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, 2007
[ ] 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
incorporation or organization) Identification No.)
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, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerate filer [ ] Non-accelerated filer [X]
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 11, 2007.
The Index to Exhibits is located at page 26.
INDEX
TO SERVICE 1ST BANCORP FORM 10-Q
FOR THE THREE MONTHS ENDED
MARCH 31, 2007
PART I PAGE
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
Item 1 Legal Proceedings 21
Item 1A Risk Factors 21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits 21
SIGNATURES 25
EXHIBIT INDEX 26
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes- 27
Oxley Act of 2002
31.2 Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes- 28
Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 29
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)
ASSETS 03/31/07 12/31/06
------------- -------------
Cash and due from banks $ 3,186,921 $ 6,543,416
Federal funds sold 165,000 10,616,902
------------- -------------
CASH AND CASH EQUIVALENTS 3,351,921 17,160,318
Certificates of deposit with other banks 1,308,407 1,500,000
Investment securities available-for-sale 77,653,016 81,157,727
Investment securities held-to-maturity 7,358,956 4,985,995
Loans, net 112,991,084 113,508,174
Bank premises and equipment, net 1,404,121 1,388,980
Cash surrender value of life insurance 3,598,775 3,566,696
Accrued interest receivable 1,447,406 1,461,602
Other assets 2,789,395 2,490,898
------------- -------------
TOTAL ASSETS $211,903,081 $227,220,390
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 22,753,141 $ 33,848,426
Money market, NOW and savings 83,206,061 94,662,249
Time deposits under $100,000 54,906,436 48,409,724
Time deposits $100,000 and over 23,036,167 23,034,692
------------- -------------
TOTAL DEPOSITS 183,901,805 199,955,091
Other borrowings 9,155,000 9,155,000
Accrued interest and other liabilities 1,639,937 1,143,465
------------- -------------
TOTAL LIABILITIES 194,696,742 210,253,556
Shareholders' equity:
Common stock 16,023,738 16,023,738
Additional paid-in-capital 257,220 207,144
Retained earnings 1,260,206 1,147,067
Accumulated other comprehensive income, net of tax (334,825) (411,115)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 17,206,339 16,966,834
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $211,903,081 $227,220,390
============= =============
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
-----------------------------------------
03/31/07 03/31/06
-------------------- -------------------
Interest income:
Interest and fees on loans $ 2,519,177 $ 1,893,374
Interest on investments 1,019,810 733,638
Interest on fed funds sold 56,996 18,502
Other interest income 17,955 6,834
-------------------- -------------------
Total interest income 3,613,938 2,652,348
Interest expense:
Interest expense on deposits 1,763,313 944,117
Interest on borrowings 131,334 32,505
-------------------- -------------------
Total interest expense 1,894,647 976,622
-------------------- -------------------
Net interest income before provision for loan losses 1,719,291 1,675,726
Provision for loan losses - 45,000
-------------------- -------------------
Net interest income after provision for loan losses 1,719,291 1,630,726
Other Income:
Service charges, fees, and other income 115,395 71,425
Gain on the sale of investment securities (7,953) -
Gain on sale and servicing of loans 21,844 26,386
Referral fees on loans 36,900 -
Earnings on cash surrender value of life insurance 38,991 37,799
-------------------- -------------------
Total other income 205,177 135,610
Other Expenses:
Salaries and employee benefits 1,019,221 813,555
Occupancy expense 164,045 157,696
Equipment expense 75,669 51,342
Data processing and other professional fees 150,210 168,552
Office supplies and equipment 67,732 42,783
Loan department expense 20,245 104,086
Advertising and promotion 91,018 29,589
Directors fee and expenses 51,693 42,441
FDIC and state assessments 9,593 20,135
Other operating expenses 117,905 57,047
-------------------- -------------------
Total other expenses 1,767,331 1,487,226
-------------------- -------------------
Income before income taxes 157,137 279,110
Income tax expense 43,998 77,780
-------------------- -------------------
Net income $ 113,139 $ 201,330
==================== ===================
Net income per share - basic $ 0.05 $ 0.08
==================== ===================
Net income per share - diluted $ 0.04 $ 0.08
==================== ===================
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 Other Total
---------------------- Paid in Comprehensive Retained Comprehensive Shareholders'
Shares Amount Capital Income Earnings Income Equity
-------------------------------------------------------------------------------------------------
Balance January 1, 2006 2,386,239 $15,992,913 $ - $ 299,946 $ (718,758) $ 15,574,101
Stock options exercised 2,500 30,825 30,825
Surplus from options expense 207,144 207,144
Comprehensive income:
Net income $ 847,121 847,121 847,121
Unrealized losses
on securities
net of taxes of $217,194 308,699 - 308,699 308,699
Reclassification adjustment
for losses included in
net income, net of tax
of $743 (1,056) - (1,056) (1,056)
---------------
Comprehensive
income $ 1,154,764
===============
----------------------------------- --------------------------------------------
Balance December 31, 2006 2,388,739 16,023,738 207,144 1,147,067 (411,115) 16,966,834
Surplus from options
expense 50,076 50,076
Comprehensive
income:
Net income $ 113,139 113,139 113,139
Unrealized losses
on securities
net of taxes of $53,587 76,290 76,290 76,290
---------------
Comprehensive income $ 189,429
===============
----------------------------------- --------------------------------------------
Balance March 31, 2007 2,388,739 $16,023,738 $ 257,220 $1,260,206 $ (334,825) $ 17,206,339
=================================== ============================================
The accompanying notes are an integral part of the financial statements.
5
SERVICE 1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2007 2006
------------- -------------
Operating activities:
Net income $ 113,139 $ 201,330
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses - 45,000
Depreciation 63,744 40,038
Loss on sales of securities, net 7,953 -
Gain on sale of loans (6,737) -
Loans originated for sale (63,750) -
Proceeds from loan sales 70,487 -
Amortization and accretion on securities 1,691 70,640
Earnings on cash surrender value life insurance, net (32,079) (32,819)
Stock-based compensation expense 50,076 49,222
Decrease in accrued interest 14,196 14,778
Increase in other assets (298,497) (146,462)
Increase in accrued expenses and other liabilities 496,472 191,939
------------- -------------
Net cash provided by (used in) operating activities 416,695 433,666
Investing activities:
Purchases of securities available-for-sale (3,689,997) (2,206,413)
Purchases of securities held to maturity (2,048,633) (500,000)
Proceeds from sales of available-for-sale securities 1,274,260 -
Proceeds from sales of held-to-maturity securities 209,042 -
Proceeds from payments, maturities and calls of available-for-sale securities 5,423,755 1,984,618
Proceeds from payments, maturities and calls of held-to-maturity securities 23,232 24,912
Net decrease (increase) in loans 523,827 (13,934,694)
Proceeds from sales of loans - -
Purchase of certificates of deposit with other banks 191,593 400,000
Purchases of premises and equipment (78,885) (74,859)
------------- -------------
Net cash used by investing activities 1,828,194 (14,306,436)
Financing activities:
Net decrease in demand, interest-bearing deposits and savings (16,054,761) (12,368,802)
Net increase in time deposits 1,475 15,806,809
Options exercised - -
Net change in borrowings - 4,441,134
------------- -------------
Net cash provided by financing activities (16,053,286) 7,879,141
------------- -------------
Net increase in cash and cash equivalents (13,808,397) (5,993,629)
Cash and cash equivalents at beginning of period 17,160,318 9,024,556
------------- -------------
Cash and cash equivalents at end of period $ 3,351,921 $ 3,030,927
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,899,011 $ 1,277,719
Income taxes $ - $ 120,000
The accompanying notes are an integral part of the financial statements.
6
SERVICE 1ST BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited consolidated financial statements of Service 1st
Bancorp (the "Company") have been prepared in accordance with the instructions
to Form 10-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, 2006. 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, 2007 and the Company's income
statement for the three months ended March 31, 2007 and 2006, and the statement
of cash flows for the three months ended March 31, 2007 and 2006. Operating
results for interim periods are not necessarily indicative of operating results
for an entire fiscal year.
The balance sheet as of December 31, 2006, 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. No options were granted for
the three months ended March 31, 2007.
The assumptions used for the three-month period ended March 31, 2006 are as
follows:
WEIGHTED AVERAGE ASSUMPTIONS FOR OPTIONS GRANTED
DURING THE PERIOD ENDED:
March 31, 2006
---------------
Expected Life 72 months
Stock Volatility 55.58%
Risk free interest rate 4.77%
Dividend yield 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, 2007 and 2006. Weighted average
shares outstanding used in the computation of basic earnings per share were
2,388,739 and 2,386,239 in 2007 and 2006, respectively. Weighted average shares
outstanding used in the computation of diluted earnings per share were 2,548,089
and 2,549,433 in 2007 and 2006, 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, 2007.
The amortized cost or fair values of investment securities available-for-sale at
March 31, 2007 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------
Available-for-Sale Securities:
Obligations of U.S. Government Agencies $36,220,118 $ 52,454 $ (253,588) $36,018,984
State and political subdivisions 18,712,589 40,575 (56,101) 18,697,063
Asset backed-securities 8,490,880 8,206 (108,571) 8,390,515
Mortgage backed-securities 14,299,443 15,782 (268,771) 14,046,454
Short-term mutual funds 500,000 - - 500,000
---------------------------------------------------
$78,223,030 $ 117,017 $ (687,031) $77,653,016
===================================================
The amortized cost or fair values of investment securities held-to-maturity at
March 31, 2007 were:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
Held-to-Maturity Securities:
Obligations of U.S. Government Agencies $3,083,538 $ - $ (119,794) $2,963,744
State and political subdivisions 3,589,576 123,143 (21,540) 3,691,179
Asset backed-securities 501,537 - - 501,537
Mortgage backed-securities 184,305 532 (6) 184,831
-------------------------------------------------
$7,358,956 $ 123,675 $ (141,340) $7,341,291
=================================================
Securities carried at approximately $75,970,000 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, 2006.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ -----------
Available-for-Sale Securities:
U.S. Government Agencies $39,415,380 $ 63,385 $ (294,940) $39,183,825
State and public subdivisions 19,522,737 38,074 (74,787) 19,486,024
Asset backed-securities 7,280,691 3,946 (133,943) 7,150,694
Mortgage backed-securities 15,138,808 12,460 (314,084) 14,837,184
Short-term mutual funds 500,000 - - 500,000
----------- ----------- ------------ -----------
$81,857,616 $ 117,865 $ (817,754) $81,157,727
=========== =========== ============ ===========
Held-to-Maturity Securities:
U.S. Government Agencies $ 2,468,485 $ - $ (17,659) $ 2,450,826
State and public subdivisions 2,313,410 119,689 (12,909) 2,420,190
Asset backed-securities 14,526 - - 14,526
Mortgage backed-securities 189,574 2,567 (57) 192,084
----------- ----------- ------------ -----------
$ 4,985,995 $ 122,256 $ (30,625) $ 5,077,626
=========== =========== ============ ===========
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, 2007, approximately 65.8% of the Bank's loans are for real estate
and construction loans and approximately 21.7% of the Bank's loans are for
general commercial users including professional, retail, and small businesses.
Consumer loans make up approximately 1.3% of the loan portfolio, leases make up
7.4% of the loan portfolio, with agricultural loans making up the remaining
3.8%. 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:
3/31/2007 12/31/2006
------------- -------------
Construction and land development loans $ 33,023,028 $ 34,248,157
Real estate loans 42,374,272 43,396,795
Commercial loans 24,915,784 23,421,351
Leases 8,436,148 8,591,815
Agricultural loans 4,299,869 4,288,022
Consumer loans 1,540,503 1,225,571
------------- -------------
114,589,604 115,171,711
Deferred loan fees and costs (169,470) (234,487)
Allowance for loan losses (1,429,050) (1,429,050)
------------- -------------
Total net loans $112,991,084 $113,508,174
============= =============
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 or Plan of Operation," are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. Such forward-looking statements may contain words related to future
projections including, but not limited to, words such as "believe," "expect,"
"anticipate," "intend," "may," "will," "should," "could," "would," and
variations of those words and similar words that are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include, but are not limited to, the following: (1) variances in the
actual versus projected growth in assets; (2) return on assets; (3) loan and
lease losses; (4) expenses; (5) changes in the interest rate environment
including interest rates charged on loans, earned on securities investments and
paid on deposits; (6) competition effects; (7) fee and other noninterest income
earned; (8) general economic conditions nationally, regionally, and in the
operating market areas of the Company and its subsidiaries; (9) changes in the
regulatory environment; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
earthquakes, floods, fires and other natural disasters, (15) terrorism, the
threat of terrorism or the impact of the current military conflict in Iraq and
the conduct of the war on terrorism by the United States and its allies, as well
as other factors. Other cautionary statements and information set forth in this
report should be carefully considered and understood as being applicable to all
related forward-looking statements contained in this report, when evaluating the
business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of
this report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any
obligation to update or release any revisions to any forward-looking statements,
to report any new information, future event or other circumstances after the
date of this report or to reflect the occurrence of unanticipated events, except
as required by law. However, your attention is directed to any further
disclosures made on related subjects in our subsequent reports filed with the
Securities and Exchange Commission on Forms 10-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, 2007, 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 will also
provide consulting services to new banks including formulating policies and
providing other ongoing services.
The following analysis is designed to provide a more complete understanding
of the material changes and trends related to the Company's financial condition,
results of operations, cash flows, and capital resources. This discussion should
be read in conjunction with the financial statements included in Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2006.
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
11
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 declined 6.7% from December 31,
2006 to March 31, 2007. As of March 31, 2007, total consolidated assets were
$211,903,081 compared to $227,220,390 as of December 31, 2006, and $177,589,194
at March 31, 2006. The decline in total assets from December 31, 2006 was
primarily from a decline in noninterest-bearing DDA, which required a reduction
in Federal Funds sold from $10,616,902 at December 31, 2006 to $165,000 at March
31, 2007.
Total net loans at March 31, 2007 were $112,991,094 compared to
$113,508,174 at December 31, 2006 and $96,422,826 at March 31, 2006. This
represents a decrease in net loans of .5% from December 31, 2006.
Cash and due from banks declined from $6,543,416 at December 31, 2006 to
$3,186,921 at March 31, 2007. The reduction in cash was used to fund a portion
of the decline in noninterest-bearing DDA.
Total deposits were $183,901,805 at March 31, 2007 compared to $199,955,091
at December 31, 2006 and $154,579,674 at March 31, 2006. Noninterest-bearing
DDA accounts decreased from $33,848,426 at December 31, 2006 to $22,753,141 at
March 31, 2007. Money market, NOW, and savings accounts decreased to
$83,206,061 at March 31, 2007 from $94,662,249 at December 31, 2006. Time
deposits under $100,000 increased from $48,409,724 at December 31, 2006 to
$54,906,436 at March 31, 2007. The decline in noninterest-bearing DDA's was
primarily related to the loss of a large title company's deposit relationship.
The decline in money market, NOW, and savings accounts was primarily related to
a large client moving funds from their money market account to time deposits.
The increase in time deposits under $100,000 was primarily from the Bank's
participation in the national Certificate of Deposit Account Registry (CDARS)
program. Through this program, the Bank can offer $30,000,000 of FDIC insurance
coverage for time deposits. When the Bank places these deposits into the CDARS
network, it has the option of receiving reciprocal deposits from other banks in
the network. Reciprocal deposits from the CDARS program increased from
$42,184,035 at December 31, 2006 to $47,806,925 at March 31, 2007.
Other borrowings at March 31, 2007 and December 31, 2006 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, 2007 was $113,139 compared
to $201,330 for 2006. Income tax expense for the three months ended March 31,
2007 was $43,998 compared to $77,780 for the same time period in 2006.
Basic earnings per share for the three months ended March 31, 2007 was
$0.05 per share compared to $.08 for the three months ended March 31, 2006.
Diluted earnings per share for the three months ended March 31, 2007 and 2006
were $0.04 and $0.08, respectively.
The decline in net income for the three months ended March 31, 2007 was
primarily due to the staffing for the new Lodi branch that opened in mid-August
2006, and for Charter Services Group, Inc., increased advertising expense, and
an increase in other expenses related to the growth of the Company.
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, 2007 and 2006:
March 31, 2007 March 31, 2006
------------------------------------- ------------------------------------
Average Average
Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate Paid Balance Expense Rate Paid
------------------------------------- ------------------------------------
Interest-earning assets:
Interest-bearing deposits $ 1,362,409 $ 17,955 5.34% $ 1,231,498 $ 13,678 4.50%
Investments 86,937,985 1,019,810 4.76% 69,174,559 726,794 4.26%
Federal funds sold 4,048,187 56,996 5.71% 1,725,216 18,502 4.35%
Loans (1) (2) 113,715,097 2,519,177 8.98% 87,913,182 1,893,374 8.73%
------------------------- -------------------------
Total interest-earning assets 206,063,678 3,613,938 7.11% 160,044,455 2,652,348 6.72%
Allowance for possible loan losses (1,429,050) (1,126,299)
Cash and due from banks 3,965,829 3,578,994
Bank premises and equipment 1,410,576 632,942
Accrued interest receivable 1,219,983 798,416
Other assets 6,643,016 6,262,603
------------- -------------
Total assets $217,874,032 $170,191,111
============= =============
Interest-Bearing Liabilities:
Demand deposits $ 57,307,812 595,141 4.21% $ 69,229,031 481,150 2.82%
Savings and money market accounts 28,931,296 220,641 3.09% 17,433,300 74,800 1.74%
Time Deposits 78,224,063 947,531 4.91% 38,718,216 388,167 4.07%
Other borrowings 9,237,206 131,334 5.77% 2,488,843 32,505 5.30%
------------------------- -------------------------
Total interest-bearing liabilities 173,700,377 1,894,647 4.42% 127,869,390 976,622 3.10%
Non-interest bearing demand deposits 25,264,283 25,854,383
Other Liabilities 1,704,600 1,887,042
------------- -------------
Total liabilities 200,669,260 155,610,815
Shareholders' equity 17,204,772 14,580,296
------------- -------------
Total liabilities and shareholders'
equity $217,874,032 $170,191,111
============= =============
----------- -----------
Net interest income $1,719,291 $1,675,726
=========== ===========
Net interest margin on average
interest earning assets (3) 3.38% 4.25%
1. Average loan balances include average deferred loan fees of $211,479 and
$286,549 for the three months ended March 31, 2007 and 2006,
respectively.
2. Interest on loans includes fees of $62,848 and $49,883 for the three month
periods ended March 31, 2007 and 2006, 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, 2007 was
$1,719,291 compared to $1,675,726 for 2006. Average interest-earning assets for
the three months ended March 31, 2007 were $206,063,678 compared to $160,044,455
during the same three months of 2006. The yield earned on average
interest-earning assets during the quarter ended March 31, 2007 was 7.11%
compared to 6.72% during the same quarter of 2006. The average rate paid on
interest bearing-liabilities increased from 3.10% for the quarter ended March
31, 2006 to 4.42% during the first quarter of 2007. The increase in rates earned
on loans, investments, and paid on deposits and borrowings was a result of the
Federal Reserve Bank raising interest rates two times during the fiscal 2006
year. Also, the competition for deposits has caused higher interest expense to
attract and maintain deposits. The Bank utilized time deposits at a higher rate
to replace a portion of the decline of noninterest-bearing DDA and money market
accounts.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring,
and established formal lending policies. Additionally, the Bank contracts with
an outside source to periodically review the existing loan portfolio.
Management believes its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for profitability
and growth. Management strives to continue the historically low level of credit
losses by continuing its emphasis on credit quality in the loan approval
process, active credit administration, and regular monitoring. Management has
implemented a loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio.
In extending credit and commitments to borrowers, the Bank generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flows or from proceeds from the sale of selected
assets of the borrowers. The Bank's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences, and other real property.
Construction loans and other real estate secured loans comprise 65.8% of
total loans outstanding at March 31, 2007. 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, 2007 was
$0 compared to $45,000 during the same quarter of 2006. The allowance for loan
losses was $1,429,050 at March 31, 2007 and December 31, 2006. The ratio of
allowance for loan losses to gross loans was 1.25% at March 31, 2007 compared to
1.19% at December 31, 2006. 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,
2007 2006
------------------ ------------------
OUTSTANDING LOANS:
Average for the Period $ 113,715,097 $ 87,913,182
End of the Period 114,589,604 97,877,589
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year 1,429,050 1,123,494
Actual Charge-Offs:
Commercial - -
Consumer - -
Real Estate - -
------------------ ------------------
Total Charge-Offs - -
------------------ ------------------
Less Recoveries:
Commercial - -
Consumer - -
Real Estate - -
------------------ ------------------
Total Recoveries - -
------------------ ------------------
Net Loans Charged-Off - -
Provision for Loan Losses - 45,000
------------------ ------------------
Balance at End of Period $ 1,429,050 $ 1,168,494
================== ==================
RATIOS:
Net Loans Charged-Off (Recoveries) to Average Loans 0.00% 0.00%
Allowance for Loan Losses to Total Loans 1.25% 1.19%
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 N/A 0.00%
Allowance for Loan Losses to Nonperforming Loans 401.37% 2,338.53%
Non performing assets 356,042 49,967
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.
At March 31, 2007, there were loans totaling $356,042 that were considered
impaired or troubled debt restructurings compared to $49,967 at March 31, 2006
and $435,147 at December 31, 2006. 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. At March
31, 2007 and December 31, 2006, $267,032 and $303,320 of the non-accrual loans,
respectively, were guaranteed by the Small Business Administration. There were
no loan concentrations in excess of 10% of total loans not otherwise disclosed
as a category of loans as of March 31, 2007 or December 31, 2006. Management is
not aware of any potential problem loans, which were accruing and current at
March 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, 2007 and December 31, 2006.
15
OTHER INCOME
Other income for the three months ended March 31, 2007 was $205,177
compared to $135,610 for the same period during 2006. The Bank offers fixed rate
commercial real estate loans through third party lenders. The Bank receives fees
for the packaging of the loans provided to the third party lender. The loans are
funded by and become assets of the third party lender. The fees on such loans
for the three months ended March 31, 2007 were $36,900. There were no fees
earned during the same quarter of 2006. Service charges, fees, and other income
for the three months ended March 31, 2007 were $115,395 compared to $71,425 for
the same period of 2006. The increase in service charges, fees and other income
from 2006 to 2007 was primarily from an increase in NSF charges and a $35,000
fee earned by the Company's subsidiary, Charter Services Group, Inc.
("Charter"). There were no fees earned by Charter in 2006.
OTHER EXPENSE
Salaries and employee benefits for the three months ended March 31, 2007
were $1,019,221 compared to $813,555 for the three months ended March 31, 2006.
The increase in salaries and employee benefits during 2007 was a result of an
increase in the number of employees for the Lodi, California office which opened
in mid-August, 2006 and for Charter. There were 47 employees at March 31, 2007
compared to 37 at March 31, 2006.
Occupancy and equipment expense for the three months ended March 31, 2007
was $239,714 compared to $209,038 for the same period of 2006.
Data processing and other professional fees were $150,210 for the three
months ended March 31, 2007 compared to $168,552 for the three months ended
March 31, 2006.
Loan department expense for the three months ended March 31, 2007 was
$20,245 compared to $104,086 for the same period of 2006. When the Company sells
a government guaranteed loan it establishes a loan servicing asset, which is the
anticipated servicing over the estimated remaining term of the loans sold. If
these loans payoff early the remaining unamortized servicing asset is written
off. During the first quarter of 2006, two large SBA loans paid-off early. The
primary decline in expense is due to amortization expense for loan servicing
assets of $93,393 during the three months ended March 31, 2006. The comparable
expense for the three months ended March 31, 2007 was $14,800.
Advertising and promotion expense for the three months ended March 31, 2007
was $91,018 compared to $29,589 for the same period during 2006. The increase in
expense was due to a substantial advertising campaign to aggressively promote
the Bank and differentiate the Bank from its competition.
The remainder of the other operating expenses increased due to the growth
of the Company.
CAPITAL RESOURCES
Total shareholders' equity at March 31, 2007 was $17,206,339 compared to
$16,966,834 at December 31, 2006. The increase was primarily from the net
income for the three months ended March 31, 2007 of $113,139 and an improvement
in market value on investments, which accounted for an increase in other
comprehensive income, net of tax of $76,290.
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, 2007 and December 31, 2006, as well as the
minimum capital ratios for capital adequacy under the regulatory framework
(dollar amounts are in thousands).
To be well-
Actual For capital adequacy capitalized under
purposes prompt corrective
action provisions
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ------------ -----------
As of March 31, 2007:
Company:
Total capital (to risk weighted assets) $ 29,337 19.0% $ 12,321 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) $ 22,691 14.7% $ 6,160 4.0% N/A N/A
Tier 1 capital (to average assets) $ 22,691 10.4% $ 8,715 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $ 21,500 14.0% $ 12,273 8.0% $ 15,341 10.0%
Tier 1 capital (to risk weighted assets) $ 20,059 13.1% $ 6,137 4.0% $ 9,205 6.0%
Tier 1 capital (to average assets) $ 20,059 9.3% $ 8,608 4.0% $ 10,736 5.0%
As of December 31, 2006:
Company:
Total capital (to risk weighted assets) $ 23,956 15.3% $ 12,510 8.0% N/A N/A
Tier 1capital (to risk weighted assets) $ 22,527 14.4% $ 6,255 4.0% N/A N/A
Tier 1 capital (to average assets) $ 22,527 10.4% $ 8,673 4.0% N/A N/A
Bank:
Total capital (to risk weighted assets) $ 21,519 13.8% $ 12,510 8.0% $ 15,637 10.0%
Tier 1capital (to risk weighted assets) $ 20,028 12.8% $ 6,255 4.0% $ 9,382 6.0%
Tier 1 capital (to average assets) $ 20,028 9.3% $ 8,593 4.0% $ 10,741 5.0%
The Bank meets the "well capitalized" capital ratio measures at both March
31, 2007 and December 31, 2006.
LIQUIDITY
Liquidity management refers to the Company's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Company's liquidity position. Federal funds lines, short-term investments and
unencumbered securities, and loan repayments contribute to liquidity, along with
deposit increases, while loan funding and deposit withdrawals decrease
liquidity. The Company assesses the likelihood of projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. Commitments to fund
loans and outstanding letters of credit at March 31, 2007 and December 31, 2006
were approximately $36,796,000 and $1,207,000 and $39,365,000 and $1,242,000,
respectively. Such loan commitments relate primarily to revolving lines of
credit and other commercial loans and to real estate construction loans. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments, and short-term interest bearing deposits. At March 31,
2007, consolidated unencumbered liquid assets totaled $21,325,708 or 10.1% of
total assets compared to $33,109,460 or 14.6% of total assets on December 31,
2006. In addition to liquid assets, the Company maintains short-term lines of
credit in the amount of $45,800,000 with correspondent banks. At March 31,
2007, the Company had $45,800,000 available under these credit lines.
Additionally, the Bank is a member of the Federal Home Loan Bank ("FHLB"). At
March 31, 2007, the Bank secured borrowings from the FHLB. These borrowings are
secured by pledged mortgage loans. At March 31, 2007, the Company had advances,
borrowings and commitments outstanding of $4,000,000, leaving $13,964,531
available under the FHLB secured borrowing arrangement. 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. The
Bank has established a master repurchase agreement with two brokerage firms to
enable such transactions. The Bank can also pledge securities to borrow from the
FRB and the FHLB.
INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company and the Bank indirectly through its effect on
market rates of interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects the Company's and the Bank's
capital adequacy because loan growth in inflationary periods can increase at
rates higher than the rate that capital grows through retention of earnings,
which the Company may generate in the future. In addition to its effects on
interest rates, inflation directly affects the Company by increasing operating
expenses. The effects of inflation were not material to the Company's results of
operations during the periods ending March 31, 2007 and 2006.
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, 2007 and
December 31, 2006, 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 $38,003,000 and $40,607,000 at March 31, 2007 and
December 31, 2006, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 33.6% and 35.8%, respectively.
The Company has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results.
Certain financial institutions have elected to use special purpose vehicles
("SPV") to dispose of problem assets. The SPV is typically a subsidiary company
with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
EFFECTS OF TERRORISM
The terrorist actions on September 11, 2001 and thereafter and the conflict
with Iraq have had significant adverse effects upon the United States economy.
Whether the terrorist activities in the future and the actions of the United
States and its allies in combating terrorism on a worldwide basis will adversely
impact the Company and the extent of such impact is uncertain. Such economic
deterioration could adversely affect the Company's future results of operations
by, among other matters, reducing the demand for loans and other products and
services offered by the Bank, increasing nonperforming loans and the amounts
reserved for loan losses, and causing a decline in the Company's stock price.
WEBSITE ACCESS
Information 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
18
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.
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 Results of
Operations-Financial Condition-Liquidity and Cash Flow" 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
------------------------------------------
March 31, December 31,
Change in interest rates 2007 2006
- ------------------------ -------------------- --------------------
100 basis point rise -18.5% -15.6%
100 basis point decline 7.6% 5.2%
The economic value of portfolio equity sensitivity from December 31, 2005
to December 31, 2006 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
----------------------------------------
March 31, December 31,
Change in interest rates 2007 2006
- ------------------------ ------------------- -------------------
100 basis point rise 3.91% 4.32%
100 basis point decline 2.51% 1.12%
Net interest income sensitivity from December 31, 2005 to December 31, 2006
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 8,140 shares of FHLB of San Francisco and 400 shares
of Pacific Coast Banker's 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
Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management as
of the end of the Company's fiscal quarter ended March 31, 2007. The Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and (ii) recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms.
(b) Internal Control Over Financial Reporting
An evaluation of any changes in the Company's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that
occurred during the Company's fiscal quarter ended March 31, 2007, 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
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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 10-KSB for the year
ended December 31, 2004, filed with the Securities
and Exchange Commission on March 31, 2005.
(4.1) Specimen form of certificate for Service 1st
Bancorp common stock incorporated by reference
from Registrant's Form 10-QSB for the quarterly
period ended September 30, 2003, filed with the
Securities and Exchange Commission on November 14,
2003.
(10.1) Lease agreement dated May 3, 2002, related
to 2800 West March Lane, Suite 120, Stockton, CA
95219 incorporated by reference from the
Registrant's Form S-4EF, Registration No.
333-104244, filed with the Securities and Exchange
Commission on April 1, 2003.
(10.2) Lease agreement dated April 13, 1999 and
amendment thereto dated June 17, 1999, related to
60 West 10th Street, Tracy, CA 95376, incorporated
by reference from the Registrant's Form S-4EF,
Registration No. 333-104244, filed with the
Securities and Exchange Commission on April 1,
2003
(10.3)* 1999 Service 1st Bancorp Stock Option
Plan, Amendment No. 1 thereto, and related forms
of Incentive and Nonstatutory Stock Option
Agreements entered into with executive officers
and directors, incorporated by reference from the
Registrant's Form S-8, Registration No.
333-107346, filed with the Securities and Exchange
Commission on July 25, 2003.
21
(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.
(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.
22
(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 quarter 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 quarter 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.
(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) Private placement to an institutional
investor of approximately $5 million of trust
preferred securities, incorporated by reference
from Registrant's Form 8-K, filed with the
Securities and Exchange Commission on August 23,
2006.
(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, filed with the
Securities and Exchange Commission on April 2,
2007.
(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.
23
(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 14, 2007 By: /s/ JOHN O. BROOKS
---------------------------------
John O. Brooks
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2007 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