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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2004
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) 943-7400
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 August 4, 2004
Common Stock 1,720,611
No Par Value
PART I
ITEM 1. FINANCIAL STATEMENTS
PACIFIC STATE BANCORP
Consolidated Balance Sheet
June 30 December 31,
Assets 2004 2003
- ------ ------------- -------------
(Unaudited)
Cash and due from banks $ 12,532,418 $ 5,317,323
Federal funds sold 8,371,000 7,456,000
Interest -bearing deposits in banks 2,000,000 4,000,000
Investment securities (market value of $16,958,029 in 2004 and
$12,096,100 in 2003) 17,158,830 12,106,562
Loans, less allowance for loan losses of $1,874,070 in 2004 and
$1,652,583 in 2003 176,226,667 155,484,998
Bank premises and equipment, net 9,558,266 8,755,992
Accrued interest receivable and other assets 8,342,214 7,803,318
------------- -------------
Total assets $ 234,189,395 $ 200,924,193
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Non-interest bearing $ 48,375,920 $ 40,400,662
Interest bearing 155,992,297 135,891,546
------------- -------------
Total deposits 204,368,217 176,292,208
Short-term borrowings 1,000,000 1,000,000
Long-term borrowings 4,000,000 4,000,000
Subordinated debentures 8,764,000 5,155,000
Accrued interest payable and other liabilities 1,276,082 1,018,450
------------- -------------
Total liabilities 219,408,299 187,465,658
Shareholders' equity:
Preferred stock - no par value; 4,000,000 shares authorized;
none issued and outstanding -- --
Common stock - no par value; 24,000,000 shares authorized;
shares issued and outstanding 1,701,661 in 2004 and 1,688,828
in 2003 7,010,603 6,936,786
Retained earnings 7,890,974 6,456,766
Accumulated other comprehensive (loss) income (120,481) 64,983
------------- -------------
Total shareholders' equity 14,781,096 13,458,535
------------- -------------
Total liabilities and shareholders' equity $ 234,189,395 $ 200,924,193
============= =============
See notes to unaudited condensed consolidated financial statements
2
Pacific State Bancorp
Consolidated Statement of Income
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 3,042,250 $ 2,576,354 $ 5,893,496 $ 4,963,138
Interest on federal funds sold 12,527 25,346 15,000 68,261
Interest on investment securities 126,068 111,544 228,213 229,816
------------ ------------ ------------ ------------
Total interest income 3,180,845 2,713,244 6,136,709 5,261,215
Interest expense:
Interest on deposits 581,814 609,841 1,076,432 1,273,948
Interest on borrowings 31,379 31,688 64,513 63,028
Interest on subordinated debentures 89,402 60,566 149,604 118,200
------------ ------------ ------------ ------------
Total interest expense 702,595 702,095 1,290,549 1.455,176
------------ ------------ ------------ ------------
Net interest income 2,478,250 2,011,149 4,846,160 3,806,039
Provision for loan losses 138,000 138,000 228,000 260,000
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 2,340,250 1,873,149 4,618,160 3,546,039
------------ ------------ ------------ ------------
Non-interest income:
Service charges 351,356 156,591 604,865 308,149
Other fee income 330,034 158,310 493,636 304,380
Rental income from other real estate -- 4,860 -- 9,720
Gain from sale of loans 18,498 74,710 72,749 308,549
------------ ------------ ------------ ------------
Total non-interest income 699,888 394,471 1,171,250 930,798
Other expenses:
Salaries and employee benefits 877,408 709,916 1,727,715 1,478,077
Occupancy 181,073 174,760 335,665 329,157
Furniture and equipment 114,807 115,795 228,091 239,087
Other 600,453 526,545 1,187,281 1,060,138
------------ ------------ ------------ ------------
Total other expenses 1,773,741 1,527,016 3,478,752 3,106,459
------------ ------------ ------------ ------------
Income before income taxes 1,266,397 740,604 2,310,658 1,370,378
Income tax expense 490,550 264,600 876,450 488,400
------------ ------------ ------------ ------------
Net income $ 775,847 $ 476,004 $ 1,434,208 $ 881,978
============ ============ ============ ============
Basic earnings per share $ 0.45 $ 0.29 $ 0.84 $ 0.53
============ ============ ============ ============
Diluted earnings per share $ 0.42 $ 0.28 $ 0.79 $ 0.52
============ ============ ============ ============
Weighted average common shares outstanding 1,706,798 1,681,992 1,699,093 1,658,360
Weighted average common and common equivalent
shares outstanding 1,830,142 1,734,228 1,822,437 1,706,564
See notes to unaudited condensed consolidated financial statements
3
Pacific State Bancorp and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
For the Six Months Ended June 30,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 1,434,208 $ 405,974
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 228,000 122,000
Deferred loan origination fees and costs, net 69,076 18,339
Depreciation and amortization 252,141 194,721
Net loss on sale of available-for-sale investment
securities (2,116)
Decrease in accrued interest receivable and other assets (467,024) (112,000)
Increase in accrued interest payable and
other liabilities 257,631 372,954
------------ ------------
Net cash provided by operating activities 1,774,032 999,872
------------ ------------
Cash flows from investing activities:
Net increase in interest-bearing deposits 2,000,000 --
Proceeds from maturity of available-for-sale investment
securities 1,633,950 494,134
Purchases of available-for-sale investment securities (7,225,900) --
Proceeds from principal repayments from available-for-sale
mortgage-backed securities 235,086 89,778
Proceeds from principal repayments from held-to-maturity
mortgage-backed securities -- 5,478
Net increase in loans (21,038,745) (6,349,784)
Proceeds from sale of other real estate -- (81,285)
Purchases of bank premises and equipment (1,007,155) (852,261)
------------ ------------
Net cash used in investing activities (25,402,764) (6,693,940)
------------ ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and 4,257,227 1,181,778
savings deposits
Net increase in time deposits 23,818,783 7,842,490
Proceeds from the issuance of subordinated debentures 3,609,000
------------ ------------
Proceeds from stock options exercised 73,817 30,065
------------ ------------
Net cash provided by financing activities 31,758,826 9,054,333
------------ ------------
Increase in cash and cash equivalents 8,130,095 3,360,265
Cash and cash equivalents at beginning of year 12,773,323 23,465,668
------------ ------------
Cash and cash equivalents at end of period $ 20,903,418 $ 26,825,933
============ ============
See notes to unaudited condensed consolidated financial statements
4
Pacific State Bancorp
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
1. 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 June 30, 2004 and December 31, 2003,
and the results of its operations for the three and six month periods ended June
30, 2004 and 2003 and its cash flows for the six month period ended June 30,
2004 and 2003 in conformity with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
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 2003 Annual Report to Shareholders. The results of
operations for the three month and six month periods ended June 30, 2004 may not
necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
2. STOCK-BASED COMPENSATION
As of June 30, 2004, the Company had one stock-based employee plan compensation
plan, the Pacific State Bancorp 1997 Stock Option Plan. The Company accounts
for this plan 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.
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. 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.
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income, as reported $ 775,847 $ 476,004 $ 1,434,208 $ 881,978
Deduct: Total stock-based employee
compensation expense determined
under the fair value method
for all awards, net of related tax effects 66,000 10,000 132,000 19,000
------------ ------------ ------------ ------------
$ 709,847 $ 476,004 $ 1,302,208 $ 862,978
============ ============ ============ ============
Basic earning per share - as reported $ 0.45 $ 0.29 $ 0.84 $ 0.53
Basic earning per share - pro forma $ 0.42 $ 0.28 $ 0.77 $ 0.52
Diluted earnings per share - as reported $ 0.42 $ 0.28 $ 0.79 $ 0.52
Diluted earnings per share - pro forma $ 0.39 $ 0.27 $ 0.72 $ 0.50
5
3. 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
4. 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 it's components
for the periods indicated:
Three Months Ended Six Months Ended
---------------------------- ----------------------------
06/30/04 06/30/03 06/30/04 06/30/03
------------ ------------ ------------ ------------
Net Income $ 775,847 $ 476,004 $ 1,434,208 $ 881,978
Other Comprehensive (Loss) Income:
Change in unrealized (loss) gain on
available for sale securities (258,860) 26,251 (185,464) (117,344)
Reclassification adjustment 0 0 0 0
------------ ------------ ------------ ------------
Total Other Comprehensive (Loss) Income (258,860) 26.251 (185,464) (117,344)
Total Comprehensive Income $ 516,987 $ 502,255 $ 1,248,744 $ 764,634
============ ============ ============ ============
5. COMMITMENTS AND CONTINGENCIES
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 $47,228,000 and letters of credit of $885,000
at June 30, 2004. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2004.
Approximately $17,470,000 of the loan commitments outstanding at June 30, 2004
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.
6. STOCK SPLIT
On September 18, 2003 the Company's board of directors declared a two-for-one
stock split payable to shareholders of record on September 30, 2003. All
references to share and per share data included in these unaudited condensed
consolidated financial statements have been restated as if the stock split was
affected on the first day of all periods presented.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in Pacific State Bancorp (the "Company") balance sheet accounts between June 30,
2004 and December 31, 2003 and its income and expense accounts for the three and
six month periods ended June 30, 2004 and 2003. The discussion is designed to
provide a better understanding of significant trends related to the Company's
financial condition, results of operations, liquidity, capital resources and
interest rate sensitivity.
In addition to the historical information contained herein, this report on Form
10-Q contains certain forward-looking statements. The reader of this report
should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits, competition effects, fee and
other noninterest income earned, general economic conditions, nationally,
regionally and in the operating market areas of the Company and its
subsidiaries, changes in the regulatory environment, changes in business
conditions and inflation, changes in securities markets, data processing
problems, a decline in real estate values in the Company's market area, the
effects of terrorism, the threat of terrorism or the impact of potential
military conflicts and the conduct of the war on terrorism by the United States
and its allies, as well as other factors. This entire report should be read to
put such forward-looking statements in context. To gain a more complete
understanding of the uncertainties and risks involved in the Company's business,
this report should be read in conjunction with the Company's annual report on
Form 10-K for the year ended December 31, 2003.
General Description of Business
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 middle-income individuals. Pacific State Statuatory
Trusts I and II are unconsolidated, wholly owned statutory business trusts
formed in June 2002 and March 2004 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 June 30, 2004 had 58
employees, including 26 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's main office is 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.
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,
7
attorneys and accountants; and accounts of small to medium-sized businesses
engaged in retail, wholesale, light industrial and service activities.
Trust Subsidiaries
The Company during 2002 and 2004 established business trust subsidiaries (the
"Trusts") for the sole purpose of issuing capital securities ("Capital
Securities") pursuant to declarations of trust. The proceeds from the sale of
the Capital Securities were loaned to the Company under deeply subordinated
debentures issued to the Trusts pursuant to indentures (the "Indentures").
Interest payments on the Debentures will flow through the Trusts to the Pooling
Vehicles, which are the holders of the Capital Securities and similar securities
issued by other financial institutions. Payments of distributions by the Trusts
to the Pooling Vehicle are guaranteed by the Company. See note 8 in the
company's consolidated financial statement.
Proceeds from the issuance of the 2002 Debentures were used to provide the Bank
with an additional $4.5 million in capital in order to support the continued
growth of the Bank. The remaining $500,000 was placed in the Company for general
corporate purposes. Proceeds from the issuance of the 2004 Debentures were used
to provide the Bank with an additional $3.5 million in capital in order to
support the continued growth of the Bank.
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 offer certain
consumer products. These products include, 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. These products 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.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
financial information contained within our statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. Other estimates that we use are related to
the expected useful lives of our depreciable assets. In addition, GAAP itself
may change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
8
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principles of
accounting: (1) Statement of Financial Accountings Standards (SFAS) No. 5
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance. The Company employs a comprehensive methodology for estimating inherent
losses consistent with SFAS 5 and SFAS 114; however, actual losses could vary
significantly from these estimates. For further discussion, see "Allowance for
Loan Losses (ALL)".
Results of Operations
Three and Six Month Periods Ended June 30, 2004 Compared to the Same Periods
Ended June 30, 2003
Net income for the three month period ended June 30, 2004, was $775,847
representing an increase of $298,000, or 62.6%, over net income of $476,004 for
the three month period ended June 30, 2003. Contributing factors include an
increase in service charge income of 124.4% and an increase in other income of
108.6%. The increase in service charge income is the result of a new overdraft
protection product offered by the bank. The increase in other income is the
result of an increase in mortgage referral fees and an increase in income from
an investment in bank-owned life insurance.
Return on average assets (ROA) was 1.38% and return on average common equity
(ROE) was 21.26% for the three month period ended June 30, 2004 compared with
1.03% and 15.73% respectively in 2003. Diluted earnings per share for 2004 and
2003 were $0.42 and $0.27, respectively, an increase of 55%. The increase in
earnings per share was due to the increase in net income.
Net income for the six month period ended June 30, 2004, was $1,434,208
representing an increase of $552,230, or 62.61%, over net income of $881,978 for
the six month period ended June 30, 2003. A contributing factor to the increase
in net income was an increase in service charge income of 96.29%. The increase
in service charge income is the result of a new overdraft protection product
offered by the bank.
Return on average assets (ROA) was 1.29% and return on average common equity
(ROE) was 21.43% for the six month period ended June 30, 2004 compared with
0.97% and 15.73% respectively in 2003. Diluted earnings per share for 2004 and
2003 were $0.79 and $0.52, respectively, an increase of 51%. The increase in
earnings per share was due to the increase in net income.
Net Interest Income
The primary source of income for the Company is net interest income. Net
interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds.
Net interest income increased to $2.5 million for the three month period ended
June 30, 2004 versus $2.0 million in 2003 representing a 23.0% increase. Net
interest income increased to $4.8 million for the six month period in 2004
versus $3.8 million in 2003 representing a 27.3% increase The average balance of
total earning assets, during 2004, increased 19.1% to $197.0 million from $165.4
million. Average loan balances outstanding during 2004 increased $30.9 million
or 21.4%, Average balances of investments and federal funds sold decreased by
$3.6 million or 14.88%. The average yields on loans and federal funds sold in
2004 were lower by 33 and 27 basis points respectively, while the average yields
on securities decreased by 1.24 basis points. Thus, the increase in average
earning assets, including the increase in loan balances was more than sufficient
to offset the decline in the average balance of investments and the increase in
average balances of interest-bearing liabilities.
9
Total interest expense remained unchanged at $702,595 for the three month period
in 2004, from $702,095 for 2003, representing a 0.6% increase. For the six month
period ended June 30, 2004 total interest expense decreased to $1,292,000 from
$1,455,000, representing an 11.2% decrease. Average balances of interest-bearing
liabilities increased to $146.1 million from $128.1 million for the period ended
June 30, 2004, or 14.10%.
Average certificates of deposit increased to $89.5 million in 2004 from $72.0
million in 2003, a 24.2% increase. The average rate paid on certificates of
deposit during 2004 decreased 106 basis points, while the overall average rate
paid on interest bearing deposits and borrowings decreased 38 basis points to
1.22% from 1.61% for 2003.
The Company's net interest margin (net interest income divided by average
earning assets) was 5.04% in 2004 and 4.88% in 2003. The combined effect of the
increase in volume of earning assets and decrease in yield on earning assets,
coupled with stable funding sources resulted in an increase of $467,000 (23.0%)
in net interest income for the three month period ended June 30, 2004 over 2003
and an increase of $1,040,,000 (27.0%) for the six month period ended June 30,
2004 over 2003.
Non interest Income
The Company's non-interest income consists primarily of service charges on
deposit accounts, gain on sale of loans and other service fees. Non-interest
income also includes ATM fees earned at various locations. For the three month
period ended June 30, 2004, non-interest income represented 18.03% of the
Company's revenues versus 12.69% in 2003. For the six month period ended June
30, 2004, non-interest income represented 16.0% of the Company's revenues versus
15.0% in 2003.
Total non-interest income increased to $305,000 for the three months ended June
30, 2004 from $394,000 for the same period in 2003, representing an increase of
77.4. Total non-interest income increased $240,000 for the six months ended June
30, 2004 to $1,171,000 in 2003, representing an increase of 25.83.
The following table sets forth a summary of non-interest income for the periods
indicated.
Non-interest Income
Three Month Ended Six Month Ended
- ---------------------------------------------------------------------------------------------------------
Non-interest income: June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
- ---------------------------------------------------------------------------------------------------------
Service charges 351,356 156,591 604,865 308,149
- ---------------------------------------------------------------------------------------------------------
Other fee income 330,034 158,310 493,636 304,380
- ---------------------------------------------------------------------------------------------------------
Rental income from other real estate -- 4,860 -- 9,720
- ---------------------------------------------------------------------------------------------------------
Gain from sale of loans 18,498 74,710 72,749 308,549
------------- ------------- ------------- -------------
- ---------------------------------------------------------------------------------------------------------
Total non-interest income 699,888 394,471 1,171,250 930,798
- ---------------------------------------------------------------------------------------------------------
Non-interest expense consists of salaries and related employee benefits,
occupancy and equipment expenses, data processing fees, professional fees,
directors' fees and other operating expenses. Non-interest expense for the three
month period ended June 30, 2004 was $1.77 million compared to $1.53 million for
2003 an increase of 16.2% for 2004. Non-interest expense for the six month
period ended June 30, 2004 was $3.48 million compared to $3.11 million for 2003
an increase of 12.0% for 2004. Increases in salaries and benefits are indicative
of the additions to staff to expand branch operations in line with their
respective growth for the year.
The following table sets forth a summary of non-interest expense for the
periods indicated.
Three Months Ended Six Months Ended
- ----------------------------------------------------------------------------------------------
Noninterest expense: June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
- ----------------------------------------------------------------------------------------------
Salaries and employee benefits 877,407 709,916 1,727,714 1,478,077
- ----------------------------------------------------------------------------------------------
Occupancy & FFE 181,073 174,760 335,665 329,157
- ----------------------------------------------------------------------------------------------
Furniture & Equipment 114,807 115,795 228,091 239,087
- ----------------------------------------------------------------------------------------------
Other operating expenses 600,914 526,545 1,187,292 1,060,138
------------- ------------- ------------- -------------
- ----------------------------------------------------------------------------------------------
Total noninterest expense 1,774,201 1,527,016 3,478,762 3,106,459
- ----------------------------------------------------------------------------------------------
10
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 bank 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 Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------
(Dollars in thousands) June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
- ---------------------------------------------------------------------------------------------
Tax Provision $ 491 $ 264 $ 876 $ 488
Effective Tax Rate 38.8% 35.7% 38.0% 35.6%
- ---------------------------------------------------------------------------------------------
Asset Quality
The Company concentrates its lending activities primarily within Calaveras, San
Joaquin, Stanislaus and Tuolumne Counties.
The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral.
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated:
June 30, December 31,
----------------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------------
dollars in thousands
Commercial and Agricultural $ 71,581 $ 57,638
Real estate-construction 29,850 28,219
Real estate -commercial and Residential 64,412 60,174
Installment & Other 12,043 10,823
Deferred Loan Fees and Costs 215 284
Allowance for Loan and Lease Losses -1,874 -1,653
Total Net Loans $ 176,227 $ 155,485
----------------------------------------------------------------------------
Net portfolio loans have increased $20.7 million or 13.34%, to $176.2 million at
June 30, 2004 over $155.5 million at December 31, 2003. Commercial and
agricultural loans have increased $13.9 million or 24.182%, real estate
construction projects have increased $1.6 million or 5.82%, real estate
commercial loans have increased by $4.2 million or 7.00% and installment loans
have increased by $1.2 million or 11.27% over December 31, 2003. The portfolio
mix remains stable as compared with the mix of a year ago, with commercial and
agricultural loans of approximately 40.60% of total loans, real estate
construction loans of 16.9%, commercial and residential real estate loans at
36.2%, and 6.8% for installment loans.
The Company's practice is to place an asset on nonaccrual status when one of the
following events occurs:(i) Any installment of principal or interest is 90 days
or more past due (unless in management's opinion the loan is well-secured and in
the process of collection), (ii) management determines the ultimate collection
of principal or interest to be unlikely or iii) the terms of the loan have been
11
renegotiated due to a serious weakening of the borrower's financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past due and
still accruing or have been restructured.
There were no non-accrual loans or other real estate owned at June 30, 2004 and
December 31, 2003.
The Company assigns all loans a credit risk rating and monitors ratings for
accuracy. The aggregate credit risk ratings are used to determine the allowance
for loan losses. Management reviews the credit risk report with the Director
Loan Committee on a weekly basis as well as with the full Board monthly.
Allowance for Loan Losses (ALL)
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.
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. 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 $228,000 for 2004 versus $260,000 in
2003. The decrease in the amount of the provision is a direct result of the
Company's in-depth analysis of the loan portfolio and the loan loss history of
12
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.
Six Months Ended
(Dollars in thousands) June 30,
--------------------------------------------------------------
2004 2003
--------------------------------------------------------------
Beginning Balance: 1,653 1,306
Provision for loan losses 228 260
Charge-offs:
Commercial -7 -90
Real Estate 0 0
Other 0 -12
---------- ----------
Total Charge-offs -7 -102
---------- ----------
Recoveries:
Commercial 0 0
Other 0 1
---------- ----------
Total Recoveries 0 1
---------- ----------
Ending Balance 1,874 1,465
========== ==========
ALLL to total loans 1.05% 0.95%
Net Charge-offs to average
loans-annualized 0.02% 0.25%
--------------------------------------------------------------
Balance Sheet Analysis
- ----------------------
Total assets increased by 16.65% from December 31, 2003 to June 30, 2004. The
increase in total assets was a result of an increase in deposits from $176.3
million to $204.4 million. Net loans during this period increased from $155.5
million to $176.2 million and investments increased from $16.1 million to $19.1
million.
Non-performing assets (including nonaccrual loans, loans 90 days past due and
other real estate owned) totaled $0.0 at June 30, 2004, compared to $0.0 on
December 31, 2003 and $130,000 on June 30, 2003. The ratio of non-performing
assets to total loans was nil at June 30, 2004, nil at December 31, 2003 and
..08% at June 30, 2003.
The allowance for loan losses was $1.87 million at June 30, 2004, compared to
$1.65 million at December 31, 2003 and $1.46 million at June 30, 2003. The
provision for loan losses was $228,000 for the six months ended June 30, 2004
versus $260,000 for the same period in 2003. Net charge-offs were $7,000 for the
first six months of 2004, compared to $102,000 for the first six months of 2003.
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.
13
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 need 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, and available-for-sale investment
securities) totaled $39.8 million or 17.0% of total assets at June 30, 2004
compared to $28.7 million or 14.28% of total assets at December 31, 2003. The
Company expects that its primary source of liquidity will be earnings of the
Company, acquisition of core deposits, and wholesale borrowing arrangements.
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 "Tier 2" capital
(defined as principally comprising the qualifying portion of the ALLL).
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 ALLL.
As of June 30, 2004 the most recent notification by the Federal Reserve Bank of
San Francisco (FRBSF) categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company must meet the minimum ratios as set forth below. There
are no conditions or events since that notification that management believes
have changed the institution's category.
The Company's risk-based capital ratios are presented below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- -------------------------- -------------------------------
(in Thousands) Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of June 30, 2004:
Total capital
(to risk weighted assets) $ 24,242 13.03% $ 14,881 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 18,747 10.08% $ 7,440 4.00% N/A N/A
Tier I capital
(to average assets) $ 18,747 8.27% $ 9,067 4.00% * N/A N/A
As of December 31, 2003:
Total capital
(to risk weighted assets) $ 19,125 11.6% $ 13,239 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 16,782 10.1% $ 6,619 4.00% N/A N/A
Tier I capital
(to average assets) $ 16,782 8.3% $ 8,129 4.00% * N/A N/A
*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%.
14
ITEM 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer, based on
their evaluation within 90 days prior to the date of 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.
Part II - Other Information
ITEM 4
The Bank held its annual shareholders meeting on May 13, 2004 at the Bank's
office on 6. So. El Dorado St., Stockton, CA. 94501.
According to the certified list of stockholders which was presented at the
Meeting, there were 1,700,301 shares of Stock of the Company outstanding and
entitled to vote at the Meeting. There were present at the Meeting, in person or
by proxy, the holders of 1,419,548 shares of Stock of the Company, representing
83.49 % of the total votes eligible to be cast, constituting a majority and more
than a quorum of the outstanding shares entitled to vote.
The Shareholders approved the following:
PROPOSAL 1 - Election of Directors
FOR WITHHELD
Michael L. Dalton 1,418,230 1,318
Maxwell M. Freeman 1,417,430 2,118
Harold Hand 1,417,750 1,798
Patricia Ann Hatton 1,418,230 1,318
Steven J. Kikuchi 1,417,430 2,118
Yosh Mataga 1,418,030 1,518
Steven A. Rosso 1,417,190 2,358
Gary A. Stewart 1,417,430 2,118
Kathleen Verner 1,417,990 1,558
Philip B. Wallace 1,415,184 4,364
15
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: August 16, 2004 BY: /s/ STEVEN A. ROSSO
-------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pacific State Bancorp
Date: August 16, 2004 BY: /s/ JOANNE ROBERTS
-------------------------------------
JoAnne Roberts
Vice President and Chief Financial
Officer
16
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 Certification pursuant to section 906 of the Sarbanes-Oxley Act.
17