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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-49892
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PACIFIC STATE BANCORP
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 61-1407606
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1889 W. March Lane
Stockton, CA 95207
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (209) 870-3215
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
As of March 12, 2003, there were 816,924 shares of the Registrant's Common Stock
outstanding.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $6,786,161 as of March 12, 2003, which was
calculated based on the last reported sale of the Company's Common Stock prior
to March 12, 2003. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Security Holders for Fiscal Year Ended
December 31, 2002 (Part II)
Proxy Statement for 2003 Annual Meeting of Shareholders (Part III)
TABLE OF CONTENTS
Page
PART I.
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 12
Item 6. Selected Financial Data........................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 8. Financial Statements and Supplemental Data..................... 12
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 12
PART III.
Item 10. Directors and Executive Officers of the Registrant............. 13
Item 11. Executive Compensation......................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 13
Item 13. Certain Relationships and Related Transactions................. 13
Item 14. Controls and Procedures........................................ 13
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 14
Signatures..................................................... 15
Index of Exhibits.............................................. 18
2
PACIFIC STATE BANCORP
STOCKTON, CALIFORNIA
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2002
PART I
------
ITEM 1. BUSINESS.
--------
This report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set
forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used. The Company's
actual future results and shareholder values may differ materially from those
anticipated and expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Company's
ability to control or predict. Investors are cautioned not to put undue reliance
on any forward-looking statements. In addition, the Company does not have any
intention or obligation to update forward-looking statements after the filing of
this report, even if new information, future events or other circumstances have
made them incorrect or misleading. Except as specifically noted herein all
references to the "Company" refer to Pacific State Bancorp, a California
corporation.
General Description of Business
- -------------------------------
Pacific State Bancorp is a newly formed holding company with one bank
subsidiary, Pacific State Bank, (the "Bank"), and a subsidiary trust, Pacific
State Statutory Trust I. 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's primary
source of revenue is providing loans to customers who are predominately small to
middle-market businesses and middle-income individuals. Pacific State Statuatory
Trust I is a statuatory business trust formed in June 2002 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 January 22,
2003 had 56 employees, including 25 officers. The Bank does not engage in any
non-bank lines of business. The business of the Bank is not to any significant
degree seasonal in nature. The Bank has no operations outside California and has
no material amount of loans or deposits concentrated among any one or few
persons, groups or industries. The Bank is a member of the Federal Reserve
System.
The Bank's main office is located at 6 So. El Dorado Street; additional
branches are located elsewhere in Stockton and in the communities of Angels
Camp, Arnold, Groveland, Modesto and Tracy, California. Executive offices for
the Company are located at 1889 W. March Lane, adjacent to the Bank's second
Stockton branch. Total deposits of $158.1 million as of December 31, 2002, were
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held by the Bank, $28.1 million (17.7%) in the Main Office, $54.5 million
(34.5%) in the March Lane (Stockton) branch, $21.3 million (13.5%) in the
Modesto branch, $14.7 million (9.3%) in the Angels Camp branch, $10.7 million
(6.8%) in the Arnold branch, $9.2 million (5.8%) in the Groveland branch and
$19.7 million (12.4%) in the Tracy branch. On March 15, 2002, the Bank completed
the acquisition of certain assets (principally cash and loans) and deposit
liabilities of the Stockton branch of California Bank & Trust at a purchase
price which included the issuance of $481,000 of the Bank's common stock and
$601,194 in cash. In the transaction, the Bank acquired approximately $22.4
million in deposit liabilities and loans valued at approximately $8.0 million.
These assets and liabilities were transferred to the Bank's March Lane branch.
Business Plan
- -------------
The focus of the Company's business plan is to attract "middle market"
accounts, but not to the exclusion of any other business which the Company can
reasonably and profitably attract. In order to provide a level of service to
attract such customers, the Company has structured its specific services and
charges on a basis which management believes to be profitable, taking into
consideration other aspects of the account relationship. The Company offers a
range of banking services to its customers intended to attract the following
specific types of accounts: relatively large consumer accounts; professional
group and association accounts, including the accounts of groups or firms of
physicians, dentists, attorneys and accountants; and accounts of small to
medium-sized businesses engaged in retail, wholesale, light industrial and
service activities.
Trust Subsidiary
- ----------------
The Company during 2002 established a business trust subsidiary (the
"Trust") for the sole purpose of issuing capital securities ("Capital
Securities") pursuant to a declaration of trust (the "Declaration"). The
proceeds from the sale of the Capital Securities were loaned to the Company
under deeply subordinated debentures (the "Debentures") issued to the Trust
pursuant to an indenture (the "Indenture"). Interest payments on the Debentures
will flow through the Trust to the Pooling Vehicle, which is the holder of the
Capital Securities and similar securities issued by other financial
institutions. Payments of distributions by the Trust to the Pooling Vehicle are
guaranteed by the Company pursuant to a guarantee agreement (the "Guarantee").
The terms of the Declaration, Indenture and Guarantee are described in more
detail below.
The Pooling Vehicle used the proceeds from the sale of notes in the
private market to purchase the Capital Securities and similar securities issued
by other financial institutions. Proceeds from the distributions payable on the
Capital Securities (as well as the proceeds from distributions payable on
capital securities issued by other pool participants) will be used to pay for
the costs of maintaining the Pooling Vehicle and to make interest payments on
the notes issued by the Pooling Vehicle.
o The Trust endures for 35 years, unless earlier
dissolved.
o The Capital Securities and Debentures have terms of
30 years. -
o The Trust issued the Capital Securities and common
securities (the "Common Securities"), for $5,000,000;
the Common Securities are held by the Company. The
Company issued the Debentures to the Trust, which
holds them for the benefit of the Capital Security
holders.
4
o For the period beginning on (and including) December
26, 2002 and ending on (but excluding) March 25,
2003, the rate per annum is 4.85% For each successive
period beginning on (and including) March 26, 2003,
and each succeeding interest payment date, interest
is payable quarterly at a floating rate per annum
equal to the 3-month London Interbank Offered Rate
(LIBOR) plus 3.45%; provided however that prior to
June 26, 2007, this interest rate shall not exceed
11.95%.
o The Company has irrevocably and unconditionally
guaranteed, with respect to the Capital Securities
and to the extent not paid by the Trust, accrued and
unpaid distributions on the Capital Securities and
the redemption price payable to the holders of the
Capital Securities, in each case to the extent the
Trust has funds available.
The purpose of this transaction was to infuse the Bank with an
additional $4.5 million in capital in order to fuel the continued growth of the
Bank. The remaining $500, 000 was placed in the Company for general operations.
Product Lines and Services
- --------------------------
The Bank currently offers the following general banking services at all
of its branches: commercial, construction and real estate loans and personal
credit lines, interest on checking, U.S. Savings bond services, domestic and
foreign drafts, banking by appointment, automatic transfer of funds between
savings and checking accounts, business courier services, checking and savings
accounts for personal and business purposes, domestic letters of credit, a
depository for MasterCard and Visa drafts, federal depository services, cash
management assistance, wire and telephone transfers, travelers' checks,
Individual Retirement Accounts, time certificates of deposit, courier service
for non-cash deposits, Visa and MasterCard, revolving lines of credit to
consumers secured by deeds of trust on private residences, unsecured overdraft
protection credit lines attached to checking accounts, ATM cards and MasterMoney
debit cards via the Star, Cirrus, Plus, Mastercard and Visa networks.
The Bank is not authorized to offer trust services. The Federal Reserve
Bank of San Francisco is the Company's primary correspondent relationship. The
Bank currently also has correspondent relationships with City National Bank in
Beverly Hills, Bank of America in San Francisco, First Tennessee Bank in
Memphis, Tennessee, Compass Bank in Birmingham, Alabama, Wells Fargo Bank and
Pacific Coast Bankers Bank.
The Bank recognizes that, in order to be competitive, it must attract a
certain number of consumer accounts. Travelers checks, Individual Retirement
Accounts, Visa and MasterCard, revolving lines of credit to consumers secured by
deeds of trust on private residences, and unsecured overdraft protection credit
lines attached to checking accounts currently offered by the Bank are designed
to appeal particularly to consumers. Moreover, participation in a large-scale
ATM network assists the Company in competing for consumer accounts.
The Bank is an approved Small Business Administration and 504 lender,
FarmerMac I and II, USDA, USDA Part-time Farmer Program, FHA and VA lender and
California Capital lender. The Bank is a national leader in the underwriting of
U.S. Department of Agriculture business and industry loans, as well as a
Preferred Lender for this program.
Marketing
- ---------
The basic marketing strategy of the Bank is to retain the Bank's
initial market share and to increase the Bank's penetration of the market over
the long term via expansion east and west of Stockton in small to medium sized
5
communities. The Bank attempts to accomplish this by providing a full range of
personalized Banking services to small and medium size businesses, professionals
and individuals within Calaveras, San Joaquin, Stanislaus and Tuolumne Counties.
The Bank's marketing plan aims to provide for strong continuity in
banker-customer relationships, a high degree of convenience for customers,
prompt response in the handling of loan requests, and personal attention to
needs of individual customers. The marketing plan also includes a commitment to
lend the Bank's deposits back into the areas from which they are derived,
thereby assisting in the building activity, population growth and other changes,
which are occurring in the market area. By focusing the Bank's relationship
toward its community the Bank attempts to establish strong continuity with its
customers.
The Directors of the Company are active in business development through
personal contacts and personal participation in local activities. The Directors
of the Company have a strong commitment to community banking. They believe in
business development by actively participating in community events.
Local advertising and publicity in local papers also are used to
attract business and to acquaint potential customers with the Bank's services.
Competition
- -----------
The Bank's service area consists of Calaveras, San Joaquin, Stanislaus
and Tuolumne Counties. The banking business in California generally, and
specifically in the Bank's primary market area, is highly competitive with
respect to both loans and deposits. The Banking business is dominated by a
relatively small number of major Banks, which have many offices operating over
wide geographic areas. Many of the major commercial Banks offer certain services
(such as international trust and securities brokerage services), which are not
offered directly by the Bank. By virtue of their greater total capitalization,
such Banks have substantially higher lending limits than the Bank and
substantial advertising and promotional budgets.
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks) savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money-market funds, which also compete with banks. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
To compete with major financial institutions in its service area, the
Bank relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, which compete primarily by
interest rates and multiple branch locations. For customers whose loan demands
exceed the Bank's lending limits, the Bank seeks to arrange funding for such
loans on a participation basis with its correspondent banks or other independent
commercial banks.
Supervision and Regulation
- --------------------------
The Company is principally regulated by the Federal Reserve Board
("FRB") and the SEC. The Bank is principally regulated by the California
Commissioner of Financial Institutions ("Commissioner"), but is also subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC") and by it's
primary federal regulator, the FRB. These agencies govern most of the Company's
and the Bank's
6
business, including capital requirements, loans, investments, mergers and
acquisitions, borrowings, dividends, branch locations, public reporting, proxy
solicitation, offers and sales of securities and other similar matters. In
addition, the Bank's business is affected by general economic conditions and by
the monetary and fiscal policies of the United States government. These policies
influence, for example, the Federal Reserve's open market operations in U.S.
Government securities, the reserve requirements imposed upon commercial Banks,
the discount rates applicable to borrowings from the Federal Reserve by Banks,
and other similar matters which impact the growth of the Bank's loans,
investments and deposits and the interest rates which the Bank charges and pays.
Proposals to change the laws and regulations governing the operations
and taxation of financial institutions are frequently made in Congress, in the
California legislature and before various regulatory and professional agencies.
The likelihood of any major changes and the impact such changes might have are
difficult to predict with accuracy. Certain significant recently proposed or
enacted laws and regulations are discussed below.
Interstate Banking. Since 1995, initial entry into California by merger
or acquisition involving an out-of state institution must be accomplished by
acquisition of or merger with an existing whole bank which has been in existence
for at least five years.
Capital Requirements. The Company and the Bank are subject to certain
regulatory capital requirements administered by the FRB and the FDIC. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the Bank's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about the components, risk weightings and other factors.
The Uniform Financial Institutions Rating System ("UFIRS") classifies
and evaluates the soundness of financial institutions according to the so-called
"CAMELS" criteria, including capital adequacy, asset quality, management,
earnings, liquidity and sensitivity to market risk, (changes in interest rates,
foreign exchange rates, commodity prices or equity prices which may adversely
affect an institution's earnings and capital).
Prompt Corrective Action regulations (the "PCA Regulations") of the
federal bank regulatory agencies establish five capital categories in descending
order (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized), assignment to which depends
upon the institution's total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio. Institutions classified in one of the three
undercapitalized categories are subject to certain mandatory and discretionary
supervisory actions, which include increased monitoring and review,
implementation of capital restoration plans, asset growth restrictions,
limitations upon expansion and new business activities, requirements to augment
capital, restrictions upon deposit gathering and interest rates, replacement of
senior executive officers and directors, and requiring divestiture or sale of
the institution. The Bank is currently classified as a well capitalized bank
pursuant to the PCA regulations.
As of December 31, 2002, the Bank's total risk-based capital ratio
(approximately 10.97%) and its leverage ratio (approximately 8.74%) exceeded
minimum levels. It is not expected that compliance with the risk-based capital
guidelines or minimum leverage requirements will have a materially adverse
effect on the business of the Bank in the reasonably foreseeable future.
Deposit Insurance Assessments. The Bank's deposit insurance assessment
was $20,453 for the year 2002; the Company estimates that its deposit insurance
assessment for 2003 will not differ materially from its 2002 assessment.
7
Community Reinvestment Act. Community Reinvestment Act ("CRA")
regulations evaluate the Bank's lending to low and moderate income individuals
and businesses across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of applications to merge,
establish new branches. In addition, any Bank rated in "substantial
noncompliance" with the CRA regulations may be subject to enforcement
proceedings. The Bank has a current rating of "satisfactory" CRA compliance.
Safety and Soundness Standards. Federal bank regulations for insured
financial institutions establish safety and soundness standards for (1) internal
controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation. If
an agency determines that an institution fails to meet any standard established
by the guidelines, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. Agencies
may elect to initiate enforcement action in certain cases where failure to meet
one or more of the standards could threaten the safe and sound operation of the
institution. The Company has not been and does not expect to be required to
submit a safety and soundness compliance plan because of a failure to meet any
of the safety and soundness standards.
Recently Enacted Legislation
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "SOA"). The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
many years. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission, ("the SEC"), under the Securities Exchange Act of 1934.
Given the extensive SEC role in implementing rules relating to many of the SOA's
new requirements, the final scope of these requirements remains to be
determined.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of specified issues by the SEC and the
Comptroller General. The SOA represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
The SOA addresses, among other matters:
o audit committees;
o certification of financial statements by the chief executive officer
and the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of
any financial statements that later require restatement;
o a prohibition on insider trading during pension plan black out periods;
o disclosure of off-balance sheet transactions;
8
o a prohibition on certain personal loans to directors and officers;
o expedited filing requirements for forms which disclose transactions by
officers and directors in Company stock ;
o disclosure of a code of ethics and of any change or waiver of such
code;
o "real time" filing of periodic reports;
o the formation of a public accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities laws.
The SOA contains provisions which became effective upon its enactment
and provisions which will become effective within 30 days to one year from
enactment. The SEC has issued final rules covering many topics, but it is to be
expected that these rules may be altered as future experience requires.
Although we anticipate that we will incur additional expense in
complying with the provisions of the SOA and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
In October 2001, the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"Patriot Act ") was enacted in response to the terrorist attacks in New York,
Pennsylvania and Washington, D.C. which occurred on September 11, 2001. The
Patriot Act is intended to strengthen U.S. law enforcement's and the
intelligence communities' abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Among other requirements, Title III of the Patriot Act imposes the
following requirements with respect to financial institutions:
o All financial institutions must establish anti-money laundering
programs that include, at minimum: (i) internal policies, procedures,
and controls, (ii) specific designation of an anti-money laundering
compliance officer, (iii) ongoing employee training programs, and (iv)
an independent audit function to test the anti- money laundering
program
o The Secretary of the Treasury, in conjunction with other bank
regulators, is authorized to issue regulations that provide for minimum
standards with respect to customer identification at the time new
accounts are opened.
o Financial institutions that establish, maintain, administer, or manage
private banking accounts or correspondent accounts in the United States
for non-United States persons or their representatives (including
foreign individuals visiting the United States) must establish
appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.
o Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell
banks (foreign banks that do not have a physical presence in any
country), and are subject to certain record keeping obligations with
respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
9
The federal banking agencies have begun to propose and implement
regulations pursuant to the Patriot Act which will require financial
institutions to adopt the policies and procedures contemplated by the new law.
The Company cannot be certain of the effect of the foregoing recently
enacted legislation on its business, although there is likely to be
consolidation among financial services institutions and increased competition
for the company.
New Financial Accounting Standards In 2002, the Financial Accounting
Standards Board (FASB ) issued Statement of Financial Accounting Standards
(SFAS) No. 147, Acquisitions of Certain Financial Institutions. This Statement,
which addresses financial accounting and reporting matters for the acquisition
of all or part of a financial institution, applies to all such transactions
except those between two or more mutual enterprises. This statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and related interpretations and
instead requires a financial institution to apply SFAS No. 144 and evaluate
long-term customer relationship intangible assets (core deposit intangible) for
impairment. Under SFAS No. 72, a financial institution may have recorded an
unidentifiable intangible asset arising from a business combination. If certain
criteria in SFAS No. 147 are met, the amount of the unidentifiable intangible
asset will be reclassified to goodwill upon adoption of SFAS No. 147 and any
amortization amounts that were incurred after the adoption of SFAS No. 142 must
be reversed. Reclassified goodwill would then be measured for impairment under
the provisions of SFAS No. 142. Provisions of SFAS No. 147 are applicable on or
after October 1, 2002. In management's opinion, the adoption of this Statement
did not have a material effect on the Company's consolidated financial position
or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reporting containing financial
statements for interim periods beginning after December 15, 2002. Because the
Company accounts for the compensation cost associated with its stock option plan
under the intrinsic value method, the alternative methods of transition will not
apply to the Company. The additional disclosure requirements of the statement
are included in these consolidated financial statements. In management's
opinion, the adoption of this Statement did not have a material impact on the
Company's consolidated financial position or results of operations.
The Company adopted SFAS No. 141, Business Combinations, and SFAS No.
142 Goodwill and Other Intangible Assets, on January 1, 2002. The Company
recorded the acquisition in 2002 of the assets and liabilities of the Stockton
branch of California Bank & Trust in accordance with SFAS No. 141 and SFAS No.
142 resulting in recognition of a core deposit intangible asset of $448,46 and
goodwill of $717,919. The initial valuation of the core deposit intangible is
based on the estimated fair value of deposits acquired and is amortized over a
period of ten years. Goodwill is not amortized, but is measured annually for
impairment. At December 31, 2002, no impairment of goodwill has been recognized
in the Company's consolidated financial statements.
10
The above description of the business of the Company should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth in Item 7 of this report, which is
incorporated by reference.
ITEM 2. PROPERTIES
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The Company owns its March Lane (Stockton), Modesto, Groveland and
Arnold branch facilities. The Company purchased the March Lane office for
$866,700 in 1992. The Company's executive officers and support staff were
relocated to the March Lane building in 1997. During 2001 the Company purchased
an adjacent building to the March Lane office, for $747,000, in order to expand
its administrative functions. The executive offices, finance department, central
operations and data processing will be moving into these offices. The Company
repossessed the Modesto building and converted it to a banking branch in 1996.
The Modesto land was purchased in 1999 for $524,000. The Company purchased the
Arnold Branch for $600,000 as part of its 1997 expansion into branches acquired
from Valliwide Bank. A portion of the building, located at 1013 Blagen Road, is
leased to First American Title. The lease is expected to generate $9,000 in
2002. During 2000 the Company purchased a lot in Groveland and purchased a lot
in Angels Camp in order to build and relocate the current Branch offices. The
new sites in both locations offer the Company better visibility and demonstrate
commitment to the communities we serve. The Groveland property was purchased for
$148,000 and construction was completed in January 2003. The Angels Camp
property was purchased for $200,000 and should be completed by the third quarter
of 2003.
All other Company premises are leased. The Company's total rentals for
premises and equipment for fiscal year 2002 were approximately $273,000, and its
minimum future commitments under lease payments as of December 31, 2002, totaled
$1,451,000.
The Company is currently in the twelfth year of a sixteen-year gross
level lease for its main office located at 6 South El Dorado Street in downtown
Stockton. The lease cost is $0.70 per square foot per month over the life of the
lease. The Company's projected lease expense through 2003 will be approximately
$147,000 per year.
The Company in 1997 entered into a 5-year lease for the 3,500 square
foot building located at 358 N. Main Street, Angels Camp, California. The base
annual rental for the Angels Camp branch is $48,000. The lease expired June 30,
2002 and is currently on a month-to-month basis.
In 1999, the Company entered into a 10-year lease with two options to
extend for an additional 5 years each for the 3,861 square foot building in
Tracy. The Tracy office is located at 2850 Tracy Boulevard. The annual rent on
the Tracy office is $69,000 for the first five years at which time it will
increase annually at a rate of 3% per year.
11
ITEM 3. LEGAL PROCEEDINGS.
-----------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable.
Item (*) Executive Officers of the Registrant.
------------------------------------
The following table presents certain information regarding the
executive officers of the Company:
NAME AGE POSITION(S) SINCE
---- --- ----------- -----
Steven A. Rosso 48 President and CEO/Director 1992
Acting Chief Financial
Officer
Gary A. Stewart 53 Executive VP/CCO/Director 1996
(*) Included pursuant to General Instruction (G(3).
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
See information under the caption "Market for Registrant's Common
Equity and Related Shareholder Matters" in the Company's 2002 Annual Report to
Shareholders (see page 53), which information is incorporated here by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
See information under the caption "Five Year Selected Financial Data"
in the Company's 2002 Annual Report to Shareholders (see page 1), which
information is incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION.
------------
See information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation" in the Company's 2002 Annual
Report to Shareholders (see pages 38-52), which information is incorporated here
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------------------------------------------
See Independent Auditor's Report, Balance Sheet, Statement of Income,
Statement of Changes in Shareholders' Equity, Statement of Cash Flows and Notes
to Financial Statements, all contained in the Company's 2002 Annual Report to
Shareholders (see pages 3-34), which information is incorporated here by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
Not applicable
12
PART III
--------
Certain information required by Part III is incorporated by reference
to the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 2003 Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by this item is incorporated by reference from
the table of directors, which appears on page 3 of the Company's definitive
proxy statement for the 2003 Annual Meeting of Shareholders of the Company to be
filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by this item is incorporated by reference from
page 6 of the Company's definitive proxy statement for the 2003 annual meeting
of shareholders of the Company to be filed with the Securities and Exchange
Commission, including all information under the caption "Compensation and
Certain Transactions" except for information under the subheading "Transactions
with Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information required by this item is incorporated by reference from
page 4 of the Company's definitive proxy statement for the 2003 annual meeting
of shareholders of the Company to be filed with the Securities and Exchange
Commission, including information under the captions "Principal Shareholders"
and "Stock Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required by this item is incorporated by reference from
page 7 of the Company's definitive proxy statement for 2003 Annual meeting of
shareholders to be filed with the Securities and Exchange Commission, including
all information under the subheading "Transactions with Management."
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
The Chief Executive Officer and Acting Chief Financial Officer of the
Company has concluded, based on his evaluation as of a date within 90 days prior
to the date of the filing of this Annual Report on Form 10-K, that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer and Acting Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
There were no significant changes in the Company's internal controls or
in other factors that significantly affect these controls subsequent to the date
of such evaluation.
13
PART IV
-------
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
The following financial statements of the Company included in the
Annual Report to Shareholders for the year ended December 31, 2002, are
incorporated by reference in Item 8 of this report.
(a) Financial Statements.
(1) Financial Statements:
(i) Independent Auditor's Report dated February
20 2003 (page 2 of Annual Report).
(ii) Consolidated Balance Sheet, December 31,
2002 and 2001 (page 3 of Annual Report).
(iii) Consolidated Statement of Income: Years
ended December 31, 2002, 2001 and 2000 (page
4 of Annual Report).
(iv) Consolidated Statement of Changes in
Shareholders' Equity: Years ended December
31, 2002, 2001 and 2000 (page 5 of Annual
Report).
(v) Consolidated Statement of Cash Flows: Years
ended December 31, 2002, 2001 and 2000
(pages 6-7 of Annual Report).
(vi) Notes to Financial Statements (pages 8-34 of
Annual Report).
(2) All Schedules have been omitted because they are not
applicable or not required, or because the
information is included in the financial statements
or the notes thereto or is not material.
(3) Exhibits filed with this report are listed in the
Index to Exhibits below, which is incorporated herein
by reference.
(b) The Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
14
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: March 20, 2003 PACIFIC STATE BANCORP
By: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President/Chief Executive Officer
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 20, 2003 By: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Acting Principal Financial Officer
and Principal Accounting Officer
Director
Date: March 20, 2003 By: /s/ MICHAEL L. DALTON
-------------------------------------
Michael L. Dalton
Director and Vice Chairman
Chairman of the Audit Committee
Date: March 20, 2003 By: /s/ HAROLD HAND
-------------------------------------
Harold Hand
Director and Chairman of the Board
Date: March 20, 2003 By: /s/ PATRICIA A. HATTON
-------------------------------------
Patricia A. Hatton
Director and Chairperson of the
Director Loan Committee
Date: March 20, 2003 By: /s/ STEVEN J. KIKUCHI
-------------------------------------
Steven J. Kikuchi
Director and Secretary of the Board
Date: March 20, 2003 By: /s/ MAXWELL FREEMAN
-------------------------------------
Maxwell Freeman
Director
Date: March 20, 2003 By: /s/ YOSHIKAZU MATAGA
-------------------------------------
Yoshikazu Mataga
Director
15
Date: March 20, 2003 By: /s/ GARY A. STEWART
-------------------------------------
Gary A. Stewart
Executive Vice President/CCO
Director
Date: March 20, 2003 By: /s/ KATHLEEN VERNER
-------------------------------------
Kathleen Verner
Director
Date: March 20, 2003 By: /s/ PHILIP B. WALLACE
-------------------------------------
Philip B. Wallace
Director
16
I, Steven A. Rosso certify that:
1. I have reviewed this annual report on Form 10-K of Pacific State Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 20, 2003
By: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Acting Chief Financial Officer
17
LIST OF EXHIBITS
3.1 Articles of Incorporation. Incorporated by reference from Exhibit 3.1
filed with the Company's Registration Statement No. 333-84908 on Form
S-4EF (the "S-4").
3.2 Bylaws. Incorporated by reference from Exhibit 3.2 filed with the S-4.
4 Agreement to file copy of Indenture for the Company's $5 Million of
Floating Rate Junior Subordinated Deferrable Interest Debentures due
2032 issued to Pacific State Statutory Trust I.
10.1 Lease Agreement for Main Office. Incorporated by reference from Exhibit
10.1filed with the S-4.
10.2 Lease Agreement, Angels Camp Branch. Incorporated by reference from
Exhibit 10.2 filed with the S-4.
10.3 Lease Agreement, Tracy Branch Office. Incorporated by reference from
Exhibit 10.3 filed with the S-4.
10.4* Employment Agreement (Steven A. Rosso). Incorporated by reference from
Exhibit 10.4 filed with the S-4.
10.5* 1987 Stock Option Plan. Incorporated by reference from Exhibit 10.5
filed with the S-4.
10.6* 1997 Stock Option Plan. Incorporated by reference from Exhibit 10.6
filed with the Company's Quarterly Report on Form 10-Q for the
quarterly period ending September 30, 2002.
13 The portions of the Pacific State Bancorp 2002 Annual Report to
Shareholders which have been incorporated by reference in Items 5-8
herein are filed with the Commission.
21 List of Subsidiaries
23.1 Independent Auditor's Consent
99.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act.
* Denotes management contract or compensatory arrangement
18