UNITED STATES OF AMERICA
BEFORE THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.

STATE OF CALIFORNIA
DEPARTMENT OF FINANCIAL INSTITUTIONS
SACRAMENTO, CALIFORNIA

 
Written Agreement by and among
 
PACIFIC STATE BANCORP
Stockton, California
 
PACIFIC STATE BANK
Stockton, California
 
FEDERAL RESERVE BANK OF
SAN FRANCISCO
San Francisco, California
 
and
 
STATE OF CALIFORNIA
DEPARTMENT OF FINANCIAL
INSTITUTIONS
Sacramento, California
 
 
 
        Docket Nos. 10-014-WA/RB-HC
                               10-014-WA/RB-SM
 

WHEREAS, in recognition of their common goal to maintain the financial soundness
of Pacific State Bancorp, Stockton, California (“Bancorp”), a registered bank
holding company, and its subsidiary bank, Pacific State Bank, Stockton,
California (the “Bank”), a state chartered bank that is a member of the Federal
Reserve System, Bancorp, the Bank, the Federal Reserve Bank of San Francisco
(the “Reserve Bank”), and the State of California Department of Financial
Institutions (the “Department”) have mutually agreed to enter into this Written
Agreement (the “Agreement”); and
 
WHEREAS, on February 18, 2010, Bancorp’s and the Bank’s boards of directors, at
duly constituted meetings, adopted resolutions authorizing and directing Ricky
D. Simas to consent to this Agreement on behalf of Bancorp and the Bank,
respectively, and consenting to compliance with each and every applicable
provision of this Agreement by Bancorp, the Bank, and their
institution-affiliated parties, as defined in sections 3(u) and 8(b)(3) of the
Federal Deposit Insurance Act, as amended (the “FDI Act”) (12 U.S.C. §§ 1813(u)
and 1818(b)(3)).
 
NOW, THEREFORE, Bancorp, the Bank, the Reserve Bank, and the Department agree as
follows:

Credit Risk Management

1.   Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Department an acceptable written plan to strengthen credit risk
management practices.  The plan shall, at a minimum, address, consider, and
include:
      (a)   Procedures to periodically review and revise risk exposure limits to
address changes in market conditions and strategies to minimize credit losses;
 
      (b)    procedures to identify, limit, and manage concentrations of credit
that are consistent with the Interagency Guidance on Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices, dated December
12, 2006 (SR 07-1);
   
      (c)   strategies to minimize credit losses and reduce the level of problem
assets; and
 
      (d)   enhanced portfolio-wide stress testing.
 
 
 

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Asset Improvement

2.   The Bank shall not, directly or indirectly, extend, renew, or restructure
any credit to or for the benefit of any borrower, including any related interest
of the borrower, whose loans or other extensions of credit are criticized in the
report of the examination of the Bank conducted by the Reserve Bank that
commenced on June 29, 2009 (the “Report of Examination”) or in any subsequent
report of examination, without the prior approval of a majority of the full
board of directors or a designated committee thereof.  The board of directors or
its committee shall document in writing the reasons for the extension of credit,
renewal, or restructuring, specifically certifying that: (i) the Bank’s risk
management policies and practices for loan workout activity are acceptable; (ii)
the extension of credit is necessary to improve and protect the Bank’s interest
in the ultimate collection of the credit already granted and maximize its
potential for collection; (iii) the extension of credit reflects prudent
underwriting based on reasonable repayment terms and is adequately secured; and
all necessary loan documentation has been properly and accurately prepared and
filed; (iv) the Bank has performed a comprehensive credit analysis indicating
that the borrower has the willingness and ability to repay the debt as supported
by an adequate workout plan, as necessary; and (v) the board of directors or its
designated committee reasonably believes that the extension of credit will not
impair the Bank’s interest in obtaining repayment of the already outstanding
credit and that the extension of credit or renewal will be repaid according to
its terms.  The written certification shall be made a part of the minutes of the
meetings of the board of directors or its committee, as appropriate, and a copy
of the signed certification, together with the credit analysis and related
information that was used in the determination, shall be retained by the Bank in
the borrower’s credit file for subsequent supervisory review.  For purposes of
this Agreement, the term “related interest” is defined as set forth in section
215.2(n) of Regulation O of the Board of Governors of the Federal Reserve System
(the “Board of Governors”) (12 C.F.R. § 215.2(n)).
 
3.   (a)    Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Department an acceptable written plan designed to improve
the Bank’s position through repayment, amortization, liquidation, additional
collateral, or other means on each loan or other asset in excess of $500,000,
including other real estate owned (“OREO”), that (i) is past due as to principal
or interest more than 90 days as of the date of this Agreement; (ii) is on the
Bank’s problem loan list; or (iii) was adversely classified in the Report of
Examination.  In developing the plan for each loan, the Bank shall, at a
minimum, review, analyze, and document the financial position of the borrower,
including source of repayment, repayment ability, and alternative repayment
sources, as well as the value and accessibility of any pledged or assigned
collateral, and any possible actions to improve the Bank’s collateral position.
         
      (b)           Within 30 days of the date that any additional loan or other
asset in excess of $500,000, including OREO, becomes past due as to principal or
interest for more than 90 days, is on the Bank’s problem loan list, or is
adversely classified in any subsequent report of examination of the Bank, the
Bank shall submit to the Reserve Bank and the Department an acceptable written
plan to improve the Bank’s position on such loan or asset.
   
   (c)           Within 30 days after the end of each calendar quarter
thereafter, the Bank shall submit a written progress report to the Reserve Bank
and the Department to update each asset improvement plan, which shall include,
at a minimum, the carrying value of the loan or other asset and changes in the
nature and value of supporting collateral, along with a copy of the Bank’s
current problem loan list, extension report, and past due/non-accrual
report.  The board of directors shall review the progress reports before
submission to the Reserve Bank and the Department and shall document the review
in the minutes of the board of directors’ meetings.

 
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Allowance for Loan and Lease Losses
 
4.   (a)           The Bank shall, within 30 days from the receipt of any
federal or state report of examination, charge off all assets classified “loss”
unless otherwise approved in writing by the Reserve Bank and the Department.
      
      (b)           The Bank shall maintain a sound process for determining,
documenting, and recording an adequate ALLL in accordance with regulatory
reporting instructions and relevant supervisory guidance, including the
Interagency Policy Statements on the Allowance for Loan and Lease Losses, dated
July 2, 2001 (SR 01-17 (Sup)) and December 13, 2006 (SR 06-17).
 
      (c)           Within 60 days of this Agreement, the Bank shall submit to
the Reserve Bank and the Department an acceptable written program for the
maintenance of an adequate ALLL.  The program shall include policies and
procedures to ensure adherence to the ALLL methodology and provide for periodic
reviews and updates to the ALLL methodology, as appropriate.  The program shall
also provide for a review of the ALLL by the board of directors on at least a
quarterly calendar basis.  Any deficiency found in the ALLL shall be remedied in
the quarter it is discovered, prior to the filing of the Consolidated Reports of
Condition and Income, by additional provisions.  The board of directors shall
maintain written documentation of its review, including the factors considered
and conclusions reached by the Bank in determining the adequacy of the
ALLL.  During the term of this Agreement, the Bank shall submit to the Reserve
Bank and the Department, within 30 days after the end of each calendar quarter,
a written report regarding the board of directors’ quarterly review of the ALLL
and a description of any changes to the methodology used in determining the
amount of ALLL for that quarter.

Capital Plan
 
5.   Within 60 days of this Agreement, Bancorp and the Bank shall submit to the
Reserve Bank and the Department an acceptable joint written plan to maintain
sufficient capital at the Bank.  The plan shall, at a minimum, address,
consider, and include:
 
      (a)   The Bank’s current and future capital requirements, including
compliance with the Capital Adequacy Guidelines for State Member
Banks:  Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and B of
Regulation H of the Board of Governors (12 C.F.R. Part 208, App. A and B);
 
      (b)   the adequacy of the Bank’s capital, taking into account the volume
of classified credits, concentrations of credit, ALLL, current and projected
asset growth, and projected retained earnings;
 
      (c)   the source and timing of additional funds to fulfill the Bank’s
future capital requirements; and
 
      (d)   the requirements of section 225.4(a) of Regulation Y of the Board of
Governors (12 C.F.R. § 225.4(a)) that Bancorp serve as a source of strength to
the Bank.
 
6.    Bancorp and the Bank shall notify the Reserve Bank and the Department, in
writing, no more than 30 days after the end of any quarter in which any of the
Bank’s capital ratios (total risk-based, Tier 1, or leverage) fall below the
approved capital plan’s minimum ratios.  Together with the notification, Bancorp
and the Bank shall submit an acceptable written plan that details the steps
Bancorp and the Bank will take to increase the Bank’s capital ratios to or above
the approved capital plan’s minimums.

 
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Earnings Plan and Budget

7.   (a)    Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Department a written business plan for 2010 to improve the
Bank’s earnings and overall condition.  The plan, at a minimum, shall provide
for or describe:
 
(i)  
a realistic and comprehensive budget for calendar year 2010, including income
statement and balance sheet projections; and
 

(ii)  
a description of the operating assumptions that form the basis for, and
adequately support, major projected income, expense, and balance sheet
components.

 
       (b)          A business plan and budget for each calendar year subsequent
to 2010 shall be submitted to the Reserve Bank and the Department at least 30
days prior to the beginning of that calendar year.

Liquidity/Funds Management

8.   Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Department an acceptable written plan designed to improve management of
the Bank’s liquidity position and funds management practices.  The plan shall,
at a minimum, address, consider, and include:
 
      (a)   Measures to enhance the monitoring and measurement of the Bank’s
liquidity;
 
      (b)   a timetable to reduce reliance on short-term wholesale funding,
including brokered deposits; and
 
      (c)   specific liquidity targets and parameters and the maintenance of
sufficient liquidity to meet contractual obligations and unanticipated demands.
 
 
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Dividends

9.   (a)           Bancorp and the Bank shall not declare or pay any dividends
without the prior written approval of the Reserve Bank, the Director of the
Division of Banking Supervision and Regulation of the Board of Governors (the
“Director”), and the Department.
 
       (b)           Bancorp shall not take any other form of payment
representing a reduction in capital from the Bank without the prior written
approval of the Reserve Bank and the Department.
 
       (c)   Bancorp and its nonbank subsidiaries shall not make any
distributions of interest, principal, or other sums on subordinated debentures
or trust preferred securities without the prior written approval of the Reserve
Bank, the Director, and the Department.
 
      (d)   All requests for prior approval shall be received at least 30 days
prior to the proposed dividend declaration date, proposed distribution on
subordinated debentures, and required notice of deferral on trust preferred
securities.  All requests shall contain, at a minimum, current and projected
information, as appropriate, on Bancorp’s capital, earnings, and cash flow; the
Bank’s capital, asset quality, earnings and ALLL needs; and identification of
the sources of funds for the proposed payment or distribution.  Bancorp and the
Bank, as appropriate, must also demonstrate that the requested declaration or
payment of dividends is consistent with the Board of Governors’ Policy Statement
on the Payment of Cash Dividends by State Member Banks and Bank Holding
Companies, dated November 14, 1985 (Federal Reserve Regulatory Service, 4-877 at
page 4-323).

Debt and Stock Redemption
 
10.    (a)           Bancorp shall not, directly or indirectly, incur, increase,
or guarantee any debt without the prior written approval of the Reserve Bank and
the Department.  All requests for prior written approval shall contain, but not
be limited to, a statement regarding the purpose of the debt, the terms of the
debt, and the planned source(s) for debt repayment, and an analysis of the cash
flow resources available to meet such debt repayment.
 
     (b)           Bancorp shall not, directly or indirectly, purchase or redeem
any shares of its stock without the prior written approval of the Reserve Bank
and the Department.

 
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Compliance with Laws and Regulations
 
11.  (a)           In appointing any new director or senior executive officer,
or changing the responsibilities of any senior executive officer so that the
officer would assume a different senior executive officer position, Bancorp and
the Bank shall comply with the notice provisions of section 32 of the FDI Act
(12 U.S.C. § 1831i) and Subpart H of Regulation Y of the Board of Governors (12
C.F.R. §§ 225.71 et seq.) and also provide written notice to the
Department.  Bancorp and the Bank shall not appoint any individual to Bancorp’s
or the Bank’s board of directors or employ or change the responsibilities of any
individual as a senior executive officer if the Reserve Bank or the Department
notifies Bancorp or the Bank of disapproval within the time limits prescribed by
Subpart H of Regulation Y.
 
    (b)           Bancorp and the Bank shall comply with the restrictions on
indemnification and severance payments of section 18(k) of the FDI Act (12
U.S.C. § 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation’s
regulations (12 C.F.R. Part 359).

Compliance with the Agreement

12.  (a)           Within 10 days of this Agreement, the boards of directors of
Bancorp and the Bank shall appoint a joint committee (the “Compliance
Committee”) to monitor and coordinate Bancorp’s and the Bank’s compliance with
the provisions of this Agreement.  The Compliance Committee shall include a
majority of outside directors who are not executive officers or principal
shareholders of Bancorp and the Bank, as defined in sections 215.2(e)(1) and
215.2(m)(1) of Regulation O of the Board of Governors (12 C.F.R. §§ 215.2(e)(1)
and 215.2(m)(1)).  At a minimum, the Compliance Committee shall meet at least
monthly, keep detailed minutes of each meeting, and report its findings to the
boards of directors of Bancorp and the Bank.
 
    (b)           Within 30 days after the end of each calendar quarter
following the date of this Agreement, Bancorp and the Bank shall submit to the
Reserve Bank and the Department written progress reports detailing the form and
manner of all actions taken to secure compliance with this Agreement and the
results thereof.

Approval and Implementation of Plans and Program

13.  (a)           The Bank and, as applicable, Bancorp shall submit written
plans and a program that are acceptable to the Reserve Bank and the Department
within the applicable time periods set forth in paragraphs 1, 3, 4(c), 5, 6, and
8 of this Agreement.
 
    (b)           Within 10 days of approval by the Reserve Bank and the
Department, the Bank shall adopt the approved plans and program.  Upon adoption,
the Bank shall promptly implement the approved plans and program, and thereafter
fully comply with them.
 
    (c)           During the term of this Agreement, the approved plans and
program shall not be amended or rescinded without the prior written approval of
the Reserve Bank and the Department.

 
 
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Communications

14.              All communications regarding this Agreement shall be sent to:

(a)           Mr. Joe Lozano
Examining Officer
Banking Supervision & Regulation
Federal Reserve Bank of San Francisco
101 Market Street
Mail Stop  920
San Francisco, California  94105

 
(b)           Mr. Scott Cameron
Deputy Commissioner for Northern Region
State of California
Department of Financial Institutions
1810 13th Street
Sacramento, California  95811

                                 (c)   Mr. Harold Hand
Chairman of the Boards of Directors
Pacific State Bancorp
Pacific State Bank
1899 West March Lane
Stockton, California  95207
 
 
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Miscellaneous

 
15.              Notwithstanding any provision of this Agreement, the Reserve
Bank and the Department may, in their sole discretion, grant written extensions
of time to Bancorp and the Bank to comply with any provision of this Agreement.
 
16.              The provisions of this Agreement shall be binding upon Bancorp,
the Bank, and their institution-affiliated parties, in their capacities as such,
and their successors and assigns.
 
17.              Each provision of this Agreement shall remain effective and
enforceable until stayed, modified, terminated, or suspended in writing by the
Reserve Bank and the Department.
 
18.              The provisions of this Agreement shall not bar, estop, or
otherwise prevent the Board of Governors, the Reserve Bank, the Department, or
any other federal or state agency from taking any other action affecting
Bancorp, the Bank, or any of their current or former institution-affiliated
parties and their successors and assigns.
 
19.              Pursuant to Section 50 of the FDI Act (12 U.S.C. § 1831aa),
this Agreement is enforceable by the Board of Governors under Section 8 of the
FDI Act (12 U.S.C. § 1818).
 
20.              If the Department determines that the Bank has violated any
substantive provision of this Agreement, the Bank shall, for the purposes of the
California Financial Code, be deemed to be conducting its business in an unsafe
or unauthorized manner.
 
 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the 18th day of February, 2010.

PACIFIC STATE BANCORP
 
FEDERAL RESERVE BANK OF
SAN FRANCISCO
 
 
By:  /S/ Ricky D. Simas
 
By:  /S/ Joe A. Lozano
              Ricky D. Simas
              President/CEO
 
              Joe A. Lozano
              Examining Officer
 
PACIFIC STATE BANK
 
STATE OF CALIFORNIA
DEPARTMENT OF FINANCIAL INSTITUTIONS
 
 
By:  /S/ Ricky D. Simas
 
By:  /S/ Scott D. Cameron
              Ricky D. Simas
              President/CEO
 
              Scott D. Cameron
              Deputy Commissioner

 
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