STOCKTON, Calif., Feb. 19 /PRNewswire-FirstCall/ -- Rick D. Simas, President of Pacific State Bank, the wholly owned subsidiary of Pacific State Bancorp (the 'Company') (Nasdaq: PSBC), today reported an after tax net loss of $5,654,000 for the fourth quarter of 2008 and an after tax net loss $5,190,000 for the year ended December 31, 2008 for the Stockton, California based bank holding company. The fourth quarter net loss of $5,654,000 reflects a provision for loan losses of $5,591,000, a loss on the sale of securities of $1,291,000 and an other than temporary impairment charge of $2,425,000 on a single issue trust preferred security held by the Company. These pretax losses were offset by a $3,901,000 tax benefit related to these charges. The increased level of provision for loan losses is the result of the continuing deteriorating real estate values and economic environment in the region where the Company operates requiring additional funding to the allowance for loan losses.

The loss on the sale of securities was primarily related to a private label mortgage backed security which was downgraded to below investment grade by rating agencies and was subsequently sold at a loss. The other than temporary impairment ('OTTI') charge was the result of a single issue trust preferred security deferring interest payments on a $2,500,000 security. After the other than temporary impairment charge, the Company now carries the security at $75,000. The issuer of the trust preferred security can defer interest payments up to 5 years. In addition to the OTTI charge taken in the fourth quarter, the Company also recorded an OTTI charge in the third quarter of $6,498,000. 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 position in the securities was liquidated in the fourth quarter at an additional loss of $345,000.

The OTTI charges were partially offset by a non-taxable gain on Bank-owned life insurance of $2,574,000 in the third quarter. In addition, the Company sold real estate owned by the Bank for a gain of $465,000 or $307,000 net of tax in the third quarter.

The Company has experienced an increase in nonperforming loans from $432,000 or 0.14% of gross loans at December 31, 2007 to $23,560,000 or 7.7% of gross loans at December 31, 2008. The increase in nonperforming loans is the result of the continuing economic downturn resulting in increased loan delinquencies and the inability of certain borrowers to repay their original loan as agreed. The increase in nonperforming loans has resulted in management increasing the provision for loan losses over 2007 levels by $4,426,000 for the three months ended December 31, 2008 and by $5,576,000 for the year ended December 31, 2008. Management believes that the level of allowance for loan losses of 1.96% of gross loans at December 31, 2008 is sufficient to provide for probable losses.

The Company's management has been proactive in working with borrowers having problems repaying loans that have become delinquent or have the potential to become delinquent. In most cases, collateral values are sufficient to repay outstanding principal and interest. In the cases where collateral values have fallen short of the principle and interest owed on the loans, management has reserved for the estimated potential loss.

Mr. Simas 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.

Despite the loss reported for 2008, Pacific State Bancorp remains well capitalized with a total risk based capital ratio of 11.50% for the Company and 11.34% for the Bank. To maintain liquidity, 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 December 31, 2008, the Bank maintained open lines with correspondent banks of $26 million with no advances outstanding. The Bank participates in the FHLB blanket lien program in which the Bank has a total borrowing capacity of $93.1 million with $26.8 million available at December 31, 2008. The Bank currently has pledged approximately $6 million in securities to the Federal Reserve.