- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from____________ to ____________
Commission file number 000-50323
SERVICE 1ST BANCORP
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
State of California 32-0061893
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
49 W. 10th Street, Tracy, California 95376
------------------------------------------
(Address of principal executive offices)
(209) 956-7800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 2,388,739 shares of registrant's
common stock were outstanding at November 13, 2006.
The Index to Exhibits is located at page 27.
EXPLANATORY NOTE
Service 1st Bancorp is filing this Amendment No. 1 to its Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 2006, filed with the
Securities and Exchange Commission on November 14, 2006 to amend and restate our
previously reported Consolidated Balance Sheet, Consolidated Statement of
Shareholders Equity and its Consolidated Statements of Cash Flow as of September
30, 2006, the Consolidated Statements of Income for three months and nine months
ended September 30, 2006 and "Management's Discussion and Analysis for these
periods, to reflect accrued deferred income tax expense related to tax leases.
The corrections to net income and earnings per share were the result of an
adjustment to the Company's accrual for income taxes. Beginning in April of
2006, the Company's subsidiary, Service 1st Bank, began to fund tax leases. The
leases have the effect of substantially reducing and deferring the Company's
current income tax liability. In computing the tax accrual, the Company
incorrectly included the tax benefit related to these leases as a permanent
timing difference. The Company's accounting firm has informed the Company that
the tax benefits for the leases were appropriate for computing the tax liability
on the tax return, but should not have been utilized in computing tax expense
for financial reporting purposes.
The amended changes related to the Consolidated Financial Statements are listed
below. The increased accrued tax expense for the three months September 30, 2006
was $81,444 and the increase in accrued taxes for the nine months ended
September 30, 2007 was $127,497. This reduced previously reported net income for
the three months ended September 30, 2006 from $247,079 to $165,635 and reduced
the previously reported net income for the nine months ended September 30, 2006
from $733,139 to $605,642. Basic net income per share for the three months ended
September 30, 2006 was reduced from $0.11 per share to $0.07 per share. Diluted
earnings per share for the three months ended September 30, 2006 was reduced
from $0.09 per share to $0.07 per share. Basic net income per share for the nine
months ended September 30, 2006 was reduced from $0.31 per share to $0.25 per
share. Diluted earnings per share for the nine months ended September 30, 2006
was reduced from $0.28 per share to $0.24 per share. Accrued interest and other
liabilities increased from $1,366,146 to $1,493,643. Retained earnings were
reduced from $1,033,085 to $905,588.
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS 09/30/06 12/31/05
------------- -------------
Cash and due from banks $ 4,191,518 $ 9,024,556
Federal funds sold 18,184,272 --
------------- -------------
Cash and cash equivalents 22,375,790 9,024,556
Certificates of deposit with other banks 2,193,720 993,720
Investment securities available-for-sale 73,416,777 67,873,931
Investment securities held-to-maturity 1,559,892 936,040
Loans, net 109,730,879 82,533,132
Bank premises and equipment, net 1,355,165 671,450
Cash surrender value of life insurance 3,534,755 3,436,150
Accrued interest receivable 1,164,832 958,001
Other assets 3,013,131 2,902,290
------------- -------------
Total assets $ 218,344,941 $ 169,329,270
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 34,221,522 $ 27,388,426
Money market, NOW and savings 89,589,504 85,127,700
Time deposits under $100,000 34,715,959 13,643,135
Time deposits $100,000 and over 27,648,746 24,982,406
------------- -------------
Total deposits 186,175,731 151,141,667
Junior subordinated debt securities 5,155,000 --
Other borrowings 9,000,000 1,030,000
Accrued interest and other liabilities 1,493,643 1,583,502
------------- -------------
Total liabilities 201,824,374 153,755,169
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued or outstanding -- --
Common stock, no par value, 30,000,000 shares
authorized, issued and outstanding, 2,386,239
shares at September 30, 2006 and
December 31, 2005 15,992,913 15,992,913
Additional paid-in-capital 149,374 --
Retained earnings 905,588 299,946
Accumulated other comprehensive income, net of tax (527,308) (718,758)
------------- -------------
Total shareholders' equity 16,520,567 15,574,101
------------- -------------
Total liabilities and shareholders' equity $ 218,344,941 $ 169,329,270
============= =============
The accompanying notes are an integral part of these consolidated statements.
3
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the periods ending
(unaudited)
For the three months ended For the nine months ended
--------------------------- ---------------------------
09/30/06 09/30/05 09/30/06 09/30/05
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 2,538,177 $ 1,513,858 $ 6,702,777 $ 4,112,345
Interest on investments 772,295 619,313 2,240,323 1,729,099
Interest on fed funds sold 100,308 48,891 124,420 156,902
Other interest income 3,411 37,320 11,220 70,293
------------ ------------ ------------ ------------
Total interest income 3,414,191 2,219,382 9,078,740 6,068,639
Interest expense:
Interest expense on deposits 1,436,635 747,603 3,488,212 1,983,999
Interest on borrowings 239,476 249 442,253 1,278
------------ ------------ ------------ ------------
Total interest expense 1,676,111 747,852 3,930,465 1,985,277
------------ ------------ ------------ ------------
Net interest income before provision for loan losses 1,738,080 1,471,530 5,148,275 4,083,362
Provision for loan losses 90,000 -- 230,000 140,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,648,080 1,471,530 4,918,275 3,943,362
Other Income:
Service charges, fees, and other income 68,503 87,117 205,980 233,801
Gain on the sale of investment securities -- 2,998 -- 6,191
Gain on sale and servicing of loans 19,601 31,214 78,672 157,901
Referral fees on loans 60,000 12,074 60,000 36,508
Earnings on cash surrender value of life insurance 38,672 33,604 114,887 85,725
------------ ------------ ------------ ------------
Total other income 186,776 167,007 459,539 520,126
Other Expenses:
Salaries and employee benefits 906,868 698,042 2,550,119 1,911,333
Occupancy expense 141,125 88,148 450,605 241,008
Equipment expense 53,460 48,133 161,625 145,848
Data processing and other professional fees 95,764 136,618 416,401 338,932
Office supplies and equipment 40,215 41,955 123,241 111,504
Loan department expense 49,214 26,731 173,739 69,842
Advertising and promotion 93,317 33,447 184,891 103,445
Directors fee and expenses 13,557 23,062 99,132 67,285
FDIC and state assessments 13,638 18,234 47,017 59,437
Other operating expenses 216,241 76,988 355,113 225,194
------------ ------------ ------------ ------------
Total other expenses 1,623,397 1,191,358 4,561,881 3,273,828
------------ ------------ ------------ ------------
Income before income taxes 211,459 447,179 815,933 1,189,660
Income tax expense 45,824 17,590 210,291 234,996
------------ ------------ ------------ ------------
Net income $ 165,635 $ 429,589 $ 605,642 $ 954,664
============ ============ ============ ============
Net income per share - basic $ 0.07 $ 0.18 $ 0.25 $ 0.40
============ ============ ============ ============
Net income per share - diluted $ 0.07 $ 0.18 $ 0.24 $ 0.38
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
4
SERVICE 1ST BANCORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
Accumulated Accumulated
Common Stock Deficit/ Other Total
-------------------------- Comprehensive Retained Comprehensive Shareholders'
Shares Amount Surplus Income Earnings Income Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance January 1, 2005 1,541,664 $ 15,425,042 $ -- $ (1,117,844) $ (205,527) $ 14,101,671
Common stock sold, net of 49,273 567,871 567,871
costs of $11,086
Three-for-two stock split
including cash for
fractional shares 795,302 (4,829) (4,829)
Comprehensive income:
Net income $ 1,422,619 1,422,619 1,422,619
Unrealized losses on
securities net of
taxes of $357,867 (509,594) -- (509,594) (509,594)
Reclassification
adjustment for gains
included in net income,
net of tax of $2,554 (3,637) -- (3,637) (3,637)
------------
Comprehensive income $ 909,388
============
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2005 2,386,239 15,992,913 -- 299,946 (718,758) 15,574,101
Surplus from options expense 149,374 99,298
Comprehensive income:
Net income $ 605,642 605,642 605,642
Unrealized gain on
securities net of
taxes of $134,700 191,450 191,450 191,450
------------
Comprehensive income $ 797,092
============
------------ ------------ ------------ ------------ ------------ ------------
Balance September 30, 2006 2,386,239 $ 15,992,913 $ 149,374 $ 905,588 $ (527,308) $ 16,520,567
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
5
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(unaudited)
2006 2005
------------ ------------
Operating activities:
Net income $ 605,642 $ 954,664
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 230,000 140,000
Depreciation 128,728 130,460
Amortization and accretion on securities 190,154 233,349
Gain on sale of securities, net -- (6,191)
Earnings on cash surrender value life insurance, net (98,605) (72,784)
Options expense 149,374 --
Gain on sale of loans (12,733) (67,226)
Increase in accrued interest (206,831) (292,586)
Increase in other assets (249,193) (666,452)
(Decrease) Increase in accrued expenses and other liabilities (89,859) 466,354
------------ ------------
Net cash provided by operating activities 646,677 819,588
Investing activities:
Purchases of securities available-for-sale (12,330,690) (30,761,032)
Purchases of securities held to maturity (680,482) --
Proceeds from sales of available-for-sale securities -- 1,396,477
Proceeds from payments, maturities and calls of available-for-sale securities 6,951,080 13,457,021
Proceeds from payments, maturities and calls of held-to-maturity securities 33,042 208,981
Net increase in loans (27,565,014) (8,107,063)
Proceeds from sales of loans 150,000 955,223
Net redemption of certificates of deposit at other banks (1,200,000) (853,799)
Purchase of Bank Owned Life Insurance -- (1,000,000)
Purchases of premises and equipment (812,443) (147,545)
------------ ------------
Net cash used by investing activities (35,454,507) (24,851,737)
Financing activities:
Net increase in demand, interest-bearing deposits and savings 32,367,724 33,369,449
Net increase in time deposits 2,666,340 5,565,048
Net proceeds from sale of stock (proceeds from sale of common stock,
net of costs) -- 567,871
Cash paid in lieu of stock splits and dividends -- (4,829)
Increase in junior subordinated debts 5,155,000 --
Proceeds from new borrowings 7,970,000 --
------------ ------------
Net cash provided by financing activities 48,159,064 39,497,539
------------ ------------
Net increase in cash and cash equivalents 13,351,234 15,465,390
Cash and cash equivalents at beginning of period 9,024,556 11,042,365
------------ ------------
Cash and cash equivalents at end of period $ 22,375,790 $ 26,507,755
============ ============
Supplemental disclosures of cash flow information:
Interest $ 3,853,017 $ 1,979,746
Income taxes $ 432,000 $ 120,000
The accompanying notes are an integral part of the financial statements.
6
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited consolidated financial statements of Service
1st Bancorp (the "Company") have been prepared in accordance with the
instructions to Form 10-QSB and, therefore, do not include information or
footnote disclosures required by generally accepted accounting principles for
complete financial statements. For further information, refer to the financial
statements and related footnotes included in the Company's annual report on Form
10-KSB for the year ended December 31, 2005. In the opinion of management, the
financial statements presented herein include all adjustments (consisting of
normal recurring accruals) necessary to present fairly, in all material
respects, the financial position of the Company as of September 30, 2006 and the
Company's income statement for the three months and nine months ended September
30, 2006 and 2005, and the statement of cash flows for the nine months ended
September 30, 2006 and 2005. Operating results for interim periods are not
necessarily indicative of operating results for an entire fiscal year.
The balance sheet as of December 31, 2005, has been derived from the
audited balance sheet as of that date.
Reclassifications
Certain reclassifications were made to prior periods presented to
conform to the current year. These reclassifications are of a normal recurring
nature.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004)
(SFAS No. 123R), "Share-Based Payment", which addresses the accounting for
stock-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by issuance of such equity instruments. In
January 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107, which provides supplemental implementation
guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for
stock-based compensation transactions using the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and instead generally requires that such transactions be
accounted for using a fair-value-based method. SFAS No. 123R requires the use of
a valuation model to calculate the fair value of stock-based awards. The Company
has elected to use the Black-Scholes Model for option valuation. This model
incorporates various assumptions including volatility, expected life, and
interest rates. The expected volatility is based on the historical volatility of
the Company's common stock over the most recent period commensurate with the
estimated expected life of the Company's stock options adjusted for the impact
of unusual fluctuations not reasonably expected to recur and other relevant
factors. The expected life of an award is based on historical experience and on
the terms and conditions of the stock awards granted to employees.
The assumptions used for the nine-month period ended September 30, 2006
are as follows:
WEIGHTED AVERAGE ASSUMPTIONS FOR OPTIONS GRANTED
DURING THE PERIOD ENDED:
September 30, 2006
------------------
Expected Life 72 months
Stock Volatility 55.58%
Risk free interest rate 4.77%
Dividend yield 0.00%
The Company has elected the modified prospective transition method as
permitted by SFAS No. 123R and accordingly prior periods have not been restated
to reflect the impact of SFAS No. 123R. The modified prospective transition
method requires that stock-based compensation expense be recorded for all new
and unvested stock options, restricted stock, restricted stock units, and
employee stock purchase plan shares that are ultimately expected to vest as the
requisite service is rendered beginning on January 1, 2006, the first day of the
Company's fiscal year 2006. Stock-based
7
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION (continued)
compensation expense for awards granted prior to January 1, 2006 is based on the
grant date fair-value as determined under the pro forma provisions of SFAS No.
123. The Company has recorded an incremental $50,076 of stock-based compensation
expense during the quarter ended September 30, 2006 and $149,374 for the nine
months ended September 30, 2006 as a result of the adoption of SFAS No. 123R.
Prior to the adoption of SFAS No. 123R, the Company measured
compensation expense for its employee stock-based compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25. The Company applied the
disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure as if the fair-value-based
method had been applied in measuring compensation expense. Under APB Opinion No.
25, when the exercise price of the Company's employee stock options was equal to
the market price of the underlying stock on the date of the grant, no
compensation expense was recognized.
The following table illustrates the effect on net income after taxes
and net income per common share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation during the
three month and nine month periods ended September 30, 2005 (in thousands,
except per share amounts):
For the three For the nine
months ended months ended
September 30, September 30,
2005 2005
-------------- --------------
Net income as reported $ 429,589 $ 954,664
Deduct: Total stock-based
employee compensation expense determined under fair
value based method of all awards, net of related tax
effects $ (42,942) $ (69,116)
-------------- --------------
Pro forma net income $ 386,647 $ 885,548
============== ==============
Earnings per share:
Basic-as reported $ 0.18 $ 0.40
Basic-pro forma $ 0.18 $ 0.38
Diluted-as reported $ 0.18 $ 0.38
Diluted-pro forma $ 0.18 $ 0.35
8
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER SHARE (EPS)
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders' by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in earnings of the entity as of September 30, 2006 and
2005. Weighted average shares outstanding used in the computation of basic
earnings per share were 2,386,239 and 2,381,219 in 2006 and 2005, respectively.
Weighted average shares outstanding used in the computation of diluted earnings
per share were 2,574,780 and 2,506,302 in 2006 and 2005, respectively. All
earnings per share data have been retroactively adjusted for the three-for-two
stock split declared on September 15, 2005 for shareholders of record on
September 29, 2005.
NOTE 3 - SECURITIES
Securities are classified in three categories and accounted for as
follows: debt and equity securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are measured
at amortized cost; debt and equity securities bought and held principally for
the purpose of selling in the near term are classified as trading securities and
are measured at fair value, with unrealized gains and losses included in
earnings; debt and equity securities not classified as either held-to-maturity
or trading securities are deemed available-for-sale and are measured at fair
value, with unrealized gains and losses, net of applicable taxes reported in a
separate component of stockholders' equity. Any gains or losses on sales of
investments are computed on a specific identification basis.
The tables below reflect the composition of investment securities,
amortized cost, unrealized gains and losses and estimated fair values as of
September 30, 2006.
The amortized cost or fair values of investment securities available-for-sale at
September 30, 2006 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Available-for-Sale Securities:
Obligations of U.S. Government Agencies $ 36,650,634 $ 6,460 $ (382,242) $ 36,274,852
State and political subdivisions 14,371,775 25,449 (54,535) 14,342,689
Asset backed-securities 7,274,820 4,357 (139,112) 7,140,065
Mortgage backed-securities 15,517,248 7,898 (365,975) 15,159,171
Short-term mutual funds 500,000 -- -- 500,000
------------ ------------ ------------ ------------
$ 74,314,477 $ 44,164 $ (941,864) $ 73,416,777
============ ============ ============ ============
The amortized cost or fair values of investment securities held-to-maturity at
September 30, 2006 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Held-to-Maturity Securities:
Obligations of U.S. Government Agencies $ 500,410 $ -- $ (12,591) $ 487,819
State and political subdivisions 827,933 73,385 -- 901,318
Asset backed-securities 30,852 -- -- 30,852
Mortgage backed-securities 200,698 3,121 (170) 203,649
------------ ------------ ------------ ------------
$ 1,559,892 $ 76,506 $ (12,761) $ 1,623,637
============ ============ ============ ============
Securities carried at approximately $60,646,000 were pledged to secure
deposits of public funds and borrowing arrangements.
9
SERVICE 1ST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES cont'd
The tables below reflect the composition of investment securities,
amortized cost, unrealized gains and losses and estimated fair values as of
December 31, 2005.
The amortized cost or fair values of investment securities
available-for-sale at December 31, 2005 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Available-for-Sale Securities:
U.S. Government Agencies $ 30,207,518 $ 11 $ (550,676) $ 29,656,853
State and political subdivisions 11,755,328 3,437 (140,036) 11,618,729
Asset backed-securities 8,645,767 276 (161,611) 8,484,432
Mortgage backed-securities 18,488,944 5,762 (380,789) 18,113,917
------------ ------------ ------------ ------------
$ 69,097,557 $ 9,486 $ (1,233,112) $ 67,873,931
============ ============ ============ ============
The amortized cost or fair values of investment securities held-to-maturity at
December 31, 2005 were:
Held-to-Maturity Securities:
State and political subdivisions $ 623,646 $ 19,382 $ -- $ 643,028
Asset backed-securities 82,721 414 -- 83,135
Mortgage backed-securities 229,673 3,174 (536) 232,311
------------ ------------ ------------ ------------
$ 936,040 $ 22,970 $ (536) $ 958,474
============ ============ ============ ============
Securities carried at approximately $38,531,000 were pledged to secure
deposits of public funds and borrowing arrangements.
10
NOTE 4 - LOANS
Service 1st Bank's customers are primarily located in San Joaquin
County. At September 30, 2006, approximately 65.4% of the Bank's loans are for
real estate and construction loans and approximately 21.8% of the Bank's loans
are for general commercial users including professional, retail, and small
businesses. Consumer loans make up approximately 2.1% of the loan portfolio,
leases make up 6.8% of the loan portfolio, with agricultural loans making up the
remaining 3.9%. Generally, real estate loans are collateralized by real property
while commercial and other loans are collateralized by funds on deposit,
business or personal assets. Repayment is generally expected from the sale of
property for real estate loans and cash flows of the borrowers for other loans.
Major classifications of loans were:
9/30/2006 12/31/2005
------------- -------------
Construction and land development loans $ 35,520,963 $ 27,787,719
Real estate loans 37,275,359 33,672,659
Commercial loans 24,289,294 18,109,304
Leases 7,592,910 --
Agricultural loans 4,313,156 1,964,690
Consumer loans 2,311,656 2,430,356
------------- -------------
111,303,338 83,964,728
Deferred loan fees and costs (213,409) (308,102)
Allowance for loan losses (1,359,050) (1,123,494)
------------- -------------
Total net loans $ 109,730,879 $ 82,533,132
============= =============
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-QSB including, but not limited to, matters described
in "Item 2 - Management's Discussion and Analysis or Plan of Operation," are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. Such forward-looking statements may contain words related to future
projections including, but not limited to, words such as "believe," "expect,"
"anticipate," "intend," "may," "will," "should," "could," "would," and
variations of those words and similar words that are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include, but are not limited to, the following: (1) variances in the
actual versus projected growth in assets; (2) return on assets; (3) loan and
lease losses; (4) expenses; (5) changes in the interest rate environment
including interest rates charged on loans, earned on securities investments and
paid on deposits; (6) competition effects; (7) fee and other noninterest income
earned; (8) general economic conditions nationally, regionally, and in the
operating market areas of the Company and its subsidiaries; (9) changes in the
regulatory environment; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
earthquakes, floods, fires and other natural disasters, (15) terrorism, the
threat of terrorism or the impact of the current military conflict in Iraq and
the conduct of the war on terrorism by the United States and its allies, as well
as other factors. Other cautionary statements and information set forth in this
report should be carefully considered and understood as being applicable to all
related forward-looking statements contained in this report, when evaluating the
business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent reports filed with the Securities and Exchange
Commission on Forms 10-KSB, 10-QSB and 8-K.
BUSINESS ORGANIZATION
Service 1st Bancorp (the "Company") is a California corporation and was
incorporated on January 23, 2004 to act as a holding company for Service 1st
Bank (the "Bank"). The Bank became a subsidiary of the Company effective June
26, 2004. As of September 30, 2006, the Company maintained its administrative
office in Tracy, San Joaquin County and the Bank operated three full-service
offices in the cities of Stockton, Tracy, and Lodi in San Joaquin County. The
Bank offers a full range of commercial banking services to individuals, small
and medium-sized businesses, municipalities and professionals in San Joaquin
County and the surrounding communities. On August 18, 2006, the Company
established a new subsidiary, Charter Services Group, Inc. ("Charter"). Charter
will assist new (de novo) banks in filing applications for regulatory approval
to organize and to commence business as a commercial bank. Charter will also
provide consulting services to new banks including formulating policies and
providing other ongoing services.
The following analysis is designed to provide a more complete
understanding of the material changes and trends related to the Company's
financial condition, results of operations, cash flows, and capital resources.
This discussion should be read in conjunction with the financial statements
included in Item 1 of the Annual Report on Form 10-KSB for the year ended
December 31, 2005.
CRITICAL ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Note 1 to the financial statements describes the
significant accounting policies used in the preparation of the financial
12
statements. A critical accounting policy is defined as one that is both material
to the presentation of the Company's financial statements and requires
management to make difficult, subjective or complex judgments that could have a
material effect on the Company's financial condition and results of operations.
Management believes that the matters described below are critical accounting
policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses inherent in existing loans and commitments to extend credit,
based on evaluations of collectibility and prior loss experience of loans and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentration, specific problem loans, commitments, and current
economic conditions that may affect the borrowers' ability to pay.
Summary of Financial Condition
The Company's total consolidated assets increased 28.9% from December
31, 2005 to September 30, 2006. As of September 30, 2006, total consolidated
assets were $218,344,941 compared to $169,329,270 as of December 31, 2005, and
$177,827,848 at September 30, 2005. The increase in growth was primarily from an
increase in loans and Federal Funds sold.
Total net loans at September 30, 2006 were $109,730,879 compared to
$82,533,132 at December 31, 2005 and $75,401,414 at September 30, 2005. This
represents an increase in net loans of 33.0% from December 31, 2005.
Cash and due from banks declined 53.6% from December 31, 2005 to
September 30, 2006. In the last quarter of 2005, the Company requested
permission from the Federal Reserve Bank of San Francisco to implement a deposit
reclassification program. The program allows banks to treat a portion of their
demand deposit accounts as savings accounts for regulatory reporting purposes.
This reclassification significantly decreases the uninvested cash that banks
must reserve for demand deposit accounts. The Company was able to reduce its
reserve requirement by approximately $5.1 million. Those funds were utilized to
fund the Bank's loan growth.
Total deposits were $186,175,731 at September 30, 2006 compared to
$151,141,667 at December 31, 2005 and $161,043,079 at September 30, 2005.
Noninterest-bearing DDA accounts increased from $27,388,426 at December 31, 2005
to $34,221,522 at September 30, 2006. Money market, NOW, and savings accounts
increased to $89,589,504 at September 30, 2006 from $85,127,700 at December 31,
2005. Time deposits under $100,000 increased from $13,643,135 at December 31,
2005 to $34,715,959 at September 30, 2006. Time deposits of $100,000 and over
increased from $24,982,406 at December 31, 2005 to $27,648,746 at September 30,
2006. The increase in time deposits under $100,000 was primarily from the Bank's
participation in the national Certificate of Deposit Account Registry (CDARS)
program. Through this program, the Bank can offer $30,000,000 of FDIC insurance
coverage for time deposits. When the Bank places these deposits into the CDARS
network, it has the option of receiving reciprocal deposits from other banks in
the network. Reciprocal deposits from the CDARS program increased from
$8,266,739 at December 31, 2005 to $26,832,183 at September 30, 2006. The
increase in time deposits over $100,000 was primarily from an increase in time
deposits from the State of California.
Other borrowings at September 30, 2006 were $14,155,000 compared to
$1,030,000 at December 31, 2005. The borrowings were utilized to fund the rapid
growth in new loan originations. The borrowings consist of $9,000,000 from the
Federal Home Loan Bank of San Francisco and $5,155,000 of Trust Preferred
Securities.
Results of Operations
Net income for the three months ended September 30, 2006 was $165,635
compared to $429,589 for the third quarter of 2005. Net income for the nine
months ended September 30, 2006 was $605,642 compared to $954,664 for September
30, 2005. For the three months ended September 30, 2006, the Company had income
tax expense of $45,824 compared to tax expense of $17,590 in the same quarter of
2005. Income tax expense for the nine months ended September 30, 2006 was
$210,291 compared to $234,996 for the same time period in 2005. During 2006, the
Company has been able to reduce its tax liability as a result of an increase in
tax exempt bonds. At September 30, 2006, the average amount invested in tax
exempt bonds was $14,218,499 compared to an average amount invested for the nine
months ended September 30, 2005 of $1,927,240.
13
Basic earnings per share for the three months ended September 30, 2006
was $0.07 per share compared to $0.18 for the three months ended September 30,
2005. Diluted earnings per share for the three months ended September 30, 2006
and 2005 was $0.07 and $0.18, respectively. Basic earnings per share for the
nine months ended September 30, 2006 was $0.25 per share compared to $0.40 for
2005. Diluted earnings per share for the nine months ended September 30, 2006
was $0.24 compared to $0.38 for 2005.
The decline in income before income taxes for the three months and nine
months ended September 30, 2006 was primarily from the staffing for the new Lodi
branch opened in mid-August 2006. The Bank hired staff and conducted an
extensive training program in preparation for the opening of the branch. The
Bank has also incurred a $21,882 monthly increase in rental expense for Lodi.
Another factor contributing to the decline in income before taxes was
the adoption of SFAS No. 123R. The Company had stock based compensation expense
of $50,076 for the third quarter of 2006 and $149,374 of expense for the nine
months ended September 30, 2006. There was no expense reflected on the income
statement for this compensation in 2005.
14
Net Interest Income and Net Interest Margin
Net interest income, the primary component of the net earnings of a
financial institution, refers to the difference between the interest earned on
loans and investments and the interest paid on deposits and borrowings. Please
see the tables of average balance sheet and net interest income below.
The following table sets forth average balance sheet information,
interest income and expense, average yields and rates, and net interest income
and margin for the three months ended September 30, 2006 and 2005:
September 30, 2006 September 30, 2005
-------------------------------------------- --------------------------------------------
Average Average
Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate Paid Balance Expense Rate Paid
------------- ------------- ------------ ------------- ------------- ------------
Interest-earning assets:
Interest-bearing deposits $ 1,041,547 $ 8,761 3.34% $ 4,931,168 $ 37,320 3.00%
Investments 67,860,945 766,945 4.48% 64,021,749 619,313 3.84%
Federal funds sold 7,967,842 100,308 4.99% 5,761,044 48,891 3.37%
Loans (1) (2) 112,096,685 2,538,177 8.98% 75,151,683 1,513,858 7.99%
------------- ------------- ------------- -------------
Total interest-earning assets 188,967,019 3,414,191 7.17% 149,865,644 2,219,382 5.88%
Allowance for possible loan losses (1,300,354) (1,102,855)
Cash and due from banks 3,427,031 8,303,313
Bank premises and equipment 1,300,373 630,808
Accrued interest receivable 970,312 571,664
Other assets 7,891,742 5,218,142
------------- -------------
Total assets $ 201,256,123 $ 163,486,716
============= =============
Interest-Bearing Liabilities:
Demand deposits $ 59,569,752 592,819 3.95% $ 68,549,822 408,574 2.36%
Savings and money market accounts 20,893,768 164,562 3.12% 16,946,875 55,874 1.31%
Time Deposits 58,924,400 679,254 4.57% 29,515,291 283,155 3.81%
Other borrowings 16,640,680 239,476 5.71% 29,007 249 3.41%
------------- ------------- ------------- -------------
Total interest-bearing
liabilities 156,028,600 1,676,111 4.26% 115,040,995 747,852 2.58%
Non-interest bearing demand
deposits 28,966,666 31,058,139
Other Liabilities 374,145 2,104,601
------------- -------------
Total liabilities 185,369,411 148,203,735
Shareholders' equity 15,886,712 15,282,981
------------- -------------
Total liabilities and
shareholders' equity $ 201,256,123 $ 163,486,716
============= =============
------------- -------------
Net interest income $ 1,738,080 $ 1,471,530
============= =============
Net interest margin on average interest earning assets (3) 3.65% 3.90%
1. Average loan balances include average deferred loan fees of $250,542 and
$257,718 for the three months ended September 30, 2006 and 2005,
respectively.
2. Interest on loans includes fees of $59,332 and $58,391 for the three month
periods ended September 30, 2006 and 2005, respectively.
3. Net interest margin is computed by dividing net interest income by total
average earning assets.
All average balances have been computed using daily balances.
15
The following table sets forth average balance sheet information, interest
income and expense, average yields and rates, and net interest income and margin
for the nine months ended September 30, 2006 and 2005:
September 30, 2006 September 30, 2005
-------------------------------------------- --------------------------------------------
Average Average
Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate Paid Balance Expense Rate Paid
------------- ------------- ------------ ------------- ------------- ------------
Interest-earning assets:
Interest-bearing deposits $ 897,017 $ 27,438 4.09% $ 3,078,635 $ 70,293 3.05%
Investments 68,839,982 2,224,105 4.32% 60,000,199 1,729,099 3.85%
Federal funds sold 3,388,930 124,420 4.91% 7,368,731 156,902 2.85%
Loans (1) (2) 101,490,247 6,702,777 8.83% 71,767,514 4,112,345 7.66%
------------- ------------- ------------- -------------
Total interest-earning assets 174,616,176 9,078,740 6.95% 142,215,079 6,068,639 5.71%
Allowance for loan losses (1,215,695) (1,055,112)
Cash and due from banks 3,483,696 8,333,333
Bank premises and equipment 938,475 634,898
Accrued interest receivable 898,144 580,627
Other assets 6,622,173 4,598,125
------------- -------------
Total assets $ 185,342,969 $ 155,306,950
============= =============
Interest-bearing liabilities:
Demand deposits $ 65,330,587 1,606,003 3.29% $ 68,856,056 1,081,281 2.10%
Savings and money market accounts 16,710,480 292,878 2.34% 15,359,741 129,676 1.13%
Time Deposits 48,616,873 1,589,331 4.37% 27,843,439 773,042 3.71%
Other borrowings 10,682,992 442,253 5.53% 53,643 1,278 3.19%
------------- ------------- ------------- -------------
Total interest-bearing
liabilities 141,340,932 3,930,465 3.72% 112,112,879 1,985,277 2.37%
Non-interest bearing demand
deposits 27,359,286 26,976,900
Other Liabilities 873,872 1,281,344
------------- -------------
Total liabilities 169,574,090 140,371,123
Shareholders' equity 15,768,879 14,935,827
------------- -------------
Total liabilities and
shareholders' equity $ 185,342,969 $ 155,306,950
============= =============
------------- -------------
Net interest income $ 5,148,275 $ 4,083,362
============= =============
Net interest margin on average interest earning assets (3) 3.94% 3.84%
1. Average loan balances include average deferred loan fees of $277,613 and
$235,050 for the nine months ended September 30, 2006 and 2005,
respectively.
2. Interest on loans includes fees of $169,764 and $149,251 for the nine
months ended September 30, 2006 and 2005, respectively.
3. Net interest margin is computed by dividing net interest income by total
average earning assets.
All average balances have been computed using daily balances.
16
Net interest income for the three months ended September 30, 2006 was
$1,738,080 compared to $1,471,530 for 2005. Net interest income for the nine
months ended September 30, 2006 was $5,148,275 compared to $4,083,362 for 2005.
Average interest-earning assets for the three months ended September 30, 2006
were $188,967,019 compared to $149,865,644 during the same three months of 2005.
The yield earned on average interest-earning assets during the third quarter of
2006 was 7.17% compared to 5.88% during the third quarter of 2005. The average
rate paid on interest bearing-liabilities increased from 2.58% for the third
quarter of 2005 to 4.26% during the third quarter of 2006. Average
interest-earning assets for the nine months ended September 30, 2006 was
$174,616,176 compared to $142,215,079 during the same nine months of 2005. The
yield earned on average interest-earning assets during the nine months ended
September 30, 2006 was 6.95% compared to 5.71% during the same period of 2005.
The average rate paid on interest bearing liabilities increased to 3.72% for the
nine months ended September 30, 2006 compared to 2.37% during the same period
for 2005. The increase in rates earned on loans, investments, and paid on
deposits and borrowings was a result of the Federal Reserve Bank raising
interest rates seventeen times from July 1, 2004 through June 29, 2006.
Allowance and Provision for Loan Losses
The Company assesses and manages credit risk on an ongoing basis
through stringent credit review and approval policies, extensive internal
monitoring, and established formal lending policies. Additionally, the Bank
contracts with an outside source to periodically review the existing loan
portfolio.
Management believes its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for profitability
and growth. Management strives to continue the historically low level of credit
losses by continuing its emphasis on credit quality in the loan approval
process, active credit administration, and regular monitoring. Management has
implemented a loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio.
In extending credit and commitments to borrowers, the Bank generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flows or from proceeds from the sale of selected
assets of the borrowers. The Bank's requirement for collateral and/or guarantees
is determined on a case-by-case basis in connection with management's evaluation
of the creditworthiness of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, income-producing
properties, residences, and other real property.
Construction loans and other real estate secured loans comprise 65.4%
of total loans outstanding at September 30, 2006. Although management believes
such loans have no more than the normal risk of collectibility, a substantial
decline in the economy in general, or a decline in real estate values in the
Company's primary operating market areas in particular, could have an adverse
impact on the collectibility of such loans. In addition, such an occurrence
could result in an increase in loan losses and an increase in the provision for
loan losses, which could adversely affect the Company's future prospects,
results of operations, overall profitability, and the market price of the
Company's common stock.
The provision for loan losses for the three months ended September 30,
2006 was $90,000 compared to $0 during the same quarter of 2005. The provision
for loan losses for the nine months ended September 30, 2006 was $230,000,
compared to $140,000 during the same period of 2005. At September 30, 2006, the
allowance for loan losses was $1,359,050 compared to $1,123,494 at December 31,
2005. The ratio of allowance for loan losses to gross loans was 1.22% at
September 30, 2006 compared to 1.34% at December 31, 2005. The allowance for
loan losses is adjusted by charges to income and decreased by charge-offs (net
of recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. Additional provisions will be added as new loans are placed on the
books in an amount adequate to support the risks inherent in the portfolio.
17
The following table summarizes the changes in the allowances for loan
losses arising from loans charged-off, recoveries on loans previously
charged-off, and additions to the allowance which have been charged to operating
expenses and certain ratios relating to the allowance for loan losses.
For the nine months ended September 30,
2006 2005
------------- -------------
Outstanding Loans:
Average for the Period $ 101,490,247 $ 71,767,514
End of the Period 111,303,338 76,773,182
Allowance For Loan Losses:
Balance at Beginning of Year 1,123,494 963,000
Actual Charge-Offs:
Commercial -- --
Consumer -- (4,506)
Real Estate -- --
------------- -------------
Total Charge-Offs -- (4,506)
------------- -------------
Less Recoveries:
Commercial -- --
Consumer 5,556 --
Real Estate -- --
------------- -------------
Total Recoveries 5,556 --
------------- -------------
Net Loans Charged-Off 5,556 (4,506)
Provision for Loan Losses 230,000 140,000
------------- -------------
Balance at End of Period $ 1,359,050 $ 1,098,494
============= =============
Ratios:
Net Loans Charged-Off (Recoveries) to Average Loans (.01)% 0.01%
Allowance for Loan Losses to Total Loans 1.22% 1.43%
Net Loans Charged-Off (Recoveries) to Beginning
Allowance for Loan Losses (.49)% 0.47%
Net Loans Charged-Off (Recoveries) to Provision for Loan
Losses (2.42)% 3.22%
Allowance for Loan Losses to Nonperforming Loans 308.15% 1,838.95%
Nonaccrual Loans, Loans Past Due 90 Days and OREO
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. There were nonaccrual loans of $441,037 at September 30, 2006,
$59,735 at September 30, 2005, and $54,020 at December 31, 2005.
At September 30, 2006, there were loans totaling $441,037 that were
considered impaired or troubled debt restructurings compared to $59,735 at
September 30, 2005 and $309,256 at December 31, 2005. These loans were
delinquent and placed on nonaccrual, but management currently believes that the
loans will be collected in full. The loans were placed on nonaccrual to defer
future income recognition until the delinquent payments have been received.
There were no loan concentrations in excess of 10% of total loans not otherwise
disclosed as a category of loans as of September 30, 2006 or December 31, 2005.
Management is not aware of any potential problem loans, which were accruing and
current at September 30, 2006, where serious doubt exists as to the ability of
the borrower to comply with the present repayment terms. There was no other real
estate owned at September 30, 2006 and December 31, 2005.
18
Other Income
Other income for the three months ended September 30, 2006 was $186,776
compared to $167,007 for the same period during 2005. Other income for the nine
months ended September 30, 2006 was $459,539 compared to $520,126 for the same
period during 2005. The Bank offers loans on single family homes through third
party lenders. The Bank receives fees for the packaging of the loans provided to
the third party lender. The loans are funded by and become assets of the third
party lender. The fees on such loans for the three months ended September 30,
2006 were $60,000 compared to $12,074 for the third quarter of 2005. Fees for
the nine months ended September 30, 2006 were $60,000 compared to $36,508 for
the nine months ended September 30, 2005. The Bank also originates loans through
various government guarantee programs. The guaranteed portion of these loans can
be sold in the secondary market. Gains on loans sold in the secondary market and
the servicing of these loans for the three months ended September 30, 2006 were
$19,601 compared to $31,214 during the same period in 2005. Gains on loans sold
in the secondary market and the servicing of these loans for the nine months
ended September 30, 2006 were $78,672 compared to $157,901 during the same
period in 2005. The gains on the guaranteed portion of loans sold for the nine
months ended September 30, 2006 were $12,733 compared to a gain of $67,226 in
2005.
Other Expense
Salaries and employee benefits for the three months ended September 30,
2006 were $906,868 compared to $698,042 for the three months ended September 30,
2005. Salaries and employee benefits for the nine months ended September 30,
2006 were $2,550,119 compared to $1,911,333 for the nine months ended September
30, 2005. The increase in salaries and employee benefits during 2006 was a
result of an increase in the number of employees in preparation for opening a
new Lodi, California office in mid-August, 2006. Beginning in 2006, the Company
is required to record expense related to employee and director stock-based
compensation. The portion of the expense related to employee stock options for
the three months ended September 30, 2006 was $30,666 and the comparable expense
for the nine months ended September 30, 2006 was $91,144. There was no expense
recorded on the income statement for stock-based compensation for 2005. There
were 47 employees at September 30, 2006 compared to 37 at September 30, 2005.
Occupancy and equipment expense for the three months ended September
30, 2006 was $194,585 compared to $136,281 for the same period of 2005.
Occupancy and equipment expense was $612,230 for the nine months ended September
30, 2006 compared to $386,856 for the same period during 2005. The increase in
expense is related to rent in the amount of $21,882 per month for the Company's
new office in Lodi, California, a new administrative office in Tracy,
California, and an annual cpi increase in the lease expense for the other branch
offices.
Data processing and other professional fees were $95,764 for the three
months ended September 30, 2006 compared to $136,618 for the three months ended
September 30, 2005. Data processing and other professional fees for the nine
months ended September 30, 2006 was $416,401 compared to $338,932 for the same
period during 2005. The primary increase in professional fees is for management
recruitment fees paid to locate new employees.
Loan department expense for the three months ended September 30, 2006
was $49,214 compared to $26,731 for the same period of 2005. Loan department
expense for the nine months ended September 30, 2006 was $173,739 compared to
$69,842 for the same period of 2005. The primary increase in loan department
expense for the nine months ended September 30, 2006 was the amortization
expense for loan servicing assets. When the Company sells a government
guaranteed loan it establishes a loan servicing asset, which is the anticipated
servicing over the estimated remaining term of the loans sold. If these loans
payoff early the remaining unamortized servicing asset is written off. During
the first quarter of 2006, two large SBA loans paid-off early.
The remainder of the other operating expenses increased due to the
growth of the Company.
19
Capital Resources
Total shareholders' equity at September 30, 2006 was $16,520,567
compared to $15,574,101 at December 31, 2005. The increase was primarily from
the net income for the nine months ended September 30, 2006 of $605,642. Due to
an improvement in market value on investments the accumulated other
comprehensive income, net of tax increased by $191,450.
The Company and the Bank are subject to regulations issued by the Board
of Governors of the Federal Reserve System and the FDIC, which require
maintenance of a certain level of capital. Under the regulations, capital
requirements are based upon the composition of an institution's asset base and
the risk factors assigned to those assets. The guidelines characterize an
institution's capital as being "Tier 1" capital (defined to be principally
shareholders' equity less intangible assets) and "Tier 2" capital (defined to be
principally the allowance for loan losses, limited to one and one-fourth percent
of gross risk weighted assets). The guidelines require the Company and the Bank
to maintain a risk-based capital target ratio of 8%, one-half or more of which
should be in the form of Tier 1 capital.
The following table shows the Company's and the Bank's actual capital
amounts and ratios at September 30, 2006 and December 31, 2005, as well as the
minimum capital ratios for capital adequacy under the regulatory framework
(dollar amounts are in thousands).
To be
well-capitalized
under prompt
Actual For capital corrective action
adequacy purposes provisions
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- -------- ---------- --------
As of September 30, 2006:
Company:
Total capital (to risk weighted assets) $23,401 15.5% $12,039 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) $22,042 14.6% $ 6,019 4.0% N/A N/A
Tier 1 capital (to average assets) $22,042 11.0% $ 8,025 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $20,740 13.8% $12,039 8.0% $15,048 10.0%
Tier 1 capital (to risk weighted (assets) $19,319 12.8% $ 6,019 4.0% $ 9,029 6.0%
Tier 1 capital (to average assets) $19,319 9.7% $ 7,972 4.0% $ 9,965 5.0%
As of December 31, 2005:
Company:
Total capital (to risk weighted assets) $17,404 15.1% $ 9,224 8.0% N/A N/A
Tier 1capital (to risk weighted assets) $16,281 14.1% $ 4,612 4.0% N/A N/A
Tier 1 capital (to average assets) $16,281 9.8% $ 6,683 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $16,304 14.1% $ 9,224 8.0% $11,530 10.0%
Tier 1capital (to risk weighted assets) $15,181 13.2% $ 4,612 4.0% $ 6,918 6.0%
Tier 1 capital (to average assets) $15,181 9.1% $ 6,644 4.0% $ 8,304 5.0%
The Bank meets the "well capitalized" capital ratio measures at both
September 30, 2006 and December 31, 2005.
20
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and unencumbered securities, and loan repayments contribute to liquidity, along
with deposit increases, while loan funding and deposit withdrawals decrease
liquidity. The Company assesses the likelihood of projected funding requirements
by reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. Commitments to fund loans and
outstanding letters of credit at September 30, 2006 and December 31, 2005 were
approximately $37,589,000 and $1,098,000 and $33,301,000 and $1,596,000,
respectively. Such loan commitments relate primarily to revolving lines of
credit and other commercial loans and to real estate construction loans. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments, short-term interest bearing deposits and loans held for
sale. At September 30, 2006, consolidated unencumbered liquid assets totaled
$33,360,847 or 15.3% of total assets compared to $39,361,207 or 23.2% of total
assets on December 31, 2005. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $41,000,000 with correspondent
banks. At September 30, 2006, the Company had $41,000,000 available under these
credit lines. Additionally, the Bank is a member of the FHLB. At September 30,
2006, the Bank could have arranged for up to $16,830,000 in secured borrowings
from the FHLB. These borrowings are secured by pledged mortgage loans. At
September 30, 2006, the Company had advances, borrowings and commitments
(including letters of credit) outstanding of $9,000,000, leaving $7,830,000
available under these FHLB secured borrowing arrangements. The Company serves
primarily a business and professional customer base and, as such, its deposit
base is susceptible to economic fluctuations. Accordingly, management strives to
maintain a balanced position of liquid assets and borrowing capacity to volatile
and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise. The
Bank has established a master repurchase agreement with two brokerage firms to
enable such transactions. The Bank can also pledge securities to borrow from the
FRB and the FHLB.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and the Bank indirectly through its
effect on market rates of interest, and thus the ability of the Bank to attract
loan customers. Inflation affects the growth of total assets by increasing the
level of loan demand, and potentially adversely affects the Company's and the
Bank's capital adequacy because loan growth in inflationary periods can increase
at rates higher than the rate that capital grows through retention of earnings,
which the Company may generate in the future. In addition to its effects on
interest rates, inflation directly affects the Company by increasing operating
expenses. The effects of inflation were not material to the Company's results of
operations during the periods ending September 30, 2006 and 2005.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company applies
the same credit policies to commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of September 30, 2006 and
December 31, 2005, commitments to extend credit and standby letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and standby
letters of credit were $338,687,000 and $34,897,000 at September 30, 2006 and
December 31, 2005, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 35.3% and 42.3%, respectively.
21
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
Effects of Terrorism
The terrorist actions on September 11, 2001 and thereafter and the
conflict with Iraq have had significant adverse effects upon the United States
economy. Whether the terrorist activities in the future and the actions of the
United States and its allies in combating terrorism on a worldwide basis will
adversely impact the Company and the extent of such impact is uncertain. Such
economic deterioration could adversely affect the Company's future results of
operations by, among other matters, reducing the demand for loans and other
products and services offered by the Bank, increasing nonperforming loans and
the amounts reserved for loan losses, and causing a decline in the Company's
stock price.
Website Access
Information on the Company and Bank may be obtained from the Company's
website www.service1stbank.com. Copies of the annual report on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K, and all
amendments thereto, as well as Section 16 reports and amendments thereto, are
available free of charge on the website as soon as they are published by the SEC
through a link to the Edgar reporting system maintained by the SEC. To obtain
copies of or to view the reports on Form 10-KSB, 10-QSB, and 8-K, click on the
"Go to Service 1st Bancorp" button, then click on the "Click here to view
Service 1st Bancorp SEC Filings" link. To obtain copies of or to view Section 16
reports filed by the Company's insiders, click on the "Click here to view
Section 16 Reports" link on the above webpage.
Other Matters
The Company filed its report on Form 8-K dated July 7, 2006 to announce
the organization of Charter Service Group, Inc. as a new wholly-owned subsidiary
of the Company. Charter will provide consulting services primarily related to
the formation of new (de novo) banks. It is anticipated that such consulting
services will include consultation with prospective organizers of de novo banks
related to regulatory approval, capitalization and infrastructure requirements,
among other matters.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management as
of the end of the Company's fiscal quarter ended September 30, 2006. The
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
accumulated and communicated to the Company's management (including the Chief
Executive Officer and Chief Financial Officer) to allow timely decisions
regarding required disclosure, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
(b) Internal Control Over Financial Reporting
An evaluation of any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)),
that occurred during the Company's fiscal quarter ended September 30, 2006, was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer, Chief Financial Officer and other members of the
Company's senior management. The Company's Chief Executive Officer and Chief
Financial Officer concluded that no change identified in connection with such
evaluation has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
22
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(2.1) Plan of Reorganization and Merger Agreement
(included in Annex A), incorporated by reference
from the Registrant's Form S-4EF, Registration
No. 333-104244, filed with the Securities and
Exchange Commission on April 1, 2003.
(3.1) Articles of Incorporation, as amended,
incorporated by reference from the Registrant's
Form 10-QSB for the quarterly period ended
September 30, 2005, filed with the Securities
and Exchange Commission on November 10, 2005.
(3.2) Bylaws, as amended, incorporated by reference
from the Registrant's Form 10-KSB for the year
ended December 31, 2004, filed with the
Securities and Exchange Commission on March 31,
2005.
(4.1) Specimen form of certificate for Service 1st
Bancorp common stock, incorporated by reference
from Registrant's Form 10-QSB for the quarterly
period ended September 30, 2003, filed with the
Securities and Exchange Commission on November
14, 2003.
(10.1) Lease agreement dated May 3, 2002, related to
2800 West March Lane, Suite 120, Stockton, CA
95219, incorporated by reference from the
Registrant's Form S-4EF, Registration No.
333-104244, filed with the Securities and
Exchange Commission on April 1, 2003.
(10.2) Lease agreement dated April 13, 1999 and
amendment thereto dated June 17, 1999, related
to 60 West 10th Street, Tracy, CA 95376,
incorporated by reference from the Registrant's
Form S-4EF, Registration No. 333-104244, filed
with the Securities and Exchange Commission on
April 1, 2003.
(10.3)* 1999 Service 1st Bancorp Stock Option Plan,
Amendment No. 1 thereto, and related forms of
Incentive and Nonstatutory Stock Option
Agreements entered into with executive officers
and directors, incorporated by reference from
the Registrant's Form S-8, Registration No.
333-107346, filed with the Securities and
Exchange Commission on July 25, 2003.
(10.4) Agreement dated July 27, 1999 with BancData
Solutions, Inc. for service bureau and data
processing services incorporated by reference
from the Registrant's Form S-4EF, Registration
No. 333-104244, filed with the Securities and
Exchange Commission on April 1, 2003.
23
(10.5) Agreement dated February 1, 2000 with Financial
Marketing Services, incorporated by reference
from the Registrant's Form S-4EF, Registration
No. 333-104244, filed with the Securities and
Exchange Commission on April 1, 2003.
(10.6)* Service 1st Bank 401(k) Profit Sharing Plan and
Trust Summary Plan Description dated January 1,
2000, incorporated by reference from the
Registrant's Form S-4EF, Registration No.
333-104244, filed with the Securities and
Exchange Commission on April 1, 2003.
(10.7) Lease agreement dated March 27, 2003, related to
3533 Jamison Way, Castro Valley, CA 94546,
incorporated by reference from the Registrant's
Form 10-KSB for the year ended December 31,
2003, filed with the Securities and Exchange
Commission on March 30, 2004.
(10.8)* John O. Brooks Salary Continuation Agreement
dated September 10, 2003, incorporated by
reference from the Registrant's Form 10-KSB for
the year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 30,
2004.
(10.9)* Bryan R. Hyzdu Salary Continuation Agreement
dated September 10, 2003, incorporated by
reference from the Registrant's Form 10-KSB for
the year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 30,
2004.
(10.10)* Robert E. Bloch Salary Continuation Agreement
dated September 10, 2003, incorporated by
reference from the Registrant's Form 10-KSB for
the year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 30,
2004.
(10.11)* Patrick Carman Salary Continuation Agreement
dated September 10, 2003, incorporated by
reference from the Registrant's Form 10-KSB for
the year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 30,
2004.
(10.12)* 2004 Stock Option Plan and Forms of Incentive
and Nonstatutory Stock Option Agreements,
incorporated by reference from the Registrant's
Form S-8, Registration No. 333-116818, filed
with the Securities and Exchange Commission on
June 24, 2004.
(10.13)* John O. Brooks Employment Agreement dated July
15, 2004, incorporated by reference from the
Registrant's Form 10-QSB, for the quarterly
period ended September 30, 2004, filed with the
Securities and Exchange Commission on November
15, 2004.
(10.14)* Bryan R. Hyzdu Employment Agreement dated July
15, 2004, incorporated by reference from the
Registrant's Form 10-QSB, for the quarterly
period ended September 30, 2004, filed with the
Securities and Exchange Commission on November
15, 2004.
(10.15)* Robert E. Bloch Employment Agreement dated July
15, 2004, incorporated by reference from the
Registrant's Form 10-QSB, for the quarterly
period ended September 30, 2004, filed with the
Securities and Exchange Commission on November
15, 2004.
(10.16)* Patrick Carman Employment Agreement dated July
15, 2004, incorporated by reference from the
Registrant's Form 10-QSB, for the quarterly
period ended September 30, 2004, filed with the
Securities and Exchange Commission on November
15, 2004.
(10.17)* Shannon Reinard Employment Agreement dated July
15, 2004, incorporated by reference from the
Registrant's Form 10-QSB, for the quarterly
period ended September 30, 2004, filed with the
Securities and Exchange Commission on November
15, 2004.
(10.18) Fiserv Solutions, Inc. Agreement dated October
7, 2004, for service bureau, data processing,
and item processing, incorporated by reference
from the Registrant's Form 10-KSB for the year
ended December 31, 2004, filed with the
Securities and Exchange Commission on June 30,
2005.
24
(10.19) Lease agreement dated May 1, 2005, related to 49
W. 10th Street, Tracy, CA 95378, incorporated by
reference from the Registrant's Form 10-QSB for
the quarterly period ended September 30, 2005,
filed with the Securities and Exchange
Commission on November 10, 2005.
(10.20) Lease agreement dated October 3, 2005, related
to 1901 W. Kettleman Lane, Building A, Suite 1A
and 1B, Lodi, CA 95242, incorporated by
reference from the Registrant's Form 10-QSB for
the quarterly period ended September 30, 2005,
filed with the Securities and Exchange
Commission on November 10, 2005.
(10.21) Lease agreement dated January 13, 2006, related
to 1930 Tienda Drive, Building B, Suite 104,
Lodi, CA 95242, incorporated by reference from
Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.22)* Shannon Reinard Salary Continuation Agreement
dated August 8, 2005, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.23)* Bryan R. Hyzdu First Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.24)* Bryan R. Hyzdu Second Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.25)* Patrick Carman First Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.26)* Patrick Carman Second Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.27)* Robert E. Bloch First Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(10.28)* Robert E. Bloch Second Amendment dated August 8,
2005 to Salary Continuation Agreement dated
September 10, 2003, incorporated by reference
from Registrant's Form 10-KSB for the year ended
December 31, 2005, filed with the Securities and
Exchange Commission on March 30, 2006.
(14.1) Code of Ethics, incorporated by reference from
the Registrant's Form 10-KSB for the year ended
December 31, 2003, filed with the Securities and
Exchange Commission on March 30, 2004.
(21.1) Registrant's only subsidiaries are Service 1st
Bank and Charter Services Group, Inc.
(31.1) Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(31.2) Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(32.1) Certification of Service 1st Bancorp by its
Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Denotes management compensatory plans or
arrangements.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15d) 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.
SERVICE 1ST BANCORP
Date: March 13, 2007 By: /s/ JOHN O. BROOKS
-----------------------------
John O. Brooks
Chief Executive Officer
(Principal Executive Officer)
Date: March 13, 2007 By: /s/ ROBERT E. BLOCH
-----------------------------
Robert E. Bloch
Executive Vice President and
Chief financial Officer
(Principal Financial and
Accounting Officer)
26
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Description Page Number
- --------------- ------------------------------------------------------------------------------- -----------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 28
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 29
32.1 Certification of Service 1st Bancorp by its Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30
27