 | % | | 205 | | | 3.50 | % | | — | | | — | % | | 2,719 | | | 4.75 | % | | 3,059 | | | 4.62 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate and Other Bonds | | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 9,755 | | | 6.24 | % | | 9,755 | | | 6.24 | % |
Mortgage- backed securities | | | — | | | — | % | | 514 | | | 3.46 | % | | — | | | — | % | | 8,240 | | | 6.43 | % | | 8,754 | | | 6.26 | % |
| |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale securities | | | 18,059 | | | 4.41 | % | | 1,715 | | | 4.36 | % | | — | | | — | % | | 22,164 | | | 6.13 | % | | 41,938 | | | 5.31 | % |
| |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | — | | | — | % | $ | — | | | — | % | $ | 39 | | | 7.28 | % | $ | 19 | | | 6.74 | % | $ | 58 | | | 7.11 | % |
| |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | | |
The following table summarizes the carrying value of the Company’s investment securities held on the dates indicated.
Table 37: Investment Balances
| | | | | | | | | | |
| | As of December 31, | |
(Dollars in thousands) | | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
Available-for-sale Securities – at fair value: | | | | | | | | | | |
U.S. Government & Agencies | | $ | 20,417 | | $ | 13,733 | | $ | 14,852 | |
Municipal Obligations | | | 3,161 | | | 2,760 | | | 2,865 | |
Corporate and Other Bonds | | | 9,592 | | | 2,506 | | | 3,325 | |
Mortgage- backed securities | | | 8,124 | | | 4,035 | | | 7,374 | |
| |
|
| |
|
| |
|
| |
Total available-for-sale | | $ | 41,294 | | $ | 23,034 | | $ | 28,416 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Held-to-maturity Securities – at amortized cost: | | | | | | | | | | |
Mortgage-backed Securities | | $ | 58 | | $ | 73 | | $ | 123 | |
| |
|
| |
|
| |
|
| |
As of December 31, 2007, the aggregate book value of the Company’s investment in securities of a single issuer did not exceed 10% of the company’s shareholders’ equity.
LOANS AND ASSET QUALITY
The Company concentrates its lending activities primarily within Alameda, Calaveras, San Joaquin, Stanislaus and Tuolumne Counties.
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 cash flows of the borrower or proceeds from the sale of collateral.
46
The following table sets forth the amounts of loans outstanding by category as of the dates indicated:
Table 38: Loan Categories
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | As of December 31, | |
| |
| |
| | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| |
| |
| |
| |
| |
| |
Commercial and Agricultural | | $ | 95,658 | | $ | 89,045 | | $ | 60,645 | | $ | 55,569 | | $ | 57,638 | |
| | | | | | | | | | | | | | | | |
Real estate-construction | | | 80,168 | | | 75,654 | | | 43,352 | | | 22,965 | | | 28,219 | |
| | | | | | | | | | | | | | | | |
Real estate-commercial mortgage | | | 121,157 | | | 112,532 | | | 126,166 | | | 109,895 | | | 60,174 | |
| | | | | | | | | | | | | | | | |
Installment | | | 15,215 | | | 12,526 | | | 13,536 | | | 13,121 | | | 10,823 | |
| | | | | | | | | | | | | | | | |
Deferred Loan Fees and Costs | | | 208 | | | 40 | | | 213 | | | 199 | | | 284 | |
| | | | | | | | | | | | | | | | |
Allowance for Loan Losses | | | (3,948 | ) | | (2,478 | ) | | (2,356 | ) | | (2,214 | ) | | (1,653 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Total Net Loans | | $ | 308,458 | | $ | 287,318 | | $ | 241,556 | | $ | 199,535 | | $ | 155,485 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net loans have increased $21.1 million or 7.36%, to $308.5 million at December 31, 2007 from $287.3 million at December 31, 2006. The Company’s loan portfolio has grown in the commercial and agricultural categories by $6.6 million or 7.43% in 2007. Real estate construction loans have increased $4.5 million or 5.97%, real estate commercial mortgage loans increased $8.6 million or 7.66% and installment loans have increased $2.7 million or 21.47% in 2007. The portfolio mix has changed in 2007 as compared with the mix of the previous year with commercial and agricultural loans increasing to 31.0% compared to 26.0% in 2006, of total net loans, real estate construction loans decreased to 26.0% compared to 26.3% in 2006, real estate - commercial mortgage loans decreased to 39.3%, compared to 44.4% and Installment loans increased to 4.9% compared to 4.1% in 2006. The shift in the mix reflects the changes in lending needs within the Company’s service area. The overall change in the mix of the loan portfolio did not significantly impact the overall risk profile in the loan portfolio.
The following table sets forth the maturity distribution of the Company’s commercial and agricultural loans and construction loans outstanding as of December 31, 2007, which, based on remaining scheduled repayments of principal, were due within the periods indicated.
Table 39: Commercial, Agriculture and Construction Loan Maturities
| | | | | | | | | | | | | |
| | | | | After One
through Five
Years | | | | | | | |
| | Within One
Year | | | After Five
Years | | | | |
(Dollars in thousands) | | | | | Total | |
| |
| |
| |
| |
| |
Commercial and agricultural loans | | $ | 47,099 | | $ | 25,447 | | $ | 23,112 | | $ | 95,658 | |
|
Construction Loans | | | 71,514 | | | 6,848 | | | 1,806 | | | 80,168 | |
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 118,613 | | $ | 32,295 | | $ | 24,918 | | $ | 176,239 | |
| |
|
| |
|
| |
|
| |
|
| |
Loans due after one year with: | | | | | | | | | | | | | |
Fixed Rates | | | | | $ | 21,793 | | $ | 2,930 | | $ | 24,723 | |
Variable Rates | | | | | $ | 10,502 | | $ | 21,988 | | $ | 32,490 | |
| | | | |
|
| |
|
| |
|
| |
The Company’s practice is to place a loan 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.
47
The following table sets forth a summary of the Company’s nonperforming loans and other assets as of the dates indicated:
Table 40: Nonperforming Assets
| | | | | | | | | | | | | | | | |
| | As of December 31, | |
| |
| |
(Dollars in Thousands) | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| |
| |
| |
| |
| |
| |
Nonaccrual loans | | $ | 432 | | $ | — | | $ | — | | $ | — | | $ | — | |
90 days past due and still accruing interest | | | — | | | — | | | — | | | — | | | — | |
Other Real Estate Owned | | | — | | | — | | | — | | | — | | | — | |
The Company had one nonaccrual loan as of December 31, 2007 and did not have any nonaccrual loans at December 31, 2006 or 2005.
ALLOWANCE FOR LOAN LOSSES (ALL)
In determining the amount of the Company’s Allowance for Loan Losses (“ALL”), management assesses probable loss characteristics of the loan portfolio including the concentrations, nature and diversification of the portfolio. Each credit is assigned a credit risk rating factor, and this factor, multiplied by the dollars associated with the credit risk rating, is used to calculate one component of the ALL. In addition, management estimates the probable loss on individual credits that are receiving increased management attention due to identified increases in credit risk. Management reviews the credit risk report with the Director Loan Committee on a weekly basis as well as with the full Board monthly.
The adequacy of the ALL is calculated upon three components. First is the credit risk rating of the loan portfolio, including all outstanding loans. Every extension of credit has been assigned a risk rating based upon a comprehensive definition intended to measure the inherent risk of lending money. Each rating has an assigned risk factor expressed as a reserve percentage. Central to this assigned risk factor is the historical loss record of the Company. Secondly, established specific reserves are available for individual loans currently on management’s watch and classified loan lists. These are the estimated potential losses associated with specific borrowers based upon the collateral and event(s) causing the risk ratings. The third component is unallocated. This reserve is for qualitative factors that may affect the portfolio as a whole, such as those factors described below. Management believes the assigned risk grades and our methods for managing risk are satisfactory.
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. Similarly, the adequacy of the ALL and the level of the related provision for probable loan losses is determined on a judgment basis by management based on consideration of a number of factors including (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 a loss potential, (ix) monthly review by the Board of Directors, and (x) assessments by regulators and other third parties. Certain members of 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’ businesses, valuation of collateral, the determination of impaired loans and exposure to potential 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 and other qualitative factors. In addition, various regulatory agencies, as an integral part of their 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. 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.
48
The Company’s principal lines of lending are (i) commercial and agricultural, (ii) real estate construction and (iii) commercial and residential real estate. The primary sources of repayment of the Company’s commercial loans are the borrowers’ conversion of short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor are usually identified as a secondary source of repayment. The principal factors affecting the Company’s risk of loss from commercial lending include each borrower’s ability to manage its business affairs and cash flows, local and general economic conditions and real estate values in the Company’s service area. The Company manages its commercial loan portfolio by monitoring its borrowers’ payment performance and their respective financial condition and makes periodic adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The Company’s evaluations of its borrowers are facilitated by management’s knowledge of local market conditions and periodic reviews by a consultant of the Company’s credit administration policies.
The principal source of repayment of the Company’s real estate construction loans is the sale of the underlying collateral or the availability of permanent financing from the Company or other lending source. The principal risks associated with real estate construction lending include project cost overruns and deterioration of real estate values as a result of various factors, including competitive pressures and economic downturns. The Company manages its credit risk associated with real estate construction lending by establishing loan-to-value ratios and loan-to-cost ratios on projects on an as-completed basis, inspecting project status in advance of controlled disbursements and matching maturities with expected completion dates. Generally, the Company requires a loan-to-value ratio of not more than 80% on single family residential construction loans.
The principal source of repayment of the Company’s real estate mortgage loans is the borrowers’ operating cash flow. Similar to commercial loans, the principal factors affecting the Company’s risk of loss in real estate mortgage lending include each borrower’s ability to manage its business affairs and cash flows, local and general economic conditions and real estate values in the Company’s service area. The Company manages its credit risk associated with real estate mortgage lending primarily by establishing maximum loan-to-value ratios and using strategies to match the borrower’s cash flow to loan repayment terms.
The Company’s specific underwriting standards and methods for each of its principal lines of lending include industry-accepted analysis and modeling and certain proprietary techniques. The Company’s underwriting criteria are designed to comply with applicable regulatory guidelines, including required loan-to-value ratios. The Company’s credit administration policies contain mandatory lien position and debt service coverage requirements, and the Company generally requires a guarantee from 20% or more owners of its corporate borrowers.
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 Company’s loan loss experience as well as provisions and charges to the allowance for loan losses and certain ratios for the periods indicated.
Table 41: Allowance for Loan Loss Activity
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| |
| |
(Dollars in thousands) | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | |
Beginning Balance: | | $ | 2,478 | | $ | 2,356 | | $ | 2,214 | | $ | 1,653 | | $ | 1,307 | |
| | | | | | | | | | | | | | | | |
Provision for loan losses | | | 1,425 | | | 360 | | | 35 | | | 504 | | | 536 | |
Charge-offs: | | | | | | | | | | | | | | | | |
Commercial | | | (143 | ) | | (10 | ) | | — | | | (9 | ) | | (90 | ) |
Real Estate | | | — | | | — | | | — | | | — | | | — | |
Other | | | (18 | ) | | (14 | ) | | (17 | ) | | — | | | (105 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total Charge-offs | | | (161 | ) | | (24 | ) | | (17 | ) | | (9 | ) | | (195 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Recoveries: | | | | | | | | | | | | | | | | |
Commercial | | | 203 | | | — | | | 124 | | | 66 | | | 1 | |
Other | | | 3 | | | 1 | | | — | | | — | | | 4 | |
Total Recoveries | | | 206 | | | 1 | | | 124 | | | 66 | | | 5 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Reclassification of the reserve for unfunded commitments | | | — | | | (215 | ) | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ending Balance | | $ | 3,948 | | $ | 2,478 | | $ | 2,356 | | $ | 2,214 | | $ | 1,653 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
ALL to total loans | | | 1.26 | % | | 0.86 | % | | 0.98 | % | | 1.10 | % | | 1.05 | % |
Net (recoveries) charge-offs to average loans | | | (0.02 | )% | | 0.01 | % | | (.01 | )% | | (.03 | )% | | .12 | % |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
49
The provision for loan losses was $1,425,000 for 2007 compared to $360,000 for 2006 and $35,000 for 2005. The increase of $1,065,000 in the provision for loan losses, in 2007 over 2006, represented potential losses from specific customers and not degradation of overall credit quality in the loan portfolio. The increase in the amount of the provision in 2006 compared to 2005 is a direct result of growth in the portfolio in addition to the analysis of the loan portfolio and the loan loss history of the Company. Net (recoveries) charge-offs were $(45,000) or .02% of average loans for 2007 compared to $23,000 or .01% of average loans for 2006 and $(107,000) or .05% of average loans for 2005. Management does not believe that there were any trends indicated by the detail of the aggregate charge-offs for any of the periods discussed.
The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the loans as a percent of loans outstanding in each loan category at the dates indicated
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 42: Allocation of Allowance for Loan Loss | | | | | | | | | | | | | | |
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| | 2007 | | | | | 2006 | | | | | 2005 | | | | | 2004 | | | | | 2003 | | | | |
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Commercial and Agricultural | | $ | 1,584 | | | 30.77 | % | $ | 1,086 | | | 25.82 | % | $ | 994 | | | 24.89 | % | $ | 880 | | | 27.57 | % | $ | 736 | | | 36.75 | % |
Real estate – construction | | | 757 | | | 25.68 | % | | 269 | | | 26.11 | % | | 196 | | | 17.79 | % | | 115 | | | 11.39 | % | | 141 | | | 17.94 | % |
Real estate – commercial | | | 563 | | | 39.58 | % | | 642 | | | 44.01 | % | | 501 | | | 51.77 | % | | 422 | | | 54.52 | % | | 229 | | | 38.36 | % |
Installment | | | 293 | | | 3.97 | % | | 279 | | | 4.06 | % | | 300 | | | 5.55 | % | | 308 | | | 6.52 | % | | 248 | | | 6.95 | % |
Unallocated | | | 751 | | | — | | | 202 | | | — | | | 365 | | | — | | | 489 | | | — | | | 305 | | | — | |
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Total | | $ | 3,948 | | | 100.00 | % | $ | 2,478 | | | 100.00 | % | $ | 2,356 | | | 100.00 | % | $ | 2,214 | | | 100.00 | % | $ | 1,653 | | | 100.00 | % |
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DEPOSITS
The Company primarily obtains deposits from local businesses and professionals as well as through certificates of deposit, savings and checking accounts.
The following table sets forth the remaining maturities of certificates of deposit at December 31, 2007
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Table 43: Deposit Maturity Schedule | | | | | | | |
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(Dollars in thousands) | | Under $100,000 | | Over $100,000 | |
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Three Months or less | | $ | 26,400 | | $ | 37,335 | |
Over three through six months | | | 19,422 | | | 34,123 | |
Over six through twelve months | | | 14,713 | | | 42,423 | |
Over twelve months | | | 8,823 | | | 13,850 | |
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Total | | $ | 69,358 | | $ | 127,731 | |
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LIQUIDITY AND MARKET RISK
The purpose of liquidity management is to ensure efficient and economical funding of the Company’s assets consistent with the needs of the Company’s depositors and, to a lesser extent, shareholders. This process is managed not by formally monitoring the cash flows from operations, investing and financing activities as described in the Company’s statement of cash flows, but through an understanding principally of depositor and borrower needs. As loan demand increases, the Company can use asset liquidity from maturing investments along with deposit growth to fund the new loans.
With respect to assets, liquidity is provided by receipts from cash and money market investments such as interest-bearing time deposits, federal-funds sold, available-for-sale investment securities, and by principal and interest payments on loans. With respect to liabilities, liquidity is provided by core deposits, shareholders’ equity and the ability of the Company to borrow funds and to generate deposits.
Because estimates of the liquidity needs of the Company may vary from actual needs, the Company maintains a substantial amount of liquid assets to absorb short-term increases in loans or reductions in deposits. As loan demand decreases or loans are paid off, investment assets can absorb these excess funds or deposit rates can be decreased to run off excess liquidity. Therefore, there is some correlation between financing activities associated with deposits and investing activities associated with lending. The Company’s liquid assets (cash and due from banks, federal funds sold, interest bearing deposits in banks and available-for-sale investment securities) totaled $89.9 million or 20.8% of total assets at December 31, 2007, $73.7 million or 19.0% of total assets at December 31, 2006 and $47.5 million or 15.4% of total assets at December 31, 2005. The Company expects that its primary source of liquidity will be earnings of the Company, acquisition of core deposits, and wholesale borrowing arrangements.
50
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates and processes such as interest rates, commodity prices and equity prices. As typical for a financial institution, the Company’s market risk arises primarily from interest rate risk exposure. Fluctuation in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those that possess a short term to maturity. Based upon the nature of its operations, the Company is not subject to foreign currency exchange or commodity pricing. However, the Company’s commercial real estate loan portfolio, concentrated primarily in Northern California, is subject to risks associated with the local economies.
The fundamental objective of the Company’s management of its assets and liabilities is to maximize the economic value of the Company while maintaining adequate liquidity and managing exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from management of assets and liabilities through using floating rate loans and deposits, maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’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 interest expense on interest bearing liabilities, such as deposits, trust preferred securities and other borrowings. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest earning assets reprice differently from its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control its interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate exposure. As part of this effort, the Company measures interest rate risk utilizing both an internal asset liability measurement system as well as independent third party reviews to confirm the reasonableness of the assumptions used to measure and report the Company’s interest rate risk, enabling management to make any adjustments necessary.
Interest rate risk is managed by the Company’s Asset Liability Committee (“ALCO”), which includes members of senior management and several members of the Board of Directors. The ALCO monitors interest rate risk by analyzing the potential impact on interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s balance sheet in part to maintain the potential impact on net interest income within acceptable ranges despite changes in interest rates. The Company’s exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO.
NET INTEREST INCOME SIMULATION
In order to measure interest rate risk at December 31, 2007, the Company used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis, which is performed quarterly by management, calculates the difference between net interest income forecasted using a rising and falling interest rate scenario and net interest income forecasted using a base market derived from the current interest rates. The income simulation model includes various assumptions regarding the re-pricing relationships for each of the Company’s products. Many of the Company’s assets are floating rate loans, which are assumed to reprice immediately and to the same extent as the change in market rates according to their contracted index. The Company’s non-term deposit products reprice more slowly, usually changing less than the change in market rates and at the discretion of the Company.
The analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes that the balance sheet grows modestly, but that its structure will remain similar to the structure at year-end. It does not account for all factors that impact this analysis, including the potential impact of loan prepayments, deposit drifts or other balance sheet movements including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to the Company’s credit risk profile as interest rates change. Changes that vary significantly from the assumptions may have significant effects on the Company’s net interest income.
51
The following table reflects the Company’s projected net interest income sensitivity analysis based on year-end data:
Table 44: Interest Income Sensitivity
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| | December 31, 2007 | |
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Change in Rates | | Adjusted Net Interest
Income | | Percent Change
From Base | |
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Up 200 basis points | | $ | 16,906 | | | 3.99 | % |
Up 150 basis points | | $ | 16,753 | | | 3.05 | % |
Up 100 basis points | | $ | 16,594 | | | 2.07 | % |
Base Scenario | | $ | 16,257 | | | 0.00 | % |
Down 100 basis points | | $ | 15,919 | | | (2.08 | )% |
Down 150 basis points | | $ | 15,743 | | | (3.16 | )% |
Down 200 basis points | | $ | 15,563 | | | (4.27 | )% |
CONTRACTUAL OBLIGATIONS
The following table summarizes the contractual obligations of the Company as of December 31, 2007:
Table 45: Contractual Obligations
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| | Total | | Less than
one year | | 1-3 years | | 3-5 years | | More than
5 years | |
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Subordinated Debentures, floating rate
of 7.78% payable March 17, 2034 | | $ | 3,609 | | $ | — | | $ | — | | $ | — | | $ | 3,609 | |
Subordinated Debentures, floating rate
of 6.44% payable September 16, 2037 | | | 5,155 | | | — | | | — | | | — | | | 5,155 | |
FHLB Loans weighted average fixed rate of 3.87% | | | 40,000 | | | 40,000 | | | — | | | — | | | — | |
Operating lease obligations | | | 2,127 | | | 426 | | | 473 | | | 417 | | | 811 | |
Salary continuation plan (1) | | | 1,016 | | | — | | | — | | | — | | | 1,016 | |
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Total | | $ | 51,907 | | $ | 40,426 | | $ | 473 | | $ | 417 | | $ | 10,591 | |
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(1) | Salary continuation plan obligations represents amount accrued as of December 31, 2007 under the terms of the plan. |
In addition to those obligations listed above, in the normal course of business, the Company will make cash distributions for, among other items, the payment of interest on interest bearing deposit accounts and debt obligations, payments for quarterly tax estimates and contributions to certain employee benefit plans.
CAPITAL RESOURCES
Capital adequacy is a measure of the amount of capital needed to sustain asset growth and act as a cushion for losses. Capital protects depositors and the Federal deposit insurance fund from potential losses and is a source of funds for the investments the Company needs to remain competitive. Historically, capital has been generated principally from the retention of earnings.
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 quarterly 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 qualifying subordinated debentures ) and “Tier 2” capital (defined as principally comprising the qualifying portion of subordinated debt and the qualifying portion of the ALL), the total amount not to exceed 100% of Tier 1 capital.
The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%.
At December 31, 2007, 2006 and 2005 the Company’s capital met all minimum regulatory requirements.
As of December 31, 2007, the most recent notification by the Federal Depository Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must meet the minimum ratios as set forth below. There are no conditions or events since that notification that management believes have changed the institution’s category. For more information on the Company’s and the Bank’s risk-based capital ratios, see note 11 “Shareholders’ Equity.”
52
IMPACT OF INFLATION
Inflation affects the Company’s financial position as well as its operating results. It is management’s opinion that the effects of inflation on the financial statements have not been material.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary unaudited results for the stated eight quarters:
Table 46: Quarterly Financial Results
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| | | | | 2007 | | | | | | | | 2006 | | | | |
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(In thousands, except per share data) | | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | |
| Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | |
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Diluted earnings per share | | $ | 0.13 | | $ | 0.33 | | $ | 0.35 | | $ | 0.33 | | $ | 0.39 | | $ | 0.39 | | $ | 0.33 | | $ | 0.31 | |
Basic earnings per share | | $ | 0.14 | | $ | 0.35 | | $ | 0.38 | | $ | 0.36 | | $ | 0.43 | | $ | 0.44 | | $ | 0.37 | | $ | 0.35 | |
Interest income | | $ | 7,667 | | $ | 7,937 | | $ | 8,132 | | $ | 7,506 | | $ | 7,440 | | $ | 6,942 | | $ | 6,321 | | $ | 5,792 | |
Net interest income | | $ | 4,175 | | $ | 4,241 | | $ | 4,653 | | $ | 4,331 | | $ | 4,573 | | $ | 4,463 | | $ | 4,199 | | $ | 4,072 | |
Provision for loan losses | | $ | 1,165 | | $ | 40 | | $ | 55 | | $ | 165 | | $ | 90 | | $ | 90 | | $ | 90 | | $ | 90 | |
Total non-interest income | | $ | 484 | | $ | 589 | | $ | 706 | | $ | 686 | | $ | 766 | | $ | 718 | | $ | 500 | | $ | 599 | |
Total non-interest expense | | $ | 2,585 | | $ | 2,711 | | $ | 3,002 | | $ | 2,699 | | $ | 2,719 | | $ | 2,602 | | $ | 2,452 | | $ | 2,587 | |
Income before taxes | | $ | 909 | | $ | 2,079 | | $ | 2,313 | | $ | 2,142 | | $ | 2,530 | | $ | 2,489 | | $ | 2,157 | | $ | 1,994 | |
Net Income | | $ | 513 | | $ | 1,301 | | $ | 1,409 | | $ | 1,326 | | $ | 1,517 | | $ | 1,512 | | $ | 1,307 | | $ | 1,207 | |
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53
|
MARKET PRICE FOR REGISTRANT’S COMMON EQUITY, DIVIDENDS AND
RELATED STOCKHOLDER MATTERS |
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The Company’s common stock is listed for trading on the NASDAQ Global Market under the symbol PSBC. Prior to July 12, 2005, trading information regarding the common stock was available via the OTC Bulletin Board. The following table, which summarizes trading activity during the Company’s last two fiscal years, is based on information provided by Yahoo.com Historical Quotes. The quotations reflect the price that would be received by the seller without retail mark-up, mark-down or commissions and may not have represented actual transactions.
Table 47: Quarterly Sales Prices
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| | Sales Prices | |
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Quarter Ended: | | High | | Low | | Volume | |
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December 31, 2007 | | | 18.89 | | | 12.44 | | | 132,100 | |
September 30, 2007 | | | 20.74 | | | 15.51 | | | 310,600 | |
June 30, 2007 | | | 21.90 | | | 16.75 | | | 149,300 | |
March 31, 2007 | | | 24.23 | | | 19.87 | | | 503,000 | |
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December 31, 2006 | | $ | 23.90 | | $ | 18.50 | | | 154,129 | |
September 30, 2006 | | $ | 19.25 | | $ | 17.65 | | | 379,539 | |
June 30, 2006 | | $ | 18.99 | | $ | 17.75 | | | 281,245 | |
March 31, 2006 | | $ | 18.50 | | $ | 16.26 | | | 100,211 | |
As of March 15, 2008, there were approximately 290 holders of record of the common stock of the Company.
DIVIDENDS
The Company’s primary source of cash is dividends from the Bank. The Bank’s ability to pay dividends is subject to certain regulatory requirements. The California Financial Code restricts the total dividend payment of any bank in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders’ during the same three-year period. As of December 31, 2007, the Bank had $15.2 million in retained earnings available for dividends to shareholders. In addition, the Company’s ability to pay dividends is subject to certain covenants contained in the indentures related to the trust preferred securities issued by the Trusts.
The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.
54
Stock Performance Graph
The following chart, compare the yearly percentage changes in cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2007., with (i) the Total Return Index for the Nasdaq Stock Market (U.S. Companies) (ii) the Standard and Poor’s 500 and (iii) the Total Return Index for the Nasdaq Bank Stocks, as reported by the Center for Research in Securities Prices. The comparison assumes $100.00 was invested on December 31, 2002, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 2002 to December 31, 2007, was obtained by using Nasdaq closing prices as of the last trading day of each year.
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| | Period Ending | |
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Index | | 12/31/2002 | | 12/31/2003 | | 12/31/2004 | | 12/31/2005 | | 12/31/2006 | | 12/31/2007 | |
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Pacific State Bancorp | | $ | 100.00 | | $ | 201.75 | | $ | 512.50 | | $ | 462.50 | | $ | 543.50 | | $ | 314.25 | |
Nasdaq Bank Stocks | | $ | 100.00 | | $ | 129.93 | | $ | 144.21 | | $ | 137.97 | | $ | 153.15 | | $ | 119.35 | |
Nasdaq U.S. | | $ | 100.00 | | $ | 150.01 | | $ | 162.89 | | $ | 165.13 | | $ | 180.85 | | $ | 198.60 | |
S&P 500 | | $ | 100.00 | | $ | 126.38 | | $ | 137.75 | | $ | 141.88 | | $ | 161.20 | | $ | 166.89 | |
55
Company and Bank Officers
Steven A. Rosso
President & Chief Executive Officer
Gary A. Stewart
Executive Vice President & Chief Credit Officer
JoAnne Roberts
Senior Vice President & Chief Financial Officer
Bank Officers
Laura Bunch
Senior Vice President
Regional Manager- March Lane
Stockton Main/Tracy/Hayward
Linda Ogata
Senior Vice President & Manager
Lodi
Rick Simas
Senior Vice President
Regional Manager
Lodi/Modesto/Angels
Camp/Arnold/Groveland
Ron Aschwanden
Senior Vice President
Calaveras County
Marie Verza
Senior Vice President
Manager - March Lane
Alan Lozito
Senior Vice President Branch
Manager Hayward
Sylvia Hanania
Vice President & Senior Operations Officer
Barbara Dennison
Vice President
Manager – Note Department
Rita Stolp
Vice President
Loan Officer – March Lane
Justin Garner
Vice President - Controller
James Murphy
Vice President
Commercial Loan Officer -Hayward
Venus Colombini
Vice President
Manager-Groveland
Patrick Coon
Vice President
Manager - Main
Glenn Scott
Vice President & MIS Director
Stephen Benton
Vice President
Commercial Loan Officer - Modesto
Lana Littell
Assistant Vice President
Credit Analyst
Shelly Urbanek
Assistant Vice President- Lending Services
Officer-Tracy
Jamie Vroege
Assistant Vice President-Operations Officer –
March Lane
Maureen Enright
Assistant Vice President-Loan Support Specialist
Laurence Held
Assistant Vice President
Business Development Officer
John Lozano
Assistant Vice President
Loan Officer – Tracy
Jennifer Higby
Assistant Vice President
Business Development Officer
Modesto
Jeffrey Dove
Loan Officer – Angels Camp
Jean Turpin
Branch Manager-Arnold
Marie Trigueiro
Personal Banking Officer – Angles Camp
Samuel Flores
Operations Officer – Hayward
56
Michelle Hendrix
Operations Officer - Groveland
Rosibel Rivera
Operations Officer – Modesto
Larry Hernandez
Operations Officer – Tracy
Touch Keo (Deborah)
Business Development Officer
Lori Menchaca
Operations Officer – Arnold
Traci Barnett
Operations Officer – Lodi
Susan Winans
Operations Officer – Angels Camp
Joanne Ford
Administration Officer
Erick Lacy
Commercial Loan Officer – Lodi
Phillip Harris
Financial Services Representative
Modesto
Stock Market Makers
First Security Van Casper
San Francisco, CA
Stephen L. Eddy
800-652-1747 ext. 727
Howe Barnes Investments, Inc.
Michael S. Hedrei
555 Market Street
18th floor
San Francisco, California 94105
800-800-4693
mhedrei@howebarnes.com
Keefe, Bruyette & Woods
Robert Sprotte
787 Seventh Ave, 4th Floor
New York, NY 10019
212-887-8960
rsprotte@kbw.com
Monroe Securities
Russel J. Feltes
343 W. Erie Street, Suite 410
Chicago, IL 60610
800-766-5560
rfeltes@monroesecurities.net
Seidler & Company
Troy Norlander
P.O. Box 1688
42605 Moonridge Road
Big Bear lake, CA 92315
800-288-2811
tnorlander@seidlercos.com
Sandler O’neill Partners, L.P.
Chris Munch
919 3rd Avenue 6th Floor
New York, New York 10022
212-466-8025
cmunch@sandleroniell.com
Wedbush Morgan Securities
4949 SW Meadows Road, Suite 100
Lake Oswego, OR 97035
Contact: Lisa Gallo
1-866-491-7828
lisa.gallo@wedbush.com
www.wedbush.com
McAdams Wright Ragen
Joey Warmenhoven
1211 S.W. Fifth Avenue, Suite 1400
Portland, OR 97204
503-422-4044
www.mwrinc.com
Wunderlich Securities
Mike Sammon
1-800-388-3851
Senior Vice President
200 W. Madison St. Suite 2950
Chicago, IL 60606.
FIG Partners
Tim Coffee
1175 Peachtree Street NE, Suite 2250
Atlanta, Georgia 30361
tcoffee@figpartners.com
Legal Counsel
Shapiro Buchman Provine &Patton LLP
John W. Carr
1333 N. California Blvd., Suite 350
Walnut Creek, CA 94596
Independent Registered Public Accounting Firm
Perry-Smith LLP
400 Capitol Mall, Suite 1200
Sacramento, CA 95814
Transfer Agent
Mellon Investor Services LLC
85 Challenger Rd
Ridgefield, Park, NJ 07660
57
Equity Research Analyst
Tim O’Brien
Sandler O’Neill + Partners. L.P.
455 Market Street, Ste 2070
San Francisco, CA 94105
415-978-5033
tobrien@sandleroneill.com
Don Worthington
Howe Barnes Hoefer & Arnett
555 Market Street
18th floor
San Francisco, California 94105
415-538-5733
dworthington@howebarnes.com
Customer Service
877-841-0110
TeleWave Banking
877-487-2265
Web Address
www.pacificstatebank.com
Trading Symbol
PSBC
Corporate Office
1899 West March Lane
Stockton, CA 95207
209-870-3214
Mailing address:
PO BOX 1649
Stockton, CA 95201
Shareholder Relations
The Company has adopted a Code of Ethics as defined in Item 406 of Regulation S-K that applies to its principal executive and financial officers and the persons performing similar functions. In addition, the Company files an Annual Report on Form 10-K with the Securities and Exchange Commission and Annual Report on Form FR Y-6 with the Federal Reserve Board. Copies of the Code of Ethics, and latest Annual Report on Form 10-K and Form FR Y-6 are available upon request. Requests for such information should be directed to:
JoAnne Roberts
Senior Vice President/Chief Financial Officer
Pacific State Bank
P. O. Box 1649
Stockton, CA 95201-1649
Member FDIC
58
Board Of Directors
Harold Hand, M.D., Inc
Chairman of the Board
Zeiter Eye Medical Group
Steven A. Rosso
President & Chief Executive Officer
Pacific State Bancorp & Pacific State Bank
Gary A. Stewart
Executive Vice President & Chief Credit Officer
Pacific State Bancorp & Pacific State Bank
Michael L. Dalton, C.P.A., Inc
Attentive Investment Managers, Inc
Maxwell M. Freeman
Freeman, D’Auito, Pierce, Gurev, Keeling & Wolf
A Professional Law Corporation
Patricia A. Hatton, M.D., Inc
Steven J. Kikuchi
Landscape Architect
Yoshikazu Mataga,
Owner, Mataga Buick Pontiac & GMC
Mataga Cadillac Tracy Pontiac Cadillac & GMC
Russell Munson
Owner, Wine & Roses Hotel Restaurant & Spa
Kathleen M. Verner*
Vice President
Verner Construction
