- Quarterly Report (10-Q)

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 March 31, 2009

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 ý No 0

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” 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 registrant issuer’s classes of common stock, as of the latest practicable date:

Title of Class	Shares outstanding as of May 8, 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	March 31,			December 31,
(Dollars in thousands)	2009			2008
ASSETS
Cash and due from banks	$	11,308		$	16,700
Federal funds sold		9,455			21,811
Total cash and cash equivalents		20,763			38,511
Investment securities		39,420			39,738
Loans, less allowance for loan losses of $6,406 in 2009 and $6,019 in 2008		297,784			301,945
Premises and equipment, net		16,974			16,811
Other real estate owned		2,878			2,029
Company owned life insurance		6,820			6,751
Accrued interest receivable and other assets		16,071			15,668
Total assets	$	400,710		$	421,453
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	58,005		$	69,874
Interest bearing		262,778			271,106
Total deposits		320,783			340,980
Other borrowings		40,000			40,000
Subordinated debentures		8,764			8,764
Accrued interest payable and other liabilities		4,213			4,425
Total liabilities		373,760			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		10,781			10,767
Retained earnings		18,520			18,814
Accumulated other comprehensive loss, net of taxes		(2,351	)		(2,297	)
Total shareholders' equity		26,950			27,284
Total liabilities and shareholders' equity	$	400,710		$	421,453

See notes to unaudited condensed consolidated financial statements

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PACIFIC STATE BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited	Three Months Ended March 31,
(Dollars in thousands)	2009			2008
Interest income:
Interest and fees on loans	$	5,024		$	6,476
Interest on Federal funds sold		16			115
Interest on investment securities		512			710
Total interest income		5,552			7,301

Interest expense:
Interest on deposits		1,837			2,798
Interest on borrowings		306			430
Interest on subordinated debentures		84			154
Total interest expense		2,227			3,382

Net interest income before provision for loan losses		3,325			3,919
Provision for loan losses		972			210
Net interest income after provision for loan losses		2,353			3,709

Non-interest income:
Service charges		164			237
Gain on sale of loans		12			19
Other income		203			216
Total non-interest income		379			472

Non-interest expenses:
Salaries and employee benefits		1,154			1,268
Occupancy		279			263
Furniture and equipment		268			179
Other real estate		431			-
Other expenses		1,165			785
Total non-interest expenses		3,297			2,495

(Loss) income before (benefit) provision for income taxes		(565	)		1,686
(Benefit) provision for income taxes		(271	)		592
Net (loss) income	$	(294	)	$	1,094

Basic (loss) earnings per share	$	(0.08	)	$	0.30

Diluted (loss) earnings per share	$	(0.08	)	$	0.27

See notes to unaudited condensed consolidated financial statements

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PACIFIC STATE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Month Periods Ended March 31, 2009 and 2008

(In thousands)

(Unaudited)	2009			2008
Cash flows from operating activities:
Net (loss) income	$	(294	)	$	1,094
Provision for loan losses		972			210
Net (increase) decrease in deferred loan origination costs		(183	)		73
Depreciation, amortization and accretion		235			36
Stock-based compensation expense		14			86
Company owned life insurance earnings		(69	)		(76	)
Other real estate impairment		357			-
Increase in accrued interest receivable and other assets		(414	)		(126	)
Decrease in accrued interest payable and other liabilities		(212	)		(1,982	)
Net cash provided by (used in) operating activities		406			(685	)
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(6,626	)		(16,886	)
Proceeds from matured and called available-for-sale investment securities		4,994			10,265
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities		1,935			296
Proceeds from principal repayments from held-to-maturity government-guarantee mortgage-backed securities		3			53
Purchase of FRB and FHLB stock		-			(14	)
Proceeds from the sale of other real estate		874			-
Net decrease (increase) in loans		1,301			(16,807	)
Purchases of premises and equipment		(438	)		(545	)
Net cash provided by (used in) investing activities		2,043			(23,638	)
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and savings deposits		(14,441	)		9,709
Net (decrease) increase in time deposits		(5,756	)		3,786
Net cash (used in) provided by financing Activities		(20,197	)		13,495
Decrease in cash and cash equivalents		(17,748	)		(10,828	)
Cash and cash equivalents at beginning of period		38,511			45,674
Cash and cash equivalents at end of period	$	20,763		$	34,846

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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 March 31, 2009 and December 31, 2008, and the results of its operations for the three month period ended March 31, 2009 and 2008, and its cash flows for the three month period ended March 31, 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 month period ended March 31, 2009 may not necessarily be indicative of the operating results for the full year.

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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:

	March 31,			December 31,

	2009			2008
	(In thousands)

Commercial	$	79,667		$	81,284
Agricultural		12,092			13,153
Real estate - commercial mortgage		148,759			135,013
Real estate - construction		50,654			64,762
Installment		12,692			13,609
Gross loans		303,864			307,821
Deferred loan origination costs, net		326			143
Allowance for loan losses		(6,406	)		(6,019	)
Net loans	$	297,784		$	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 $49,126,000 and $55,522,000 and stand-by letters of credit of $1,587,000 and $1,557,000 at March 31, 2009 and December 31, 2008, respectively. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company.

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Approximately $11,645,000 of the loan commitments outstanding at March 31, 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 March 31, 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 first quarter of 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 March 31, 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
(in thousands)	March 31, 2009			March 31, 2008
Net (loss) income	$	(294	)	$	1,094
Other comprehensive loss:
Change in unrealized loss on available for sale securities		(54	)		(98	)
Reclassification adjustment		22			11
Total other comprehensive loss		(32	)		(87	)
Total comprehensive (loss) income	$	(326	)	$	1,007

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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 three month period ended March 31, 2009 and none granted for the three months ended March 31, 2008. For the three month periods ended March 31, 2009 and 2008, the compensation cost recognized for stock option compensation was $14,000 and $85,000, respectively. The excess tax benefits were not significant for the Company.

At March 31, 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 $186,000. This cost is expected to be recognized over a weighted average remaining period of 3.5 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 March 31, 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		-
Cancelled		123,200		7.42		4.5		-
Outstanding at March 31, 2009		519,069	$	7.82	4.5 years		$	-
Options vested or expected to vest at March 31, 2009		519,069	$	7.82	4.5 Years		$	-
Exercisable at March 31, 2009		495,069	$	7.25	4.4 Years		$	-

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The intrinsic value was derived from the closing market price of the Company’s common stock of $1.93 as of March 31, 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 months ended March 31, 2009.

9. FAIR VALUE MEASUREMENT

In accordance with FAS 157, the following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize information other than the quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement, in its entirety, falls has been determined based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement, in its entirety, requires judgment and considers factors specific to the asset or liability.

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(dollars in thousands)

Description	Fair Value March 31, 2009		Fair Value Measurements at March 31, 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	$	39,420	$	30,888	$	8,532	$	-
Total	$	39,420	$	30,888	$	8,532	$	-

Assets and liabilities measured on a nonrecurring basis:
Impaired loans	$	25,488	$	-	$	-	$	25,488
Other real estate owned		2,878		-		-		2,878
Total	$	28,366	$	-	$	-	$	28,366

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities - Fair values for investment securities are based on evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Evaluated pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings, and matrix pricing.

Impaired Loans - The fair value of impaired loans is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.

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.

10. NEW ACCOUNTING PRONOUNCEMENTS

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.

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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 March 31, 2009 and December 31, 2008 and for the three month periods ended March 31, 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.

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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

For the three months ended March 31, 2009:

The 2009 first quarter net loss of $294,000 compares to net income of $1,094,000 for the first quarter of 2008. The decrease in income compared to the first quarter of 2008 reflects a provision for loan losses of $972,000, other real estate expense of $431,000, increased professional costs of $225,000 and a contraction in net interest margin.

The increased level of provision for loan losses is the result of the continued deterioration in the real estate values and economic environment of the region where the Company operates, requiring additional funding to the allowance for loan losses. Other real estate expense is primarily the result of decreasing prices experienced in the market for the type of other real estate the Bank currently owns, and the costs associated with marketing and selling those properties. Increased professional costs are primarily the result of increased legal fees associated with the collection of loans. The contraction of the net interest margin in the first quarter of 2009 compared to the first quarter of 2008 was primarily the result of higher levels of nonaccrual loans. 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 (“ROAA”) was 0.29% for the three month period ended March 31, 2009 compared to an annualized return on average assets of 1.03% for the same period in 2008. The annualized loss on average equity (“ROAE”) was 4.30% for the three month period March 31, 2009 compared to a return on annualized average assets of 12.71% for the same period in 2008. The decrease in ROAA and ROAE is primarily attributable to the net loss recorded for the first quarter of 2009 and the decrease in net income for the three months ended March 31, 2009 as compared to the same period in 2008.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009

The Company recorded a net loss of $294,000 for the three months ended March 31, 2009 compared to net income of $1,094,000 for the same period in 2008. The primary contributors to the decrease in net income for the three months ended March 31, 2009 were the (1) $594,000 decrease in net interest income, (2) increase in provision for loan losses of $762,000, (3) increase of other real estate expense of $431,000 and (4) increase in other expenses of $380,000 primarily related to legal costs of loan collection. These changes were partially offset by a decreased provision for income taxes of $863,000. 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 $0.08 for the three months ended March 31, 2009 from basic earnings per share of $0.30 for the same period in 2008. The Company recorded a diluted loss per share of $0.08 for the three months ended March 31, 2009 from diluted earnings per share of $0.27 for the same period in 2008.

Total assets at March 31, 2009 were $400,710,000, a decrease of $20,743,000 or 5%, from the $421,453,000 at December 31, 2008. The contraction in assets was primarily in the Company’s federal funds sold. Federal funds sold and cash and due from banks decreased $17,748,000 or 47% to $20,763,000 at March 31, 2009 from $38,511,000 at December 31, 2008. The decrease in federal funds sold and cash and due from banks was used to fund decreasing deposits of $20,197,000. The remainder of the balance sheet continued on a flat trend.

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Net interest income before provision for loan losses

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2009		2008		Dollar Change			Percentage Change
Interest income:
Interest and fees on loans	$	5,024	$	6,476	$	(1,452	)		(22.4	)%
Interest on Federal funds sold		16		115		(99	)		(86.1	)
Interest on investment securities		512		710		(198	)		(27.9	)
Total interest income		5,552		7,301		(1,749	)		(24.0	)

Interest expense:
Interest on deposits		1,837		2,798		(961	)		(34.3	)
Interest on other borrowings		306		430		(124	)		(28.8	)
Interest on subordinated debentures		84		154		(70	)		(45.5	)
Total interest expense		2,227		3,382		(1,155	)		(34.2	)

Net interest income before provision for loan losses	$	3,325	$	3,919	$	(594	)		(15.2	)%

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. 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 8.10% for the first three months of 2008 to 6.65% for the first three months of 2009. The yield earned on all interest earning assets in the first quarter of 2009 totaled 6.18% compared to 7.61% for the same time period in 2008. In addition to the decrease in yields earned on assets, total average earning assets decreased $21,477,000 to $364,157,000 for the first three months and 2009 from $385,634,000 for the same time period in 2008. The decrease in average earning assets occurred primarily in the loan portfolio where average balances decreased $15,228,000 or 4.7% to $306,195,000 in the first quarter of 2009 from $321,423,000 for the same time 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 quarter of 2009 compared to the same time period in 2008. The cost of funding in the first quarter of 2009 totaled 2.84% compared to 4.20% in the first quarter of 2008. The cost of funding decreased primarily because of decreased market rates paid for deposits and borrowings during the first 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 $6,523,000 to $317,643,000 for the first quarter of 2009 from $324,166,000 for the same period in 2008. The decrease was primarily attributable to a decrease of $12,116,000 in time deposits to $188,494,000 for the first quarter of 2009 from $200,610,000 for the same time period in 2008.

As a result of the changes noted above, the net interest margin for the three months ended March 31, 2009 decreased 39 basis points to 3.70%, from 4.09% for the same period in 2008.

-12-

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:

PACIFIC STATE BANCORP
Yield Analysis
	For Three Months Ended March 31,
(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		$	306,195		$	5,024		6.65	%	$	321,423		$	6,476		8.10	%
Investment securities			41,444			512		5.01	%		48,044			704		5.89	%
Federal funds sold			16,518			16		0.39	%		13,167			115		3.51	%
Interest Bearing Deposits in Banks			-			-		-			3,000			6		0.80	%
Total average earning assets		$	364,157		$	5,552		6.18	%	$	385,634		$	7,301		7.61	%

Non-earning assets:
Cash and due from banks			12,136								12,944
Bank premises and equipment			19,257								14,458
Other assets			20,017								16,104
Allowance for loan loss			(6,243	)							(4,009	)
Total average assets		$	409,324							$	425,131


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

Interest-bearing Demand		$	70,837		$	211		1.21	%	$	69,081		$	389		2.26	%
Savings			9,537			21		0.89	%		5,359			7		0.53	%
Time Deposits			188,494			1,605		3.45	%		200,610			2,402		4.82	%
Other borrowing			48,775			390		3.24	%		49,116			584		4.78	%

Total average interest-bearing liabilities		$	317,643		$	2,227		2.84	%	$	324,166		$	3,382		4.20	%

Noninterest-bearing liabilities:
Demand deposits			59,424								61,640
Other liabilities			4,500								4,708
Total average liabilities			381,567								390,514
Shareholders' equity			27,757								34,617
Total average liabilities and shareholders' equity		$	409,324							$	425,131

Net interest income					$	3,325							$	3,919

Net interest margin								3.70	%							4.09	%

(1)	Loan fees included in loan interest income for the three month periods ended March 31, 2009 and 2008 amounted to $7 thousand and $154 thousand, 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.

-13-

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 March 31,
	2009 over 2008
	Net
	Change			Rate (1)			Volume (2)
(In thousands)

Interest Income:
Loans and leases	$	(1,452	)	$	(1,145	)	$	(307	)
Investment securities		(192	)		(95	)		(97	)
Federal funds sold		(99	)		(128	)		29
Interest bearing deposits in banks		(6	)		-			(6	)
Total interest income	$	(1,749	)	$	(1,369	)	$	(380	)


Interest Expense:
Interest-bearing demand	$	(178	)	$	(188	)	$	10
Savings		14			9			5
Time deposits		(797	)		(652	)		(145	)
Other borrowings		(194	)		(190	)		(4	)
Total interest expense	$	(1,155	)	$	(1,021	)	$	(134	)
Net interest income	$	(594	)	$	(348	)	$	(246	)

(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 $972 thousand in provision for loan losses for the three month period ended March 31, 2009, an increase of $762 thousand from $210 thousand 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 Income

During the three months ended March 31, 2009, total non-interest income decreased $93,000 or 19.7% to $379,000, down from $472,000 for the comparable period in 2008. The decrease in non-interest income was primarily the result of decreased service charges of $73,000. In other areas overall non-interest income remained relatively flat for the three months ended March 31, 2009 compared to the same time period in 2008.

-14-

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 March 31, 2009 was $3,297,000 compared to $2,495,000 for the same period in 2008, representing an increase of $802,000 or 32%. The increase is primarily the result of expenses related to other real estate of $431,000 in the first quarter of 2009 and no expense related to other real estate in the first quarter of 2008. The increase in occupancy, furniture and equipment expense of $105,000 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 $380,000 is primarily the result of increased legal fees associated with loan collection.

The following table sets forth a summary of non-interest expense for the three month periods ended March 31, 2009 and 2008:

	Three Months Ended
(In thousands)	March 31, 2009		March 31 2008
Non-interest Expense:
Salaries and employee benefits	$	1,154	$	1,268
Occupancy		279		263
Furniture and equipment		268		179
Other real estate		431		-
Other expenses		1,165		785
Total Non-Interest Expenses	$	3,297	$	2,495

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 March 31, 2009 resulted in a benefit of 48.0% of pretax loss compared to a provision of 35.1% for the same period in 2008.

-15-

FINANCIAL CONDITION

Total assets at March 31, 2009 were $400,710,000, a decrease of $20,743,000 or 4.9%, from $421,453,000 at December 31, 2008. The decline in assets was primarily in the Company’s level of federal funds sold and cash and due from banks which declined $17,748,000 or 46.1%. Net loans decreased $4,161,000 or 1.4% from $301,945,000 at December 31, 2008 to $297,784,000 at March 31, 2009. The decrease in federal funds sold, cash and due from banks and net loans was utilized to fund the decrease in deposits of $20,197,000 or 5.9% from $340,980,000 at December 31, 2008 to $320,783,000 at March 31, 2009.

The decrease in deposits included a decrease in non-interest bearing deposits of $11,869,000 or 17.0% to $58,005,000 at March 31, 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. In addition to the non-interest bearing deposit decrease, interest bearing deposits decreased $8,328,000 or 3.1% to $262,778,000 at March 31, 2009 from $271,106,000 at December 31, 2008. The decrease in interest bearing deposits is the result of a decreased level of certificate of deposit promotions.

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 March 31, 2009 by loan category:

(Dollars in thousands)	March 31, 2009		December 31, 2008		Dollar Change			Percentage Change
Commercial	$	79,667	$	81,284	$	(1,617	)		(2.0	)%
Agricultural		12,092		13,153		(1,061	)		(8.1	)
Real estate - commercial mortgage		148,759		135,013		13,746			10.2
Real estate - construction		50,654		64,762		(14,108	)		(21.8	)
Installment		12,692		13,609		(917	)		(6.7	)
Gross loans	$	303,864	$	307,821	$	(3,957	)		(1.3	)%

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 and installment segments of the loan portfolio. The contraction in these segments reflects the weak economic environment and customer deleveraging which continued from 2008 into the first quarter of 2009. The Bank has experienced a decline in its real estate construction segment due to the completion of construction projects and the subsequent real estate commercial mortgage loan extended to most borrowers or payoffs related to the sale of collateral. The real estate commercial mortgage segment has increased primarily through permanent financing loans extended to completed construction project already financed through the Bank. Both of these segments have been negatively affected by the real estate market decline which has taken place in the Bank’s service area.

-16-

Nonperforming loans

The Bank's level of nonperforming loans remained flat in the first quarter of 2009. There were eleven loans in the amount of $23,560,000 on nonaccrual at December 31, 2008. During the first quarter 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 March 31, 2009 the Bank had eight loans in the amount of $21,067,000 on nonaccrual. The forgone interest related to the loans on nonaccrual totaled $495,000 for the first three months of 2009. At present, management believes that the level of allowance of 2.11% of total loans at March 31, 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.

-17-

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
(Dollars In thousands)	March 31,
	2009			2008
Beginning Balance:	$	6,019		$	3,948
Provision for loan losses		972			210
Charge-offs:
Commercial		102			533
Real Estate		486			-
Other		47			-
Total Charge-offs		635			533
Recoveries:
Commercial		-			4
Real Estate		50			-
Total Recoveries		50			4
Net Charge-offs:		583			529
Ending Balance	$	6,406		$	3,629
ALL to total loans		2.11	%		1.11	%
Net Charge-offs to average loans-annualized		0.64	%		0.67	%

Investment securities

Investment securities decreased $318,000 to $39,420,000 at March 31, 2009, from $39,738,000 at December 31, 2008. The decrease was the result of normal activity related to mortgage backed security principle payments, asset allocation management and funds reinvestment. Federal funds sold decreased $12,356,000 to $9,455,000 at March 31, 2009, from $21,811,000 at December 31, 2008. The decrease in federal funds sold was primarily the result of a decrease in deposits discussed below in the section titled “ Deposits .”

The Company’s investment in U.S. Treasury securities decreased to 11% of the investment portfolio at March 31, 2009 compared to 23% at December 31, 2008. Obligations of U.S. Agencies increased to 4% of the investment portfolio at March 31, 2009 compared to 0% at December 31, 2008. The Company’s investment in mortgage backed securities decreased to 54% of the investment portfolio at March 31, 2009 compared to 59% at December 31, 2008. The Company’s investment in corporate bonds increased to 23% of the investment portfolio at March 31, 2009 compared to 10% at December 31, 2008. Tax-exempt municipal obligation bonds remained at 8% of the investment portfolio at March 31, 2009 compared to December 31, 2008.

Deposits

Total deposits were $320.8 million as of March 31, 2009 a decrease of $20.2 million or 6.0% 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 decreased to 18.1% of total deposits down from 20.5% at December 31, 2008. Money market and savings accounts increased to 19.2% of total deposits from 18.8% at December 31, 2008. Time deposits increased to 62.7% 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 to $250,000. If not renewed, the additional FDIC insurance provision expires December 31, 2009. 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.

-18-

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, and FAS 123 stock options.

At March 31, 2009 shareholders’ equity was $26,950,000 compared with $27,284,000 at December 31, 2008. Changes within shareholders’ equity reflect decreases from the net loss during the quarter, stock based compensation expense, proceeds from the exercise of stock options and the increase 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 quarterly basis. The Bank’s regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Under the risk-based capital standard, assets reported on the Company’s balance sheet and certain off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight.

This standard characterizes an institution's capital as being "Tier 1" capital (defined as principally comprising shareholders' equity and the qualifying portion of subordinated debentures) and "Tier 2" capital (defined as principally comprising Tier 1 capital and the remaining qualifying portion of subordinated debentures and the qualifying portion of the ALL).

The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of the total risk-based capital is to be comprised of Tier 1 capital; the balance may consist of debt securities and a limited portion of the ALL.

As of March 31, 2009 the most recent notification by the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must meet the minimum ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank’s category. However, Management and the Board of Directors assess the Bank's capital requirements continuously and are developing contingency plans in case additional capital is required. Management believes that the Company met all of its capital adequacy requirements.

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.

-19-

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
March 31, 2009	Amount		Ratio			Minimum Amount		Minimum Ratio			Minimum Amount		Minimum Ratio
Company:
Total capital (to risk-weighted assets)	$	41,581		11.6	%	$	28,619		8.0	%		N/A		N/A
Tier 1 capital (to risk weighted assets)	$	37,083		10.4	%	$	14,310		4.0	%		N/A		N/A
Tier 1 capital (to average assets)	$	37,083		9.1	%	$	16,344		4.0	%		N/A		N/A
Bank:
Total capital (to risk-weighted assets)	$	41,041		11.5	%	$	28,576		8.0	%	$	35,720		10.0	%
Tier 1 capital (to risk-weighted assets)	$	36,549		10.2	%	$	14,288		4.0	%	$	21,432		6.0	%
Tier 1 capital (to average assets)	$	36,549		9.0	%	$	16,326		4.0	%	$	20,407		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	%

-20-

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 $60.1 million or 15.0% of total assets at March 31, 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 three months ended March 31, 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:

(in thousands)	March 31, 2009
Change in Rates	Adjusted Net Interest Income		Percent Change From Base

Up 300 basis points	$	14,625		(2.33	) %
Up 200 basis points	$	14,751		(1.48	) %
Up 100 basis points	$	14,875		(0.66	) %
Base Scenario	$	14,973		0.00	%
Down 100 basis points	$	15,080		0.71	%
Down 200 basis points	$	15,184		1.41	%
Down 300 basis points	$	15,289		2.11	%

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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 providing 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.

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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

31.1	Certification of Chief Executive Officer (section 302 of the Sarbanes Oxley Act)
31.2	Certification of Chief Financial Officer (section 302 of the Sarbanes-Oxley Act)
32.1	Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act
32.2	Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Pacific State Bancorp
Date: May 15, 2009	By: /s/ Rick D. Simas
	Rick D. Simas
	President and Chief Executive Officer

	Pacific State Bancorp
Date: May 15, 2009	By: /s/ Justin R. Garner
	Justin R. Garner
	Vice President and Chief Financial Officer

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