UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2006
OR
[ ] 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: 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
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]
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 10, 2006
Common Stock 3,626,418
No Par Value
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC STATE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts) September 30 December 31
Assets 2006 2005
- ------ ------------ ------------
Cash and due from banks $ 12,919 14,453
Federal funds sold 213 4,667
------------ ------------
Total cash and cash equivalents 13,132 19,120
Interest -bearing deposits in banks -- --
Investment securities - available for sale (amortized
cost of $24,160 in 2006 and $28,696 in 2005) 24,031 28,539
Loans, less allowance for loan losses of $2,604
in 2006 and $2,356 in 2005 280,501 241,556
Bank premises and equipment, net 12,019 9,511
Company owned life insurance 6,012 4,411
Accrued interest receivable and other assets 7,113 6,474
------------ ------------
Total assets $ 342,808 309,611
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 63,150 68,657
Interest bearing 236,699 204,417
------------ ------------
Total deposits 299,849 273,074
Other borrowings 4,900 4,000
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 2,897 2,400
------------ ------------
Total liabilities 316,410 288,238
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - no par value; 2,000,000
shares authorized; none outstanding
Common stock - no par value; 24,000,000
shares authorized; issued and outstanding
3,616,418 in 2006 and 3,512,622 in 2005 8,538 7,556
Retained earnings 17,937 13,912
Accumulated other comprehensive loss,
net of tax (77) (95)
------------ ------------
Total shareholders' equity 26,398 21,373
------------ ------------
Total liabilities and shareholders' equity $ 342,808 309,611
============ ============
See notes to unaudited condensed consolidated financial statements
2
- ----------------------------------------------------------------------------------------------------------------------
PACIFIC STATE BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended Nine months ended
September 30 September 30
----------------------------- -----------------------------
(in thousands, except per share 2006 2005 2006 2005
amounts) ------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 6,627 $ 4,836 $ 18,086 $ 12,716
Interest on federal funds sold 21 84 38 209
Interest on investment securities 294 197 939 649
------------ ------------ ------------ ------------
Total interest income 6,942 5,117 19,063 13,574
Interest expense:
Interest on deposits 2,207 1,199 5,484 3,205
Interest on subordinated
debentures 187 145 531 372
Interest on borrowings 85 21 306 67
------------ ------------ ------------ ------------
Total interest expense 2,479 1,365 6,321 3,644
------------ ------------ ------------ ------------
Net interest income before 4,463 3,752 12,742 9,930
provision for loan losses
Provision for loan losses 90 90 270 210
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 4,373 3,662 12,472 9,720
------------ ------------ ------------ ------------
Non-interest income:
Service charges 195 197 653 567
Other fee income 475 238 928 648
Gain from sale of loans 48 142 228 728
------------ ------------ ------------ ------------
Total non-interest income 718 577 1,809 1,943
Non-interest expenses:
Salaries and employee benefits 1,359 1,255 4,044 3,563
Occupancy 258 224 665 618
Furniture and equipment 174 156 535 436
Other 811 726 2,397 1,971
------------ ------------ ------------ ------------
Total non-interest expenses 2,602 2,361 7,641 6,588
------------ ------------ ------------ ------------
Income before provision for
income taxes 2,489 1,878 6,640 5,075
Provision for income taxes 977 680 2,614 1,872
------------ ------------ ------------ ------------
Net income $ 1,512 $ 1,198 $ 4,026 $ 3,203
============ ============ ============ ============
Basic earnings per share $ 0.44 $ 0.35 $ 1.16 $ 0.93
============ ============ ============ ============
Diluted earnings per share $ 0.39 $ 0.31 $ 1.04 $ 0.82
============ ============ ============ ============
Weighted average common shares
outstanding 3,467,819 3,467,819 3,475,663 3,459,428
Weighted average common and
common equivalent shares
outstanding 3,841,522 3,926,957 3,867,431 3,890,905
- ----------------------------------------------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
PACIFIC STATE BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months
(Unaudited) Ended
(in thousands) September 30,
2006 2005
------------ ------------
Cash flows from operating activities:
Net income 4,026 3,203
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 270 210
Gain on sale of loans (228) (728)
Stock based compensation
Net increase (decrease) in deferred loan origination fees
and costs 133 (18)
Depreciation and amortization 398 371
Increase in Company owned life insurance, net of
expenses (1,601) (560)
Decrease in accrued interest receivable and other
assets (778) (816)
Increase in accrued interest payable and other
liabilities 497 799
------------------------------
Net cash provided by operating activities 2,717 2,461
------------------------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in banks -- 6,000
Proceeds from matured and called available-for-sale
investment securities 12,186 2,311
Purchases of available-for-sale investment securities (8,003) (6,976)
Proceeds from principal repayments from available-for-sale
securities 491 1,151
Proceeds from principal repayments from held-to-maturity
securities 48 17
Net increase in loans (39,097) (18,931)
Proceeds from sale of premises and equipment 17
Purchases of premises and equipment (2,801) (136)
------------------------------
Net cash (used in) provided by investing activities (37,176) (16,547)
------------------------------
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing
and savings deposits (21,973) 25,380
Net increase in time deposits 48,748 9,809
Net increase in borrowed funds 900
------------------------------
Proceeds from exercise of stock options 546 132
Proceeds from stock issuance 250
------------------------------
Net cash provided by financing activities 28,471 35,321
------------------------------
(Decrease) Increase in cash and cash equivalents (5,988) 21,235
Cash and cash equivalents at beginning of year 19,120 12,108
------------------------------
Cash and cash equivalents at end of period 13,132 33,343
==============================
See notes to unaudited condensed consolidated financial statements
4
Pacific State Bancorp and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Pacific State Bancorp is a holding company with one bank subsidiary, Pacific
State Bank, (the "Bank"), and two unconsolidated subsidiary grantor trusts,
Pacific State Statutory Trusts I and II. Pacific State Bancorp commenced
operations on June 24, 2002 after acquiring all of the outstanding shares of
Pacific State Bank. 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 interest on 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
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, 2006 had 80
employees, including 35 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 eight 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, Lodi, Modesto and Tracy and a loan production office in Castro
Valley, California.
Pacific State Bancorp common stock trades on the Nasdaq(TM) Global
Market under the symbol of "PSBC".
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, 2006 and December 31,
2005, and the results of its operations for the three and nine month periods
ended September 30, 2006 and 2005, and its cash flows for the nine month periods
ended September 30, 2006 and 2005 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.
The Company believes that the disclosures in the interim condensed consolidated
financial statements are adequate to make the information not misleading. These
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2005 Annual Report to Shareholders. The results of
5
operations for the three and nine month periods ended September, 2006 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 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 its subsidiary
operate as one business segment. No customer accounts for more than 10% of the
revenue for the Bank or the Company.
3. LOANS
Outstanding loans are summarized below:
September 30, December 31,
================================================================================
2006 2005
- --------------------------------------------------------------------------------
(In thousands)
Commercial $ 45,818 $ 43,063
Agriculture 18,124 17,582
Real estate - commercial 131,307 126,166
Real estate - construction 75,554 43,352
Installment & other 12,223 13,536
------------ ------------
283,025 243,699
Deferred loan fees and costs, net 80 213
Allowance for loan losses (2,604) (2,356)
------------ ------------
Total net loans $ 280,501 $ 241,556
------------ ------------
================================================================================
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 $108,355,000 and $112,066,000 and stand-by
letters of credit of $3,107,000 and $2,318,000 at September 30, 2006 and
December 31, 2005, respectively. However, all such commitments will not
necessarily culminate in actual extensions of credit by the Company.
Approximately $55,179,000 of the loan commitments outstanding at September 30,
2006 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
6
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, 2006 and December 31, 2005.
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 outstanding options.
6. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income or loss. Other comprehensive income or loss, net of taxes,
is comprised of the unrealized gains or losses on available-for-sale investment
securities. The following table shows comprehensive income and its components
for the periods indicated:
Three Months Ended Nine Months Ended
(in thousands) 09/30/06 09/30/05 09/30/06 09/30/05
Net Income 1,512 1,198 $ 4,026 $ 3,203
Other Comprehensive Loss:
Change in unrealized loss on
available for sale securities 51 59 18 (34)
Reclassification adjustment -- -- -- --
-------------------------------------------------------
Total Other Comprehensive Loss 51 59 18 (34)
-------------------------------------------------------
Total Comprehensive Income 1,563 1,257 4,044 3,169
=======================================================
7. STOCK-BASED COMPENSATION
The Company has one stock-based compensation plan which is described in Note 8.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), Share Based Payment ("SFAS 123(R)"), using the modified
prospective application transition method, which requires recognizing expense
for options granted prior to the adoption date equal to the fair value of the
unvested amounts over their remaining vesting period, based on the grant date
fair value estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock Based Compensation, and compensation cost for all share
based payments granted subsequent to January 1, 2006, based on the grant date
fair values estimated in accordance with the provisions of SFAS 123(R). There
were no grants made in the first nine months of 2006 or 2005. Results for prior
periods have not been restated. Prior to January 1, 2006, the Company accounted
for these plans under the recognition and measurement principles of APB Opinion
7
No. 25, Accounting for Stock Issued to Employees, and related Interpretations
("APB 25"). No stock-based compensation cost is reflected in net income prior to
January 1, 2006, 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.
As a result of adopting SFAS 123(R), the Company's income before provision for
income taxes and net income for the three months ended September 30, 2006 was
$62,000 and $51,000, respectively, lower than if we had continued to account for
share-based compensation under APB 25. Basic and diluted earnings per share for
the quarter ended September 30, 2006 would have been $.45 and $.41,
respectively, without the adoption of SFAS 123 (R) compared to $.44 and $.39,
respectively, as reported
As a result of adopting SFAS 123(R), the Company's income before provision for
income taxes and net income for the nine months ended September 30, 2006 was
$186,000 and $103,000, respectively, lower than if we had continued to account
for share-based compensation under APB 25. Basic and diluted earnings per share
for the nine months ended September 30, 2006 would have been $1.19 and $1.07,
respectively, without the adoption of SFAS 123 (R) compared to $1.16 and $1.04,
respectively, as reported.
SFAS 123(R) requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) to be classified as a cash flow from financing in
the statement of cash flows. These excess tax benefits were not significant for
the Company.
The following table illustrates the pro forma effect on net income and earnings
per share if the fair value recognition provisions of SFAS 123 had been applied
to the Company's stock option plans for the quarter and nine month periods ended
September 30, 2005.
For the Three For the Nine
Months Months
Ended Ended
September 30 September 30
2005 2005
------------ ------------
(in thousands, except share amounts)
Net income, as reported $ 1,198 $ 3,203
Deduct: Total stock-based employee
compensation expense determined
under the fair value method for all
outstanding awards, net of related tax effects 66 198
------------ ------------
Pro forma net income, in thousands $ 1,132 $ 3,005
============ ============
Basic earning per share - as reported $ 0.35 $ 0.93
Basic earning per share - pro forma $ 0.33 $ 0.87
Diluted earnings per share - as reported $ 0.31 $ 0.82
Diluted earnings per share - pro forma $ 0.29 $ 0.77
8. STOCK OPTION PLAN
At September 30, 2006, the Company has one stock-based employee compensation
plan, the Pacific State Bancorp 1997 Stock Option Plan. At September 30, 2006,
28,304 shares of common stock remain reserved under the 1997 plan for issuance
to employees and directors through incentive and nonstatutory agreements. The
plan requires that the option price may not be less than the fair market value
8
of the stock at the date the option is granted, and that the stock must be paid
in full at the time the option is exercised. The options under the plans expire
on dates determined by the Board of Directors, but not later than ten years from
the date of grant. The vesting period is determined by the Board of Directors
and is generally over five years. The Company issues new shares of common stock
upon the exercise of stock options.
A summary of the activity of the plan is as follows:
Nine Months ended September 30, 2006
-----------------------------------------------------------
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (000's)
- ------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of
period 840,050 $ 6.96 4.3 Yrs $ 9,694
Options granted -- -- --
Options exercised 87,901 6.22 1,061
Options canceled 30,000 7.50 165
------- ------------
- -------------------------------------------------------------------------------------------------------------
Options outstanding, end of period 722,149 $ 7.03 3.6 Yrs $ 7,873
=============================================================================================================
Options vested or expected to vest at 675,669 $ 6.51 3.6 Yrs $ 7,716
September 30, 2006
=============================================================================================================
Options exercisable, end of period 256,649 $ 6.51 3.6 yrs $ 2,931
=============================================================================================================
No shares vested for the three month periods ended September 30, 2006 and 2005.
The total fair value of shares vested during the nine month periods ended
September 30, 2006 and 2005 was $155,000 and $135,000, respectively. The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Company's common
stock for options that were in-the-money at September 30, 2006. The intrinsic
value of options outstanding and exercisable relating to the above stock option
plan was $2,931,000 as of September 30, 2006. During the three months ended
September 30, 2006 and 2005, the aggregate intrinsic value of options exercised
relating to the above stock option plan was $408,000 and $266,000, respectively.
For the nine months ended September 30, 2006 and 2005, the aggregate intrinsic
value of options exercised relating to the above stock option plan was
$1,061,000 and $1,030,000, respectively.
There were no options granted in the nine months ended September 30, 2006 and
2005. The Company bases the fair value of the options previously granted on the
date of grant using a Black-Scholes option pricing model that uses assumptions
based on expected option life and the level of estimated forfeitures, expected
stock volatility, risk free interest rate, and dividend yield. The Company uses
historical data to estimate expected option life. Stock volatility is based on
the historical volatility of the Company's stock. The risk-free rate is based on
the U. S. Treasury yield curve for the periods within the contractual life of
the options in effect at the time of grant.
As required by SFAS 123(R), management made an estimate of expected forfeitures
and is recognizing compensation costs only for those equity awards expected to
vest. Management has estimated the forfeiture rate to be approximately 3% for
the remaining non-vested options.
As of September 30, 2006, there was $467,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Plans. The cost is expected to be realized over a weighted average period of
1.71 years and will be adjusted for subsequent changes in estimated forfeitures.
9
9. NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. FIN 48 is effective
for fiscal years beginning after December 15, 2007. Management does not expect
the adoption of FIN 48 to have a material impact on the Company's financial
position or results of operations.
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair
Value Measurements. SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
157 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any
new circumstances. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The provisions of SFAS 157 are effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The provisions should be applied
prospectively, except for certain specifically identified financial instruments.
Management does not expect the adoption of SFAS 157 to have a material impact to
the Company's financial position or result of operations.
Accounting for Purchases of Life Insurance
In September 2006, the FASB ratified the consensuses reached by the
Emerging Issues Task Force (the Task Force) on Issue No. 06-5 (EITF 06-5)
Accounting for the Purchases of Life Insurance - Determining the Amount that
Could be Realized in Accordance with FASB Technical Bulletin No.85-4 (FTB 85-4).
FTB 85-4 indicates that the amount of the asset included in the balance sheet
for life insurance contracts within its scope should be "the amount that could
be realized under the insurance contract as of the date of the statement of
financial position." Questions arose in applying the guidance in FTB 85-4 to
whether "the amount that could be realized" should consider 1) any additional
amounts included in the contractual terms of the insurance policy other than the
cash surrender value and 2) the contractual ability to surrender all of the
individual-life policies (or certificates in a group policy) at the same time.
EITF 06-5 determined that "the amount that could be realized" should 1) consider
any additional amounts included in the contractual terms of the policy and 2)
assume the surrender of an individual-life by individual-life policy (or
certificate by certificate in a group policy). Any amount that is ultimately
realized by the policy holder upon the assumed surrender of the final policy (or
final certificate in a group policy) shall be included in the "amount that could
be realized." An entity should apply the provisions of EITF 06-5 through either
a change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption or a change in
accounting principle through retrospective application to all prior periods. The
10
provisions of EITF 06-5 are effective for fiscal years beginning after December
15, 2006. Management has not yet completed its evaluation of the impact that
EITF 06-5 will have.
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements
In September 2006, the FASB ratified the consensuses reached by the
Task Force on Issue No. 06-4 (EITF 06-4) Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. A question arose when an employer enters into an endorsement
split-dollar life insurance arrangement related to whether the employer should
recognize a liability for the future benefits or premiums to be provided to the
employee. EITF 06-4 indicates that an employer should recognize a liability for
future benefits and that a liability for the benefit obligation has not been
settled through the purchase of an endorsement type policy. An entity should
apply the provisions of EITF 06-4 either through a change in accounting
principle through a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption or a change in accounting principle through
retrospective application to all prior periods. The provisions of EITF 06-4 are
effective for fiscal years beginning after December 15, 2007. Management has not
yet completed its evaluation of the impact that EITF 06-4 will have.
Consideration of the Effects of Prior Year Misstatements
In September, 2006, the Securities and Exchange Commission published
Staff Accounting Bulleting No. 108 (SAB 108) Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. The interpretations in SAB 108 were issued to address diversity in
practice in quantifying financial statement misstatements and the potential
under current practice to build up improper amounts on the balance sheet. This
guidance will apply to the first fiscal year ending after November 15, 2006 and
early application in interim periods is encouraged. Management does not believe
the adoption of SAB 108 will have a material impact on the Company's financial
position or results of operations.
11
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
The following discussion and analysis sets forth certain statistical information
relating to the Company as of September 30, 2006 and December 31, 2005 and for
the three and nine month periods ended September 30, 2006 and 2005. The
discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report 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, 2005.
CRITICAL ACCOUNTING POLICIES
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (R), Share Based Payment ("SFAS 123(R)") using the modified
prospective transition method. Prior to adoption of this statement, the Company
accounted for its share-based employee compensation plans under the recognition
and measurement provisions of APB Opinion No. 25, Accounting for Stock-Based
Compensation. See Notes 7 and 8 to the Condensed Consolidated Financial
Statements for additional information related to implementation of SFAS 123(R).
Except as disclosed above, there have been no changes to the Company's critical
accounting policies from those discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's 2005 Annual
Report to Shareholders' on Form 10-K.
12
OVERVIEW
For the three months ended September 30, 2006:
The Company's net income increased $314 thousand or 26.21% to $1,512 thousand
for the third quarter of 2006 from $1,198 thousand for the same period in 2005.
The primary contributors to the increase in net income for the third quarter of
2006 was the $711 thousand increase in net interest income and a $141 thousand
increase in non interest income over the same period in 2005. These increases
were partially offset by increases in non interest expenses of $241 thousand.
The increase in non interest expenses consisted primarily of increases in
salaries and benefits of $104 thousand, occupancy and furniture and equipment
expenses of $52 thousand and other expenses of $85 thousand. Additionally, the
provision for income taxes increased $297 thousand. Basic earnings per share
increased to $0.44 for the third quarter of 2006 up 22.56% from $0.35 for the
same period in 2005. Diluted earnings per share increased to $0.39 for the third
quarter of 2006 up 25.81% from the $0.31 for the same period in 2005.
For the nine months ended September 30, 2006:
The Company's net income increased $823 thousand or 25.69% to $4,026 thousand
for the nine month period ended September 30, 2006 from $3,203 thousand for the
same period in 2005. The primary contributor to the increase in net income for
the nine month period ended September 30, 2006 was the $2,812 thousand increase
in net interest income over the same period in 2005. This increase was partially
offset by a decrease in non-interest income of $134 thousand and an increase in
non-interest expenses of $1,053 thousand. The increase in non interest expenses
consisted primarily of increases in salaries and benefits of $481 thousand,
occupancy and furniture and equipment expenses of $146 thousand and other
expenses of $426 thousand. In addition the provision for loan losses increased
$60 thousand and the provision for income taxes increased $742 thousand. Basic
earnings per share increased to $1.16 for the nine month period ended September
30, 2006 up 24.73% from $0.93 for the same period in 2005. Diluted earnings per
share increase to $1.04 for the nine month period ended September 30, 2006 up
26.83% from the $0.82 for the same period in 2005.
Total assets at September 30, 2006 were $343 million, an increase of $33 million
or 10.72%, from the $310 million at December 31, 2005. The growth in assets was
primarily in the Company's loans offset by decreases in the level of Federal
funds sold and investments. Loans grew $39 million or 16.12% to $281 million at
September 30, 2006 from $242 million at December 31, 2005 while Federal funds
sold and Investment Securities decreased $9million over the same period. The
growth in loans was also funded by the net income of $4.0million and growth in
deposits of $27 million or 9.81%. Borrowed funds increased $0.9 million or
22.5%.
The annualized return on assets was 1.77% and 1.68% for the three and nine month
periods ended September 30, 2006 compared to 1.69% and 1.57% for the same
periods in 2005. The annualized return on equity was 23.93% and 23.11 % for the
three and nine month periods ended September 30, 2006 compared to 24.76% and
23.65% for the same periods in 2005.
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis, was $4.5 million for the three months ended September
30, 2006, an increase of $711 thousand or 18.95% from $3.7 million for the same
period in 2005. The increase in net interest income was primarily attributed to
the volume increase in the Company's average loan balances supported by the
overall increases in the yields earned on earning assets. These increases were
partially offset by the increases in both the level of average interest bearing
liabilities primarily time deposits and the increase in the average rates paid,
primarily on time deposits and other borrowings.
Interest income increased $1.8 million or 35.67% to $6.9 million for the three
months ended September 30, 2006 from $5.1 million for the same period in 2005.
The increase in interest income was primarily attributed to volume increases in
loan balances and an increase in yield on all earning assets. Loan volume
increased due to the Bank's growth in loans associated with the overall growth
of the Company. The Company's average loan balances were $280.1 million for the
three months ended September 30, 2006, up $60.0 million or 27.3% from $220.1
million for the same period in 2005. The Company's average loan yield was 9.39%
for the three months ended September 30, 2006, up 67 basis points from the 8.72%
yield for the same period in 2005. As a result, interest income on loans
increased $1,791 thousand. The Company's average balances of investment
securities increased $5.5 million to $24.3 million for the three months ended
September 30, 2006 from the $18.8 million for the same period in 2005. The
Company's average yield on investment securities increased 76 basis points to
4.80% from 4.04% for the same period in 2005. As a result, interest income
increased $102 thousand. These increases were offset by a decrease in the
interest earned on federal funds sold of $63 thousand primarily as a result of
decreased volumes. The overall yield on average earning assets increased 91
basis points to 9.00% for the three months ended September 30, 2006, from 8.09%
for the same period in 2005.
Interest expense increased $1.1 million, or 81.6% to $2.5 million for the three
months ended September 30, 2006, from $1.4 million for the same period in 2005.
The increase is primarily attributed to both the increase in levels of the
average time deposits and other borrowings and the overall increases in the
rates paid on all interest bearing liabilities, offset by the decrease in the
level of interest-bearing demand deposits. Time deposits increased as the bank
experienced disintermediation from lower yielding transaction accounts into
higher yielding time deposits. Rates increased during the period as rates on
deposits were increased to remain competitive with other financial institutions.
The Company's average balances of time deposits were $133.5 million for the
three months ended September 30, 2006, up $56.2 million, or 72.8% from $77.2
million for the same period in 2005. The average rate paid on time deposits also
increased 157 basis points to 4.63% for the three months ended September 30,
2006 from 3.06% for the same period in 2005. As a result, interest expense on
time deposits increased $963 thousand. The Company's average balances of other
borrowings increased $2.5 million to $15.5 million for the three months ended
September 30, 2006 from $13 million for the same period in 2005 and the rates
paid increased 187 basis points to 6.94% for the three months ended September
30, 2006 from 5.07% for the same period in 2005. As a result interest expense on
other borrowings increased $106 thousand. The Company's average balances of
interest bearing demand deposits decreased $13.9 million to $89.4 million for
the three months ended September 30, 2006 from $103.4 million for the same
period in 2005. The average rate paid increased 52 basis points to 2.80% from
2.28% for the same period in 2005. As a result interest expense on interest
bearing demand deposits decreased $37 thousand. The overall rates paid on
average interest-bearing liabilities increased 131 basis points to 4.01% for the
three months ended September 30, 2006, from 2.70% for the same period in 2005.
As a result of the changes noted above, the net interest margin for the three
months ended September 30, 2006 decreased 14 basis points to 5.79%, from 5.93%
for the same period in 2005.
14
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, 2006 September 30, 2005
---------------------------------------- ----------------------------------------
(Dollars in Thousands) Interest Average Interest Average
Income Income
Average or Yield or Average or Yield or
Assets: Balance Expense Cost Balance Expense Cost
- ------- ---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans (1)(2) $ 280,097 $ 6,627 9.39% $ 220,066 $ 4,836 8.72%
Investment securities (1) 24,310 294 4.80% 18,835 192 4.04%
Federal funds sold 1,651 21 5.05% 11,531 84 2.89%
Interest bearing deposits in banks -- -- 0.00% 546 5 3.63%
------------------------- -------------------------
Total average earning assets 306,058 6,942 9.00% 250,978 5,117 8.09%
Non-earning assets:
Cash and due from banks 13,833 14,281
Other assets 18,371 15,918
---------- ----------
Total average assets $ 338,262 $ 281,177
========== ==========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing demand $ 89,429 632 2.80% $ 103,358 595 2.28%
Savings 6,526 17 1.03% 6,691 9 0.53%
Time deposits 133,455 1,558 4.63% 77,217 595 3.06%
Other borrowings(3) 15,555 272 6.94% 12,981 166 5.07%
------------------------- -------------------------
Total average interest-bearing
liabilities 244,964 2,479 4.01% 200,247 1,365 2.70%
========== ==========
Noninterest-bearing liabilities:
Demand deposits 67,163 61,156
Other liabilities 1,069 559
---------- ----------
Total liabilities 313,197 261,962
Shareholders' Equity: 25,065 19,215
---------- ----------
Total average liabilities and
shareholders' equity $ 338,262 $ 281,177
========== ==========
---------- ----------
Net interest income $ 4,463 $ 3,752
========== ==========
Yield on interest-earning assets(4) 9.00% 8.09%
Cost of funding interest-earning assets 3.21% 2.16%
---------- ----------
Net interest margin(5) 5.79% 5.93%
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended September 30, 2006 and 2005 amounted to $431 thousand and $688
thousand, respectively.
(3) For the purpose of this schedule the interest expense related to the
Company's junior subordinated debentures is included in other
borrowings.
(4) Total interest expense divided by the average balance of total earning
assets. (5) Net interest income divided by the average balance of total
earning assets
15
The following table sets forth changes in interest income and interest expense,
for the 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,
2006 over 2005 change in net interest income
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 1,791 $ 371 $ 1,319 $ 101
Investment securities 102 36 56 10
Federal funds sold (63) 63 (72) (54)
Interest bearing deposits in banks (5) (5) (5) 5
---------- ---------- ---------- ----------
Total interest income $ 1,825 $ 464 $ 1,298 $ 63
Interest Expense:
Interest-bearing demand 37 135 (80) (18)
Savings 8 8 (0) (0)
Time deposits 963 306 433 223
Other borrowings 106 61 33 12
---------- ---------- ---------- ----------
Total interest expense $ 1,114 $ 511 $ 386 $ 217
---------- ---------- ---------- ----------
Net interest income $ 711 $ (47) $ 912 $ (154)
========== ========== ========== ==========
(1) The volume change in net interest income represents the change in
average balance multiplied by the previous year's rate.
(2) The rate change in net interest income represents the change in rate
multiplied 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 both of the three month periods ended September 30, 2006 and
2005. 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, 2006, total
non-interest income increased $141 thousand or 24.44% to $718 thousand, up from
$577 thousand for the comparable period in 2005. The increase in non interest
income was primarily the result of increases in fee income derived from the
referral of commercial mortgage loans to third parties. The increase was offset
by a decrease in gain on sale of loans.
Other fee income increased $237 thousand as a result of increases in mortgage
referral fees due to an increase in Commercial Real Estate loan referral
activity during the third quarter of 2006 as opposed to the same period in 2005.
16
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.
Income derived from the gain on sale of loans decreased $94 thousand or 66.20%
to $48 thousand, down from $142 thousand for the comparable period in 2005.
Non-Interest Expenses. Non-interest expenses consist of salaries and related
employee benefits, occupancy, furniture 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, 2006 was $2.6 million compared to $2.4 million
for the same period in 2005, representing an increase of $241 thousand or 10.2%.
This increase reflects increases in salaries and benefits of $104 thousand or
8.3% which are indicative of the additions to staff to expand branch operations
in line with their respective growth, and the recognition of stock based
compensation expenses of $62,000 as a result of adopting SFAS No. 123(R). As of
September 30, 2006, there was $467,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Company's stock option plan. The related compensation expense is expected to be
realized over a weighted average period of 1.71 years. The increase in furniture
and equipment expense is attributable to the depreciation on new computer
equipment purchased to stay current with technology. The increase in other
expense is consistent generally with the growth of the Company.
The following table sets forth a summary of non-interest expense for the three
months ended September 30, 2006 and 2005:
Three Months Ended
September 30, September 30,
(In thousands) 2006 2005
Non-interest Expense:
Salaries & Benefits 1,359 1,255
Occupancy 258 224
Furniture and Equipment 174 156
Other Expense 811 726
------------ ------------
Total Non-Interest Expenses 2,602 2,361
============ ============
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 Company's effective tax rate
for the three month period ended September 30, 2006 increased to 39.3% from
36.2% for the same period in 2005. The increase was due to decreases in the
level of investments in tax free municipal bonds. Additionally, income derived
from Enterprise Zone loans represented a smaller percentage of the loan
portfolio than in prior periods.
The following table reflects the Company's tax provision and the related
effective tax rate for the three months ended September 30, 2006 and 2005.
Three Months Ended
September 30, September 30,
(In thousands) 2006 2005
Tax Provision $ 977 $ 680
Effective Tax Rate 39.3% 36.2%
17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis, was $12.7 million for the nine months ended September
30, 2006, an increase of $2.8 million or 28.32% from $9.9 million for the same
period in 2005. 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 on all earning assets.
These increases were partially offset by the decreases in the volumes of federal
funds sold and interest bearing deposits in banks coupled with the increases in
both the level of average interest bearing liabilities and the increase in the
average rates paid, primarily on time deposits and other borrowings.
Interest income increased $5.5 million or 40.44% to $19.1 million for the nine
months ended September 30, 2006 from $13.6 million for the same period in 2005.
The increase in interest income was primarily attributed to volume increases in
loan and investment balances and increases in yields on all interest earning
assets. Loan volume increased due to the bank's increased loan demand. The yield
on loans increased as the Federal Open Market Committee increased the prime
lending rate for banks six times during the nine month period ended September
30, 2006. The increase in rate totaled 150 basis points for the period. The
Company's average loan balances were $264.8 million for the nine months ended
September 30, 2006, up $54.0 million or 25.6% from $210.8 million for the same
period in 2005. The Company's average loan yield was 9.13% for the nine months
ended September 30, 2006, up 107 basis points from the 8.06% yield for the same
period in 2005. The Company's average investment balances were $25.6 million for
the nine months ended September 30, 2006, up $7.7 million, or 42.57%, from $18.0
million for the same period in 2005. The Company's average investment yield was
4.90% for the nine months ended September 30, 2006, up 132 basis points from the
3.58% yield for the same period in 2005. Although the Company's average balances
of Federal funds sold decreased $8.9 million to $1.1 million for the nine months
ended September 30, 2006 from the $9.9 million for the same period in 2005 and
interest income decreased $171 thousand, the average yield on Federal funds sold
increased 202 basis points to 4.83% compared to 2.81% for the same period in
2005. 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 128 basis
points to 8.74% for the nine months ended September 30, 2006, from 7.46% for the
same period in 2005.
Interest expense increased $2.7 million, or 73.5% to $6.3 million for the nine
months ended September 30, 2006, from $3.6 million for the same period in 2005.
The increase is primarily attributed to both the increase in the levels of
average time deposits and other borrowings and the overall increases in the
rates paid on all interest bearing liabilities. Time deposits increased and
interest-bearing demand deposits decreased as the Bank experienced
disintermediation from lower yielding transaction accounts into higher yielding
time deposits. Rates rose during the period as rates on deposits were increased
to remain competitive with other financial institutions. The Company's average
balances of time deposits were $115.7 million for the nine months ended
September 30, 2006, up $41.6 million, or 56.1% from $74.1 million for the same
period in 2005. The average rate paid on time deposits increased 158 basis
points to 4.19% for the nine months ended September 30, 2006 from 2.61% for the
same period in 2005. As a result, interest expense on time deposits increased
$2,183 thousand. The Company's average balances of other borrowings increased
$4.4 million to $17.3 million for the nine months ended September 30, 2006 from
$12.8 million for the same period in 2005 and the rates paid increased 191 basis
points to 6.47% from 4.56% for the same period in 2005. As a result, interest
expense on other borrowings increased $398 thousand. The Company's average
balances of interest bearing demand deposits decreased $9.55 million to $93.6
18
million for the nine months ended September 30, 2006 from $103.0 million for the
same period in 2005. At the same time the average rate paid increased 34 basis
points to 2.59% from 2.25%. As a result, interest expense on interest bearing
demand deposits increased $81 thousand. The overall rates paid on average
interest-bearing liabilities increased 116 basis points to 3.63% for the nine
months ended September 30, 2006, from 2.47% for the same period in 2005.
As a result of the changes noted above, the net interest margin for the nine
months ended September 30, 2006 increased 38 basis points or 6.96% to 5.84%,
from 5.46% for the same period in 2005.
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, 2006 September 30, 2005
---------------------------------------- ----------------------------------------
(Dollars in Thousands) Interest Average Interest Average
Income Income
Average or Yield or Average or Yield or
Assets: Balance Expense Cost Balance Expense Cost
- ------- ---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans (1)(2) $ 264,800 $ 18,086 9.13% $ 210,847 $ 12,716 8.06%
Investment securities (1) 25,629 939 4.90% 17,977 482 3.58%
Federal funds sold 1,052 38 4.83% 9,946 209 2.81%
Interest bearing deposits in banks -- -- 0.00% 4,392 167 5.08%
------------------------- -------------------------
Total average earning assets 291,481 19,063 8.74% 243,162 13,574 7.46%
Non-earning assets:
Cash and due from banks 13,210 14,044
Other assets 16,552 15,571
---------- ----------
Total average assets $ 321,243 $ 272,777
========== ==========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing demand $ 93,571 1,814 2.59% $ 103,122 1,733 2.25%
Savings 6,452 42 0.87% 6,968 27 0.52%
Time deposits 115,750 3,628 4.19% 74,139 1,445 2.61%
Other borrowings(3) 17,294 837 6.47% 12,873 439 4.56%
------------------------- -------------------------
Total average interest-
bearing liabilities 233,067 6,321 3.63% 197,102 3,644 2.47%
========== ==========
Noninterest-bearing liabilities:
Demand deposits 63,534 54,022
Other liabilities 1,347 3,547
---------- ----------
Total liabilities 297,948 254,671
Shareholders' Equity: 23,295 18,106
---------- ----------
Total average liabilities and
shareholders' equity $ 321,243 $ 272,777
========== ==========
---------- ----------
Net interest income $ 12,742 $ 9,930
========== ==========
Yield on interest-earning assets(4) 8.74% 7.46%
Cost of funding interest-earning assets 2.90% 2.00%
---------- ----------
Net interest margin(5) 5.84% 5.46%
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
19
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the six month periods
ended September 30, 2006 and 2005 amounted to $1,328 thousand and
$1,056 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
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,
2006 over 2005 change in net interest income
Net
Change Rate Volume Mix
---------- ---------- ---------- ----------
(In thousands)
Interest Income:
Loans and leases $ 5,370 $ 1,685 $ 3,254 $ 431
Investment securities 457 177 205 75
Federal funds sold (171) 150 (187) (134)
Interest bearing deposits in banks (167) (167) (167) 167
---------- ---------- ---------- ----------
Total interest income $ 5,489 $ 1,845 $ 3,105 $ 539
Interest Expense:
Interest-bearing demand 81 266 (161) (25)
Savings 15 18 (2) (1)
Time deposits 2,183 879 811 493
Other borrowings 398 184 151 63
Total interest expense $ 2,677 $ 1,347 $ 799 $ 530
---------- ---------- ---------- ----------
Net interest income $ 2,812 $ 498 $ 2,306 $ 9
========== ========== ========== ==========
(1) The volume change in net interest income represents the change in
average balance multiplied by the previous year's rate.
(2) The rate change in net interest income represents the change in rate
multiplied 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 $270 thousand in provision for
loan losses for the nine month period ended September 30, 2006, up $60 thousand
or 28.6%, from the $210 thousand provision for the same period in 2005.
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, 2006, total
non-interest income decreased $134 thousand or 6.90% to $1.81 million, down from
$1.94 million for the comparable period in 2005. The decrease in non interest
income was primarily the result of a decrease in gains on sales of loans
partially offset by increases in other fee income and service charges.
20
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.
Income derived from the gain on sale of loans decreased $500 thousand or 68.7%
to $228 thousand, down from $728 thousand for the comparable period in 2005.
The increase in service charges of $86 thousand or 15.2% to $653 thousand from
$567 thousand for the comparable period in 2005 is primarily the result of the
growth in the number of deposit accounts from the same period in 2005.
The increase in other fee income is primarily the result of an increase in
mortgage referral fees due to increases in activity during the first nine months
of 2006 as compared to the same period in 2005. Other fee income increased $280
thousand or 43.2% to $928 thousand, from $648 thousand for the comparable period
in 2005.
Non-Interest Expenses. Non-interest expenses consists of salaries and related
employee benefits, occupancy, furniture 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
nine months ended September 30, 2006 was $7.6 million compared to $6.6 million
for the same period in 2005, representing an increase of $1,053 thousand or
15.9%. This increase reflects Increases in salaries and benefits of $481
thousand or 13.5% which are indicative of the additions to staff to expand
branch operations in line with their respective growth, and the recognition of
stock based compensation expenses of $186 thousand as a result of adopting SFAS
No. 123(R). As of September 30, 2006, there was $467,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Company's stock option plan. The related compensation expense
is expected to be realized over a weighted average period of 1.71 years. The
increase in furniture and equipment expense is attributable to the depreciation
on new computer equipment purchased to stay current with technology. The
increase in other expense is consistent generally with the growth of the Company
and also reflects increased legal expense associated with the settlement of a
litigation matter.
The following table sets forth a summary of non-interest expense for the nine
months ended September 30, 2006 and 2005:
Nine Months Ended
September 30, September 30,
(In thousands) 2006 2005
Non-interest Expenses:
Salaries & Benefits $ 4,044 $ 3,563
Occupancy 665 618
Furniture and Equipment 535 436
Other Expense 2,397 1,971
------------ ------------
Total Non-Interest Expenses $ 7,641 $ 6,588
============ ============
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 Company's effective tax rate
21
for the nine month period ended September 30, 2006 increased to 39.4% from 36.9%
for the same period in 2005. The increase was due to decreases in the level of
investments in tax free municipal bonds. Additionally, income derived from
Enterprise Zone loan income represented a smaller percentage of the loan
portfolio than in prior periods.
The following table reflects the Company's tax provision and the related
effective tax rate for the nine months ended September 30, 2006 and 2005.
Nine Months Ended
September 30, September 30,
(In thousands) 2006 2005
Tax Provision $ 2,614 $ 1,872
Effective Tax Rate 39.4% 36.9%
FINANCIAL CONDITION
Total assets at September 30, 2006 were $343 million, an increase of $33 million
or 10.6%, from the $310 million at December 31, 2005. The growth in assets was
primarily in the Company's loans offset by decreases in Federal funds sold and
investment securities. Loans grew $38.9 million or 16.1% to $281 million at
September 30, 2006 from $242 million at December 31, 2005. Federal funds sold at
September 30, 2006 were $213 thousand representing a decrease of $4.5 million
from December 31, 2005. Over the same period investments decreased $4.5 million
or 15.8% to $24 million from $28.5 million. The growth in assets was primarily
funded by the net income of $4 million and growth in deposits of $26.8 million
or 9.8%. Borrowed funds increased $900 thousand or 22.5%.
The change in deposits was comprised of a decrease in non-interest bearing
deposits of $5.5 million or 8.0% to $63.1 million at September 30, 2006 from $69
million at December 31, 2005; this decrease was offset by increases in interest
bearing deposits of $32.3 million or 15.8% to $236.7 million at September 30,
2006 from $204 million at December 31, 2005.
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.
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated:
22
September 30, December 31,
================================================================================
2006 2005
- --------------------------------------------------------------------------------
(In thousands)
Commercial $ 45,818 $ 43,063
Agriculture 18,124 17,582
Real estate - commercial 131,307 126,166
Real estate - construction 75,554 43,352
Installment & other 12,223 13,536
------------ ------------
283,025 243,699
Deferred loan fees and costs 80 213
Allowance for loan losses (2,604) (2,356)
------------ ------------
Total net loans $ 280,501 $ 241,556
------------ ------------
================================================================================
The Company continues to manage the mix in its loan portfolio consistent with
its identity as a community bank serving Northern California and the Central
Valley. Net portfolio loans have increased $38.9 million or 16.1%, to $280.5
million at September 30, 2006 from $241.5 million at December 31, 2005.
Commercial loans increased $2.7 million or 6.4% to $45.8 million from $43.1
million at December 31, 2005. Agricultural loans increased slightly by $542
thousand or 3.1% to $18.1 million from $17.6 million at December 31, 2005. Real
estate - commercial loans increased by $5.1 million or 4.1% to $131.3 million
from $126.2 million at December 31, 2005. The largest increase was in real
estate - construction loans which increased $32.2 million or 74.3% to $75.5
million from $43.4 million at December 31, 2005. The increase in construction
loans during the nine month period ended September 30, 2006 was due to delayed
draws on construction loans as building was delayed due the longer than normal
winter season. Installment and other loans decreased $1.3 million or 9.7% to
$12.2 million from $13.5 million at December 31, 2005. 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 now representing 22.8% of
total loans compared to 25.1% in the prior year, real estate construction loans
now representing 26.9% compared to 17.9% in the prior year, commercial real
estate loans now representing 46.8% compared to 52.2% in the prior year, and
installment loans now representing 4.4% compared to 5.6% in the prior year,
Nonperforming loans. There were no nonperforming loans at September 30, 2006 and
December 31, 2005.
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 operations 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'
23
businesses, valuation of collateral, the determination of impaired loans and
exposure to potential losses.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and other qualitative factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's ALL. Such agencies may require the Company to provide additions to
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 increased to $270,000 for the nine months ended
September 30, 2006 compared to $210,000 for the same period in 2005. The
increase 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,
=========================================================================================================
2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------------------
Beginning Balance: $ 2,516 $ 2,332 $ 2,356 $ 2,213
Provision for loan losses 90 9 270 210
Charge-offs:
Commercial -- 8 19 9
Real Estate -- -- -- --
Other 2 -- 5 --
---------- ---------- ---------- ----------
Total Charge-offs 2 8 24 9
---------- ---------- ---------- ----------
Recoveries:
Commercial -- -- 0 --
Other -- -- -- --
---------- ---------- ---------- ----------
Total Recoveries -- -- 0 --
---------- ---------- ---------- ----------
Ending Balance $ 2,604 $ 2,414 $ 2,604 $ 2,414
========== ========== ========== ==========
ALL to total loans 0.93% 1.10% 0.93% 1.10%
Net Charge-offs to average
loans-annualized 0.00% 0.00% 0.00% 0.00%
=========================================================================================================
Investment securities. Investment securities decreased $4.5 million to $24.0
million at September 30, 2006, from $28.5 million at December 31, 2005.
24
The Company's investment in U.S. Treasury securities decreased to 49.5% of the
investment portfolio at September 30, 2006 compared to 52.0% at December 31,
2005. Obligations of U.S. Agencies increased to 29.2% of the investment
portfolio at September 30, 2006 compared to 26.3% at December 31, 2005. The
Company's investment in corporate bonds decreased to 9.6% of the investment
portfolio at September 30, 2006 compared to 11.7% at December 31, 2005.
Tax-exempt municipal obligation bonds increased to 11.7% of the investment
portfolio at September 30, 2006 compared to 10.0% at December 31, 2005. Fed
Funds sold decreased $4.5 million, or 95.4%. The overall decrease was the result
of the proceeds from maturities of securities and the cash position being used
as a funding source for the increased demand in loans.
Deposits. Total deposits were $299.8 million as of September 30, 2006 an
increase of $26.7 million or 9.8% from the December 31, 2005 balance of $273.1
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 deposits and interest bearing checking deposits
decreased to 29.2% of total deposits from 30.9% at December 31, 2005. Money
market and savings accounts decreased to 27.2% of total deposits from 34.9% at
December 31, 2005. Time deposits increased to 43.6% of total deposits from 34.1%
at December 31, 2005
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, 2006 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.
25
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%.
The Company's and the Bank's risk-based capital ratios are presented below
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------------ -------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of September 30, 2006:
Total capital
(to risk weighted assets) $36,690 11.93% 24,610 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $33,610 10.93% 12,305 4.00% N/A N/A
Tier I capital
(to average assets) $33,610 9.96% 13,495 4.00% N/A N/A
Bank
As of September 30, 2006:
Total capital
(to risk weighted assets) $34,605 11.29% $24,511 8.00% $30,640 10.00%
Tier I capital
(to risk weighted assets) $32,002 10.44% $12,556 4.00% $18,843 6.00%
Tier I capital
(to average assets) $32,002 9.49% $13,495 4.00% $16,869 5.00%
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------------ -------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of December 31, 2005:
Total capital
(to risk weighted assets) $31,650 11.90% $21,268 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $27,654 10.40% $10,634 4.00% N/A N/A
Tier I capital
(to average assets) $27,654 9.20% $12,067 4.00% N/A N/A
Bank
As of December 31, 2005:
Total capital
(to risk weighted assets) $29,933 11.50% $20,865 8.00% $26,082 10.00%
Tier I capital
(to risk weighted assets) $27,577 10.60% $10,433 4.00% $15,649 6.00%
Tier I capital
(to average assets) $27,577 9.10% $12,067 4.00% $15,083 5.00%
26
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 and available-for-sale investment
securities) totaled $37.2 million or 10.8% of total assets at September 30, 2006
compared to $47.7 million or 15.4% of total assets at December 31, 2005. 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 earning
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.
27
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.
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, 2006 compared to December 31, 2005 as discussed under the caption "Liquidity
and Market Risk" and "Net Interest Income Simulation" in the Company's 2005
Annual Report to Shareholders filed as an exhibit with the Company's 2005 Annual
Report on Form 10-K, which is incorporated here by reference.
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.
28
Part II - Other Information
ITEM 1A RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The
Company is not aware of any material changes to the risks described in our
Annual Report.
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, 2006 By: /s/ STEVEN A. ROSSO
-----------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: November 14, 2006 By: /s/ JOANNE ROBERTS
-----------------------------------------
JoAnne Roberts
Senior Vice President and Chief Financial
Officer
29
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
30