UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 November 14, 2007
Common Stock 3,696,157
No Par Value
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC STATE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts) September 30, December 31,
2007 2006
Assets
Cash and due from banks $ 17,592 $ 18,985
Federal funds sold 18,117 31,630
------------- ------------
Total cash and cash equivalents 35,709 50,615
Interest bearing deposits in banks 3,000 --
Investment securities - available for sale (amortized cost of
$45,899 in 2007 and $23,186 in 2006) 45,809 23,107
Loans, less allowance for loan losses of $2,598 in 2007 and $2,478
in 2006 308,092 287,318
Bank premises and equipment, net 13,665 11,957
Company owned life insurance 6,258 6,079
Accrued interest receivable and other assets 8,589 7,676
------------- ------------
Total assets $ 421,122 $ 386,752
============= ============
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 60,940 $ 73,197
Interest bearing 304,539 267,799
------------- ------------
Total deposits 365,479 340,996
Other borrowings 8,500 4,900
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 4,702 3,033
------------- ------------
Total liabilities 387,445 357,693
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;
shares issued and outstanding 3,705,698 2007 and 10,240 9,651
3,661,477 in 2006
Retained earnings 23,491 19,455
Accumulated other comprehensive loss, net of tax (54) (47)
------------- ------------
Total shareholders' equity 33,677 29,059
------------- ------------
Total liabilities and shareholders' equity $ 421,122 $ 386,752
============= ============
See notes to unaudited condensed consolidated financial statements
2
PACIFIC STATE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
September 30
Unaudited Three months ended Nine months ended
(in thousands, except share amounts) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 7,006 $ 6,627 $ 21,148 $ 18,086
Interest on Federal funds sold 396 21 1,065 38
Interest on interest bearing deposits in
banks 14 -- 14 --
Interest on investment securities 521 294 1,348 939
---------- ---------- ---------- ----------
Total interest income 7,937 6,942 23,575 19,063
Interest expense:
Interest on deposits 3,467 2,207 9,623 5,484
Interest on subordinated debentures 139 187 516 531
Interest on other borrowings 90 85 211 306
---------- ---------- ---------- ----------
Total interest expense 3,696 2,479 10,350 6,321
---------- ---------- ---------- ----------
Net interest income before
provision for loan losses 4,241 4,463 13,225 12,742
Provision for loan losses 40 90 260 270
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,201 4,373 12,965 12,472
---------- ---------- ---------- ----------
Non-interest income:
Service charges 208 195 646 653
Other fee income 262 475 1,188 928
Gain from sale of loans 119 48 147 228
---------- ---------- ---------- ----------
Total non-interest income 589 718 1,981 1,809
Non-interest expenses:
Salaries and employee benefits 1,264 1,359 4,252 4,044
Occupancy 292 258 855 665
Furniture and equipment 157 174 524 535
Other 998 811 2,781 2,397
---------- ---------- ---------- ----------
Total other expenses 2,711 2,602 8,412 7,641
---------- ---------- ---------- ----------
Income before provision for income taxes 2,079 2,489 6,534 6,640
Provision for Income taxes 778 977 2,498 2,614
---------- ---------- ---------- ----------
Net income $ 1,301 $ 1,512 $ 4,036 $ 4,026
========== ========== ========== ==========
Basic earnings per share $ 0.35 $ 0.44 $ 1.10 $ 1.16
========== ========== ========== ==========
Diluted earnings per share $ 0.33 $ 0.39 $ 1.01 1.04
========== ========== ========== ==========
Weighted average common shares outstanding 3,696,157 3,467,819 3.679,763 3,475,663
Weighted average common and common equivalent shares
outstanding 3,988,460 3,841,522 4,014,470 3,867,431
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 Nine Months Ended September 30, 2007 and 2006
(In thousands)
2007 2006
- ------------------------------------------------------------------------ ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 4,036 $ 4,026
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 260 270
Net (increase) decrease in deferred loan
origination costs (174) 133
Depreciation and amortization 19 398
Gain on sale of loans, net (147) (228)
Stock-based compensation expense 211 186
Increase in Company owned life insurance,
net (179) (1,601)
Increase in accrued interest
receivable and other assets (957) (964)
Increase (decrease) in accrued interest
payable and other liabilities 1,669 497
--------- ---------
Net cash provided by operating
activities 4,738 2,717
--------- ---------
Cash flows from investing activities:
Purchases of available-for-sale investment
securities (37,271) (8,003)
Proceeds from matured and called available-
for-sale investment securities 12,767 12,186
Proceeds from principal repayments from
available-for-sale government-guaranteed
mortgage-backed securities 2,371 491
Proceeds from principal repayments from
held-to-maturity government-guarantee
mortgage-backed securities 48
Purchases Interest bearing deposits in banks (3,000) 0
Net increase in loans (20,713) (39,097)
Purchases of premises and equipment (2,259) (2,801)
--------- ---------
Net cash used in investing activities (48,105) (37,176)
--------- ---------
(Continued)
4
PACIFIC STATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(In thousands)
2007 2006
--------- ---------
Cash flows from financing activities:
Net decrease in demand, interest-bearing
and savings deposits $ (22,135) $ (21,973)
Net increase in time deposits 46,618 48,748
Proceeds from exercise of stock options 378 546
Proceeds from stock issuance 250
Net increase in short-term borrowings 3,600 900
--------- ---------
Net cash provided by financing
activities 28,461 28,471
--------- ---------
Decrease in cash and cash
equivalents (14,906) (5,988)
Cash and cash equivalents at beginning of year 50,615 19,120
--------- ---------
Cash and cash equivalents at end of year $ 35,709 $ 13,132
========= =========
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 June
2007 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 September 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, Tracy and
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 September 30, 2007 and December 31,
2006, and the results of its operations for the three and nine month periods
ended September 30, 2007 and 2006, and its cash flows for the nine month periods
ended September 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
6
of operations for the three and nine month periods ended September 30, 2007 may
not necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan losses, the provision for income
taxes and the estimated fair value of 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:
September 30, December 31,
- -----------------------------------------------------------------
2007 2006
- -----------------------------------------------------------------
(In thousands)
Commercial $ 72,558 $ 57,942
Agriculture 14,742 16,873
Real estate - commercial 132,163 127,545
Real estate - construction 78,572 75,654
Installment & other 12,440 11,741
------------- ------------
310,475 289,755
Deferred loan fees and costs, net 215 41
Allowance for loan losses (2,598) (2,478)
------------- ------------
Total net loans $ 308,092 $ 287,318
------------- ------------
- -----------------------------------------------------------------
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 $122,828,000 and $110,937,000 and stand-by
letters of credit of $3,117,000 and $2,971,000 at September 30, 2007 and
December 31, 2006, respectively. However, all such commitments will not
necessarily culminate in actual extensions of credit by the Company.
Approximately $58,541,000 of the loan commitments outstanding at September 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
7
loans, and many of these are expected to expire without being drawn upon.
Therefore, the total commitments do not necessarily represent future cash
requirements. Each potential borrower and the necessary collateral are evaluated
on an individual basis. Collateral varies, but may include real property, bank
deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized. The deferred liability related to the Company's stand-by letters
of credit was not significant at September 30, 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 Nine Months Ended
(in thousands) 9/30/2007 9/30/2006 9/30/2007 9/30/2006
Net Income 1,301 1,512 4,036 4,026
Other Comprehensive Income (Loss)
Change in unrealized loss on
available for sale securities 23 51 (7) 18
Reclassification adjustment -- -- -- --
---------------------------------------------
Total Other Comprehensive Income (Loss)
23 51 (7) 18
---------------------------------------------
Total Comprehensive Income 1,324 1,563 4,029 4,044
=============================================
7. STOCK -BASED COMPENSATION
Stock Option Plan
At September 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
8
over five years. New shares are issued upon the exercise of options. Under the
Plan, 26,954 shares of common stock remain reserved for issuance to employees
and directors through incentive and non-statutory agreements.
Stock Option Compensation
There were 30,000 stock options granted in the three and nine month periods
ended September 30, 2007, as compared to no options granted in the three and
nine month periods ended September 30, 2006. For the three month periods ended
September 30, 2007 and 2006, the compensation cost recognized for stock option
compensation was $83,000 and $62,000, respectively. For the nine month periods
ended September 30, 2007 and 2006, the compensation cost recognized for stock
option compensation was $211,000 and $186,000, respectively. The excess tax
benefits were not significant for the Company.
At September 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 $516,000. 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 4.75 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 September 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 30,000 $ 19.70 9.8 years
Exercised (34,680) $ 5.24 -- --
Cancelled -- -- --
-----------
Outstanding at September 30, 2007 637,658 $ 7.80 6.6 years $ 6,542
=========== =========== ===========
Options vested or expected to
vest at September 30, 2007 402,205 $ 7.80 2.7 years $ 4,127
=========== =========== ===========
Exercisable at September 30, 2007 402,205 $ 7.80 2.7 years $ 4,127
=========== =========== ===========
The intrinsic value was derived from the market price of the Company's common
stock of $18.06 as of September 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
9
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 three-month LIBOR plus 3.45%,
issued in September 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 September 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 nine months ended September 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
10
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-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 September 30, 2007 and December 31, 2006 and for
the three and nine month periods ended September 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.
11
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.
OVERVIEW
For the three months ended September 30, 2007:
The Company's net income decreased $211 thousand or 13.96% to $1,301 thousand
for the third quarter of 2007 from $1,512 thousand for the same period in 2006.
The primary contributors to the decrease in net income for the third quarter of
2007 were the (1) $222 thousand decrease in net interest income, (as the
increase in interest expense was greater than the increase in interest income),
(2) $129 thousand decrease in non-interest income, primarily other fees, over
the same period in 2006, and (3) $109 thousand increase in other expenses. The
increase in non-interest expenses consist of increases in occupancy and
furniture and equipment expenses of $17 thousand and an increase in other
expenses of $187 thousand offset by a decrease in salaries and benefits of $95
thousand. The increase in other expense is primarily the result of $129 thousand
to recognize the unamortized origination costs as a result of the redemption of
the Trust Preferred Securities in June of 2007. The provision for loan losses
decreased by $50 thousand and the provision for income taxes decreased $199
thousand. Basic earnings per share decreased to $0.35 for the third quarter of
2007 down 18.60% from $0.44 for the same period in 2006. Diluted earnings per
share decreased to $0.33 for the third quarter of 2007 down 15.38% from the
$0.39 for the same period in 2006.
For the nine months ended September 30, 2007:
The Company's net income increased $10 thousand or 0.25% to $4,036 thousand for
the nine months ended September 30, 2007 from $4,026 thousand for the same
period in 2006. The primary contributors to the increase in net income for the
nine months ended September 30, 2007 were the (1) $483 thousand increase in net
interest income, (as the increase in interest income was greater than the
increase in interest expense), and (2) $172 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 $771 thousand. The increase in non interest expenses
consisted primarily of increases in salaries and benefits of $208 thousand,
occupancy and furniture and equipment expenses of $179 thousand as well as an
increase of $384 thousand in other expenses. The increase in salaries, occupancy
and furniture and equipment expense are primarily the result of opening the
Company's ninth office in Hayward, Ca in September 2007. The increase in other
expense is primarily the result of $129 thousand to recognize the unamortized
origination costs as a result of the redemption of the Trust Preferred
Securities in June of 2007. These Trust Preferred Securities were redeemed on
the first available call date in order to reissue new Trust preferred Securities
at a lower interest rate. The provision for income taxes decreased $116
thousand. Basic earnings per share decreased to $1.10 for the nine months ended
September 30, 2007 down 5.22% from $1.16 for the same period in 2006. Diluted
earnings per share decreased to $1.01 for the nine months ended September 30,
2007 down 2.88% from the $1.04 for the same period in 2006.
Total assets at September 30, 2007 were $421 million, an increase of $34.5
million or 8.93%, from the $387 million at December 31, 2006. The growth in
assets was primarily in the Company's loan portfolio. Loans grew by $20.8
million or 7.23% to $308 million at September 30, 2007 from $287 million at
December 31, 2006. Federal funds sold, interest bearing deposits in other banks
and investments grew $12 million or 22.27% to $67 million at
12
September 30, 2007 from $55 million at December 31, 2006. The growth in our
assets was funded by the net income of $4.0 million, growth in deposits of $24.5
million or 7.18% and an increase in other borrowings of $3.6 million.
The annualized return on assets ("ROA") was 1.26% for the three month period
ended September 30, 2007 compared to 1.77% for the same period in 2006. The
annualized return on equity ("ROE") was 15.99% for the three month period ended
September 30, 2007 compared to 23.93% for the same period in 2006. The decrease
in ROE is primarily attributable to lower earnings for the third quarter of 2007
as compared to 2006. Quarter on Quarter earnings decreased $211 thousand to $1.3
million as compared to $1.5 million for the same period in 2006. The increase in
shareholders equity from net income and the exercise of stock options also
contributed to the decrease in ROE.
The annualized return on assets ("ROA") was 1.36% for the nine month period
ended September 30, 2007 compared to 1.68% for the same period in 2006. The
annualized return on equity ("ROE") was 17.48% for the nine month period ended
September 30, 2007 compared to 23.11% for the same period in 2006. The decrease
in ROE is primarily attributable to an increase in shareholders equity from net
income and the exercise of stock options.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis, was $4.2 million for the three months ended September
30, 2007, a decrease of $222 thousand or 4.98% from $4.4 million for the same
period in 2006. The decrease in net interest income was primarily a result of
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. The increase in interest expense was partially
offset by the increase in the average balances of earning assets mainly in
loans, investment securities and Federal funds offset by the overall decreases
in the yields earned.
Interest income increased $995 thousand or 14.33% to $7.9 million for the three
months ended September 30, 2007 from $6.9 million for the same period in 2006.
The increase in interest income was primarily attributed to increases in levels
of average loans, investment securities and Federal funds sold offset by
decreases in the yields earned on loans. Loan volume increased due to the
overall growth of the Company. The Company's average loan balances were $303.8
million for the three months ended September 30, 2007, up $23.8 million or 8.5%
from $280.1 million for the same period in 2006. The Company's average loan
yield was 9.15% for the three months ended September 30, 2007, down 24 basis
points from the 9.39% yield for the same period in 2006. As a result, interest
income on loans increased $379 thousand. The Company's average balances of
investment securities increased $15.6 million to $39.9 million for the three
months ended September 30, 2007 from the $24.3 million for the same period in
2006. The Company's average yield on investments increased 38 basis points to
5.18% from 4.80% for the same period in 2006. As a result of the increase in
volume and yield, interest income on investments increased $227 thousand. The
Company's average balances of Federal funds sold increased $29.0 million to
$30.7 million for the three months ended September 30, 2007 from the $1.7
million for the same period in 2006. The Company's average yield on Federal
funds sold increased 7 basis points to 5.12% from 5.05% for the same period in
2006. As a result, interest income on Federal funds increased $375 thousand. The
overall yield on average earning assets decreased 61 basis points to 8.39% for
the three months ended September 30, 2007, from 9.00% for the same period in
2006.
Interest expense increased $1.2 million, or 49.09% to $3.7 million for the three
months ended September 30, 2007, from $2.5 million for the same period in 2006.
The increase is
13
primarily attributed to the change in mix of interest bearing liabilities, the
level of average time deposits increased significantly while the levels of other
interest bearing liabilities decreased, coupled with the increase in the rates
paid on these time deposits. Time deposits increased as the Company experienced
disintermediation from lower yielding transaction accounts into higher yielding
time deposits. Rates paid on time deposits were increased during the period to
remain competitive with other financial institutions. The Company's average
balances of time deposits were $216.1 million for the three months ended
September 30, 2007, up $82.6 million, or 61.92% from $133.5 million for the same
period in 2006. The average rate paid on time deposits increased 73 basis points
to 5.36% for the three months ended September 30, 2007 from 4.63% 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 $13.1 million to $76.3 million for the three months ended September
30, 2007 from $89.4 million for the same period in 2006. The average rate paid
for both periods was 2.80%. As a result, of the decrease in average balances,
interest expense on interest bearing demand deposits decreased $94 thousand. The
Company's average balances of other borrowings increased $1.7 million to $17.3
million for the three months ended September 30, 2007 from $15.6 million for the
same period in 2006 and the rates paid decreased 168 basis points to 5.26% for
the three months ended September 30, 2007 from 6.94% for the same period in
2006. As a result of the increased volume offset by the decreased rates paid,
interest expense on other borrowings decreased $43 thousand. The overall rates
paid on average interest-bearing liabilities increased 65 basis points to 4.66%
for the three months ended September 30, 2007, from 4.01% for the same period in
2006.
As a result of the changes noted above, the net interest margin for the three
months ended September 30, 2007 decreased 131 basis points to 4.48%, from 5.79%
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
September 30, 2007 September 30, 2006
Interest Interest
Income Average Income Average
Average or Yield or Average or Yield or
Assets: Balance Expense Cost Balance Expense Cost
Interest-earning assets:
Loans (1)(2) $ 303,858 $ 7,006 9.15% $ 280,097 $ 6,627 9.39%
Investment securities (1) 39,890 521 5.18% 24,310 294 4.80%
Federal funds sold 30,697 396 5.12% 1,651 21 5.05%
Interest Bearing Deposits in Banks 867 14 6.41% - - 0.00%
---------------------- --------------------
Total average earning assets 375,312 7,937 8.39% 306,058 6,942 9.00%
Non-earning assets:
Cash and due from banks 14,344 13,833
Other assets 21,620 18,371
---------- ---------
Total average assets $ 411,276 $ 338,262
========== =========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing Demand $ 76,347 $ 538 2.80% 89,429 632 2.80%
Savings 5,288 11 0.83% 6,526 17 1.03%
Time Deposits 216,093 2,918 5.36% 133,455 1,558 4.63%
Other borrowings (3) 17,264 229 5.26% 15,555 272 6.94%
---------------------- --------------------
Total average interest-bearing liabilities 314,992 3,696 4.66% 244,965 2,479 4.01%
Noninterest-bearing liabilities:
Demand deposits 61,010 67,163
Other liabilities 2,988 1,069
---------- ---------
Total liabilities 378,990 313,197
Shareholders' equity: 32,286 25,065
---------- ---------
Total average liabilities and shareholders' equity $ 411,276 $ 338,262
========== =========
--------- --------
Net interest income $ 4,241 $ 4,463
========= ========
Yield on interest-earning assets (4) 8.39% 9.00%
Cost of funding interest-earning assets 3.91% 3.21%
------- -------
Net interest margin (5) 4.48% 5.79%
======= =======
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended September 30, 2007 and 2006 amounted to $615 thousand $431 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 September 30,
2007 over 2006 change in net interest income
Net
Change Rate Volume Mix
------------- ------------- ------------- -------------
(In thousands)
Interest Income:
Loans and leases $ 379 ($ 169) $ 562 ($ 14)
Investment securities 227 25 187 16
Federal funds sold 375 0 369 5
Interest Bearing Deposits in Banks 14 0 0 14
------------- ------------ ------------- -------------
Total interest income $ 995 ($ 144) $ 1,118 $ 21
Interest Expense:
Interest-bearing Demand (94) (2) (92) 0
Savings (6) (3) (3) 1
Time Deposits 1,360 244 965 151
Other borrowing (43) (66) 30 (7)
------------- ------------ ------------- -------------
Total interest expense $ 1,217 $ 173 $ 899 $ 145
------------- ------------ ------------- -------------
Net interest income ($ 222) ($ 317) $ 219 ($ 124)
============= ============ ============= =============
(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 $40 thousand in provision for
loan losses for the three month period ended September 30, 2007, a decrease of
$50 thousand or 55.56% 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 September 30, 2007, total
non-interest income decreased $129 thousand or 17.97% to $589 thousand, down
from $718 thousand for the comparable period in 2006. The decrease in
non-interest income was primarily the result of decreases in fee income derived
from the referral of commercial mortgage loans to third parties. Fee income
decreased $213 thousand or 44.84% to $262 thousand for the quarter ended
September 30, 2007 down from $475 thousand for the comparable period in 2006.
The decrease was offset by an increase in gain on sales of loans of $71 thousand
or 147.92% to $119 thousand for the quarter ended September 30, 2007 up from $48
thousand for the comparable period in 2006. Service charge income also increased
slightly, up $13 thousand or 6.67% to $208 thousand as compared to $195 thousand
for the comparable period in 2006. The increase is the result of increases in
the volume of transaction 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 September 30, 2007 was $2.7 million compared to $2.6 million
for the same period in 2006, representing an increase of $109 thousand or 4.19%.
Salaries and benefits decreased $95 thousand or 6.99%. During the third quarter
of 2007, management completed the scheduled review of its deferred loan cost
model under SFAS 91. The primary result was an increase in the level of deferred
costs associated with short term loans (less than twelve months). The increase
in occupancy and furniture and equipment expense of $17 thousand is primarily
attributable to the opening of the Hayward office in September of 2007. The
increase in other expense reflects increases of $56 thousand in advertising and
business development, as well as an increase in data processing expense of $35
thousand and an increase in telephone expense of $10 thousand. These increases
are primarily attributable to the opening of the new office in Hayward.
The following table sets forth a summary of non-interest expense for the three
month periods ended September 30, 2007 and 2006:
Three Months Ended
September 30, September 30,
(In thousands) 2007 2006
Non-interest Expense:
Salaries & Benefits $ 1,264 $ 1,359
Occupancy 292 258
Furniture and Equipment 157 174
Other Expense 998 811
------------- -------------
Total Non-Interest Expenses $ 2,711 $ 2,602
============= =============
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, Company owned life
insurance and California Enterprise Zone credits. Increases and decreases in the
provision for taxes reflect changes in the Company's net income before tax. The
Company's effective tax rate for the three month period ended September 30, 2007
decreased to 37.4% from 39.3% for the same period in 2006. The decrease was due
primarily 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 three months periods ended September 30, 2007 and
2006:
Three Months Ended
September 30, September 30,
(In thousands) 2007 2006
Tax Provision $ 778 $ 977
Effective Tax Rate 37.4% 39.3%
17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
Net interest income before provision for loan losses. Net interest income, on a
non-tax equivalent basis, was $13.2 million for the nine months ended September
30, 2007, an increase of $483 thousand or 3.79% from $12.7 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 all our earning assets. These increases
were partially offset by the increases in both the level of and mix in average
interest bearing liabilities. While time deposits increased interest-bearing
demand deposits, savings and other borrowings decreased. Over the same period
average rates paid also increased, primarily on time deposits.
Interest income increased $4.5 million or 23.67% to $23.6 million for the nine
months ended September 30, 2007 from $19.1 million for the same period in 2006.
The increase in interest income was primarily attributed to increases in levels
of average loans, investments 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 $297.4 million
for the nine months ended September 30, 2007, up $32.6 million or 12.30% from
$264.8 million for the same period in 2006. The Company's average loan yield was
9.51% for the nine months ended September 30, 2007, up 38 basis points from the
9.13% yield for the same period in 2006. As a result, interest income on loans
increased $3.1 million. The Company's average balances of investment securities
increased $9.0 million to $34.6 million for the nine months ended September 30,
2007 from the $25.6 million for the same period in 2006. The Company's average
yield on investments increased 31 basis points to 5.21% from 4.90% for the same
period in 2006. As a result of the increase in volume and yield, interest income
on investments increased $409 thousand. The Company's average balances of
Federal funds sold increased $26.8 million to $27.8 million for the nine months
ended September 30, 2007 from the $1.1 million for the same period in 2006. The
Company's average yield on Federal funds sold increased 28 basis points to 5.11%
from 4.83% for the same period in 2006. As a result, interest income on Federal
funds sold increased $1.0 million. The overall yield on average earning assets
remained consistent at 8.75% for the nine months ended September 30, 2007,
compared to 8.74% for the same period in 2006.
Interest expense increased $4.0 million, or 63.74% to $10.4 million for the nine
months ended September 30, 2007, from $6.3 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, most notably time deposits, were increased during the period to remain
competitive with other financial institutions. The Company's average balances of
time deposits were $197.2 million for the nine months ended September 30, 2007,
up $81.5 million, or 70.41% from $115.8 million for the same period in 2006. The
average rate paid on time deposits also increased 111 basis points to 5.30% for
the nine months ended September 30, 2007 from 4.19% for the same period in 2006.
As a result, interest expense on time deposits increased $4.2 million. The
Company's average balances of interest bearing demand deposits decreased $10.7
million to $82.9 million for the nine months ended September 30, 2007 from $93.6
million for the same period in 2006. The average rate paid increased 26 basis
points to 2.85% from 2.59% 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 decreased $46 thousand. The Company's average
balances of other borrowings decreased $2.4 million to $14.9 million for the
nine months ended September 30, 2007 from $17.3 million for the same period in
2006. Rates paid on other borrowings increased 6 basis points to 6.53% for the
nine months ended September
18
30, 2007 from 6.47% 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 $110 thousand. The primary reason for the decrease in the rates paid
on other borrowings was the pay off of the Pacific State Statutory Trust I on
June 26, 2007 for $5,155,000 and the corresponding issuance of the Pacific State
Statutory Trust III on June 27, 2007 for $5,155,000. The rate paid on the
Pacific State Statutory Trust I was three-month LIBOR plus 345 basis points. The
Pacific State Statutory Trust III rate is three-month LIBOR plus 145 basis
points. The net result is a reduction of 200 basis points on $5,155,000 of other
borrowings. The overall rates paid on average interest-bearing liabilities
increased 98 basis points to 4.61% for the nine months ended September 30, 2007,
from 3.63% for the same period in 2006.
As a result of the changes noted above, the net interest margin for the nine
months ended September 30, 2007 decreased 93 basis points to 4.91%, from 5.84%
for the same period in 2006.
19
The following table presents for the nine month periods indicated the
distribution of consolidated average assets, liabilities and shareholders'
equity. It also presents the amounts of interest income from the interest
earning assets and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while nonaccrued interest thereon
is excluded from the computation of yields earned:
Nine Months Ended Nine Months Ended
September 30, 2007 September 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) $ 297,362 $ 21,148 9.51% $ 264,800 $ 18,086 9.13%
Investment securities (1) 34,621 1,348 5.21% 25,629 939 4.90%
Federal funds sold 27,846 1,065 5.11% 1,052 38 4.83%
Interest Bearing Deposits in Banks 429 14 4.36% 0 0 0.00%
--------------------- --------------------
Total average earning assets 360,258 23,575 8.75% 291,481 19,063 8.74%
Non-earning assets:
Cash and due from banks 15,649 13,210
Other assets 20,441 16,552
---------- ---------
Total average assets $ 396,348 $ 321,243
========== =========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits
Interest-bearing Demand 82,863 1,768 2.85% 93,571 1,814 2.59%
Savings 5,407 38 0.94% 6,452 42 0.87%
Time Deposits 197,246 7,817 5.30% 115,750 3,628 4.19%
Other borrowings (3) 14,886 727 6.53% 17,294 837 6.47%
--------------------- --------------------
Total average interest-bearing
liabilities 300,402 10,350 4.61% 233,067 6,321 3.63%
======== =========
Noninterest-bearing liabilities:
Demand deposits 64,609 63,534
Other liabilities 1,003 1,347
---------- ---------
Total liabilities 366,014 297,948
Shareholders' equity: 30,870 23,295
---------- ---------
Total average liabilities and shareholders'
equity $ 396,884 $ 321,243
========== =========
--------- ---------
Net interest income $ 13,225 $ 12,742
========= =========
Yield on interest-earning assets (4) 8.75% 8.74%
Cost of funding interest-earning assets 3.84% 2.90%
-------- --------
Net interest margin (5) 4.91% 5.84%
======== ========
(1) Not computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the nine month periods
ended September 30, 2007 and 2006 amounted to $1,424 thousand and $1,328
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 nine month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:
Nine Months ended September 30,
2007 over 2006 change in net interest income
Net
Change Rate Volume Mix
----------- ---------- ----------- -----------
(In thousands)
Interest Income:
Loans and leases $ 3,062 $ 746 $ 2,224 $ 92
Investment securities 409 59 329 21
Federal funds sold 1,027 2 968 57
Interest Bearing Deposits in Banks 14 0 0 14
----------- ---------- ----------- -----------
Total interest income $ 4,512 $ 807 $ 3,521 $ 183
Interest Expense:
Interest-bearing Demand (46) 182 (208) (21)
Savings (4) 3 (7) (1)
Time Deposits 4,189 959 2,554 675
Other borrowing (110) 8 (117) (1)
----------- ---------- ----------- -----------
Total interest expense 4,029 1,153 2,223 653
----------- ---------- ----------- -----------
Net interest income $ 483 ($ 345) $ 1,298 ($ 470)
=========== ========== =========== ===========
(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 $260 thousand in provision for
loan losses for the nine month period ended September 30, 2007, a decrease of
$10 thousand or 3.7% from $270 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 nine months ended September 30, 2007, total
non-interest income increased $172 thousand or 9.51% to $2.0 million, up from
$1.8 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 slight decrease in service charge
income.
Other fee income increased $260 thousand as a result of increases in mortgage
referral fees due to an increase in Commercial Real Estate loan referral
activity primarily during the first half of 2007 and then decreasing during the
third quarter.
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
21
the gain on sale of loans decreased $81 thousand or 35.53% to $147 thousand,
down from $228 thousand for the comparable period in 2006.
The slight 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
$7 thousand or 1.07% to $646 thousand, down from $653 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
nine months ended September 30, 2007 was $8.4 million compared to $7.6 million
for the same period in 2006, representing an increase of $771 thousand or
10.09%. This increase reflects increases in salaries and benefits of $208
thousand or 5.14% which are indicative of the additions to staff for the Hayward
office opened in September 2007 and of expanded branch operations in line with
their respective growth. The increase in occupancy and furniture and equipment
expense of $179 thousand is also primarily a result of the opening of the
Hayward office. The increase in other expense of $384 thousand is primarily the
result of $255 increased expenses associated with the growth of the Company and
the opening of the Hayward branch. The additional increase in other expense of
$129 thousand represents the recognition of the unamortized origination costs as
a result of the redemption of the Trust Preferred Securities in June of 2007.
These Trust Preferred Securities were redeemed on the first available call date
in order to reissue new Trust Preferred Securities at a lower interest rate. The
following table sets forth a summary of non-interest expense for the nine months
periods ended September 30, 2007 and 2006:
Nine Months Ended
September 30, September 30,
(In thousands) 2007 2006
Non-interest Expense:
Salaries & Benefits $ 4,252 $ 4,044
Occupancy 855 665
Furniture and Equipment 524 535
Other Expense 2,781 2,397
------------- -------------
Total Non-Interest Expenses $ 8,412 $ 7,641
============= =============
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, Company owned life
insurance and California Enterprise Zone credits.. 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 nine month period ended September 30,
2007 decreased slightly to 38.2% from 39.4% for the same period in 2006. The
decrease was primarily due to the increased level of income derived from
Enterprise Zone loans.
22
The following table reflects the Company's tax provision and the related
effective tax rate for the nine months periods ended September 30, 2007 and
2006:
Nine Months Ended
September 30, September 30,
(In thousands) 2007 2006
Tax Provision $ 2,498 $ 2,614
Effective Tax Rate 38.2% 39.4%
FINANCIAL CONDITION
Total assets at September 30, 2007 were $421 million, an increase of $34.4
million or 8.89%, from the $387 million at December 31, 2006. The growth in
assets was primarily in the Company's loan portfolio. Loans grew by $20.8
million or 7.23% to $308 million at September 30, 2007 from $287 million at
December 31, 2006. Federal funds sold, interest bearing deposits in other banks
and investments grew $12 million or 22.27% to $67 million at September 30, 2007
from $55 million at December 31, 2006. The growth in our assets was funded by
the net income of $4.0 million, growth in deposits of $24.5 million or 7.18% 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 $12.3 million or 16.75% to $60.9 million at September 30, 2007 from
$73.2 million at December 31, 2006. This decrease was offset by increases in
interest bearing deposits of $36.7 million or 13.72% to $304.5 million at
September 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:
September 30, December 31,
- -----------------------------------------------------------------
2007 2006
- -----------------------------------------------------------------
(In thousands)
Commercial $ 72,558 $ 57,942
Agriculture 14,742 16,873
Real estate - commercial 132,163 127,545
Real estate - construction 78,572 75,654
Installment & other 12,440 11,741
------------- -------------
310,475 289,755
Deferred loan fees and costs, net 215 41
Allowance for loan losses (2,598) (2,478)
------------- -------------
Total net loans $ 308,092 $ 287,318
------------- -------------
- -----------------------------------------------------------------
23
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 $20.8 million or 7.23%, to $308.1
million at September 30, 2007 from $287.3 million at December 31, 2006.
Commercial loans increased $14.6 million or 25.23% to $72.6 million from $57.9
million at December 31, 2006. Agricultural loans decreased by $2.1 million or
12.63% to $14.7 million from $16.9 million at December 31, 2006. Real estate -
commercial loans increased by $4.6 million or 3.62% to $132.2 million from
$127.5 million at December 31, 2006. Real estate - construction loans increased
$2.9 million or 3.86% to $78.6 million from $75.7 million at December 31, 2006.
Installment and other loans increased $700 thousand or 5.96% to $12.4 million
from $11.7 million at December 31, 2006. The portfolio mix has changed to some
extent from the prior year, with commercial and agricultural loans now
representing 28.12% of total loans compared to 25.82% in the prior year, real
estate construction loans now representing 25.31% compared to 26.11% in the
prior year, commercial real estate loans now representing 42.57% compared to
44.02% in the prior year, and installment loans now representing 4.01% compared
to 4.05% in the prior year.
Nonperforming loans. The Company had no nonperforming loans as of September 30,
2007 and December 31, 2006.
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
24
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. Thirdly, established specific
reserves are available for individual loans currently on management's watch and
high-grade loan lists. These are the estimated potential losses associated with
specific borrowers based upon the collateral and event(s) causing the risk
ratings. The third component is unallocated. This reserve is for qualitative
factors that may effect the portfolio as a whole, such as those factors
described above.
Management believes the assigned risk grades and our methods for managing risk
are satisfactory.
The provision for loan losses decreased to $260,000 for the nine months ended
September 30, 2007 compared to $270,000 for the same period in 2006. The
decrease in the amount of the provision is a direct result of the Company's
analysis of the loan portfolio and the loan loss history of the Company.
Management does not believe that there were any adverse trends indicated by the
detail of the aggregate charge-offs for any of the periods discussed.
The following table summarizes the activity in the ALL for the periods
indicated:
Three Months Ended Nine Months Ended
(In thousands) September 30, September 30,
- --------------------------------------------------------------------------------
2007 2006 2007 2006
- --------------------------------------------------------------------------------
Beginning Balance: $ 2,699 $ 2,516 $ 2,478 $ 2,356
Provision for loan losses 40 90 260 270
Charge-offs:
Commercial 142 2 142 19
Real Estate -- -- -- --
Other 1 -- 1 5
-------- -------- ------- -------
Total Charge-offs 143 2 143 24
-------- -------- ------- -------
Recoveries:
Commercial -- -- -- --
Other 2 -- 3 --
-------- -------- ------- -------
Total Recoveries 2 -- 3 --
-------- -------- ------- -------
Ending Balance $ 2,598 $ 2,604 $ 2,598 $ 2,604
======== ======== ======= =======
ALL to total loans 0.84% 0.93% 0.84% 0.93%
Net Charge-offs to average
loans-annualized 0.05% 0.00% 0.05% 0.00%
- --------------------------------------------------------------------------------
Investment securities. Investment securities increased $22.7 million to $45.8
million at September 30, 2007, from $23.1 million at December 31, 2006. Federal
funds sold decreased by $13.5 million to $18.1 million at September 30, 2007,
from $31.6 million at December 31, 2006. Interest bearing deposits in other
banks increased to $3.0 million from $0.0 at December 31, 2006.
The Company's investment in U.S. Treasury securities increased to 64.1% of the
investment portfolio at September 30, 2007 compared to 47.2% at December 31,
2006. Obligations of U.S. Agencies decreased to 18.8% of the investment
portfolio at September 30, 2007 compared to 29.2% at December 31, 2006. The
Company's investment in corporate bonds increased to 11.4% of the investment
portfolio at September 30, 2007 compared to 10.9% at December 31, 2006.
Tax-exempt municipal obligation bonds decreased to 5.7% of the investment
portfolio at September 30, 2007 compared to 12.7% at December 31, 2006. Fed
Funds sold decreased $13.5 million, or 42.7%. The overall increase was primarily
the
25
result of the additional investments in U.S. Treasury securities used to pledge
as collateral for public deposits.
Deposits. Total deposits were $365.5 million as of September 30, 2007 an
increase of $24.5 million or 7.18% 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 21.65% of total deposits from 27.0% at December 31, 2006. Money
market and savings accounts decreased to 18.6% of total deposits from 21.9% at
December 31, 2006. Time deposits increased to 60.2% of total deposits from 51.1%
at December 31, 2006.
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 June 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 nine-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 of 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 September 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 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 Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- -------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of September 30, 2007:
Total capital
(to risk weighted assets) $ 44,209 12.68% $ 27,887 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 41,325 11.85% $ 13,944 4.00% N/A N/A
Tier I capital
(to average assets) $ 41,325 10.43% $ 15,842 4.00% N/A N/A
Bank
As of September 30, 2007:
Total capital
(to risk weighted assets) $ 42,213 12.11% $ 27,887 8.00% $ 34,859 10.00%
Tier I capital
(to risk weighted assets) $ 39,410 11.31% $ 13,944 4.00% $ 20,915 6.00%
Tier I capital
(to average assets) $ 39,410 9.95% $ 15,842 4.00% $ 19,801 5.00%
To Be Well
Capitalized Under
For Capital 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, interest bearing deposits in other banks
and available-for-sale investment securities) totaled $84.5 million or 20.1% of
total assets at September 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 nine months ended September
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:
September 30, 2007
--------------------------------------------
Adjusted Net Interest
Change in Income Percent change from
Rates (in thousands) Base
--------------------------------------------
Up 200 basis points $ 19,584 10.97%
Up 150 basis points $ 19,103 8.24%
Up 100 basis points $ 18,621 5.51%
Base Scenario $ 17,648 0.00%
Down 100 basis points $ 16,743 (5.13%)
Down 150 basis points $ 16,291 (7.69%)
Down 200 basis points $ 15,838 (10.26%)
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
The Company is not aware of any material changes to the risks described in our
Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer (section 302 of the
Sarbanes-Oxley Act).
31.2 Certification of Chief Financial Officer (section 302 of the
Sarbanes-Oxley Act).
32.1 Certification of Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific State Bancorp
Date: November 14, 2007 By: /s/ Steven A. Rosso
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: November 14, 2007 By: /s/ JoAnne Roberts
JoAnne Roberts
Senior Vice President and Chief Financial Officer
31