UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-49892
PACIFIC STATE BANCORP
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 61-1407606
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1899 W. March Lane
Stockton, CA 95207
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (209) 870-3213
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [X]
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in rule 12b-2 of the
Exchange Act).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the Registrant was approximately $27,486,486 as of June 30, 2005 which was
calculated based on the last reported sale of the Company's Common Stock prior
to June 30, 2005. This calculation does not reflect a determination that certain
persons are affiliates of the Registrant for any other purpose.
Common stock, no par value 3,524,282 shares outstanding as of March 16, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for Fiscal Year Ended December 31, 2005 (Part II)
Proxy Statement for 2006 Annual Meeting of Shareholders (Part III)
TABLE OF CONTENTS
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PART 1. Page
Item 1. Business 2
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 13
Item 9A Controls and Procedures 13
Item 9B Other Information 14
PART III.
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 14
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accountant Fees and Services 15
PART IV.
Item 15. Exhibits, Financial Statement Schedules 15
Signatures 16-17
Index of Exhibits 18
PACIFIC STATE BANCORP
STOCKTON, CALIFORNIA
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2005
PART I
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ITEM 1. BUSINESS
--------
Certain statements discussed or incorporated by reference in this Annual Report
including, but not limited to, information concerning possible or assumed future
results of operations of the Company set forth in the Management's Discussion
and Analysis of Financial Condition and Results of Operation, are
forward-looking statements within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act"). Forward-looking statements include statements in
which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider" or similar expressions are used. The Company's actual
future results and shareholder values may differ materially from those
anticipated and expressed in these forward-looking statements, which are based
on management's beliefs and assumptions and on information currently available
to management, and are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, among others, (1) competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) general economic
conditions, either nationally or regionally; (4) changes in the regulatory
environment; (5) changes in business conditions and inflation; and (6) changes
in securities markets. Many of these factors are beyond the Company's ability to
control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention
or obligation to update forward-looking statements contained in this Annual
Report, even if new information, future events or other circumstances have made
them incorrect or misleading. Except as specifically noted herein all references
to the "Company" refer to Pacific State Bancorp, a California corporation, and
its consolidated subsidiary.
General Description of Business
-------------------------------
Pacific State Bancorp is a holding company with one bank subsidiary, Pacific
State Bank, (the "Bank"), and two unconsolidated subsidiary grantor trusts,
Pacific State Statutory Trusts I and II. Pacific State Bancorp commenced
operations on June 24, 2002 when it acquired all the shares of Pacific State
Bank under a plan of reorganization approved by the Bank's shareholders on May
9, 2002. The Bank is a California state chartered bank formed November 2, 1987.
The Bank is a member of the Federal Reserve System. The Bank's primary source of
revenue is providing loans to customers who are predominantly small to
middle-market businesses and middle-income individuals. Pacific State Statutory
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 conducts a general commercial banking business, primarily in
Stockton and San Joaquin County, and offers commercial banking services to
residents and employers of businesses in the Bank's service area, including
professional firms and small to medium sized retail and wholesale businesses and
manufacturers. The Company as of March 15, 2006 had 82 employees, including 36
officers. The Bank does not engage in any non-bank lines of business. The
business of the Bank is not to any significant degree seasonal in nature. The
Bank has no operations outside California and has no material amount of loans or
deposits concentrated among any one or few persons, groups or industries. The
Bank operates seven branches with its Administrative Office located at 1899 W.
March Lane, in Stockton, California; additional branches are located in downtown
Stockton and in the communities of Angels Camp, Arnold, Groveland, Modesto and
Tracy, California. In 2004, the company opened a loan production office in
Castro Valley, California. The bank plans to open its 8th branch in Lodi,
California, mid-year 2006.
2
Effective July 12, 2005, Pacific State Bancorp began trading on the
Nasdaq(TM) National Market under the symbol of "PSBC". Prior to July 12, 2005,
transactions in the Company's common stock were reported on the OTC Bulletin
Board under the same symbol.
Business Plan
-------------
The focus of the Company's business plan is to attract "Business
Relationship" small, medium and large accounts, but not to the exclusion of any
other business which the Company can reasonably and profitably attract. In order
to provide a level of service to attract such customers, the Company has
structured its specific services and charges on a basis which management
believes to be profitable, taking into consideration other aspects of the
account relationship. The Company offers a full range of banking services to its
customers intended to attract the following specific types of accounts:
relatively large consumer accounts; professional group and association accounts,
including the accounts of groups or firms of physicians, dentists, attorneys and
accountants; and accounts of small to medium-sized businesses engaged in retail,
wholesale, light industrial, manufacturing, agricultural and service activities.
Trust Subsidiaries
------------------
The Company during 2002 and 2004 established two business trust
subsidiary grantor trusts, Pacific State Statutory Trusts I and II (the
"Trusts") for the sole purpose of issuing capital securities ("Capital
Securities") pursuant to declarations of trust (the "Declarations"). The
proceeds from the sale of the Capital Securities were loaned to the Company as
subordinated debentures (the "Debentures") issued to the Trusts pursuant to
indentures (the "Indentures"). Interest payments on the Debentures will flow
through the Trusts to the Pooling Vehicles, which are the holders of the Capital
Securities and similar securities issued by other financial institutions.
Payments of distributions by the Trusts to the Pooling Vehicles are guaranteed
by the Company. See Note 8 to the Company's consolidated financial statements at
Item 8, Financial Statements and Supplementary data.
Proceeds from the issuance of the 2002 subordinated debentures were
used to provide the Bank with an additional $4.5 million in capital in order to
support the continued growth of the Bank. The remaining $500,000 was placed in
the Company for general corporate purposes. Proceeds from the issuance of the
2004 subordinated debentures were used to provide the Bank with an additional
$3.5 million in capital in order to support the continued growth of the Bank.
Product Lines and Services
--------------------------
The Bank currently offers the following general banking services at all
of its branches: commercial, construction, agriculture and real estate loans and
personal credit lines, interest on checking, U.S. Savings bond services,
domestic and foreign drafts, banking by appointment, automatic transfer of funds
between savings and checking accounts, business courier services, checking and
savings accounts for personal and business purposes, domestic letters of credit,
a depository for MasterCard and Visa drafts, federal depository services, cash
management assistance, wire and telephone transfers, Individual Retirement
Accounts, time certificates of deposit, courier service for non-cash deposits,
Visa and MasterCard, revolving lines of credit to consumers secured by deeds of
trust on private residences, unsecured overdraft protection credit lines
attached to checking accounts, ATM cards and MasterMoney debit cards via the
Star, Cirrus, Plus, MasterCard and Visa networks.
The Bank is not authorized to offer trust services. The Federal Reserve
Bank of San Francisco is the Company's primary correspondent relationship. The
Bank currently also has correspondent relationships with City National Bank in
Beverly Hills, California, First Tennessee Bank in Memphis, Tennessee, Bank of
the West in Walnut Creek, California, U.S. Bank, Minneapolis, Minnesota, Wells
Fargo Bank, San Francisco, California and Pacific Coast Bankers Bank, San
Francisco, California.
3
The Bank recognizes that, in order to be competitive, it must attract a
certain number of consumer accounts. Individual Retirement Accounts, Visa and
MasterCard, revolving lines of credit to consumers secured by deeds of trust on
private residences, and unsecured overdraft protection credit lines attached to
checking accounts currently offered by the Bank are designed to appeal
particularly to consumers. Moreover, participation in a large-scale ATM network
assists the Company in competing for consumer accounts.
The Bank is an approved Small Business Administration and 504 lender,
FSA, USDA Business and Industry, USDA Part-time Farmer Program, FHA and VA
lender and California Capital lender. The Bank is a national leader in the
underwriting of U.S. Department of Agriculture business and industry loans, as
well as a Preferred Lender for this program.
Marketing
- ---------
The basic marketing strategy of the Bank is to retain the Bank's
initial market share and to increase the Bank's penetration of the market over
the long term via expansion east and west of Stockton, California in small to
medium sized communities. The Bank attempts to accomplish this by providing a
full range of personalized banking services to small and medium size businesses,
professionals and individuals within Alameda, Calaveras, San Joaquin, Stanislaus
and Tuolumne Counties.
The Bank's marketing plan aims to provide for strong continuity in
banker-customer relationships, a high degree of convenience for customers,
prompt response in the handling of loan requests, and personal attention to
needs of individual customers. The marketing plan also includes a commitment to
lend the Bank's deposits back into the areas from which they are derived,
thereby assisting in the building activity, population growth and other changes,
which are occurring in the market area. By focusing the Bank's relationship
toward its community the Bank attempts to establish strong continuity with its
customers.
The Directors of the Company are active in business development through
personal contacts and personal participation in local activities. The Directors
of the Company have a strong commitment to community banking. They believe in
business development by actively participating in community events.
Local advertising and publicity in local papers also are used to
attract business and to acquaint potential customers with the Bank's services.
Competition
-----------
The Bank's service area consists of Alameda, Calaveras, San Joaquin,
Stanislaus and Tuolumne Counties. The banking business in California generally,
and specifically in the Bank's primary market area, is highly competitive with
respect to both loans and deposits. The banking business is dominated by a
relatively small number of major banks, which have many offices operating over
wide geographic areas. Many of the major commercial banks offer certain services
(such as international, trust and securities brokerage services), which are not
offered directly by the Bank. By virtue of their greater total capitalization,
such banks have substantially higher lending limits than the bank and
substantial advertising and promotional budgets.
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
4
money-market funds, which also compete with banks. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
To compete with major financial institutions in its service area, the
Bank relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, which compete primarily by
interest rates and multiple branch locations. For customers whose loan demands
exceed the Bank's lending limits, the Bank seeks to arrange funding for such
loans on a participation basis with its correspondent banks or other independent
commercial banks.
Supervision and Regulation
--------------------------
The Company is principally regulated by the Federal Reserve Board
("FRB"). The Bank is principally regulated by the California Commissioner of
Financial Institutions ("Commissioner"), but is also subject to regulation by
the Federal Deposit Insurance Corporation ("FDIC") and by its primary federal
regulator, the FRB. These agencies govern most of the Company's and the Bank's
business, including capital requirements, loans, investments, mergers and
acquisitions, borrowings, dividends, branch locations and other similar matters.
In addition, the Bank's business is affected by general economic conditions and
by the monetary and fiscal policies of the United States government. These
policies influence, for example, the Federal Reserve's open market operations in
U.S. Government securities, the reserve requirements imposed upon commercial
banks, the discount rates applicable to borrowings from the Federal Reserve by
banks, and other similar matters which impact the growth of the Bank's loans,
investments and deposits and the interest rates which the Bank charges and pays.
Proposals to change the laws and regulations governing the operations
and taxation of financial institutions are frequently made in Congress, in the
California legislature and before various regulatory and professional agencies.
Major changes and the impact such changes might have are difficult to predict
with accuracy. Certain significant recently proposed or enacted laws and
regulations are discussed below.
Interstate Banking. Since 1995, initial entry into California by merger
or acquisition involving an out-of state institution must be accomplished by
acquisition of or merger with an existing whole bank which has been in existence
for at least five years.
Capital Requirements. The Company and the Bank are subject to certain
regulatory capital requirements administered by the FRB and the FDIC. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about the components, risk weightings
and other factors.
The Uniform Financial Institutions Rating System classifies and
evaluates the soundness of financial institutions according to the so-called
"CAMELS" criteria, an acronym for capital adequacy, asset quality, management,
earnings, liquidity and sensitivity to market risk, (including changes in
interest rates, foreign exchange rates, commodity prices or equity prices which
may adversely affect an institution's earnings and capital).
Prompt Corrective Action regulations (the "PCA Regulations") of the
federal bank regulatory agencies establish five capital categories in descending
order (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized), assignment to which depends
upon the institution's total risk-based capital ratio, Tier 1 risk-based capital
5
ratio, and leverage ratio. Institutions classified in one of the three
undercapitalized categories are subject to certain mandatory and discretionary
supervisory actions, which include increased monitoring and review,
implementation of capital restoration plans, asset growth restrictions,
limitations upon expansion and new business activities, requirements to augment
capital, restrictions upon deposit gathering and interest rates, replacement of
senior executive officers and directors, and requiring divestiture or sale of
the institution. The Bank is currently classified as a well capitalized bank
pursuant to the PCA regulations.
As of December 31, 2005, the Bank's total risk-based capital ratio
(approximately 11.5%) and its leverage ratio (approximately 9.1%) exceeded
minimum levels. It is not expected that compliance with the risk-based capital
guidelines or minimum leverage requirements will have a materially adverse
effect on the business of the Bank in the reasonably foreseeable future.
Deposit Insurance Assessments. In 2005, Congress adopted the Federal
Deposit Insurance Reform Act of 2005, which will have the effect of merging the
Bank Insurance Fund and the Savings Association Insurance Fund into a new
Deposit Insurance Fund (which is anticipated to occur on or before July 1,
2006). It is anticipated that final regulations will be released by the FDIC not
later than the fourth quarter of 2006. Until final regulations are released, the
precise amount of premium assessment for the Bank cannot be determined, but it
is expected that the Bank's expense for premium assessments will not increase in
an amount that will have a material adverse effect on the Company's results of
operations. The Bank's deposit insurance assessment was $30,000 for the year
2005.
Community Reinvestment Act. Community Reinvestment Act ("CRA")
regulations evaluate the Bank's lending to low and moderate income individuals
and businesses across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of applications to merge,
or establish new branches. In addition, any Bank rated in "substantial
noncompliance" with the CRA regulations may be subject to enforcement
proceedings. The Bank has a current rating of "satisfactory" CRA compliance.
Safety and Soundness Standards. Federal bank regulations for insured
financial institutions establish safety and soundness standards for (1) internal
controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation. If
an agency determines that an institution fails to meet any standard established
by the guidelines, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. Agencies
may elect to initiate enforcement action in certain cases where failure to meet
one or more of the standards could threaten the safe and sound operation of the
institution. The Company has not been and does not expect to be required to
submit a safety and soundness compliance plan because of a failure to meet any
of the safety and soundness standards.
Recently Enacted Legislation
----------------------------
The Sarbanes-Oxley Act of 2002 (the "SOA") was enacted to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
many years. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission, ("the SEC"), under the Securities Exchange Act of 1934.
Since the enactment of the SOA, the SEC has issued numerous new and proposed
regulations to implement SOA requirements.
6
The SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
The SOA addresses, among other matters:
o Duties, responsibilities and qualifications of the audit committee;
o certification of financial statements by the chief executive officer
and the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of
any financial statements that later require restatement;
o a prohibition on insider trading during pension plan black out periods;
o disclosure of off-balance sheet transactions;
o a prohibition on certain personal loans to directors and officers;
o expedited filing requirements for forms which disclose transactions by
officers and directors in Company stock ;
o disclosure of a code of ethics and of any change or waiver of such
code;
o new requirements for auditing and reporting on Company internal
controls;
o "real time" filing of periodic reports;
o the formation of a public company accounting oversight board (the
"PCAOB") with authority to set auditing, quality control and
independence standards and investigate and discipline public accounting
firms;
o auditor independence; and
o various increased criminal penalties for violations of securities laws.
The SEC has and PCAOB have issued final rules covering most of these
topics, but it is to be expected that these rules may be altered as future
experience requires.
Although we anticipate that we will incur additional expense in
complying with the provisions of the SOA, management does not expect that such
compliance will have a material impact on our results of operation or financial
condition.
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts. Certain surveillance provisions of the Patriot Act were
scheduled to expire on December 31, 2005, but the deadline was postponed to
allow time for evaluation of such provisions, and on March 9, 2006, President
Bush signed legislation to reauthorize the Patriot Act, incorporating certain
civil liberty protections approved by Congress.
Section 313(a) of the Patriot Act prohibits any insured financial
institution such as Pacific State Bancorp from providing correspondent accounts
to foreign banks which do not have a physical presence in any country
(designated as "shell banks"), subject to certain exceptions for regulated
affiliates of foreign banks. Section 313(a) also requires financial institutions
to take reasonable steps to ensure that foreign bank correspondent accounts are
not being used to indirectly provide banking services to foreign shell banks,
and Section 319(b) requires financial institutions to maintain records of the
owners and agent for service of process of any such foreign banks with whom
correspondent accounts have been established.
7
Section 312 of the Patriot Act creates a requirement for special due
diligence for correspondent accounts and private banking accounts. Under Section
312, each financial institution that establishes, maintains, administers, or
manages a private banking account or a correspondent account in the United
States for a non-United States person, including a foreign individual visiting
the United States, or a representative of a non-United States person, shall
establish appropriate, specific, and, where necessary, enhanced, due diligence
policies, procedures, and controls that are reasonably designed to detect and
record instances of money laundering through those accounts.
The Company and its subsidiaries are not currently aware of any account
relationships between the Company and its banking subsidiaries and any foreign
bank or other person or entity as described above under Sections 313(a) or 312
of the Patriot Act. The terrorist attacks on September 11, 2001 have realigned
national security priorities of the United States and it is reasonable to
anticipate that the United States Congress may enact additional legislation in
the future to combat terrorism including modifications to existing laws such as
the Patriot Act to expand powers as deemed necessary. The effects which the
Patriot Act and any additional legislation enacted by Congress may have upon
financial institutions is uncertain; however, such legislation would likely
increase compliance costs and thereby potentially have an adverse effect upon
the Company's results of operations.
New Accounting Pronouncements
The Company adopted no new accounting policies in 2005 that had a
material impact on its consolidated financial position or results of operation.
Please see Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operation, for a discussion of critical accounting policies and
see Note 2 to the consolidated financial statements at Item 8, Financial
Statements and Supplementary Data, for a summary of significant accounting
policies.
Other-Than-Temporary Impairment of Certain Investments
In March 2004, the Financial Accounting Standards Board (FASB) and
Emerging Issues Task Force (EITF) reached consensus on several issues being
addressed in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. The disclosure provisions of EITF Issue
No. 03-1 continue to be effective for the Company's consolidated financial
statements for the year ended December 31, 2005.
On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS
115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. These FSP's address the determination as to
when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. These FSP's also include
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. These FSP's nullify certain requirements of EITF Issue No. 03-1,
and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.
The guidance in these FSP's amends FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The FSP's are effective for
reporting periods beginning after December 15, 2005. The Company does not
anticipate any material impact to its financial condition or results of
operations as a result of the adoption of this guidance.
8
Share-Based Payments
In December 2004, the FASB issued Statement No. 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. The Company may elect to
adopt FAS 123 (R) using a modified prospective method or modified retrospective
method. Under the modified retrospective method, the Company would restate
previously issued financial statements, basing the compensation expense on that
previously reported in their pro forma disclosures required by FAS 123. The
modified prospective method would require the Company to record compensation
expense for the unvested portion of previously granted awards that remain
outstanding at the date of adoption as these awards continue to vest. FAS 123
(R) is effective for the first fiscal year beginning after June 15, 2005.
Management has elected to use the modified prospective method and has completed
its evaluation of the effect FAS 123 (R) will have and believes that the effect
of implementation will be consistent with the pro forma disclosures included in
the notes to the consolidated financial statements.
Accounting Changes and Error Corrections
On June 7, 2005, the FASB issued Statement No. 154 (FAS 154),
Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. Under the
provisions of FAS 154, voluntary changes in accounting principles are applied
retrospectively to prior periods' financial statements unless it would be
impractical to do so. FAS 154 supersedes APB Opinion No. 20, which required that
most voluntary changes in accounting principles be recognized by including in
the current period's net income the cumulative effect of the change. FAS 154
also makes a distinction between "retrospective application" of a change in
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. The provisions of FAS 154 are effective for
accounting changes made in fiscal years beginning after December 15, 2005.
Management of the Company does not expect the adoption of this standard to have
a material impact on its financial position or results of operations.
ITEM 1A. RISK FACTORS
------------
The Company and its subsidiary, Pacific State Bank, conduct business in
an environment that includes certain risks described below which could have a
material adverse effect on the Company's business, results of operations,
financial condition, future prospects and stock price. You are also referred to
the matters described under the heading "Cautionary Statements Regarding
Forward-Looking Statements," for additional information regarding factors that
may affect the Company's business.
o The Company's business is subject to interest rate risk, and variations
in interest rates may negatively affect its financial performance.
Changes in the interest rate environment may reduce the Company's net
interest income. It is expected that the Company will continue to realize income
from the differential or "spread" between the interest earned on loans,
securities and other interest-earning assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. Net interest spreads are
affected by the difference between the maturities and repricing characteristics
of interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. We cannot assure you that we can minimize the Company's interest
rate risk. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially and adversely affect the Company's net interest
spread, asset quality, loan origination volume and overall profitability.
9
o The Company faces strong competition from financial service companies
and other companies that offer banking services, which can hurt Pacific
State Bancorp' business.
The Company's subsidiary, Pacific State Bank, conducts banking
operations principally in Stockton California and San Joaquin County. Increased
competition in the Bank's market may result in reduced loans and deposits.
Ultimately, it may not be able to compete successfully against current and
future competitors. Many competitors offer the banking services that are offered
by the Bank in its service area. These competitors include national and
super-regional banks, finance companies, investment banking and brokerage firms,
credit unions, government-assisted farm credit programs, other community banks
and technology-oriented financial institutions offering online services. In
particular, the Bank's competitors include several major financial companies
whose greater resources may afford them a marketplace advantage by enabling them
to maintain numerous banking locations and mount extensive promotional and
advertising campaigns. Additionally, banks and other financial institutions with
larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the credit needs of larger customers. Areas of competition include interest
rates for loans and deposits, efforts to obtain deposits, and range and quality
of products and services provided, including new technology-driven products and
services. Technological innovation continues to contribute to greater
competition in domestic and international financial services markets as
technological advances, such as Internet-based banking services that cross
traditional geographic bounds, enable more companies to provide financial
services. If the Bank is unable to attract and retain banking customers, it may
be unable to continue its loan growth and level of deposits, which may adversely
affect its and the Company's results of operations, financial condition and
future prospects.
o Changes in economic conditions could result in an economic downturn in
Northern California which could adversely affect the Company's
business.
The Company's business is directly affected by factors such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond the Company's control. A
deterioration in economic conditions locally, regionally or nationally including
as the result of terrorist activities within and outside California could result
in an economic downturn in Northern California and trigger the following
consequences, any of which could adversely affect the Company's business:
o loan delinquencies and defaults may increase;
o problem assets and foreclosures may increase;
o demand for the Company's products and services may decline;
o low cost or non-interest bearing deposits may decrease; and
o collateral for loans may decline in value, in turn reducing customers'
borrowing power, and reducing the value of assets and collateral as
sources of repayment of existing loans.
o The Company has a concentration risk in real estate related loans.
At December 31, 2005, approximately 78.6% of the Company's loan
portfolio consisted of real estate related loans. Substantially all of the
Company's real property collateral is located in its operating markets in
Stockton, California and San Joaquin County. A substantial decline in real
estate values in the Company's primary market areas could occur as a result of
an economic downturn, or other events including natural disasters such as
earthquakes, fires, and floods. Such a decline in values could have an adverse
impact on the Company by limiting repayment of defaulted loans through sale of
the real estate collateral and by likely increasing the number of defaulted
10
loans to the extent that the financial condition of its borrowers is adversely
affected by such a decline in values. Those events could necessitate a
significant increase in the provision for loan and lease losses which could
adversely affect the Company's results of operations, financial condition, and
future prospects.
o The Company and its subsidiary Bank are subject to extensive
regulation, which could adversely affect its business.
The Company's and the Bank's operations are subject to extensive
regulation by state and local governmental authorities and are subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company believes that it and
its subsidiary Bank are in substantial compliance in all material respects with
laws, rules and regulations applicable to the conduct of its business. Because
the Company's business is highly regulated, the laws, rules and regulations
applicable to it are subject to regular modification and change. There can be no
assurance that these laws, rules and regulations, or any other laws, rules or
regulations, will not be adopted in the future, which could make compliance much
more difficult or expensive, restrict the Company's ability to originate, broker
or sell loans, further limit or restrict the amount of commissions, interest or
other charges earned on loans originated or sold by the Company, or otherwise
adversely affect the Company's results of operations, financial condition, or
future prospects.
o The Company's allowance for loan losses may not be adequate to cover
actual losses.
Like all financial institutions, the Company maintains an allowance for
loan losses to provide for loan defaults and non-performance, but its allowance
for loan losses may not be adequate to cover actual loan losses. In addition,
future provisions for loan losses could materially and adversely affect the
Company's operating results. The Company's allowance for loan losses is based on
prior experience, as well as an evaluation of the risks in the current
portfolio. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates that may be
beyond the Company's control, and these losses may exceed current estimates.
Federal regulatory agencies, as an integral part of their examination process,
review the Company's loans and allowance for loan losses. Although we believe
that the Company's allowance for loan losses is adequate to cover current
losses, we cannot assure you that it will not further increase the allowance for
loan losses or that regulators will not require it to increase this allowance.
Either of these occurrences could materially and adversely affect the Company's
earnings.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
-------------------------
Inapplicable
ITEM 2. PROPERTIES
----------
The Company owns its March Lane (Stockton), Modesto, Groveland, Angels
Camp and Arnold branch facilities. The Company purchased the March Lane office
for $866,700 in 1992. The Company's executive officers and support staff were
located in the March Lane building from 1997 to 2004. During 2001 the Company
purchased an adjacent building to the March Lane office, for $747,000, in order
to expand its administrative functions. The executive offices, finance
department, central operations and data processing were moved into these offices
in 2004. The Company repossessed the Modesto building and converted it to a
banking branch in 1996. The Modesto land was purchased in 1999 for $524,000. The
Company purchased the Arnold Branch for $600,000 as part of its 1997 expansion
into branches acquired from Valliwide Bank. A portion of the building, located
at 1013 Blagen Road, is leased to First American Title. The lease is expected to
generate $10,000 in 2006. During 2000 the Company purchased a lot in Groveland
and purchased a lot in Angels Camp in order to build and relocate the current
Branch offices. These sites offer the Company better visibility and demonstrate
commitment to the communities we serve. The Groveland property was purchased for
11
$148,000 and construction was completed in January 2003. The Angels Camp
property was purchased for $200,000 and was completed in the third quarter of
2003.
All other Company premises are leased. The Company's total rentals for
premises and equipment for fiscal year 2005 were approximately $276,000.
The Company is currently in the fourteenth year of a sixteen-year gross
level lease for its main office located in downtown Stockton. The Company's
projected lease expense for 2006 under this lease is approximately $200,000 per
year, and will increase annually at a rate of 3% per year.
In 1999, the Company entered into a 10-year lease with two options to
extend for an additional 5 years each for the building in Tracy. The annual rent
for 2005 was $71,000 and will increase annually at a rate of 3% per year. The
Company's projected lease expense for 2006 under this lease is approximately
$74,000 per year, and will increase annually at a rate of 3% per year.
In 2005, the Company entered into a 10-year lease with four options to
extend for an additional 5 years each for the building in Lodi. The annual rent
will commence in 2006 upon completion of the building and occupation by Pacific
State Bank. The estimated annual rent for 2006 under this lease is approximately
$90,000, and will increase annually at a rate of 3% per year. The estimated
annual rent for 2007 under this lease is approximately $180,000.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matters were submitted to vote of the security holders during the fourth
quarter of the period covered by this report.
Item (*) Executive Officers of the Registrant.
------------------------------------
The following table presents certain information regarding the
executive officers of the Company:
NAME AGE POSITION(S) SINCE
- ---- --- ----------- -----
Steven A. Rosso 51 President and CEO/Director 1992
Gary A. Stewart 56 Executive VP/CCO/Director 1996
JoAnne Roberts 49 Vice President/CFO 2004
(*) Included pursuant to General Instruction (G)(3).
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
----------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
See information under the caption "Market for Registrant's Common
Equity and Related Stockholder Matters" in the Company's 2005 Annual Report to
Shareholders, which information is incorporated here by reference.
12
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
See information under the caption "Selected Financial Data" in the
Company's 2005 Annual Report to Shareholders, which information is incorporated
here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION.
------------
See information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation" in the Company's 2005 Annual
Report to Shareholders which information is incorporated here by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK.
---------------------------------------------------------
See information under the caption "Liquidity and Market Risk" and "Net
Interest Income Simulation" in the Company's 2005 Annual Report to Shareholders
which information is incorporated here by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Report of Independent Registered Public Accounting Firm,
Consolidated Balance Sheet, Consolidated Statement of Income, Consolidated
Statement of Changes in Shareholders' Equity, Statement of Cash Flows and Notes
to Consolidated Financial Statements, all contained in the Company's 2005 Annual
Report to Shareholders, which information is incorporated here by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
The Chief Executive Officer and Chief Financial Officer of the Company
have concluded, based on their evaluation as of the end of the period covered by
this Annual Report on Form 10-K, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and include controls and procedures designed
to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. The design
of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
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 are reasonably likely to materially affect, these controls
subsequent to the date of such evaluation.
ITEM 9B. OTHER INFORMATION
-----------------
On October 20, 2005, the Registrant entered into a new employment
agreement with its president and chief executive officer Steven A. Rosso.
Registrant failed to disclose this event in a Form 8-K filed with the
Commission.
The principal terms of the agreement include the following:
13
o The term of employment is five years ending September 30, 2010, with an
automatic one-year renewal unless either party gives written notice of
renewal prior to the end of the term. In the event of prior termination
without cause, Mr. Rosso is entitled to a severance payment of one
year's salary plus continuation of all health and welfare benefits for
one year.
o Starting annual salary is $223,084, with annual adjustments in the
discretion of the board of directors.
o Additional benefits include use of a company automobile, membership in
country club and other service clubs, participation in all employment
benefits and plans generally available to Company and Bank employees,
and reimbursement for Company-related expenses.
o If Mr. Rosso becomes temporarily or permanently disabled other than as
a result of his intentional act, he is to be paid the difference
between his contracted rate of compensation and the amounts paid by
state disability insurance for a maximum of six months.
o Incentive compensation is payable tied to certain Bank performance
goals.
o In the event of a change in control of the Company, a pool of five
percent (5%) of the total sale value will be established at the close
of a transaction above the book value of the Company. Mr. Rosso will be
entitled to receive at least sixty percent (60%) of this pool.
o Five weeks annual vacation.
A copy of the agreement is attached as Exhibit 10.4 and is incorporated
here by reference.
On March 13, 2006, Director Philip Wallace notified the Company of his
intent to resign his position with the Company effective immediately due solely
to health issues. Mr. Wallace's resignation was accepted by the Board of
Directors on March 16, 2006. The Company failed to file a Form 8-K in connection
with Mr. Wallace's resignation.
PART III
--------
Certain information required by Part III is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's 2006 Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by this item is incorporated by reference from
the table of directors in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by this item is incorporated by reference from
the Proxy Statement, including all information under the caption "Compensation
and Certain Transactions" except for information under the subheading
"Transactions with Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
---------------------------
The information required by this item is incorporated by reference from
the Proxy Statement, including information under the captions "Principal
Shareholders" and "Stock Ownership of Management."
14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required by this item is incorporated by reference from
the Proxy Statement, including all information under the subheading
"Transactions with Management."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
--------------------------------------
The information required by this item is incorporated by reference from
the Proxy Statement, including all information under the subheading "Principal
Accountant Fees and Services."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
---------------------------------------
(a)(1)
The following financial statements of the Company included in the
Annual Report to Shareholders for the year ended December 31, 2005, are filed
and incorporated by reference in Item 8 of this report.
(a) Financial Statements.
(1) Financial Statements:
(i) Report of Independent Registered Public Accounting
Firm, dated March 17 2006.
(ii) Consolidated Balance Sheet, December 31, 2005 and
2004.
(iii) Consolidated Statement of Income: Years ended
December 31, 2005, 2004 and 2003.
(iv) Consolidated Statement of Changes in Shareholders'
Equity: Years ended December 31, 2005, 2004 and 2003.
(v) Consolidated Statement of Cash Flows: Years ended
December 31, 2005, 2004 and 2003.
(vi) Notes to Consolidated Financial Statements.
(2) All Schedules have been omitted because they are not
applicable or not required or because the information is
included in the financial statements or the notes thereto or
is not material.
(3) Exhibits filed with this report are listed in the Index to
Exhibits below, which is incorporated herein by reference.
(b) The Exhibits listed on the Index of Exhibits are filed and
incorporated here by reference.
(c) All Schedules have been omitted because they are not applicable or
not required, or because the information is included in the financial
statements or the notes thereto or is not material.
15
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: March 16, 2006 PACIFIC STATE BANCORP
By: /s/ STEVEN A. ROSSO
------------------------------------
Steven A. Rosso
President/Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 16, 2006 By: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Director
Date: March 16, 2006 By: /s/ JOANNE ROBERTS
-------------------------------------
JoAnne Roberts
Vice President/CFO
(Principal Financial Officer)
(Principal Accounting Officer)
Date: March 16, 2006 By: /s/ MICHAEL L. DALTON
-------------------------------------
Michael L. Dalton
Director and Vice Chairman
Chairman of the Audit Committee
Date: March 16, 2006 By: /s/ HAROLD HAND
-------------------------------------
Harold Hand
Director and Chairman of the Board
Date: March 16, 2006 By: /s/ PATRICIA A. HATTON
-------------------------------------
Patricia A. Hatton
Director and Chairperson of the
Director Loan Committee
Date: March 16, 2006 By: /s/ STEVEN J. KIKUCHI
-------------------------------------
Steven J. Kikuchi
Director and Secretary of the Board
Date: March 16, 2006 By: /s/ MAXWELL FREEMAN
-------------------------------------
Maxwell Freeman
Director
Date: March 16, 2006 By: /s/ YOSHIKAZU MATAGA
-------------------------------------
Yoshikazu Mataga
Director
16
Date: March 16, 2006 By: /s/ GARY A. STEWART
-------------------------------------
Gary A. Stewart
Executive Vice President/CLO
Director
Date: March 16, 2006 By: /s/ KATHLEEN VERNER
-------------------------------------
Kathleen Verner
Director
17
LIST OF EXHIBITS
3.1 Articles of Incorporation, as amended. Incorporated by reference from
Exhibit 3.1 filed with the Company's Form 10-K for the year ended
December 31, 2004.
3.2 Bylaws. Incorporated by reference from Exhibit 3.2 filed with the
Company's Registration Statement No. 333-84908 on Form S-4EF (the
"S-4").
4 Agreement to file copy of Indenture for the Company's $5 Million of
Floating Rate Junior Subordinated Deferrable Interest Debentures due
2032 issued to Pacific State Statutory Trust I. Incorporated by
reference from the Company's Form 10-K for the year ended December 31,
2002.
4.1 Agreement to file copy of Indenture for the Company's $3.5 Million of
Floating Rate Junior Subordinated Deferrable Interest Debentures due
2034 issued to Pacific State Statutory Trust II. Incorporated by
reference from the Company's Form 10-K for the year ended December 31,
2003.
10.1 Lease Agreement for Main Office. Incorporated by reference from Exhibit
10.1 filed with the S-4.
10.2 Lease Agreement for Lodi Office
10.3 Lease Agreement, Tracy Branch Office. Incorporated by reference from
Exhibit 10.3 filed with the S-4.
10.4* Employment Agreement (Steven A. Rosso) dated October 20, 2005. Exhibit
10.4 filed with the S-4.
10.5.1* Form of Salary Continuation Agreement
10.5.2* Form of Split Dollar Agreement
10.6* 1997 Stock Option Plan. Incorporated by reference from Exhibit 10.6
filed with the Company's Quarterly Report on Form 10-Q for the
quarterly period ending September 30, 2003.
13 The portions of the Pacific State Bancorp 2005 Annual Report to
Shareholders which have been incorporated by reference in Items 5-8
herein are filed with the Commission.
21 List of Subsidiaries
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of the Chief Executive Officer (section 302 of
Sarbanes-Oxley Act).
31.2 Certification of the Chief Financial Officer (section 302 of
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
* Denotes management contract or compensatory arrangement
18