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.