Exhibit 13.0
April 11, 2002
Dear: Shareholders, Customers, and Friends of Pacific State Bank
What a year 2001 was for Pacific State Bank and all of us. In retrospect, the
year 2001 that our bank, our communities, and our country experienced was truly
a challenge in many ways. For Pacific State Bank the year started out slowly;
requiring intense cost control evaluation, as well as strong asset and liability
management. In addition, Management anticipated the potential for prime rate
reductions, however we did not foresee the need for eleven reductions. As
management began restructuring our company's balance sheet and income statement
for the many financial issues that it anticipated; California was hit with
raising energy cost adding unplanned costs to all of our daily lives. The energy
issue so concerned and perplexed me that I contacted many of our small business
customers and friends to evaluate the effects of raising energy costs on them
and their businesses. Due to my research; and the information provided to me by
many of you on your plight to save energy, I was asked to address Senator
Michael Machado's Senate Committee on the effect of the "Energy Crisis" on the
banking industry. The committee was comprised of members of the California State
Senate Banking Committee, which heard testimony from a cadre of financial
institutions from all areas of the state. The testimony made to the committee
led to information that aided in protecting small business and it's dealings
with the large utilities in the state.
The 2nd and 3rd quarters brought solid financial growth and performance to the
Bank. Pacific State Bank increased earnings and grew assets at a strong and
steady pace. Then on September 11, 2001 all of our worlds stood still as our
nation dealt with the horror and destruction that was leveled onto New York City
and Washington D.C. As we all know the loss of life and financial issues that
were created by this devious act of cowardice were unprecedented. Pacific State
Bank and its staff made contributions of several thousand dollars toward the
9-11 fund.
As we began to restore a bit of normalcy back into our daily lives, Pacific
State Bank charged into the 4th quarter. The bank entered into an agreement to
purchase the deposits and loans of the California Bank and Trust's Stockton
Branch in December. Pacific State Bank also pushed profits to record levels
earning over $1,000,0000 for the second consecutive year. Year-end 2001 also
reported the fifth consecutive year of increased profits; Pacific State Bank's
management takes great pride in this accomplishment. 2001 also produced an
increase in Pacific State Bank's market price per share of more than 28%.
Increasing Pacific State Bank's Market Capitalization to $11,395,410. For
further information on Pacific State Bank and our stock visit our website at
www.pacificstatebank.com.
The 1st quarter of 2002 has proven to be just as exciting as 2001. Our
shareholders approved the purchase of the California Bank and Trust branch in
February and the transaction closed as scheduled on March 15th. The completed
purchase pushed the bank's total assets to record levels $145,000,000. In
addition to adding millions in new assets Pacific State Bank gained over 1,000
new customers from throughout San Joaquin County. Please join me in welcoming
all of our new friends, customers and staff to the Pacific State Bank family.
2002 marks Pacific State Bank's 15th year in operation. An important issue for
the Board of Directors and I is that of financial privacy; an important concern
for all of us. Pacific State Bank was formed based on the premises that
financial privacy is to be maintained at all times for our customers and
shareholders. Rest assure that Pacific State Bank will not sell your financial
information to a third party without your written consent. It is the bank's
policy to protect the privacy of all our customers and shareholders. You may
obtain a copy of our privacy policy from our website or by visiting any of our
seven branches.
In closing on May 9th the Pacific State Bank's 15th annual meeting will take on
a special connotation. This year's meeting is very important because we are
asking you the shareholder to approve the creation of Pacific State Bancorp, our
new bank holding company. So please return your proxy with a vote for approval
of the holding company and your Board of Directors as quickly as possible.
Pacific State Bancorp's development will enable the bank's successful growth
trends to continue into the future.
Thank you again for all of your support and investment in Pacific State Bank.
Pacific State Bank is a community bank and you are our community. Please visit
or call any of our seven branches to find out more about the banking services
you can obtain from Pacific State Bank
Sincerely,
Steven A. Rosso
President and Chief Executive Officer
SELECTED CONDENSED FINANCIAL DATA
(Dollars in thousands, except share data) Year Ended December 31,
--------------------------------------------------------------------------------
Statements of Income: 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total Interest Income $ 9,195 $ 9,720 $ 7,586 $ 6,428 $ 5,962
Net Interest Income 5,614 5,735 4,693 4,127 3,437
Provision for Loan Losses 383 300 330 228 225
Total Other Income 1,259 748 1,180 762 648
Net Income 1,036 1,009 743 476 276
Balance Sheets:
Total Assets 121,247 113,809 104,264 81,557 77,612
Total Loans 98,280 83,644 71,853 50,915 45,265
Allowance for Loan Losses
(ALLL) 1,172 1,001 796 568 391
Total Deposits 111,104 104,747 96,586 75,184 71,852
Shareholders' Equity $ 9,378 $ 8,047 $ 6,165 $ 5,783 $ 5,180
Performance Ratios:
Return on Average Assets .87% .92% .80% .64% .40%
Return on Average Equity 12.04% 13.93% 12.02% 8.88% 5.53%
Average Equity to Average
Assets 7.24% 6.57% 6.64% 7.16% 7.14%
Tier 1 Risk-Based Capital 9.15% 9.06% 8.40% 9.10% 8.60%
Total Risk-Based Capital 10.29% 10.20% 9.40% 10.00% 9.30%
Net Interest Margin 5.15% 5.66% 5.57% 6.23% 5.57%
Earning Assets to Total Assets 91.74% 90.80% 90.70% 86.10% 90.00%
Nonperforming Assets to
Total Assets .63% .79% .34% 1.25% .50%
ALLL to Total Loans 1.19% 1.20% 1.10% 1.10% .83%
Nonperforming Loans to ALLL 65.41% 74.33% 7.91% 15.85% 98.97%
Share Data (Common
Shares Outstanding) 759,694 731,299 656,523 643,242 619,540
Book Value Per Share $ 12.34 $ 11.00 $ 9.39 $ 8.99 $ 8.36
Basic Earnings Per Share $ 1.40 $ 1.41 $ 1.14 $ 0.76 $ 0.45
Diluted Earnings Per Share $ 1.32 $ 1.35 $ 1.08 $ 0.69 $ 0.41
PACIFIC STATE BANK
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
AND
INDEPENDENT AUDITOR'S REPORT
[LOGO] PS
INDEPENDENT AUDITOR'S REPORT
The Shareholders and
Board of Directors
Pacific State Bank
We have audited the accompanying balance sheet of Pacific State Bank as of
December 31, 2001 and 2000 and the related statements of Income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31,2001. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in a11 material respects, the financial position of Pacific State Bank as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31,2001, In
conformity with accounting principles generally accepted In the United States of
America.
/s/ Perry-Smith LLP
February 8, 2002
400 CAPITAL MALL, SUITE 1200, SACRAMENTO, CA 95814
916.441.1000 FAX 916.441.1110 URL www. perry-smith.com
2
PACIFIC STATE BANK
BALANCE SHEET
December 31, 2001 and 2000
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 5,439,720 $ 5,894,898
Federal funds sold 1,386,000 2,888,000
Investment securities (market value of $10,789,400
in 2001 and $16,860,100 in 2000) (Notes 2 and 6) 10,788,600 16,864,590
Loans, less allowance for loan losses of $1,171,608
in 2001 and $1,000,999 in 2000 (Notes 3, 7 and 11) 97,108,704 82,642,623
Other real estate 181,648 150,531
Bank premises and equipment, net (Note 4) 4,620,147 3,561,937
Accrued interest receivable and other assets (Note 10) 1,721,977 1,806,641
------------- -------------
$ 121,246,796 $ 113,809,220
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 21,205,315 $ 22,785,829
Interest bearing (Note 5) 89,898,323 81,961,476
------------- -------------
Total deposits 111,103,638 104,747,305
Accrued interest payable and other liabilities 765,219 1,015,147
------------- -------------
Total liabilities 111,868,857 105,762,452
------------- -------------
Commitments and contingencies (Note 7)
Shareholders' equity (Note 8):
Preferred stock - no par value; 2,000,000 shares
authorized; none issued and outstanding -- --
Common stock - no par value; 12,000,000
shares authorized; issued and outstanding - 759,694
shares in 2001 and 731,299 shares in 2000 6,192,188 5,955,337
Retained earnings 3,241,458 2,205,478
Accumulated other comprehensive loss (Notes 2 and 13) (55,707) (114,047)
------------- -------------
Total shareholders' equity 9,377,939 8,046,768
------------- -------------
$ 121,246,796 $ 113,809,220
============= =============
The accompanying notes are an integral
part of these financial statements.
3
PACIFIC STATE BANK
STATEMENT OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------- ---------- ----------
Interest income:
Interest and fees on loans $8,167,597 $8,244,959 $6,564,307
Interest on Federal funds sold 219,034 605,026 368,577
Interest on investment securities:
Taxable 555,042 656,156 440,709
Exempt from Federal income taxes 253,067 213,866 212,365
---------- ---------- ----------
Total interest income 9,194,740 9,720,007 7,585,958
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 5) 3,580,965 3,977,550 2,878,570
Interest on short-term borrowings (Note 6) 182 7,290 14,676
---------- ---------- ----------
Total interest expense 3,581,147 3,984,840 2,893,246
---------- ---------- ----------
Net interest income 5,613,593 5,735,167 4,692,712
Provision for loan losses (Note 3) 382,500 300,000 331,000
---------- ---------- ----------
Net interest income after provision
for loan losses 5,231,093 5,435,167 4,361,712
---------- ---------- ----------
Non-interest income:
Service charges 403,154 346,795 384,672
Rental income from other real estate 2,100 4,285 13,407
Net gain on sale of investments (Note 2) 69,067
Gain on sale of loans 427,520 151,661 538,986
Gain on sale of branch (Note 15) 20,002
Other 357,613 225,175 243,398
---------- ---------- ----------
Total non-interest income 1,259,454 747,918 1,180,463
---------- ---------- ----------
Other expenses:
Salaries and employee benefits (Notes 3
and 12) 2,082,906 2,173,799 1,999,444
Occupancy (Notes 4 and 7) 527,781 478,809 446,919
Furniture and equipment (Notes 4 and 7) 578,206 463,413 397,546
Other (Note 9) 1,745,674 1,503,882 1,612,697
---------- ---------- ----------
Total other expenses 4,934,567 4,619,903 4,456,606
---------- ---------- ----------
Income before income taxes 1,555,980 1,563,182 1,085,569
Income taxes (Note 10) 520,000 554,500 343,000
---------- ---------- ----------
Net income $1,035,980 $1,008,682 $ 742,569
========== ========== ==========
Basic earnings per share (Note 8) $ 1.40 $ 1.41 $ 1.14
======= ======= =======
Diluted earnings per share (Note 8) $ 1.32 $ 1.35 $ 1.08
======= ======= =======
The accompanying notes are an integral
part of these financial statements.
4
PACIFIC STATE BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Other
-------------------------- Compre-
Retained hensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
----------- ----------- ----------- ------------- -------------
Balance, January 1, 1999 643,242 $ 5,321,930 $ 454,227 $ 7,157 $ 5,783,314
Net income 742,569 742,569
Unrealized losses on available-for-sale
investment securities (439,406) (439,406)
Stock options exercised and related tax
benefit (Note 8) 13,281 78,364 78,364
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 656,523 5,400,294 1,196,796 (432,249) 6,164,841
Net income 1,008,682 1,008,682
Unrealized gains on available-for-sale
investment securities 318,202 318,202
Stock options exercised and related tax
benefit (Note 8) 8,276 56,293 56,293
Issuance of common stock (Note 8) 66,500 498,750 498,750
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 731,299 5,955,337 2,205,478 (114,047) 8,046,768
Net income 1,035,980 1,035,980
Unrealized gains on available-for-sale
investment securities (Note 2) 58,340 58,340
Stock options exercised and related tax
benefit (Note 8) 28,395 236,851 236,851
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 759,694 $ 6,192,188 $ 3,241,458 $ (55,707) $ 9,377,939
=========== =========== =========== =========== ===========
2001 2000 1999
---------- ----------- ---------
Comprehensive income (Note 13):
Net income $1,035,980 $ 1,008,682 $ 742,569
---------- ----------- ---------
Other comprehensive income (loss):
Unrealized holdings gains (losses) arising during the
year, net of tax 99,780 318,202 (439,406)
Less: reclassification adjustment for gains included
in net income, net of tax 41,440
---------- ----------- ---------
58,340 318,202 (439,406)
---------- ----------- ---------
Total comprehensive income $1,094,320 $ 1,326,884 $ 303,163
========== =========== =========
The accompanying notes are an integral
part of these financial statements.
5
PACIFIC STATE BANK
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,035,980 $ 1,008,682 $ 742,569
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 382,500 300,000 331,000
Deferred loan origination fees and costs,
net (108,257) (176,426) (42,963)
Depreciation and amortization 501,661 350,028 384,134
Net gain on available-for-sale investment
securities (69,067)
Net gain on sale of equipment (3,116)
Net decrease (increase) in loans held for sale 220,500 (220,500)
Provision for losses on other real estate 1,578 10,086
Decrease (increase) in accrued interest
receivable and other assets 191,629 (524,801) (32,520)
(Decrease) increase in accrued interest
payable and other liabilities (249,928) 38,730 423,832
Deferred tax benefit (81,000) (116,000) (159,000)
------------ ------------ ------------
Net cash provided by operating
activities 1,605,096 1,107,683 1,426,552
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from matured and called available-
for-sale investment securities 7,299,300 24,000,000 4,910,000
Proceeds from sale of available-for-sale
investment securities 3,551,478
Purchases of available-for-sale investment
securities (4,957,587) (21,798,720) (15,333,008)
Proceeds from principal repayments from
available-for-sale government-guaranteed
mortgage-backed securities 306,620 406,400 499,236
Proceeds from principal repayments from
held-to-maturity government-guaranteed
mortgage-backed securities 71,025 149,446 111,451
Net increase in loans (14,882,274) (11,183,301) (20,245,007)
Proceeds from sale of other real estate 109,255 144,938 16,067
Purchase of other real estate (78,546)
Capitalized other real estate costs (13,200) (10,140)
Proceeds from sale of bank premises and
equipment 9,700
Purchases of bank premises and equipment (1,563,537) (484,962) (1,088,399)
------------ ------------ ------------
Net cash used in investing activities (10,065,720) (8,769,699) (31,218,346)
------------ ------------ ------------
(Continued)
6
PACIFIC STATE BANK
STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 8,325,687 $ 5,337,995 $ 3,463,043
Net (decrease) increase in time deposits (1,969,354) 6,930,907 17,938,516
Sale of Columbia branch deposits and facility (4,015,281)
Proceeds from exercise of stock options 147,113 38,794 53,664
Proceeds from the issuance of common stock 498,750
Net (decrease) increase in short-term
borrowings (500,000) 500,000
----------- ----------- ------------
Net cash provided by financing
activities 6,503,446 8,291,165 21,955,223
----------- ----------- ------------
(Decrease) increase in cash and cash
equivalents (1,957,178) 629,149 (7,836,571)
Cash and cash equivalents at beginning of year 8,782,898 8,153,749 15,990,320
----------- ----------- ------------
Cash and cash equivalents at end of year $ 6,825,720 $ 8,782,898 $ 8,153,749
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 3,652,210 $ 3,595,256 $ 2,680,365
Income taxes $ 570,109 $ 983,000 $ 255,794
Non-cash investing activities:
Real estate acquired through foreclosure $ 141,950 $ 40,447
Net change in unrealized gain (loss) on
available-for-sale investment securities $ 90,431 $ 555,856 $ (744,737)
Supplemental disclosure related to sale:
On October 13, 2000, the Bank sold certain
assets and liabilities of the Columbia branch:
Deposits sold $(4,107,330)
Other liabilities (36,663)
Premises and equipment 13,153
Other assets 95,557
Gain on sale 20,002
-----------
Cash provided $(4,015,281)
===========
The accompanying notes are an integral
part of these financial statements.
7
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Pacific State Bank (the "Bank") commenced operations in 1987 and is a
California state-chartered member bank of the Federal Reserve System. The
Bank operates seven branches in California, including two branches in
Stockton and branches in Modesto, Groveland, Arnold, Angels Camp and
Tracy. An eighth branch in Columbia was sold in 2000 (Note 15). The Bank's
primary source of revenue is providing loans to customers who are
predominately small and middle-market businesses and individuals.
The accounting and reporting policies of the Bank conform with generally
accepted accounting principles and prevailing practices within the banking
industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2001.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and due from banks and Federal funds sold. Generally, Federal
funds are sold for one-day periods.
Investment Securities
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and
reported, net of taxes, as accumulated other comprehensive
income or loss within shareholders' equity.
o Held-to-maturity securities, which management has the positive
intent and ability to hold to maturity, reported at amortized
cost, adjusted for the accretion of discounts and amortization
of premiums.
Management determines the appropriate classification of its investments at
the time of purchase and may only change the classification in certain
limited circumstances. All transfers between categories are accounted for
at fair value.
Gains or losses on the sale of securities are computed on the specific
identification method. Interest earned on investment securities is
reported in interest income, net of applicable adjustments for accretion
of discounts and amortization of premiums. In addition, unrealized losses
that are other than temporary are recognized in earnings for all
investments.
8
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower of
principal balance or market value at the date of transfer, adjusted for
accretion of discounts. Interest is accrued daily based upon outstanding
loan balances. However, when, in the opinion of management, loans are
considered to be impaired and the future collectibility of interest and
principal is in serious doubt, loans are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent
payments on these loans, or payments received on nonaccrual loans for
which the ultimate collectibility of principal is not in doubt, are
applied first to earned but unpaid interest and then to principal.
An impaired loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due (including both
principal and interest) in accordance with the contractual terms of the
loan agreement.
Loan origination fees, commitment fees, direct loan origination costs and
purchase premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the
contractual term of the loan. The unamortized balance of deferred fees and
costs is reported as a component of net loans.
Loan Sales and Servicing
Government Guaranteed Loans
Included in the portfolio are loans which are 75% to 90% guaranteed by the
Small Business Administration (SBA), Business and Industrial, Farmer Mac
and California Capital. The guaranteed portion of these loans may be sold
to a third party, with the Bank retaining the unguaranteed portion. The
Bank generally receives a premium in excess of the adjusted carrying value
of the loan at the time of sale. The Bank may be required to refund a
portion of the sales premium if the borrower defaults or prepays within
ninety days of the settlement date. At December 31, 2001, there were no
premiums subject to these recourse provisions.
The Bank's investment in the loan is allocated between the retained
portion of the loan, the servicing asset, the interest-only (IO) strip,
and the sold portion of the loan based on their relative fair values on
the date the loan is sold. The gain on the sold portion of the loan is
recognized as income at the time of sale. The carrying value of the
retained portion of the loan is discounted based on the estimated value of
a comparable non-guaranteed loan. The servicing asset is amortized over
the estimated life of the related loan. Assets (accounted for as
interest-only (IO) strips) are recorded at the fair value of the
difference between note rates and rates paid to purchasers (the interest
spread) and contractual servicing fees, if applicable. The IO strip asset
is not significant at December 31, 2001. Significant future prepayments of
these loans will result in the recognition of additional amortization of
related servicing assets and an adjustment to the carrying value of
related IO strips.
The Bank serviced government-guaranteed loans for others totaling
$20,175,000 and $20,062,000 as of December 31, 2001 and 2000,
respectively.
9
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Sales and Servicing (Continued)
Servicing Rights
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing, and
are subsequently amortized in proportion to and over the period of the
related net servicing income or expense. Servicing assets are periodically
evaluated for impairment. Servicing rights were not considered material
for disclosure purposes.
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses related
to impaired loans and other losses that can be expected to occur in the
normal course of business. The determination of the allowance is based on
estimates made by management, to include consideration of the character of
the loan portfolio, specifically identified problem loans, potential
losses inherent in the portfolio taken as a whole and economic conditions
in the Bank's service area.
Loans determined to be impaired or classified are individually evaluated
by management for specific risk of loss. In addition, reserve factors are
assigned to currently performing loans based on management's assessment of
the following for each identified loan type: (1) inherent credit risk, (2)
historical losses and, (3) where the Bank has not experienced losses, the
loss experience of peer banks. Management also computes specific and
expected loss reserves for loan commitments. These estimates are
particularly susceptible to changes in the economic environment and market
conditions.
The Bank's Loan Committee reviews the adequacy of the allowance for loan
losses at least quarterly, to include consideration of the relative risks
in the portfolio and current economic conditions. The allowance is
adjusted based on that review if, in the judgment of the Loan Committee
and management, changes are warranted.
This allowance is established through a provision for loan losses which is
charged to expense. Additions to the allowance are expected to maintain
the adequacy of the total allowance after net charge-offs and loan growth.
The allowance for loan losses at December 31, 2001 and 2000, respectively,
reflects management's estimate of possible losses in the portfolio.
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the Bank's recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property, net of
estimated selling costs, is charged against the allowance for loan losses.
A valuation allowance for losses on other real estate is maintained to
provide for temporary declines in value. The allowance is established
through a provision for losses on other real estate which is included in
other expenses. Subsequent gains or losses on sales or writedowns
resulting from permanent impairments are recorded in other income or
expenses as incurred.
10
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful lives
of the related assets. The useful lives of Bank premises are estimated to
be twenty to twenty-seven years. The useful lives of furniture, fixtures
and equipment are estimated to be two to seven years. Leasehold
improvements are amortized over the life of the asset or the life of the
related lease, whichever is shorter. When assets are sold or otherwise
disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts, and any resulting gain or loss
is recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement and
tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. On the balance sheet, net deferred tax assets
are included in accrued interest receivable and other assets.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders 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, such as stock options, result in the issuance of
common stock which shares in the earnings of the Bank. The treasury stock
method has been applied to determine the dilutive effect of stock options
in computing diluted EPS.
Stock-Based Compensation
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Bank's stock at the date of grant over the exercise price. However, if
the fair value of stock-based compensation computed under a fair value
based method, as prescribed in Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, is material to the
financial statements, pro forma net income and earnings per share are
disclosed as if the fair value method had been applied.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
11
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, to replace SFAS No. 125 which was
issued in June 1996. The original statement addressed issues related to
transfers of financial assets in which the transferor has some continuing
involvement with the transferred assets or with the transferee. SFAS No.
140 resolves implementation issues which arose as a result of SFAS No.
125, but carries forward most of the provisions of the original statement.
SFAS 140 was effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not believe
the adoption of this statement has had a significant impact on the Bank's
financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses the financial accounting and reporting for business
combinations and requires the use of a single method to account for
business combinations, the purchase method of accounting. In addition,
SFAS No. 141 requires that intangible assets be recognized as assets apart
from goodwill if they meet one of two criteria, the contractual-legal
criterion or the separability criterion. SFAS No. 141 applies to all
business combinations for which the date of acquisition is July 1, 2001 or
later.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Pursuant to SFAS No. 142, goodwill and other intangible assets
that have indefinite useful lives will be evaluated periodically for
impairment rather than amortized. The provisions of this statement apply
to financial statements for fiscal years beginning after December 15,
2001, except for goodwill or other intangible assets acquired after June
30, 2001 for which SFAS No. 142 is immediately effective. Management does
not believe the adoption of SFAS No. 141 and SFAS No. 142 will have a
significant impact on the Bank's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provision of Accounting
Principles Board Opinion No. 30, Reporting Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value less costs to
sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15,
2001 and, generally, are to be applied prospectively. Management does not
believe the adoption of this statement will have a significant impact on
the Bank's financial position or results of operations.
12
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 2001 and 2000 consisted of the following:
Available-for-Sale:
2001
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government
agencies $ 3,616,277 $ 56,148 $ (3,925) $ 3,668,500
Obligations of states
and political sub-
divisions 5,592,590 63,321 (220,011) 5,435,900
Government guaranteed
mortgage-backed
securities 626,928 18,834 (862) 644,900
Corporate bonds 501,724 313 (237) 501,800
Federal Reserve
Bank stock 177,600 177,600
Farmer Mac Home
Administration stock 3,100 3,100
------------ ------------ ------------ ------------
$ 10,518,219 $ 138,616 $ (225,035) $ 10,431,800
============ ============ ============ ============
Net unrealized losses on available-for-sale investment securities totaling
$86,419 were recorded, net of $30,712 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at December 31, 2001. Proceeds,
gross realized gains and gross realized losses from the sale of
available-for-sale investment securities for the year ended December 31, 2001
totaled $3,551,478, $73,111 and $(4,044), respectively.
2000
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government
agencies $ 7,040,389 $ 37,549 $ (7,938) $ 7,070,000
Obligations of states
and political sub-
divisions 3,989,655 12,232 (203,587) 3,798,300
Government guaranteed
mortgage-backed
securities 4,645,861 19,859 (19,620) 4,646,100
Corporate bonds 755,745 (15,345) 740,400
Federal Reserve
Bank stock 177,600 177,600
Farmer Mac Home
Administration stock 3,100 3,100
------------ ------------ ------------ ------------
$ 16,612,350 $ 69,640 $ (246,490) $ 16,435,500
============ ============ ============ ============
13
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
Net unrealized losses on available-for-sale investment securities totaling
$176,850 were recorded, net of $62,803 in tax benefits, as accumulated
other comprehensive loss within shareholders' equity at December 31, 2000.
There were no sales of available-for-sale investment securities for the
years ended December 31, 2000 and 1999.
Held-to-Maturity:
2001
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Government guaranteed
mortgage-backed
securities $ 356,800 $ 2,534 $ (1,734) $ 357,600
============ ============ ============ ============
2000
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Government guaranteed
mortgage-backed
securities $ 429,090 $ 2,012 $ (6,502) $ 424,600
============ ============ ============ ============
There were no sales or transfers of held-to-maturity investment
securities during the years ended December 31, 2001, 2000 and 1999.
14
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities at
December 31, 2001 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers of
the securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
-------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
Within one year $ 1,000,123 $ 1,003,700
After one year
through five years 4,387,070 4,485,800
After five years
through ten years 1,905,912 1,919,000
After ten years 2,417,486 2,197,700
------------ ------------ ------------ ------------
9,710,591 9,606,200
Investment securities
not due at a single
maturity date:
Government guar-
anteed mortgage-
backed securities 626,928 644,900 $ 356,800 $ 357,600
Federal Reserve
Bank stock 177,600 177,600
Farmer Mac Home
Administration
stock 3,100 3,100
------------ ------------ ------------ ------------
$ 10,518,219 $ 10,431,800 $ 356,800 $ 357,600
============ ============ ============ ============
Investment securities with amortized costs totaling $5,520,059 and
$6,255,074 and market values totaling $5,534,000 and $6,232,900 were
pledged to secure treasury tax and loan accounts, public deposits and
short-term borrowings at December 31, 2001 and 2000, respectively.
3. LOANS
Outstanding loans are summarized below:
December 31,
----------------------------
2001 2000
------------ ------------
Commercial $ 26,147,571 $ 26,246,448
Agricultural 7,930,969 7,881,574
Real estate-mortgage 36,830,356 29,703,257
Real estate-construction 23,561,128 16,874,998
Installment 3,493,095 2,728,409
------------ ------------
97,963,119 83,434,686
Deferred loan origination costs, net 317,193 208,936
Allowance for loan losses (1,171,608) (1,000,999)
------------ ------------
$ 97,108,704 $ 82,642,623
============ ============
15
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. LOANS (Continued)
Changes in the allowance for loan losses were as follows:
Year Ended December 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
Balance, beginning of year $ 1,000,999 $ 796,030 $ 568,109
Provision charged to operations 382,500 300,000 331,000
Losses charged to allowance (228,401) (96,183) (103,079)
Recoveries 16,510 1,152
----------- ----------- -----------
Balance, end of year $ 1,171,608 $ 1,000,999 $ 796,030
=========== =========== ===========
The recorded investment in impaired loans totaled $585,000 and $744,000 at
December 31, 2001 and 2000, respectively. There were no valuation
allowances for impaired loans as determined under SFAS No. 114 at December
31, 2001 and 2000. The average recorded investment in impaired loans for
the years ended December 31, 2001, 2000 and 1999 was $787,000, $418,000
and $333,000, respectively. The Bank recognized $106,000 in interest
income on these loans under the cash basis method during 2000. The Bank
did not recognize interest income on impaired loans during 2001 and 1999.
At December 31, 2001 and 2000, nonaccrual loans totaled $585,000 and
$744,000, respectively. Interest foregone on nonaccrual loans totaled
$73,755, $39,973 and $3,240 for the years ended December 31, 2001, 2000
and 1999, respectively.
Salaries and employee benefits totaling $654,941, $387,362 and $171,410
have been deferred as loan origination costs for the years ended December
31, 2001, 2000 and 1999, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
------------------------------
2001 2000
----------- -----------
Land $ 1,793,101 $ 1,140,311
Bank premises 1,487,797 1,190,797
Furniture, fixtures and equipment 3,066,371 2,667,385
Leasehold improvements 472,058 544,555
Construction in progress 321,516 62,935
----------- -----------
7,140,843 5,605,983
Less accumulated depreciation
and amortization (2,520,696) (2,044,046)
----------- -----------
$ 4,620,147 $ 3,561,937
=========== ===========
Depreciation and amortization included in occupancy, furniture and equipment
expense totaled $505,327, $404,852 and $343,646 for the years ended December 31,
2001, 2000 and 1999, respectively.
16
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
--------------------------------
2001 2000
----------- -----------
Savings $ 3,980,262 $ 4,225,483
Money market 26,763,115 19,761,518
NOW accounts 11,245,505 8,095,680
Time, $100,000 or more 23,576,075 20,747,453
Other time 24,333,366 29,131,342
----------- -----------
$89,898,323 $81,961,476
=========== ===========
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
--------------
2002 $43,231,963
2003 3,761,482
2004 886,624
2005 26,488
2006 2,884
-----------
$47,909,441
===========
Interest expense recognized on interest-bearing deposits consisted of the
following:
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Savings $ 23,352 $ 84,728 $ 108,004
Money market 613,333 837,483 580,444
NOW accounts 65,619 140,510 169,895
Time, $100,000 or more 1,100,273 1,071,334 786,622
Other time 1,778,388 1,843,495 1,233,605
---------- ---------- ----------
$3,580,965 $3,977,550 $2,878,570
========== ========== ==========
6. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has unsecured short-term borrowing arrangements totaling
$4,000,000 with three of its correspondent banks. There were no borrowings
outstanding under these arrangements at December 31, 2001 and 2000.
Additionally, the Bank has a borrowing arrangement with the Federal
Reserve Bank secured by investment securities with amortized costs
totaling $212,000 and estimated market values totaling $215,000. At
December 31, 2001 and 2000, the Bank had no outstanding borrowings under
this arrangement.
17
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES
Leases
The Bank leases branch offices and certain equipment under non-cancelable
operating leases. The leases expire on various dates through 2009 and have
various renewal options ranging from five to ten years. The lease on one
branch office includes scheduled rent increases. The total amount of the
rent payments is being charged to expense using a straight-line method
over the term of the lease. The Bank has recorded a deferred credit to
reflect the excess of rent expense over cash payments since inception of
the lease. Future minimum lease payments are as follows:
Year Ending
December 31,
-------------
2002 $ 254,000
2003 239,000
2004 239,000
2005 240,000
2006 241,000
Thereafter 510,000
----------
$1,723,000
==========
Rental expense included in occupancy, furniture and equipment expense
totaled $267,000, $271,000 and $245,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business in order to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments consist of commitments to extend credit
and letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and letters of credit as it
does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
-------------------------------
2001 2000
----------- -----------
Commitments to extend credit $39,564,000 $29,590,000
Letters of credit $ 2,211,000 $ 245,000
18
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable,
inventory, equipment, income-producing commercial properties and
residential real estate.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance or financial obligation of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
At December 31, 2001, commercial loan commitments represent approximately
42% of total commitments and are generally secured by various assets of
the borrower. Real estate loan commitments represent approximately 53% of
total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 75% to 80%. Consumer loan commitments
represent the remaining 5% of total commitments and are generally
unsecured. In addition, the majority of the Bank's commitments have
variable interest rates.
Significant Concentrations of Credit Risk
The Bank's customers are primarily located in San Joaquin, Stanislaus,
Calaveras and Tuolumne Counties. Approximately 27% of the Bank's loans are
for general commercial uses, including professional, retail and small
business, and 8% are for agricultural uses. Additionally, 24% of the
Bank's loans are for the construction of residential and commercial real
estate and 37% are loans which are collateralized by mortgages on
residential and commercial real estate. Generally, real estate loans are
secured by real property while commercial and other loans are secured by
funds on deposit and business or personal assets. The remaining 4% of the
Bank's loans are consumer installment loans. Repayment is generally
expected from the proceeds of property sales and permanent financing for
real estate construction loans and borrower cash flows for other loans.
Contingencies
The Bank is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to such actions will not materially affect
the financial position or results of operations of the Bank.
Federal Reserve Requirements
Banks are required to maintain a combination of reserves with the Federal
Reserve Bank and vault cash equal to a percentage of their reservable
deposits. The reserve balances required at December 31, 2001 and 2000 were
maintained entirely in the form of vault cash.
19
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHAREHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors, all shareholders of record
will be entitled to receive dividends. 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 a member of the Federal
Reserve System, the Bank is also subject to similar restrictions imposed
by Federal law. At December 31, 2001, retained earnings of $2,787,231 were
free of such restrictions.
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Basic Earnings Per Share
Numerator:
Net income $1,035,980 $1,008,682 $ 742,569
Denominator:
Weighted average shares outstanding 742,241 714,548 649,767
---------- ---------- ----------
Basic earnings per share $ 1.40 $ 1.41 $ 1.14
========== ========== ==========
Diluted Earnings Per Share
Numerator:
Net income $1,035,980 $1,008,682 $ 742,569
Denominator:
Weighted average shares outstanding 742,241 714,548 649,767
Dilutive effect of stock options 42,531 34,407 36,863
---------- ---------- ----------
784,772 748,955 686,630
---------- ---------- ----------
Diluted earnings per share $ 1.32 $ 1.35 $ 1.08
========== ========== ==========
The following options were not included in the computation of diluted
earnings per share for the year ended December 31, 2001 because their
exercise prices were greater than the average market prices of the Bank's
common shares: options to purchase 11,500 shares of common stock at a
price of $10.38 outstanding during the first quarter. The following
options were not included in the computation of diluted earnings per share
for the year ended December 31, 2000 because their exercise prices were
greater than the average market prices of the Bank's common shares:
options to purchase 12,500 shares of common stock at a price of $10.38
outstanding during the third quarter; and options to purchase 250 shares
at a price of $10.13 outstanding during the first and second quarters. The
following options were excluded in the computation of diluted earnings per
share for the year ending December 31, 1999 because their exercise prices
were greater than the average market prices of the Bank's common shares:
options to purchase 35,250 shares of common stock at prices ranging from
$8.13 to $10.75 outstanding during the first, second and third quarters of
1999; and options to purchase 18,250 shares of common stock at prices
ranging from $8.75 to $10.75 outstanding during the entire 1999 fiscal
year.
20
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHAREHOLDERS' EQUITY (Continued)
Stock Options
During 1997 and 1987, the Bank established Stock Option Plans. At December
31, 2001, 113,208 shares of common stock are reserved under the 1997 plan
for issuance to employees and directors through incentive and nonstatutory
agreements. Outstanding options under the 1987 Plan are exercisable until
their expiration; however, no new options will be granted under that plan.
The plans require that the option price may not be less than the fair
market value of the stock at the date the option is granted, and that the
stock must be paid in full at the time the option is exercised. The
options under the plans expire on dates determined by the Board of
Directors, but not later than ten years from the date of grant. The
vesting period is determined by the Board of Directors and is generally
over five years.
A summary of the combined activity within the plans follows:
2001 2000 1999
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Options outstanding,
beginning of year 121,213 $ 6.51 121,800 $ 5.98 140,081 $ 5.93
Options granted 2,500 $ 10.00 28,000 $ 9.50 1,000 $ 8.13
Options exercised (28,395) $ 5.18 (8,276) $ 4.69 (13,281) $ 4.05
Options canceled (3,000) $ 10.38 (20,311) $ 8.02 (6,000) $ 8.54
-------- -------- --------
Options outstanding,
end of year 92,318 $ 6.88 121,213 $ 6.51 121,800 $ 5.98
======== ======== ========
Options exercisable,
end of year 68,298 $ 6.02 86,563 $ 5.39 98,200 $ 5.35
======== ======== ========
A summary of options outstanding at December 31, 2001 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2001 Life 2001
- ------------------------ ------------ ----------- ------------
$ 5.00 45,469 1.5 years 45,469
$ 4.00 3,799 2.3 years 3,799
$ 8.50 9,200 5.0 years 7,360
$ 8.88 7,900 5.5 years 6,320
$ 10.13 250 6.3 years 150
$ 8.75 1,400 6.7 years 840
$ 8.80 13,500 8.0 years 2,700
$ 10.38 8,300 8.6 years 1,660
$ 10.00 2,500 9.5 years
------------ -----------
92,318 68,298
============ ===========
21
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHAREHOLDERS' EQUITY (Continued)
Stock Offering
In February 2000, the Bank issued 66,500 shares of the Bank's no par value
common stock to a director in a private placement at a price of $7.50 per
share resulting in proceeds to the Bank of $498,750.
Regulatory Capital
The Bank is subject to certain regulatory capital requirements promulgated
by the Federal Deposit Insurance Corporation (FDIC). Failure to meet these
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
1 capital to risk-weighted assets and of Tier 1 capital to average assets.
Each of these components is defined in the regulations. Management
believes that the Bank met all its capital adequacy requirements as of
December 31, 2001 and 2000.
In addition, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt
correction action. To be considered well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth below. There are no conditions or events since
December 31, 2001 that management believes have changed the Bank's
category.
2001 2000
---------------------- ---------------------
Amount Ratio Amount Ratio
----------- ------- ---------- -------
Leverage Ratio
Pacific State Bank $ 9,363,000 7.8% $8,059,000 6.8%
Minimum requirement for "Well-Capitalized" institution $ 5,974,000 5.0% $5,935,000 5.0%
Minimum regulatory requirement $ 4,779,000 4.0% $4,748,000 4.0%
Tier 1 Risk-Based Capital Ratio
Pacific State Bank $ 9,363,000 9.1% $8,059,000 9.1%
Minimum requirement for "Well-Capitalized" institution $ 6,184,000 6.0% $5,321,000 6.0%
Minimum regulatory requirement $ 4,122,000 4.0% $3,547,000 4.0%
Total Risk-Based Capital Ratio
Pacific State Bank $10,535,000 10.2% $9,060,000 10.2%
Minimum requirement for "Well-Capitalized" institution $10,306,000 10.0% $8,867,000 10.0%
Minimum regulatory requirement $ 8,245,000 8.0% $7,094,000 8.0%
22
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. OTHER EXPENSES
Other expenses consisted of the following:
Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Professional fees $ 319,461 $ 192,441 $ 171,923
Advertising and promotion 81,978 149,958 166,372
Postage, stationery and supplies 177,262 135,392 154,448
Telephone 126,226 138,547 122,104
Directors fees 57,700 115,877 96,782
Other operating expenses 983,047 771,667 901,068
---------- ---------- ----------
$1,745,674 $1,503,882 $1,612,697
========== ========== ==========
10. INCOME TAXES
Income tax expense for the years ended December 31, 2001, 2000 and 1999
consisted of the following:
2001 2000 1999
---------- ---------- ----------
Current:
Federal $ 478,000 $ 528,000 $ 408,000
State 123,000 142,500 94,000
---------- ---------- ----------
601,000 670,500 502,000
---------- ---------- ----------
Deferred:
Federal (58,000) (91,000) (121,000)
State (23,000) (25,000) (38,000)
---------- ---------- ----------
(81,000) (116,000) (159,000)
---------- ---------- ----------
$ 520,000 $ 554,500 $ 343,000
========== ========== ==========
23
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
December 31,
-------------------------------
2001 2000
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 447,000 $ 374,000
Bank premises and equipment 47,000 37,000
Future benefit of State tax deduction 32,000 46,000
Organization costs 5,000 14,000
Deposit purchase premium 37,000 29,000
Unrealized losses on available-for-sale
investment securities 31,000 63,000
----------- -----------
Total deferred tax assets 599,000 563,000
----------- -----------
Deferred tax liabilities:
Accrual to cash conversion (21,000)
Future federal liability of state deferred
tax asset (41,000) (33,000)
Accretion of discount on investment
securities (36,000) (36,000)
----------- -----------
Total deferred tax liabilities (77,000) (90,000)
----------- -----------
Net deferred tax assets $ 522,000 $ 473,000
=========== ===========
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rates to operating income before income
taxes. The items comprising these differences for the years ended December
31, 2001, 2000 and 1999 consisted of the following:
2001 2000 1999
------------------------ ------------------------ -----------------------
Amount Rate % Amount Rate % Amount Rate %
--------- --------- --------- --------- --------- ---------
Federal income tax
expense, at statu-
tory rate $ 529,033 34.0 $ 531,482 34.0 $ 369,093 34.0
State franchise tax,
net of Federal tax
effect 62,416 4.0 79,402 5.1 50,398 4.6
Interest on obligations
of states and political
subdivisions (81,840) (5.3) (40,448) (2.6) (42,782) (3.9)
Other 10,391 .7 (15,936) (1.0) (33,709) (3.1)
--------- --------- --------- --------- --------- ---------
Total income tax
expense $ 520,000 33.4 $ 554,500 35.5 $ 343,000 31.6
========= ========= ========= ========= ========= =========
24
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including executive officers and directors. These
transactions include borrowings from the Bank with substantially the same
terms, including rates and collateral, as loans to unrelated parties. The
following is a summary of the aggregate activity involving related party
borrowers during 2001:
Balance, January 1, 2001 $ 3,370,000
Disbursements 2,053,000
Amounts repaid (1,622,000)
-----------
Balance, December 31, 2001 $ 3,801,000
===========
Undisbursed commitments to related
parties, December 31, 2001 $ 910,000
===========
12. EMPLOYEE BENEFIT PLAN
In 1990, the Bank initiated a 401(k) Savings Plan. Under the provisions of
the plan, the Bank matches one-half of the employees' contributions up to
a maximum of three percent of an employee's annual salary. All employees
who are at least 21 years of age and have completed one year of service
are eligible under the plan. The Bank's contributions vest at a rate of
20% after one year of service and an additional 20% for each year
thereafter. Contributions to the plan totaled $28,000 in 2001 and $27,000
for the years ended December 31, 2000 and 1999.
13. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income (loss)
that historically has not been recognized in the calculation of net
income. Unrealized gains and losses on the Bank's available-for-sale
investment securities are included in other comprehensive income (loss).
Total comprehensive income and the components of accumulated other
comprehensive income (loss) are presented in the Statement of Changes in
Shareholders' Equity.
At December 31, 2001, 2000 and 1999, the Bank held securities classified
as available-for-sale which had unrealized gains (losses) as follows:
2001 2000 1999
--------- --------- ---------
Other comprehensive income (loss):
Unrealized holding gains (losses) $ 159,498 $ 555,856 $(744,737)
Tax (expense) benefit on unrealized
holding (gains) losses (59,718) (237,654) 305,331
--------- --------- ---------
Net unrealized holding gains (losses) 99,780 318,202 (439,406)
--------- --------- ---------
Less: reclassification adjustment for gains
included in net income 69,067
Tax benefit on reclassification adjustment (27,627)
--------- --------- ---------
Net reclassification adjustment 41,440
--------- --------- ---------
Total other comprehensive income (loss) $ 58,340 $ 318,202 $(439,406)
========= ========= =========
25
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which it
is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information about
the financial instruments. These estimates do not reflect any premium or
discount that could result from offering the Bank's entire holdings of a
particular financial instrument for sale at one time, nor do they attempt
to estimate the value of anticipated future business related to the
instruments. In addition, the tax ramifications related to the realization
of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
Because no market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the fair values presented.
The following methods and assumptions were used by management to estimate
the fair value of its financial instruments at December 31, 2001 and 2000:
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
Loans: For variable-rate loans that reprice frequently with no significant
change in credit risk, fair values are based on carrying values. The fair
values for the remaining loans are estimated using discounted cash flow
analyses, using interest rates being offered at each reporting date for
loans with similar terms to borrowers of comparable creditworthiness. The
carrying amount of accrued interest receivable approximates its fair
value.
Deposits: The fair values for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date represented by their
carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis using interest rates
offered at each reporting date by the Bank for certificates with similar
remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
26
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Commitments to extend credit: Commitments to extend credit are primarily
for variable rate loans. For these commitments, there is no difference
between the committed amounts and their fair values. Commitments to fund
fixed rate loans and letters of credit are at rates which approximate fair
value at each reporting date.
December 31, 2001 December 31, 2000
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 5,439,720 $ 5,439,720 $ 5,894,898 $ 5,894,898
Federal funds sold 1,386,000 1,386,000 2,888,000 2,888,000
Investment securities 10,788,600 10,789,400 16,864,590 16,860,100
Loans, net 97,108,704 97,291,526 82,642,623 82,462,400
Accrued interest receivable 847,007 847,007 896,987 896,987
------------ ------------ ------------ ------------
$115,570,058 $115,753,653 $109,187,098 $109,002,385
============ ============ ============ ============
Financial liabilities:
Deposits $111,103,638 $111,302,759 $104,747,305 $104,891,500
Accrued interest payable 773,556 773,556 844,619 844,619
------------ ------------ ------------ ------------
$111,877,194 $112,076,315 $105,591,924 $105,736,119
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 39,564,000 $ 39,564,000 $ 29,590,000 $ 29,590,000
Standby letters of credit 2,211,000 2,211,000 245,000 245,000
------------ ------------ ------------ ------------
$ 41,775,000 $ 41,775,000 $ 29,835,000 $ 29,835,000
============ ============ ============ ============
15. BRANCH SALE
On October 13, 2000, the Bank sold certain assets and liabilities of the
Columbia branch to another financial institution, summarized as follows:
Cash provided $4,015,281
Fair value of fixed assets sold 13,153
Fair value of other assets and liabilities sold, net 58,894
Gain on sale 20,002
----------
Deposits sold $4,107,330
==========
16. SUBSEQUENT EVENT
The Bank has entered into a Purchase and Assumption Agreement (P&A
Transaction) dated December 6, 2001, with California Bank & Trust (CBT)
pursuant to which the Bank has agreed to acquire assets (consisting mainly
of loans) and assume liabilities (consisting mainly of deposits and safe
deposit boxes and related agreements) of CBT's branch office located at
4603 N. Pershing Avenue in Stockton, California.
27
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
16. SUBSEQUENT EVENT (Continued)
The purchase price for the P&A Transaction is expected to be approximately
$9.25 million, and will be equal to the sum of the book value of the loans
to be acquired and a "premium" equal to 5% of the total amount of deposits
to be acquired. At the closing of the P&A Transaction, CBT has the right
to apply up to $481,000 of the purchase price towards the purchase of up
to 37,000 shares of Pacific State Bank common stock, representing
approximately 5% of the outstanding shares of Pacific State Bank. Within
60 days after the closing of the P&A Transaction, the Bank has the right
to require CBT to repurchase any loan which was acquired in the
transaction.
Upon approval of the P&A Transaction by the Department of Financial
Institutions, the Federal Reserve Bank and the Bank's shareholders, the
P&A Transaction is expected to close in the first quarter of 2002.
28
Business of the Bank
The Bank has engaged since November 2, 1987 in a general commercial
banking business, primarily in Stockton and San Joaquin County, and 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 Bank as of January 28,
2002 had 56 employees, including 25 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. However, about 61% of the Bank's loan portfolio
is concentrated in real estate loans which are secured by commercial or
residential real estate. The Bank is a member of the Federal Reserve System.
The Bank's main office is located at 6 So. El Dorado Street; additional
branches are located elsewhere in Stockton and in the communities of Angels
Camp, Arnold, Groveland, Modesto and Tracy, California. Executive offices are
located at 1889 W. March Lane, adjacent to the Bank's second Stockton branch.
Total deposits of $111.1 million as of December 31, 2001, were held by the Bank,
$25.8 million (23.2%) in the Main Office, $32.0 million (28.8%) in the March
Lane (Stockton) branch, $17.5 million (15.8%) in the Modesto branch, $10.7
million (9.6%) in the Angels Camp branch, $5.9 million (5.3%) in the Arnold
branch, $7.8 million (7.0%) in the Groveland branch and $11.4 million (10.3%) in
the Tracy branch.
Business Plan
The focus of the Bank's business plan is to attract "middle market"
accounts, but not to the exclusion of any other business which the Bank can
reasonably and profitably attract. In order to provide a level of service to
attract such customers, the Bank 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 Bank offers a 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, real estate developers and accountants; and accounts of
small to medium-sized businesses engaged in retail, wholesale, light industrial
and service activities.
Product Lines and Services
The Bank currently offers the following general banking services at all of
its branches: commercial, construction 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, travelers' checks, 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 (Automated Teller Machine)
29
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 Bank's primary correspondent relationship. The Bank
currently also has correspondent relationships with City National Bank in
Beverly Hills, Bank of America in San Francisco, First Tennessee Bank in
Memphis, Tennessee, Compass Bank in Birmingham, Alabama, Wells Fargo Bank and
Pacific Coast Bankers Bank.
The Bank recognizes that, in order to be competitive, it must attract a
certain number of consumer accounts. The travelers checks, 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 a large-scale
ATM network assists the Bank in competing for consumer accounts.
The Bank is an approved Small Business Administration and 504 lender, FarmerMac
I and II, USDA, USDA Part-time Farmer Program, FHA and VA lender and California
Capital 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
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements discussed or incorporated by reference in this Annual
Report including, but not limited to, matters described in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Changes to
such risks and uncertainties, which could impact future financial performance,
include, among other factors (1) competitive pressures in the banking industry
(2) changes in the interest rate environment; (3) general economic conditions,
either nationally or regionally; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; and (6) changes in securities
markets.
The following sections discuss significant changes and trends in the
Bank's financial conditions, and result of operations, from 2000 to 2001. The
comparison of these two years reflects a level of activity that is consistent
with the Bank's projections and plans for its operations. The following section
also discusses significant changes and trends in the Bank's financial condition
and results of operations from 1999 to 2000.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net income for the year ended December 31, 2001, was $1,036,000,
representing an increase of $27,000, or 2.7%, over net income of $1,009,000 for
the year ended December 31, 2000. A contributing factor to the increase in net
income is an increase in noninterest income of 68.9%, due to an increase in the
gain on sale of loans.
Return on average assets (ROA) was .87% and return on average common
equity (ROE) was 12.04% in 2001 compared with .92% and 13.93% respectively in
2000. Diluted earnings per share for 2001 and 2000 were $1.32 and $1.35,
respectively, a decrease of 2.2%. The decrease in earnings per share is due to
the increase in the number of shares outstanding due to stock options exercised.
The Bank's average total assets increased to $118.8 million or 7.7% over
$110.3 million in 2000. Net loans increased to $97.1 million over $82.6 million
in 2000, an increase of $14.5 million or 17.6%. Deposits in 2001 grew to $111.1
million, or 6.1%, compared to $104.7 million at December 31, 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net income for the year ended December 31, 2000, was $1,009,000,
representing an increase of $266,000, or 35.8%, over net income of $743,000 for
the year ended December 31, 1999. Factors contributing to the increase in net
income include an increase in net interest income of 22.2% contributed by loan
volume, partially offset by a slight increase of 3.7% in non-interest expense.
The provision for loan loss was reduced by $31,000 over the prior year
reflecting the Bank's ongoing efforts to maintain its credit quality and low
percentage of classified assets.
Return on average assets (ROA) was .92% and return on average common
equity (ROE) was 13.93% in 2000 compared with .80% and 12.02% respectively in
1999. Diluted earnings per share for 2000 and 1999 were $1.35 and $1.08,
respectively, an increase of 24% from 1999 to 2000.
31
The Bank's average total assets increased to $110.3 million or 18.5% over
$93.1 million in 1999. Net loans increased to $82.6 million over $71.6 million
in 1999, an increase of $11.0 million or 16.8%.
Net Interest Income
The primary source of income for the Bank 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 decreased to $5.6 million in 2001 from $5.7 million in
2000 and $4.7 million in 1999, representing a 1.8% decrease in 2001 over 2000.
and a 21.3% increase in 2000 over 1999. The average balance of total earning
assets during 2001 increased 7.8% to $109.0 million. Average loan balances
outstanding during 2001 increased $13.5 million or 7.6%, while average balances
of investments and federal funds sold decreased by $5.6 million or 23.6%. The
average yields on loans and federal funds sold in 2001 were lower by 168 and 236
basis points respectively, while the average yield on U.S. government securities
rose 28 basis points. The decrease in average yields on loans is attributed to
eleven decreases in the prime lending rate or 475 basis points. During 2001
prime rate dropped from 9.5% to 4.75%. The overall yield on average earning
assets during 2001 declined 117 basis points to 8.44% from 9.61% for 2000.
Total interest expense decreased to $3.6 million in 2001. from $4.0
million for in 2000, and $2.9 million for 1999, representing a 10.0% decrease
for 2000 over 1999, and a 37.9% increase in 2000 over 1999. Average balances of
interest-bearing liabilities increased to $82.4 million from $68.8 million for
the year ended December 31, 2000, or 19.6%.
Average certificates of deposit increased to $50.0 million in 2001 from
$47.9 million in 2000, a 4.4% Increase. The average rate paid on certificates of
deposit during 2001 decreased 31 basis points, while the overall average rate
paid on interest bearing deposits and borrowings decreased 78 basis points to
4.06% from 4.84% for 2000.
The Bank's net interest margin (net interest income divided by average
earning assets) was 5.15% in 2001, 5.67% in 2000 and 5.57% in 1999. The combined
effect of the increase in volume of earning assets and decrease in yield on
earning assets, coupled with stable funding sources resulted in a decrease of
$121,000 (2.1%) in net interest income for the year ended December 31, 2001 over
2000. The decrease in the Bank's net interest margin from 2000 to 2001 is
directly attributable to the decrease in prime rate of 475 basis points since
most of the Bank's reprice when the prime rate changes. In spite of the eleven
prime rate changes, the net interest margin only dropped 52 basis points which
is attributed to growth and change in mix of earning assets, which was funded by
growth of both interest-bearing and non-interest-bearing demand deposits.
32
The following table sets forth the Bank'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, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
(Dollars in thousands) 2001 2000 1999
----------------- ----------------- ----------------
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Earning Assets
Loans(1) $ 90,675 $ 8,168 9.00% $ 77,166 $ 8,245 10.68% $ 65,404 $6,564,653 10.04%
Investment Securities 12,741 808 6.34% 14,346 870 6.06% 11,498 653 5.68%
Federal Funds Sold 5,579 219 3.93% 9,622 605 6.29% 7,418 369 4.97%
-------- ------- ---- -------- ------- ---- -------- ---------- ----
Average Earning $108,995 $ 9,195 8.44% $101,134 $ 9,720 9.61% $ 84,320 $ 7,586 9.00%
------- ------- ----------
Assets
Cash & Due From $ 5,000 $ 4,831 $ 4,662
Banks
Bank Premises 4,109 3,593 3,126
Other Assets 1,839 1,724 1,643
Less: Allowance for loan
loss (1,128) (910) (692)
-------- -------- --------
Average Total Assets $118,815 $110,372 $ 93,059
======== ======== ========
Interest Bearing
Liabilities
Demand Interest $ 34,515 $ 679 1.97% $ 29,890 $ 978 3.27% $ 25,467 $ 750 2.94%
Bearing
Savings Deposits 3,814 24 .63% 4,437 89 2.01% 5,535 114 2.06%
Certificates of Deposits 49,961 2,878 5.76% 47,944 2,911 6.07% 37,421 2,014 5.38%
Other Borrowings -- -- --% 86 7 8.14% 385 15 3.90%
-------- ------- ---- -------- ------- ---- -------- ---------- ----
88,290 $ 3,581 4.06% 82,357 $ 3,985 4.84% 68,808 $ 2,893 4.20%
------- ------- ----------
Noninterest Demand 20,931 19,676 17,350
Other Liabilities 991 1,097 724
Shareholders' Equity 8,603 7,242 6,177
-------- -------- --------
Average Liabilities and
Shareholders' Equity $118,815 $110,372 $ 93,059
======== ======== ========
Net Income and Net
Interest Margin $ 5,614 5.15% $ 5,735 5.67% $ 4,693 5.57%
======= ======= ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Interest income on loans includes fee income of $127,000, $265,000 and
$217,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
The Bank's average total assets increased from $93.1 million in 1999 to
$110.3 in 2000 and $118.8 in 2001, representing a 18.5% increase during 2000
over 1999, and an 7.7% increase in 2001 over 2000. Average portfolio loans
increased to $77.1 million in 2000 and $90.7 million in 2001, representing a
19.7% and 17.6% increase respectively. In addition the Bank's average
non-interest bearing demand deposits increased from $17.4 million 1999 to $19.7
million in 2000 and $20.9 million in 2001, representing a 13.2% and 6.1%
increase respectively.
33
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 and rate changes for the periods
indicated. Changes attributable to rate/volume have been allocated to volume
changes. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
Analysis of Changes in Net Interest Income
Years ended December 31,
(Dollars in thousands) 2001 over 2000 2000 over 1999
- ---------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease)
In Interest Income:
- -------------------
Loans $ 1,217 $(1,294) $ (77) $ 1,248 $ 433 $ 1,681
Investment securities (102) 40 (62) 185 32 217
Federal Funds sold (159) (227 (386) 147 89 236
------- ------- ----- ------- ------- -------
Total Increase(Decrease) $ 956 $(1,481) $(525) $ 1,580 $ 554 $ 2,134
------- ------- ----- ------- ------- -------
Increase(Decrease)
In Interest Expense:
Interest-bearing Demand $ 91 $ (390) $ (99) 148 80 228
Savings Deposits (4) (61) (65) (21) (4) (25)
Certificates of Deposit 116 (149) (33) 643 254 897
Other Borrowings (7) -- (7) (25) 17 (8)
------- ------- ----- ------- ------- -------
Total Increase(Decrease) $ 196 $ (600) $(404) $ 745 $ (347) $ 1,092
------- ------- ----- ------- ------- -------
Net Increase(Decrease) $ 760 $ (881) $(121) $ 835 $ 207 $ 1,042
======= ======= ===== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
Non-interest Income
The Bank's non-interest income consists primarily of service charges on
deposit accounts, gain on sale of loans and other service fees. Non-interest
income also includes ATM fees earned at various locations. For the year ended
December 31, 2001, non-interest income represented 12.1% of the Bank's revenues
versus 7.1% in 2000, and 13.5% in 1999. Historically, the Bank's service
charges on deposit accounts have lagged peer levels for similar services. This
is consistent with the Bank's philosophy of allowing customers to pay for
services with compensating balances and the emphasis on core deposits as a
significant funding source.
Total non-interest income increased to $1.3 million in 2001 over $748,000
in 2000, and $1.2 million in 1999, representing an increase of 68.9% and a
decrease of 36.6% respectively. The increase is directly attributable to the
181.5% increase in the gain from the sale of loans because of the increase in
demand for these types of loans.
34
The following table sets forth a summary of non interest income for the
periods indicated.
(Dollars in thousands) Years Ended December 31,
- ----------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------
Non-interest Income:
Service Charges $ 403 $ 347 $ 385
Rental Income from Other Real Estate 2 4 13
Gain on Sale of Guaranteed Loans 428 152 539
Gain on Sale of Investment Securities 69 -- --
Other Income 357 245 243
------ ------ ------
Total Non-interest Income $1,259 $ 748 $1,180
====== ====== ======
- ----------------------------------------------------------------------------------
Non-interest Expense
Non-interest expense consists of salaries and related employee benefits,
occupancy and equipment expenses, data processing fees, professional fees,
directors' fees and other operating expenses. Non-interest expense for 2001 was
$4.9 million compared to $4.6 million for 2000 and $4.5 million in 1999,
representing an increase of $319,000, or 6.9% for 2001, and $163,000 or 3.7% for
2000. Increases in salaries and benefits are indicative of the additions to
staff to expand Branch operations in line with their respective growth for the
year. The increase in occupancy arid equipment is attributable to the general
upgrade of technology systems. The $128,000 increase in professional fees is
attributable to legal costs in collecting one loan which is in nonaccrual.
The following table sets forth a summary of non-interest expense for the
periods indicated.
(Dollars in thousands) Years Ended December 31,
- ----------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------
Non-interest Expense:
Salaries & Benefits $2,217 $2,174 $1,999
Occupancy & Equipment 1,106 942 845
Professional Fees 320 192 172
Advertising & Promotion 82 150 166
Postage, Stationery & Supplies 178 136 154
Telephone 126 139 122
Director Fees 58 116 97
Data Processing 23 27 32
Other Expense 825 744 870
------ ------ ------
Total Non-Interest Expenses $4.935 $4,620 $4,457
====== ====== ======
- ----------------------------------------------------------------------------------
35
Income Taxes
The Bank'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 Bank's net income before taxes. The principal difference
between statutory tax rates and the Bank's effective tax rate is the benefit
derived from investing in tax-exempt securities. Increases and decreases in the
provision for taxes reflect changes in the Bank's net income before tax.
The following table reflects the Bank's tax provision and the related effective
tax rate for the periods indicated.
(Dollars in thousands) Years Ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Tax Provision $ 520 $ 555 $ 343
Effective Tax Rate 33.4% 35.5% 31.6%
- --------------------------------------------------------------------------------
Asset Quality
The Bank concentrates its lending activities primarily within Calaveras,
San Joaquin, Stanislaus and Tuolumne Counties.
The Bank manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Bank 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.
The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:
(Dollars in thousands) As of December 31,
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Commercial and Agricultural $ 34,079 $ 34,128
Real estate-construction 23,561 16,875
Real estate - mortgage 36,831 29,703
Installment & Other 3,493 2,729
Deferred Loan Fees and Costs 317 209
Allowance for Loan and Lease Losses (1,172) (1,001)
-------- --------
Total Net Loans $ 97,109 $ 82,643
======== ========
- --------------------------------------------------------------------------------
36
Net portfolio loans have increased $14.5 million or 17.5%, to $97.1
million at December 31, 2001 over $82.6 million at December 31, 2001. Commercial
and agricultural loans have increased $7.5 million or 29%, real estate
construction projects have increased $6.7 million or 40%, and real estate
mortgage loans have decreased slightly by $230,000, over 1999. The portfolio mix
remains stable as compared with the mix of a year ago, with commercial and
agricultural loans of approximately 42% of total loans, real estate construction
loans of 24%, commercial and residential real estate loans at 30%, and 4% for
installment loans.
The Bank's practice is to place an asset on nonaccrual status when one of
the following events occurs: (i) Any installment of principal or interest is 90
days or more past due (unless in management's opinion the loan is well-secured
and In the process of collection), (ii) management determines the ultimate
collection of principal or interest to be unlikely or (iii) the terms of the
loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing or have been restructured.
The following table sets forth a summary of the Bank's nonperforming loans and
other assets as of the dates indicated:
(Dollars in Thousands) As of December 31,
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Nonaccrual loans $585 $744
90 days past and still accruing interest -- --
Restructured loans in compliance with
modified terms -- --
Other Real Estate Owned 182 151
- --------------------------------------------------------------------------------
The Bank's nonaccrual loans decreased from $714,000 to $585,000 during
2001 and are comprised of seven loans. Other real estate owned ("OREO")
increased slightly to $182,000 in 2001 from $151,000 in 2000.
37
The following table sets forth the maturity distribution for certain types
of the Bank's loans outstanding as of December 31, 2001, which, based on
remaming scheduled repayments of principal, were due within the periods
indicated.
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
After One through
Within One Five Years After Five Years Total
Year
- -------------------------------------------------------------------------------------------------------------
Commercial and
agricultural loans $ 17,662 $ 13,620 $ 2,797 $ 34,079
Construction Loans 22,370 0 1,191 23,561
-------- -------- ------- --------
Total $ 40,032 $ 13,620 $ 3,988 $ 57,640
======== ======== ======= ========
Loans due after one year with:
Fixed Rates $ 12,483 $ 3,397 $ 15,880
Variable Rates 1,137 591 1,728
-------- ------- --------
Total $ 13,620 $ 3,988 $ 17,608
======== ======= ========
- -------------------------------------------------------------------------------------------------------------
Allowance for Loan and Lease Losses (ALLL)
In determining the amount of the Bank's Allowance for Loan and Lease
Losses ("ALLL"), management assesses the 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 ALLL. In addition, management estimates the probable loss on
individual credits that are receiving increased management attention due to
actual or perceived increases in credit risk.
The Bank makes provisions to the ALLL on a regular basis through charges
to operations that are reflected in the Bank's statements of income as a
provision for loan losses. When a loan is deemed uncollectible, it is charged
against the allowance. Any recoveries of previously charged-off loans are
credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio. Similarly, the adequacy of the ALLL and the
level of the related provision for possible loan losses is determined on a
judgment basis by management based on consideration of (i) economic conditions,
(ii) borrowers' financial condition, (iii) loan impairment, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans which are
contractually current as to payment terms but demonstrate a higher degree of
risk as identified by management, (vii) continuing evaluation of the performing
loan portfolio, (viii) monthly review and evaluation of problem loans identified
as having a loss potential, (ix) monthly review by the Board of Directors, (x)
off balance sheet risks and (xi) assessments by regulators and other third
parties. Management and the Board of Directors evaluate the allowance and
determine its desired level considering objective and subjective measures, such
as knowledge of the borrowers' businesses, valuation of collateral, the
determination of impaired loans and exposure to potential losses.
38
While management uses available information to recognize losses or 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 Bank's ALLL. Such agencies may require the Bank to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination. There is uncertainty concerning future economic trends.
Accordingly it is not possible to predict the effect future economic trends may
have on the level of the provision for possible loan losses in future periods.
The Bank'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 Bank'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 Bank'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 Bank's service area. The Bank 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 Bank's evaluations of its
borrowers are facilitated by management's knowledge of local market conditions
and periodic reviews by a consultant of the Bank's credit administration
policies.
The principal source of repayment of the Bank's real estate construction
loans is the sale of the underlying collateral or the availability of permanent
financing from the Bank or other lending source. The principal risks associated
with real estate construction lending include project cost overruns in the
project and deterioration of real estate values as a result of various factors,
including competitive pressures and economic downturns. The Bank 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 Bank requires
a loan-to-value ratio of not more than 80% on single family residential
construction loans.
The principal source of repayment of the Bank's real estate mortgage loans
is the Borrowers' operating cash flow. Similar to commercial loans, the
principal factors affecting the Bank's risk of loss in real estate mortgage
lending include each borrowers' ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Bank's service area. The Bank 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 Bank'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 Bank's underwriting criteria are designed to
comply with applicable regulatory guidelines, including required loan-to-value
ratios. The Bank's credit administration policies contain mandatory lien
position and debt service coverage requirements, and the Bank generally requires
a guarantee from 20% or more owners of its corporate borrowers.
The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions. In management's
opinion the estimated charge-offs by loan category for the year ended December
31, 2002 are: $200,000 for commercial and agriculture, $3,000 for installment
and none for real estate construction or real-estate mortgage.
39
The adequacy of the ALLL is calculated upon three components. First is the
credit risk rating of the loan portfolio, including all outstanding loans and
leases, off balance sheet items, and commitments to lend. Ever:' 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 Bank. Secondly, established
specific reserves are available for individual loans currently on managements
watch and high-grade loan lists. These are the estimated potential losses
associated with specific borrowers based upon the collateral and Event(s)
causing the risk ratings. The third component is unallocated. This reserve is
for qualitative factors that may effect the portfolio as a whole, such as those
factors described above.
Management believes the assigned risk grades and our methods for managing
risk are satisfactory.
The provision for loan losses increased to $383,000 for 2001 versus
$30(i,000 in 2000. The increase in the amount of the provision is a direct
result of the Bank's 17.7% increase in loans for 2001 Net charge-offs were
$212,000 or .23% of average loans during 2001. 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 activity in the ALLL for the periods
indicated.
(Dollars in thousands) Years Ended December 31,
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Beginning Balance: $ 1,001 $ 796
Provision for loan losses 383 300
Charge-offs:
Commercial (226) (70)
Real Estate (--) (--)
Other (2) (26)
------- ------
Total Charge-offs (228) (96)
------- ------
Recoveries:
Commercial 16 --
Other -- 1
------- ------
Total Recoveries 16 1
------- ------
Ending Balance $ 1,172 $1,001
======= ======
ALLL to total loans 1.19% 1.20%
Net Charge-offs to average
loans .23% .22%
- --------------------------------------------------------------------------------
40
Investment Portfolio
The Bank classifies its investment securities as "held-to-maturity" or
"available-sale" at the time of investment purchase. Generally, all securities
are purchased with the intent and ability to hold the security for long-term
investment, and the Bank has both the ability and intent to hold
"held-to-maturity" investments to maturity. The Bank does not engage in trading
activities. Investment securities held-to-maturity are carried at cost adjusted
For the accretion of discounts and amortization of premiums. Securities
available-for-sale may be sold to implement the Bank'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 market
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 securities held-to-maturity at December 31, 2001, consisted of
mortgage-backed securities totaling $357,000 with a remaining contractual
maturity of 14 to 21 years and a weighted-average yield to maturity of 6.38%.
The following table summarizes the contractual maturities of the Bank's
investment securities held as available-for-sale at their amortized cost basis
and their weighted average yields at December 31, 2001. The yield on tax-exempt
securities has not been adjusted to a tax-equivalent yield basis
Within One One to Five Five to Ten Ten Years
---------- ----------- ----------- ---------
Year Years Years And Over Total
---- ----- ----- -------- -----
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------------------
U.S.
Government $ 250 5.15% $ 3,369 5.85% $ 194 6.75% 430 6.06% $ 4,243 5.87%
& Agencies
Obligations of
State and 500 9.60% 2,675 5.11% 3,985 4.88% 5,592 5.41%
Political [ILLEGIBLE]
Equity -- -- -- -- -- -- 181 5.90% 181 5.90%
Securities
Other 250 5.88% 252 6.42% -- -- -- -- 502 6.15%
------ ---- ------- ---- ----- ---- ------ ---- ------- ----
Securities
Total $1,000 9.43% $ 6,296 5.18% $ 194 5.06% $3,028 6.78% $10,518 6.34%
====== ==== ======= ==== ===== ==== ====== ==== ======= ====
- --------------------------------------------------------------------------------------------------------------------------
41
The following table summarizes the carrying value of the Bank's available
for sale Investment securities held on the sales indicated.
(Dollars in thousands) Years Ended December 31
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
U.S. Government & Agencies $ 4,313 $11,716
- --------------------------------------------------------------------------------
Municipal Obligations 5,437 3,798
Corporate and Other Bonds 682 921
------- -------
Total $10,518 $16,435
======= =======
- --------------------------------------------------------------------------------
Deposit Structure
The Bank primarily obtains deposits from local businesses and
professionals as well as through certificates of deposits, savings and checking
accounts.
The following table sets forth the remaining maturities of certificates of
deposit at December 31, 2001
Deposit Maturity Schedule
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------
Under $100,000 Over $100,000
- ------------------------------------------------------------------------------------------------
Three Months or less $ 9,071 $ 9,673
Over three through six months
Over six through twelve 4,846 5,537
months 8,395 5,710
Over twelve months 2,021 2,656
------- -------
Total $24,333 $23,576
======= =======
- ------------------------------------------------------------------------------------------------
Liquidity
The purpose of liquidity management is to ensure efficient and economical
funding of the Bank's assets consistent with the needs of the Bank'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 Bank's statement of cash flows, but through an understanding
principally of depositor and borrower needs. As loan demand increases, the Bank
can use asset liquidity from maturing investments along with deposit growth to
fund the new loans.
With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal funds sold,
available-for-sale investment securities, and principal and interest payments on
loans. With respect to liabilities, liquidity is provided by core deposits,
shareholders' equity and the ability of the Bank to borrow funds and to generate
deposits, provide asset funding.
Because estimates of the liquidity need of the Bank may vary from actual
needs, the Bank maintains a substantial amount of liquid assets to absorb
short-term increases
42
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 Bank's liquid assets (cash and due from banks,
federal [ILLEGIBLE] sold, and available-for-sale investment securities) totaled
$17.3 million or 14.3% of total assets at December 31, 2001, $25.2 million or
22.2% of total assets at December 31, 2000 and $27.1 million or 26.0% of total
assets at December 31, 1999. Though liquidity was lower at year end December 31,
2001 compared to December 31, 2000, the Bank expects liquidity to be well over
20% through the acquisition of the CB&T deposits on March 15, 2002.
Capital Adequacy
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 deposit insurance fund from potential losses and is a source of funds for
the investments the Bank 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 Bank's
management and reported to the Bank'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 Bank's balance
sheet and certain off-balance sheet items are assigned to risk categories, each
of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1"
capital (defined as principally comprising shareholders' equity) and "Tier 2"
capital (defined as principally comprising the qualifying portion of the ALLL).
The minimum ratio of total risk-based capital to risk-adjusted assets,
including certain off-balance sheet items, is 8%. At least one-half (4%) of the
total risk-based capital is to be comprised of Tier 1 capital; the balance may
consist of debt securities and a limited portion of the ALLL.
The most recent notification by the Federal Reserve Bank of San Francisco
(FRBSF) 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.
The following table sets forth the Bank's capital ratios for the periods
indicated.
For Bank to
-----------
be well
-------
December 31 December 31 capitalized
----------- ----------- -----------
2001 2000
---- ----
Total Risk-Based Capital 10.3% 10.2% > 10.00%
Tier 1 Capital to Risk-Based 9.2% 9.1% > 6.00%
Assets
Tier 1 Capital to Average Assets 7.8% 6.8% > 5.00%
(Leverage ratio)
43
Impact of Inflation
Inflation affects the Bank'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 results for the stated eight
quarters:
(Dollars in thousands)
2001 2000
---- ----
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
Net interest income $1,354 $1,420 $1,322 $1,518 $1,334 $1,419 $1,409 $1,573
Provision for loan loses 100 113 113 58 65 60 100 75
Total non-interest income 227 445 379 209 187 183 204 174
Total non-interest 1,211 1,200 1,267 1,256 1,106 1,080 1,253 1,181
expense
Income before taxes 270 552 321 413 350 462 260 491
Provision for income taxes 95 194 97 134 106 157 88 203
------ ------ ------ ------ ------ ------ ------ ------
Net Income $ 175 $ 358 $ 224 $ 279 $ 224 $ 305 $ 172 $ 288
====== ====== ====== ====== ====== ====== ====== ======
Net Income Per Common
Share:
Diluted $ 0.22 $ 0.46 $ 0.29 $ 0.35 $ 0.34 $ 0.40 $ 0.22 $ 0.39
Basic $ 0.24 $ 0.48 $ 0.31 $ 0.37 $ 0.36 $ 0.42 $ 0.24 $ 0.40
44
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is only a limited trading market for the Bank's Common stock, which
is not listed on any exchange. Hoefer & Arnett (San Francisco) is the Bank's
primary market maker. Trading information is available via the World Wide Web
NASDAQ OTC Electronic Bulletin Board, under the symbol PSSF.
The following table, which summarizes trading activity during the Bank'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.
Sales Price
-----------
Quarter Ended: High Low Volume
- -------------- ---- --- ------
March 31, 2001 $10.750 $10.250 7,600
June 30, 2001 $11.000 $10.440 60,300
September 30, 2001 $15.650 $10.850 11,200
December 31, 2001 $15.120 $13.050 28,200
March 31 2000 $10.000 $ 8.625 19,100
June 30, 2000 $10.500 $ 9.750 54,300
September 30, 2000 $10.625 $10.125 34,700
December 31, 2000 $10.750 $10.250 14,200
As of March 1, 2002, there were approximately 400 holders of record of the
common stock of 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. The Bank
is also subject to similar restrictions imposed by Federal law. As of December
31, 2001, the Bank had $2,787,000 in retained earnings available for dividends
to shareholders'.
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.
45
- --------------------------------------------------------------------------------
Mission Statement
- --------------------------------------------------------------------------------
Maintain a shared responsibility to preserve and protect depositor funds and
Bank capital adequacy.
Provide a higher than average return on investment to shareholders. Be the
premier financial institution of our service region.
Develop and provide education and training to be the most professional staff,
providing technologically superior financial products and services delivered in
a quality manner at a corresponding price.
Operate in a culture that promotes self-motivation, provides professionalism and
a positive sales environment, enabling a healthy and financially secure
financial institution.
Establish our position in the community through pride and integrity with the
base commitment to achieve success, financial superiority, and establishing
value for our shareholders.
46
- --------------------------------------------------------------------------------
Corporate Directory
- --------------------------------------------------------------------------------
Stock Market Makers
- -------------------
Hoefer & Arnett
Dave Bonacorso
353 Sacramento Street
San Francisco, CA 94111
800/346-5544
Wedbush Morgan Securities
Joey Warnemhoven
1300 S.W. Fifth Avenue
Suite 2000
Portland, OR 97201
503/471-1898
www.wedbush.com
First Security Van Casper
San Francisco, CA
Stephen L. Eddy
800/652-1747 Ext. 727
A.G. Edwards
Stockton, CA 95207
Rob Thompson
209/957-8109
Monroe Securities
800/766-5560
Legal Counsel
- -------------
Shapiro, Buchman, Provine & Patton LLP
John Carr
1331 N. California Blvd.
Suite 320
Walnut Creek, CA 94596
Transfer Agent
- --------------
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606
800/356-2017
www.melloninvestor.com
Shareholder Relations
- ---------------------
A copy of Pacific State Bank's Form 10-K annual report filed with the Federal
Reserve Board. Requests for Form 10-K or other shareholder information should be
directed to:
Carmela Johnson
Executive Vice President,
Chief Operations Officer,
& Chief Financial Officer
Pacific State Bank
Post Office Box 1649
Stockton, CA 95201-1649
Certified Public Accountants
- ----------------------------
Perry-Smith & Company
400 Capitol Mall, Suite 1200
Sacramento, CA 95814
Corporate Offices
- -----------------
1889 West March Lane
Stockton, CA 95207
209/870-3200