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 September 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-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 November 9, 2005
Common Stock 3,489,982
No Par Value
PART I
ITEM 1. FINANCIAL STATEMENTS
Pacific State Bancorp and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share amounts) September 30, December 31,
Assets 2005 2004
- ------ ------------- -------------
Cash and due from banks $ 16,580 $ 12,108
Federal funds sold 16,763 0
Interest -bearing deposits in banks 100 6,100
Investment securities - available for sale (amortized cost
of $22,215 in 2005 and $17,407 in 2004) 20,988 17,482
Loans, less allowance for loan losses of $2,414 in 2005
and $2,214 in 2004 219,002 199,535
Bank premises and equipment, net 9,479 9,748
Company owned life insurance 4,806 4,246
Accrued interest receivable and other assets 5,932 5,142
------------- -------------
Total assets $ 293,650 $ 254,361
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 61,509 $ 51,980
Interest bearing 197,441 171,781
------------- -------------
Total deposits 258,950 223,761
Other Borrowings 4,000 4,000
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 1,805 1,006
------------- -------------
Total liabilities 273,519 237,531
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;
shares issued and outstanding 3,489,982 in 2005 and
3,448,042 in 2004
7,291 7,159
Retained earnings 12,829 9,626
Accumulated other comprehensive income, net of tax 11 45
------------- -------------
Total shareholders' equity 20,131 16,830
Total liabilities and shareholders' equity $ 293,650 $ 254,361
============= =============
See notes to unaudited condensed consolidated financial statements
1
Pacific State Bancorp and Subsidiary
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(in thousands, except share amounts) 2005 2004 2005 2004
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 4,836 $ 3,200 $ 12,716 $ 9,094
Interest on federal funds sold 84 27 209 42
Interest on investment securities 197 144 649 372
---------- ---------- ---------- ----------
Total interest income 5,117 3,371 13,574 9,508
Interest expense:
Interest on deposits 1,199 671 3,205 1,748
Interest on subordinated debentures 145 101 372 251
Interest on borrowings 21 31 67 95
---------- ---------- ---------- ----------
Total interest expense 1,365 803 3,644 2,094
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 3,752 2,568 9,930 7,414
Provision for loan losses 90 138 210 366
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 3,662 2,430 9,720 7,048
---------- ---------- ---------- ----------
Non-interest income:
Service charges 197 286 567 891
Other fee income 238 291 648 785
Gain on sale of loans 142 240 728 313
---------- ---------- ---------- ----------
Total non-interest income 577 817 1,943 1,989
Non-interest expenses:
Salaries and employee benefits 1,255 853 3,563 2,580
Occupancy 224 200 618 536
Furniture and equipment 156 125 436 354
Other 726 662 1,971 1,849
---------- ---------- ---------- ----------
Total non-interest expenses 2,361 1,840 6,588 5,319
---------- ---------- ---------- ----------
Income before provision for income taxes 1,878 1,407 5,075 3,718
Provision for income taxes 680 513 1,872 1,390
---------- ---------- ---------- ----------
Net income $ 1,198 $ 894 $ 3,203 $ 2,328
========== ========== ========== ==========
Basic earnings per share $ 0.35 $ 0.26 $ 0.93 $ 0.68
========== ========== ========== ==========
Diluted earnings per share $ 0.31 $ 0.24 $ 0.82 $ 0.63
========== ========== ========== ==========
Weighted average common shares outstanding 3,467,819 3,437,575 3,459,428 3,407,185
Weighted average common and common
equivalent shares outstanding 3,926,957 3,784,982 3,890,905 3,710,882
See notes to unaudited condensed consolidated financial statements
2
Pacific State Bancorp and Subsidiaries
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
(in thousands) September 30
--------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net income $ 3,203 $ 2,328
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 210 366
Gain on sale of loans (728) (313)
Net increase in deferred loan origination fees and costs (18) 68
Depreciation and amortization 371 363
Increase in Company owned life insurance, net of expenses (560) 0
Decrease in accrued interest receivable and other assets (816) (433)
Increase in accrued interest payable and other liabilities 799 955
---------- ----------
Net cash provided by operating activities 2,461 3,647
---------- ----------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in banks 6,000 2,500
Proceeds from matured and called available-for-sale investment securities 2,311 1,634
Purchases of available-for-sale investment securities (6,976) (7,476)
Proceeds from principal repayments from available-for-sale securities 1,151 423
Proceeds from principal repayments from held-to-maturity securities 17 33
Net increase in loans (18,931) (32,824)
Proceeds from sale of premises and equipment 17 0
Purchases of premises and equipment (136) (1,076)
---------- ----------
Net cash used in investing activities (16,547) (36,786)
---------- ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits 25,380 43,047
Net increase in time deposits 9,809 (327)
Proceeds from the issuance of subordinated debentures -- 3,609
---------- ----------
Proceeds from exercise of stock options 132 119
---------- ----------
Net cash provided by financing activities 35,321 46,448
---------- ----------
Increase in cash and cash equivalents 21,235 12,997
Cash and cash equivalents at beginning of year 12,108 12,773
---------- ----------
Cash and cash equivalents at end of period $ 33,343 $ 25,770
========== ==========
See notes to unaudited condensed consolidated financial statements
3
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 September
30, 2005 had 69 employees, including 28 officers. The Bank does not engage in
any non-bank lines of business and 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 September 30, 2005 and December 31,
2004, and the results of its operations for the three and nine month periods
ended September 30, 2005 and 2004,and its cash flows for the nine month periods
ended September 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 nine month period ended September 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
4
share data in the condensed consolidated financial statements have been
retroactively restated to give effect to the stock split.
3. LOANS
Outstanding loans are summarized below:
September 30 December 31,
================================================================================
2005 2004
- --------------------------------------------------------------------------------
(Iin thousands)
Commercial $ 38,467 $ 40,562
Agriculture 15,526 15,007
Real estate -commercial 121,775 109,895
Real estate-construction 32,624 22,965
Installment & Other 12,807 13,121
------------ ------------
221,199 201,550
Deferred loan fees and costs, net 217 199
Allowance for loan and lease losses (2,414) (2,214)
------------ ------------
Total Net Loans $ 219,002 $ 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 $48,931,000 and $41,868,000 and stand-by
letters of credit of $2,054,000 and $498,000 at September 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 $20,564,000 of the loan commitments outstanding at September 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 September 30, 2005 and December 31, 2004.
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.
5
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 Nine Months Ended
--------------------------- ----------------------------
(in thousands) 9/30/2005 9/30/2004 9/30/2005 9/30/2004
----------- ----------- ----------- -----------
Net Income $ 1,198 $ 894 $ 3,203 $ 2,328
----------- ----------- ----------- -----------
Other Comprehensive Income (Loss):
Change in unrealized gain on
available for sale securities 59 214 (34) 29
Reclassification adjustment -- -- -- --
----------- ----------- ----------- -----------
Total Other Comprehensive Income (Loss) 59 214 (34) 29
Total Comprehensive Income 1,257 1,108 3,169 2,357
=========== =========== =========== ===========
7. STOCK-BASED COMPENSATION
At September 30, 2005, the Company has one stock-based employee compensation
plan, 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 Ended For the Nine Months Ended
September 30 September 30
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except share amounts)
Net income, as reported $ 1,198 $ 894 $ 3,203 $ 2,328
Deduct: Total stock-based employee
compensation expense determined
under the fair value method
for all awards, net of related tax effects 66 66 198 198
---------- ---------- ---------- ----------
Pro forma net income, in thousands $ 1,132 $ 828 $ 3,005 $ 2,130
========== ========== ========== ==========
Basic earning per share - as reported $ 0.35 $ 0.26 $ 0.93 $ 0.68
Basic earning per share - pro forma $ 0.33 $ 0.24 $ 0.87 $ 0.63
Diluted earnings per share - as reported $ 0.31 $ 0.24 $ 0.82 $ 0.63
Diluted earnings per share - pro forma $ 0.29 $ 0.22 $ 0.77 $ 0.59
There were no options grants made during the three-month and nine-month period
ending September 30, 2005 and 2004
6
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. FAS 123 (R) allows for either a modified prospective
recognition of compensation expense or a modified retrospective recognition. The
Company currently intends to apply the modified prospective recognition method
and implement the provisions of FAS 123 (R) beginning in the first quarter of
2006. Management has completed its evaluation of the effect that FAS 123 (R)
will have and believes that the effect will be consistent with its pro forma
disclosures, see Note 7.
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, may be 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 prospects of 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, trading of Pacific State Bancorp common stock began 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 September 30, 2005 and December 31, 2004 and the
three and nine month periods ended September 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 on Form 10-K.
7
OVERVIEW
The Company's net income increased $304 thousand or 34.0% to $1,198 thousand for
the third quarter of 2005 from $894 thousand for the same period in 2004. The
primary contributors to the increase in net income for the third quarter of 2005
was the $1,184 thousand increase in net interest income and a $48 thousand
decrease in the provision for loan losses. These changes were partially offset
by a decrease in non-interest income of $240 thousand, an increase in
non-interest expenses of $521 thousand consisting primarily of increases in
salaries and benefits of $402 thousand, occupancy expenses of $24 thousand,
furniture and equipment expenses of $31 thousand and other expenses of $64
thousand and an increase in the provision for income taxes of $167 thousand.
Diluted earnings per share were $0.31 for the third quarter of 2005 up 29.2%
from the $0.24 for the same period in 2004.
The Company's net income increased $875 thousand or 37.6% to $3,203 thousand for
the nine month period ended September 30, 2005 from $2,328 thousand for the same
period in 2004. The primary contributors to the increase in net income for the
first nine months of the 2005 were $2,516 thousand increase in net interest
income and a decrease in the provision for loan losses of $156 thousand. These
changes were partially offset by a slight decrease in non-interest income of $46
thousand, an increase in non-interest expenses of $1,269 thousand consisting
primarily of increases in salaries and benefits of $983 thousand, an increase in
occupancy expenses of 82 thousand, furniture and equipment expense of $82
thousand and other expenses of $122, thousand and an increase in the provision
for income taxes of $482 thousand. and. Diluted earnings per share were $0.82
for the first nine months of 2005 up 30.2% from the $0.63 for the same period in
2004.
Total assets at September 30, 2005 were $294 million, an increase of $40 million
or 15.7%, from the $254 million at December 31, 2004. The growth in assets was
primarily in the Company's loans and Federal funds sold. Loans grew $19 million
or 9.5% to $219 million at September 30, 2005 from $200 million at December 31,
2004 while Federal funds sold grew $17 million over the same period. The growth
in assets was funded by the $35 million or 6.4% growth in deposits consisting of
$10 million or 5.5% in non-interest bearing deposits and $25 million or 14.5%
growth in interest bearing deposits and the net income of the Company.
The annualized return on assets was 1.69% and 1.57% for the three and nine
months ended September 30, 2005 compared to 1.46% and 1.39% for the same periods
in 2004. The annualized return on equity was 24.76% and 23.65% for the three and
nine months ended September 30, 2005 compared to 23.53% and 21.72% for the same
periods in 2004.
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis, was $3.8 million for the three months ended September
30, 2005, an increase of $1,184 thousand or 46.1% from $2.6 million for the same
period in 2004. The increase in net interest income was primarily attributed to
the volume increase in the Company's average loan and investment balances
supported by the overall increases in the yields earned primarily on loans and
Federal funds sold. 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 $1.7 million or 51.8% to $5.1 million for the three
months ended September 30, 2005 from $3.4 million for the same period in 2004.
The increase in interest income was primarily attributed to volume increases in
investment and loan balances and an increase in yield, particularly in loans,
Federal funds sold and investment securities. The Company's average loan
balances were $220.0 million for the three months ended September 30, 2005, up
$35.2 million or 19.0% from $184.9 million for the same period in 2004. The
Company's average loan yield was 8.72% for the three months ended September 30,
2005, up 185 basis points from the 6.87% yield for the same period in 2004.
Although the Company's average balances of Federal funds sold decreased $14.0
million to $11.5 million for the three months ended September 30, 2005 from the
$25.5 million for the same period in 2004 interest income increased $57 thousand
a a result of the increase in yield of 247 basis points. Average yields
increased to 2.89% from 0.42% for the same period in 2004. The Company's average
investment balances were $18.8 million for the three months ended September 30,
2005, up $2.7 million, or 16.9%, from $16.1 million for the same period in 2004.
The Company's average investment yield was 4.04% for the three months ended
September 30, 2005, up 68 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 overall yield on average earning assets increased 224
basis points to 8.09% for the three months ended September 30, 2005, from 5.85%
for the same period in 2004
8
Interest expense increased $562 thousand, or 69.9% to $1.4 million for the three
months ended September 30, 2005, from $803 thousand for the same period in 2004.
The increase is primarily attributed to both the increase in interest-bearing
demand deposit volumes and in the increases in the rates paid on interest
bearing liabilities. The Company's average balances of interest bearing demand
deposits were $103.3 million for the three months ended September 30, 2005, up
$44.4 million, or 75.4% from $58.9 million for the same period in 2004.
Additionally the average rate paid on interest-bearing demand deposits increased
56 basis points to 2.29% for the three months ended September 30, 2005 from
1.73% for the same period in 2004. Although the Company's average balances of
time deposits decreased $14.0 million to $77.2 million for the three months
ended September 30, 2005 from the $91.2 million for the same period in 2004
interest expense increased $186 thousand a result of the increase in rates paid
of 128 basis points. Average rates paid increased to 3.06% from 1.78% for the
same period in 2004.
As a result of the changes noted above, the net interest margin for the three
months ended September 30, 2005 increased 147 basis points or 32.9% to 5.93%,
from 4.46% for the same period in 2004.
9
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
September 30, 2005 September 30, 2004
-------------------------------- --------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Assets: Balance Expense Cost Balance Expense Cost
- ------ -------- -------- --------- -------- -------- --------
Interest-earning assets:
Loans (1) (2) $220,066 $ 4,836 8.72% $184,900 $ 3,200 6.87%
Investment securities (1) 18,835 192 4.04% 16,076 139 3.36%
Federal funds sold 11,531 84 2.89% 25,493 27 0.42%
Interest bearing deposits in banks 546 5 3.64% 2,000 5 0.99%
---------
Total average earning assets 250,977 5,117 8.09% 228,469 3,371 5.85%
Non-earning assets:
Cash and due from banks 14,281 12,769
Other assets 15,918 2,488
-------- --------
Total average assets $281,177 $243,726
======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing Demand $103,358 595 2.29% $ 58,941 257 1.73%
Savings 6,691 9 0.51% 6,936 5 0.27%
Time Deposits 77,217 595 3.06% 91,215 409 1.78%
Other borrowings (3) 4,217 166 15.62% 13,775 132 3.80%
--------------------- ---------------------
Total average interest-bearing liabilities (4) 191,484 1,365 2.83% 170,867 803 1.86%
Non-interest-bearing liabilities:
Demand deposits 61,156 50,231
Other liabilities 169 7,557
-------- --------
Total liabilities 252,809 228,655
Shareholders' equity: 19,215 15,072
-------- --------
Total average liabilities and shareholders' equity $272,024 $243,726
======== ========
-------- --------
Net interest income $ 3,752 $ 2,568
======== ========
Yield on interest-earning assets 8.09% 5.85%
Cost of funding interest-earning assets 2.16% 1.39%
-------- --------
Net interest margin (5) 5.93% 4.46%
======== ========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended September 30, 2005 and 2004 amounted to $688 thousand and $206
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
10
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 September 30
2005 over 2004 change in net interest income
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 1,636 $ 863 $ 609 $ 164
Investment securities 53 28 23 2
Federal funds sold 57 159 (15) (87)
Interest bearing deposits in banks -- 13 (3) (10)
---------- ---------- ---------- ----------
Total interest income $ 1,746 $ 1,063 $ 614 $ 69
Interest Expense:
Interest-bearing demand 338 82 194 62
Savings 4 4 (0) (0)
Time Deposits 186 294 (63) (45)
Other borrowings 34 410 (92) (285)
---------- ---------- ---------- ----------
Total interest expense $ 562 $ 790 $ 39 $ (268)
---------- ---------- ---------- ----------
Net interest income $ 1,184 $ 273 $ 574 $ 337
========== ========== ========== ==========
(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 $90 thousand in provision for
loan losses for the three month period ended September 30, 2005, down $48
thousand or 34.8%, 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 probable
losses 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 September 30, 2005, total
non-interest income decreased $240 thousand or 29.4% to $577 thousand, down from
$817 thousand for the comparable period in 2004. The decrease in non interest
income was primarily the result of decreases in service charge income, other fee
income and a decrease in gains on sales of loans.
The decrease in service charge income is the result of (1) higher earnings rate
paid on accounts to offset fees charged through account analysis for certain
depositors for charges based on their volume of activity and (2) a decrease in
the volume of account overdrafts. Service charge income decreased $89 thousand
or 31.1% to $197 thousand, down from $286 thousand for the comparable period in
2004.
The decrease in other fee income is the result of a decrease in mortgage
referral fees. Other fee income decreased $53 thousand or 18.2% to $238
thousand, from $291 thousand for the comparable period in 2004.
The decrease in gain on sale of loan income is due to the timing of the sale of
the loans as well as the decrease in the number and dollar amount of loans sold.
For the three month period ended September 30, 2005, the company sold two loans
as compared to one for the same period ended 2004. Income derived for the gain
on sale of loans decreased $98 thousand or 40.8% to $142 thousand, down from
$240 thousand for the comparable period in 2004. The company expects that this
trend will continue through the fourth quarter of 2005.
11
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
September 30, 2005 was 2.3 million compared to $1.8 million for the same period
in 2004, representing an increase of $521 thousand or 28.3%. 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 increase Furniture and Equipment are attributable to the addition of
the loan production office in Castro Valley, CA. The increase in other expense
relates to the increased expenses associated with the growth of the company.
The following table sets forth a summary of non-interest expense for the three
months ended September 30, 2005 and 2004:
Three Months Ended
-----------------------------
September 30, September 30,
(In thousands) 2005 2004
------------ ------------
Non-interest Expense:
Salaries & Benefits $ 1,255 $ 853
Occupancy 224 200
Furniture and Equipment 156 125
Other Expense 726 662
------------ ------------
Total Non-Interest Expenses $ 2,361 $ 1,840
============ ============
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 September 30, 2005 and 2004.
Three Months Ended
----------------------------
September 30, September 30,
(In thousands) 2005 2004
---------- ----------
Tax Provision $ 680 $ 513
Effective Tax Rate 36.21% 36.46%
12
RESULTS OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis was $9.9 million for the nine months ended September
30, 2005, an increase of $2.5 million or 33.9% from $7.4 million for the same
period in 2004. The increase in net interest income was primarily attributed to
volume increases in the Company's average level of earning assets, primarily in
loans, 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 $4.1 million or 42.8% to $13.6 million for the nine
months ended September 30, 2005 from $9.5 million for the same period in 2004.
The increase in interest 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 $210.8 million for the nine months ended
September 30, 2005, up $37.1 million or 21.3% from $173.8 million for the same
period in 2004. The Company's average loan yield was 8.06% for the nine months
ended September 30, 2005, up 106 basis points from the 7.00% yield for the same
period in 2004. The Company's average investment balances were $17.9 million for
the nine months ended September 30, 2005, up $4.2 million, or 30.8%, from $13.7
million for the same period in 2004. The Company's average investment yield was
3.58% for the nine months ended September 30, 2005, up 11 basis points from the
3.47% yield for the same period in 2004. The Company's average Federal funds
sold balances were $9.9 million for the nine months ended September 30, 2005, up
$4.6 million, or 86.8%, from $5.3 million for the same period in 2004. The
Company's average Federal funds sold yield was 2.81% for the nine months ended
September 30, 2005, up 174 basis points from the 1.07% 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 97 basis points to
7.46% for the nine months ended September 30, 2005, from 6.49% for the same
period in 2004 period.
Interest expense increased $1.5 million, or 74.0% to $3.6 million for the nine
months ended September 30, 2005, up from $2.1 million for the same period in
2004. The increase is primarily attributed to both the increase in
interest-bearing demand deposit volumes and in the increases in the rates paid
on interest bearing liabilities. The Company's average balance of interest
bearing demand deposits was $103.1 million for the nine months ended September
30, 2005, up $47.4 million, or 85.0% from $55.7 million for the same period in
2004. Additionally the average rate paid on interest-bearing demand deposits
increased 106 basis points to 2.25% for the nine months ended September 30, 2005
from 1.19% for the same period in 2004. Although the Company's average balances
of time deposits decreased $14.4 million to $74.1 million for the nine months
ended September 30, 2005 from the $88.5 million for the same period in 2004
interest expense increased $202 thousand a result of the increase in rates paid
of 73 basis points. Average rates paid increased to 2.61% from 1.88% for the
same period in 2004.
As a result of the changes noted above, the net interest margin for the nine
months ended September 30, 2005 increased by 40 basis points or 0.8% to 5.46, up
from 5.06% for the same period in 2004.
13
The following table presents for the nine 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 Nine Months Ended For the Nine Months Ended
September 30, 2005 September 30, 2004
-------------------------------- --------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Assets: Balance Expense Cost Balance Expense Cost
- ------ -------- -------- --------- -------- -------- --------
Interest-earning assets:
Loans (1) (2) $210,847 $ 12,716 8.06% $173,780 $ 9,094 7.00%
Investment securities (1) 17,977 482 3.58% 13,741 357 3.47%
Federal funds sold 9,946 209 2.81% 5,264 42 1.07%
Interest bearing deposits in banks 4,392 167 5.05% 3,111 15 0.64%
--------------------- ---------------------
Total average earning assets 243,162 13,574 7.46% 195,896 9,508 6.49%
Non-earning assets:
Cash and due from banks 14,044 11,222
Other assets 15,571 16,311
-------- --------
Total average assets $272,777 $223,429
======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing demand $103,122 1,733 2.25% $ 55,706 494 1.19%
Savings 6,968 27 0.52% 6,478 11 0.23%
Time deposits 74,139 1,445 2.61% 88,516 1,243 1.88%
Other borrowings (3) 12,873 439 4.56% 13,964 346 3.31%
--------------------- ---------------------
Total average interest-bearing liabilities (4) 197,102 3,644 2.47% 164,664 2,094 1.70%
Noninterest-bearing liabilities:
Demand deposits 54,022 44,154
Other liabilities 3,547 278
-------- --------
Total liabilities 254,671 209,096
Shareholders' equity: 18,106 14,333
-------- --------
Total average liabilities and shareholders' equity $272,777 $223,429
======== ========
Net interest income $ 9,930 $ 7,414
======== ========
Yield on interest-earning assets 7.46% 6.49%
Cost of funding interest-earning assets 2.00% 1.43%
-------- --------
Net interest margin (5) 5.46% 5.06%
======== ========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the nine month periods ended
September 30, 2005 and 2004 amounted to $1,056 thousand and $703 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
14
The following table sets forth changes in interest income and interest expense,
for the nine 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:
Nine Months Ended September 30,
2005 over 2004 change in net interest income
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 3,622 $ 1,387 $ 1,940 $ 295
Investment securities 125 11 110 4
Federal funds sold 167 69 37 61
Interest bearing deposits in banks 152 103 6 43
---------- ---------- ---------- ----------
Total interest income $ 4,066 $ 1,570 $ 2,093 $ 403
Interest Expense:
Interest-bearing demand 1,239 443 420 376
Savings 16 14 1 1
Time deposits 202 482 (202) (78)
Other borrowings 93 130 (27) (10)
---------- ---------- ---------- ----------
Total interest expense $ 1,550 $ 1,069 $ 192 $ 289
---------- ---------- ---------- ----------
Net interest income $ 2,516 $ 501 $ 1,901 $ 114
========== ========== ========== ==========
(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 $210 thousand in provision for
loan losses for the nine month period ended September 30, 2005, down $156
thousand or 42.6%, from the $366 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 probable
losses 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 nine months ended September 30, 2005 compared to
the same period in the prior year , total non-interest income remained fairly
consistent at $1.9 million. The slight decrease in non interest income was
primarily the result of an decrease in service charge and other fee income,
offset by an in crease in gain on sale of loans.
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 nine month period ended September 30, 2005, the company sold nine loans
as compared two for the same period in 2004. As a result of the increased sales
the gain on sale of loans increased $415 thousand or 132.6% to $728 thousand, up
from $313 thousand for the comparable period in 2004.
The decrease in service charge income is the result of (1) higher earnings rate
paid on accounts to offset fees charged though account analysis for certain
depositors for charges based on their volume of activity and (2) a decrease in
the volume of account overdrafts. Service charge income decreased $324 thousand
or 36.4% to $567 thousand, down from $891 thousand for the comparable period in
2004.
The decrease in other fee income is the result of a decrease in mortgage
referral fees. Other fee income decreased $137 thousand or 17.5% to $648
thousand, from $785 thousand for the comparable period in 2004.
15
Non-Interest Expenses. Non-interest expense for the nine months ended September
30, 2005 was $6.6 million compared to $5.3 million for the same period in 2004,
representing an increase of $1.3 million or 23.9%. 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 increase Furniture and Equipment are attributable to the addition of the
loan production office in Castro Valley, CA. The increase in other expense
relates to the increased expenses associated with the growth of the company.
The following table sets forth a summary of non-interest expense for the nine
months ended September 30, 2005 and 2004:
Nine Months Ended
-----------------------------
September 30, September 30,
(In thousands) 2005 2004
------------ ------------
Non-interest Expense:
Salaries & Benefits $ 3,563 $ 2,580
Occupancy 618 536
Furniture and Equipment 436 354
Other Expense 1,971 1,849
------------ ------------
Total Non-Interest Expenses $ 6,588 $ 5,319
============ ============
Income Taxes.
The following table reflects the Company's tax provision and the related
effective tax rate for the nine months ended September 30, 2005 and 2004:
Nine Months Ended
------------------------------
September 30, September 30,
(In thousands) 2005 2004
------------ ------------
Tax Provision $ 1,872 $ 1,390
Effective Tax Rate 36.88% 37.38%
FINANCIAL CONDITION
Total assets at September 30, 2005 were $294 million, an increase of $40 million
or 15.7%, from the $254 million at December 31, 2004. The growth in assets was
primarily in the Company's loans and Federal funds sold. Loans grew $19 million
or 9.5% to $219 million at September 30, 2005 from $200 million at December 31,
2004 while Federal funds sold grew $17 million over the same period. The growth
in assets was funded by the $35 million or 5.5% growth in deposits consisting of
$10 million or 6.4% in non-interest bearing deposits and $25 million or 14.5%
growth in interest bearing deposits and the net income of the Company.
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.
16
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated:
September 30 December 31,
================================================================================
2005 2004
- --------------------------------------------------------------------------------
(In thousands)
Commercial $ 38,467 $ 40,562
Agriculture 15,526 15,007
Real estate -commercial 121,775 109,895
Real estate-construction 32,624 22,965
Installment & Other 12,807 13,121
------------ ------------
221,199 201,550
Deferred Loan Fees and Costs 217 199
Allowance for Loan and Lease Losses (2,414) (2,214)
------------ ------------
Total Net Loans $ 219,002 $ 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 $19.5 million or 9.8%, to $219.0
million at September 30, 2005 from $199.5 million at December 31, 2004.
Commercial loans decreased slightly by $2.1 million or 5.16% to $38.5 million
from $40.6 million at December 31, 2004. Agricultural Loans increased $519
thousand or 3.5% to $15.5 million from $15.0 million at December 31, 2004. The
largest increase was in real estate - commercial and construction loans. .Real
estate commercial mortgage loans increased by $11.9 million or 10.8% to $121.8
million from $109.9 million at December 31, 2004. Real estate construction loans
increased $9.7 million or 42.0% to $32.6 from $23.0 million at December 31,
2004. Installment and Other loans decreased $314 thousand or 2.4% from $13.1
million at December 31, 2004. The portfolio mix continues to reflect the
increase in real estate loans as compared with the mix of a year ago, with
commercial and agricultural loans of approximately 24.7% of total loans, real
estate construction loans of 14.9%, commercial real estate loans at 55.6%, and
5.8% for installment loans at September 30, 2005.
Nonperforming loans. There were no nonperforming loans at September, 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.
17
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and other qualitative factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's ALL. Such agencies may require the Company to provide additions to
the allowance based on their judgment of information available to them at the
time of their examination. There is uncertainty concerning future economic
trends. Accordingly it is not possible to predict the effect future economic
trends may have on the level of the provision for 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 $90,000 and $210,000 for the three
and nine months ended September 30, 2005 compared to $138,000 and $366,000 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 adverse
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 Nine Months Ended
(In thousands) September 30, September 30,
====================================================================================================================
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Beginning Balance: $ 2,332 $ 1,874 $ 2,213 $ 1,653
Provision for loan losses 90 138 210 366
Charge-offs:
Commercial 8 -- 9 7
Real Estate -- -- -- --
Other -- -- -- --
---------- ---------- ---------- ----------
Total Charge-offs 8 0 9 7
---------- ---------- ---------- ----------
Recoveries:
Commercial -- -- -- --
Other -- -- -- --
---------- ---------- ---------- ----------
Total Recoveries -- -- -- --
---------- ---------- ---------- ----------
Ending Balance $ 2,414 $ 2,012 $ 2,414 $ 2,012
========== ========== ========== ==========
ALL to total loans 1.10% 1.07% 1.10% 1.06%
Net Charge-offs to average loans-annualized
0.00% 0.00% 0.00% 0.02%
====================================================================================================================
Investment securities and interest-bearing deposits in banks. Combined
investment securities, and interest-bearing deposits in other banks decreased
$2.5 million to $21.1 million at September 30, 2005, from $23.6 million at
December 31, 2004.
The Company's investment in U.S. Treasury securities increased to 42.4% of the
investment portfolio at September 30, 2005 compared to 34.1% at December 31,
2004. Obligations of U.S. Agencies decreased to 33.0% of the investment
portfolio at September 30, 2005 compared to 46.2% at December 31, 2004. The
Company's investment in corporate bonds increased to 9.8% of the investment
portfolio at September 30, 2005 compared to 1.8% at December 31, 2004.
18
Tax-exempt municipal obligations bonds decreased to 14.3% of the investment
portfolio at September 30, 2005 compared to 18.0% at December 31, 2004. Fed
Funds sold increased $16.6 million, or 100% as a result of the increase in
deposits.
Deposits. Total deposits were $258.9 million as of September 30, 2005, an
increase of $35.2 million or 15.7% 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 slightly to 30.6% of total deposits from 30.3% at December 31, 2004.
Money market and savings accounts increased slightly to 38.3% of total deposits
from 38.1% at December 31, 2004. Time deposits decreased slightly to 31.1% of
total deposits from 31.6% at December 31, 2004
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 September 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.
19
The Company's and the Bank's risk-based capital ratios are presented below.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- ----------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of September 30, 2005:
Total capital
(to risk weighted assets) $ 30,081 12.63% $ 19,047 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 25,810 10.84% $ 9,524 4.00% N/A N/A
Tier I capital
(to average assets) $ 25,810 9.02% $ 11,447 4.00% N/A N/A
Bank
As of September 30, 2005:
Total capital
(to risk weighted assets) $ 28,770 12.16% $ 18,928 8.00% $ 23,659 10.00%
Tier I capital
(to risk weighted assets) $ 26,356 11.14% $ 9,464 4.00% $ 14,196 6.00%
Tier I capital
(to average assets) $ 26,356 9.33% $ 11,304 4.00% $ 14,129 5.00%
To Be Well
Capitalized
Under Prompt
For Capital 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%.
20
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 $54.4 million or 18.5% of
total assets at September 30, 2005 compared to $35.6 million or 14.0% 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.
21
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 nine months ended September
30, 2005 compared to December 31, 2004 as discussed in the Company's 2004 Annual
Report on Form 10-K.
22
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
None
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
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: November 14, 2005 By: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: November14, 2005 By: /s/ JOANNE ROBERTS
-------------------------------------
JoAnne Roberts
Senior Vice President and Chief
Financial Officer
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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
25