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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2007
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 [ ] No [X]
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 AUGUST 6, 2007
-------------- ---------------------------------------
Common Stock 3,696,157
No Par Value
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EXPLANATORY NOTE
This Form 10-Q for Pacific State Bancorp for period ended June 30, 2007 is being
re-filed as Amendment No. 1 because an error occurred during the electronic
filing transmission on August 14, 2007 and the Form 10-Q did not upload to the
SEC website in its entirety.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC STATE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, December 31,
(in thousands, except share amounts) 2007 2006
- ------------------------------------------------------------ ------------ ------------
Assets
Cash and due from banks $ 14,257 $ 18,985
Federal funds sold 31,164 31,630
------------ ------------
Total cash and cash equivalents 45,421 50,615
Investment securities - available for sale (amortized
cost of $38,216 in 2007 and $23,186 in 2006) 37,262 23,107
Loans, less allowance for loan losses of $2,699 in 2007
and $2,478 in 2006 296,138 287,318
Premises and equipment, net 13,020 11,957
Company owned life insurance 6,198 6,079
Accrued interest receivable and other assets 8,300 7,676
------------ ------------
Total assets $ 406,339 $ 386,752
============ ============
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 63,077 $ 73,197
Interest bearing 289,780 267,799
------------ ------------
Total deposits 352,857 340,996
Other borrowings 8,500 4,900
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 4,145 3,033
------------ ------------
Total liabilities 374,266 357,693
Shareholders' equity:
Preferred stock - no par value; 2,000,000 shares
authorized; none issued or outstanding
Common stock - no par value; 24,000,000 shares
authorized; issued and outstanding 3,696,157 in
2007 and 3,661,477 in 2006 9,961 9,651
Retained earnings 22,190 19,455
Accumulated other comprehensive loss, net of tax (77) (47)
------------ ------------
Total shareholders' equity 32,073 29,059
------------ ------------
Total liabilities and shareholders' equity $ 406,339 $ 386,752
============ ============
See notes to unaudited condensed consolidated financial statements
2
PACIFIC STATE BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
(Unaudited) ------------------------- -------------------------
(in thousands, except share amounts) 2007 2006 2007 2006
- ---------------------------------------------- ----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans $ 7,300 $ 5,998 $ 14,142 $ 11,459
Interest on Federal funds sold 348 6 669 17
Interest on investment securities 484 317 827 637
----------- ----------- ----------- -----------
Total interest income 8,132 6,321 15,638 12,113
Interest expense:
Interest on deposits 3,239 1,792 6,156 3,276
Interest on subordinated debentures 185 180 377 344
Interest on borrowings 55 150 121 221
----------- ----------- ----------- -----------
Total interest expense 3,479 2,122 6,654 3,841
----------- ----------- ----------- -----------
Net interest income before
provision for loan losses 4,653 4,199 8,984 8,272
Provision for loan losses 55 90 220 180
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 4,598 4,109 8,764 8,092
----------- ----------- ----------- -----------
Non-interest income:
Service charges 217 250 438 458
Other fee income 470 230 926 461
Gain on sale of loans 19 20 28 180
----------- ----------- ----------- -----------
Total non-interest income 706 500 1,392 1,099
----------- ----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits 1,506 1,335 2,988 2,685
Occupancy 277 208 563 407
Furniture and equipment 200 183 367 361
Other 1,019 726 1,783 1,586
----------- ----------- ----------- -----------
Total non-interest expenses 3,002 2,452 5,701 5,039
----------- ----------- ----------- -----------
Income before provision for
income taxes 2,313 2,157 4,455 4,152
Provision for income taxes 904 850 1,720 1,638
----------- ----------- ----------- -----------
Net income $ 1,409 $ 1,307 $ 2,735 $ 2,514
=========== =========== =========== ===========
Basic earnings per share $ 0.38 $ 0.37 $ 0.75 $ 0.72
=========== =========== =========== ===========
Diluted earnings per share $ 0.35 $ 0.34 $ 0.68 $ 0.65
=========== =========== =========== ===========
Weighted average common shares outstanding 3,677,935 3,510,801 3,665,558 3,493,964
Weighted average common and common equivalent
shares outstanding 4,002,109 3,900,010 3,999,302 3,894,748
See notes to unaudited condensed consolidated financial statements
3
PACIFIC STATE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
PACIFIC STATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands)
(Unaudited) 2007 2006
- ------------------------------------------------------------ ------------ ------------
Cash flows from operating activities:
Net income $ 2,735 $ 2,514
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 220 180
Net (increase) decrease in deferred loan
origination costs (20) 95
Depreciation and amortization (3) 69
Gain on sale of loans, net (28) (180)
Provision for deferred taxes (29)
Stock-based compensation expense 127 124
Increase in Company owned life insurance,
net (119) (88)
Increase in accrued interest
receivable and other assets (608) (232)
Increase (decrease) in accrued interest
payable and other liabilities 1,113 (50)
------------ ------------
Net cash provided by operating
activities 3,388 2,432
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale investment
securities (24,477) (4,100)
Proceeds from matured and called available-
for-sale investment securities 9,070 9,026
Proceeds from principal repayments from
available-for-sale government-guaranteed
mortgage-backed securities 1,558 360
Proceeds from principal repayments from
held-to-maturity government-guarantee
mortgage-backed securities 1 40
Net increase in loans (8,992) (28,646)
Purchases of premises and equipment (1,384) (266)
------------ ------------
Net cash used in investing activities (24,224) (23,586)
------------ ------------
(Continued)
4
PACIFIC STATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands)
2007 2006
------------ ------------
Cash flows from financing activities:
Net decrease in demand, interest-bearing
and savings deposits $ (23,253) $ (17,844)
Net increase in time deposits 35,114 32,080
Proceeds from exercise of stock options 181 350
Proceeds from stock issuance 250
Net increase in short-term borrowings 3,600 900
------------ ------------
Net cash provided by financing activities 15,642 15,736
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Decrease in cash and cash equivalents (5,194) (5,418)
Cash and cash equivalents at beginning of year 50,615 19,120
------------ ------------
Cash and cash equivalents at end of year $ 45,421 $ 13,702
============ ============
5
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 II and III. 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 II and III are unconsolidated, wholly owned
statutory business trusts formed in March, 2004 and June 2007, respectively for
the exclusive purpose of issuing and selling trust preferred securities. In
June2007 the trust preferred securities held by Pacific State Statutory Trust I
were redeemed from the proceeds of the issuance of Trust Preferred Securities
issued by Pacific State Statutory Trust III. Pacific State Statutory Trust I was
terminated on July 11, 2007.
The Bank conducts a general commercial banking business, primarily in
the five county region that comprises Alameda, Calaveras, San Joaquin,
Stanislaus and Tuolumne counties, and offers commercial banking services to
residents and employers of businesses in the Bank's service area, including
professional firms and small to medium sized retail and wholesale businesses and
manufacturers. The Company as of June 30, 2007 had 86 employees, including 36
officers. The Bank does not engage in any non-bank lines of business. The
business of the Bank is not to any significant degree seasonal in nature. The
Bank has no operations outside California and has no material amount of loans or
deposits concentrated among any one or few persons, groups or industries. The
Bank operates nine 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 limited service branch in Hayward, California. Pacific State
Bancorp common stock trades on the NASDAQ 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 June 30, 2007 and December 31, 2006,
and the results of its operations for the three and six month periods ended June
30, 2007 and 2006, and its cash flows for the six month periods ended June 30,
2007 and 2006 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 of America 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 2006 Annual Report to Shareholders. The results of
operations for the three and six month periods ended June 30, 2007 may not
necessarily be indicative of the operating results for the full year.
6
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 available for sale 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:
June 30, December 31,
(In thousands) 2007 2006
- ---------------------------------------- ------------ ------------
Commercial $ 64,347 $ 57,942
Agriculture 15,557 16,873
Real estate - commercial 134,136 127,545
Real estate - construction 72,858 75,654
Installment & other 11,888 11,742
------------ ------------
298,777 289,756
Deferred loan fees and costs, net 60 40
Allowance for loan losses (2,699) (2,478)
------------ ------------
Total net loans $ 296,138 $ 287,318
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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 $125,699,000 and $110,937,000 and stand-by
letters of credit of $2,024,000 and $2,971,000 at June 30, 2007 and December 31,
2006, respectively. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company.
Approximately $53,329,000 of the loan commitments outstanding at June 30, 2007
are for real estate loans and are expected to fund within the next twelve
months. The remaining commitments primarily relate to revolving lines of credit
or other commercial loans, and many of these are expected to expire without
being drawn upon. Therefore, the total commitments do not necessarily represent
future cash requirements. Each potential borrower and the necessary collateral
are evaluated on an individual basis. Collateral varies, but may include real
property, bank deposits, debt or equity securities or business assets.
7
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized. The deferred liability related to the Company's stand-by letters
of credit was not significant at June 30, 2007 and December 31, 2006.
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. The treasury stock method has been applied to
determine the dilutive effect of stock options.
6. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income or loss. Other comprehensive income or loss, net of taxes,
is comprised of the unrealized gains or losses on available-for-sale investment
securities. The following table shows comprehensive income and its components
for the periods indicated:
Three Months Ended Six Months Ended
-------------------------- --------------------------
(in thousands) 6/30/2007 6/30/2006 6/30/2007 6/30/2006
- ---------------------------------------- ----------- ----------- ----------- -----------
Net Income 1,409 1,307 2,735 2,514
Other Comprehensive Loss:
Change in unrealized loss on
available for sale securities (9) (14) (30) (33)
Reclassification adjustment - - - -
----------- ----------- ----------- -----------
Total Other Comprehensive Loss (9) (14) (30) (33)
----------- ----------- ----------- -----------
Total Comprehensive Income 1,400 1,293 2,705 2,481
=========== =========== =========== ===========
7. STOCK -BASED COMPENSATION
Stock Option Plan
At June 30, 2007, the Company has one stock-based compensation plan, the Pacific
State Bancorp 1997 Stock Option Plan (the "Plan"). The Plan requires that the
option price may not be less than the fair market value 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 expire on a date 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.
New shares are issued upon the exercise of options. Under the Plan, 56,954
shares of common stock remain reserved for issuance to employees and directors
through incentive and non-statutory agreements.
8
Stock Option Compensation
There were no stock options granted in the three and six month periods ended
June 30, 2007 and June 30, 2006. For the three month periods ended June 30, 2007
and 2006, the compensation cost recognized for stock option compensation was
$77,000 and $62,000, respectively. For the six month periods ended June 30, 2007
and 2006, the compensation cost recognized for stock option compensation was
$127,000 and $124,000, respectively. The excess tax benefits were not
significant for the Company.
At June 30, 2007, the total compensation cost related to nonvested stock option
awards granted to employees under the Company's stock option plans but not yet
recognized was $355,000. Stock option compensation expense is recognized on a
straight-line basis over the vesting period of the option. This cost is expected
to be recognized over a weighted average remaining period of 1.0 years and will
be adjusted for subsequent changes in estimated forfeitures.
Stock Option Activity
A summary of option activity under the stock option plans as of June 30, 2007
and changes during the period then ended is presented below:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term ($000)
- ---------------------------------------- ----------- ----------- ----------- -----------
Outstanding at January 1, 2007 668,499 $ 7.04 6.8 years $ 7,313
Granted - - -
Exercised (34,680) $ 5.24 - -
Cancelled - - -
-----------
Outstanding at June 30, 2007 633,819 $ 6.90 6.6 years $ 7,023
=========== =========== ===========
Options vested or expected to vest
at June 30, 2007 402,205 $ 6.90 2.9 years $ 4,456
=========== =========== ===========
Exercisable at June 30, 2007 402,205 $ 6.90 2.9 years $ 4,456
=========== =========== ===========
The intrinsic value was derived from the market price of the Company's common
stock of $17.98 as of June 30, 2007.
8. SUBORDINATED DEBENTURES
On June 27, 2007, the Company through its newly formed business trust
subsidiary, Pacific State Statutory Trust III issued and sold $5,000,000 of the
Trust's Floating Rate Capital Securities. The proceeds from the sale of the
securities were combined with the proceeds of the sale by the Trust to the
Company of the Trust's common securities and were used by the Trust to purchase
$5,155,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures
("2007 Debentures") of the Company. The interest rate on the 2007 Debentures is
variable, based on the three-month LIBOR plus 1.45%, and is payable and resets
quarterly. The 2007 Debentures mature in September 2037 but are redeemable at
par after five years.
9
On June 26, 2007, the first call date without penalty, the Company redeemed
$5,155,000 in principal amount of its Floating Rate Junior Subordinated
Deferrable Interest Debentures with interest at six-month LIBOR plus 3.45%,
issued in June 2002 by Pacific State Statutory Trust I ("2002 Debentures") and
the proceeds were used to redeem $5,000,000 in principal amount of its Floating
Rate Capital Securities issued by Trust I in June 2002. As a result, the Company
recognized $129,000 in non-interest expenses for the remaining unamortized
origination costs on the 2002 Debentures. Pacific State Statutory Trust I was
terminated on July 11, 2007.
9. INCOME TAXES
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes--an Interpretation of FASB statement No. 109. 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 also prescribes a recognition threshold and measurement
standard for the financial statement recognition and measurement of an income
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. The Company has adopted FIN 48 as
of January 1, 2007.
The Company previously recognized income tax positions based on management's
estimate of whether it is reasonably possible that a liability has been incurred
for unrecognized income tax benefits by applying FASB Statement No. 5,
Accounting for Contingencies.
The provisions of FIN 48 have been applied to all tax positions of the Company
as of January 1, 2007. There was no cumulative effect of applying the provisions
of FIN 48 and there was no material effect on the Company's provision for income
taxes for the six months ended June 30, 2007. The Company recognizes interest
accrued related to unrecognized tax benefits and accruals for penalties in
income tax expense.
10. NEW ACCOUNTING PRONOUNCEMENTS
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value
Option for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115. This standard permits an entity to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. The entity will report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option: (a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for
by the equity method; (b) is irrevocable (unless a new election date occurs);
and (c) is applied only to entire instruments and not to portions of
instruments. The provisions of SFAS 159 are effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. Management did
not elect to early adopt SFAS 159 and has not yet completed its evaluation of
the impact that SFAS 159 will have.
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements
In March 2007, the Emerging Issues Task Force (EITF) reached a final consensus
on Issue No. 06-10 (EITF 06-10), Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements. EITF 06-10 requires employers to recognize a liability
for the post-retirement benefit related to collateral assignment split-dollar
life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No.
12. EITF 06-10 also requires employers to recognize and measure an asset based
on the nature and substance of the collateral assignment split-
10
dollar life insurance arrangement. The provisions of EITF 06-10 are effective
for the Company on January 1, 2008, with earlier application permitted, and are
to be applied as a change in accounting principle either through a
cumulative-effect adjustment to retained earnings or other components of equity
or net assets in the statement of financial position as of the beginning of the
year of adoption; or as a change in accounting principle through retrospective
application to all prior periods. The Company does not expect adoption of EITF
06-10 to have a significant impact on its financial position, results of
operations or cash flows.
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 June 30, 2007 and December 31, 2006 and for the
three and six month periods ended June 30, 2007 and 2006. 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, 2006.
CRITICAL ACCOUNTING POLICIES
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 2006 Annual Report to Shareholders on
Form 10-K.
11
OVERVIEW
For the three months ended June 30, 2007:
The Company's net income increased $102 thousand or 7.80% to $1,409 thousand for
the second quarter of 2007 from $1,307 thousand for the same period in 2006. The
primary contributors to the increase in net income for the second quarter of
2007 were the (1) $454 thousand increase in net interest income, (as the
increase in interest income was greater than the increase in interest expense),
and a (2) $206 thousand increase in non-interest income, primarily other fees,
over the same period in 2006. These increases were partially offset by increases
in non interest expenses of $550 thousand. The increase in non-interest expenses
consisted primarily of increases in salaries and benefits of $171 thousand,
occupancy and furniture and equipment expenses of $86 thousand as well as an
increase of $293 thousand in other expenses. The increase in other expense is
the result of $129 thousand to recognize the unamortized origination costs as a
result of the redemption of the Trust Preferred Securities issued in June of
2002. These Trust Preferred Securities were redeemed on the first call date in
June 2007 in order to reissue new Trust preferred Securities at a lower interest
rate. The provision for income taxes increased $54 thousand. Basic earnings per
share increased to $0.38 for the second quarter of 2007 up 2.70% from $0.37 for
the same period in 2006. Diluted earnings per share increased to $0.35 for the
second quarter of 2007 up 2.94% from the $0.34 for the same period in 2006.
For the six months ended June 30, 2007:
The Company's net income increased $221 thousand or 8.79% to $2,735 thousand for
the six months ended June 30, 2007 from $2,514 thousand for the same period in
2006. The primary contributors to the increase in net income for the six months
ended June 30, 2007 were the (1) $712 thousand increase in net interest income,
(as the increase in interest income was greater than the increase in interest
expense), and (2) $293 thousand increase in non interest income, primarily other
fees offset by a decline in the gain on sale of loans, over the same period in
2006. These increases were partially offset by increases in non interest
expenses of $662 thousand. The increase in non interest expenses consisted
primarily of increases in salaries and benefits of $303 thousand, occupancy and
furniture and equipment expenses of $162 thousand as well as an increase of $197
thousand in other expenses. The increase in salaries, occupancy and furniture
and equipment expense are the result of opening the Company's eighth office in
Lodi, California in late 2006. The increase in other expense is the result of
$129 thousand to recognize the unamortized origination costs as a result of the
redemption of the Trust Preferred Securities issued in June of 2002. These Trust
Preferred Securities were redeemed on the first call date in June 2007 in order
to reissue new Trust preferred Securities at a lower interest rate. The
provision for income taxes increased $82 thousand. Basic earnings per share
increased to $0.75 for the six months ended June 30, 2007 up 4.17% from $0.72
for the same period in 2006. Diluted earnings per share increased to $0.68 for
the six months ended June 30, 2007 up 4.62% from the $0.65 for the same period
in 2006.
Total assets at June 30, 2007 were $406 million, an increase of $20 million or
5.06%, from the $387 million at December 31, 2006. The growth in assets was
primarily in the Company's level of Federal funds sold and investments. Federal
funds sold and investments grew $14 million or 25.01% to $68 million at June 30,
2007 from $55 million at December 31, 2006. Loans grew by $9 million or 3.07% to
$296 million at June 30, 2007 from $287 million at December 31, 2006. The growth
in loans and Federal funds sold and investments was funded by the net income of
$2.7 million, growth in deposits of $12 million or 3.48% and an increase in
other borrowings of $3.6 million.
12
The annualized return on assets ("ROA") was 1.43% for the three month period
ended June 30, 2007 compared to 1.65% for the same period in 2006. The
annualized return on equity ("ROE") was 18.33% for the three month period ended
June 30, 2007 compared to 22.60% for the same period in 2006. The decrease in
ROE is primarily attributable to an increase in shareholders equity from net
income, the proceeds from the sale of common stock to a new member of the Board
of Directors and the exercise of stock options. The increase in equity totaled
$7.5 million or 30.49% from June 30, 2006.
The annualized return on assets ("ROA") was 1.42% for the six month period ended
June 30, 2007 compared to 1.62% for the same period in 2006. The annualized
return on equity ("ROE") was 18.29% for the six month period ended June 30, 2007
compared to 22.64% for the same period in 2006. The decrease in ROE is primarily
attributable to an increase in shareholders equity from net income, the proceeds
from the sale of common stock to a new member of the Board of Directors and the
exercise of stock options.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis, was $4.7 million for the three months ended June 30,
2007, an increase of $454 thousand or 10.81% from $4.2 million for the same
period in 2006. The increase in net interest income was primarily a result of
the increase in the average balances of earning assets mainly in loans and
Federal funds supported by the overall increase in the yields earned. These
increases were partially offset by the increases in both the level of and mix in
average interest bearing liabilities, primarily increases in time deposits and
decreases in interest-bearing demand deposits, and increases in the average
rates paid, primarily on time deposits and other borrowings.
Interest income increased $1.8 million or 28.65% to $8.1 million for the three
months ended June 30, 2007 from $6.3 million for the same period in 2006. The
increase in interest income was primarily attributed to increases in levels of
average loans and Federal funds sold and the increases in the yields earned on
those earning assets. Loan volume increased due to the overall growth of the
Company. The Company's average loan balances were $295.0 million for the three
months ended June 30, 2007, up $29.7 million or 11.19% from $265.3 million for
the same period in 2006. The Company's average loan yield was 9.92% for the
three months ended June 30, 2007, up 85 basis points from the 9.07% yield for
the same period in 2006. As a result, interest income on loans increased $1,302
thousand. The Company's average balances of investment securities increased
$10.2 million to $37.3 million for the three months ended June 30, 2007 from the
$27.1 million for the same period in 2006. The Company's average yield on
investments increased 51 basis points to 5.20% from 4.69% for the same period in
2006. As a result of the increase in volume and yield, interest income increased
$167 thousand. The Company's average balances of Federal funds sold increased
$26.6 million to $27.4 million for the three months ended June 30, 2007 from the
$861 thousand for the same period in 2006. The Company's average yield on
Federal funds sold increased 229 basis points to 5.09% from 2.80% for the same
period in 2006. As a result, interest income increased $1.8 million. The overall
yield on average earning assets increased 43 basis points to 9.07% for the three
months ended June 30, 2007, from 8.64% for the same period in 2006.
Interest expense increased $1.4 million, or 63.95% to $3.5 million for the three
months ended June 30, 2007, from $2.1 million for the same period in 2006. The
increase is primarily attributed to the change in mix of interest bearing
liabilities, (as the level of average time deposits increased significantly
while the levels of other interest bearing liabilities decreased), and the
overall increases in the rates paid on all interest bearing liabilities. Time
deposits increased as the Company experienced disintermediation from lower
yielding transaction accounts into higher yielding time deposits. Rates paid on
deposits were 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 $196.2 million for the three months ended June
30, 2007, up $80.1 million,
13
or 69.08% from $116.1 million for the same period in 2006. The average rate paid
on time deposits also increased 116 basis points to 5.32% for the three months
ended June 30, 2007 from 4.16% for the same period in 2006. As a result,
interest expense on time deposits increased $1.4 million. The Company's average
balances of interest bearing demand deposits decreased $4.9 million to $84.5
million for the three months ended June 30, 2007 from $89.4 million for the same
period in 2006. The average rate paid increased 38 basis points to 2.95% from
2.57% for the same period in 2006. As a result interest expense on interest
bearing demand deposits decreased $49 thousand. The Company's average balances
of other borrowings decreased $6.0 million to $13.6 million for the three months
ended June 30, 2007 from $19.6 million for the same period in 2006 and the rates
paid increased 34 basis points to 7.10% for the three months ended June 30, 2007
from 6.76% for the same period in 2006. As a result of the decreased volume
offset by the increased rates paid, interest expense on other borrowings
decreased $90 thousand. The overall rates paid on average interest-bearing
liabilities increased 98 basis points to 4.66% for the three months ended June
30, 2007, from 3.68% for the same period in 2006.
As a result of the changes noted above, the net interest margin for the three
months ended June 30, 2007 decreased 55 basis points to 5.19%, from 5.74% for
the same period in 2006.
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:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
---------------------------------- --------------------------------
Interest Interest
Income Average Income Average
Average or Yield or Average or Yield or
Balance Expense Cost Balance Expense Cost
------------ -------- -------- ---------- ---------- --------
ASSETS:
Interest-earning assets:
Loans (1)(2) $ 295,030 $ 7,300 9.92% $ 265,333 $ 5,998 9.07%
Investment securities (1) 37,310 484 5.20% 27,095 317 4.69%
Federal funds sold 27,424 348 5.09% 861 6 2.80%
------------ -------- ---------- ----------
Total average earning assets 359,764 8,132 9.07% 293,289 6,321 8.64%
Non-earning assets:
Cash and due from banks 16,644 13,498
Other assets 20,143 11,215
------------ ----------
Total average assets $ 396,551 $ 318,002
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits
Interest-bearing demand $ 84,522 622 2.95% $ 89,412 573 2.57%
Savings 5,343 13 0.98% 6,298 15 0.96%
Time deposits 196,233 2,604 5.32% 116,062 1,204 4.16%
Other borrowings (3) 13,564 240 7.10% 19,592 330 6.76%
------------ -------- ---------- --------
Total average interest-bearing
liabilities 299,661 3,479 4.66% 231,364 2,122 3.68%
======== ========
Noninterest-bearing liabilities:
Demand deposits 63,893 62,558
Other liabilities 2,157 881
------------ ----------
Total liabilities 365,711 294,803
Shareholders' equity: 30,839 23,199
------------ ----------
Total average liabilities and shareholders'
equity $ 396,551 $ 318,002
============ -------- ========== --------
Net interest income $ 4,653 $ 4,199
======== ========
Yield on interest-earning assets (4) 9.07% 8.64%
Cost of funding interest-earning assets 3.88% 2.90%
-------- --------
Net interest margin (5) 5.19% 5.74%
======== ========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended June 30, 2007 and 2006 amounted to $809 thousand $480 thousand,
respectively.
(3) For the purpose of this table 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 JUNE 30,
2007 OVER 2006 CHANGE IN NET INTEREST INCOME
--------------------------------------------
NET
(In thousands) CHANGE RATE VOLUME MIX
- ------------------------------------- -------- -------- -------- --------
Interest Income:
Loans $ 1,302 $ 567 $ 671 $ 63
Investment securities 167 34 120 13
Federal funds sold 342 5 185 152
Interest Bearing Deposits in Banks - - - -
-------- -------- -------- --------
Total interest income $ 1,811 $ 607 $ 976 $ 228
Interest Expense:
Interest-bearing demand 49 85 (31) (5)
Savings (2) 0 (2) (0)
Time deposits 1,400 336 832 232
Other borrowing (90) 17 (102) (5)
-------- -------- -------- --------
Total interest expense $ 1,357 $ 438 $ 697 $ 222
-------- -------- -------- --------
Net interest income $ 454 $ 169 $ 279 $ 6
======== ======== ======== =========
(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 $55 thousand in provision for
loan losses for the three month period ended June 30, 2007, a decrease of $35
thousand or 38.89% from $90 thousand for the same period in 2006. The decrease
in the provision is based on management's assessment of the required level of
reserves. Management assesses 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 June 30, 2007, total
non-interest income increased $206 thousand or 41.20% to $706 thousand, up from
$500 thousand for the comparable period in 2006. 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 service charge income of $33 thousand or 13.20% to $217
thousand for the quarter ended June 30, 2007 down from $250 thousand for the
comparable period in 2006 as a result of a decrease in the volume of transaction
accounts as well as the increase in the number of service charge free checking
accounts.
16
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 June 30, 2007 was $3.0 million compared to $2.5 million for
the same period in 2006, representing an increase of $550 thousand or 22.43%.
This increase reflects increases in salaries and benefits of $171 thousand or
12.81% which are indicative of the additions to staff for the Lodi office opened
in the 4th quarter of 2006 and of expanded branch operations in line with their
respective growth. The increase in occupancy and furniture and equipment expense
of $86 thousand is attributable to the opening of the Lodi office. The increase
in other expense is the result of $129 thousand to recognize the unamortized
origination costs as a result of the redemption of the Trust Preferred
Securities issued in June of 2002. These Trust Preferred Securities were
redeemed on the first call date in June 2007 in order to reissue new Trust
Preferred Securities at a lower interest rate. The additional increase in other
expense of $164 thousand was the result of increased expenses associated with
the growth of the Company.
The following table sets forth a summary of non-interest expense for the three
month periods ended June 30, 2007 and 2006:
Three Months Ended
-------------------
June 30, June 30,
(In thousands) 2007 2006
- ---------------------------- -------- --------
Non-interest Expense:
Salaries & Benefits $ 1,506 $ 1,335
Occupancy 277 208
Furniture and Equipment 200 183
Other Expense 1,019 726
-------- --------
Total Non-Interest Expenses $ 3,002 $ 2,452
======== ========
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 June 30, 2007 decreased slightly to 39.08% from
39.4% for the same period in 2006. The decrease was due primarily to the
decreased level of income derived from Enterprise Zone loans
The following table reflects the Company's tax provision and the related
effective tax rate for the three months periods ended June 30, 2007 and 2006:
Three Months Ended
-------------------
June 30, June 30,
(In thousands) 2007 2006
- ---------------------------- -------- --------
Tax Provision $ 904 $ 850
Effective Tax Rate 39.08% 39.4%
17
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007
Net interest income before provision for loan losses. Net interest income, on a
non-tax equivalent basis, was $9.0 million for the six months ended June 30,
2007, an increase of $712 thousand or 8.61% from $8.3 million for the same
period in 2006. The increase in net interest income was primarily a result of
the increase in the average balances of earning assets (mainly in loans and
Federal funds) supported by the overall increases in the yields earned. These
increases were partially offset by the increases in both the level of and mix in
average interest bearing liabilities, primarily increases in time deposits,
decreases in interest-bearing demand deposits and other borrowings, and by the
increase in the average rates paid, primarily on time deposits and other
borrowings.
Interest income increased $3.5 million or 29.10% to $15.6 million for the six
months ended June 30, 2007 from $12.1 million for the same period in 2006. The
increase in interest income was primarily attributed to increases in levels of
average loans and Federal funds sold and to the increases in the yields earned
on those earning assets. Loan volume increased due to the overall growth of the
Company. The Company's average loan balances were $294.0 million for the six
months ended June 30, 2007, up $36.7 million or 14.28% from $257.0 million for
the same period in 2006. The Company's average loan yield was 9.71% for the six
months ended June 30, 2007, up 72 basis points from the 8.99% yield for the same
period in 2006. As a result, interest income on loans increased $2.7 million.
The Company's average balances of investment securities increased $4.5 million
to $31.9 million for the six months ended June 30, 2007 from the $27.4 million
for the same period in 2006. The Company's average yield on investments
increased 49 basis points to 5.18% from 4.69% for the same period in 2006. As a
result of the increase in volume and yield, interest income increased $184
thousand. The Company's average balances of Federal funds sold increased $25.5
million to $26.4 million for the six months ended June 30, 2007 from the $845
thousand for the same period in 2006. The Company's average yield on Federal
funds sold increased 105 basis points to 5.11% from 4.06% for the same period in
2006. As a result, interest income increased $652 thousand. The overall yield on
average earning assets increased 39 basis points to 8.95% for the six months
ended June 30, 2007, from 8.56% for the same period in 2006.
Interest expense increased $2.8 million, or 73.24% to $6.6 million for the six
months ended June 30, 2007, from $3.8 million for the same period in 2006. The
increase is primarily attributed to the change in mix of interest bearing
liabilities (as the levels of the average time deposits increased significantly
while the levels of all other interest bearing liabilities decreased) and to the
overall increases in the rates paid on all interest bearing liabilities. Time
deposits increased as the Company experienced disintermediation from lower
yielding transaction accounts into higher yielding time deposits. Rates paid on
deposits were increased during the period to remain competitive with other
financial institutions. The Company's average balances of time deposits were
$187.7 million for the six months ended June 30, 2007, up $80.9 million, or
75.76% from $106.8 million for the same period in 2006. The average rate paid on
time deposits also increased 135 basis points to 5.26% for the six months ended
June 30, 2007 from 3.91% for the same period in 2006. As a result, interest
expense on time deposits increased $2.8 million. The Company's average balances
of interest bearing demand deposits decreased $9.5 million to $86.2 million for
the six months ended June 30, 2007 from $95.7 million for the same period in
2006. The average rate paid increased 39 basis points to 2.88% from 2.49% for
the same period in 2006. As a result of the decrease in volume offset by the
increase in rates paid, interest expense on interest bearing demand deposits
increased $48 thousand. The Company's average balances of other borrowings
decreased $4.5 million to $13.7 million for the six months ended June 30, 2007
from $18.2 million for the same period in 2006. Rates paid on other borrowings
increased 107 basis points to 7.34% for the six months ended June 30, 2007 from
6.27% for the same period in 2006. As a result of the decreased volume offset by
the
18
increased rates paid, interest expense on other borrowings decreased $67
thousand. The overall rates paid on average interest-bearing liabilities
increased 117 basis points to 4.58% for the six months ended June 30, 2007, from
3.41% for the same period in 2006.
As a result of the changes noted above, the net interest margin for the six
months ended June 30, 2007 decreased 71 basis points to 5.14%, from 5.85% for
the same period in 2006.
19
The following table presents for the six month periods indicated the
distribution of consolidated average assets, liabilities and shareholders'
equity. It also presents the amounts of interest income from the interest
earning assets and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while nonaccrued interest thereon
is excluded from the computation of yields earned:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
--------- --------- --------- --------- --------- ---------
ASSETS:
Interest-earning assets:
Loans (1)(2) $ 293,728 $ 14,142 9.71% $ 257,036 $ 11,459 8.99%
Investment securities (1) 31,945 821 5.18% 27,408 637 4.69%
Federal funds sold 26,393 669 5.11% 845 17 4.06%
Interest bearing deposits in banks 215 6 5.63% 0 0 0.00%
--------- --------- --------- ---------
Total average earning assets 352,281 15,638 8.95% 285,289 12,113 8.56%
Non-earning assets:
Cash and due from banks 16,316 12,896
Other assets 21,007 14,431
--------- ---------
Total average assets $ 389,604 $ 312,616
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits
Interest-bearing demand $ 86,181 1,230 2.88% $ 95,679 1,182 2.49%
Savings 5,468 27 1.00% 6,415 25 0.79%
Time deposits 187,687 4,899 5.26% 106,785 2,069 3.91%
Other borrowings (3) 13,677 498 7.34% 18,169 565 6.27%
--------- --------- --------- ---------
Total average interest-bearing
liabilities 293,013 6,654 4.58% 227,048 3,841 3.41%
========= =========
Noninterest-bearing liabilities:
Demand deposits 64,609 61,686
Other liabilities 1,826 1,486
--------- ---------
Total liabilities 359,448 290,220
Shareholders' equity: 30,156 22,396
--------- ---------
Total average liabilities and shareholders'
equity $ 389,604 $ 312,616
========= =========
--------- ---------
Net interest income $ 8,984 $ 8,272
========= =========
Yield on interest-earning assets (4) 8.95% 8.56%
Cost of funding interest-earning assets 3.81% 2.72%
--------- ---------
Net interest margin (5) 5.14% 5.85%
========= =========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the six month periods ended
June 30, 2007 and 2006 amounted to $1,196 thousand and $897 thousand,
respectively.
(3) For the purpose of this table 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.
20
The following table sets forth changes in interest income and interest expense,
for the six month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:
SIX MONTHS ENDED JUNE 30,
2007 OVER 2006 CHANGE IN NET INTEREST INCOME
------------------------------------------------
NET
(In thousands) CHANGE RATE VOLUME MIX
- ------------------------------------------- --------- --------- --------- ---------
Interest Income:
Loans $ 2,683 $ 916 $ 1,636 $ 131
Investment securities 184 67 105 11
Federal funds sold 652 4 514 134
Interest bearing deposits in banks 6 - - 6
--------- --------- --------- ---------
Total interest income $ 3,525 $ 988 $ 2,255 $ 282
Interest Expense:
Interest-bearing demand 48 184 (117) (18)
Savings 2 7 (4) (1)
Time deposits 2,830 718 1,568 544
Other borrowing (67) 97 (140) (24)
Total interest expense $ 2,813 $ 1,005 $ 1,307 $ 501
--------- --------- --------- ---------
Net interest income $ 712 $ (17) $ 948 $ (220)
========= ========= ========= =========
(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 $220 thousand in provision for
loan losses for the six month period ended June 30, 2007, an increase of $40
thousand or 22.22% from $180 thousand for the same period in 2006. The increase
in the provision is based on management's assessment of the required level of
reserves. Management assesses 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 six months ended June 30, 2007, total
non-interest income increased $293 thousand or 26.67% to $1.4 million, up from
$1.1 million for the comparable period in 2006. 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 and a decrease in service charge income.
Other fee income increased $465 thousand as a result of increases in mortgage
referral fees due to an increase in Commercial Real Estate loan referral
activity during the first quarter of 2007 as opposed to the same period in 2006.
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 $152 thousand or 84.44%
to $28 thousand, down from $180 thousand for the comparable period in 2006.
21
The decrease in service charge income is the result of a decrease in the volume
of transaction accounts as well as the increase in the number of service charge
free checking accounts. Income derived from the service charges decreased $20
thousand or 4.37% to $438 thousand, down from $458 thousand for the comparable
period in 2006.
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 six
months ended June 30, 2007 was $5.7 million compared to $5.0 million for the
same period in 2006, representing an increase of $662 thousand or 13.14%. This
increase reflects increases in salaries and benefits of $303 thousand or 11.28%
which are indicative of the additions to staff for the Lodi office opened in the
4th quarter of 2006 and of expanded branch operations in line with their
respective growth. The increase in occupancy and furniture and equipment expense
of $162 thousand is also primarily a result of the opening of the Lodi office.
The increase in other expense is the result of $129 thousand to recognize the
unamortized origination costs as a result of the redemption of the Trust
Preferred Securities issued in June of 2002. These Trust Preferred Securities
were redeemed on the first call date in June 2007 in order to reissue new Trust
Preferred Securities at a lower interest rate. The additional increase in other
expense of $68 thousand, was the result of increased expenses associated with
the growth of the Company.
The following table sets forth a summary of non-interest expense for the six
months periods ended June 30, 2007 and 2006:
Six Months Ended
----------------------
June 30, June 30,
(In thousands) 2007 2006
- ------------------------------------------- --------- ---------
Non-interest Expense:
Salaries & Benefits $ 2,988 $ 2,685
Occupancy 563 407
Furniture and Equipment 367 361
Other Expense 1,783 1,586
--------- ---------
Total Non-Interest Expenses $ 5,701 $ 5,039
========= =========
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 six month period ended June 30, 2007 decreased slightly to 38.6% from
39.5% for the same period in 2006. The decrease was primarily due to the
increased level of income derived from Enterprise Zone loans.
The following table reflects the Company's tax provision and the related
effective tax rate for the six months periods ended June 30, 2007 and 2006:
Six Months Ended
----------------------
June 30, June 30,
(In thousands) 2007 2006
- ------------------------------------------- --------- ---------
Tax Provision $ 1,720 $ 1,638
Effective Tax Rate 38.6% 39.5%
22
FINANCIAL CONDITION
Total assets at June 30, 2007 were $406 million, an increase of $20 million or
5.06%, from the $387 million at December 31, 2006. The growth in assets was
primarily in the Company's level of Federal funds sold and investments. Federal
funds sold and investments grew $14 million or 25.01% to $68 million at June 30,
2007 from $55 million at December 31, 2006. Loans grew by $9 million or 3.07% to
$296 million at June 30, 2007 from $287 million at December 31, 2006. The growth
in Federal funds sold and investments was funded by the net income of $2.7
million, growth in deposits of $12 million or 3.48% and the increase of $3.6
million in other borrowings.
The change in deposits was comprised of a decrease in non-interest bearing
deposits of $10.1 million or 13.83% to $63.0 million at June 30, 2007 from $73.2
million at December 31, 2006. This decrease was offset by increases in interest
bearing deposits of $21.9 million or 8.21% to $289.8 million at June 30, 2007
from $267.8 million at December 31, 2006. The change in the mix of deposit is
the result of disintermediation in which depositors seek higher yields on
deposits by placing the deposits in higher yield term accounts.
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:
June 30, December 31,
(In thousands) 2007 2006
- ------------------------------------------- ------------ ------------
Commercial $ 64,347 $ 57,942
Agriculture 15,557 16,873
Real estate - commercial 134,136 127,545
Real estate - construction 72,858 75,654
Installment & other 11,888 11,742
------------ ------------
298,777 289,756
Deferred loan fees and costs, net 60 40
Allowance for loan losses (2,699) (2,478)
------------ ------------
Total net loans $ 296,138 $ 287,318
------------ ------------
The Company continues to manage the mix in its loan portfolio consistently with
its identity as a community bank serving Northern California and the Central
Valley. Net portfolio loans have increased by $8.8 million or 3.07%, to $296.1
million at June 30, 2007 from $287.3 million at December 31, 2006. Commercial
loans increased $6.4 million or 11.05% to $64.3 million from $57.9 million at
December 31, 2006. Agricultural loans decreased by $1.3 million or 7.80% to
$15.6 million from $16.9 million at December 31, 2006. Real estate - commercial
loans increased by $6.6 million or 5.16% to $134.1 million from $127.5 million
23
at December 31, 2006. Real estate - construction loans decreased $2.3 million or
3.69% to $72.9 million from $75.6 million at December 31, 2006. Installment and
other loans increased $147 thousand or 1.25% to $11.8 million from $11.7 million
at December 31, 2006. The portfolio mix remained consistent with the prior year,
with commercial and agricultural loans now representing 21.54% of total loans
compared to 22.57% in the prior year, real estate construction loans now
representing 24.39% compared to 22.27% in the prior year, commercial real estate
loans now representing 44.89% compared to 46.33% in the prior year, and
installment loans now representing 3.98% compared to 3.93% in the prior year.
Nonperforming loans. The Company had one non performing loan in the amount of
$121 thousand as of June 30, 2007. As of December 31, 2006 the Company had no
nonperforming loans.
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'
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.
24
Management believes the assigned risk grades and our methods for managing risk
are satisfactory.
The provision for loan losses increased to $220,000 for the six months ended
June 30, 2007 compared to $180,000 for the same period in 2006. 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
(In thousands) 2007 2006 2007 2006
- ------------------------------------------- --------- --------- --------- ---------
Beginning Balance: $ 2,646 $ 2,442 $ 2,478 $ 2,356
Provision for loan losses 55 90 220 180
Charge-offs:
Commercial 2 16 2 15
Real Estate - - - -
Other - - - 5
--------- --------- --------- ---------
Total Charge-offs 2 16 2 20
--------- --------- --------- ---------
Recoveries:
Commercial - - 0 0
Other - - 3 -
--------- --------- --------- ---------
Total Recoveries - - 3 0
--------- --------- --------- ---------
Ending Balance $ 2,699 $ 2,516 $ 2,699 $ 2,516
========= ========= ========= =========
ALL to total loans 0.91% 0.93% 0.91% 0.93%
Net Charge-offs to average loans-annualized 0.00% 0.00% 0.00%
Investment securities. Investment securities increased $14.2 million to $37.3
million at June 30, 2007, from $23.1 million at December 31, 2006. Federal funds
sold decreased slightly by $466 thousand to $31.2 million at June 30, 2007, from
$31.6 million at December 31, 2006.
The Company's investment in U.S. Treasury securities increased to 58.6% of the
investment portfolio at June 30, 2007 compared to 47.2% at December 31, 2006.
Obligations of U.S. Agencies decreased to 24.2% of the investment portfolio at
June 30, 2007 compared to 29.2% at December 31, 2006. The Company's investment
in corporate bonds decreased to 9.4% of the investment portfolio at June 30,
2007 compared to 10.9% at December 31, 2006. Tax-exempt municipal obligation
bonds decreased to 7.8% of the investment portfolio at June 30, 2007 compared to
12.7% at December 31, 2006. Fed Funds sold decreased $466 thousand, or 1.47%.
The overall increase was primarily the result of the increase in U. S. Treasury
securities used to pledge as collateral for public deposits.
Deposits. Total deposits were $352.9 million as of June 30, 2007 an increase of
$11.9 million or 3.48% from the December 31, 2006 balance of $341.0 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
23.32% of total deposits down from 27.0% at December 31, 2006. Money market and
savings accounts decreased to 17.6% of total deposits from 21.9% at December 31,
2006. Time deposits decreased to 59.1% of total deposits from 51.1% at December
31, 2006.
25
SUBORDINATED DEBENTURES
On June 27, 2007, the Company through its newly formed business trust
subsidiary, Pacific State Statutory Trust III issued and sold $5,000,000 of the
Trust's Floating Rate Capital Securities. The proceeds from the sale of the
securities were combined with the proceeds of the sale by the Trust to the
Company of the Trust's common securities and were used by the Trust to purchase
$5,155,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures
("2007 Debentures") of the Company. The interest rate on the 2007 Debentures is
variable, based on the three-month LIBOR plus 1.45%, and is payable and resets
quarterly. The 2007 Debentures mature in September 2037 but are redeemable at
par after five years.
On June 26, 2007, the first call date without penalty, the Company redeemed
$5,155,000 in principal amount of its Floating Rate Junior Subordinated
Deferrable Interest Debentures with interest at six-month LIBOR plus
3.45%,("2002 Debentures") issued in June 2002 by Pacific State Statutory Trust I
("Trust I") and the proceeds were used to redeem $5,000,000 in principal amount
of its Floating Rate Capital Securities issued by Trust I in June 2002. As a
result, the Company recognized $129,000 in non-interest expenses for the
remaining unamortized origination costs on the 2002 Debentures, but expects to
significantly reduce the interest costs on these subordinated debentures going
forward. The Company anticipates reduced interest expense of approximately $100
thousand annually, on a pre-tax basis. Pacific State Statutory Trust I was
terminated on July 11, 2007.
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.
26
As of June 30, 2007 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. 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 June 30, 2007:
Total capital
(to risk weighted assets) $ 42,713 12.69% $ 26,928 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 39,327 11.68% $ 13,464 4.00% N/A N/A
Tier I capital
(to average assets) $ 39,327 9.94% $ 15,862 4.00% N/A N/A
BANK
As of June 30, 2007:
Total capital
(to risk weighted assets) $ 40,586 12.06% $ 26,928 8.00% $ 33,660 10.00%
Tier I capital
(to risk weighted assets) $ 37,682 11.19% $ 13,464 4.00% $ 20,196 6.00%
Tier I capital
(to average assets) $ 37,682 9.52% $ 15,862 4.00% $ 19,828 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, 2006:
Total capital
(to risk weighted assets) $ 39,427 11.83% $ 26,654 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 35,499 10.65% $ 13,327 4.00% N/A N/A
Tier I capital
(to average assets) $ 35,499 10.17% $ 13,961 4.00% N/A N/A
BANK
As of December 31, 2006:
Total capital
(to risk weighted assets) $ 37,141 11.2% $ 27,922 8.00% $ 33,317 10.00%
Tier I capital
(to risk weighted assets) $ 34,141 10.3% $ 13,327 4.00% $ 19,990 6.00%
Tier I capital
(to average assets) $ 34,141 9.7% $ 13,961 4.00% $ 17,541 5.00%
27
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, borrowers 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 $82.6 million or 20.3% of total assets at June 30, 2007
compared to $73.6 million or 19.0% of total assets at December 31, 2006. 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.
28
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 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 six months ended June 30, 2007
compared to December 31, 2006 as discussed under the caption "Liquidity and
Market Risk" and "Net Interest Income Simulation" in the Company's 2006 Annual
Report to Shareholders filed as an exhibit with the Company's 2006 Annual Report
on Form 10-K, which is incorporated here by reference.
The following table reflects the company's projected net interest income
sensitivity analysis based on year-end data:
June 30, 2007
----------------------------------
Adjusted Net Percent change
Change in Rates Interest Income from base
- -------------------------- --------------- ---------------
(in thousands)
Up 200 basis points $ 21,254 9.46%
Up 150 basis points $ 20,798 7.11%
Up 100 basis points $ 20,340 4.75%
Base Scenario $ 19,417 0.00%
Down 100 basis points $ (18,571) -4.36%
Down 150 basis points $ (18,149) -6.53%
Down 200 basis points $ (17,723) -8.72%
29
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 control over financial reporting.
30
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, 2006, 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Bank held its annual shareholders meeting ("Meeting") on May 10, 2007 at the
Bank's office at 6 So El Dorado St., Stockton, CA. 94501.
According to the certified list of stockholders which was presented at the
Meeting, there were 3,676,718 shares of Common Stock of the Company outstanding
and entitled to vote at the Meeting. There were present at the Meeting, in
person or by proxy, the holders of 3,073,204 shares of Common Stock of the
Company, representing 83.58% of the total votes eligible to be cast,
constituting a majority and more than a quorum of the outstanding shares
entitled to vote.
The Shareholders approved the following:
PROPOSAL 1 - Election of Directors
FOR WITHHELD
------------ ------------
Michael L. Dalton 3,071,524 1,680
Maxwell M. Freeman 3,066,724 6,480
Harold Hand 3,071,524 1,680
Patricia Ann Hatton 3,071,524 1,680
Steven J. Kikuchi 3,071,524 1,680
Yosh Mataga 3,071,524 1,680
Russell G. Munson 3,071,524 1,680
Steven A. Rosso 3,065,226 7,978
Gary A. Stewart 3,071,524 1,680
Kathleen Verner 3,071,524 1,680
31
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: August 14, 2007 By: /s/ Steven A. Rosso
-------------------------------
Steven A. Rosso
President and Chief Executive
Officer
Pacific State Bancorp
Date: August 14, 2007 By: /s/ JoAnne Roberts
-------------------------------
JoAnne Roberts
Senior Vice President and Chief
Financial Officer
32