UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 000-50323
SERVICE 1ST BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
State of California 32-0061893
- -------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 W. 10th Street, Tracy, California 95376
------------------------------------------
(Address of principal executive offices)
(209) 956-7800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check 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 issuer's classes of
common equity as of the latest practicable date: No par value common stock -
2,388,739 shares outstanding at May 14, 2008.
The Index to Exhibits is located at page 26.
INDEX
TO SERVICE 1ST BANCORP FORM 10-Q
FOR THE NINE MONTHS ENDED
MARCH 31, 2008
Page
Part I Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Controls and Procedures 20
Item 4T Controls and Procedures 20
Part II Other Information
Item 1 Legal Proceedings 20
Item 1A Risk Factors 21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits 22
Signatures 25
Exhibit
Index 26
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Service 1st Bancorp by its Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
3/31/08 12/31/07
---------------- -----------------
ASSETS
Cash and due from banks $ 3,528,293 $ 6,636,751
Federal funds sold 6,756,503 4,652,900
---------------- -----------------
Cash and cash equivalents 10,284,796 11,289,651
Certificates of deposit with other banks 191,750 486,488
Investment securities available for sale 77,870,379 82,934,208
Investment securities held to maturity 16,782,689 13,061,476
Loans, net 126,097,373 113,169,164
Bank premises and equipment, net 1,236,668 1,308,720
Cash surrender value of life insurance 3,732,125 3,698,239
Accrued interest receivable 1,496,924 1,505,244
Other assets 4,264,185 3,622,753
Other real estate owned 1,614,000 -
---------------- -----------------
$ 243,570,889 $ 231,075,943
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 25,836,066 $ 26,697,543
Money market, NOW and savings 92,778,739 86,305,530
Time deposits under $100,000 69,087,219 69,781,685
Time deposits $100,000 and over 27,025,838 19,620,888
---------------- -----------------
Total deposits 214,727,862 202,405,646
Junior subordinated debt securities 5,155,000 5,155,000
Other borrowings 4,000,000 4,000,000
Accrued interest and other liabilities 2,112,969 1,867,283
---------------- -----------------
Total liabilities 225,995,831 213,427,929
Commitments and contingencies - Notes 5 and 9 - -
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued or outstanding - -
Common stock, no par value, 30,000,000 shares
authorized; issued and outstanding, 2,388,739
shares at March 31, 2008 and December 31, 2007 16,023,738 16,023,738
Additional paid in capital 394,657 356,152
Retained earnings 1,643,355 1,484,090
Accumulated other comprehensive income, net of tax (486,692) (215,966)
---------------- -----------------
Total shareholders' equity 17,575,058 17,648,014
---------------- -----------------
$ 243,570,889 $ 231,075,943
================ =================
The accompanying notes are an integral part of these consolidated statements.
3
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the periods ending
(unaudited)
For the three months ended
--------------------------------------
03/31/08 03/31/07
--------------------------------------
Interest income:
Interest and fees on loans $ 2,349,239 $ 2,519,177
Interest on investments 1,212,109 1,019,810
Interest on Federal funds sold 63,738 56,996
Other interest income 4,073 17,955
--------------------------------------
Total interest income 3,629,159 3,613,938
Interest expense:
Interest expense on deposits 1,643,809 1,763,313
Interest on borrowings 126,638 131,334
--------------------------------------
Total interest expense 1,770,447 1,894,647
--------------------------------------
Net interest income before provision for loan losses 1,858,712 1,719,291
Provision for loan losses 303,000 -
--------------------------------------
Net interest income after provision for loan losses 1,555,712 1,719,291
Other Income:
Service charges, fees, and other income 69,515 115,395
Gain on the sale of investment securities 36,317 (7,953)
Gain on sale and servicing of loans 10,381 21,844
Referral fees on mortgage loans - 36,900
Earnings on cash surrender value of life
insurance 40,669 38,991
--------------------------------------
Total other income 156,882 205,177
Other Expenses:
Salaries and employee benefits 799,251 1,019,221
Occupancy expense 156,799 164,045
Equipment expense 88,072 75,669
Data processing and other professional fees 148,042 150,210
Office supplies and equipment 42,005 67,732
Loan department expense 43,906 20,245
Advertising and promotion 37,772 91,018
Directors fees and expenses 50,744 51,693
FDIC and state assessments 46,821 9,593
Other operating expenses 120,228 117,905
--------------------------------------
Total other expenses 1,533,640 1,767,331
--------------------------------------
Income before income taxes 178,954 157,137
Income tax expense 19,689 43,998
--------------------------------------
Net income $ 159,265 $ 113,139
======================================
Net income per share - basic $ 0.07 $ 0.05
======================================
Net income per share - diluted $ 0.07 $ 0.04
======================================
The accompanying notes are an integral part of these consolidated statements.
4
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
Accumulated
Common Stock Additional Retained Other Total
----------------------- Paid In Comprehensive Earnings Comprehensive Shareholders'
Shares Amount Capital Income (Deficit) Income Equity
---------------------------------------------------------------- ------------- -------------
Balance at January 1, 2007 2,388,739 $ 16,023,738 $ 207,144 $ 1,147,067 $ (411,115) $ 16,966,834
Surplus from options expense 149,008 149,008
Comprehensive Income:
Net income $ 337,023 337,023 337,023
Unrealized gains on securities
net of taxes of $135,135 199,368 199,368 199,368
Reclassification adjustment for
gains included in net
income, net of tax of $2,968 (4,219) (4,219) (4,219)
-------------
Comprehensive Income $ 532,172
=============
--------- ------------ ---------- ----------- ------------- -------------
Balance at December 31, 2007 2,388,739 $ 16,023,738 $ 356,152 $ 1,484,090 $ (215,966) $ 17,648,014
Surplus from options expense 38,505 38,505
Comprehensive Income:
Net income $ 159,625 159,625 159,625
Unrealized loss on securities
net of taxes of $122,292 (173,814) (173,814) (173,814)
Unrealized loss on accounting
change net of taxes of $82,686 (118,230) (118,230) (118,230)
Reclassification adjustment
for gains included in net
income, net of tax of $14,999 21,318 21,318 21,318
-------------
Comprehensive Loss $ (114,461)
=============
--------- ------------ ---------- ----------- ------------- -------------
Balance at March 31, 2008 2,388,739 $ 16,023,738 $ 356,152 $ 1,643,355 $ (486,692) $ 17,575,058
========= ============ ========== =========== ============= =============
The accompanying notes are an integral part of the financial statements.
5
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(unaudited)
2008 2007
------------ ------------
Operating activities:
Net income $ 159,265 $ 113,139
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 303,000 -
Depreciation 74,249 63,744
Amortization and accretion on securities (51,353) 1,691
Earnings on cash surrender value life insurance, net (33,886) (32,079)
Stock-based compensation expense 38,505 50,076
Gain on sale of loans - (6,737)
Loans originated for sale - (63,750)
Proceeds from loan sales - 70,487
(Gain) Loss on sale of securities, net (36,317) 7,953
Decrease (increase) in accrued interest 8,320 14,196
Increase in other assets (752,943) (298,497)
Increase (decrease) in accrued expenses and other liabilities 245,686 496,472
------------ ------------
Net cash provided by (used in) operating activities (45,474) 416,695
Investing activities:
Purchases of securities available-for-sale (22,024,310) (3,689,997)
Purchases of securities held-to-maturity (5,134,635) (2,048,633)
Proceeds from sales of available-for-sale securities 5,157,578 1,274,260
Proceeds from sales of held-to-maturity securities - 209,042
Proceeds from payments, maturities and calls of available-for-sale
securities 21,765,726 5,423,755
Proceeds from payments, maturities and calls of held-to-maturity securities 1,506,709 23,232
Net decrease (increase) in loans (14,845,209) 523,827
Certificates of deposit with other banks 294,738 191,593
Purchases of premises and equipment (2,197) (78,885)
------------ ------------
Net cash (used in) provided by investing activities (13,281,597) 1,828,194
Financing activities:
Net (decrease) increase in demand, interest-bearing deposits and
savings 5,611,732 (16,054,761)
Net increase in time deposits 6,710,484 1,475
Increase in junior subordinated debts - -
Net increase in other borrowings - -
------------ ------------
Net cash provided by (used for) financing activities 12,322,216 (16,053,286)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,004,855) (13,808,397)
Cash and cash equivalents at beginning of period 11,289,651 17,160,318
------------ ------------
Cash and cash equivalents at end of period $ 10,284,796 $ 3,351,921
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,690,532 $ 1,899,011
Income taxes $ - $ -
The accompanying notes are an integral part of the financial statements.
6
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited consolidated financial statements of Service
1st Bancorp (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include information or footnote
disclosures required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and related footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 2007. In the opinion of management, the financial
statements presented herein include all adjustments (consisting of normal
recurring accruals) necessary to present fairly, in all material respects, the
financial position of the Company as of March 31, 2008 and the Company's income
statement for the three months ended March 31, 2008 and 2007, and the statement
of cash flows for the three months ended March 31, 2008 and 2007. Operating
results for interim periods are not necessarily indicative of operating results
for an entire fiscal year.
The balance sheet as of December 31, 2007, has been derived from the
audited balance sheet as of that date.
Reclassifications
Certain reclassifications were made to prior periods presented to conform
to the current year. These reclassifications are of a normal recurring nature.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS
No. 123R), "Share-Based Payment," which addresses the accounting for stock-based
payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by issuance of such equity instruments. In January 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 107, which provides supplemental implementation guidance for SFAS No. 123R.
SFAS No. 123R eliminates the ability to account for stock-based compensation
transactions using the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and instead
generally requires that such transactions be accounted for using a
fair-value-based method. SFAS No. 123R requires the use of a valuation model to
calculate the fair value of stock-based awards. The Company has elected to use
the Black-Scholes Model for option valuation. This model incorporates various
assumptions including volatility, expected life, and interest rates. The
expected volatility is based on the historical volatility of the Company's
common stock over the most recent period commensurate with the estimated
expected life of the Company's stock options adjusted for the impact of unusual
fluctuations not reasonably expected to recur and other relevant factors. The
expected life of an award is based on historical experience and on the terms and
conditions of the stock awards granted to employees.
The assumptions used for the three-month period ended March 31, 2008 and
2007 are as follows:
WEIGHTED AVERAGE ASSUMPTIONS FOR OPTIONS GRANTED
DURING THE PERIOD ENDED:
March 31, 2008 March 31, 2007
-------------- --------------
Expected Life N/A 72 months
Stock Volatility N/A 55.58%
Risk free interest rate N/A 4.77%
Dividend yield N/A 0.00%
7
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER SHARE (EPS)
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders' by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in earnings of the entity as of March 31, 2008 and 2007.
Weighted average shares outstanding used in the computation of basic earnings
per share for the three months ended March 31, 2008 and 2007 were 2,388,739 and
2,388,739 respectively. Weighted average shares outstanding used in the
computation of diluted earnings per share for the three months ended March 31,
2008 and 2007 were 2,395,191 and 2,548,089, respectively.
NOTE 3 - SECURITIES
Securities are classified in two categories and accounted for as follows:
debt and equity securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and are measured at
amortized cost; and equity securities classified as available-for-sale and are
measured at fair value, with unrealized gains and losses, net of applicable
taxes reported in a separate component of stockholders' equity. Any gains or
losses on sales of investments are computed on a specific identification basis.
The tables below reflect the composition of investment securities,
amortized cost, unrealized gains and losses and estimated fair values as of
March 31, 2008.
The amortized cost or fair values of investment securities available-for-sale at
March 31, 2008 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
Available-for-Sale Securities:
Obligations of U.S. Government Agencies $ 18,326,044 $ 198,890 $ (161) $ 18,524,773
State and political subdivisions 27,863,552 17,927 (755,164) 27,126,315
Asset backed-securities 7,360,556 7,630 (241,086) 7,127,100
Mortgage backed-securities 22,917,505 233,411 (21,950) 23,128,966
Preferred Stock 1,530,000 - (62,664) 1,467,336
Short-term mutual funds 500,000 - (4,111) 495,889
-----------------------------------------------------------
$ 78,497,657 $ 457,858 $ (1,085,136) $ 77,870,379
===========================================================
The amortized cost or fair values of investment securities held-to-maturity at
March 31, 2008 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
Held-to-Maturity Securities:
Obligations of U.S. Government Agencies $ 3,907,538 $ 22,533 $ (17,197) $ 3,912,874
State and political subdivisions 5,181,831 - (599,606) 4,582,225
Asset backed-securities 7,537,445 20,294 (281,738) 7,276,001
Mortgage backed-securities 155,875 4,983 - 160,858
-----------------------------------------------------------
$ 16,782,689 $ 47,810 $ (898,541) $ 15,931,958
===========================================================
Securities carried at approximately $63,166,000 were pledged to secure
deposits of public funds and borrowing arrangements.
8
SERVICE 1ST BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES cont'd
The tables below reflect the composition of investment securities,
amortized cost, unrealized gains and losses and estimated fair values as of
December 31, 2007.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Available-for-Sale Securities:
U.S. Government Agencies $ 35,211,652 $ 83,394 $ (53,615) $ 35,241,431
State and political subdivisions 23,520,119 24,390 (249,204) 23,295,305
Asset backed-securities 7,173,180 1,274 (77,244) 7,097,210
Mortgage backed-securities 14,368,973 47,170 (128,003) 14,288,140
Agency preferred stock 2,530,000 - (13,767) 2,516,233
Short-term mutual funds 500,000 - (4,111) 495,889
------------ ------------ ------------ ------------
$ 83,303,924 $ 156,228 $ (525,944) $ 82,934,208
============ ============ ============ ============
Held-to-Maturity Securities:
U.S. Government Agencies $ 3,875,767 $ 353 $ (96,834) $ 3,779,286
State and political subdivisions 5,123,990 18,549 (383,769) 4,758,770
Asset backed-securities 3,898,115 14,070 (83,352) 3,828,833
Mortgage backed-securities 163,604 3,202 (6) 166,800
------------ ------------ ------------ ------------
$ 13,061,476 $ 36,174 $ (563,961) $ 12,533,689
============ ============ ============ ============
Securities carried at approximately $63,146,000 were pledged to secure
deposits of public funds and borrowing arrangements.
9
NOTE 4 - LOANS
Service 1st Bank's customers are primarily located in San Joaquin County.
At March 31, 2008, approximately 60.1% of the Bank's loans are for real estate
and construction loans and approximately 20.2% of the Bank's loans are for
general commercial users including professional, retail, and small businesses.
Consumer loans make up approximately 9.2% of the loan portfolio, leases make up
6.5% of the loan portfolio, with agricultural loans making up the remaining
4.0%. Generally, real estate loans are collateralized by real property while
commercial and other loans are collateralized by funds on deposit, business or
personal assets. Repayment is generally expected from the sale of property for
real estate loans and cash flows of the borrowers for other loans.
Major classifications of loans were:
3/31/2008 12/31/2007
------------- -------------
Construction and land development loans $ 26,922,692 $ 29,541,045
Real estate loans 50,117,076 45,002,196
Commercial loans 25,834,798 23,029,593
Leases 8,291,218 8,560,166
Agricultural loans 5,095,448 4,713,710
Consumer loans 11,811,503 4,041,061
------------- -------------
128,072,735 114,887,771
Deferred loan fees and costs (114,312) (160,557)
Allowance for loan losses (1,861,050) (1,558,050)
------------- -------------
Total net loans $ 126,097,373 $ 113,169,164
============= =============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed or incorporated by reference in this Quarterly
Report on Form 10-Q including, but not limited to, matters described in "Item 2
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations," are "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, Section 27A of the
Securities Act of 1933, as amended, and subject to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) variances in the actual versus projected growth in assets;
(2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions nationally,
regionally, and in the operating market areas of the Company and its
subsidiaries; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12) data
processing problems; (13) a decline in real estate values in the Company's
operating market areas; (14) the effects of earthquakes, floods, fires and other
natural disasters, (15) terrorism, the threat of terrorism or the impact of the
current military conflicts in Afghanistan and Iraq and the conduct of the war on
terrorism by the United States and its allies, as well as other factors. The
factors set forth under "Item 1A-Risk Factors" in the Annual Report on Form 10-K
for the year ended December 31, 2007 and other cautionary statements and
information set forth in this quarterly report on Form 10-Q should be carefully
considered and understood as being applicable to all related forward-looking
statements contained in this report, when evaluating the business prospects of
the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent reports filed with the Securities and Exchange
Commission on Forms 10-K, 10-Q and 8-K.
BUSINESS ORGANIZATION
Service 1st Bancorp (the "Company") is a California corporation and was
incorporated on January 23, 2004 to act as a holding company for Service 1st
Bank (the "Bank"). The Bank became a subsidiary of the Company effective June
26, 2004. As of March 31, 2008, the Company maintained its administrative office
in Tracy, San Joaquin County and the Bank operated three full-service offices in
the cities of Stockton, Tracy, and Lodi in San Joaquin County. The Bank offers a
full range of commercial banking services to individuals, small and medium-sized
businesses, municipalities and professionals in San Joaquin County and the
surrounding communities. On August 18, 2006, the Company established a new
subsidiary, Charter Services Group, Inc. ("Charter"). Charter assists new (de
novo) banks in filing applications for regulatory approval to organize and to
commence business as a commercial bank. Charter also provide consulting services
to new banks including formulating policies and providing other ongoing
services.
The following analysis is designed to provide a more complete
understanding of the material changes and trends related to the Company's
financial condition, results of operations, cash flows, and capital resources.
This discussion should be read in conjunction with the audited financial
statements included in Item 1 of the Annual Report on Form 10-K for the year
ended December 31, 2007.
11
CRITICAL ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Note 1 to the financial statements describes the
significant accounting policies used in the preparation of the financial
statements. A critical accounting policy is defined as one that is both material
to the presentation of the Company's financial statements and requires
management to make difficult, subjective or complex judgments that could have a
material effect on the Company's financial condition and results of operations.
Management believes that the matters described below are critical accounting
policies.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses inherent in existing loans and commitments to extend credit,
based on evaluations of collectibility and prior loss experience of loans and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentration, specific problem loans, commitments, and current
economic conditions that may affect the borrowers' ability to pay.
Summary of Financial Condition
The Company's total consolidated assets increased 5.5% from December 31,
2007 to March 31, 2008. As of March 31, 2008, total consolidated assets were
$243,713,538 compared to $231,075,943 as of December 31, 2007, and $211,903,081
at March 31, 2007. The increase in total assets from December 31, 2007 was
primarily due to an increase in loans.
Total net loans at March 31, 2008 were $126,283,373compared $113,169,164
at December 31, 2007 and $112,991,094 at March 31, 2007. This represents an
increase in net loans of 11.6% from December 31, 2007.
Cash and due from banks declined from $6,636,751 at December 31, 2007 to
$3,528,293 at March 31, 2008. The reduction in cash was used to fund loan
originations.
Total deposits were $214,727,862 at March 31, 2008 compared to
$202,405,646 at December 31, 2007 and $183,901,805 at March 31, 2007.
Noninterest-bearing DDA accounts decreased from $26,697,543 at December 31, 2007
to $25,836,066 at March 31, 2008. Money market, NOW, and savings accounts
increased to $92,778,739 at March 31, 2008 from $86,305,530 at December 31,
2007. Time deposits under $100,000 increased from $69,781,685 at December 31,
2007 to $69,087,219 at March 31, 2008. The increase in time deposits under
$100,000 was primarily from the Bank's participation in the national Certificate
of Deposit Account Registry (CDARS) program. Through this program, the Bank can
offer $50,000,000 of FDIC insurance coverage for time deposits. When the Bank
places these deposits into the CDARS network, it has the option of receiving
reciprocal deposits from other banks in the network. Reciprocal deposits from
the CDARS program increased from $61,284,069 at December 31, 2007 to $62,160,164
at March 31, 2008.
Other borrowings at March 31, 2008 and December 31, 2007 were $9,155,000.
The borrowings consist of $4,000,000 from the Federal Home Loan Bank of San
Francisco and $5,155,000 of Trust Preferred Securities.
Results of Operations
Net income for the three months ended March 31, 2008 was $159,265 compared
to $113,139 for 2007. The increase in net income for the three months ended
March 31, 2008 was from an increase in net interest income and a reduction in
operating expenses.
Basic earnings per share for the three months ended March 31, 2008 was
$0.07 per share compared to $0.05 for the three months ended March 31, 2007.
Diluted earnings per share for the three months ended March 31, 2008 and 2007
were $0.07 and $0.04, respectively.
12
Net Interest Income and Net Interest Margin
Net interest income, the primary component of the net earnings of a
financial institution, refers to the difference between the interest earned on
loans and investments and the interest paid on deposits and borrowings. Please
see the tables of average balance sheet and net interest income below.
The following table sets forth average balance sheet information, interest
income and expense, average yields and rates, and net interest income and margin
for the three months ended March 31, 2008 and 2007:
March 31, 2008 March 31, 2007
----------------------------------------- ---------------------------------------
Average Average
Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate Paid Balance Expense Rate Paid
----------------------------------------- ---------------------------------------
Interest-earning assets:
Interest-bearing deposits $ 361,459 $ 4,073 4.53% $ 1,362,409 $ 17,955 5.34%
Investments 90,795,150 1,212,109 5.37% 86,937,985 1,019,810 4.76%
Federal funds sold 7,408,934 63,738 3.46% 4,048,187 56,996 5.71%
Loans (1) (2) 122,920,439 2,349,239 7.69% 113,715,097 2,519,177 8.98%
------------------------------ ---------------------------
Total interest-earning assets 221,485,982 3,629,159 6.59% 206,063,678 3,613,938 7.11%
Allowance for possible loan losses (1,584,336) (1,429,050)
Cash and due from banks 5,316,359 3,965,829
Bank premises and equipment 1,279,933 1,410,576
Accrued interest receivable 1,187,327 1,219,983
Other assets 10,240,452 6,643,016
-------------- -------------
Total assets $ 237,925,717 $ 217,874,032
============== =============
Interest-bearing liabilities:
Demand deposits $ 58,448,640 524,948 3.61% $ 57,307,812 595,141 4.21%
Savings and money market accounts 31,347,515 201,688 2.59% 28,931,296 220,641 3.09%
Time deposits 94,367,303 917,173 3.91% 78,224,063 947,531 4.91%
Other borrowings 9,155,000 126,638 5.56% 9,237,206 131,334 5.77%
------------------------------ ---------------------------
Total interest-bearing
liabilities 193,318,458 1,770,447 3.68% 173,700,377 1,894,647 4.42%
Non-interest bearing demand
deposits 25,419,210 25,264,283
Other liabilities 1,447,517 1,704,600
-------------- -------------
Total liabilities 220,185,185 200,669,260
Shareholders' equity 17,740,532 17,204,772
-------------- -------------
Total liabilities and
shareholders' equity $ 237,925,717 $ 217,874,032
============== =============
----------- -----------
Net interest income $ 1,858,712 $ 1,719,291
=========== ===========
Net interest margin on average
interest earning assets (3) 3.38% 3.38%
1. Average loan balances include average deferred loan fees of $143,886 and
$211,479 for the three months ended March 31, 2008 and 2007, respectively.
2. Interest on loans includes fees of $45,303 and $62,848 for the three month
periods ended March 31, 2008 and 2007, respectively.
3. Net interest margin is computed by dividing net interest income by total
average earning assets.
All average balances have been computed using daily balances.
13
Net interest income for the three months ended March 31, 2008 was
$1,858,712 compared to $1,719,291for 2007. Average interest-earning assets for
the three months ended March 31, 2008 were $221,485,982 compared to $206,063,678
during the same three months of 2007. The Federal Reserve started lowering
interest rates beginning in September of 2007. The prime rate has dropped from
8.25% in September 2007 to 5.25% at March 31, 2008. As a result of the Federal
Reserve's action, the yield earned on average interest-earning assets during the
first quarter of 2008 was 6.59% compared to 7.11% during the same quarter of
2007. The average rate paid on interest bearing-liabilities decreased from 4.42%
for the first quarter of 2007 to 3.68% during the first quarter of 2008. While
the yield earned on interest earning assets declined from March 2007, the net
interest margin remained steady.
Allowance and Provision for Loan Losses
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring,
and established formal lending policies. Additionally, the Bank contracts with
an outside source to periodically review the existing loan portfolio.
Management believes its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for profitability
and growth. Management strives to reduce credit losses by continuing its
emphasis on credit quality in the loan approval process, active credit
administration, and regular monitoring. Management has implemented a loan review
and grading system that functions to continually assess the credit risk inherent
in the loan portfolio.
In extending credit and commitments to borrowers, the Bank generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flows or from proceeds from the sale of selected
assets of the borrowers. The Bank's requirement for collateral and/or guarantees
is determined on a case-by-case basis in connection with management's evaluation
of the creditworthiness of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, income-producing
properties, residences, and other real property.
Construction loans and other real estate secured loans comprised 60.1% of
total loans outstanding at March 31, 2008. Although management believes such
loans have no more than the normal risk of collectibility, a substantial decline
in the economy in general, or a decline in real estate values in the Company's
primary operating market areas in particular, could have an adverse impact on
the collectibility of such loans. In addition, such an occurrence could result
in an increase in loan losses and an increase in the provision for loan losses,
which could adversely affect the Company's future prospects, results of
operations, overall profitability, and the market price of the Company's common
stock.
The provision for loan losses for the three months ended March 31, 2008
was $303,000 compared to $0 during the same quarter of 2007. At March 31, 2008,
the allowance for loan losses was $1,861,050 compared to $1,558,050 at December
31, 2007 and $1,429,050 at March 31, 2007. The ratio of allowance for loan
losses to gross loans was 1.30% at March 31, 2008 compared to 1.36% at December
31, 2007 and 1.25% at March 31, 2007. The allowance for loan losses is adjusted
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions. Additional
provisions will be added as new loans are placed on the books in an amount
necessary to support the risks inherent in the portfolio.
14
The following table summarizes the changes in the allowances for loan
losses arising from loans charged-off, recoveries on loans previously
charged-off, and additions to the allowance which have been charged to operating
expenses and certain ratios relating to the allowance for loan losses.
For the three months ended March 31,
2008 2007
---------------- ----------------
Outstanding Loans:
Average for the Period $ 122,920,439 $ 113,715,097
End of the Period 128,072,735 114,589,604
Allowance For Loan Losses:
Balance at Beginning of Year 1,558,050 1,429,050
Actual Charge-Offs:
Commercial - -
Consumer - -
Real Estate - -
---------------- ----------------
Total Charge-Offs - -
---------------- ----------------
Less Recoveries:
Commercial - -
Consumer - -
Real Estate - -
---------------- ----------------
Total Recoveries - -
---------------- ----------------
Net Loans Charged-Off (Recoveries) - -
Provision for Loan Losses 303,000 -
---------------- ----------------
Balance at End of Period $ 1,861,050 $ 1,429,050
================ ================
Ratios:
Net Loans Charged-Off (Recoveries) to Average Loans 0.00% 0.00%
Allowance for Loan Losses to Total Loans 1.45% 1.25%
Net Loans Charged-Off (Recoveries) to Beginning
Allowance for Loan Losses 0.00% 0.00%
Net Loans Charged-Off (Recoveries) to Provision for Loan
Losses 0.00% N/A
Allowance for Loan Losses to Nonperforming Loans 205.66% 401.37%
Nonaccrual Loans, Loans Past Due 90 Days and OREO
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of collection.
Loans are charged off when, in the opinion of management, collection appears
unlikely. There were nonaccrual loans of $814,493 at March 31, 2008, $356,042 at
March 31, 2007, and $2,006,029 at December 31, 2007.
At March 31, 2008, there were loans totaling $4,300,674 that were
considered impaired or troubled debt restructurings compared to $356,042 at
March 31, 2007 and $2,006,029 at December 31, 2007. These loans were delinquent
and placed on nonaccrual, but management currently believes that there will be
no material losses on these loans. The loans were placed on nonaccrual to defer
future income recognition until the delinquent payments have been received.
During the first quarter of 2008, the Bank foreclosed on a delinquent loan. The
current net realizable value of the foreclosed property at March 31, 2008 is
$1,614,000. There were no loan concentrations in excess of 10% of total loans
not otherwise disclosed as a category of loans as of March 31, 2008 or December
31, 2007. Management is not aware of any potential problem loans, which were
accruing and current at March 31, 2008 or December 31, 2007, where serious doubt
exists as to the ability of the borrower to comply with the present repayment
terms. There was no other real estate owned at March 31, 2008 and December 31,
2007.
15
Other Income
Other income for the three months ended March 31, 2008 was $156,822
compared to $205,177 for the same period during 2007. The Bank offers fixed rate
commercial real estate loans through a third party lender. The Bank receives
fees for packaging the loans provided to the third party lender. The loans are
funded by and become assets of the third party lender. The fees on such loans
for the three months ended March 31, 2008 were $0 compared to $36,900 for the
same quarter in 2007. The Bank originates loans through various government
guarantee programs. The guaranteed portion of these loans can be sold in the
secondary market. Gains on loans sold in the secondary market and the fees for
servicing of these loans for the three months ended March 31, 2008 were $10,381
compared to $21,844 during the same period in 2007.
Other Expense
Salaries and employee benefits for the three months ended March 31, 2008
were $799,251 compared to $1,019,221 for the three months ended March 31, 2007.
The reduction in salaries and employee benefits was from a reduction of 8
employees through attrition and layoffs.
Occupancy and equipment expense for the three months ended March 31, 2008
was $244,871 compared to $239,714 for the same period of 2007.
Data processing and other professional fees expense was $148,042 for the
three months ended March 31, 2008 compared to $150,210 for the three months
ended March 31, 2007.
Loan department expense for the three months ended March 31, 2007 was
$43,906 compared to $20,245 for the same period of 2007. During the first
quarter of 2008, the Company foreclosed on real estate securing collateral for
one loan. The increase in costs are related to foreclosure expenses of $32,045.
Capital Resources
Total shareholders' equity at March 31, 2008 was $17,575,058 compared to
$17,648,014 December 31, 2007. The primary changes in shareholders' equity were
net income for the three months ended March 31, 2008 of $159,265, an increase in
additional paid in capital of $38,505 related to stock-based compensation, and a
decrease in accumulated other comprehensive income (net of tax of $270,726).
The Company and the Bank are subject to regulations issued by the Board of
Governors of the Federal Reserve System and the FDIC, which require maintenance
of a certain level of capital. Under the regulations, capital requirements are
based upon the composition of an institution's asset base and the risk factors
assigned to those assets. The guidelines characterize an institution's capital
as being "Tier 1" capital (defined to be principally shareholders' equity less
intangible assets) and "Tier 2" capital (defined to be principally the allowance
for loan losses, limited to one and one-fourth percent of gross risk weighted
assets). The guidelines require the Company and the Bank to maintain a
risk-based capital target ratio of 8%, one-half or more of which should be in
the form of Tier 1 capital.
16
The following table shows the Company's and the Bank's actual capital
amounts and ratios at March 31, 2008 and December 31, 2007, as well as the
minimum capital ratios for capital adequacy under the regulatory framework
(dollar amounts are in thousands).
To be well-
capitalized under
For capital adequacy prompt corrective
Actual purposes action provisions
------------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ------------ ----- ---------- -----
As of March 31, 2008:
Company:
Total capital (to risk weighted assets) $ 25,073 13.3% $ 14,900 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) $ 23,212 12.4% $ 7,450 4.0% N/A N/A
Tier 1 capital (to average assets) $ 23,212 9.8% $ 9,493 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $ 23,012 12.4% $ 14,900 8.0% $ 18,624 10.0%
Tier 1 capital (to risk weighted assets) $ 21,151 11.4% $ 7,450 4.0% $ 11,175 6.0%
Tier 1 capital (to average assets) $ 21,151 9.0% $ 9,418 4.0% $ 11,772 5.0%
As of December 31, 2007:
Company:
Total capital (to risk weighted assets) $ 24,574 14.7% $ 13,334 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) $ 23,016 13.8% $ 6,667 4.0% N/A N/A
Tier 1 capital (to average assets) $ 23,016 9.8% $ 9,422 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $ 22,423 13.5% $ 13,334 8.0% $ 16,668 10.0%
Tier 1 capital (to risk weighted assets) $ 20,825 12.5% $ 6,667 4.0% $ 10,001 6.0%
Tier 1 capital (to average assets) $ 20,825 8.9% $ 9,375 4.0% $ 11,719 5.0%
The Bank met the "well capitalized" capital ratio measures at both March
31, 2008 and December 31, 2007.
Liquidity
Liquidity management refers to the Company's ability to provide funds on
an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at March 31, 2008 and December 31, 2007 were approximately
$42,677,929 and $38,038,672, respectively. Such loan commitments relate
primarily to revolving lines of credit and other commercial loans and to real
estate construction loans. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured
borrowings. At March 31, 2008, consolidated liquid assets totaled $27,980,736 or
11.48% of total assets compared to $36,075,272 or 15.61% of total assets on
December 31, 2007. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $41,300,000 with correspondent
banks. At March 31, 2008, the Company had $41,300,000 available under these
credit lines. Additionally, Service 1st Bank is a member of the FHLB. At March
31, 2008, Service 1st Bank could have arranged for up to $17,454,796 in secured
borrowings from the FHLB. These borrowings are secured by pledged mortgage
loans. At March 31, 2008, the Company had advances, borrowings and commitments
(including letters of credit) outstanding of $4,000,000, leaving $13,454,796
available under these FHLB secured borrowing arrangements. Service 1st Bank also
has informal agreements with various other banks to sell participations in
loans, if necessary. The Company serves primarily a business and professional
customer base and, as such, its deposit base is susceptible to economic
fluctuations. Accordingly, management strives to maintain a balanced position of
liquid assets and borrowing capacity to volatile and cyclical deposits.
17
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise.
Service 1st Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions. Service 1st Bank can also pledge
securities to borrow from the FRB and the FHLB. The principal cash requirements
of the Company are for expenses incurred in the support of administration and
operations.
Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company and the Bank indirectly through its effect on
market rates of interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects the Company's and the Bank's
capital adequacy because loan growth in inflationary periods can increase at
rates higher than the rate that capital grows through retention of earnings,
which the Company may generate in the future. In addition to its effects on
interest rates, inflation directly affects the Company by increasing operating
expenses. The effects of inflation were not material to the Company's results of
operations during the periods ending March 31, 2008 and 2007.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company applies
the same credit policies to commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of March 31, 2008 and
December 31, 2007, commitments to extend credit and standby letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and standby
letters of credit were $42,677,929 and $38,038,672 at March 31, 2008 and
December 31, 2007, respectively. As a percentage of gross loans and leases these
off-balance sheet items represent 33.27% and 33.13%, respectively.
The Company has certain ongoing commitments under operating leases. The
minimum commitment under these operating leases for 2008 is $470,247.
Effects of Terrorism
The terrorist actions on September 11, 2001 and thereafter and the
conflicts in Afghanistan and Iraq have had significant adverse effects upon the
United States economy. Whether the terrorist activities in the future and the
actions of the United States and its allies in combating terrorism on a
worldwide basis will adversely impact the Company and the extent of such impact
is uncertain. Such economic deterioration could adversely affect the Company's
future results of operations by, among other matters, reducing the demand for
loans and other products and services offered by the Bank, increasing
nonperforming loans and the amounts reserved for loan losses, and causing a
decline in the Company's stock price.
Website Access
Information regarding the Company, the Bank, and Charter may be obtained
from the Company's website at www.service1stbank.com. Copies of the Company's
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and Section 16 reports by Company insiders, including exhibits and
amendments thereto, are available free of charge on the Company's website as
soon as they are published by the Securities and Exchange Commission through a
link to the Edgar reporting system maintained by the Securities and Exchange
Commission. To access Company filings, select "Go to Service 1st Bancorp" at the
bottom of the Company website page, then select "Click here to view Service 1st
Bancorp SEC Filings", followed by selecting "Continue to view SEC Filings" to
view or download copies of reports including Form 10-K, 10-Q or 8-K, or select
"Click here to view Section 16 Reports," followed by selecting "Continue to view
Section 16 Reports," to view or download reports on Forms 3, 4 or 5 of insider
transactions in Company securities.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The types of market risk exposures generally faced in the banking industry
include interest rate risk, liquidity risk, equity price risk, foreign currency
risk, and commodity price risk. Due to the nature of our operations, foreign
currency and commodity price risk are not significant to us. See "Management's
Discussion and Analysis of Financial Condition and Operations - Liquidity" for a
discussion of our liquidity risk. Our interest rate risk and equity market price
risk are described below.
Interest Rate Risk
The Company manages its interest rate risk within an overall asset and
liability management framework that includes attention to credit risk, liquidity
risk, and capital structure. A principal objective of asset/liability management
is to manage the sensitivity of net interest income to changing interest rates.
Asset and liability management activity is governed by a policy reviewed and
approved annually by the Board of Directors. The Board of Directors has
delegated the administration of this policy to the Funds Management Committee, a
committee of the Board of Directors, which is comprised of senior executive
management, and four independent directors. Two common measures used to monitor
interest rate risk are economic value interest rate sensitivity and forecasted
net interest income rate sensitivity.
Economic Value Interest Rate Sensitivity
Interest rate sensitivity is computed by estimating percentage changes in
the economic value of our equity over a range of potential yield curve shocks.
Economic value sensitivity is defined as the economic value of our assets less
the economic value of our liabilities plus or minus the economic value of
off-balance sheet items. The economic value of each asset, liability and
off-balance sheet item is its discounted present value of expected cash flows.
Discount rates are based on implied forward market rates of interest, adjusted
for assumed shock scenario interest rate changes. The following table shows our
projected percentage change in economic value sensitivity for parallel yield
curve shocks as of the dates indicated relative to the value if wholesale market
rates follow implied forward rates.
Projected change in economic value
----------------------------------
Change in interest rates March 31, 2008 December 31, 2007
- -------------------------------- -------------- -----------------
100 basis point rise (3.45)% (3.28)%
100 basis point decline 2.17% 1.61%
The economic value of portfolio equity sensitivity from March 31, 2008 to
December 31, 2007 has shifted due to changes in wholesale rates, a change in the
composition of customer loans, leases, investments, and deposits, and shortened
wholesale borrowing maturities.
Forecasted Net Interest Income Interest Rate Sensitivity
The impact of interest rate changes on the next 12 months' net interest
income is measured using income simulation. The various products in our balance
sheet are modeled to simulate their income (and cash flow) behavior in relation
to interest rate movements. Income for the next 12 months is calculated using
the implied forward curve and for immediate and sustained yield curve shocks.
19
The income simulation model includes various assumptions about the
repricing behavior for each product and new business volumes and pricing
behaviors. Many of our assets are floating rate loans, which would subsequently
reprice in response to changes in market interest rates with the repricing being
the same extent as the change in the underlying contracted index. Our Liquid
Gold account deposit products are assumed to reprice gradually in response to
wholesale rate changes. The following table shows our projected percentage
change in 12 month net interest income as a consequence of parallel yield curve
shocks from the implied forward curve:
Projected change in net interest income
---------------------------------------
Change in interest rates March 31, 2008 December 31, 2007
- ------------------------------ -------------- -----------------
100 basis point rise 0.21% 0.09%
100 basis point decline (0.05)% 0.07%
Net interest income sensitivity from March 31, 2008 to December 31, 2007
evolved from a slightly asset-sensitive position to a relatively neutral
position.
Equity Market Price Risk
We are not exposed to equity market risk through our investments in
stocks. The only stocks owned are 9,716 shares of FHLB of San Francisco and 400
shares of Pacific Coast Bankers' Bank. These stocks are not actively traded on
any exchange, but their market value exceeds their cost.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 ("Exchange Act") Rules 13a-15(e)
and 15d-15(e)) was carried out under the supervision and with the participation
of the Company's Chief Executive Officer, Chief Financial Officer and other
members of the Company's senior management as of the end of the period covered
by this quarterly report on Form 10-Q. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures as in effect are effective in ensuring that the information required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) to allow
timely decisions regarding required disclosure, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) Internal Control Over Financial Reporting
An evaluation of any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)),
that occurred during the Company's fiscal quarter ended March 31, 2008, was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer, Chief Financial Officer and other members of the
Company's senior management. The Company's Chief Executive Officer and Chief
Financial Officer concluded that no change identified in connection with such
evaluation has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 4T. Controls and Procedures
Not Applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 2008, the Registrant's bank subsidiary, Service 1st Bank, was
served with a Summons and Complaint, which was filed on May 1, 2008 in the
Superior Court of the State of California in the County of Sacramento, Case No.
34-2008 -00009879, by Plaintiff, Regent Hotel LLC, a California limited
liability company and subsidiary of Regent Development, Inc., a California
corporation. The full details of the lawsuit are included in the Company's Form
8-K filed with the Securities and Exchange Commission on May 15, 2008. After
evaluating the potential loss related to this loan, the Bank increased its
reserve for possible loan loss by $186,000 which is reflected in the
Consolidated Statement of Income for the three months ended March, 31, 2008.
20
Item 1A. Risk Factors
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(2.1) Plan of Reorganization and Merger Agreement (included
in Annex A) incorporated by reference from the
Registrant's Form S-4EF, Registration No. 333-104244,
filed with the Securities and Exchange Commission on
April 1, 2003.
(3.1) Articles of Incorporation, as amended, incorporated by
reference from the Registrant's Form 10-QSB for the
quarter ended September 30, 2005, filed with the
Securities and Exchange Commission on November 10,
2005.
(3.2) Bylaws, as amended, incorporated by reference from the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on July 23, 2007.
(4.1) Specimen form of certificate for Service 1st Bancorp
common stock incorporated by reference from
Registrant's Form 10-QSB for the quarterly period ended
September 30, 2003, filed with the Securities and
Exchange Commission on November 14, 2003.
(4.2) Trust Preferred Security Indenture dated August 17,
2006 between Service 1st Bancorp and Wells Fargo Bank,
National Association, incorporated by reference from
the Registrant's Form 10-Q for the quarterly period
ended June 30, 2007, filed with the Securities and
Exchange Commission on August 13, 2007.
(4.3) Trust Preferred Security Amended and Restated
Declaration of Trust dated August 17, 2006 between
Service 1st Capital Trust I and Wells Fargo Bank,
National Association, incorporated by reference from
the Registrant's Form 10-Q for the quarterly period
ended June 30, 2007, filed with the Securities and
Exchange Commission on August 13, 2007.
(4.4) Trust Preferred Security Guarantee Agreement dated
August 17, 2006 between Service 1st Bancorp and Wells
Fargo Bank, National Association, incorporated by
reference from the Registrant's Form 10-Q for the
quarterly period ended June 30, 2007, filed with the
Securities and Exchange Commission on August 13, 2007.
21
(4.5) Trust Preferred Security Junior Subordinated Debt
Security dated August 17, 2006 between Service 1st
Bancorp and Wells Fargo Bank, National Association,
incorporated by reference from the Registrant's Form
10-Q for the quarterly period ended June 30, 2007,
filed with the Securities and Exchange Commission on
August 13, 2007.
(4.6) Trust Preferred Security Trust Preferred Security
Certificate dated August 17, 2006 between Service 1st
Capital Trust I and Wells Fargo Bank, National
Association, incorporated by reference from the
Registrant's Form 10-Q for the quarterly period ended
June 30, 2007, filed with the Securities and Exchange
Commission on August 13, 2007.
(10.1) Lease agreement dated May 3, 2002, related to 2800 West
March Lane, Suite 120, Stockton, CA 95219 incorporated
by reference from the Registrant's Form S-4EF,
Registration No. 333-104244, filed with the Securities
and Exchange Commission on April 1, 2003.
(10.2) Lease agreement dated April 13, 1999 and amendment
thereto dated June 17, 1999, related to 60 West 10th
Street, Tracy, CA 95376, incorporated by reference from
the Registrant's Form S-4EF, Registration No.
333-104244, filed with the Securities and Exchange
Commission on April 1, 2003.
(10.3)* 1999 Service 1st Bancorp Stock Option Plan, Amendment
No. 1 thereto, and related forms of Incentive and
Nonstatutory Stock Option Agreements entered into with
executive officers and directors, incorporated by
reference from the Registrant's Form S-8, Registration
No. 333-107346, filed with the Securities and Exchange
Commission on July 25, 2003.
(10.4) Agreement dated July 27, 1999 with BancData Solutions,
Inc. for service bureau and data processing services,
incorporated by reference from the Registrant's Form
S-4EF, Registration No. 333-104244, filed with the
Securities and Exchange Commission on April 1, 2003.
(10.5) Agreement with Financial Marketing Services dated
February 1, 2000, incorporated by reference from the
Registrant's Form S-4EF, Registration No. 333-104244,
filed with the Securities and Exchange Commission on
April 1, 2003.
(10.6)* Service 1st Bank 401(k) Profit Sharing Plan and Trust
Summary Plan Description, dated January 1, 2000,
incorporated by reference from the Registrant's Form
S-4EF, Registration No. 333-104244, filed with the
Securities and Exchange Commission on April 1, 2003.
(10.7)* John O. Brooks Salary Continuation Agreement dated
September 10, 2003, incorporated by reference from the
Registrant's Form 10-KSB for the year ended December
31, 2003, filed with the Securities and Exchange
Commission on March 30, 2004.
(10.8)* Bryan R. Hyzdu Salary Continuation Agreement dated
September 10, 2003, incorporated by reference from the
Registrant's Form 10-KSB for the year ended December
31, 2003, filed with the Securities and Exchange
Commission on March 30, 2004.
(10.9)* Robert E. Bloch Salary Continuation Agreement dated
September 10, 2003, incorporated by reference from the
Registrant's Form 10-KSB for the year ended December
31, 2003, filed with the Securities and Exchange
Commission on March 30, 2004.
(10.10)* Patrick Carman Salary Continuation Agreement dated
September 10, 2003, incorporated by reference from the
Registrant's Form 10-KSB for the year ended December
31, 2003, filed with the Securities and Exchange
Commission on March 30, 2004.
(10.11)* 2004 Stock Option Plan and Forms of Incentive and
Nonstatutory Stock Option Agreements, incorporated by
reference from the Registrant's Form S-8, Registration
No. 333-116818, filed with the Securities and Exchange
Commission on June 24, 2004.
22
(10.12)* John O. Brooks Employment Agreement dated July 15,
2004, incorporated by reference from the Registrant's
Form 10-QSB, for the quarterly period ended September
30, 2004, filed with the Securities and Exchange
Commission on November 15, 2004.
(10.13)* Bryan R. Hyzdu Employment Agreement dated July 15,
2004, incorporated by reference from the Registrant's
Form 10-QSB, for the quarterly period ended September
30, 2004, filed with the Securities and Exchange
Commission on November 15, 2004.
(10.14)* Robert E. Bloch Employment Agreement dated July 15,
2004, incorporated by reference from the Registrant's
Form 10-QSB, for the quarterly period ended September
30, 2004, filed with the Securities and Exchange
Commission on November 15, 2004.
(10.15)* Patrick Carman Employment Agreement dated July 15,
2004, incorporated by reference from the Registrant's
Form 10-QSB, for the quarterly period ended September
30, 2004, filed with the Securities and Exchange
Commission on November 15, 2004.
(10.16)* Shannon Reinard Employment Agreement dated July 15,
2004, incorporated by reference from the Registrant's
Form 10-QSB, for the quarterly period ended September
30, 2004, filed with the Securities and Exchange
Commission on November 15, 2004.
(10.17) Fiserv Solutions, Inc. Agreement dated October 7, 2004,
for service bureau, data processing, and item
processing, incorporated by reference from the
Registrant's Form 10-KSB for the year ended December
31, 2004, filed with the Securities and Exchange
Commission on June 30, 2005.
(10.18) Lease agreement dated May 1, 2005, related to 49 W.
10th Street, Tracy, CA 95378 incorporated by reference
from the Registrant's Form 10-QSB for the quarterly
period ended September 30, 2005, filed with the
Securities and Exchange Commission on November 10,
2005.
(10.19) Lease agreement dated October 3, 2005, related to 1901
W. Kettleman Lane, Building A, Suite 1A and 1B, Lodi,
CA 95242, incorporated by reference from the
Registrant's Form 10-QSB for the quarterly period ended
September 30, 2005, filed with the Securities and
Exchange Commission on November 10, 2005.
(10.20)* Shannon Reinard Salary Continuation Agreement dated
August 8, 2005, incorporated by reference from
Registrant's Form 10-KSB for the year ended December
31, 2005, filed with the Securities and Exchange
Commission on March 30, 2006.
(10.21)* Bryan R. Hyzdu First Amendment dated August 8, 2005 to
Salary Continuation Agreement dated September 10, 2003,
incorporated by reference from Registrant's Form 10-KSB
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 30, 2006.
(10.22)* Bryan R. Hyzdu Second Amendment dated August 8, 2005 to
Salary Continuation Agreement dated September 10, 2003,
incorporated by reference from Registrant's Form 10-KSB
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 30, 2006.
(10.23)* Patrick Carman First Amendment dated August 8, 2005 to
Salary Continuation Agreement dated September 10, 2003,
incorporated by reference from Registrant's Form 10-KSB
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 30, 2006.
23
(10.24)* Patrick Carman Second Amendment dated August 8, 2005 to
Salary Continuation Agreement dated September 10, 2003,
incorporated by reference from Registrant's Form 10-KSB
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 30, 2006.
(10.25)* Robert E. Bloch First Amendment dated August 8, 2005 to
Salary Continuation Agreement dated September 10, 2003,
incorporated by reference from Registrant's Form 10-KSB
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 30, 2006.
(10.26)* Robert E. Bloch Second Amendment dated August 8, 2005
to Salary Continuation Agreement dated September 10,
2003, incorporated by reference from Registrant's Form
10-KSB for the year ended December 31, 2005, filed with
the Securities and Exchange Commission on March 30,
2006.
(10.27)* Director Emeritus Program approved by Board of
Directors effective June 30, 2006, incorporated by
reference from Registrant's Form 8-K, filed with the
Securities and Exchange Commission on July 7, 2006.
(10.28) Lease option exercise letter dated September 12, 2006,
related to 60 West 10th Street, Tracy, CA 95376,
incorporated by reference from Registrant's Form 10-K,
filed with the Securities and Exchange Commission on
April 2, 2007.
(10.29) Lease option exercise letter dated September 12, 2006,
related to 60 West 10th Street, Tracy, CA 95376,
incorporated by reference from Registrant's Form 10-K
for the year ended December 31, 2006, filed with the
Securities and Exchange Commission on March 14, 2007.
(10.30)* Thomas A. Vander Ploeg Employment Agreement dated
November 16, 2007, incorporated by reference from
Registrant's Form 10-K for the year ended December 31,
2007, filed with the Securities and Exchange Commission
on March 31, 2008.
(10.31) Resignation letter from Thomas A. Vander Ploeg dated
May 7, 2008, incorporated by reference from
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on May 9, 2008.
(10.32)* Thomas A. Vander Ploeg Settlement Agreement and Release
of All Claims, incorporated by reference from
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on May 15, 2008.
(14.1) Code of Ethics, incorporated by reference from the
Registrant's Form 10-K for the year ended December 31,
2003, filed with the Securities and Exchange Commission
on March 30, 2004.
(21.1) Registrant's only subsidiaries are Service 1st Bank and
Charter Services Group, Inc.
(31.1) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Service 1st Bancorp by its Chief
Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
*Denotes management compensatory plans or arrangements.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SERVICE 1ST BANCORP
Date: May 20, 2008 By: /s/ JOHN O. BROOKS
-----------------------------------------
John O. Brooks
Chief Executive Officer
(Principal Executive Officer)
Date: May 20, 2008 By: /s/ ROBERT E. BLOCH
-----------------------------------------
Robert E. Bloch
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Description Page Number
- --------- ------------------------------------------------------ -----------
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 27
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 28
32.1 Certification of Service 1st Bancorp by its Chief
Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 29
26