FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2002
PACIFIC STATE BANK
(Exact Name of Registrant as Specified in its Charter)
California 68-0125961
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 South El Dorado Street, Stockton, California 95202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (209) 943-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant classes
of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of March 31, 2002
Common Stock
No Par Value 806,437
ITEM 1. FINANCIAL STATEMENTS
PACIFIC STATE BANK
Balance Sheets
March 31, December 31,
Assets 2002 2001
- ------ (Unaudited)
------------- -------------
Cash and due from banks $ 13,004,531 $ 5,439,720
Federal funds sold -- 1,386,000
Investment securities (market value of $21,060,931 in 2002 and
$10,789,400 in 2001) 21,047,609 10,788,600
Loans, less allowance for loan losses of $1,237,645 in 2002 and
$1,171,608 in 2001 102,198,023 97,108,704
Other real estate 171,648 181,648
Bank premises and equipment, net 4,732,830 4,620,147
Accrued interest receivable and other assets 3,423,581 1,721,977
------------- -------------
Total assets $ 144,578,222 $ 121,246,796
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 26,067,171 $ 21,205,315
Interest bearing 107,722,041 89,898,323
------------- -------------
Total deposits 133,789,212 111,103,638
Accrued interest payable and other liabilities 662,353 765,219
------------- -------------
Total liabilities 134,451,565 111,868,857
Shareholders' equity
Preferred stock - no par value; 2,000,000 shares authorized;
none issued and outstanding -- --
Common stock - no par value; 12,000,000 shares authorized; shares issued and
outstanding 806,437 in 2002 and 759,694 in 2001 6,745,729 6,192,188
Retained earnings 3,441,690 3,241,458
Accumulated other comprehensive (loss) (60,762) (55,707)
------------- -------------
Total shareholders' equity 10,126,657 9,377,939
------------- -------------
Total liabilities and shareholders' equity $ 144,578,222 $ 121,246,796
============= =============
See notes to unaudited financial statements
2
PACIFIC STATE BANK
Statements of Income
(Unaudited)
For the Three Months Ended
March 31,
2002 2001
------------ ------------
Interest income:
Interest and fees on loans $ 1,845,408 $ 2,090,275
Interest on Federal funds sold 14,730 79,850
Interest on investment securities
Taxable 91,287 216,881
Exempt from Federal income taxes 71,964 53,203
------------ ------------
Total interest income 2,023,389 2,440,209
Interest expense:
Interest on deposits 707,741 1,086,115
Interest on short-term borrowings 338 --
------------ ------------
Total interest expense 708,079 1,086,115
------------ ------------
Net interest income 1,315,310 1,354,094
Provision for loan losses 76,500 100,000
------------ ------------
Net interest income after provision for loan losses 1,238,810 1,254,094
------------ ------------
Non-interest income:
Service charges 106,606 86,306
Other fee income 145,076 69,046
Rental income from other real estate 2,250 2,250
Gain from sale of loans 143,072 69,853
------------ ------------
Total non-interest income 397,004 227,455
Other expenses:
Salaries and employee benefits 585,808 607,754
Occupancy 131,938 124,154
Furniture and equipment 144,578 128,370
Professional fees 95,412 49,666
Postage, stationary and supplies 40,708 35,494
Other 333,138 266,121
------------ ------------
Total other expenses 1,331,582 1,211,559
------------ ------------
Income before income taxes 304,232 269,990
Income tax expense 104,000 95,000
------------ ------------
Net income $ 200,232 $ 174,990
============ ============
Basic earnings per share $ 0.26 $ 0.24
============ ============
Diluted earnings per share $ 0.25 $ 0.23
============ ============
Weighted average common shares outstanding 771,696 731,413
Weighted average common and common equivalent shares outstanding 814,262 766,700
See notes to unaudited financial statements
3
PACIFIC STATE BANK
Statement of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 200,232 $ 174,991
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 76,500 100,000
Deferred loan origination fees and costs, net (16,797) (26,687)
Depreciation and amortization (43,874) 115,026
Net decrease in loans held for sale -- --
Net gain on sale of available-for-sale investment
securities -- --
Increase in accrued interest receivable and other assets (589,320) (106,244)
Decrease in accrued interest payable and
other liabilities (125,623) (285,517)
------------ ------------
Net cash used in by operating activities (498,882) (28,431)
------------ ------------
Cash flows from investing activities:
Proceeds from matured and called available-for-sale
investment securities 1,865,000 1,000,000
Purchase of available-for-sale investment securities (12,000,000) --
Proceeds from principal repayments from available-for-sale
mortgage-backed securities 30,708 171,658
Proceeds from principal repayments from held-to-maturity
mortgage-backed securities 14,250 11,305
Net decrease (increase) in loans 2,853,272 (4,364,223)
Proceeds from sale of other real estate -- 95,833
Purchases of bank premises and equipment (228,278) (184,626)
Net liabilities assumed in the acquisition of CB&T branch 13,805,923 --
------------ ------------
Net cash provided by (used in) investing activities 6,340,875 (3,270,053)
------------ ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing savings deposits 5,296,557 2,534,841
Net increase (decrease) in time deposits (5,032,280) 3,724,417
Proceeds from stock options exercised 72,541 3,200
------------ ------------
Net cash provided by financing activities 336,818 6,262,458
------------ ------------
Increase in cash and cash equivalents 6,178,811 2,963,974
Cash and cash equivalents at beginning of year 6,825,720 8,782,898
------------ ------------
Cash and cash equivalents at end of period $ 13,004,531 $ 11,746,872
============ ============
See notes to unaudited financial statements
4
PACIFIC STATE BANK
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management, the financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Bank's financial position at March 31, 2002 and December 31, 2001, and the
results of its operations and its cash flows for the three month periods ended
March 31, 2002 and 2001.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Bank's 2001 Annual Report to Shareholders. The results of operations for the
three-month period ended March 31, 2002 may not necessarily be indicative of the
operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for credit losses and the carrying value of
other real estate.
2. COMPREHENSIVE INCOME
Other comprehensive income, net of taxes, was comprised of the unrealized gain
(loss) in available-for-sale investment securities for the three-month periods
ended March 31, 2002 and 2001 and totaled $(5,055) and $128,163, respectively.
Total comprehensive income, net of taxes, was $195,177 and $303,153 for the
three-month periods ended March 31, 2002 and 2001.
3. BRANCH ACQUISITION
On March 15, 2002, the Bank completed its purchase of certain assets and the
assumption of deposit liabilities of the Stockton branch of California Bank &
Trust. The following tables summarize the initial accounting entries recorded by
the Bank:
Purchase price:
Estimated at: $1,082,194
Allocated between:
Stock 481,000
Cash 601,194
----------
$1,084,194
==========
5
Allocation of fair value of liabilities assumed and assets acquired:
Cash received $ 13,805,923
Loans 8,002,294
Other assets 34,642
CDI 560,532
Goodwill 521,662
Deposits other than CDs $ 12,645,067
CDs 9,776,230
Other liabilities 22,756
Equity 481,000
------------
$ 22,925,053 $ 22,925,053
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Overview
- --------
Pacific State Bank, (the "Bank"), is a California state chartered bank. The Bank
operates seven branches in California, including two branches in Stockton, and
branches in Modesto, Groveland, Arnold, Angels Camp, and Tracy. The Bank's
primary source of revenue is providing loans to customers who are predominately
small to middle-market businesses and middle-income individuals.
Earnings Summary
- ----------------
Pacific State Bank reported net income for the first quarter of 2002 of $200,232
or $0.26 basic earnings per common share or $0.25 diluted earnings per common
equivalent share, compared to net income of $174,990 or $0.24 basic earnings per
common and $0.23 diluted earnings per common equivalent share, reported for the
same period in 2001. Return on average assets annualized for the first quarters
of 2002and 2001 were .64% and .61%, respectively. Return on average assets
increased for the first quarter ended March 31, 2002 from the same period in
2001 due to a 9% increase in average assets and a 14% increase in net earnings.
Return on average common equity annualized was 8.67% for the first quarter of
2001, compared with 8.76% for the first quarter of 2001.
Interest income for the quarter ended March 31, 2002 was $2.0 million compared
to $2.4 million for the same period in 2001, a decrease of 17%. The decrease was
due to a decrease of 325 basis points in the prime rate during the period
between April 1, 2001 and March 31, 2002. Interest expense decreased by 35% for
the quarter ended March 31, 2002 compared to March 31, 2001. Net interest income
decreased 3% for the quarter ended March 31, 2002 compared to March 31, 2001.
Non-interest income increased from $227,000 for the quarter ended March 31, 2001
to $397,000 for the quarter ended March 31, 2002. The increase was primarily due
to a increase of $76,000 from other fee income which includes mortgage broker
fees and $73,000 from gain on sale of loans from quarter end 2001 and 2002.
6
Non-interest expense increased from $1.2 million in 2000 to $1.3 million in 2002
or 10%. Salaries and benefits decreased from $608,000 for the first quarter in
2001 to $586,000 in the first quarter 2002. Occupancy and equipment increased
slightly by $24,000 from first quarter end 2001 to first quarter end 2002. The
8% increase in non-interest expense is reflective of normal operations from a
21% increase in total assets from the first quarter end 2001 to first quarter
end 2002.
Balance Sheet Analysis
- ----------------------
Total assets increased by 20% from December 31, 2001 to March 31, 2002. The
increase in total assets was a result of an increase in deposits from $111.1
million to $133.8 million. Net loans during this period increased from $97.1
million to $102.2 million. On March 15, 2002 the Bank consummated the
acquisition of deposits and purchase of loans from the Stockton Office of
California Bank & Trust, ("CB&T"). Loans purchased from CB&T were $8.1 million
and the Bank assumed $22.4 million in deposits.
Non-performing assets (including nonaccrual loans, loans 90 day past due and
other real estate owned) totaled $626,000 at March 31, 2002, compared to
$767,000 on December 31, 2001 and $916,000 on March 31, 2001. The ratio of
non-performing assets to total loans was .61% at March 31, 2001, .78% at
December 31, 2000 and 1.04% at March 31, 2000.
The allowance for loan losses was $1,238,000 at March 31, 2002, compared to
$1,172,000 at December 31, 2001 and $1,052,000 at March 31, 2001. The provision
for loan losses was $76,500 for the first quarter of 2002 versus $100,000 for
the same period in 2001. Net charge-offs were $10,000 for the first three months
of 2002, compared to $49,000 for the first three months of 2001. The ratio of
the allowance for loan losses to non-performing assets was 197.7% at March 31,
2002, compared to 219.9% at December 31, 2001 and 114.9% at March 31, 2001.
Income Taxes
- ------------
The Bank accrued $104,000 in income taxes for the period ending March 31, 2002
compared to $95,000 for the same period in 2001, an increase of 9.5%.
Liquidity
- ---------
Liquidity represents the Bank's ability to meet the requirements of customer's
borrowing needs as well as fluctuations in core deposits, which include demand,
savings and interest bearing demand accounts, money market accounts and time
deposits. Total deposits averaged $116.9 million during the first quarter of
2002 compared to $108.0 million in 2001. Principal sources of liquidity are cash
and due from banks, Federal funds sold and investment securities. At quarter end
March 31, 2001 these items represented $34.1 million or 25.5% of total deposits
compared to $27.6 million or 25.6% at March 31, 2001. Other sources of liquidity
are maturing loans, a borrowing line from the Federal Reserve Discount Window
and Federal funds borrowing lines from correspondent banks. It is the opinion of
management that these sources of liquidity are sufficient to meet the needs of
the Bank at present levels.
Shareholders' equity increased $749,000 to $10.1 million, or 7.0% of assets, at
March 31, 2002 from $9.4 million or 7.8% of assets at December 31, 2001. The
increase in shareholders' equity was due to the net income increase of $200,000
to retained earnings and increase in capital of $554,000. At the closing of the
CB&T transaction, per the agreement, CB&T applied $481,000 of the purchase price
towards the purchase of 37,000 shares of Pacific State Bank. The remaining
$73,000 of capital contribution was from the exercise of stock options.
7
INVESTMENT SECURITIES
Available-for-sale March 31, 2002
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government agencies $ 3,611,756 $ 26,671 $ (2,352) $ 3,636,075
U.S. Treasury notes 12,215,648 11,582 -- 12,227,230
Obligations of states and political
subdivisions 3,981,640 67,314 (210,654) 3,838,300
Mortgage-backed securities 558,345 16,729 (18) 575,056
Corporate Bonds 251,449 -- (3,479) 247,970
Federal Reserve Bank Stock 177,600 -- -- 177,600
Farmer Mac Home Administration Stock 3,100 -- -- 3,100
Total $ 20,799,538 $ 122,296 $ (216,503) $ 20,705,331
============ ============ ============ ============
- -----------------------------------------------------------------------------------------------
Held-to-Maturity:
- -----------------
March 31, 2002
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Mortgage-backed securities $ 342,278 $ 1,514 $ (6,601) $ 337,191
============ ============ ============ ============
- -----------------------------------------------------------------------------------------------
LOANS
Outstanding loans are summarized below:
- -----------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
------------- -------------
Commercial & Agricultural $ 33,969,943 $ 34,078,540
Real estate 42,290,824 36,830,356
Real estate-construction 21,888,599 23,561,128
Installment 4,952,313 3,493,095
------------- -------------
Total loans 103,101,679 97,963,119
------------- -------------
Deferred loan fees 333,989 317,193
Allowance for loan losses (1,237,645) (1,171,608)
------------- -------------
Total net loans $ 102,198,023 $ 97,108,704
============= =============
- -----------------------------------------------------------------------------------------------
Changes in the allowance for loan losses were as follows:
Three Months Ended
March 31, March 31,
- -----------------------------------------------------------------------------------------------
2002 2001
------------- -------------
Balance, beginning of the period $ 1,171,608 $ 1,000,999
Provision charged to operations 76,500 100,000
Losses charged to allowance (10,463) (52,193)
Recoveries -- 3,035
------------- -------------
Balance, end of the period $ 1,237,645 $ 1,051,841
============= =============
- -----------------------------------------------------------------------------------------------
8
The following table summarizes non-performing assets of the Bank for the periods
indicated:
March 31, December 31,
2002 2001
------------ ------------
Non-performing Assets:
Non-accrual loans $ 411,000 $ 585,000
Accruing loans past due 90 days or more 43,000 --
------------ ------------
Total non-performing loans 454,000 585,000
Other real estate owned 172,000 182,000
------------ ------------
Total non-performing assets $ 626,000 $ 767,000
============ ============
Non-performing assets as a percentage of:
Total loans .61% .78%
Total assets .43% .63%
DEPOSITS
Deposits consisted of the following:
March 31, December 31,
2002 2001
------------ ------------
Non-interest bearing $ 26,067,171 $ 21,205,315
Savings 6,245,457 3,980,262
Money markets 36,074,580 26,763,115
NOW Accounts 12,748,612 11,245,505
Time, $100,000 or more 23,881,211 23,576,075
Other time 28,772,181 24,333,366
------------ ------------
$133,789,212 $111,103,638
============ ============
Regulatory Capital
- ------------------
The Bank's Tier I and Total Risk-based capital ratios were 9.12% and 10.37% at
March 31, 2002, respectively, compared with 9.10% and 10.20% at December 31,
2001. The Leverage ratio was 7.16% at March 31, 2002 compared to 7.80% at
December 31, 2001. The Bank exceeded the minimum standards to be categorized as
well-capitalized for Total Risk-based capital, Tier I risk-based and Tier I
leverage ratios, 10.00%, 6.00% and 5.00%, respectively.
The Bank's actual amounts and ratios as of March 31, 2002 and December 31, 2001
- -------------------------------------------------------------------------------
are as follows:
- ---------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------- ------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------- ---------- -------- ------------- ------- ------------- --------
As of March 31, 2002
- ----------------------------- ---------- -------- ------------- ------- ------------- --------
Total capital (to risk
weighted assets) 10,255,000 10.37% 7,915,000 8.00% 9,893,000 10.00%
- ----------------------------- ---------- -------- ------------- ------- ------------- --------
Tier I capital (to risk
weighted assets) 9,018,000 9.12% 3,957,000 4.00% 5,936,000 6.00%
- ----------------------------- ---------- -------- ------------- ------- ------------- --------
Leverage ratio* 9,018,000 7.16% 5,039,000 4.00% 6,298,000 5.00%
- ----------------------------- ---------- -------- ------------- ------- ------------- --------
9
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------- -------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------- ---------- -------- ------------- ------- ------------- --------
As of December 31, 2001
- ---------------------------- ----------- -------- ------------- ------- ------------- --------
Total capital (to risk
weighted assets) $10,535,000 10.20% $ 8,245,000 8.00% $ 10,535,000 10.00%
- ---------------------------- ----------- -------- ------------- ------- ------------- --------
Tier I capital (to risk
weighted assets) $ 9,363,000 9.10% $ 4,122,000 4.00% $ 6,184,000 6.00%
- ---------------------------- ----------- -------- ------------- ------- ------------- --------
Leverage ratio* $ 9,363,000 7.80% $ 4,779,000 4.00% $ 5,974,000 5.00%
- ---------------------------- ----------- -------- ------------- ------- ------------- --------
*The leverage ratio consists of Tier I capital divided by quarterly average
assets. The minimum leverage ratio is 3 percent for banking organizations that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality and in general, are considered top-rated banks.
10
Part II - Other Information
Item 1. Legal Proceedings
There are no material proceedings to which the Bank is a party of which any of
their property is subject.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults of Matters to a Vote of Security Holders - None
Item 4. Submission of Maters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of Securities and Exchange Act of 1934, the Bank
duly caused this report to be signed by the undersigned thereunto duly
authorized.
BY: /s/ STEVEN A. ROSSO
-------------------------------------
Date: April 29, 2002 Steven A. Rosso
President and Chief Executive Officer
Date: April 29, 2002 BY: /s/ CARMELA D. JOHNSON
-------------------------------------
Carmela D. Johnson
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
11