Pacific State Bancorp Reports Earnings for the Third Quarter of 2008

STOCKTON, Calif., Oct. 16  /PRNewswire-FirstCall/ -- Steven A. Rosso, President and C.E.O. of Pacific State Bancorp (NASDAQ:PSBC), the parent company of Pacific State Bank, today reported a net loss of $1,209,000 for the third quarter of 2008 for the Stockton, California based financial institution.  The loss was the result of an other than temporary impairment charge on the Bank's securities portfolio offset by a gain on bank owned life insurance discussed below.  On a year-to-date basis Pacific State Bancorp remains profitable through the third quarter, earning $464,000.  The bank remains well capitalized in these uncertain times with a total risk based capital ratio of 11.62%.

Mr. Rosso is disappointed to report that with this quarter's release, the Company experienced its first quarterly loss in over 15 years.  Mr. Rosso emphasizes that the loss is the result of an "other than temporary impairment" ("OTTI") charge of $6,498,000 or $4,255,000 net of tax benefit.  The impairment charge is the result of the actions taken by the United States Treasury Department of placing into conservatorship the government sponsored enterprises, Fannie Mae and Freddie Mac.  The Company owned approximately $7 million in shares of Fannie Mae and Freddie Mac preferred stock which declined significantly in value after the Treasury Department announced the cancellation of preferred stock dividends.  The OTTI charge was calculated based upon the market value of the shares on September 30, 2008.  The amount of this OTTI charge is subject to material change in the future as a result of significant uncertainties related to Fannie Mae's and Freddie Mac's business operations and the Federal conservatorship and the continuing impact of such factors on the market value of the preferred stock.

The OTTI charge was partially offset by a non-taxable gain on Bank-owned life insurance of $2,574,000.  In addition, the Company sold real estate owned by the Bank for a gain of $465,000 or $307,000 net of tax.  With the exception of the OTTI charge, management believes that the Company continues to perform well despite the troubled economic times for financial institutions.

Mr. Rosso noted that the decreased income performance, other than the individual items discussed above, compared to 2007 is primarily the result of the Bank experiencing a contraction in its net interest margin, increased provision for loan losses and an increase in legal expenses associated with the collection of loans.  The contraction of the net interest margin is the result of the Bank's interest earning assets re-pricing downward more quickly, after the 325 basis points reductions in the federal reserve federal funds rate since September 2007, than the Bank's interest bearing liabilities.  In addition, the Bank has experienced higher levels of nonearning assets as a result of loans being placed on nonaccrual status.

The Bank has continued to experience decreasing interest expense throughout 2008 as interest bearing liabilities continue to re-price.  Net interest income continues to improve quarter after quarter through 2008.  For more information on the net interest margin, please see the Yield Analysis statements included as part of this report below.

The increase in the provision for loan losses is the result of a deteriorating economic environment and the concern that the overall credit quality in the bank's service area is declining.  The Bank will monitor nonperforming assets very closely and work to collect them in full where possible.  Subsequent to the end of the third quarter, Pacific State Bank received a recovery of approximately $875,000.  The receipt of this recovery on a loan previously charged-off will bring our allowance for loan losses to $4,767,000 or 1.46% of gross loans.

The Bank has experienced an increase in nonperforming loans from $432,000 or 0.14% of gross loans at December 31, 2007 to $7,639,000 or 2.34% of gross loans at September 30, 2008.  The increase in nonperforming loans is the result of a decline in real estate values in the region where the Bank operates; resulting in the Bank placing certain loans into foreclosure. Bank's management has immediately placed any loan secured by real estate, which has had a notice of default filed, on non-accrual status.  The increase in nonperforming loans has prompted management to increase the provision for loan losses over 2007 levels by $560 thousand for the quarter ended September 30, 2008 and $1.15 million for the nine months ended September 30, 2008.  At present, management believes that the level of allowance of 1.19% of total loans at September 30, 2008 compared to 1.26% at December 31, 2007 for loan losses currently recorded 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 principle and interest owed on the loans, management has reserved for the estimated potential loss. Management has also ordered real estate appraisals on all new or renewed loans and on loans which are in foreclosure that are secured by real estate. Management has also been proactive in ordering real estate appraisals on loans with potential problems.  Appraisals received thus far indicate generally that overall collateral levels remain sufficient to repay the loans secured by the real estate in case of default.  Management has also reviewed all home equity lines of credit for current loan to values, credit quality and performance issues.  If issues are identified, the debt availability is frozen and reductions or new terms are obtained.  The Bank believes that real estate values remain sufficient in a declining market due to the conservative lending policies of the Bank.

Pacific State Bank continues to have more than sufficient liquidity to operate.  The Bank utilizes borrowing lines from correspondent banks, the Federal Home Loan Bank ("FHLB"), and the discount window with the Federal Reserve for additional liquidity purposes.  At September 30, 2008, the Bank maintained open lines with correspondent banks of $21 million with no advances outstanding.  The Bank participates in the FHLB blanket lien program in which the Bank has a total borrowing capacity of $88.6 million with $27.2 million available at September 30, 2008.  The Bank currently has pledged approximately $16 million in securities to the Federal Reserve.   This allows the Bank a total borrowing capacity of approximately $14 million with no advances taken at the Federal Reserve as of September 30, 2008.  These lines coupled with $10.75 million of federal funds sold at September 30, 2008, provide the Bank with $76 million of immediate liquidity to draw on.

PSBC financial performance information for the three month period ending September 30, 2008 compared to the same quarter in the prior year is as follows:

  Income Statement:

  -- Total Interest Income: $6,948,000, a decrease of $989,000 or 13%.
  -- Total Interest Expense: $2,900,000, a decrease of $796,000 or 22%.
  -- Net Interest Income: $4,048,000, a decrease of $193,000 or 5%.
  -- Non-Interest Income: $3,561,000, an increase of $2,972,000 or 505%.
  -- Non-Interest Expense: $10,056,000, an increase of $7,345,000 or 271%.
  -- Provision for loan losses: $600,000, an increase of $560,000 or 1,400%.
  -- Net Loss: $1,209,000, a decrease of $2,510,000 or 193%.
  -- Efficiency Ratio: 102% deteriorating from 56%.
  -- Basic Loss Per Share: $0.33, a decrease of $0.68 per share or 194%.
  -- Diluted Loss Per Share: $0.33, a decrease of $0.66 per share or 200%.
  -- Loss on Average Assets: Annualized loss rate of 1.11%, a decrease of
     237 basis points from 1.26%
  -- Loss on Average Equity: Annualized loss rate of 11.56%, a decrease of
     27.55% from 15.99%




PSBC financial performance information for the nine month period ending September 30, 2008 compared to the same time period in the prior year is as follows:

  Income Statement:

  -- Total Interest Income: $18,998,000, a decrease of $2,150,000 or 10%.
  -- Total Interest Expense: $9,668,000, a decrease of $682,000 or 7%.
  -- Net Interest Income: $11,815,000, a decrease of $1,410,000 or 11%.
  -- Non-Interest Income: $4,630,000, an increase of $2,649,000 or 134%.
  -- Non-Interest Expense: $15,376,000, an increase of $6,964,000 or 83%.
  -- Provision for loan losses: $1,410,000, an increase of $1,150,000 or
     442%.
  -- Net Income: $464,000, a decrease of $3,572,000 or 89%.
  -- Efficiency Ratio: 93% deteriorating from 55%.
  -- Basic Earnings Per Share: $0.13, a decrease of $0.97 per share or 88%.
  -- Diluted Earnings Per Share: $0.12, a decrease of $0.89 per share or
     88%.
  -- ROAA: Annualized rate of 0.14%, a decrease of 122 basis points from
     1.36%
  -- ROAE: Annualized rate of 1.76%, a decrease of 15.72% from 17.48%




PSBC September 30, 2008 compared to December 31, 2007 annual financial performance information was as follows:

  Balance Sheet:

  -- Total Federal Funds and Investment Securities: $52,717,000, a decrease
     of $20,515,000 or an annualized 39%.
  -- Net Loans: $322,420,000, an increase of $13,962,000 or an annualized
     6%.
  -- Total Assets: $427,822,000, a decrease of $3,253,000 or an annualized
     1%.
  -- Non-Interest Bearing Deposits: $69,019,000, an increase of $1,948,000
     or an annualized 4%.
  -- Total Deposits: $345,166,000, an increase of $3,345,000 or an
     annualized 1%.
  -- Total Borrowings: decreased from $40,000,000 to $35,000,000.
  -- Total Shareholders' Equity: $34,000,000, a decrease of $36,000 or an
     annualized 1%.
  -- Total Tier 1 Risk Based Capital Ratio of 10.61%.
  -- Total Tier 1 Leverage Capital Ratio of 9.40%.
  -- Total Risk Based Capital Ratio of 11.62%.




Attached are certain unaudited financial statements supporting the financial information summarized above.  Further inquiries should be directed to Mr. Rosso at 209-870-3214, or by mail to P.O. Box 1649, Stockton, California 95201.  Additional information also can be obtained by visiting the Company website - http://www.pacificstatebank.com/.

SAFE HARBOR: Except for historical information contained herein, the statements contained in this press release include forward-looking statements within the meaning of the "safe harbor" provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those set forth in or implied by forward-looking statements. These risks are described from time to time in Pacific State Bancorp's Securities and Exchange Commission filings, including its Annual Reports on Form 10-K, quarterly reports on Form 10-Q and Current Reports on Form 8-K. Pacific State Bancorp disclaims any intent or obligation to update these forward-looking statements.

                   PACIFIC STATE BANCORP AND SUBSIDIARY
                  CONDENSED CONSOLIDATED BALANCE SHEETS

  Unaudited                                     September 30,   December 31,
  (Dollars in thousands)                           2008            2007
                     ASSETS
  Cash and due from banks                        $13,198         $13,794
  Federal funds sold                              10,750          31,880
  Total cash and cash equivalents                 23,948          45,674
  Interest bearing deposits at other banks             -           3,000
  Investment securities                           41,967          41,352
  Loans, less allowance for loan losses of
   $3,892 in 2008 and $3,948 in 2007             322,420         308,458
  Premises and equipment, net                     15,977          14,269
  Other real estate owned                            190               -
  Company owned life insurance                     6,682           8,025
  Accrued interest receivable and other assets    16,638          10,296
  Total assets                                  $427,822        $431,074
                LIABILITIES AND
              SHAREHOLDERS' EQUITY
  Deposits:
  Non-interest bearing                           $69,019         $67,071
  Interest bearing                               276,147         274,750
  Total deposits                                 345,166         341,821
  Other borrowings                                35,000          40,000
  Subordinated debentures                          8,764           8,764
  Accrued interest payable and other
   liabilities                                     4,892           6,453
  Total liabilities                              393,822         397,038
  Commitments and contingencies
  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
   -3,718,598 shares in 2008 and 3,707,698
   shares in 2007                                 10,753          10,418
  Retained earnings                               24,468          24,004
  Accumulated other comprehensive loss, net of
   taxes                                          (1,221)           (386)
  Total shareholders' equity                      34,000          34,036
  Total liabilities and shareholders' equity    $427,822        $431,074



                          PACIFIC STATE BANCORP
             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                               Three Months Ended        Nine Months Ended
  (Unaudited)                     September 30,             September 30,
  (Dollars in thousands,
   except per share data)        2008        2007        2008         2007
  Interest income:
  Interest and fees
   on loans                    $6,321      $7,006      $18,998      $21,148
  Interest on Federal
   funds sold                      85         396          341        1,065
  Interest on investment
   securities                     542         535        2,144        1,362
  Total interest income         6,948       7,937       21,483       23,575

  Interest expense:
  Interest on deposits          2,587       3,467        8,245        9,623
  Interest on borrowings          216          90        1,064          211
  Interest on
   subordinated debentures         97         139          359          516
  Total interest expense        2,900       3,696        9,668       10,350

  Net interest income before
   provision for loan losses    4,048       4,241       11,815       13,225
  Provision for loan losses       600          40        1,410          260
  Net interest income after
   provision for loan losses    3,448       4,201       10,405       12,965

  Non-interest income:
  Service charges                 196         208          656          646
  Gain on sale of loans            37         119          188          147
  Gain on sale of assets          471           -          471            -
  Gain on bank owned life
   insurance                    2,574           -        2,574            -
  Other income                    283         262          741        1,188
  Total non-interest
   income                       3,561         589        4,630        1,981

  Non-interest expenses:
  Salaries and employee
   benefits                     1,398       1,264        3,948        4,252
  Occupancy                       316         292          881          855
  Furniture and equipment         259         157          633          524
  Other than temporary
   impairment charge            6,498           -        6,498            -
  Other expenses                1,585         998        3,416        2,781
  Total non-interest
   expenses                    10,056       2,711       15,376        8,412

  (Loss) income before
   provision for income
   taxes                       (3,047)      2,079         (341)       6,534
  (Benefit) provision for
   income taxes                (1,838)        778         (805)       2,498
  Net (loss) income           $(1,209)     $1,301         $464       $4,036

  Basic (loss) earnings
   per share                   $(0.33)      $0.35        $0.13        $1.10

  Diluted (loss) earnings
   per share                   $(0.33)      $0.33        $0.12        $1.01




                            PACIFIC STATE BANCORP
                               Yield Analysis
                         For Three Months Ended September 30,
  (Dollars in thousands)       2008                         2007
                             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           $324,545   $6,321     7.75%   $303,858   $7,006     9.15%
  Investment
   securities       53,019      542     4.07%     39,733      521     5.20%
  Federal funds
   sold             17,739       85     1.91%     30,697      396     5.12%
  Interest
   bearing
   deposits
   in banks              -        -        -         867       14     6.41%
  Total average
   earning
   assets        $ 395,303   $6,948     6.99%   $375,155   $7,937     8.39%

  Non-earning
   assets:
  Cash and due
   from banks       13,342                        14,354
  Bank premises
   and equipment    15,393                        13,421
  Other assets      12,010                        11,051
  Allowance for
   loan loss        (3,785)                       (2,704)
  Total average
   assets         $432,263                      $411,277


  Liabilities and Shareholders' Equity:
  Interest-
   bearing
   liabilities:
  Deposits

    Interest-
     bearing
     demand      $  73,397     $126     0.68%    $76,347     $538     2.80%
    Savings          6,113        7     0.46%      5,288       11     0.83%
    Time deposits  215,307    2,454     4.53%    216,093    2,918     5.36%
    Other
     borrowing      26,685      313     4.67%     17,264      229     5.26%

    Total average
     interest-
     bearing
     liabilities  $321,502   $2,900     3.59%   $314,992   $3,696     4.66%

  Noninterest-
   bearing
   liabilities:
    Demand
     deposits       65,098                        61,010
    Other
     liabilities     4,045                         2,995
  Total average
   liabilities     390,645                       378,997
  Shareholders'
   equity:          41,618                        32,280
  Total average
   liabilities
   and
   shareholders'
   equity         $432,263                      $411,277

  Net interest
   income                    $4,048                        $4,241

  Net interest
   margin                               4.07%                         4.49%



                            PACIFIC STATE BANCORP
                               Yield Analysis
                            For Nine Months Ended September 30,
  (Dollars in thousands)       2008                         2007
                             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           $325,004  $18,998     7.81%   $297,362  $21,148     9.51%
  Investment
   securities       49,956    2,100     5.62%     34,621    1,348     5.21%
  Federal funds
   sold             19,930      341     2.29%     27,846    1,065     5.11%
  Interest
   bearing
   deposits
   in banks          1,391       44     4.23%        429       14     4.36%
  Total average
   earning
   assets         $396,281  $21,483     7.24%   $360,258  $23,575     8.75%

  Non-earning
   assets:
  Cash and due
   from banks       13,435                        15,649
  Bank premises
   and equipment    14,956                        12,595
  Other assets      16,194                        11,033
  Allowance for
   loan loss        (3,609)                       (2,651)
  Total average
   assets         $437,257                      $396,884


  Liabilities and Shareholders' Equity:
  Interest-
   bearing
   liabilities:
  Deposits

    Interest-
     bearing
     demand        $70,421   $1,215     2.30%   $ 82,863   $1,768     2.85%
    Savings          5,623       22     0.52%      5,407       38     0.94%

    Time deposits  214,583    7,008     4.36%    197,246    7,817     5.30%
    Other
     borrowing      44,109    1,423     4.31%     14,886      727     6.53%

    Total average
    interest-
    bearing
    liabilities   $334,736   $9,668     3.86%   $300,402  $10,350     4.61%

  Noninterest-
   bearing
   liabilities:
     Demand
      deposits      63,101                        64,609
     Other
      liabilities    4,245                         1,003
  Total average
   liabilities     402,082                       366,014
  Shareholders'
   equity:          35,175                        30,870
  Total average
   liabilities
   and
   shareholders'
   equity         $437,257                      $396,884

  Net interest
   income                   $11,815                       $13,225

  Net interest
   margin                               3.98%                         4.91%


DATASOURCE: Pacific State Bancorp



CONTACT:  Steven A. Rosso of Pacific State Bancorp, [phone]



Web site:  http://www.pacificstatebank.com/ 

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