UNITED
STATES
SECURITIES
& EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
Quarter Ended June 30, 2009
OR
0
|
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: 0-49892
PACIFIC
STATE BANCORP
(Exact
Name of Registrant as Specified in its Charter)
California
|
61-1407606
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1899
W. March Lane, Stockton, CA 95207
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
Telephone Number, including Area Code (209) 870-3214
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
ý
No
0
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
0
No
0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
0
Accelerated filer
0
Non
–accelerated filer
0
Smaller
reporting company
ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
0
No
ý
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Title
of Class
|
Shares
outstanding as of August 1, 2009
|
Common
Stock
No
Par Value
|
3,722,198
|
PART
I. FINANCIAL INFORMATION
ITEM
I. FINANCIAL STATEMENTS
PACIFIC
STATE BANCORP AND SUBSIDIARY
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
Unaudited
|
|
June
30,
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
11,271
|
|
|
$
|
16,700
|
|
Federal
funds sold
|
|
|
28,383
|
|
|
|
21,811
|
|
Total
cash and cash equivalents
|
|
|
39,654
|
|
|
|
38,511
|
|
Investment
securities
|
|
|
31,806
|
|
|
|
39,738
|
|
Loans,
less allowance for loan losses of $5,716 in 2009 and $6,019 in
2008
|
|
|
279,537
|
|
|
|
301,945
|
|
Premises
and equipment, net
|
|
|
16,746
|
|
|
|
16,811
|
|
Other
real estate owned
|
|
|
13,524
|
|
|
|
2,029
|
|
Company
owned life insurance
|
|
|
6,890
|
|
|
|
6,751
|
|
Accrued
interest receivable and other assets
|
|
|
14,839
|
|
|
|
15,668
|
|
Total
assets
|
|
$
|
402,996
|
|
|
$
|
421,453
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$
|
55,232
|
|
|
$
|
69,874
|
|
Interest
bearing
|
|
|
281,361
|
|
|
|
271,106
|
|
Total
deposits
|
|
|
336,593
|
|
|
|
340,980
|
|
Other
borrowings
|
|
|
30,000
|
|
|
|
40,000
|
|
Subordinated
debentures
|
|
|
8,764
|
|
|
|
8,764
|
|
Accrued
interest payable and other liabilities
|
|
|
4,404
|
|
|
|
4,425
|
|
Total
liabilities
|
|
|
379,761
|
|
|
|
394,169
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock - 2,000,000 shares authorized; none issued or
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock – no par value; 24,000,000 shares authorized; issued and outstanding
–3,722,198 shares in 2009 and 3,718,598 shares in 2008
|
|
|
10,795
|
|
|
|
10,767
|
|
Retained
earnings
|
|
|
13,955
|
|
|
|
18,814
|
|
Accumulated
other comprehensive loss, net of taxes
|
|
|
(1,515
|
)
|
|
|
(2,297
|
)
|
Total
shareholders' equity
|
|
|
23,235
|
|
|
|
27,284
|
|
Total
liabilities and shareholders' equity
|
|
$
|
402,996
|
|
|
$
|
421,453
|
|
See notes
to unaudited condensed consolidated financial statements
PACIFIC
STATE BANCORP
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Unaudited
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
4,741
|
|
|
$
|
6,201
|
|
|
$
|
9,765
|
|
|
$
|
12,677
|
|
Interest
on Federal funds sold
|
|
|
16
|
|
|
|
141
|
|
|
|
32
|
|
|
|
256
|
|
Interest
on investment securities
|
|
|
421
|
|
|
|
892
|
|
|
|
933
|
|
|
|
1,602
|
|
Total
interest income
|
|
|
5,178
|
|
|
|
7,234
|
|
|
|
10,730
|
|
|
|
14,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,748
|
|
|
|
2,860
|
|
|
|
3,585
|
|
|
|
5,658
|
|
Interest
on borrowings
|
|
|
311
|
|
|
|
418
|
|
|
|
617
|
|
|
|
848
|
|
Interest
on subordinated debentures
|
|
|
71
|
|
|
|
108
|
|
|
|
155
|
|
|
|
262
|
|
Total
interest expense
|
|
|
2,130
|
|
|
|
3,386
|
|
|
|
4,357
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
|
3,048
|
|
|
|
3,848
|
|
|
|
6,373
|
|
|
|
7,767
|
|
Provision
for loan losses
|
|
|
4,180
|
|
|
|
600
|
|
|
|
5,152
|
|
|
|
810
|
|
Net
interest (loss) income after provision for loan losses
|
|
|
(1,132
|
)
|
|
|
3,248
|
|
|
|
1,221
|
|
|
|
6,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges
|
|
|
156
|
|
|
|
223
|
|
|
|
320
|
|
|
|
460
|
|
Gain
on sale of loans
|
|
|
66
|
|
|
|
132
|
|
|
|
78
|
|
|
|
151
|
|
Other
than temporary impairment
|
|
|
(2,184
|
)
|
|
|
-
|
|
|
|
(2,184
|
)
|
|
|
-
|
|
Other
income
|
|
|
270
|
|
|
|
242
|
|
|
|
473
|
|
|
|
458
|
|
Total
non-interest income
|
|
|
(1,692
|
)
|
|
|
597
|
|
|
|
(1,313
|
)
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,316
|
|
|
|
1,282
|
|
|
|
2,470
|
|
|
|
2,550
|
|
Occupancy
|
|
|
272
|
|
|
|
302
|
|
|
|
551
|
|
|
|
565
|
|
Furniture
and equipment
|
|
|
203
|
|
|
|
195
|
|
|
|
471
|
|
|
|
374
|
|
Other
real estate
|
|
|
1,698
|
|
|
|
-
|
|
|
|
2,129
|
|
|
|
-
|
|
Other
expenses
|
|
|
1,578
|
|
|
|
1,046
|
|
|
|
2,743
|
|
|
|
1,831
|
|
Total
non-interest expenses
|
|
|
5,067
|
|
|
|
2,825
|
|
|
|
8,364
|
|
|
|
5,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before (benefit) provision for income taxes
|
|
|
(7,891
|
)
|
|
|
1,020
|
|
|
|
(8,456
|
)
|
|
|
2,706
|
|
(Benefit)
provision for income taxes
|
|
|
(3,326
|
)
|
|
|
441
|
|
|
|
(3,597
|
)
|
|
|
1,033
|
|
Net
(loss) income
|
|
$
|
(4,565
|
)
|
|
$
|
579
|
|
|
$
|
(4,859
|
)
|
|
$
|
1,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$
|
(1.23
|
)
|
|
$
|
0.16
|
|
|
$
|
(1.31
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share
|
|
$
|
(1.23
|
)
|
|
$
|
0.15
|
|
|
$
|
(1.31
|
)
|
|
$
|
0.43
|
|
See notes
to unaudited condensed consolidated financial statements
PACIFIC
STATE BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Month Periods Ended June 30, 2009 and 2008
(In
thousands)
(Unaudited)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(4,859
|
)
|
|
$
|
1,673
|
|
Provision
for loan losses
|
|
|
5,152
|
|
|
|
810
|
|
Net
increase in deferred loan origination costs
|
|
|
(222
|
)
|
|
|
(1
|
)
|
Depreciation,
amortization and accretion
|
|
|
450
|
|
|
|
80
|
|
Stock-based
compensation expense
|
|
|
28
|
|
|
|
171
|
|
Gain
on sale of loans
|
|
|
|
|
|
|
(151
|
)
|
Company
owned life insurance earnings
|
|
|
(139
|
)
|
|
|
(135
|
)
|
Other
real estate impairment
|
|
|
1,788
|
|
|
|
-
|
|
Other
than temporary impairment
|
|
|
2,184
|
|
|
|
-
|
|
Decrease
in accrued interest receivable and other assets
|
|
|
65
|
|
|
|
557
|
|
Decrease
in accrued interest payable and other liabilities
|
|
|
(22
|
)
|
|
|
(2,661
|
)
|
Net
cash provided by operating activities
|
|
|
4,425
|
|
|
|
343
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease
in interest bearing deposits at other banks
|
|
|
-
|
|
|
|
3,000
|
|
Purchases
of available-for-sale investment securities
|
|
|
(6,580
|
)
|
|
|
(21,102
|
)
|
Proceeds
from the sale of available-for-sale securities
|
|
|
7,351
|
|
|
|
-
|
|
Proceeds
from matured and called available-for-sale investment
securities
|
|
|
-
|
|
|
|
12,735
|
|
Proceeds
from principal repayments from available-for-sale government-guaranteed
mortgage-backed securities
|
|
|
6,441
|
|
|
|
730
|
|
Proceeds
from principal repayments from held-to-maturity government-guarantee
mortgage-backed securities
|
|
|
4
|
|
|
|
20
|
|
Purchase
of FRB and FHLB stock
|
|
|
-
|
|
|
|
(14
|
)
|
Proceeds
from the sale of other real estate
|
|
|
1,587
|
|
|
|
-
|
|
Proceeds
from loan sales
|
|
|
3,699
|
|
|
|
3,241
|
|
Net
increase in loans
|
|
|
(1,017
|
)
|
|
|
(16,882
|
)
|
Purchases
of premises and equipment
|
|
|
(380
|
)
|
|
|
(1,214
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
11,105
|
|
|
|
(19,486
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
decrease in demand, interest-bearing and savings deposits
|
|
|
(10,594
|
)
|
|
|
(3,170
|
)
|
Net
increase in time deposits
|
|
|
6,207
|
|
|
|
32,753
|
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
|
56
|
|
Net
decrease in other borrowings
|
|
|
(10,000
|
)
|
|
|
(5,000
|
)
|
Net
cash (used in) provided by financing Activities
|
|
|
(14,387
|
)
|
|
|
24,639
|
|
Increase
in cash and cash equivalents
|
|
|
1,143
|
|
|
|
5,496
|
|
Cash
and cash equivalents at beginning of period
|
|
|
38,511
|
|
|
|
45,674
|
|
Cash
and cash equivalents at end of period
|
|
$
|
39,654
|
|
|
$
|
51,170
|
|
Pacific
State Bancorp and Subsidiary
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
GENERAL
Pacific
State Bancorp is a holding company with one bank subsidiary, Pacific State Bank,
(the “Bank”), and two unconsolidated subsidiary grantor trusts, Pacific State
Statutory Trusts II and III. Pacific State Bancorp commenced
operations on June 24, 2002 after acquiring all of the outstanding shares of
Pacific State Bank. The Bank is a California state chartered bank
formed on November 2, 1987. The Bank is a member of the Federal Reserve System.
The Bank’s primary source of revenue is interest on loans to customers who are
predominantly small to middle-market businesses and middle-income
individuals. Pacific State Statutory Trusts II and III are
unconsolidated, wholly owned statutory business trusts formed in March 2004 and
June 2007, respectively for the exclusive purpose of issuing and selling trust
preferred securities.
The Bank
conducts general commercial banking business, primarily in the five county
region that comprises Alameda, Calaveras, San Joaquin, Stanislaus and Tuolumne
counties, 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 May 8, 2009, had 92 employees. The Bank does not engage in any
non-banking related 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 operates
nine branches with its Administrative Office located at 1899 W. March Lane, in
Stockton, California; additional branches are located in the communities of
Angels Camp, Arnold, Groveland, Lodi, Modesto, Stockton, Tracy, and Hayward,
California. Pacific State Bancorp common stock trades on the NASDAQ
Global Market under the symbol of “PSBC”.
2. BASIS
OF PRESENTATION AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the
opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of Pacific State
Bancorp (the "Company") at June 30, 2009 and December 31, 2008, and the results
of its operations for the three and six month periods ended June 30, 2009 and
2008, and its cash flows for the six month periods ended June 30, 2009 and 2008
in conformity with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the Securities and Exchange Commission (“SEC”).
Certain
disclosures normally presented in the notes to the consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America for annual financial statements have been
omitted. The Company believes that the disclosures in the interim
condensed consolidated financial statements are adequate to make the information
not misleading. These interim condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2008 Annual Report to
Shareholders. The results of operations for the three and six
month period ended June 30, 2009 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 losses, the provision for income taxes and the estimated fair
value of investment securities.
Management
has determined that all of the commercial banking products and services offered
by the Company are available in each branch of the Bank, that all branches are
located within the same economic environment and that management does not
allocate resources based on the performance of different lending or transaction
activities. Accordingly, the Company and its subsidiary operate as one business
segment. No customer accounts for more than 10% of the revenue for the Bank or
the Company.
3.
LOANS
Outstanding
loans are summarized below:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
77,353
|
|
|
$
|
81,284
|
|
Agricultural
|
|
|
12,354
|
|
|
|
13,153
|
|
Real
estate - commercial mortgage
|
|
|
150,105
|
|
|
|
135,013
|
|
Real
estate - construction
|
|
|
32,065
|
|
|
|
64,762
|
|
Installment
|
|
|
13,011
|
|
|
|
13,609
|
|
Gross
loans
|
|
|
284,888
|
|
|
|
307,821
|
|
Deferred
loan origination costs, net
|
|
|
365
|
|
|
|
143
|
|
Allowance
for loan losses
|
|
|
(5,716
|
)
|
|
|
(6,019
|
)
|
Net
loans
|
|
$
|
279,537
|
|
|
$
|
301,945
|
|
4.
COMMITMENTS AND CONTINGENCIES
The
Company is party to claims and legal proceedings arising in the ordinary course
of business. In the opinion of the Company’s management, the ultimate
liability with respect to such proceedings will not have a materially adverse
effect on the financial condition or results of operations of the Company as a
whole.
In the
normal course of business there are outstanding various commitments to extend
credit which are not reflected in the consolidated financial statements,
including loan commitments of approximately $36,553,000 and $55,522,000 and
stand-by letters of credit of $1,587,000 and $1,557,000 at June 30, 2009 and
December 31, 2008, respectively. However, all such commitments will
not necessarily culminate in actual extensions of credit by the
Company.
Approximately
$3,655,000 of the loan commitments outstanding at June 30, 2009 are for real
estate loans and are expected to fund within the next twelve
months. The remaining commitments primarily relate to revolving lines
of credit or other commercial loans, and many of these are expected to expire
without being drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements. Each potential
borrower and the necessary collateral are evaluated on an individual
basis. Collateral varies, but may include real property, bank
deposits, debt or equity securities or business assets.
Stand-by
letters of credit are commitments written to guarantee the performance of a
customer to a third party. These guarantees are issued primarily
relating to purchases of inventory by commercial customers and are typically
short term in nature. Credit risk is similar to that involved in
extending loan commitments to customers and accordingly, evaluation and
collateral requirements similar to those for loan commitments are
used. Virtually all such commitments are collateralized. The deferred
liability related to the Company’s stand-by letters of credit was not
significant at June 30, 2009 and December 31, 2008.
5.
EARNINGS (LOSS) PER SHARE COMPUTATION
Basic
earnings (loss) per share are computed by dividing net income (loss) 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 weighted average dilutive effect of
outstanding options. In the three and six months ended June 30, 2009,
the Company recognized a net loss. Due to the net loss, the diluted
loss per share is equal to the basic loss per share. At June 30,
2009, the Company had 519,000 anti-dilutive shares outstanding.
6.
COMPREHENSIVE (LOSS) INCOME
Comprehensive
(loss) income is reported in addition to net (loss) income for all periods
presented. Comprehensive (loss) income is made up of net (loss)
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
total comprehensive (loss) income and its components for the periods
indicated:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
(Loss) Income
|
|
$
|
(4,565
|
)
|
|
$
|
579
|
|
|
$
|
(4,859
|
)
|
|
$
|
1,673
|
|
Other
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized loss on available for sale securities
|
|
|
836
|
|
|
|
(895
|
)
|
|
|
782
|
|
|
|
(982
|
)
|
Reclassification
adjustment
|
|
|
(1,220
|
)
|
|
|
11
|
|
|
|
(1,197
|
)
|
|
|
11
|
|
Total
Other Comprehensive Loss
|
|
|
(384
|
)
|
|
|
(884
|
)
|
|
|
(415
|
)
|
|
|
(971
|
)
|
Total
Comprehensive (Loss) Income
|
|
$
|
(4,949
|
)
|
|
$
|
(305
|
)
|
|
$
|
(5,274
|
)
|
|
$
|
702
|
|
7. STOCK
–BASED COMPENSATION
Stock
Option Plan
The
Company’s only stock-based compensation plan, the Pacific State Bancorp 1997
Stock Option Plan (the “Plan”), terminated in 2007. The Plan requires that the
option price may not be less than the fair market value of the stock at the date
the option is granted, and that the stock must be paid in full at the time the
option is exercised. The options expire on a date determined by the Board of
Directors, but not later than ten years from the date of grant. The vesting
period is determined by the Board of Directors and is generally over five
years. New shares are issued upon the exercise of
options
Stock
Option Compensation
There
were no stock options granted in the six month period ended June 30, 2009 and
none granted for the six months ended June 30, 2008. For the three
and six month periods ended June 30, 2009 and 2008, the compensation cost
recognized for stock option compensation was $14,000 and $28,000 in 2009 and
$86,000 and $171,000 in 2008, respectively. The excess tax benefits were not
significant for the Company.
At June
30, 2009, the total compensation cost related to nonvested stock option awards
granted to employees under the Company’s stock option plans but not yet
recognized was $172,000. This cost is expected to be recognized over
a weighted average remaining period of 3.25 years and will be adjusted for
subsequent changes in estimated forfeitures.
Stock
Option Activity
A summary
of option activity under the stock option plans as of June 30, 2009 and changes
during the period then ended is presented below:
Options
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value ($000)
|
|
Outstanding
at January 1, 2009
|
|
|
645,869
|
|
|
$
|
7.73
|
|
|
4.8
Years
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(3,600
|
)
|
|
|
5.42
|
|
|
|
3.6
Years
|
|
|
|
-
|
|
Cancelled
|
|
|
(123,200
|
)
|
|
|
7.42
|
|
|
|
4.5
Years
|
|
|
|
-
|
|
Outstanding
at June 30, 2009
|
|
|
519,069
|
|
|
$
|
7.82
|
|
|
4.3
Years
|
|
|
$
|
-
|
|
Options
vested or expected to vest at June 30, 2009
|
|
|
519,069
|
|
|
$
|
7.82
|
|
|
4.3
Years
|
|
|
$
|
-
|
|
Exercisable
at June 30, 2009
|
|
|
495,069
|
|
|
$
|
7.25
|
|
|
4.1
Years
|
|
|
$
|
-
|
|
The
intrinsic value was derived from the closing market price of the Company’s
common stock of $1.24 as of June 30, 2009.
8. INCOME
TAXES
The
Company files its income taxes on a consolidated basis with its subsidiaries.
The allocation of income tax expense (benefit) represents each entity’s
proportionate share of the consolidated provision for income taxes.
The
Company accounts for income taxes using the liability or balance sheet method.
Under this method, deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the consolidated balance sheet, net deferred tax assets are
included in accrued interest receivable and other assets.
Accounting
for Uncertainty in Income Taxes
The
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon
examination. The Company recognizes accrued interest and penalties related
to unrecognized tax benefits, if applicable, as a component of interest expense
in the consolidated statements of operations. There have been no
significant changes to unrecognized tax benefits or accrued interest and
penalties for the three and six months ended June 30, 2009.
9. FAIR
VALUE MEASUREMENT
The
measurement of fair value under US GAAP uses a hierarchy intended to maximize
the use of observable inputs and minimize the use of unobservable
inputs. This hierarchy uses three levels of inputs to measure the
fair value of assets and liabilities as follows:
Level 1:
Quoted prices in active exchange markets for identical assets or liabilities;
also includes certain U.S. Treasury and other U.S. government and agency
securities actively traded in over-the-counter markets.
Level 2:
Observable inputs other than Level 1 including quoted prices for similar
assets or liabilities, quoted prices in less active markets, or other observable
inputs that can be corroborated by observable market data; also includes
derivative contracts whose value is determined using a pricing model with
observable market inputs or can be derived principally from or corroborated by
observable market data. This category generally includes certain U.S.
government and agency securities, corporate debt securities, derivative
instruments, and residential mortgage loans held for sale.
Level 3:
Unobservable inputs supported by little or no market activity for
financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires significant management judgment or
estimation; also includes observable inputs for single dealer nonbinding quotes
not corroborated by observable market data. This category generally includes
certain private equity investments, retained interests from securitizations, and
certain collateralized debt obligations.
Assets
measured at fair value on a recurring basis comprised the following at June 30,
2009:
(Dollars
in thousands)
Description
|
|
Fair
Value
June
30, 2009
|
|
|
Fair
Value Measurements
at
June 30, 2009 using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Other
Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
31,806
|
|
|
$
|
11,978
|
|
|
$
|
19,703
|
|
|
$
|
125
|
|
Total
|
|
$
|
31,806
|
|
|
$
|
11,978
|
|
|
$
|
19,703
|
|
|
$
|
125
|
|
The
investment securities measured at fair value utilizing Level 1 and Level 2
inputs are obligations of the U.S. Treasury, agencies and corporations of the
U.S. government, including mortgage-backed securities, bank eligible obligations
of any state or political subdivision in the U.S., bank eligible corporate
obligations, including private-label mortgage-backed securities and common
stocks issued by various unrelated banking holding companies. The
fair values used by the Company are obtained from an independent pricing service
and represent either quoted market prices for the identical securities (Level 1
inputs) or fair values determined by pricing models that consider observable
market data, such as interest rate volatilities, LIBOR yield curve, credit
spreads and prices from market makers and live trading
systems.
The
investment security measured at fair value using Level 3 inputs is a
collateralized debt obligations, with a total book value of $125,000 for
which there is not an active market and the Company recorded an other than
temporary impairment charge on in the second quarter of 2009. The
Company uses multiple input factors to determine the fair value of these
securities. Those input factors are discounted cash flow analysis,
structure of the security in relation to current level of deferrals and/or
defaults, changes in credit ratings, financial condition of the debtors within
the underlying securities, broker quotes for securities with similar structure
and credit risk, interest rate movements and pricing of new
issuances.
The
following is a reconciliation of activity for assets measured at fair value
based on significant unobservable (non-market) information:
|
|
Investment
Securities
|
|
Balance,
January 1, 2009
|
|
$
|
-
|
|
Assets
added during the period
|
|
|
125
|
|
Unrealized
loss included in comprehensive income
|
|
|
-
|
|
Adjustment
to initially apply FASB FSP 115-2
|
|
|
-
|
|
Balance,
June 30, 2009
|
|
$
|
125
|
|
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets measured at fair value on a
non-recurring basis included the following:
Impaired Loans:
Impaired loans are measured and reported at fair value in accordance with
the provisions of FASB SFAS No. 114,
Accounting by Creditors for
Impairment of a Loan.
Management’s determination of the fair
value for these loans represents the estimated net proceeds to be received from
the sale of the collateral based on observable market prices and market value
provided by independent, licensed or certified appraisers (Level 2
Inputs). At June 30, 2009, impaired loans with an aggregate
outstanding principal balance of $40.7 million were measured and reported at a
fair value of $38.1 million. During the three months and six months
ended June 30, 2009, the Company recognized losses on impaired loans of $3.98
million and $4.98 million, respectively, through the allowance for loan
losses.
Other real estate
owned
-
Other real estate owned
represents real estate which the Company has taken control of in partial or full
satisfaction of loans. At the time of foreclosure, other real estate owned is
recorded at the fair value of the real estate less costs to sell, which becomes
the property’s new basis.
(Dollars
in thousands)
Description
|
|
Fair
Value
June
30, 2009
|
|
|
Fair
Value Measurements
at
June 30, 2009 using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Other
Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
38,077
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,077
|
|
Other
real estate owned
|
|
|
13,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,524
|
|
Total
|
|
$
|
51,601
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51,601
|
|
The
following table presents the fair values of financial assets and liabilities
carried on the Company’s consolidated balance sheet, including those financial
assets and financial liabilities that are not measured and reported at fair
value on a recurring basis or non-recurring basis:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
11,271
|
|
|
$
|
11,271
|
|
|
$
|
16,700
|
|
|
$
|
16,700
|
|
Federal
funds sold
|
|
|
28,383
|
|
|
|
28,383
|
|
|
|
21,811
|
|
|
|
21,811
|
|
Investment
securities
|
|
|
31,806
|
|
|
|
31,806
|
|
|
|
39,738
|
|
|
|
39,738
|
|
Loans,
net
|
|
|
279,537
|
|
|
|
285,253
|
|
|
|
301,945
|
|
|
|
305,257
|
|
Other
real estate owned
|
|
|
13,524
|
|
|
|
13,524
|
|
|
|
2,029
|
|
|
|
2,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
336,593
|
|
|
$
|
338,670
|
|
|
$
|
340,980
|
|
|
$
|
343,084
|
|
Other
borrowings
|
|
|
30,000
|
|
|
|
30,637
|
|
|
|
40,000
|
|
|
|
40,019
|
|
Subordinated
debentures
|
|
|
8,764
|
|
|
|
2,629
|
|
|
|
8,764
|
|
|
|
2,918
|
|
The
methodologies for estimating the fair value of financial assets and liabilities
that are measured at fair value on a recurring or non-recurring basis are
discussed above. For certain financial assets and liabilities,
carrying value approximates fair value due to the nature of the financial
instrument. These instruments include cash and cash equivalents,
demand and other non-maturity deposits and overnight borrowings. The
Company used the following methods and assumptions in estimating the fair value
of the following financial
instruments:
Loans:
The
fair value of performing variable rate loans that reprice frequently and
performing demand loans, with no significant change in credit risk, is based on
carrying value. The fair value of fixed rate performing loans is
estimated using discounted cash flow analyses and interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
The fair
value of significant nonperforming loans is based on either the estimated fair
value of underlying collateral or estimated cash flows, discounted at a rate
commensurate with the risk. Assumptions regarding credit risk, cash
flows, and discount rates are determined using available market information and
specific borrower information.
Deposits:
The fair value of fixed maturity certificates of deposit is estimated
using a discounted cash flow calculation based on current rates offered for
deposits of similar remaining maturities.
Borrowings:
The fair value of long-term borrowings is estimated using discounted cash
flow analysis based on rates currently available to the Company for borrowings
with similar terms.
Junior
Subordinated Notes Held by Subsidiary Trust:
The fair value of the junior
subordinated notes held by subsidiary trust is estimated using current
market rates of securities with similar risk and remaining
maturity.
Bank
premises and equipment, customer relationships, deposit base, banking center
networks, and other information required to compute the Company’s aggregate fair
value are not included in the above information. Accordingly, the
above fair values are not intended to represent the aggregate fair value of the
Company.
10. NEW
ACCOUNTING PRONOUNCEMENTS
On June
29, 2009, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards (“SFAS”) No. 168,
The
FASB Accounting Standards
Codification
TM
and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No.
162 (“SFAS 168”)
. SFAS 168 establishes the
FASB Accounting Standards
Codification
TM
as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with US GAAP. SFAS 168 will be effective for financial
statements issued for interim and annual periods ending after September 15,
2009, for most entities. On the effective date, all non-SEC
accounting and reporting standards will be superceded. Pacific State
Bancorp will adopt SFAS 168 for the quarterly period ended September 30, 2009,
as required, and adoption is not expected to have a material impact on Pacific
State Bancorp’s financial statements taken as a whole.
On June
12, 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of
Financial Assets
(“SFAS 166”), and SFAS No.167,
Amendments to FASB Interpretation
No. 46(R)
(“SFAS 167”), which change the way entities account for
securitizations and special-purpose entities.
SFAS 166
is a revision to FASB SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
, and
will require more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. SFAS 166 also
eliminates the concept of a “qualifying special-purpose entity”, changes the
requirements for derecognizing financial assets and requires additional
disclosures.
SFAS 167
is a revision to FASB Interpretation No. 46(R),
Consolidation of Variable Interest
Entities
, and changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance.
Both SFAS
166 and SFAS 167 will be effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is
prohibited. The recognition and measurement provisions of SFAS 166
shall be applied to transfers that occur on or after the effective
date. Pacific State Bancorp will adopt both SFAS 166 and SFAS 167 on
January 1, 2010, as required. Management has not determined the
impact adoption may have on Pacific State Bancorp’s consolidated financial
statements.
On May
28, 2009, the FASB issued SFAS No. 165,
Subsequent Events
(“SFAS
165”). Under SFAS 165, companies are required to evaluate events and
transactions that occur after the balance sheet date but before the date the
financial statements are issued, or available to be issued in the case of
non-public entities. SFAS 165 requires entities to recognize in the
financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation
process. Entities shall not recognize the impact of events or
transactions that provide evidence about conditions that did not exist at the
balance sheet date but arose after that date. SFAS 165 also requires
entities to disclose the date through which subsequent events have been
evaluated. SFAS 165 was effective for interim and annual reporting
periods ending after June 15, 2009. Pacific State Bancorp adopted the
provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and
adoption did not have a material impact on Pacific State Bancorp’s financial
statements taken as a whole.
The
adoption of SFAS 165 did not impact the Company’s financial position or
results of operations. The Company evaluated all events or transactions that
occurred from June 30, 2009 to August 14, 2009, the date the Company issued
these financial statements.
On April
1, 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1,
Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies
(“FSP 141(R)-1”). FSP 141(R)-1 provides
additional guidance regarding the recognition, measurement and disclosure of
assets and liabilities arising from contingencies in a business
combination. FSP 141(R)-1 is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The impact of Pacific State Bancorp
adopting FSP 141(R)-1 will depend on the timing of future acquisitions, as well
as the nature and existence of contingencies associated with such
acquisitions.
In April
2009, the Financial Accounting Standards Board (FASB) issued the following three
FASB Staff Positions (FSPs) intended to provide additional guidance and enhance
disclosures regarding fair value measurements and impairment of
securities:
FSP FAS
157-4,
Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
, provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have decreased significantly. FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly. The provisions of FSP FAS 157-4 were adopted by
the Company on January 1, 2009 and did not have a significant effect on the
Company’s financial position or results of operations.
FSP FAS
107-1 and APB 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
,
requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The provisions of FSP FAS 107-1
and APB 28-1 were adopted by the Company on January 1, 2009 and the required
disclosures are presented in Note 9.
FSP FAS
115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
, amends current other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities.
The provisions of FSP FAS 115-2 and FAS 124-2 were adopted by the Company on
January 1, 2009. Management has determined that there was no material
effect on the Company’s financial position or results of operations from the
adoption of the standards.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain
matters discussed in this Quarterly Report are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties include, among others (1) significant increases in competitive
pressures in the financial services industry; (2) changes in the interest rate
environment resulting in reduced margins; (3) general economic conditions,
either nationally or regionally, may be less favorable than expected, resulting
in among other things, a deterioration in credit quality; (4) changes in the
regulatory environment; (5) loss of key personnel; (6) fluctuations in the real
estate market; (7) changes in business conditions and inflation; (8) operational
risks including data processing systems failures and fraud; and (9) changes in
the securities market. Therefore the information set forth herein
should be carefully considered when evaluating the business prospects of the
Company.
When the
Company uses in this Quarterly Report the words “anticipate”, “estimate”,
“expect”, “project”, “intend, “commit”, “believe” and similar expressions, the
Company intends to identify forward-looking statements. Such
statements are not guarantees of performance and are subject to certain risks,
uncertainties and assumptions, including those described in this Quarterly
Report. Should one or more of the uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected, projected, intended, committed or
believed. The future results and stockholder values of the Company
may differ materially from those expressed in these forward-looking
statements. Many factors that will determine these results and values
are beyond the Company’s ability to control or predict. For those
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
INTRODUCTION
The
following discussion and analysis sets forth certain statistical information
relating to the Company as of June 30, 2009 and December 31, 2008 and for the
three and six month periods ended June 30, 2009 and 2008. The
discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report and the consolidated financial statements and notes thereto included in
Pacific State Bancorp’s Annual Report filed on Form 10-K for the year
ended December 31, 2008.
CRITICAL
ACCOUNTING POLICIES
There
have been no changes to the Company’s critical accounting policies from those
discussed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Company’s 2008 Annual Report on Form
10-K.
OVERVIEW
The 2009
second quarter net loss of $4,565,000 compares to net income of $579,000 for the
second quarter of 2008. The decrease in net income compared to
the second quarter of 2008 was primarily driven by significant increases in the
provision for loan losses of $3,580,000, other real estate expense of
$1,698,000, and an other than temporary impairment charge of $2,184,000 which
was offset by a tax benefit of $3,326,000. In addition to the items
discussed above, the bank has experienced a contracting net interest margin as
nonperforming assets increase and account for a greater portion of the balance
sheet.
The
2009 first half net loss of $4,859,000 compares to net income of
$1,673,000 for the first half of 2008. The decrease in
net income compared to the first half of 2008 was primarily
driven by significant increases in the provision for loan losses of $4,342,000,
other real estate expense of $2,129,000, and an other than temporary impairment
charge of $2,184,000 which was offset by a tax benefit of
$3,597,000. In addition to the items discussed above, the bank has
experienced a contracting net interest margin as nonperforming assets increase
and account for a greater portion of the balance sheet.
The
increased level of provision for loan losses is primarily the result of the Bank
completing foreclosure on three large commercial real estate projects and
complete charge-off of a large unsecured loan. At the time of
foreclosure new appraisals were ordered which reflected a significant decline in
the value of the projects from late 2008 when the last appraisals were
received. The Bank also experienced some additional credit
deterioration in the second quarter of 2009, although the rate at which
deterioration is occurring appears to have slowed. The Bank has been
negatively affected by declining real estate values and economic environment of
the region where the Company operates. Other real estate expense is
primarily the result of selling and administration costs related to the
foreclosure of the properties discussed above, and also reflects decreasing
prices experienced in the market for the type of other real estate the Bank
currently owns. The other than temporary impairment charge was
related to a single issue trust preferred security which announced deferral of
interest payments. This action caused the value of the security to
decline significantly and credit agency downgrades which prompted the other than
temporary impairment charge. The contraction of the net interest
margin in 2009 compared to 2008 was primarily the result of higher
levels of nonaccrual loans and nonperforming assets. Nonaccrual loans
have the effect of driving down loan portfolio yields, causing a contraction in
the net interest margin.
The
annualized loss on average assets was 4.36% for the three month period
ended June 30, 2009 compared to an annualized return on average assets of 0.51%
for the same period in 2008. The annualized loss on average equity
was 70.47% for the three month period June 30, 2009 compared to a return on
annualized average assets of 6.50% for the same period in 2008. The loss on
average assets and loss on average equity compared to a return on
average assets and average equity for the same time period in 2008 is
primarily attributable to the net loss recorded for the second
quarter of 2009 compared to net income in 2008.
The
annualized loss on average assets was 2.38% for the six month period ended June
30, 2009 compared to an annualized return on average assets of 0.77% for the
same period in 2008. The annualized loss on average equity was 36.67%
for the six month period June 30, 2009 compared to a return on annualized
average assets of 9.60% for the same period in 2008. The loss on average assets
and loss on average equity compared to a return on average assets and
average equity for the same time period in 2008 is primarily attributable
to the net loss recorded for the first half of 2009 compared to net income in
2008.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009
The
Company recorded a net loss of $4,565,000 for the three months ended June 30,
2009 compared to net income of $579,000 for the same period in
2008. The primary contributors to the decrease in net income for the
three months ended June 30, 2009 were the (1) increase in provision for loan
losses of $3,580,000, (2) Other than temporary impairment charge of $2,184,000,
(3) increase of other real estate expense of $1,698,000 and (4) $800,000
decrease in net interest income. These changes were partially offset
by a decreased provision for income taxes of $3,767,000. The decrease
in the provision for income taxes is primarily a result of the decrease in
taxable income. The Company recorded a basic loss per share of $1.23
for the three months ended June 30, 2009 from basic earnings per share of $0.16
for the same period in 2008. The Company recorded a diluted loss per
share of $1.23 for the three months ended June 30, 2009 from diluted earnings
per share of $0.15 for the same period in 2008.
Net
interest income before provision for loan losses
|
|
Three
Months Ended June 30,
|
|
(Dollars
in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
4,741
|
|
|
$
|
6,201
|
|
|
$
|
(1,460
|
)
|
|
|
(23.5
|
)%
|
Interest
on Federal funds sold
|
|
|
16
|
|
|
|
141
|
|
|
|
(125
|
)
|
|
|
(88.7
|
)
|
Interest
on investment securities
|
|
|
421
|
|
|
|
892
|
|
|
|
(471
|
)
|
|
|
(52.8
|
)
|
Total
interest income
|
|
|
5,178
|
|
|
|
7,234
|
|
|
|
(2,056
|
)
|
|
|
(28.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,748
|
|
|
|
2,860
|
|
|
|
(1,112
|
)
|
|
|
(38.9
|
)
|
Interest
on other borrowings
|
|
|
311
|
|
|
|
418
|
|
|
|
(107
|
)
|
|
|
(25.6
|
)
|
Interest
on subordinated debentures
|
|
|
71
|
|
|
|
108
|
|
|
|
(37
|
)
|
|
|
(34.3
|
)
|
Total
interest expense
|
|
|
2,130
|
|
|
|
3,386
|
|
|
|
(1,256
|
)
|
|
|
(37.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
$
|
3,048
|
|
|
$
|
3,848
|
|
|
$
|
(800
|
)
|
|
|
(20.8
|
)%
|
Net
interest income is the interest earned on debt securities, loans (including
yield-related loan fees) and other interest-earning assets minus the interest
paid for deposits and long-term and short-term debt. The net interest margin is
the average yield on earning assets minus the average interest rate paid for
deposits and our other sources of funding.
The
decreased net interest income performance is primarily the result of the Bank
experiencing a contraction in its net interest margin. The
contraction of the net interest margin is the result of an increased level of
nonaccrual loans and nonperforming assets. Increased levels of
nonaccrual loans have the effect of reducing loan yields over the time
period. Increased levels of nonaccrual loans coupled with decreasing
market rates charged on loan balances have caused the yields earned on the loan
portfolio to decrease from 7.58% for the second quarter of 2008 to 6.37% for the
second quarter of 2009. The yield earned on all interest earning
assets in the second quarter of 2009 totaled 5.64% compared to 7.09% for the
same time period in 2008. In addition to the decrease in yields
earned on assets, total average earning assets decreased $41,719,000 to
$368,366,000 for the second quarter of 2009 from $410,085,000 for the same time
period in 2008. The decrease in average earning assets occurred
primarily in the loan portfolio where average balances decreased $30,553,000 or
9.3% to $298,454,000 in the second quarter of 2009 from $329,007,000 for the
same time period in 2008.
The net
interest margin for the three months ended June 30, 2009 decreased 45 basis
points to 3.32%, from 3.77% for the same period in 2008. The decrease in
interest income described above was offset by a decrease in the level of funding
and rate paid for the funding of assets during the second quarter of 2009
compared to the same time period in 2008. The cost of funding in the
second quarter of 2009 totaled 2.58% compared to 3.89% in the second quarter of
2008. The cost of funding decreased primarily because of decreased
market rates paid for deposits and borrowings during the second quarter of
2009 compared to the same time period in 2008. In addition to
decreased rates paid on deposits, the average balance on which interest was paid
decreased by $18,905,000 to $330,782,000 for the second quarter of 2009 from
$349,687,000 for the same period in 2008. The decrease was primarily
attributable to a decrease of $27,536,000 in time deposits to $200,138,000 for
the second quarter of 2009 from $227,674,000 for the same time period in
2008.
The
following table presents for the three month period indicated the distribution
of consolidated average assets, liabilities and shareholders’
equity. It also presents the amounts of interest income from the
interest earning assets and the resultant yields expressed in both dollars and
rate percentages. Average balances are based on daily
averages. Nonaccrual loans are included in the calculation of average
loans while nonaccrued interest thereon is excluded from the computation of
yields earned:
|
|
Yield
Analysis
|
|
|
For
Three Months Ended June 30,
|
|
(Dollars
in thousands)
|
2009
|
|
|
2008
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Income
or
|
|
|
Yield
or
|
|
|
Average
|
|
|
Income
or
|
|
|
Yield
or
|
|
Assets:
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)(2)
|
|
$
|
298,454
|
|
|
$
|
4,741
|
|
|
|
6.37
|
%
|
|
$
|
329,007
|
|
|
$
|
6,201
|
|
|
|
7.58
|
%
|
Investment
securities(2)
|
|
|
39,041
|
|
|
|
421
|
|
|
|
4.33
|
%
|
|
|
51,061
|
|
|
|
892
|
|
|
|
7.03
|
%
|
Federal
funds sold
|
|
|
30,871
|
|
|
|
16
|
|
|
|
0.21
|
%
|
|
|
28,821
|
|
|
|
129
|
|
|
|
1.80
|
%
|
Interest
bearing deposits in banks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,196
|
|
|
|
12
|
|
|
|
4.04
|
%
|
Total
average earning assets
|
|
$
|
368,366
|
|
|
$
|
5,178
|
|
|
|
5.64
|
%
|
|
$
|
410,085
|
|
|
$
|
7,234
|
|
|
|
7.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
11,875
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
23,120
|
|
|
|
|
|
|
|
|
|
|
|
14,949
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
18,539
|
|
|
|
|
|
|
|
|
|
|
|
15,857
|
|
|
|
|
|
|
|
|
|
Allowance
for loan loss
|
|
|
(6,378
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,036
|
)
|
|
|
|
|
|
|
|
|
Total
average assets
|
|
$
|
415,522
|
|
|
|
|
|
|
|
|
|
|
$
|
451,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
68,134
|
|
|
$
|
182
|
|
|
|
1.07
|
%
|
|
$
|
68,755
|
|
|
$
|
399
|
|
|
|
2.33
|
%
|
Savings
|
|
|
13,835
|
|
|
|
39
|
|
|
|
1.13
|
%
|
|
|
5,393
|
|
|
|
7
|
|
|
|
0.52
|
%
|
Time
deposits
|
|
|
200,138
|
|
|
|
1,527
|
|
|
|
3.06
|
%
|
|
|
227,674
|
|
|
|
2,454
|
|
|
|
4.34
|
%
|
Other
borrowings(3)
|
|
|
48,676
|
|
|
|
382
|
|
|
|
3.15
|
%
|
|
|
47,865
|
|
|
|
526
|
|
|
|
4.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
average interest-bearing liabilities
|
|
$
|
330,782
|
|
|
$
|
2,130
|
|
|
|
2.58
|
%
|
|
$
|
349,687
|
|
|
$
|
3,386
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
54,849
|
|
|
|
|
|
|
|
|
|
|
|
62,812
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
4,190
|
|
|
|
|
|
|
|
|
|
|
|
3,914
|
|
|
|
|
|
|
|
|
|
Total
average liabilities
|
|
|
389,821
|
|
|
|
|
|
|
|
|
|
|
|
416,413
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
25,700
|
|
|
|
|
|
|
|
|
|
|
|
35,456
|
|
|
|
|
|
|
|
|
|
Total
average liabilities and shareholders' equity
|
|
$
|
415,522
|
|
|
|
|
|
|
|
|
|
|
$
|
451,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
3,048
|
|
|
|
|
|
|
|
|
|
|
$
|
3,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin(4)
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
(1)
|
Net
loan (costs) fees included in loan interest income for the three month
periods ended June 30, 2009 and 2008 amounted to $(53,000) and $216,000,
respectively.
|
(2)
|
Not
computed on a tax-equivalent basis.
|
(3)
|
For
the purpose of this table the interest expense related to the Company’s
junior subordinated debentures is included in other
borrowings.
|
(4)
|
Net
interest income divided by the average balance of total earning
assets.
|
The
following table sets forth changes in interest income and interest expense, for
the three month periods indicated and the change attributable to variance in
volume and rates:
|
|
Three
Months ended June 30,
|
|
|
|
2009
over 2008
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Rate
(1)
|
|
|
Volume
(2)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
(1,460
|
)
|
|
$
|
(884
|
)
|
|
$
|
(576
|
)
|
Investment
securities
|
|
|
(471
|
)
|
|
|
(261
|
)
|
|
|
(210
|
)
|
Federal
funds sold
|
|
|
(113
|
)
|
|
|
(122
|
)
|
|
|
9
|
|
Interest
bearing deposits in banks
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
Total
interest income
|
|
$
|
(2,056
|
)
|
|
$
|
(1,267
|
)
|
|
$
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
(217
|
)
|
|
$
|
(213
|
)
|
|
$
|
(4
|
)
|
Savings
|
|
|
32
|
|
|
|
21
|
|
|
|
11
|
|
Time
deposits
|
|
|
(927
|
)
|
|
|
(630
|
)
|
|
|
(297
|
)
|
Other
borrowings
|
|
|
(144
|
)
|
|
|
(153
|
)
|
|
|
9
|
|
Total
interest expense
|
|
$
|
(1,256
|
)
|
|
$
|
(975
|
)
|
|
$
|
(281
|
)
|
Net
interest income
|
|
$
|
(800
|
)
|
|
$
|
(292
|
)
|
|
$
|
(508
|
)
|
(1)
|
The
rate change in net interest income represents the change in rate
multiplied by the current year’s average
balance.
|
(2)
|
The
volume change in net interest income represents the change in average
balance multiplied by the current year’s
rate.
|
Provision
for loan losses
The
Company recorded $4,180,000 in provision for loan losses for the three month
period ended June 30, 2009, an increase of $3,580,000 from $600,000 for the same
period in 2008. The increase in the provision is based on
management’s assessment of the required level of reserves. Management
assesses loan quality monthly to maintain an adequate allowance for loan
losses. Based on the information currently available, management
believes that the allowance for loan losses is adequate to absorb probable
losses in the portfolio. However, no assurance can be given that the
Company may not sustain charge-offs which are in excess of the allowance in any
given period. The Company’s loan portfolio composition and
non-performing assets are further discussed under the “Financial Condition”
section below.
Non-Interest
(Loss) Income
During
the three months ended June 30, 2009, the total non-interest loss was
$(1,692,000). This non-interest loss compares to non-interest income
of $597,000 for the comparable period in 2008. The primary reason for
the non-interest loss in the second quarter of 2009 was the other than temporary
impairment charge of $2,184,000 that was recorded during the
period. The Bank has also experienced a decline in service charges
and gain on the sale of loans. The decline in service charges of
$67,000 is primarily related to decreased deposit activity and the decrease in
loan sales of $66,000 was related to a fewer number of sales compared to the
same time period in 2008.
Non-Interest
Expenses
Non-interest
expenses ordinarily consist of salaries and related employee benefits,
occupancy, furniture and equipment expenses, professional fees, appraisal fees,
directors’ fees, postage, stationary and supplies expenses, telephone expenses,
data processing expenses, advertising and promotion expense and other operating
expenses. Non-interest expense for the three months ended June 30, 2009 was
$5,067,000 compared to $2,825,000 for the same period in 2008, representing an
increase of $2,242,000 or 79%. The increase is primarily the result of expenses
related to other real estate of $1,698,000 in the second quarter of 2009 and no
expense related to other real estate in the second quarter of
2008. For further information on other real estate please see the
section titled "Other real estate owned" included in this report. The decrease
in occupancy was primarily related to moving from a leased facility to an owned
facility. Furniture and equipment expense increase is attributable to
increased costs of maintaining facilities and the addition of the new branch
located at 1547 East March Lane, Stockton. The increase in other expense of
$532,000 is primarily the result of increased legal fees associated with loan
collection and increased FDIC assessments of $466,000.
The
following table sets forth a summary of non-interest expense for the three month
periods ended June 30, 2009 and 2008:
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Non-interest
Expense:
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
1,316
|
|
|
$
|
1,282
|
|
Occupancy
|
|
|
272
|
|
|
|
302
|
|
Furniture
and equipment
|
|
|
203
|
|
|
|
195
|
|
Other
real estate
|
|
|
1,698
|
|
|
|
-
|
|
Other
expenses
|
|
|
1,578
|
|
|
|
1,046
|
|
Total
Non-Interest Expenses
|
|
$
|
5,067
|
|
|
$
|
2,825
|
|
Income
Taxes
The
Company’s provision for income taxes includes both federal income and state
franchise taxes and reflects the application of federal and state statutory
rates to the Company’s net income before taxes. The principal
difference between statutory tax rates and the Company’s effective tax rate is
the benefit derived from investing in tax-exempt securities and Company owned
life insurance. Increases and decreases in the provision for taxes
reflect changes in the Company’s net income before tax. The Company’s effective
tax rate for the three month period ended June 30, 2009 resulted in a benefit of
42.1% of pretax loss compared to a provision of 43.2% for the same period in
2008.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009
The
Company recorded a net loss of $4,859,000 for the six months ended June 30, 2009
compared to net income of $1,673,000 for the same period in 2008. The
primary contributors to the decrease in net income for the six months ended June
30, 2009 were the (1) increase in provision for loan losses of $4,342,000, (2)
Other than temporary impairment charge of $2,184,000, (3) increase of other real
estate expense of $2,129,000 and (4) $1,394,000 decrease in net interest
income. These changes were partially offset by a decreased provision
for income taxes of $4,630,000. The decrease in the provision for
income taxes is primarily a result of decrease in taxable income. The
Company recorded a basic loss per share of $1.31 for the six months ended June
30, 2009 from basic earnings per share of $0.45 for the same period in
2008. The Company recorded a diluted loss per share of $1.31 for the
six months ended June 30, 2009 from diluted earnings per share of $0.43 for the
same period in 2008.
Net
interest income before provision for loan losses
|
|
Six
Months Ended June 30,
|
|
(Dollars
in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
9,765
|
|
|
$
|
12,677
|
|
|
$
|
(2,912
|
)
|
|
|
(23.0
|
)%
|
Interest
on Federal funds sold
|
|
|
32
|
|
|
|
256
|
|
|
|
(224
|
)
|
|
|
(87.5
|
)
|
Interest
on investment securities
|
|
|
933
|
|
|
|
1,602
|
|
|
|
(669
|
)
|
|
|
(41.8
|
)
|
Total
interest income
|
|
|
10,730
|
|
|
|
14,535
|
|
|
|
(3,805
|
)
|
|
|
(26.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
3,585
|
|
|
|
5,658
|
|
|
|
(2,073
|
)
|
|
|
(36.6
|
)
|
Interest
on other borrowings
|
|
|
617
|
|
|
|
848
|
|
|
|
(231
|
)
|
|
|
(27.2
|
)
|
Interest
on subordinated debentures
|
|
|
155
|
|
|
|
262
|
|
|
|
(107
|
)
|
|
|
(40.8
|
)
|
Total
interest expense
|
|
|
4,357
|
|
|
|
6,768
|
|
|
|
(2,411
|
)
|
|
|
(35.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
$
|
6,373
|
|
|
$
|
7,767
|
|
|
$
|
(1,394
|
)
|
|
|
(17.9
|
)%
|
Net
interest income is the interest earned on debt securities, loans (including
yield-related loan fees) and other interest-earning assets minus the interest
paid for deposits and long-term and short-term debt. The net interest margin is
the average yield on earning assets minus the average interest rate paid for
deposits and our other sources of funding.
The
decreased net interest income performance is primarily the result of the Bank
experiencing a contraction in its net interest margin. The
contraction of the net interest margin is the result of an increased level of
nonaccrual loans and nonperforming assets. Increased levels of
nonaccrual loans have the effect of reducing loan yields over the time
period. Increased levels of nonaccrual loans coupled with decreasing
market rates charged on loan balances have caused the yields earned on the loan
portfolio to decrease from 7.84% for the first half of 2008 to 6.51% for the
first half of 2009. The yield earned on all interest earning assets
in the first half of 2009 totaled 5.91% compared to 7.35% for the same time
period in 2008. In addition to the decrease in yields earned on
assets, total average earning assets decreased $31,654,000 to $366,273,000 for
the first half of 2009 from $397,927,000 for the same time period in
2008. The decrease in average earning assets occurred primarily in
the loan portfolio where average balances decreased $22,933,000 or 7.1% to
$302,303,000 in the first half of 2009 from $325,236,000 for the same time
period in 2008.
The net
interest margin for the six months ended June 30, 2009 decreased 42 basis points
to 3.51%, from 3.93% for the same period in 2008. The decrease in interest
income described above was offset by a decrease in the level of funding and rate
paid for the funding of assets during the first half of 2009 compared to the
same time period in 2008. The cost of funding in the first half of
2009 totaled 2.71% compared to 4.04% for the same time period in
2008. The cost of funding decreased primarily because of decreased
market rates paid for deposits and borrowings during the first half of 2009
compared to the same time period in 2008. In addition to decreased
rates paid on deposits and borrowings, the average balance on which interest was
paid decreased by $12,748,000 to $324,249,000 for the first half of 2009 from
$336,997,000 for the same period in 2008. The decrease was
attributable to a decrease of $19,869,000 in time deposits to $194,348,000 for
the second quarter of 2009 from $214,217,000 for the same time period in
2008.
The
following table presents for the six month periods indicated the distribution of
consolidated average assets, liabilities and shareholders’ equity. It
also presents the amounts of interest income from the interest earning assets
and the resultant yields expressed in both dollars and rate
percentages. Average balances are based on daily
averages. Nonaccrual loans are included in the calculation of average
loans while nonaccrued interest thereon is excluded from the computation of
yields earned:
PACIFIC
STATE BANCORP
|
|
Yield
Analysis
|
|
|
For
Six Months Ended June 30,
|
|
(Dollars
in thousands)
|
2009
|
|
|
2008
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Income
or
|
|
|
Yield
or
|
|
|
Average
|
|
|
Income
or
|
|
|
Yield
or
|
|
Assets:
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)(2)
|
|
$
|
302,303
|
|
|
$
|
9,765
|
|
|
|
6.51
|
%
|
|
$
|
325,236
|
|
|
$
|
12,677
|
|
|
|
7.84
|
%
|
Investment
securities(2)
|
|
|
40,236
|
|
|
|
933
|
|
|
|
4.68
|
%
|
|
|
49,561
|
|
|
|
1,559
|
|
|
|
6.33
|
%
|
Federal
funds sold
|
|
|
23,734
|
|
|
|
32
|
|
|
|
0.27
|
%
|
|
|
21,037
|
|
|
|
256
|
|
|
|
2.45
|
%
|
Interest
bearing deposits in banks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,093
|
|
|
|
43
|
|
|
|
4.13
|
%
|
Total
average earning assets
|
|
$
|
366,273
|
|
|
$
|
10,730
|
|
|
|
5.91
|
%
|
|
$
|
397,927
|
|
|
$
|
14,535
|
|
|
|
7.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
12,005
|
|
|
|
|
|
|
|
|
|
|
|
13,482
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
21,199
|
|
|
|
|
|
|
|
|
|
|
|
14,705
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
19,274
|
|
|
|
|
|
|
|
|
|
|
|
15,980
|
|
|
|
|
|
|
|
|
|
Allowance
for loan loss
|
|
|
(6,311
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,520
|
)
|
|
|
|
|
|
|
|
|
Total
average assets
|
|
$
|
412,440
|
|
|
|
|
|
|
|
|
|
|
$
|
438,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
69,478
|
|
|
$
|
393
|
|
|
|
1.14
|
%
|
|
$
|
68,917
|
|
|
$
|
788
|
|
|
|
2.30
|
%
|
Savings
|
|
|
11,698
|
|
|
|
60
|
|
|
|
1.03
|
%
|
|
|
5,376
|
|
|
|
14
|
|
|
|
0.52
|
%
|
Time
deposits
|
|
|
194,348
|
|
|
|
3,132
|
|
|
|
3.25
|
%
|
|
|
214,217
|
|
|
|
4,856
|
|
|
|
4.56
|
%
|
Other
borrowings(3)
|
|
|
48,725
|
|
|
|
772
|
|
|
|
3.20
|
%
|
|
|
48,487
|
|
|
|
1,110
|
|
|
|
4.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
average interest-bearing liabilities
|
|
$
|
324,249
|
|
|
$
|
4,357
|
|
|
|
2.71
|
%
|
|
$
|
336,997
|
|
|
$
|
6,768
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
57,124
|
|
|
|
|
|
|
|
|
|
|
|
62,229
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
4,344
|
|
|
|
|
|
|
|
|
|
|
|
4,309
|
|
|
|
|
|
|
|
|
|
Total
average liabilities
|
|
|
385,717
|
|
|
|
|
|
|
|
|
|
|
|
403,535
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
26,723
|
|
|
|
|
|
|
|
|
|
|
|
35,039
|
|
|
|
|
|
|
|
|
|
Total
average liabilities and shareholders' equity
|
|
$
|
412,440
|
|
|
|
|
|
|
|
|
|
|
$
|
438,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
6,373
|
|
|
|
|
|
|
|
|
|
|
$
|
7,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin(4)
|
|
|
|
|
|
|
|
|
|
|
3.51
|
%
|
|
|
|
|
|
|
|
|
|
|
3.93
|
%
|
(1)
|
Net
loan (costs) fees included in loan interest income for the six month
periods ended June 30, 2009 and 2008 amounted to $(46,000) and $370,000,
respectively.
|
(2)
|
Not
computed on a tax-equivalent basis.
|
(3)
|
For
the purpose of this table the interest expense related to the Company’s
junior subordinated debentures is included in other
borrowings.
|
(4)
|
Net
interest income divided by the average balance of total earning
assets.
|
The
following table sets forth changes in interest income and interest expense, for
the six month periods indicated and the change attributable to variance in
volume and rates:
|
|
Six
Months ended June 30,
|
|
|
|
2009
over 2008
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Rate
(1)
|
|
|
Volume
(2)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
(2,912
|
)
|
|
$
|
(2,018
|
)
|
|
$
|
(894
|
)
|
Investment
securities
|
|
|
(626
|
)
|
|
|
(333
|
)
|
|
|
(293
|
)
|
Federal
funds sold
|
|
|
(224
|
)
|
|
|
(257
|
)
|
|
|
33
|
|
Interest
bearing deposits in banks
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
(43
|
)
|
Total
interest income
|
|
$
|
(3,805
|
)
|
|
$
|
(2,608
|
)
|
|
$
|
(1,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
(395
|
)
|
|
$
|
(401
|
)
|
|
$
|
6
|
|
Savings
|
|
|
46
|
|
|
|
30
|
|
|
|
16
|
|
Time
deposits
|
|
|
(1,724
|
)
|
|
|
(1,274
|
)
|
|
|
(450
|
)
|
Other
borrowings
|
|
|
(338
|
)
|
|
|
(343
|
)
|
|
|
5
|
|
Total
interest expense
|
|
$
|
(2,411
|
)
|
|
$
|
(1,989
|
)
|
|
$
|
(422
|
)
|
Net
interest income
|
|
$
|
(1,394
|
)
|
|
$
|
(619
|
)
|
|
$
|
(775
|
)
|
(1)
|
The
rate change in net interest income represents the change in rate
multiplied by the current year’s average
balance.
|
(2)
|
The
volume change in net interest income represents the change in average
balance multiplied by the current year’s
rate.
|
Provision
for loan losses
The
Company recorded $5,152,000 in provision for loan losses for the six month
period ended June 30, 2009, an increase of $4,342,000 from $810,000 for the same
period in 2008. The increase in the provision is based on
management’s assessment of the required level of reserves. Management
assesses loan quality monthly to maintain an adequate allowance for loan
losses. Based on the information currently available, management
believes that the allowance for loan losses is adequate to absorb probable
losses in the portfolio. However, no assurance can be given that the
Company may not sustain charge-offs which are in excess of the allowance in any
given period. The Company’s loan portfolio composition and
non-performing assets are further discussed under the “Financial Condition”
section below.
Non-Interest
(Loss) Income
During
the six months ended June 30, 2009, the total non-interest loss was
$1,313,000. This non-interest loss compares to non-interest income of
$1,069,000 for the comparable period in 2008. The primary reason for
the non-interest loss in the second quarter of 2009 was the other than temporary
impairment charge of $2,184,000 that was recorded during the
period. The Bank has also experienced a decline in service charges
and gain on the sale of loans. The decline in service charges of
$140,000 is primarily related to decreased deposit activity and the decrease in
loan sales of $73,000 was related to a fewer number of sales compared to the
same time period in 2008.
Non-Interest
Expenses
Non-interest
expenses ordinarily consist of salaries and related employee benefits,
occupancy, furniture and equipment expenses, professional fees, appraisal fees,
directors’ fees, postage, stationary and supplies expenses, telephone expenses,
data processing expenses, advertising and promotion expense and other operating
expenses. Non-interest expense for the six months ended June 30, 2009 was
$8,364,000 compared to $5,320,000 for the same period in 2008, representing an
increase of $3,044,000 or 57%. The increase is primarily the result of expenses
related to other real estate of $2,129,000 in the first half of 2009 and no
expense related to other real estate in the first half of 2008. For
further information on other real estate please see the section titled "Other
real estate owned" included in this report. The decrease in occupancy
was primarily related to moving from a leased branch facility to an owned branch
facility. Furniture and equipment expense increase is attributable to
increased costs of maintaining facilities and the addition of the new branch
located at 1547 East March Lane, Stockton. The increase in other expense of
$912,000 is primarily the result of increased legal fees associated with loan
collection and increased FDIC assessments of $481,000.
The
following table sets forth a summary of non-interest expense for the six month
periods ended June 30, 2009 and 2008:
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Non-interest
Expense:
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
2,470
|
|
|
$
|
2,550
|
|
Occupancy
|
|
|
551
|
|
|
|
565
|
|
Furniture
and equipment
|
|
|
471
|
|
|
|
374
|
|
Other
real estate
|
|
|
2,129
|
|
|
|
-
|
|
Other
expenses
|
|
|
2,743
|
|
|
|
1,831
|
|
Total
Non-Interest Expenses
|
|
$
|
8,364
|
|
|
$
|
5,320
|
|
Income
Taxes
The
Company’s provision for income taxes includes both federal income and state
franchise taxes and reflects the application of federal and state statutory
rates to the Company’s net income before taxes. The principal
difference between statutory tax rates and the Company’s effective tax rate is
the benefit derived from investing in tax-exempt securities and Company owned
life insurance. Increases and decreases in the provision for taxes
reflect changes in the Company’s net income before tax. The Company’s effective
tax rate for the six month period ended June 30, 2009 resulted in a benefit of
42.5% of pretax loss compared to a provision of 38.2% for the same period in
2008.
FINANCIAL
CONDITION
Total
assets at June 30, 2009 were $402,996,000, a decrease of $18,457,000 or 4%, from
the $421,453,000 at December 31, 2008. The contraction in assets was
primarily in the Company’s loan portfolio and securities
portfolio. The reduction in the size of the loan portfolio is
primarily the result of assets being reclassified to other real estate,
charge-offs and pay downs. The investment portfolio decreased as a
result of large principal pay downs in the mortgage backed section of the
portfolio and the other than temporary impairment charge taken in the second
quarter of 2009. Pay downs have occurred as interest rates for
mortgages have declined and borrowers prepay their mortgages at a faster
rate. The remainder of the balance sheet continued on a flat
trend.
The bank
experienced a slight decrease in deposits primarily in non-interest bearing
deposits. Non-interest bearing deposits decreased $14,642,000 or
21.0% to $55,232,000 at June 30, 2009 from $69,874,000 at December 31,
2008. The decrease in non-interest bearing deposits is primarily the
result of seasonal fluctuations in customer deposits at the end of
2008. The loss in non-interest bearing deposits has been offset in
part by an increase in interest bearing deposits of $10,255,000 or 3.8% to
$281,361,000 at June 30, 2009 from $271,106,000 at December 31,
2008. The increase in interest-bearing deposits is the result of an
increased use of brokered deposits. On June 30, 2009 the Bank
utilized $37,629,000 in brokered deposits compared to $2,500,000 at December 31,
2008.
Loan
portfolio composition
The
Company concentrates its lending activities primarily within Calaveras, San
Joaquin, Stanislaus, Tuolumne and Alameda Counties.
The
Company manages its credit risk through diversification of its loan portfolio
and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral.
The
following table illustrates loan balances and percentage changes from December
31, 2008 to June 30, 2009 by loan category:
(Dollars
in thousands)
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Commercial
|
|
$
|
77,353
|
|
|
$
|
81,284
|
|
|
$
|
(3,931
|
)
|
|
|
(4.84
|
)%
|
Agricultural
|
|
|
12,354
|
|
|
|
13,153
|
|
|
|
(799
|
)
|
|
|
(6.07
|
)
|
Real
estate - commercial mortgage
|
|
|
150,105
|
|
|
|
135,013
|
|
|
|
15,092
|
|
|
|
11.18
|
|
Real
estate - construction
|
|
|
32,065
|
|
|
|
64,762
|
|
|
|
(32,697
|
)
|
|
|
(50.49
|
)
|
Installment
|
|
|
13,011
|
|
|
|
13,609
|
|
|
|
(598
|
)
|
|
|
(4.39
|
)
|
Gross
loans
|
|
$
|
284,888
|
|
|
$
|
307,821
|
|
|
$
|
(22,933
|
)
|
|
|
(7.45
|
)%
|
The
Company continues to manage the mix in its loan portfolio consistently with its
identity as a community bank serving Northern California and the Central
Valley. The Bank has experienced contraction in its commercial,
agricultural, construction and installment segments of the loan
portfolio. The contraction in these segments reflects the weak
economic environment and customer deleveraging which continued from
2008 through the first half of 2009. The real estate
construction segment has been reduced significantly due to the completion of
construction projects and a permanent loan being extended, pay downs on
completed projects and foreclosure of certain projects which have been
reclassified to other real estate owned. The real estate commercial
mortgage segment has increased primarily through permanent financing loans
extended to completed construction projects already financed through the
Bank.
Nonperforming
loans
The
Bank's level of nonperforming loans declined significantly in the first half of
2009. There were loans in the amount of $23,560,000 on nonaccrual at
December 31, 2008. During the first half of 2009 the Bank either
foreclosed on collateral of nonperforming loans resulting in an increase in
other real estate owned or charged-off the loan balance. At June 30,
2009 the Bank had loans in the amount of $10,392,000 on
nonaccrual. The forgone interest related to the loans on nonaccrual
totaled $498,000 for the first half of 2009.
The
Bank held an average of $15,743,000 on nonaccrual for the six month period ended
June 30, 2009. At present, management believes that the level of
allowance of 2.00% of total loans at June 30, 2009 compared to 1.95% at December
31, 2008 is sufficient to provide for both specifically identified and probable
losses.
Management
has been proactive in working with problem customers to repay loans that have
become delinquent or have the potential to become delinquent. In most
cases, personal guarantees and collateral value are sufficient to repay
outstanding principal and interest. In the cases where collateral
value and personal guarantees have fallen short of the principal and interest
owed on the loans, management has reserved for the estimated potential
loss. Management has also ordered real estate appraisals on all loans
which are in foreclosure that are secured by real estate and on loans where we
have identified potential problems.
Analysis
of allowance for loan losses
In
determining the amount of the Company’s Allowance for Loan Losses (“ALL”),
management assesses the diversification of the portfolio. Each credit is
assigned a credit risk rating factor, and this factor, multiplied by the dollars
associated with the credit risk rating, is used to calculate one component of
the ALL. In addition, management estimates the probable loss on individual
credits that are receiving increased management attention due to actual or
perceived increases in credit risk.
The
Company makes provisions to the ALL on a regular basis through charges to
operations that are reflected in the Company’s statements of operations 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 loan losses in future
periods.
The
adequacy of the ALL is calculated upon three components. First, is the credit
risk rating of the loan portfolio, including all outstanding loans and
leases. Every extension of credit has been assigned a risk rating
based upon a comprehensive definition intended to measure the inherent risk of
lending money. Each rating has an assigned risk factor expressed as a
reserve percentage. Central to this assigned risk factor is the historical loss
record of the Company. Secondly, established specific reserves are available for
individual loans currently on management's watch and high-grade loan lists.
These are the estimated potential losses associated with specific borrowers
based upon the collateral and event(s) causing the risk ratings. The third
component is unallocated. This reserve is for qualitative factors that may
effect the portfolio as a whole, such as those factors described
above.
Management
believes the assigned risk grades and our methods for managing risk are
satisfactory.
The
following table summarizes the activity in the ALL for the periods
indicated:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(Dollars
in thousands)
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Beginning
Balance:
|
|
$
|
6,406
|
|
|
$
|
3,629
|
|
|
$
|
6,019
|
|
|
$
|
3,948
|
|
Provision
for loan losses
|
|
|
4,180
|
|
|
|
600
|
|
|
|
5,152
|
|
|
|
810
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,389
|
|
|
|
757
|
|
|
|
1,491
|
|
|
|
1,290
|
|
Real
Estate
|
|
|
3,407
|
|
|
|
-
|
|
|
|
3,893
|
|
|
|
-
|
|
Other
|
|
|
110
|
|
|
|
55
|
|
|
|
157
|
|
|
|
55
|
|
Total
Charge-offs
|
|
|
4,906
|
|
|
|
812
|
|
|
|
5,541
|
|
|
|
1,345
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
13
|
|
Real
Estate
|
|
|
34
|
|
|
|
|
|
|
|
84
|
|
|
|
-
|
|
Other
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
Total
Recoveries
|
|
|
36
|
|
|
|
10
|
|
|
|
86
|
|
|
|
14
|
|
Net
Charge-offs:
|
|
|
4,870
|
|
|
|
802
|
|
|
|
5,455
|
|
|
|
1,331
|
|
Ending
Balance
|
|
$
|
5,716
|
|
|
$
|
3,427
|
|
|
$
|
5,716
|
|
|
$
|
3,427
|
|
ALL
to total loans
|
|
|
2.00
|
%
|
|
|
1.06
|
%
|
|
|
2.00
|
%
|
|
|
1.06
|
%
|
Net
Charge-offs to average loans-annualized
|
|
|
5.30
|
%
|
|
|
0.98
|
%
|
|
|
3.00
|
%
|
|
|
0.82
|
%
|
Other
real estate owned
At
December 31, 2008, the Company had $2,029,000 invested in properties acquired
through foreclosure. In the first half of 2009, the Company
foreclosed on six more properties totaling $13,847,000. The
Company received proceeds of $1,587,000 on properties sold during the first
half of 2009, recorded impairment on properties previously recorded into
other real estate of $490,000 and recorded a loss on the sale other real
estate of $52,000. At June 30, 2009, the carrying value of all
properties was $13,524,000. These properties were carried at the lower of their
estimated market value, as evidenced by an independent appraisal less estimated
selling expenses. At foreclosure, if the fair value of the real estate is less
than the Company’s recorded investment in the related loan, a charge is made to
the allowance for loan losses. If the value of the property is subsequently
determined to be less than the recorded investment in the property, an
impairment on the property is recorded. No assurance can be given that the
Company will sell the properties during 2009 or at any time or for an amount
that will be sufficient to recover the Company’s investment in these
properties.
Investment
securities
Investment
securities decreased $7,932,000 to $31,806,000 at June 30, 2009, from
$39,738,000 at December 31, 2008. The decrease was the result of
activity related to mortgage backed security principle payments, asset
allocation management, funds reinvestment and the other than temporary
impairment charge recorded in the second quarter. Federal funds sold
increased $6,572,000 to $28,383,000 at June 30, 2009, from $21,811,000 at
December 31, 2008. The increase in federal funds sold was primarily
the result of a decrease in the investment and loan portfolios.
The
Company’s investment in U.S. Treasury securities decreased to 16% of the
investment portfolio at June 30, 2009 compared to 23% at December 31,
2008. Obligations of U.S. Agencies increased to 6% of the investment
portfolio at June 31, 2009, and were not part of the portfolio at December 31,
2008. The Company’s investment in mortgage backed securities
increased to 61% of the investment portfolio at June 30, 2009 compared to 59% at
December 31, 2008. The Company’s investment in corporate bonds
decreased to 7% of the investment portfolio at June 30, 2009 compared to 10% at
December 31, 2008. Tax-exempt municipal obligation bonds increased to 10% at
June 30, 2009 compared to 8% of the investment portfolio at December 31,
2008.
Deposits
Total
deposits were $336.6 million as of June 30, 2009 a decrease of $4.4 million or
1.3% from the December 31, 2008 balance of $341.0 million. The
Company continues to manage the mix of its deposits consistent with its identity
as a community bank serving the financial needs of its
customers. Non-interest bearing demand deposits and interest bearing
checking deposits increased to 21.8% of total deposits up from 20.5% at December
31, 2008. Money market and savings accounts increased to 20.4% of
total deposits from 18.8% at December 31, 2008. Time deposits
decreased to 57.8% of total deposits from 60.7% at December 31,
2008.
The
Emergency Economic Stabilization Act of 2008 included a provision for an
increase in the amount of deposits insured by the FDIC. The $250,000 standard
insurance limit is permanent for certain retirement accounts, which includes
IRAs. The $250,000 limit is temporary for all other deposit accounts through
December 31, 2013. On January 1, 2014, the standard insurance amount will return
to $100,000 per depositor for all account categories except certain retirement
accounts, which will remain at $250,000 per depositor.
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, stock
offerings, issuance of junior subordinated debentures and FAS 123 stock
options.
The
recent losses incurred have reduced the Company’s Risk-Based Capital level to
adequately capitalized. The Company is in the process of developing a
Capital Plan to return the Company to a well capitalized status. The Risk-Based
Capital computations for the Company are complex and are impacted by operating
losses and various limitations including loan loss reserves which are limited to
125% of risk-based loans as well as deferred income taxes which generally cannot
exceed 10% of Tier 1 risk-based capital.
In
computing total risk-based capital, Management is required to take into
consideration the deferred tax assets that may not be fully utilized.
Specifically, Tier 1 capital will be reduced by an amount of deferred tax assets
above 10% of Tier 1 risk-based capital that Management does not expect to
realize beyond the next twelve months as described below.
Deferred Taxes:
The Company
has recorded a tax benefit of $3,326,000 for the three months ended June 30,
2009 and $3,597,000 for the six months ended June 30, 2009. These amounts have
been recorded as a taxable loss being carried forward to offset future taxable
income expected to be generated by the Company. The Company has not recorded a
valuation allowance at June 30, 2009 for the future realization of these tax
benefits as it believes it is more likely than not that these tax benefits will
ultimately be realized via the Company’s projection of future income, unrealized
gains in real estate and unrealized gains in bank owned life insurance.
Prospective losses could require the Company to reevaluate the assumptions
related to future income projection which could result in the establishment of a
valuation allowance to the extent that the realization of deferred tax assets
becomes less likely than not. Net deferred tax assets were $8.2 million at June
30, 2009.
At June
30, 2009 shareholders’ equity was $23,235,000 compared with $27,284,000 at
December 31, 2008. Changes within shareholders’ equity reflect decreases from
the net loss during the first half of 2009, stock based compensation expense,
and a decrease in unrealized losses on available for sale
securities.
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 monthly
basis. The Bank’s regulators measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. Under the risk-based capital standard, assets reported on the
Company’s balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.
This
standard characterizes an institution's capital as being "Tier 1" capital
(defined as principally comprising shareholders' equity and the qualifying
portion of subordinated debentures) and "Tier 2" capital (defined as principally
comprising Tier 1 capital and the remaining qualifying portion of subordinated
debentures and the qualifying portion of the ALL).
The
minimum ratio of total risk-based capital to risk-adjusted assets, including
certain off-balance sheet items, is 8%. At least one-half (4%) of the total
risk-based capital is to be comprised of Tier 1 capital; the balance may consist
of debt securities and a limited portion of the ALL.
As of
June 30, 2009 the most recent notification by the Federal Deposit Insurance
Corporation (“FDIC”) categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank’s category. The Company is subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a material adverse effect on the Company’s consolidated financial
statements.
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%.
The
Company’s and the Bank’s risk-based capital ratios are presented
below:
|
|
Actual
|
|
|
For Capital Adequacy
Purposes
|
|
|
To Be Well Capitalized Under Prompt Corrective
Action Provisions
|
|
June
30, 2009
|
|
Amount
|
|
|
Ratio
|
|
|
Minimum Amount
|
|
|
Minimum Ratio
|
|
|
Minimum Amount
|
|
|
Minimum Ratio
|
|
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
32,659
|
|
|
|
9.6
|
%
|
|
$
|
27,101
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to risk weighted assets)
|
|
$
|
26,091
|
|
|
|
7.7
|
%
|
|
$
|
13,550
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to average assets)
|
|
$
|
26,091
|
|
|
|
6.4
|
%
|
|
$
|
16,608
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
32,729
|
|
|
|
9.7
|
%
|
|
$
|
27,054
|
|
|
|
8.0
|
%
|
|
$
|
33,817
|
|
|
|
10.0
|
%
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
28,480
|
|
|
|
8.4
|
%
|
|
$
|
13,527
|
|
|
|
4.0
|
%
|
|
$
|
20,290
|
|
|
|
6.0
|
%
|
Tier
1 capital (to average assets)
|
|
$
|
28,480
|
|
|
|
6.9
|
%
|
|
$
|
16,608
|
|
|
|
4.0
|
%
|
|
$
|
20,760
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
41,903
|
|
|
|
11.5
|
%
|
|
$
|
29,143
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to risk weighted assets)
|
|
$
|
37,336
|
|
|
|
10.3
|
%
|
|
$
|
14,562
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to average assets)
|
|
$
|
37,336
|
|
|
|
8.6
|
%
|
|
$
|
17,310
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
41,275
|
|
|
|
11.3
|
%
|
|
$
|
29,107
|
|
|
|
8.0
|
%
|
|
$
|
36,384
|
|
|
|
10.0
|
%
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
36,708
|
|
|
|
10.1
|
%
|
|
$
|
14,554
|
|
|
|
4.0
|
%
|
|
$
|
21,830
|
|
|
|
6.0
|
%
|
Tier
1 capital (to average assets)
|
|
$
|
36,708
|
|
|
|
8.7
|
%
|
|
$
|
16,819
|
|
|
|
4.0
|
%
|
|
$
|
21,023
|
|
|
|
5.0
|
%
|
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,
borrowers and, to a lesser extent, shareholders. This process is managed not by
formally monitoring the cash flows from operations, investing and financing
activities as described in the Company’s statement of cash flows, but through an
understanding principally of depositor and borrower needs. As loan demand
increases, the Company can use asset liquidity from maturing investments along
with deposit growth to fund the new loans.
With
respect to assets, liquidity is provided by cash and money market investments
such as interest-bearing time deposits, federal funds sold, available-for-sale
investment securities, and principal and interest payments on loans. With
respect to liabilities, liquidity is provided by core deposits, shareholders'
equity and the ability of the Company to borrow funds and to generate
deposits.
Because
estimates of the liquidity needs of the Company may vary from actual needs, the
Company maintains a substantial amount of liquid assets to absorb short-term
increases in loans or reductions in deposits. As loan demand decreases or loans
are paid off, investment assets can absorb these excess funds or deposit rates
can be decreased to run off excess liquidity. Therefore, there is some
correlation between financing activities associated with deposits and investing
activities associated with lending. The Company’s liquid assets (cash and due
from banks, federal funds sold and available-for-sale investment securities)
totaled $71.5 million or 17.7% of total assets at June 30, 2009 compared to
$78.2 million or 18.6% of total assets at December 31, 2008. The Company expects
that its primary source of liquidity will be acquisition of deposits and
wholesale borrowing arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market rates such as interest rates, commodity prices and equity
prices. The Company’s market risk as a financial institution arises
primarily from interest rate risk exposure. Fluctuation in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Company’s assets and liabilities, and the market value of
all interest earning assets and interest bearing liabilities, other than those
that possess a short term to maturity. Based upon the nature of its
operations, the Company is not subject to fluctuations in foreign currency
exchange or commodity pricing. However, the Company’s commercial real
estate loan portfolio, concentrated primarily in Northern California, is subject
to risks associated with the local economies.
The
fundamental objective of the Company’s management of its assets and liabilities
is to maximize the economic value of the Company while maintaining adequate
liquidity and managing exposure to interest rate risk deemed by management to be
acceptable. Management believes an acceptable degree of exposure to
interest rate risk results from management of assets and liabilities through
using floating rate loans and deposits, maturities, pricing and mix to attempt
to neutralize the potential impact of changes in market interest
rates. The Company’s profitability is dependent to a large extent
upon its net interest income which is the difference between its interest income
on interest earning assets, such as loans and securities, and interest expense
on interest bearing liabilities, such as deposits, trust preferred securities
and other borrowings. The Company, like other financial institutions,
is subject to interest rate risk to the degree that its interest earning assets
reprice differently from its interest bearing liabilities. The
Company manages its mix of assets and liabilities with the goal of limiting
exposure to interest rate risk, ensuring adequate liquidity, and coordinating
its sources and uses of funds.
The
Company seeks to control its interest rate risk exposure in a manner that will
allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Company has adopted formal policies
and practices to monitor and manage interest rate risk exposure. As
part of this effort, the Company measures interest rate risk utilizing both an
internal asset liability measurement system as well as independent third party
reviews to confirm the reasonableness of the assumptions used to measure and
report the Company’s interest rate risk, enabling management to make any
adjustments necessary.
Interest
rate risk is managed by the Company’s Asset Liability Committee (“ALCO”), which
includes members of senior management and several members of the Board of
Directors. The ALCO monitors interest rate risk by analyzing the
potential impact on interest income from potential changes in interest rates and
considers the impact of alternative strategies or changes in balance sheet
structure. The ALCO manages the Company’s balance sheet in part to
maintain the potential impact on net interest income within acceptable ranges
despite changes in interest rates. The Company’s exposure to interest
rate risk is reviewed on at least a quarterly basis by the ALCO.
In
management’s opinion there has not been a material change in the Company’s
market risk or interest rate risk profile for the six months ended June 30, 2009
compared to December 31, 2008 as discussed under the caption "Liquidity and
Market Risk" and "Net Interest Income Simulation" in the Company's 2008 Annual
Report to Shareholders filed as an exhibit with the Company’s 2008 Annual Report
on Form 10-K, which is incorporated here by reference.
The
following table reflects the company’s projected net interest income sensitivity
analysis based on period-end data:
(Dollars
in thousands)
|
|
June
30, 2009
|
|
Change
in Rates
|
|
Adjusted
Net Interest Income
|
|
|
Percent
Change From Base
|
|
|
|
|
|
|
|
|
Up
300 basis points
|
|
$
|
14,610
|
|
|
|
9.1
|
%
|
Up
200 basis points
|
|
|
14,209
|
|
|
|
6.1
|
%
|
Up
100 basis points
|
|
|
13,804
|
|
|
|
3.1
|
%
|
Base
Scenario
|
|
|
13,386
|
|
|
|
-
|
|
Down
100 basis points
|
|
|
13,211
|
|
|
|
(1.3
|
)%
|
Down
200 basis points
|
|
|
13,100
|
|
|
|
(2.1
|
)%
|
Down
300 basis points
|
|
$
|
12,989
|
|
|
|
(3.0
|
)%
|
ITEM
4. CONTROLS AND PROCEDURES
The
Company's Chief Executive Officer and Chief Financial Officer, based on their
evaluation as of the end of the period covered by this report of the Company's
disclosure controls and procedures (as defined in Exchange Act
Rule 13a—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 and unconsolidated 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 during the period covered by this report that have materially affected
or could significantly affect internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1A. RISK FACTORS
The
Emergency Economic Stabilization Act of 2008 included a provision for an
increase in the amount of deposits insured by the Federal Deposit Insurance
Corporation (FDIC) to $250,000. On October 14, 2008, the FDIC announced a new
program ~ the Temporary Liquidity Guarantee Program that provides unlimited
deposit insurance on funds in noninterest-bearing transaction deposit accounts
not otherwise covered by the existing deposit insurance limit of $250,000. All
eligible institutions will be covered under the program for the first 30 days
without incurring any costs. After the initial period, participating
institutions will be assessed a 10 basis point surcharge on the additional
insured deposits.
The
behavior of depositors in regard to the level of FDIC insurance could cause our
existing customers to reduce the amount of deposits held at the Bank, and could
cause new customers to open deposit accounts at the Bank. The level and
composition of the Bank's deposit portfolio directly impacts the Bank's funding
cost and net interest margin.
The
Federal Reserve Bank has been injecting vast amounts of liquidity into the
banking system to compensate for weaknesses in short-term borrowing markets and
other capital markets. A reduction in the Federal Reserve's activities or
capacity could reduce liquidity in the markets, thereby increasing funding costs
to the Bank or reducing the availability of funds to the Bank to finance its
existing operations.
On
October 3, 2008, the Troubled Asset Relief Program ("TARP") was signed into law.
TARP gave the United States Treasury Department ("Treasury") authority to deploy
up to $750 billion into the financial system with an objective of improving
liquidity in capital markets. On October 24, 2008, Treasury announced plans to
direct $250 billion of this authority into preferred stock investments in banks.
Principal terms of this preferred stock program include payment of preferred
cumulative dividends on the Treasury's stock, restrictions on the payment of
common stock dividends, redemption provisions which (during the first three
years) permit redemption only with the proceeds of high-quality private capital,
restrictions on stock repurchase programs, and restrictions on executive
compensation. The Bank is not a participant in the TARP program, but could face
increased competition from financial institutions which do
participate,
In
addition to the information set forth above, you should carefully consider the
factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2008, which could materially affect
our business, financial condition or future results. Except as described above,
the Company is not aware of any material changes to the risks described in our
Annual Report.
ITEM
6. EXHIBITS
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 14, 2009
|
By:
/S/ Rick D. Simas
|
|
Rick
D. Simas
|
|
President
and Chief Executive Officer
|
|
Pacific
State Bancorp
|
Date:
August 14, 2009
|
By:/S/
Justin R. Garner
|
|
Justin
R. Garner
|
|
Vice
President and Chief Financial
Officer
|
Pacific State Bancorp (CE) (USOTC:PSBC)
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