UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2005
Commission file number: 0-49892
PACIFIC STATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 61-1407606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1899 W. March Lane, Stockton, CA 95207
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (209) 870-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126-2 of the Exchange Act.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant
issuer's classes of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of August 11, 2005
Common Stock 3,458,000
No Par Value
PART I
ITEM 1. FINANCIAL STATEMENT
Pacific State Bancorp and Subsidiary
Condensed Consolidated Balance Sheet
(Unaudited)
(in thousands, except share amounts) June 30, December 31,
Assets 2005 2004
- ------ ------------ ------------
Cash and due from banks $ 7,124 $ 12,108
Interest -bearing deposits in banks 5,000 6,100
Investment securities - (amortized cost of $18,938 in 2005 and $17,407 in 2004) 18,890 17,482
Loans, less allowance for loan losses of $2,332 in 2005 and $2,214 in 2004 212,546 199,535
Premises and equipment, net 9,563 9,748
Company owned life insurance 4,329 4,246
Accrued interest receivable and other assets 6,033 5,142
------------ ------------
Total assets $ 263,485 $ 254,361
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 58,034 $ 51,980
Interest bearing 171,991 171,781
Total deposits 230,025 223,761
Other borrowings 4,000 4,000
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 1,852 1,006
------------ ------------
Total liabilities 244,641 237,531
Commitments and contingencies
Shareholders' equity:
Preferred stock - no par value; 2,000,000 shares authorized;
none issued and outstanding -- --
Common stock - no par value; 24,000,000 shares authorized;
issued and outstanding 3,481,152 in 2005 and 3,448,042 in 2004 7,261 7,159
Retained earnings 11,631 9,626
Accumulated other comprehensive (loss) income, net of taxes (48) 45
Total shareholders' equity 18,844 16,830
Total liabilities and shareholders' equity $ 263,485 $ 254,361
============ ============
See notes to unaudited condensed consolidated financial statements
2
Pacific State Bancorp and Subsidiary
Condensed Consolidated Statement of Income
(Unaudited)
June 30, June 30,
Three Months Ended Six Months Ended
------------------------- -------------------------
(in thousands, except per share amounts) 2005 2004 2005 2004
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 4,234 $ 3,042 $ 7,881 $ 5,894
Interest on Federal funds sold 67 13 125 15
Interest on investment securities 228 126 451 228
---------- ---------- ---------- ----------
Total interest income 4,529 3,181 8,457 6,137
Interest expense:
Interest on deposits 1,070 582 2,005 1,076
Interest on subordinated debentures 105 89 226 150
Interest on borrowings 28 31 47 65
---------- ---------- ---------- ----------
Total interest expense 1,203 702 2,278 1,291
---------- ---------- ---------- ----------
Net interest income before
provision for loan losses 3,326 2,479 6,179 4,846
Provision for loan losses 60 138 120 228
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 3,266 2,341 6,059 4,618
---------- ---------- ---------- ----------
Non-interest income:
Service charges 189 351 370 605
Other fee income 192 330 410 494
Gain on sale of loans 216 19 586 73
---------- ---------- ---------- ----------
Total non-interest income 597 700 1,366 1,172
Non-interest expenses:
Salaries and employee benefits 1,192 877 2,309 1,728
Occupancy 196 181 393 336
Furniture and equipment 147 115 279 228
Other 651 601 1,237 1,188
---------- ---------- ---------- ----------
Total non-interest expense 2,186 1,774 4,218 3,480
---------- ---------- ---------- ----------
Income before provision for
income taxes 1,677 1,267 3,207 2,310
Provision for income taxes 620 491 1,202 876
---------- ---------- ---------- ----------
Net income $ 1,057 $ 776 $ 2,005 $ 1,434
========== ========== ========== ==========
Basic earnings per share $ 0.31 $ 0.23 $ 0.58 $ 0.42
========== ========== ========== ==========
Diluted earnings per share $ 0.27 $ 0.21 $ 0.52 $ 0.40
========== ========== ========== ==========
Weighted average common shares outstanding 3,466,017 3,413,596 3,458,115 3,398,186
Weighted average common and common equivalent
shares outstanding
3,845,993 3,660,284 3,869,135 3,644,874
See notes to unaudited condensed consolidated financial statements
3
Pacific State Bancorp and Subsidiaries
Statement of Cash Flows
(Unaudited)
For the Six Months Ended
(in thousands) June 30
--------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net income $ 2,005 $ 1,434
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 228
Gain on Sale of Loans (586) (73)
Net increase in deferred loan origination fees and costs 11 69
Depreciation and amortization 283 252
Increase in Company owned life insurance, net of expenses (83) (101)
Decrease in accrued interest receivable and other assets (793) (366)
Increase in accrued interest payable and other liabilities 846 258
---------- ----------
Net cash provided by operating activities 1,803 1,701
---------- ----------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in banks 1,100 2,000
Proceeds from matured and called available-for-sale investment securities 800 1,634
Purchases of available-for-sale investment securities (3,034) (7,226)
Proceeds from principal repayments from available-for-sale securities 639 235
Proceeds from principal repayments from held-to-maturity securities 12
Net increase in loans (12,556) (20,966)
Proceeds from sale of premises and equipment 17 0
Purchases of premises and equipment (131) (1,007)
---------- ----------
Net cash used in investing activities (13,153) (25,330)
---------- ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits 7,101 4,257
Net (decrease) increase in time deposits (837) 23,819
Proceeds from the issuance of subordinated debentures 0 3,609
---------- ----------
Proceeds from exercise of stock options 102 74
---------- ----------
Net cash provided by financing activities 6,366 31,759
---------- ----------
(Decrease) increase in cash and cash equivalents (4,984) 8,130
Cash and cash equivalents at beginning of year 12,108 12,773
---------- ----------
Cash and cash equivalents at end of period $ 7,124 $ 20,903
========== ==========
See notes to unaudited condensed consolidated financial statements
4
Pacific State Bancorp and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Pacific State Bancorp is a holding company with one bank subsidiary, Pacific
State Bank, (the "Bank"), and two unconsolidated subsidiary guarantor trusts,
Pacific State Statutory Trusts I and II. Pacific State Bancorp commenced
operations on June 24, 2002 when it acquired all the then issued and outstanding
shares of Pacific State Bank. The Bank is a California state chartered bank and
is a member of the Federal Reserve System. The Bank's primary source of revenue
is providing loans to customers who are predominately small to middle-market
businesses and individuals within the Bank's service area. Pacific State
Statuatory Trusts I and II are unconsolidated, wholly owned statutory business
trusts formed in June 2002 and March 2004, respectively, for the exclusive
purpose of issuing and selling trust preferred securities.
The Bank has engaged since November 2, 1987 in a general commercial banking
business, primarily in the City of 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 Company as of June 30,
2005 had 69 employees, including 28 officers. The Bank does not engage in any
non-bank lines of business and its business is not to any significant degree
seasonal in nature. The Bank's Administrative headquarters are located at 1899
W. March Lane, Stockton, California. The Bank operates seven branches with its
main office located at 6 So. El Dorado Street, in Stockton, California;
additional branches are located elsewhere in Stockton and in the communities of
Angels Camp, Arnold, Groveland, Modesto and Tracy, California. In 2004, the
company opened a Loan Production Office in Castro Valley, California.
2. BASIS OF PRESENTATION AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
Pacific State Bancorp (the "Company") at June 30, 2005 and December 31, 2004,
and the results of its operations for the three and six month periods ended June
30, 2005 and 2004,and its cash flows for the six month periods ended June 30,
2005 and 2004 in conformity with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission ("SEC").
Certain disclosures normally presented in the notes to the consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States for annual financial statements have been omitted.
These interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2004 Annual Report to Shareholders. The results of
operations for the three and six month period ended June 30, 2005 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 loan and lease losses, the provision for
income taxes and the estimated fair value of investment securities.
Management has determined that all of the commercial banking products and
services offered by the Company are available in each branch of the Bank, that
all branches are located within the same economic environment and that
management does not allocate resources based on the performance of different
lending or transaction activities. Accordingly, the Company and it's subsidiary
operate as one business segment. No customer accounts for more than 10% of the
revenue for the Bank or the Company.
On September 16, 2004, the Company's Board of Directors approved a two-for-one
stock split to shareholders of record at the close of business on September 30,
2004, effective on the same date. All shares outstanding, stock option and per
share data in the condensed consolidated financial statements have been
retroactively restated to give effect to the stock split.
5
3. LOANS
Outstanding loans are summarized below:
June 30 December 31,
2005 2004
------------ ------------
(In thousands)
Commercial $ 40,890 $ 40,562
Agriculture 18,191 15,007
Real estate -commercial 110,456 109,895
Real estate-construction 31,745 22,965
Installment & Other 13,408 13,121
------------ ------------
214,690 201,550
Deferred Loan Fees and Costs 188 199
Allowance for Loan and Lease (2,332) (2,214)
------------ ------------
Losses
Total Net Loans $ 212,546 $ 199,535
============ ============
4. COMMITMENTS AND CONTINGENCIES
The Company is party to claims and legal proceedings arising in the ordinary
course of business. In the opinion of the Company's management, the ultimate
liability with respect to such proceedings will not have a materially adverse
effect on the financial condition or results of operations of the Company as a
whole.
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $64,070,000 and $41,868,000 and stand-by
letters of credit of $405,000 and $498,000 at June 30, 2005 and December 31,
2004, respectively. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2005.
Approximately $19,085,000 of the loan commitments outstanding at June 30, 2005
are for real estate loans and are expected to fund within the next twelve
months. The remaining commitments primarily relate to revolving lines of credit
or other commercial loans, and many of these are expected to expire without
being drawn upon. Therefore, the total commitments do not necessarily represent
future cash requirements. Each potential borrower and the necessary collateral
are evaluated on an individual basis. Collateral varies, but may include real
property, bank deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized. The deferred liability related to the Company's stand-by letters
of credit was not significant at June 30, 2005 and December 31, 2004.
6
5. EARNINGS PER SHARE COMPUTATION
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if outstanding stock options
were exercised. Diluted earnings per share is computed by dividing net income by
the weighted average common shares outstanding for the period plus the dilutive
effect of options.
6. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income or loss. Other comprehensive income or loss, net of taxes,
is comprised of the unrealized gains or losses on available-for-sale investment
securities. The following table shows comprehensive income and its components
for the periods indicated:
Three Months Ended Six Months Ended
---------------------------- ----------------------------
(In thousands) 6/30/2005 6/30/2004 6/30/2005 6/30/2004
----------- ----------- ----------- -----------
Net Income $ 1,057 $ 776 $ 2,005 $ 1,434
Other Comprehensive Income:
Change in unrealized gain on
available for sale securities (3) (259) (93) (185)
Reclassification adjustment -- -- -- --
----------- ----------- ----------- -----------
Total Other Comprehensive Income (3) (259) (93) (185)
Total Comprehensive Income 1,054 517 1,912 1,249
=========== =========== =========== ===========
7. STOCK-BASED COMPENSATION
At June 30, 2005, the Company has one stock-based employee compensation plans,
the Pacific State Bancorp 1997 Stock Option Plan. The Company accounts for this
plan under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under these plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Pro forma adjustments to the Company's consolidated net earnings and earnings
per share are disclosed during the years in which the options become vested.
For the Three Months For the Six Months
Ended Ended
June 30 June 30
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(in thousands, except share amounts)
Net income, as reported $ 1,057 $ 776 $ 2,005 $ 1,434
Deduct: Total stock-based employee
compensation expense determined
under the fair value method
for all awards, net of related tax effects 66 66 132 132
------------ ------------ ------------ ------------
Pro forma net income, in thousands $ 991 $ 710 $ 1,873 $ 1,302
============ ============ ============ ============
Basic earning per share - as reported $ 0.31 $ 0.23 $ 0.58 $ 0.42
Basic earning per share - pro forma $ 0.29 $ 0.21 $ 0.54 $ 0.38
Diluted earnings per share - as reported $ 0.27 $ 0.21 $ 0.52 $ 0.40
Diluted earnings per share - pro forma $ 0.26 $ 0.19 $ 0.48 $ 0.36
There were no options grants made during the three-month and six month period
ending June 30, 2005 and 2004
7
8. ACCOUNTING PRONOUCEMENTS
Share-Based Payments
In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123
(R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. In April 2005, the
Securities and Exchange Commission adopted a rule that defers the compliance
date of FAS 123(R) from the first reporting period beginning after June 15, 2005
to the first fiscal year beginning after June 15, 2005, January 1, 2006 for the
Company. Management has not completed its evaluation of the effect that FAS 123
(R) will have, but believes that the effect will be consistent with its previous
pro forma disclosures.
8
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others (1) significant
increases in competitive pressures in the financial services industry; (2)
changes in the interest rate environment resulting in reduced margins; (3)
general economic conditions, either nationally or regionally, maybe less
favorable than expected, resulting in among other things, a deterioration in
credit quality; (4) changes in the regulatory environment; (5) loss of key
personnel; (6) fluctuations in the real estate market; (7) changes in business
conditions and inflation; (8) operational risks including data processing
systems failures and fraud; and (9) changes in the securities market. Therefore
the information set forth herein should be carefully considered when evaluating
the business prospect of Pacific State Bancorp (the "Company").
When the Company uses in this Quarterly Report the words "anticipate",
"estimate", "expect", "project", "intend, "commit", "believe" and similar
expressions, the Company intends to identify forward-looking statements. Such
statements are not guarantees of performance and are subject to certain risks,
uncertainties and assumptions, including those described in this Quarterly
Report. Should one or more of the uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected, projected, intended, committed or
believed. The future results and stockholder values of the Company may differ
materially from those expressed in these forward-looking statements. Many
factors that will determine these results and values are beyond the Company's
ability to control or predict. For those statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
INTRODUCTION
Effective July 12, 2005, Pacific State Bancorp common stock began trading on the
Nasdaq(TM) National Market under the symbol of "PSBC". Prior to July 12, 2005
the Company was traded on the OTC Bulletin Board under the same symbol. The
following discussion and analysis sets forth certain statistical information
relating to the company as of June 30, 2005 and December 31, 2004 and the three
and six month periods ended June 30, 2005 and 2004. The discussion should be
read in conjunction with condensed consolidated financial statements and related
notes included elsewhere in this 10-Q and the consolidated financial statements
and notes thereto included in Pacific State Bancorp's Annual Report filed on
form 10-K for the year ended December 31, 2004.
CRITICAL ACCOUNTING POLICIES
There have been no changes to the Company's critical accounting policies from
those discussed in the Company's 2004 Annual Report to Shareholders' on Form
10-K.
OVERVIEW
The Company's net income increased $281 thousand or 36.2% to $1,057 thousand for
the second quarter of 2005 from $776 thousand for the same period in 2004. The
primary contributor to the increase in net income for the second quarter of 2005
was the $847 thousand increase in net interest income and a $78 thousand
decrease in the provision for loan losses. These changes were partially offset
by a decrease in non -interest income of $103 thousand, an increase in salaries
and benefits of $315 thousand, an increase in occupancy and equipment expense of
$47 thousand and an increase in the provision for income taxes of $129 thousand.
Diluted earnings per share were $0.27 for the second quarter of 2005 up 28.6%
from the $0.21 for the same period in 2004.
The Company's net income increased $571 thousand or 39.8% to $2,005 thousand for
the six month period ended June 30, 2005 from $1,434 thousand for the same
period in 2004. The primary contributors to the increase in net income for the
9
first six months of the 2005 were $1,333 thousand increase in net interest
income, a decrease in the provision for loan losses of $108 thousand and a $194
thousand increase in non-interest income. These changes were partially offset by
an increase in salaries and benefits of $581 thousand, an increase in occupancy
and equipment expense of $108 thousand and an increase in the provision for
income taxes of $326 thousand. Diluted earnings per share were $0.52 for the
first six months of 2005 up 30.0% from the $0.40 for the same period in 2004.
Total assets at June 30, 2005 were $263 million, an increase of $9 million or
3.6%, from the $254 million at December 31, 2004. The growth in assets was
primarily in the Company's loans. Loans grew $13 million or 6.5% to $213 million
at June 30, 2005 from $200 million at December 31, 2004. The growth in loans was
funded by the $6 million or 11.6% growth in non-interest bearing deposits and
the utilization of available cash.
The annualized return on assets was 1.57% and 1.50% for the three and six months
ended June 30, 2005 compared to 1.38% and 1.28% for the same periods in 2004.
The annualized return on equity was 23.00% and 22.58% for the three and six
months ended June 30, 2005 compared to 21.26% and 19.81% for the same periods in
2004.
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED JUNE 30, 2005
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis was $3.3 million for the three months ended June 30,
2005, an increase of $847 thousand or 34.2% from $2.5 million for the same
period in 2004. The increase in net interest income was primarily attributed to
volume increase in the company's average loan and investment balances supported
by the overall increases in the yields earned primarily on loans. These
increases were partially offset by the increases in both the level of average
interest bearing liabilities and the increase in the average rates paid.
Interest income increased $1.3 million or 42.4% to $4.5 million for the three
months ended June 30, 2005 from $3.2 million for the same period in 2004. The
increase in interest income was primarily attributed to volume increases in
investment and loan balances as well as a slight increase in yield, particularly
in loans, offset by a decrease in yields on investment securities. The Company's
average loan balances were $208.6 million for the three months ended June 30,
2005, up $37.1 million or 21.6% from $171.5 million for the same period in 2004.
The Company's average loan yield was 8.14% for the three months ended June 30,
2005, up 103 basis points from the 7.11% yield for the same period in 2004. The
Company's average investment balances were $28.6 million for the three months
ended June 30, 2005, up $14.0 million, or 95.9%, from $14.6 million for the same
period in 2004. The Company's average investment yield was 2.44% for the three
months ended June 30, 2005, down 91 basis points from the 3.35% yield for the
same period in 2004. As a result of the change in mix of the Company's earning
assets and the yields earned, the overall yield on average earning assets
increased 66 basis points to 7.21% for the three months ended June 30, 2005,
from 6.55% for the same period in 2004
Interest expense increased $501 thousand, or 70.8% to $1.2 million for the three
months ended June 30, 2005, from $702 thousand for the same period in 2004. The
increase is primarily attributed to both the increase in interest-bearing
deposit volumes and in the rates paid on interest bearing liabilities. The
Company's average balances of interest bearing liabilities were $197.8 million
for the three months ended June 30, 2005, up $34.6 million, or 21.2% from $163.2
million for the same period in 2004. Additionally the average rate paid on
interest-bearing deposits increased 71 basis points to 2.44% for the three
months ended June 30, 2005 from 1.73% for the same period in 2004.
As a result of the changes noted above, the net interest margin for the three
months ended June 30, 2005 increased 20 basis points or 3.9% to 5.30%, from
5.10% for the same period in 2004.
10
The following table presents for the three month periods indicated the
distribution of consolidated average assets, liabilities and shareholders'
equity. It also presents the amounts of interest income from the interest
earning assets and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while nonaccrued interest thereon
is excluded from the computation of yields earned:
For the Three Months Ended For the Three Months Ended
June 30, 2005 June 30, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest Yield/Rate Average Interest Yield/Rate
Balance Income / Balance Income /
Expense Expense
Assets
Loans [1] [2] $ 208,585 $ 4,234 8.14% $ 171,505 $ 3,042 7.11%
- -------------
Investment Securities [1] 28,628 174 2.44% 14,609 122 3.35%
Federal Funds Sold 9,571 67 2.81% 4,886 13 1.07%
Interest-bearing Deposits in Banks 5,000 54 4.33% 3,924 4 0.41%
---------- ---------- ---------- ----------
Total Average Earning Assets 251,784 $ 4,529 7.21% 194,924 $ 3,181 6.55%
---------- ----------
Cash & Due From Banks 14,184 11,054
Other Assets 4,849 19,380
---------- ----------
Total Average Assets $ 270,817 $ 225,358
========== ==========
Liabilities and Shareholders Equity
Interest Bearing Liabilities:
Interest-bearing Demand $ 105,049 $ 595 2.27% $ 50,480 $ 136 1.08%
Savings 6,935 9 0.52% 6,469 3 0.19%
Time Deposits 72,901 466 2.56% 93,254 443 1.91%
Other Borrowings [3] 12,869 133 4.15% 13,018 120 3.70%
---------- ---------- ---------- ----------
Total Average Interest Bearing
Liabilities [4] 197,754 1,203 2.44% 163,221 702 1.73%
---------- ----------
Non-interest Bearing Demand 54,721 42,624
Other Liabilities 170 5,330
Shareholder Equity 18,172 18,185
---------- ----------
Total Average Liabilities and
Shareholders Equity $ 270,817 $ 229,360
========== ==========
Net Interest Income and Net
Interest Margin [5] $ 3,326 5.30% $ 2,479 5.10%
========== ==========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended June 30, 2005 and 2004 amounted to $177 thousand and $241
thousand, respectively.
(3) For the purpose of this schedule the interest expense related to the
Company's junior subordinated debentures is included in other
borrowings.
(4) Total interest expense divided by the average balance of total earning
assets. (5) Net interest income divided by the average balance of total
earning assets
11
The following table sets forth changes in interest income and interest expense,
for the three month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:
Three Months Ended June 30,
2005 over 2004 change in net interest income
---------------------------------------------------------
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 1,192 $ 439 $ 658 $ 95
Investment securities 52 (33) 117 (32)
Federal funds sold 54 22 12 20
Interest Bearing Deposits in Banks 50 38 1 11
---------- ---------- ---------- ----------
Total interest income $ 1,348 $ 466 $ 783 $ 94
Interest Expense:
Interest-bearing Demand 459 150 147 162
Savings 6 6 -- --
Time Deposits 23 153 (97) (33)
Other borrowing 13 14 (1) --
Total interest expense $ 501 $ 323 $ 49 $ 129
---------- ---------- ---------- ----------
Net interest income $ 847 $ 143 $ 739 $ (35)
========== ========== ========== ==========
(1) The volume change in net interest income represents the change in average
balance divided by the previous year's rate.
(2) The rate change in net interest income represents the change in rate
divided by the previous year's average balance.
(3) The mix change in net interest income represents the change in average
balance multiplied by the change in rate.
Provision for loan losses. The Company recorded $60 thousand in provision for
loan losses for the three month period ended June 30, 2005, down $78 thousand or
56.5%, from the $138 thousand provision for the same period in 2004. Management
assesses its loan quality monthly to maintain an adequate allowance for loan
losses. Based on the information currently available, management believes that
the allowance for loan losses is adequate to absorb potential risks in the
portfolio. However, no assurance can be given that the Company may not sustain
charge-offs which are in excess of the allowance in any given period. The
Company's loan portfolio composition and non-performing assets are further
discussed under the Financial Condition section below.
Non-Interest Income. During the three months ended June 30, 2005, total
non-interest income decreased $103 thousand or 14.7% to $597 thousand, down from
$700 thousand for the comparable period in 2004. The decrease in non interest
income was primarily the result of decreases in service charge income and other
fee income partially offset by the increase in gains on sales of loans.
The decrease in service charge income is the result of (1) higher earnings rate
used to credit fee charged to high volume accounts and (2)a decrease in the
volume of account overdrafts.
The decrease in other fee income is the result of a decrease in mortgage
referral fees. Other fee income decreased $138 thousand or 41.8% to $192
thousand, from $330 thousand for the comparable period in 2004.
The increase in gain on sale of loan income is due to the timing of the sale of
the loans as well as the increase in the number and dollar amount of loans sold.
For the three month period ended June 30, 2005, the company sold six loans as
compared one for the same period ended 2004. Income derived from the gain on
sale of loans increased $197 thousand or 1,036.8% to $216 thousand, up from $19
thousand for the comparable period in 2004. The company expects that this trend
will continue through the third and fourth quarter of 2005.
12
Non-Interest Expenses. Non-interest expense consists of salaries and related
employee benefits, occupancy and equipment expenses, professional fees,
appraisal fees, directors' fees, postage, stationary and supplies expenses,
telephone expenses, data processing expenses, advertising and promotion expense
and other operating expenses. Non-interest expense for the three months ended
June 30, 2005 was 2.2 million compared to $1.8 million for the same period in
2004, representing an increase of $412 thousand or 23.2%. Increases in salaries
and benefits are indicative of the additions to staff to expand branch
operations in line with their respective growth. The increase in occupancy
expense is attributable to the addition of a loan production facility in Alameda
County.
The following table sets forth a summary of non-interest expense for the three
months ended June 30, 2005 and 2004:
Three Months Ended
-------------------------
June 30, June 30,
2005 2004
(In thousands) ---------- ----------
Non-interest Expense:
Salaries & Benefits $ 1,192 $ 877
Occupancy 196 181
Furniture and Equipment 147 115
Other Expense 651 601
---------- ----------
Total Non-Interest Expenses $ 2,186 $ 1,774
========== ==========
Income Taxes. The Company's provision for income taxes includes both federal
income and state franchise taxes and reflects the application of federal and
state statutory rates to the Company's net income before taxes. The principal
difference between statutory tax rates and the Company's effective tax rate is
the benefit derived from investing in tax-exempt securities and Company owned
life insurance. Increases and decreases in the provision for taxes reflect
changes in the Company's net income before tax.
The following table reflects the Company's tax provision and the related
effective tax rate for the three months ended June 30, 2005 and 2004.
Three Months Ended
-------------------------
June 30, June 30,
(In thousands) 2005 2004
---------- ----------
Tax Provision $ 620 $ 491
Effective Tax Rate 36.97% 38.75%
13
RESULTS OF OPERATION FOR THE SIX MONTHS ENDED JUNE 30, 2005
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis was $6.2 million for the six months ended June 30,
2005, an increase of $1.4 million or 27.5% from $4.8 million for the same period
in 2004. The increase in net interest income was primarily attributed to volume
increase in the company's average loan and investment balances supported by
increases in the yields earned . These increases were partially offset by the
increases in both the overall level of average interest bearing liabilities and
the increase in the average rates paid.
Interest income increased $2.4 million or 37.7% to $8.5 million for the six
months ended June 30, 2005 from $6.1 million for the same period in 2004. The
increase in income was primarily attributed to volume increases in all earning
assets but primarily in loans as well as an increase in yields. The Company's
average loan balances were $206.2 million for the six months ended June 30,
2005, up $38.0 million or 22.6% from $168.2 million for the same period in 2004.
The Company's average loan yield was 7.71% for the six months ended June 30,
2005, up 64 basis points from the 7.07% yield for the same period in 2004. The
Company's average investment balances were $18.6 million for the six months
ended June 30, 2005, up $5.3 million, or 40.2%, from $13.3 million for the same
period in 2004. The Company's average investment yield was 3.97% for the six
months ended June 30, 2005, up 61 basis points from the 3.36% yield for the same
period in 2004. As a result of the change in mix of the Company's earning assets
and the yields earned, the yield on average earning assets was up 55 basis
points to 7.10% for the six months ended June 30, 2005, from 6.55% for the same
period in 2004
Interest expense increased $987 thousand, or 76.5% to $2.3 million for the six
months ended June 30, 2005, up from $1.3 million for the same period in 2004.
The increase is primarily attributed to both the increase in overall
interest-bearing deposit volumes and in the rates paid on interest bearing
liabilities. The Company's average balances of interest bearing liabilities were
$195.6 million for the six months ended June 30, 2005, up $37.2 million, or
23.5% from $158.4 million for the same period in 2004. Additionally the average
rate paid on interest-bearing deposits increased 71 basis points to 2.35% for
the six months ended June 30, 2005 from 1.64% for the same period in 2004.
As a result of the changes noted above, the net interest margin for the six
months ended June 30, 2005 increased slightly by 2 basis points or 0.4% to
5.19%, up from 5.17% for the same period in 2004.
14
The following table presents for the six month periods indicated the
distribution of consolidated average assets, liabilities and shareholders'
equity. It also presents the amounts of interest income from the interest
earning assets and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily averages. Nonaccrual loans
are included in the calculation of average loans while nonaccrued interest
thereon is excluded from the computation of yields earned:
For the Six Months Ended For the Six Months Ended
June 30, 2005 June 30, 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Average Interest Yield/Rate Average Interest Yield/Rate
Balance Income / Balance Income /
Expense Expense
Assets
Loans [1] [2] $ 206,150 $ 7,881 7.71% $ 168,193 $ 5,894 7.07%
- -------------
Investment Securities [1] 18,587 366 3.97% 13,250 221 3.36%
Federal Funds Sold 10,011 125 2.52% 3,620 15 0.84%
Interest-bearing Deposits in Banks 5,450 85 3.15% 3,839 7 0.37%
---------- ---------- ---------- ----------
Total Average Earning Assets 240,198 $ 8,457 7.10% 188,902 $ 6,137 6.55%
---------- ----------
Cash & Due From Banks 13,930 10,445
Other Assets 14,462 14,493
---------- ----------
Total Average Assets $ 268,590 $ 213,840
========== ==========
Liabilities and Shareholders Equity
Interest Bearing Liabilities:
Interest-bearing Demand $ 103,045 $ 1,137 2.23% $ 50,405 $ 236 0.94%
Savings 7,109 18 0.51% 6,247 6 0.19%
Time Deposits 72,590 850 2.36% 89,464 834 1.88%
Other Borrowings [3] 12,814 273 4.30% 12,275 215 3.53%
---------- ---------- ---------- ----------
Total Average Interest Bearing
Liabilities [4] 195,558 2,278 2.35% 158,391 1,291 1.64%
---------- ----------
Non-interest Bearing Demand 54,965 41,096
Other Liabilities 1,222 391
Shareholder Equity 16,845 13,962
---------- ----------
Total Average Liabilities and
Shareholders Equity $ 268,590 $ 213,840
========== ==========
Net Interest Income and Net
Interest Margin [5] $ 6,179 5.19% $ 4,846 5.17%
========== ==========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the six month periods
ended June 30, 2005 and 2004 amounted to $177 thousand and $241
thousand, respectively.
(3) For the purpose of this schedule the interest expense related to the
Company's junior subordinated debentures is included in other
borrowings.
(4) Total interest expense divided by the average balance of total earning
assets. (5) Net interest income divided by the average balance of total
earning assets
15
The following table sets forth changes in interest income and interest expense,
for the six month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:
Six Months Ended June 30,
2005 over 2004 change in net interest income
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 1,987 $ 536 $ 1,330 $ 121
Investment securities 145 40 89 16
Federal funds sold 110 30 27 53
Interest Bearing Deposits in Banks 78 53 4 21
---------- ---------- ---------- ----------
Total interest income $ 2,320 $ 659 $ 1,450 $ 211
Interest Expense:
Interest-bearing Demand 901 320 246 335
Savings 12 10 1 1
Time Deposits 16 214 (158) (40)
Other borrowing 58 47 10 1
Total interest expense $ 987 $ 591 $ 99 $ 297
---------- ---------- ---------- ----------
Net interest income $ 1,333 $ 68 $ 1,351 $ (86)
========== ========== ========== ==========
(1) The volume change in net interest income represents the change in average
balance divided by the previous year's rate.
(2) The rate change in net interest income represents the change in rate
divided by the previous year's average balance.
(3) The mix change in net interest income represents the change in average
balance multiplied by the change in rate.
Provision for loan losses. The Company recorded $120 thousand in provision for
loan losses for the six month period ended June 30, 2005, down $108 thousand or
47.4%, from the $228 thousand provision for the same period in 2004. Management
assesses its loan quality monthly to maintain an adequate allowance for loan
losses. Based on the information currently available, management believes that
the allowance for loan losses is adequate to absorb potential risks in the
portfolio. However, no assurance can be given that the Company may not sustain
charge-offs which are in excess of the allowance in any given period. The
Company's loan portfolio composition and non-performing assets are further
discussed under the financial condition section below.
Non-Interest Income. During the six months ended June 30, 2005, total
non-interest income increased $194 thousand or 16.6% to $1.4 million, up from
$1.2 million for the comparable period in 2004. The increase in non interest
income was primarily the result of an increase in gain on sale of loans, offset
by a decrease in service charge income and other fee income.
The increase in gain on sale of loan income is due to the timing of the sale of
the loans as well as the increase in the number and dollar amount of loans sold.
For the six month period ended June 30, 2005, the company sold seven loans as
compared two for the same period ended 2004. The increase in gain on sale of
loan income is due to the timing of the sale of the loans. Income derived from
the gain on sale of loans increased $513 thousand or 702.7% to $586 thousand, up
from $73 thousand for the comparable period in 2004. The company expects that
this trend will continue through the third and fourth quarter of 2005.
The decrease in service charge income is the result of (1) higher earnings rate
used to credit fee charged to high volume accounts and (2)a decrease in the
volume of account overdrafts.
The decrease in other fee income is the result of a decrease in mortgage
referral fees. Other fee income decreased $84 thousand or 17.0% to $410
thousand, from $494 thousand for the comparable period in 2004.
16
Non-Interest Expenses. Non-interest expense for the six months ended June 30,
2005 was $4.2 million compared to $3.5 million for the same period in 2004,
representing an increase of $738 thousand or 21.29% Increases in salaries and
benefits are indicative of the additions to staff to expand branch operations in
line with their respective growth. The increase in occupancy expense is
attributable to the addition of a loan production facility in Alameda County.
The following table sets forth a summary of non-interest expense for the six
months ended June 30, 2005 and 2004:
Six Months Ended
-------------------------
June 30, June 30,
2005 2004
(In thousands) ---------- ----------
Non-interest Expense:
Salaries & Benefits $ 2,309 $ 1,728
Occupancy 393 336
Furniture and Equipment 279 228
Other Expense 1,237 1,188
---------- ----------
Total Non-Interest Expense $ 4,218 $ 3,480
========== ==========
Income Taxes.
The following table reflects the Company's tax provision and the related
effective tax rate for the six months ended June 30, 2005 and 2004:
Six Months Ended
-------------------------
June 30, June 30,
(In thousands) 2005 2004
---------- ----------
Tax Provision $ 1,202 $ 876
Effective Tax Rate 37.48% 37.92%
FINANCIAL CONDITION
Total assets at June 30, 2005 were $263 million, an increase of $9 million or
3.6%, from the $254 million at December 31, 2004. The growth in assets was
primarily in the Company's loans. Loans grew $13 million or 6.5% to $213 million
at June 30, 2005 from $200 million at December 31, 2004. The growth in loans was
funded by the $6 million or 11.6% growth in non-interest bearing deposits and
the utilization of available cash.
Loan portfolio composition. The Company concentrates its lending activities
primarily within Calaveras, San Joaquin, Stanislaus, Tuolumne and Alameda
Counties.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral.
17
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated:
June 30 December 31,
- -------------------------------------------------------------------------------
2005 2004
- -------------------------------------------------------------------------------
dollars in thousands
Commercial $ 40,890 $ 40,562
Agriculture 18,191 15,007
Real estate -commercial 110,456 109,895
Real estate-construction 31,745 22,965
Installment & Other 13,408 13,121
Deferred Loan Fees and Costs 188 199
Allowance for Loan and Lease Losses (2,332) (2,214)
------------ ------------
Total Net Loans $ 212,546 $ 199,535
- -------------------------------------------------------------------------------
The Company continues to manage the mix in its loan portfolio consistent with
its identity as a community bank servicing Northern California and the Central
Valley. Net portfolio loans have increased $13 million or 6.5%, to $212.5
million at June 30, 2005 from $199.5 million at December 31, 2004. Commercial
loans have increased slightly by $328 thousand or 0.81% to $40.9 million from
$40.6 million at December 31, 2004. Agricultural Loans increased $3.2 million or
21.2% to $18.2 million from $15.0 million at December 31, 2004. Real estate
commercial mortgage loans increased slightly by $561 thousand or 0.51% to $110.5
million from $109.9 million at December 31, 2004. Real estate construction loans
increased $8.8 million or 38.23% to $31.7 from $23.0 million at December 31,
2004. Installment loans increased $286 thousand or 2.2% from $13.1 million at
December 31, 2004. The portfolio mix remains stable as compared with the mix of
a year ago, with commercial and agricultural loans of approximately 27.8% of
total loans, real estate construction loans of 14.9%, commercial real estate
loans at 51.9%, and 6.3% for installment loans at June 30, 2005.
Nonperforming loans. There were no nonperforming loans at June 30, 2005 and
December 31, 2004.
Analysis of allowance for loan losses. In determining the amount of the
Company's Allowance for Loan Losses ("ALL"), 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 ALL. 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 Company makes provisions to the ALL on a regular basis through charges to
operations that are reflected in the Company's statements of income as a
provision for loan losses. When a loan is deemed uncollectible, it is charged
against the allowance. Any recoveries of previously charged-off loans are
credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio. Similarly, the adequacy of the ALL and the
level of the related provision for possible loan losses is determined on a
judgment basis by management based on consideration of a number of factors
including (i) economic conditions, (ii) borrowers' financial condition, (iii)
loan impairment, (iv) evaluation of industry trends, (v) industry and other
concentrations, (vi) loans which are contractually current as to payment terms
but demonstrate a higher degree of risk as identified by management, (vii)
continuing evaluation of the performing loan portfolio, (viii) monthly review
and evaluation of problem loans identified as having a loss potential, (ix)
monthly review by the Board of Directors, (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.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and other qualitative factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's ALL. Such agencies may require the Company to provide additions to
18
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 adequacy of the ALL is calculated upon three components. First is the credit
risk rating of the loan portfolio, including all outstanding loans and leases.
Every extension of credit has been assigned a risk rating based upon a
comprehensive definition intended to measure the inherent risk of lending money.
Each rating has an assigned risk factor expressed as a reserve percentage.
Central to this assigned risk factor is the historical loss record of the
Company. Secondly, established specific reserves are available for individual
loans currently on management's watch and 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 decreased to $60,000 and $120,000 for the three
and six months ended June 30, 2005 versus $138,000 and $228,000 for the same
periods in 2004. The decrease in the amount of the provision is a direct result
of the Company's analysis of the loan portfolio and the loan loss history of the
Company. 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 ALL for the periods
indicated.
Three Months Ended Six Months Ended
(In thousands) June 30, June 30,
- ------------------------------------------------------------------------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------
Beginning Balance: $ 2,276 $ 1,743 $ 2,214 $ 1,653
Provision for loan losses 60 138 120 228
Charge-offs:
Commercial 4 7 5 7
Real Estate -- -- -- --
Other -- -- -- --
---------- ---------- ---------- ----------
Total Charge-offs 4 7 5 7
---------- ---------- ---------- ----------
Recoveries:
Commercial -- -- 3 --
Other -- -- -- --
---------- ---------- ---------- ----------
Total Recoveries -- -- 3 --
---------- ---------- ---------- ----------
Ending Balance $ 2,332 $ 1,874 $ 2,332 $ 1,874
========== ========== ========== ==========
ALL to total loans 1.09% 1.05% 1.09% 1.05%
Investment securities and interest-bearing deposits. Combined investment
securities, and interest-bearing deposits in other banks increased $308 thousand
to $23.9 million June 30, 2005, from $23.6 million at December 31, 2004.
The Company's investment in U.S. Treasury securities increased to 34.4% of the
investment portfolio at June 30, 2005 compared to 34.1% at December 31, 2004.
Obligations of U.S. Agencies decreased to 39.4% of the investment portfolio at
June 30, 2005 compared to 46.1% at December 31, 2004. The Company's investment
in corporate bonds increased to 10.9% of the investment portfolio at June 30,
2005 compared to 1.8% at December 31, 2004. Tax-exempt municipal obligations
bonds decreased to 15.3% of the investment portfolio at June 30, 2005 compared
to 18.0% at December 31, 2004.
Deposits. Total deposits were $230.0 million as of June 30, 2005, an increase of
$6.2 million or 2.8% from the December 31, 2004 balance of $223.8 million. The
Company continues to manage the mix of its deposits consistent with its identity
as a community bank serving the financial needs of its customers. Non-interest
bearing demand deposit and interest bearing checking deposits increased to 25.2%
of total deposits from 23.2% at December 31, 2004. Money market and savings
accounts decreased to 44.4% of total deposits from 45.2% at December 31, 2004.
Time deposits decreased to 30.4% of total deposits from 31.6% at December 31,
2004
19
CAPITAL RESOURCES
Capital adequacy is a measure of the amount of capital needed to sustain asset
growth and act as a cushion for losses. Capital protects depositors and the
deposit insurance fund from potential losses and is a source of funds for the
investments the Company needs to remain competitive. Historically, capital has
been generated principally from the retention of earnings.
Overall capital adequacy is monitored on a day-to-day basis by the Company's
management and reported to the Company's Board of Directors on a quarterly
basis. The Bank's regulators measure capital adequacy by using a risk-based
capital framework and by monitoring compliance with minimum leverage ratio
guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1" capital
(defined as principally comprising shareholders' equity and the qualifying
portion of subordinated debentures) and "Tier 2" capital (defined as principally
comprising Tier 1 capital and the remaining qualifying portion of subordinated
debentures and the qualifying portion of the ALL).
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 ALL.
As of June 30, 2005 the most recent notification by the Federal Deposit
Insurance Corporation ("FDIC") categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must meet the minimum ratios as set forth below. There are
no conditions or events since that notification that management believes have
changed the Bank's category. Management believes that the Company met all of its
capital adequacy requirements.
20
The Company's risk-based capital ratios are presented below (dollars in
thousands).
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- --------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of June 30, 2005:
Total capital
(to risk weighted assets) $ 28,754 12.49% $ 18,415 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 24,142 10.49% $ 9,207 4.00% N/A N/A
Tier I capital
(to average assets) $ 24,142 9.03% $ 10,700 4.00% N/A N/A
Bank
As of June 30, 2005:
Total capital
(to risk weighted assets) $ 27,569 12.05% $ 18,307 8.00% $ 26,749 10.00%
Tier I capital
(to risk weighted assets) $ 25,238 11.03% $ 9,154 4.00% $ 13,730 6.00%
Tier I capital
(to average assets) $ 25,238 9.43% $ 10,700 4.00% $ 11,442 5.00%
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- --------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of December 31, 2004
Total capital
(to risk weighted assets) $ 26,704 12.60% $ 16,875 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 21,262 10.10% $ 8,437 4.00% N/A N/A
Tier I capital
(to average assets) $ 21,262 8.30% $ 10,245 4.00% N/A N/A
Bank
As of December 31, 2004:
Total capital
(to risk weighted assets) $ 25,655 12.20% $ 16,809 8.00% $ 21,012 10.00%
Tier I capital
(to risk weighted assets) $ 23,315 11.10% $ 8,405 4.00% $ 12,607 6.00%
Tier I capital
(to average assets) $ 23,315 9.10% $ 10,242 4.00% $ 12,802 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. For all
other institutions the minimum rate is 4%.
21
LIQUIDITY
The purpose of liquidity management is to ensure efficient and economical
funding of the Company's assets consistent with the needs of the Company's
depositors and, to a lesser extent, shareholders. This process is managed not by
formally monitoring the cash flows from operations, investing and financing
activities as described in the Company's statement of cash flows, but through an
understanding principally of depositor and borrower needs. As loan demand
increases, the Company can use asset liquidity from maturing investments along
with deposit growth to fund the new loans.
With respect to assets, liquidity is provided by 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 Company to borrow funds and to
generate deposits.
Because estimates of the liquidity needs of the Company may vary from actual
needs, the Company maintains a substantial amount of liquid assets to absorb
short-term increases in loans or reductions in deposits. As loan demand
decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity. Therefore, there
is some correlation between financing activities associated with deposits and
investing activities associated with lending. The Company's liquid assets (cash
and due from banks, federal funds sold, interest bearing deposits and
available-for-sale investment securities) totaled $31.0 million or 11.8% of
total assets at June 30, 2005 compared to $35.5 million or 13.9% of total assets
at December 31, 2004. The Company expects that its primary source of liquidity
will be earnings of the Company, acquisition of core deposits, and wholesale
borrowing arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates such as interest rates, commodity prices and equity
prices. As a financial institution, the Company's market risk arises primarily
from interest rate risk exposure. Fluctuation in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest earnings
assets and interest bearing liabilities, other than those that possess a short
term to maturity. Based upon the nature of its operations, the Company is not
subject to fluctuations in foreign currency exchange or commodity pricing.
However, the Company's commercial real estate loan portfolio, concentrated
primarily in Northern California, is subject to risks associated with the local
economies.
The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic value of the Company while maintaining
adequate liquidity and managing exposure to interest rate risk deemed by
management to be acceptable. Management believes an acceptable degree of
exposure to interest rate risk results from management of assets and liabilities
through using floating rate loans and deposits, maturities, pricing and mix to
attempt to neutralize the potential impact of changes in market interest rates.
The Company's profitability is dependent to a large extent upon its net interest
income which is the difference between its interest income on interest earning
assets, such as loans and securities, and interest expense on interest bearing
liabilities, such as deposits, trust preferred securities and other borrowings.
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest earning assets reprice differently than its
interest bearing liabilities. The Company manages its mix of assets and
liabilities with the goal of limiting exposure to interest rate risk, ensuring
adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control its interest rate risk exposure in a manner that
will allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Company has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Company measures interest rate risk utilizing both an internal asset
liability measurement system as well as employing independent third party
reviews to confirm the reasonableness of the assumptions used to measure and
report the Company's interest rate risk, enabling management to make any
adjustments necessary.
22
Interest rate risk is managed by the Company's Asset Liability Committee
("ALCO"), which includes members of senior management and several members of the
Board of Directors. The ALCO monitors interest rate risk by analyzing the
potential impact on interest income from potential changes in interest rates and
considers the impact of alternative strategies or changes in balance sheet
structure. The ALCO manages the Company's balance sheet in part to maintain the
potential impact on net interest income within acceptable ranges despite changes
in interest rates. The Company's exposure to interest rate risk is reviewed on
at least a quarterly basis by the ALCO.
In management's opinion there has not been a material change in the Company's
market risk or interest rate risk profile for the six months ended June 30, 2005
compared to December 31, 2004 as discussed in the Company's 2004 Annual Report
on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, based on
their evaluation as of the end of the period covered by this report of the
Company's disclosure controls and procedures (as defined in Exchange Act Rule
13a--15(e)), have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in its periodic SEC filings is recorded, processed and reported
within the time periods specified in the SEC's rules and forms. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated and unconsolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including
cost limitations, judgments used in decision making, assumptions regarding the
likelihood of future events, soundness of internal controls, fraud, the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can provide only reasonable, and not absolute, assurance of achieving their
control objectives.
There were no significant changes in the Company's internal controls or in other
factors during the period covered by this report that have materially affected
or could significantly affect internal controls over financial reporting.
23
Part II - Other Information
ITEM 4
The Bank held its annual shareholders meeting ("Meeting") on May 12, 2005 at the
Bank's office at 6. So. El Dorado St., Stockton, CA. 94501.
According to the certified list of stockholders which was presented at the
Meeting, there were 3,454,922 shares of Common Stock of the Company outstanding
and entitled to vote at the Meeting. There were present at the Meeting, in
person or by proxy, the holders of 2,789,519 shares of Common Stock of the
Company, representing 80.74 % of the total votes eligible to be cast,
constituting a majority and more than a quorum of the outstanding shares
entitled to vote.
The Shareholders approved the following:
PROPOSAL 1 - Election of Directors
FOR WITHHELD
Michael L. Dalton 2,772,559 16,960
Maxwell M. Freeman 2,766,159 23,360
Harold Hand 2,772,599 16,960
Patricia Ann Hatton 2,772,559 16,960
Steven J. Kikuchi 2,770,959 18,560
Yosh Mataga 2,772,559 16,960
Steven A. Rosso 2,770,479 19,040
Gary A. Stewart 2,770,479 19,040
Kathleen Verner 2,772,559 16,960
Philip B. Wallace 2,772,079 17,440
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer (section 302 of the
Sarbanes-Oxley Act).
31.2 Certification of Chief Financial Officer (section 302 of the
Sarbanes-Oxley Act).
32.1 Certification of Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific State Bancorp
Date: August 12, 2005 BY: /s/ STEVEN A. ROSSO
--------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: August 12, 2005 BY: /s/ JOANNE ROBERTS
--------------------------------------
JoAnne Roberts
Senior Vice President and Chief
Financial Officer
25
EXHIBITS
31.1 Certification of Chief Executive Officer (section 302 of the
Sarbanes-Oxley Act).
31.2 Certification of Chief Financial Officer (section 302 of the
Sarbanes-Oxley Act).
32.1 Certification of Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act
26