UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) Of the Securities Exchange
Act of 1934
For Quarter Ended March 31, 2005
Commission file number: 0-49892
PACIFIC STATE BANCORP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
California 61-1407606
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1899 W. March Lane, Stockton, CA 95207
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (209) 870-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126-2 of the Exchange Act.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant issuer's
classes of common stock, as of the latest practicable date:
Title of Class Shares outstanding as of April 27, 2005
-------------- ---------------------------------------
Common Stock 3,458,472
No Par Value
PART I
ITEM 1. FINANCIAL STATEMENT
Pacific State Bancorp and Subsidiary
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except share amounts) March 31, December 31,
2005 2004
------------ ------------
Assets
- ------
Cash and due from banks $ 15,830 $ 12,108
Federal funds sold 16,732 --
------------ ------------
Total cash and cash equivalents 32,562 12,108
Interest -bearing deposits in banks 5,000 6,100
Investment securities - available for sale (amortized cost of $18,236
in 2005 and $17,407 in 2004) 18,162 17,482
Loans, less allowance for loan losses of $2,276 in 2005 and $2,214 in
2004 196,817 199,535
Premises and equipment, net 9,658 9,748
Company owned life insurance 4,312 4,246
Accrued interest receivable and other assets 5,315 5,142
------------ ------------
Total assets $ 271,826 $ 254,361
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 50,316 $ 51,980
Interest bearing 190,118 171,781
------------ ------------
Total deposits 240,434 223,761
Other borrowings 4,000 4,000
Subordinated debentures 8,764 8,764
Accrued interest payable and other liabilities 924 1,006
------------ ------------
Total liabilities 254,122 237,531
Commitments and contingencies
Shareholders' equity:
Preferred stock - no par value; 2,000,000 shares authorized;
None issued and outstanding -- --
Common stock - no par value; 24,000,000 shares authorized;
issued and outstanding 3,454,922 in 2005 and 3,448,042 in 2004 . 7,174 7,159
Retained earnings 10,574 9,626
Accumulated other comprehensive (loss) income, net of tax (44) 45
Total shareholders' equity 17,704 16,830
Total liabilities and shareholders' equity $ 271,826 $ 254,361
============ ============
See notes to unaudited condensed consolidated financial statements
2
Pacific State Bancorp and Subsidiary
Condensed Consolidated Statement of Income
(Unaudited)
For the Three Months Ended March 31,
---------------------------
2005 2004
(In thousands, except per share amounts) ------------ ------------
Interest income:
Interest and fees on loans $ 3,647 $ 2,851
Interest on Federal funds sold 58 2
Interest on investment securities 223 103
------------ ------------
Total interest income 3,928 2,956
Interest expense:
Interest on deposits 935 495
Interest on subordinated debentures 121 60
Interest on borrowings 19 33
------------ ------------
Total interest expense 1,075 588
------------ ------------
Net interest income before provision
for loan Losses 2,853 2,368
Provision for loan losses 60 90
------------ ------------
Net interest income after
provision for loan losses 2,793 2,278
------------ ------------
Non-interest income:
Service charges 181 253
Gain on sale of loans 370 54
Other income 218 164
------------ ------------
Total non-interest income 769 471
Non-interest expenses:
Salaries and employee benefits 1,117 850
Occupancy 197 155
Furniture and equipment 132 113
Other expenses 586 587
------------ ------------
Total non-interest expenses 2,032 1,705
------------ ------------
Income before provision for income taxes 1,530 1,044
Provision for income taxes 582 386
------------ ------------
Net income $ 948 $ 658
============ ============
Basic earnings per share 3/31/04 Press Release =.$19?? $ 0.27 $ 0.20
============ ============
Diluted earnings per share $ 0.24 $ 0.18
============ ============
Weighted average common shares outstanding 3,452,601 3,384,710
Weighted average common and common equivalent shares outstanding 3,898,120 3,650,882
See notes to unaudited condensed consolidated financial statements
3
Pacific State Bancorp and Subsidiary
Statement of Cash Flows
(Unaudited)
For the Three Months
Ended
(In thousands) March 31,
---------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 948 $ 658
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 90
Deferred loan origination fees and costs, net 51 69
Depreciation and amortization 112 96
Increase in Company owned life insurance, net (66) (47)
Decrease in accrued interest receivable and other assets (324) (180)
(Decrease) increase in accrued interest payable and other
liabilities 17 279
------------ ------------
Net cash provided by operating activities 843 965
------------ ------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits in banks 1,100 (100)
Purchases of available-for-sale investment securities (1,000) (747)
Proceeds from principal repayments from available-for-sale securities 200 189
Net (decrease) increase in loans 2,607 (12,620)
Proceeds from sale of premises and equipment (2) --
Purchases of premises and equipment How can purchases not be (16)? 17 (891)
------------ ------------
Net cash provided by (used in) investing activities 2,922 (14,169)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing and savings deposits 16,983 (4,247)
This or time deposits off $1k
Net (decrease) increase in time deposits (309) 9,792
Proceeds from the issuance of subordinated debentures -- 3,609
------------ ------------
Proceeds from stock options exercised 15 59
------------ ------------
Net cash provided by financing activities 16,689 9,213
Increase (decrease) in cash and cash equivalents 20,454 (3,991)
Cash and cash equivalents at beginning of year 12,108 12,773
------------ ------------
Cash and cash equivalents at end of period $ 32,562 $ 8,782
============ ============
See notes to unaudited condensed consolidated financial statements
4
Pacific State Bancorp and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Pacific State Bancorp is a holding company with one bank subsidiary, Pacific
State Bank, (the "Bank"), and two unconsolidated subsidiary guarantor trusts,
Pacific State Statutory Trusts I and II. Pacific State Bancorp commenced
operations on June 24, 2002 when it acquired all the then issued and outstanding
shares of Pacific State Bank under a plan of reorganization approved by the
Bank's shareholders on May 9, 2002. The Bank is a California state chartered
bank. The Bank is a member of the Federal Reserve System. The Bank's primary
source of revenue is providing loans to customers who are predominately small to
middle-market businesses and individuals within the bank's service area. Pacific
State Statutory Trusts I and II are unconsolidated, wholly owned statutory
business trusts formed in June 2002 and March 2004, respectively for the
exclusive purpose of issuing and selling trust preferred securities.
The Bank has engaged since November 2, 1987 in a general commercial banking
business, primarily in Stockton and San Joaquin County, and offers commercial
banking services to residents and employers of businesses in the Bank's service
area, including professional firms and small to medium sized retail and
wholesale businesses and manufacturers. The Company as of March 15, 2005 had 65
employees, including 28 officers. The Bank does not engage in any non-bank lines
of business and its business is not to any significant degree seasonal in
nature. The Bank's Administrative headquarters are located at 1899 W. March
Lane, Stockton, California. The Bank operates seven branches with its main
office located at 6 So. El Dorado Street, in Stockton, California; additional
branches are located elsewhere in Stockton and in the communities of Angels
Camp, Arnold, Groveland, Modesto and Tracy, California. In 2004, the company
opened a Loan Production Office in Castro Valley, California.
2. BASIS OF PRESENTATION AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
Pacific State Bancorp (the "Company") at March 31, 2005 and December 31, 2004,
and the results of its operations for the three month periods ended March 31,
2005 and 2004 and its cash flows for the three month periods ended March 31,
2005 and 2004 in conformity with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission ("SEC").
Certain disclosures normally presented in the notes to the consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States for annual financial statements have been omitted.
These interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2004 Annual Report to Shareholders. The results of
operations for the three month period ended March 31, 2005 may not necessarily
be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
amounts and results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in the near
term relate to the determination of the allowance for loan and lease losses, the
provision for income taxes and the estimated fair value of investment
securities.
Management has determined that all of the commercial banking products and
services offered by the Company are available in each branch of the Bank, that
all branches are located within the same economic environment and that
management does not allocate resources based on the performance of different
lending or transaction activities. Accordingly, the Company and it's subsidiary
operate as one business segment. No customer accounts for more than 10% of the
revenue for the Bank or the Company.
5
On September 16, 2004, the Company's Board of Directors approved a two-for-one
stock split to shareholders of record at the close of business on September 30,
2004, effective on the same date. All shares outstanding, stock option and per
share data in the consolidated financial statements have been retroactively
restated to give effect to the stock split.
3. LOANS
Outstanding loans are summarized below:
March 31, December 31,
2005 2004
------------ ------------
(In thousands)
Commercial $ 40,901 $ 40,562
Agricultural 14,615 15,007
Real estate - commercial mortgage 103,220 109,895
Real estate - construction 26,810 22,965
Installment 13,398 13,121
------------ ------------
198,944 201,550
Deferred loan origination costs, net 149 199
Allowance for loan losses (2,276) (2,214)
------------ ------------
$ 196,817 $ 199,535
============ ============
4. COMMITMENTS AND CONTINGENCIES
The Company is party to claims and legal proceedings arising in the ordinary
course of business. In the opinion of the Company's management, the ultimate
liability with respect to such proceedings will not have a materially adverse
effect on the financial condition or results of operations of the Company as a
whole.
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $44,754,000 and $41,868,000 and stand-by
letters of credit of $402,000 and $498,000 at March 31, 2005 and December 31,
2004, respectively. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2005.
Approximately $21,492,000 of the loan commitments outstanding at March 31, 2005
are for real estate loans and are expected to fund within the next twelve
months. The remaining commitments primarily relate to revolving lines of credit
or other commercial loans, and many of these are expected to expire without
being drawn upon. Therefore, the total commitments do not necessarily represent
future cash requirements. Each potential borrower and the necessary collateral
are evaluated on an individual basis. Collateral varies, but may include real
property, bank deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized. The deferred liability related to the Company's stand-by letters
of credit was not significant at March 31, 2005 and December 31, 2004.
6
5. EARNINGS PER SHARE COMPUTATION
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if outstanding stock options
were exercised. Diluted earnings per share is computed by dividing net income by
the weighted average common shares outstanding for the period plus the dilutive
effect of options
6. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income or loss. Other comprehensive income or loss, net of taxes,
is comprised of the unrealized gains or losses on available-for-sale investment
securities. The following table shows comprehensive income and its components
for the periods indicated:
Three Months Ended
---------------------------
(In thousands) 3/31/2005 3/31/2004
------------ ------------
Net Income $ 948 $ 658
Other Comprehensive (Loss) Income:
Change in unrealized gain on
available for sale securities (89) 58
Reclassification adjustment -- --
------------ ------------
Total Other Comprehensive (Loss)
Income (89) 58
Total Comprehensive Income 859 716
============ ============
7. ACCOUNTING PRONOUCEMENTS
Share-Based Payments
In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123
(R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. In April 2005, the
Securities and Exchange Commission adopted a rule that defers the compliance
date of FAS 123(R) from the first reporting period beginning after June 15, 2005
to the first fiscal year beginning after December 15, 2005, or the fiscal year
beginning January 1, 2006 for the Company. Management has not completed its
evaluation of the effect that FAS 123 (R) will have, but believes that the
effect will be consistent with its previous pro forma disclosures.
8. STOCK-BASED COMPENSATION
At March 31, 2005, the Company has two stock-based employee compensation plans,
the Pacific State Bancorp 1997 Stock Option Plan and the Pacific State Bancorp
1987 Stock Option Plan (the "Plans"). The Company accounts for these plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under these
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Pro forma adjustments to the Company's consolidated net earnings and earnings
per share are disclosed during the years in which the options become vested.
7
For the Three Months Ended
March 31
---------------------------
2005 2004
------------ ------------
(In thousands, except share amounts)
Net income, as reported $ 948 $ 658
Deduct: Total stock-based employee
compensation expense determined
under the fair value method
for all awards, net of related tax effects 66 66
------------ ------------
Pro forma net income, in thousands $ 882 $ 592
============ ============
Basic earning per share - as reported $ 0.26 $ 0.20
Basic earning per share - pro forma $ 0.26 $ 0.18
Diluted earnings per share - as reported $ 0.24 $ 0.18
Diluted earnings per share - pro forma $ 0.23 $ 0.17
The fair value of each option is estimated on the date of the grant using an
option-pricing model with the following assumptions:
Weighted average fair value of options granted
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life in years
There were no options grants made during the three-month period ending March 31,
2005 and 2004
8
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others (1) significant
increases in competitive pressures in the financial services industry; (2)
changes in the interest rate environment resulting in reduced margins; (3)
general economic conditions, either nationally or regionally, maybe less
favorable than expected, resulting in among other things, a deterioration in
credit quality; (4) changes in the regulatory environment; (5) loss of key
personnel; (6) fluctuations in the real estate market; (7) changes in business
conditions and inflation; (8) operational risks including data processing
systems failures and fraud; and (9) changes in the securities market. Therefore
the information set forth herein should be carefully considered when evaluating
the business prospect of Pacific State Bancorp.
When the Company uses in this Quarterly Report the words "anticipate",
"estimate", "expect", "project", "intend, "commit", "believe" and similar
expressions, the Company intends to identify forward-looking statements. Such
statements are not guarantees of performance and are subject to certain risks,
uncertainties and assumptions, including those described in this Quarterly
Report. Should one or more of the uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected, projected, intended, committed or
believed. The future results and stockholder values of the Company may differ
materially from those expressed in these forward-looking statements. Many
factors that will determine these results and values are beyond the Company's
ability to control or predict. For those statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
INTRODUCTION
Pacific State Bancorp (the "Company") is traded on the OTC bulletin Board under
the symbol of "PSBC". The following discussion and analysis sets forth certain
statistical information relating to the company as of March 31, 2005 and
December 31, 2004 and the three month periods ended March 31, 2005 and 2004. The
discussion should be read in conjunction with condensed consolidated financial
statements and related notes included elsewhere in this 10-Q and the
consolidated financial statements and notes thereto included in Pacific State
Bancorp's Annual Report filed on form 10-K for the year ended December 31, 2004.
CRITICAL ACCOUNTING POLICIES
There have been no changes to the Company's critical accounting policies from
those discussed in the Company's 2004 Annual Report to Shareholders' on Form
10-K.
OVERVIEW
The Company's net income increased $290 thousand or 44.1% to $948 thousand for
the three month period ended March 31, 2005 from $658 thousand for the same
period in 2004. The primary contributors to the increase in net income for the
first three months of the 2005 were a $485 thousand increase in net interest
income and a $298 thousand increase in non-interest income. The increases were
mostly offset by an increase in salaries and benefits of $267 thousand, an
increase in occupancy expense of $42 thousand and an increase in the provision
for income taxes of $196 thousand.
Total assets at March 31, 2005 were $272 million, an increase of $17 million or
7%, from the $254 million at December 31, 2004. The growth in assets was funded
by growth in the Company's deposits. Deposits grew $17 million or 7.5% to $240
million at March 31, 2005 from $224 million at December 31, 2004.
The annualized return on assets was 1.42% for the three months ended March 31,
2005 compared to 1.31% for the same period in 2004. The annualized return on
equity was 22.11% for the three months ended March 31, 2005 compared to 19.49%
for the same period in 2004.
9
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2005
Net interest income before provision for loan losses. Net interest income, on a
non tax equivalent basis was $2.9 million for the three months ended March 31,
2005, an increase of $485 thousand or 20.5% from $2.4 million for the same
period in 2004. The increase in net interest income was primarily attributed to
volume increase in the company's average loan and investment balances supported
by slight increases in the yields earned . These increases were partially offset
by the increases in both the level of average interest bearing liabilities and
the increase in the average rates paid.
Interest income increased $972 thousand or 32.9% to $3.9 million for the three
months ended March 3, 2005 from $2.9 million for the same period in 2004. The
increase in income was primarily attributed to volume increases in investment
and loan balances as well as a slight increase in yield, particularly in
investment securities. The Company's average investment balances were $18.2
million for the three months ended March 31, 2005, up $6.4 million, or 54.2%,
from $11.8 million for the same period in 2004. The Company's average loan
balances were $203.2 million for the three months ended March 31, 2005, up $41.6
million or 25.7% from $161.6 million for the same period in 2004. The Company's
average loan yield was 7.28% for the three months ended March 31, 2005, up 20
basis points from the 7.08% yield for the same period in 2004. As a result of
the change in mix of the Company's earning assets, the yield on average earning
assets was up slightly to 6.70% for the three months ended March 31, 2005, from
the 6.65% yield for the same period in 2004
Interest expense increased $487 thousand, or 82.8% to $1.1 million for the three
months ended March 31, 2005, up from $588 thousand for the same period in 2004.
The increase is primarily attributed to both the increase in interest-bearing
deposit volumes and in the rates paid on interest bearing liabilities. The
Company's average balances of interest bearing liabilities were $193.3 million
for the three months ended March 31, 2005, up $44.3 million, or 29.7% from
$149.0 million for the same period in 2004. Additionally the average rate paid
on interest-bearing deposits increased 68 basis points to 2.26% for the three
months ended March 31, 2005 from 1.58% for the same period in 2004.
As a result of the changes noted above, the net interest margin for the three
months ended March 31, 2005 decreased 46 basis points or 8.6% to 4.86%, down
from 5.32% for the same period in 2004.
10
The following table presents for the three month periods indicated the
distribution of consolidated average assets, liabilities and shareholders'
equity. It also presents the amounts of interest income from the interest
earning assets and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while nonaccrued interest thereon
is excluded from the computation of yields earned:
For the Three Months Ended For the Three Months Ended
March 31, 2005 March 31, 2004
-------------------------------- ----------------------------------
(In thousands) Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- -------- --------- --------- ---------
Assets
Loans (1) (2) $ 203,198 $ 3,647 7.28% $ 161,577 $ 2,851 7.08%
Investment Securities (1) 18,191 195 4.35% 11,790 94 3.20%
Federal Funds Sold 10,460 58 2.25% 1,001 3 1.20%
Interest-bearing Deposits in Banks 6,088 28 1.87% 4,018 8 0.80%
Total Average Earning Assets $ 237,937 $ 3,928 6.70% $ 178,386 $ 2,956 6.65%
--------- --------- -------- --------- --------- ---------
Cash & Due From Banks $ 13,450 $ 9,340
Premises and Equipment 9,710 9,252
Other Assets 11,376 7,060
Less: Allowance for Loan Losses (2,247) (1,702)
Total Average Assets $ 270,226 $ 202,336
========= =========
Liabilities and Shareholders Equity
Interest Bearing Liabilities:
Interest Bearing Demand $ 101,019 $ 542 2.18% $ 50,348 $ 102 .0.81%
Savings 7,286 9 0.50% 6,059 3 0.20%
Time Deposits 72,264 384 2.16% 81,839 390 1.91%
Other Borrowings (3) 12,764 140 4.45% 10,787 93 3.46%
--------- --------- -------- --------- --------- ---------
Total Average Interest Bearing Liabilities (4) 193,333 $ 1,075 2.26% 149,033 $ 588 1.58%
--------- ---------
Non-Interest Bearing Demand 55,229 39,241
Other Liabilities 4284 474
Shareholder Equity 17,380 13,588
--------- ---------
Total Average Liabilities and Shareholders Equity $ 270,226 $ 202,336
========= =========
Net Interest Income and Net Interest Margin (5) $ 2,853 4.86% $ 2,368 5.32%
========= =========
(1) Not Computed on a tax-equivalent basis.
(2) Loan fees included in loan interest income for the three month periods
ended March 31, 2005 and 2004 amounted to $177 thousand and $241 thousand,
respectively.
(3) For the purpose of this schedule the interest expense related to the
Company's junior subordinated debentures is included in other borrowings.
(4) Total interest expense divided by the average balance of total earning
assets.
(5) Net interest income divided by the average balance of total earning assets
11
The following table sets forth changes in interest income and interest expense
for the three month periods indicated and the effect of the change attributable
to variance in volume, rates and the combination of volume and rates on the
relative changes of volume and rates.
2005 over 2004 change in net interest income
-------------------------------------------------------
Net
(In thousands) Change Rate Volume Mix
---------- ---------- ---------- ----------
Interest Income:
Loans and leases $ 796 $ 49 $ 734 $ 13
Investment securities 156 16 120 20
Federal funds sold 20 10 4 5
---------- ---------- ---------- ----------
Total interest income $ 972 $ 75 $ 859 $ 38
Interest Expense:
Interest-bearing Demand 440 168 103 169
Savings 6 4 1 1
Time (6) 45 (46) (5)
Other Borrowings 47 25 17 5
---------- ---------- ---------- ----------
Total interest expense $ 487 $ 243 $ 75 $ 170
---------- ---------- ---------- ----------
Net interest income $ 485 $ (167) $ 784 $ (132)
========== ========== ========== ==========
(1) The volume change in net interest income represents the change in average
balance divided by the previous year's rate.
(2) The rate change in net interest income represents the change in rate
divided by the previous year's average balance.
(3) The mix change in net interest income represents the change in average
balance multiplied by the change in rate.
Provision for loan losses. The Company recorded $60 thousand in provision for
loan losses for the three month period ended March 31, 2005, down $30 thousand
or 33.3%, from the $90 thousand provision for the same period in 2004.
Management assesses its loan quality monthly to maintain an adequate allowance
for loan losses. Based on the information currently available, management
believes that the allowance for loan losses is adequate to absorb potential
risks in the portfolio. However, no assurance can be given that the Company may
not sustain charge-offs which are in excess of the allowance in any given
period. The Company's loan portfolio composition and non-performing assets are
further discussed under the financial condition section below.
Non-Interest Income. During the three months ended March 31, 2005, total
non-interest income increased $298 thousand or 63.3% to $769 thousand, up from
$471 thousand for the comparable period in 2004. The increase in non interest
income was primarily the result of the increase in gain on sale of loans and the
increase in other non-interest income. These increases were offset by a decrease
in service charge income.
The increase in gain on sale of loan income is due to the timing of the sale of
the loans. Income derived from the gain on sale of loans increased $316 thousand
or 585.2% to $370 thousand, up from $54 thousand for the comparable period in
2004.
The increase in other non-interest income is the result of an increase in
mortgage referral fees. Other non-interest income increased $54 thousand or
32.9% to $218 thousand, up from $164 thousand for the comparable period in 2004.
The decrease in service charge income is the result of higher earnings rate paid
on accounts charged though account analysis for certain depositors for charges
based on their volume of activity, as well as a decrease in the volume of
account overdrafts.] Service charge income decreased $72 thousand or 28.5% to
$181 thousand, down from $253 thousand for the comparable period in 2004.
Non-Interest Expense. Non-interest expense consists of salaries and related
employee benefits, occupancy and equipment expenses, professional fees,
appraisal fees, directors' fees, postage, stationary and supplies expenses,
telephone expenses, data processing expenses, advertising and promotion expense
and other operating expenses. Non-interest expense for the three months ended
March 31, 2005 was $2.0 million compared to $1.7 million for the same period in
12
2004, representing an increase of $327 thousand or 19.2%. Increases in salaries
and benefits are indicative of the additions to staff to expand branch
operations in line with their respective growth. The increase in occupancy
expense is attributable to the addition of a loan production facility in Alameda
County. The following table sets forth a summary of non-interest expense for the
periods indicated.
Three Months Ended
March 31,
-------------------------
(In thousands) 2005 2004
---------- ----------
Non-interest Expense:
Salaries & Benefits $ 1,117 $ 850
Occupancy 197 155
Furniture and Equipment 132 113
Other Expense 586 587
Total Non-Interest Expense $ 2,032 $ 1,705
========== ==========
Income Taxes. The Company's provision for income taxes includes both federal
income and state franchise taxes and reflects the application of federal and
state statutory rates to the Company's net income before taxes. The principal
difference between statutory tax rates and the Company's effective tax rate is
the benefit derived from investing in tax-exempt securities and Company owned
life insurance. Increases and decreases in the provision for taxes reflect
changes in the Company's net income before tax.
The following table reflects the Company's tax provision and the related
effective tax rate for the periods indicated.
Three Month Period Ended March 31,
- ----------------------------------
(In thousands)
2005 2004
---------- ----------
Tax Provision $ 582 $ 386
Effective Tax Rate 38.0% 36.9%
LOAN PORTFOLIO COMPOSITION
The Company concentrates its lending activities primarily within Calaveras, San
Joaquin, Stanislaus, Tuolumne and Alameda Counties.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral.
13
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated:
March 31, December 31,
2005 2004
---------- ----------
(In thousands)
Commercial $ 40,901 $ 40,562
Agriculture 14,615 15,007
Real estate -commercial mortgage 103,220 109,895
Real estate-construction 26,810 22,965
Installment 13,398 13,121
Deferred loan origination costs, net 149 199
Allowance for Loan Losses (2,276) (2,214)
Total Net Loans $ 196,817 $ 199,535
---------- ----------
The Company continues to manage the mix of its loan portfolio consistent with
its identity as a community bank servicing Northern California and the Central
Valley. Net portfolio loans have decreased $2.7 million or 1.35%, to $196.8
million at March 31, 2005 from $199.5 million at December 31, 2004. Commercial
loans have increased $339 thousand or .84% from $40.6 million at December 31,
2004. Agricultural Loans decreased $392 thousand or 2.6% from $15.0 million at
December 31, 2004. Real estate commercial mortgage loans decreased $6.7 million
or 6.1% from $110.0 million at December 31, 2004. Real estate construction loans
increased $3.8 million or 16.7% from $23.0 million at December 31, 2004.
Installment loans increased $277 thousand or 2.1% from $13.1 million at December
31, 2004. The portfolio mix remains stable as compared with the mix of a year
ago, with commercial and agricultural loans of approximately 28.2% of total
loans, real estate construction loans of 13.6%, commercial real estate loans at
52.4%, and 6.8% for installment loans at March 312, 2005.
Nonperforming loans. Nonperforming loans at March 31, 2005 were $174, 000.
There were no nonperforming loans at December 31, 2004. Nonperforming loans as a
percentage of total loans were 0.09% at March 31, 2005. Management believes
that these nonperforming loan balances will be satisfactorily resolved without
significant loss to the Company.
Analysis of allowance for loan losses. In determining the amount of the
Company's Allowance for Loan Losses ("ALL"), management assesses the
diversification of the portfolio. Each credit is assigned a credit risk rating
factor, and this factor, multiplied by the dollars associated with the credit
risk rating, is used to calculate one component of the ALL. In addition,
management estimates the probable loss on individual credits that are receiving
increased management attention due to actual or perceived increases in credit
risk.
The Company makes provisions to the ALL on a regular basis through charges to
operations that are reflected in the Company's statements of income as a
provision for loan losses. When a loan is deemed uncollectible, it is charged
against the allowance. Any recoveries of previously charged-off loans are
credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio. Similarly, the adequacy of the ALL and the
level of the related provision for possible loan losses is determined on a
judgment basis by management based on consideration of a number of factors
including (i) economic conditions, (ii) borrowers' financial condition, (iii)
loan impairment, (iv) evaluation of industry trends, (v) industry and other
concentrations, (vi) loans which are contractually current as to payment terms
but demonstrate a higher degree of risk as identified by management, (vii)
continuing evaluation of the performing loan portfolio, (viii) monthly review
and evaluation of problem loans identified as having a loss potential, (ix)
monthly review by the Board of Directors, (x) off balance sheet risks and (xi)
assessments by regulators and other third parties. Management and the Board of
Directors evaluate the allowance and determine its desired level considering
objective and subjective measures, such as knowledge of the borrowers'
businesses, valuation of collateral, the determination of impaired loans and
exposure to potential losses.
14
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and other qualitative factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's ALL. Such agencies may require the Company to provide additions to
the allowance based on their judgment of information available to them at the
time of their examination. There is uncertainty concerning future economic
trends. Accordingly it is not possible to predict the effect future economic
trends may have on the level of the provision for possible loan losses in future
periods.
The adequacy of the ALL is calculated upon three components. First is the credit
risk rating of the loan portfolio, including all outstanding loans and leases.
Every extension of credit has been assigned a risk rating based upon a
comprehensive definition intended to measure the inherent risk of lending money.
Each rating has an assigned risk factor expressed as a reserve percentage.
Central to this assigned risk factor is the historical loss record of the
Company. Secondly, established specific reserves are available for individual
loans currently on management's watch and high-grade loan lists. These are the
estimated potential losses associated with specific borrowers based upon the
collateral and event(s) causing the risk ratings. The third component is
unallocated. This reserve is for qualitative factors that may effect the
portfolio as a whole, such as those factors described above.
Management believes the assigned risk grades and our methods for managing risk
are satisfactory.
The provision for loan losses decreased to $60,000 for 2005 versus $90,000 in
2004. The decrease in the amount of the provision is a direct result of the
Company's analysis of the loan portfolio and the loan loss history of the
Company. Management does not believe that there were any trends indicated by the
detail of the aggregate charge-offs for any of the periods discussed.
The following table summarizes the activity in the ALL for the periods
indicated.
Three Months Ended
(In thousands) March 31,
-------------------------
2005 2004
---------- ----------
Beginning Balance: 2,213 1,653
Provision for loan losses 60 90
Charge-offs:
Commercial 0 0
Real Estate 0 0
Other 0 0
---------- ----------
Total Charge-offs 0 0
---------- ----------
Recoveries:
Commercial 3 0
Other 0 0
---------- ----------
Total Recoveries 3 0
---------- ----------
Ending Balance 2,276 1,743
========== ==========
ALL to total loans 1.14% 1.05%
Net Charge-offs to average
loans-annualized 0.0% 0.0%
Investment securities and Federal Funds. Combined investment securities, Federal
funds sold and interest-bearing deposits in other banks increased $17.3 million
to $40.9 million at March 31, 2005, from $23.6 million at December 31, 2004.
Federal funds sold increased to $16.7 million at March 31, 2005 as funding from
the growth in deposits was invested in Federal funds. There were no Federal
funds sold at December 31, 2004.
The Company's investment in U.S. Treasury securities decreased to 31.2% of the
investment portfolio at March 31, 2005 compared to 34.1% at December 31, 2004.
Obligations of U.S. Agencies decreased to 15.0% of the investment portfolio at
March 31, 2005 compared to 18.0% at December 31, 2004. The Company's investment
in corporate bonds increased to 13.1% of the investment portfolio at March 31,
2005 compared to 1.8% at December 31, 2004. Tax-exempt municipal obligations
15
bonds decreased to 40.7% of the investment portfolio at March 31, 2005 compared
to 46.2 at December 31, 2004.
Deposits. Total deposits were $240.4 million as of March 31, 2005, an increase
of $16.6 million or 7.42% from the December 31, 2004 balance of $223.8 million.
The Company continues to manage the mix of its deposits consistent with its
identity as a community bank serving the financial needs of its customers.
Non-interest bearing demand deposit and interest bearing checking deposits
decreased to 28.1% of total deposits form 32.9% at December 31, 2004. Money
market and savings accounts increased to 42.68% of total deposits from 35.9% at
December 31, 2004. Time deposits decreased to 29.3% of total deposits from 31.2%
at December 31, 2004
CAPITAL RESOURCES
Capital adequacy is a measure of the amount of capital needed to sustain asset
growth and act as a cushion for losses. Capital protects depositors and the
deposit insurance fund from potential losses and is a source of funds for the
investments the Company needs to remain competitive. Historically, capital has
been generated principally from the retention of earnings.
Overall capital adequacy is monitored on a day-to-day basis by the Company's
management and reported to the Company's Board of Directors on a quarterly
basis. The Bank's regulators measure capital adequacy by using a risk-based
capital framework and by monitoring compliance with minimum leverage ratio
guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1" capital
(defined as principally comprising shareholders' equity and the qualifying
portion of subordinated debentures) and "Tier 2" capital (defined as principally
comprising Tier 1 capital and the remaining qualifying portion of subordinated
debentures and the qualifying portion of the ALL).
The minimum ratio of total risk-based capital to risk-adjusted assets, including
certain off-balance sheet items, is 8%. At least one-half (4%) of the total
risk-based capital is to be comprised of Tier 1 capital; the balance may consist
of debt securities and a limited portion of the ALL.
As of March 31, 2005 the most recent notification by the Federal Depository
Insurance Corporation ("FDIC") categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must meet the minimum ratios as set forth below. There are
no conditions or events since that notification that management believes have
changed the Bank's category. Management believes that the Company met all of its
capital adequacy requirements.
16
The Company's risk-based capital ratios are presented below.
For Capital
Actual Adequacy Purposes
--------------------- ---------------------
Minimum Minimum
Amount Ratio Amount Ratio
---------- -------- ---------- --------
Company
As of March 31, 2005:
Total capital
(to risk weighted assets) $ 27,665 12.1% $ 18,241 8.00%
Tier I capital
(to risk weighted assets) $ 22,604 9.9% $ 9,120 4.00%
Tier I capital
(to average assets) $ 22,604 8.4% $ 10,721 4.00%
As of December 31, 2004:
Total capital
(to risk weighted assets) $ 26,704 12.6% $ 16,875 8.00%
Tier I capital
(to risk weighted assets) $ 21,262 10.1% $ 8,437 4.00%
Tier I capital
(to average assets) $ 21,262 8.3% $ 10,245 4.00%*
* The leverage ratio consists of Tier I capital divided by quarterly average
assets. The minimum leverage ratio is 3 percent for banking organizations that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality and in general, are considered top-rated banks. For all
other institutions the minimum rate is 4%.
LIQUIDITY
The purpose of liquidity management is to ensure efficient and economical
funding of the Company's assets consistent with the needs of the Company's
depositors and, to a lesser extent, shareholders. This process is managed not by
formally monitoring the cash flows from operations, investing and financing
activities as described in the Company's statement of cash flows, but through an
understanding principally of depositor and borrower needs. As loan demand
increases, the Company can use asset liquidity from maturing investments along
with deposit growth to fund the new loans.
With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal-funds sold ,
available-for-sale investment securities, and principal and interest payments on
loans. With respect to liabilities, liquidity is provided by core deposits,
shareholders' equity and the ability of the Company to borrow funds and to
generate deposits.
Because estimates of the liquidity needs of the Company may vary from actual
needs, the Company maintains a substantial amount of liquid assets to absorb
short-term increases in loans or reductions in deposits. As loan demand
decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity. Therefore, there
is some correlation between financing activities associated with deposits and
investing activities associated with lending. The Company's liquid assets (cash
and due from banks, federal funds sold, interest bearing deposits and
available-for-sale investment securities) totaled $55.6 million or 20.4% of
total assets at March 31, 2005 compared to $35.5 million or 13.9% of total
assets at December 31, 2004. The Company expects that its primary source of
liquidity will be earnings of the Company, acquisition of core deposits, and
wholesale borrowing arrangements.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates such as interest rates, commodity prices and equity
prices. As a financial institution, the Company's market risk arises primarily
from interest rate risk exposure. Fluctuation in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest earnings
assets and interest bearing liabilities, other than those that possess a short
term to maturity. Based upon the nature of its operations, the Company is not
subject to foreign currency exchange or commodity pricing. However, the
Company's commercial real estate loan portfolio, concentrated primarily in
Northern California, is subject to risks associated with the local economies.
The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic value of the Company while maintaining
adequate liquidity and managing exposure to interest rate risk deemed by
management to be acceptable. Management believes an acceptable degree of
exposure to interest rate risk results from management of assets and liabilities
through using floating rate loans and deposits, maturities, pricing and mix to
attempt to neutralize the potential impact of changes in market interest rates.
The Company's profitability is dependent to a large extent upon its net interest
income, which is the difference between its interest income on interest earning
assets, such as loans and securities, and interest expense on interest bearing
liabilities, such as deposits, trust preferred securities and other borrowings.
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest earning assets reprice differently than its
interest bearing liabilities. The Company manages its mix of assets and
liabilities with the goal of limiting exposure to interest rate risk, ensuring
adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control its interest rate risk exposure in a
manner that will allow for adequate levels of earnings and capital over a range
of possible interest rate environments. The Company has adopted formal policies
and practices to monitor and manage interest rate exposure. As part of this
effort, the Company measures interest rate risk utilizing both an internal asset
liability measurement system as well as employing independent third party
reviews to confirm the reasonableness of the assumptions used to measure and
report the Company's interest rate risk, enabling management to make any
adjustments necessary.
Interest rate risk is managed by the Company's Asset Liability
Committee ("ALCO"), which includes members of senior management and several
members of the Board of Directors. The ALCO monitors interest rate risk by
analyzing the potential impact on interest income from potential changes in
interest rates and considers the impact of alternative strategies or changes in
balance sheet structure. The ALCO manages the Company's balance sheet in part to
maintain the potential impact on net interest income within acceptable ranges
despite changes in interest rates. The Company's exposure to interest rate risk
is reviewed on at least a quarterly basis by the ALCO.
In managements opinion there has not been a material change in the Company's
market risk or interest rate risk profile for the three months ended March 31,
2005 compared to December 31, 2004 as discussed in the Company's 2004 Annual
Report on Form 10-K.
18
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, based on
their evaluation as of the end of the period covered by this report of the
Company's disclosure controls and procedures (as defined in Exchange Act Rule
13a--14(c15(e) or 15d-15(e))), have concluded that the Company's disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in its periodic SEC filings is recorded, processed and
reported within the time periods specified in the SEC's rules and forms. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures, including cost limitations, judgments
used in decision making, assumptions regarding the likelihood of future events,
soundness of internal controls, fraud, the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and
not absolute, assurance of achieving their control objectives.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
19
Part II - Other Information
ITEM 6. EXHIBITS
The exhibits itemized on the List of Exhibits following the signature page of
this report are incorporated here by reference.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific State Bancorp
Date: May 16, 2005 BY: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: May 16, 2005 BY: /s/ JOANNE ROBERTS
------------------------------------
JoAnne Roberts
Senior Vice President and
Chief Financial Officer
21
EXHIBITS
31.1 Certification of Chief Executive Officer (section 302 of the
Sarbanes-Oxley Act).
31.2 Certification of Chief Financial Officer (section 302 of the
Sarbanes-Oxley Act).
32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act.
32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act.
22