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, 2008





OR




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) 870-3200





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 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 0Accelerated
filer0Non –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 14, 2008Common
      Stock
              No
      Par Value
            3,703,207


-1-


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)
            
            2008
            
            
            2007ASSETSCash
      and due from banks
            
            $
            13,130
            
            
            $
            13,794Federal
      funds sold
            
            
            21,716
            
            
            
            31,880Total
      cash and cash equivalents
            
            
            34,846
            
            
            
            45,674Interest
      bearing deposits at other banks
            
            
            3,000
            
            
            
            3,000Investment
      securities
            
            
            47,539
            
            
            
            41,352Loans,
      less allowance for loan losses of $3,629 at March 31, 2008 and $3,948 at
      December 31, 2007
            
            
            325,041
            
            
            
            308,458Premises
      and equipment, net
            
            
            14,659
            
            
            
            14,269Company
      owned life insurance
            
            
            8,101
            
            
            
            8,025Accrued
      interest receivable and other assets
            
            
            10,494
            
            
            
            10,296Total
      assets
            
            $
            443,680
            
            
            $
            431,074LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYDeposits:Non-interest
      bearing
            
            $
            60,318
            
            
            $
            67,071Interest
      bearing
            
            
            294,998
            
            
            
            274,750Total
      deposits
            
            
            355,316
            
            
            
            341,821Other
      borrowings
            
            
            40,000
            
            
            
            40,000Subordinated
      debentures
            
            
            8,764
            
            
            
            8,764Accrued
      interest payable and other liabilities
            
            
            4,471
            
            
            
            6,453Total
      liabilities
            
            
            408,551
            
            
            
            397,038Commitments
      and contingenciesShareholders'
      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
      –3,703,207 shares in 2008 and 3,703,207 shares in 2007
            
            
            10,504
            
            
            
            10,418Retained
      earnings
            
            
            25,098
            
            
            
            24,004Accumulated
      other comprehensive loss, net of taxes
            
            
            (473
            )
            
            
            (386
            )Total
      shareholders' equity
            
            
            35,129
            
            
            
            34,036Total
      liabilities and shareholders' equity
            
            $
            443,680
            
            
            $
            431,074





See notes
to unaudited condensed consolidated financial statements


-2-


PACIFIC
STATE BANCORP


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Periods Ended March 31, 2008 and 2007


(In
thousands)


(Unaudited)
            
            Three
      Months Ended March 31,(Dollars
      in thousands, except per share data)
            
            2008
            
            
            2007Interest
      income:Interest
      and fees on loans
            
            $
            6,476
            
            
            $
            6,842Interest
      on Federal funds sold
            
            
            115
            
            
            
            321Interest
      on investment securities
            
            
            710
            
            
            
            343Total
      interest income
            
            
            7,301
            
            
            
            7,506Interest
      expense:Interest
      on deposits
            
            
            2,798
            
            
            
            2,917Interest
      on borrowings
            
            
            430
            
            
            
            66Interest
      on subordinated debentures
            
            
            154
            
            
            
            192Total
      interest expense
            
            
            3,382
            
            
            
            3,175Net
      interest income before provision for loan losses
            
            
            3,919
            
            
            
            4,331Provision
      for loan losses
            
            
            210
            
            
            
            165Net
      interest income after provision for loan losses
            
            
            3,709
            
            
            
            4,166Non-interest
      income:Service
      charges
            
            
            237
            
            
            
            221Gain
      on sale of loans
            
            
            19
            
            
            
            9Other
      income
            
            
            216
            
            
            
            456Total
      non-interest income
            
            
            472
            
            
            
            686Non-interest
      expenses:Salaries
      and employee benefits
            
            
            1,268
            
            
            
            1,482Occupancy
            
            
            263
            
            
            
            286Furniture
      and equipment
            
            
            179
            
            
            
            167Other
      expenses
            
            
            785
            
            
            
            775Total
      non-interest expenses
            
            
            2,495
            
            
            
            2,710Income
      before provision for income taxes
            
            
            1,686
            
            
            
            2,142Provision
      for income taxes
            
            
            592
            
            
            
            816Net
      income
            
            $
            1,094
            
            
            $
            1,326Basic
      earnings per share
            
            $
            0.30
            
            
            $
            0.36Diluted
      earnings per share
            
            $
            0.27
            
            
            $
            0.33





See notes
to unaudited condensed consolidated financial statements


-3-


PACIFIC
STATE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Periods Ended March 31, 2008 and 2007


(In
thousands)





2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            1,094
            
            
            $
            1,326Provision
      for loan losses
            
            
            210
            
            
            
            165Net
      decrease in deferred loan origination costs
            
            
            73
            
            
            
            38Depreciation,
      amortization and accretion
            
            
            36
            
            
            
            52Gain
      on sale of loans, net
            
            
            -
            
            
            
            (9
            )Stock-based
      compensation expense
            
            
            86
            
            
            
            50Increase
      in Company owned life insurance, net
            
            
            (76
            )
            
            
            (60
            )Increase
      in accrued interest receivable and other assets
            
            
            (126
            )
            
            
            (600
            )Increase  in
      accrued interestpayable
      and other liabilities
            
            
            (1,982
            )
            
            
            981Net
      cash provided by operating activities
            
            
            (685
            )
            
            
            1,943Cash
      flows from investing activities:Purchases
      of available-for-sale investment securities
            
            
            (16,886
            )
            
            
            (10,737
            )Proceeds
      from matured and called available-for-sale investment
      securities
            
            
            10,265
            
            
            
            6,070Proceeds
      from principal repayments from available-for-sale government-guaranteed
      mortgage-backed securities
            
            
            296
            
            
            
            116Proceeds
      from principal repayments from held-to-maturity government-guarantee
      mortgage-backed securities
            
            
            53
            
            
            
            1Purchase
      of FRB and FHLB stock
            
            
            (14
            )
            
            
            -Net
      increase in loans
            
            
            (16,807
            )
            
            
            (362
            )Purchases
      of premises and equipment
            
            
            (545
            )
            
            
            (262
            )Net
      cash used in investing activities
            
            
            (23,638
            )
            
            
            (5,174
            )Cash
      flows from financing activities:Net
      increase (decrease) in demand, interest-bearing and savings
      deposits
            
            
            9,709
            
            
            
            1,799Net
      increase  in time deposits
            
            
            3,786
            
            
            
            13,266Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            51Net
      cash provided by financing Activities
            
            
            13,495
            
            
            
            15,116Increase
      (decrease) in cash and cash equivalents
            
            
            (10,828
            )
            
            
            11,885Cash
      and cash equivalents at beginning of year
            
            
            45,674
            
            
            
            50,615Cash
      and cash equivalents at end of year
            
            $
            34,846
            
            
            $
            62,500





-4-


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 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 a 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 March 31, 2008 had 83 employees, including 20 officers. The Bank
does not engage in any non-bank 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 downtown
Stockton and in the communities of Angels Camp, Arnold, Groveland, Lodi,
Modesto, 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, 2008 and December 31, 2007, and the results
of its operations for the three month period ended March 31, 2008 and 2007, and
its cash flows for the three month periods ended March 31, 2008 and 2007 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 2007 Annual Report to
Shareholders.   The results of operations for the three month
period ended March 31, 2008 may not necessarily be indicative of the operating
results for the full year.





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.





-5-




3.
LOANS





Outstanding
loans are summarized below:





March
      31,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)Commercial
            
            $
            88,292
            
            
            $
            83,012Agricultural
            
            
            13,062
            
            
            
            12,646Real
      estate - commercial mortgage
            
            
            123,920
            
            
            
            121,157Real
      estate - construction
            
            
            89,538
            
            
            
            80,168Installment
            
            
            13,723
            
            
            
            15,215Gross
      loans
            
            
            328,535
            
            
            
            312,198Deferred
      loan origination (fees) costs, net
            
            
            135
            
            
            
            208Allowance
      for loan losses
            
            
            (3,629
            )
            
            
            (3,948
            )Net
      loans
            
            $
            325,041
            
            
            $
            308,458





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 financial statements, including loan
commitments of approximately $101,991,000 and $121,255,000 and stand-by letters
of credit of $3,299,000 and $3,491,000 at March 31, 2008 and December 31, 2007,
respectively.  However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company.





Approximately
$36,858,000 of the loan commitments outstanding at March 31, 2008 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, 2008 and December 31, 2007.




-6-




5.
EARNINGS PER SHARE COMPUTATION





Basic
earnings per share are computed by dividing net income 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 dilutive effect of outstanding options.





6.
COMPREHENSIVE INCOME





Comprehensive
income is reported in addition to net income for all periods
presented.  Comprehensive income is made up of net 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 comprehensive income
and its components for the periods indicated:





Three
      Months Ended(in
      thousands)
              
              March
      31, 2008
              
              
              March
      31, 20087Net
      Income
              
              $
              1,094
              
              
              $
              1,326Other
      Comprehensive Loss:Change
      in unrealized loss onavailable
      for sale securities
              
              
              (98
              )
              
              
              (21
              )Reclassification
      adjustment
              
              
              11
              
              
              
              -Total
      Other Comprehensive Loss
              
              
              (87
              )
              
              
              (21
              )Total
      Comprehensive Income
              
              $
              1,007
              
              
              $
              1,305


-7-




7. STOCK
–BASED COMPENSATION
 
 Stock
Option Plan
 
 At March
31, 2008, the Company has one stock-based compensation plan, the Pacific State
Bancorp 1997 Stock Option Plan (the “Plan”). 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.  Under the Plan,
the Company can no longer issue any incentive stock options and has 26,954
shares of common stock remaining in reserve for issuance to directors through
non statutory agreements.
 
 Stock
Option Compensation
 
 There
were no stock options granted in the three month periods ended March 31, 2008
and none granted for the three months ended March 31, 2007. For the three month
periods ended March 31, 2008 and 2007, the compensation cost recognized for
stock option compensation was $85,000 and $50,000, respectively. The excess tax
benefits were not significant for the Company.
 
 At March
31, 2008, 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 $400,000.  Stock option compensation expense is
recognized on a straight-line basis over the vesting period of the
option.  This cost is expected to be recognized over a weighted
average remaining period of 2.1 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, 2008 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, 2008
              
              
              656,769
              
              
              $
              7.69
              
              
              5.5
      years
              
              
              $
              3,836Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at March 31, 2008
              
              
              656,769
              
              
              $
              7.69
              
              
              5.5
      years
              
              
              $
              3,836Options
      vested or expected to vest at March 31, 2008
              
              
              515,622
              
              
              $
              7.01
              
              
              5.4
      years
              
              
              $
              3,362Exercisable
      at March 31, 2008
              
              
              515,622
              
              
              $
              7.01
              
              
              5.4
      years
              
              
              $
              3,362
 
 The
intrinsic value was derived from the closing market price of the Company’s
common stock of $13.53 as of March 31, 2008
  .


-8-




8. INCOME
TAXES





In July
2006, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB statement No. 109.  FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 also prescribes a recognition threshold and measurement standard for the
financial statement recognition and measurement of an income tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. The Company has adopted FIN 48 as of
January 1, 2007.





The
Company previously recognized income tax positions based on management’s
estimate of whether it is reasonably possible that a liability has been incurred
for unrecognized income tax benefits by applying FASB Statement No.
5,  Accounting for
Contingencies.





The
provisions of FIN 48 have been applied to all tax positions of the Company as of
January 1, 2007.  There was no cumulative effect of applying the
provisions of FIN 48 and there was no material effect on the Company’s provision
for income taxes for the three months ended March 31, 2008.  The
Company recognizes interest accrued related to unrecognized tax benefits
and accruals for penalties in income tax expense.





-9-




9. NEW
ACCOUNTING PRONOUNCEMENTS





Fair
Value Measurements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS
No. 157").  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurement.  SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets.  Under SFAS No. 157, fair value measurements are
disclosed by level within that hierarchy.  SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, except for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis for
which delayed application is permitted until fiscal years beginning after
November 15, 2008.  The adoption of SFAS No. 157 is not expected
to have a material impact on the Company’s financial position, results of
operations or cash flows.





Fair
Value Accounting





In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities ("SFAS No. 159").  SFAS No. 159 permits
companies to elect to follow fair value accounting for certain financial assets
and liabilities in an effort to mitigate volatility in earnings without having
to apply complex hedge accounting provisions.  The standard also
establishes presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement attributes for
similar types of assets and liabilities.  SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.  SFAS
No. 159 is not expected to have a material impact on the Company’s
financial position, results of operations or cash flows.





Business
Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), Business Combinations ("SFAS
No. 141(R)").  SFAS No. 141(R), among other things,
establishes principles and requirements for how the acquirer in a business
combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquired business, (ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  The Company is required to adopt SFAS
No. 141(R) for all business combinations for which the acquisition date is
on or after January 1, 2009.  Earlier adoption is
prohibited.  This standard will change the Company’s accounting
treatment for business combinations on a prospective basis.





-10-




Noncontrolling
Interests in Consolidated Financial Statements





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51 ("SFAS No. 160").  SFAS No. 160
establishes accounting and reporting standards for noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary.  Minority interests
will be recharacterized as noncontrolling interests and classified as a
component of equity.  It also establishes a single method of accounting for
changes in a parent's ownership interest in a subsidiary and requires expanded
disclosures.  This statement is effective for fiscal years beginning
on or after December 15, 2008, with early adoption
prohibited.  The Company does not expect the adoption of this
Statement will have a material impact on its financial position, results of
operations or cash flows.





Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements





In
September 2006, the FASB ratified the Emerging Issues Task Force ("EITF")
conclusion under EITF Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements ("EITF 06-4").  EITF 06-4 requires that
endorsement split-dollar life insurance arrangements which provide a
postretirement benefit to an employee be recorded in accordance with FASB
Statement No. 106, Employer's Accounting for Postretirement Benefits Other
Than Pensions or APB Opinion No. 12, Omnibus Opinion—1967, based on the
substance of the agreement with the employee.  Under the provisions of
these Statements, if the employer has effectively agreed to maintain a life
insurance policy during the employee's retirement, the cost of the insurance
policy during postretirement periods should be accrued in accordance with either
Statement 106 or Opinion 12.  Similarly, if the employer has
effectively agreed to provide the employee with a death benefit, the employer
should accrue, over the service period, a liability for the actuarial present
value of the future death benefit as of the employee's expected retirement date,
in accordance with either Statement 106 or
Opinion 12.  EITF 06-4 is effective for fiscal years
beginning after December 15, 2007.  The effects of adopting
EITF 06-4 can be recorded either as (i) a change in accounting principle
through a cumulative-effect adjustment to retained earnings or to other
components of equity as of the beginning of the year of adoption, or (ii) a
change in accounting principle through retrospective application to all prior
periods.  The Company adopted the provisions of EITF 06-4 as of
January 1, 2008 and management determined that adoption will not have an
impact on the financial position, results of operations or cash flows of the
Company.





Accounting
for Collateral Assignment Split-Dollar Life Insurance Arrangements





In March
2007, the FASB ratified the consensus the EITF reached regarding EITF Issue
No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements ("EITF 06-10"), which provides accounting guidance for
postretirement benefits related to collateral assignment split-dollar life
insurance arrangements, whereby the employee owns and controls the insurance
policies.  The consensus concludes that an employer should recognize a
liability for the postretirement benefit in accordance with FASB Statement
No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, or APB Opinion No. 12, Omnibus Opinion – 1967, as well as recognize an
asset based on the substance of the arrangement with the
employee.  EITF 06-10 is effective for fiscal years beginning
after December 15, 2007, with early application permitted.  The
Company adopted the provisions of EITF 06-10 on January 1, 2008 and management
determined that adoption will not have an impact on the financial position,
results of operations or cash flows of the Company.





-11-





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, 2008 and December 31, 2007 and for the
three month periods ended March 31, 2008 and 2007.  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, 2007.




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 2007 Annual Report to Shareholders on
Form 10-K.





-12-




OVERVIEW





For the
three months ended March 31, 2008:





The
Company’s net income decreased $232 thousand or 17.5% to $1,094 thousand for the
first quarter of 2008 from $1,326 thousand for the same period in
2007.  The primary contributors to the decrease in net income for the
first quarter of 2008 were the $412 thousand decrease in net interest income and
a $214 thousand decrease in non interest income over the same period in
2007.  The decreases were partially offset by a decrease in non
interest expenses of $215 thousand. The decrease in non interest expenses
consisted primarily of decreases in salaries and benefits of $214
thousand.  Additionally, the provision for income taxes decreased $224
thousand.  Basic earnings per share decreased to $0.30 for the first
quarter of 2008 down 16.7% from $0.36 for the same period in
2007.  Diluted earnings per share decreased to $0.27 for the first
quarter of 2008 down 18.2% from the $0.33 for the same period in
2007.





Total
assets at March 31, 2008 were $443,680,000, an increase of $12,606,000 or 2.92%
(11.9% annualized), from the $431,074,000 at December 31, 2007.  The
growth in assets was primarily in the Company’s loan and investment
portfolios.  Loans grew by $16,583,000 or 5.38% (21.9% annualized) to
$325,041,000 at March 31, 2008 from $308,458,000 at December 31, 2007.
Investments grew $6,187,000 or 15.00% (60.8% annualized) to $47,539,000 million
at March 31, 2008 from $41,352,000 million at December 31, 2007.  The
growth in loans and investments was funded by a decrease in federal funds sold
of $10,164,000 or 31.9%, an increase in total deposits of $13,495,000 or 3.9%
and net income of $1,094,000.





The
annualized return on average assets (“ROAA”) was 1.05% for the three month
period ended March 31, 2008 compared to 1.42% for the same period in
2007.  The annualized return on average equity (“ROAE”) was 12.85% for
the three month period ended March 31, 2008 compared to 18.46% for the same
period in 2007. The decrease in ROAA and ROAE is primarily attributable to a
decrease in earnings in the first quarter of 2008 compared to the first quarter
of 2007.





-13-




RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008





Net interest income before provision
for loan losses.  Net interest income was $3.9 million for the
three months ended March 31, 2008, a decrease of $412 thousand or 9.5% from $4.3
million for the same period in 2007.  The decrease in net interest
income was primarily the result of a contraction in the Bank’s net interest
margin.  The contraction in the net interest margin has been partially
offset by increased volume in the average interest earning asset segment of the
portfolio.  In addition to an increase in average earning assets,
average earning liabilities has increased by a similar amount.  The
decrease in asset yields of 121 basis points compared to a decrease in liability
yields of 30 basis points has resulted in an overall decrease in the net
interest margin of 100 basis points.  The decrease in yields on
liabilities has decreased at a slower rate as a result of a change in the Bank’s
deposit mix and strong competition in the market place for
deposits.  Management anticipates liability funding costs to decrease
during the remainder of the year as current liabilities mature and
reprice.





Interest
income decreased $205 thousand or 2.7% to $7.3 million for the three months
ended March 31, 2008 from $7.5 million for the same period in
2007.  The decrease in interest income was primarily attributed to
decreasing yields earned on earning assets.  The Company’s average
loan yield was 8.10% for the three months ended March 31, 2008, down 139 basis
points from the 9.49% yield for the same period in 2007.  Increasing
average loan volumes partially offset the decrease in yields earned on
loans.  Average loan balances grew by $29,013,000 or 9.9% for the
three months ended March 31, 2008 compared to the same time period in
2007.  As a result of the yield decrease, interest income on loans
decreased $366 thousand.  The Company’s average balances of investment
securities increased $21,307,000 to $48,044,000 for the three months ended March
31, 2008 from the $26,737,000 for the same period in 2007. The Company’s average
yield on investments increased 69 basis points to 5.89% from 5.20% for the same
period in 2007.  As a result, interest income increased $361
thousand.  The Company’s average balances of Federal funds sold
decreased $12,982,000 to $13,167,000 for the three months ended March 31, 2008
from the $26,149,000 for the same period in 2007. The Company’s average yield on
Federal funds sold decreased 147 basis points to 3.51% from 4.98% for the same
period in 2007.  As a result, interest income decreased $206
thousand.





Interest
expense increased $207 thousand, or 6.5% to $3.4 million for the three months
ended March 31, 2008, from $3.2 million for the same period in
2007.  The increase is primarily attributed to both the increase in
levels of the average time deposits and other borrowings, offset by the decrease
in the level of interest-bearing demand deposits and rates paid on all interest
bearing liabilities. Time deposits increased as the bank experienced
disintermediation from lower yielding transaction accounts into higher yielding
time deposits.  Rates were decreased during the period as rates on
deposits with competitors decreased subsequent to the Federal Reserve rate
cuts.  The Company’s average balances of time deposits grew to
$200,610,000 for the three months ended March 31, 2008, up $21,534,000, or 12.0%
from $174,076,000 for the same period in 2007.  The increase in time
deposit balances was offset by a decrease in the average rate paid on time
deposits of 38 basis points to 4.82% for the three months ended March 31,
2008.  This was a decrease from 5.20% for the same period in
2007.  As a result, interest expense on time deposits increased
$107,000.  The Company’s average balances of interest bearing demand
deposits decreased $18.8 million to $69.1 million for the three months ended
March 31, 2008 from $87.8 million for the same period in 2007.  The
average rate paid decreased 55 basis points to 2.26% from 2.81% for the same
period in 2007. As a result interest expense on interest bearing demand deposits
decreased $219 thousand. The Company’s average balances of other borrowings
increased $35.3 million to $49.1 million for the three months ended March 31,
2008 from $13.8 million for the same period in 2007 and the rates paid decreased
281 basis points to 4.78% for the three months ended March 31, 2008 from 7.59%
for the same period in 2007.  As a result interest expense on other
borrowings increased $326 thousand.





As a
result of the changes noted above, the net interest margin for the three months
ended March 31, 2008 decreased 100 basis points to 4.09%, from 5.09% for the
same period in 2007.





-14-




The
following table presents for the three month periods 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 BANCORPYield
      AnalysisFor Ended
      Three Months March 31,(Dollars
      in thousands)
              2008
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              Income
      or
              
              
              Yield
      or
              
              
              Average
              
              
              Income
      or
              
              
              Yield
      orAssets:
              Balance
              
              Expense
              
              
              Cost
              
              
              Balance
              
              
              Expense
              
              
              CostInterest-earning
      assets:Loan(2)
              
              $
              321,423
              
              
              $
              6,476
              
              
              
              8.10
              %
              
              $
              292,410
              
              
              $
              6,842
              
              
              
              9.49
              %Investment
      securities(1)
              
              
              48,044
              
              
              
              704
              
              
              
              5.89
              %
              
              
              26,737
              
              
              
              343
              
              
              
              5.20
              %Federal
      funds sold
              
              
              13,167
              
              
              
              115
              
              
              
              3.51
              %
              
              
              26,149
              
              
              
              321
              
              
              
              4.98
              %Interest
      Bearing Deposits in Banks
              
              
              3,000
              
              
              
              6
              
              
              
              0.80
              %
              
              
              0
              
              
              
              0
              
              
              
              0.00
              %Total
      average earning assets
              
              $
              385,634
              
              
              $
              7,301
              
              
              
              7.61
              %
              
              $
              345,296
              
              
              
              7,506
              
              
              
              8.82
              %Non-earning
      assets:Cash
      and due from banks
              
              
              12,944
              
              
              
              
              
              
              
              
              
              
              
              18,802Bank
      premises and equipment
              
              
              14,458
              
              
              
              
              
              
              
              
              
              
              
              11,987Other
      assets
              
              
              16,104
              
              
              
              
              
              
              
              
              
              
              
              9,058Allowance
      for loan loss
              
              
              (4,009
              )
              
              
              
              
              
              
              
              
              
              
              (2,544
              )Total
      average assets
              
              $
              425,131
              
              
              
              
              
              
              
              
              
              
              $
              382,599Liabilities
      and Shareholders' Equity:Interest-bearing
      liabilities:DepositsInterest-bearing
      Demand
              
              $
              69,081
              
              
              $
              389
              
              
              
              2.26
              %
              
              $
              87,840
              
              
              $
              608
              
              
              
              2.81
              %Savings
              
              
              5,359
              
              
              
              7
              
              
              
              0.53
              %
              
              
              5,595
              
              
              
              14
              
              
              
              1.01
              %Time
      Deposits
              
              
              200,610
              
              
              
              2,402
              
              
              
              4.82
              %
              
              
              179,076
              
              
              
              2,295
              
              
              
              5.20
              %Other
      borrowing(3)
              
              
              49,116
              
              
              
              584
              
              
              
              4.78
              %
              
              
              13,787
              
              
              
              258
              
              
              
              7.59
              %Total
      average interest-bearing liabilities
              
              $
              324,166
              
              
              $
              3,382
              
              
              
              4.20
              %
              
              $
              286,298
              
              
              $
              3,175
              
              
              
              4.50
              %Noninterest-bearing
      liabilities:Demand
      deposits
              
              
              61,640
              
              
              
              
              
              
              
              
              
              
              
              65,347Other
      liabilities
              
              
              4,708
              
              
              
              
              
              
              
              
              
              
              
              1,488Total
      average liabilities
              
              
              390,514
              
              
              
              
              
              
              
              
              
              
              
              353,133Shareholders'
      equity:
              
              
              34,617
              
              
              
              
              
              
              
              
              
              
              
              29,466Total
      average liabilities and shareholders' equity
              
              $
              425,131
              
              
              
              
              
              
              
              
              
              
              $
              382,599Net
      interest income
              
              
              
              
              
              $
              3,919
              
              
              
              
              
              
              
              
              
              
              $
              4,331Net
      interest margin(4)
              
              
              
              
              
              
              
              
              
              
              4.09
              %
              
              
              
              
              
              
              
              
              
              
              5.09
              %





(1)
            Not
      computed on a tax-equivalent basis.


(2)
            Loan
      fees included in loan interest income for the three month periods ended
      March 31, 2008


and 2007 amounted to $154 thousand and
$387 thousand, respectively.


(3)
            For
      the purpose of this schedule 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





-15-




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 31,2008
      over 2007NetChange
            
            
            Rate
            
            
            Volume(In
      thousands)Interest
      Income:Loans
            
            $
            (366
            )
            
            $
            (1,045
            )
            
            $
            679Investment
      securities
            
            
            361
            
            
            
            88
            
            
            
            273Federal
      funds sold
            
            
            (206
            )
            
            
            (47
            )
            
            
            (159
            )Interest
      Bearing Deposits in Banks
            
            
            6
            
            
            
            -
            
            
            
            6Total
      interest income
            
            $
            (205
            )
            
            $
            (1,004
            )
            
            $
            799Interest
      Expense:Interest-bearing
      Demand
            
            $
            (219
            )
            
            $
            (89
            )
            
            $
            (130
            )Savings
            
            
            (7
            )
            
            
            (6
            )
            
            
            (1
            )Time
      Deposits
            
            
            107
            
            
            
            (169
            )
            
            
            276Other
      borrowing
            
            
            326
            
            
            
            (335
            )
            
            
            661Total
      interest expense
            
            $
            207
            
            
            $
            (600
            )
            
            $
            807Net
      interest income
            
            $
            (412
            )
            
            $
            (404
            )
            
            $
            (8
            )





(1)
            The
      volume change in net interest income represents the change in average
      balance multiplied


by the
current year’s rate.


(2)
            The
      rate change in net interest income represents the change in rate
      multiplied by the current year’s average
  balance.





Provision for loan
losses.The Company recorded $210 thousand in provision for
loan losses for the three month period ended March 31, 2008 an increase of $45
thousand or 27.3% from $165 thousand for the same period in 2007.  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.





-16-




Non-Interest
Income.During the three months ended March 31, 2008, total
non-interest income decreased $214 thousand or 31.2% to $472 thousand, down from
$686 thousand for the comparable period in 2007.  The decline has been
the result of decreased asset sales, loan sales, and servicing
income.  These areas of income generation have been affected by the
general slowdown in home sales in the region.





Other
income decreased $240 thousand to $216 thousand for the three months ended March
31, 2008 compared to $456 thousand for the same time period in
2007.  The decrease was the result of a decrease in mortgage referral
fees and servicing revenues due to a downturn in the region’s real estate market
in 2008.





Non-Interest
Expenses.Non-interest expenses 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, 2008 was $2.5 million compared to $2.7 million for
the same period in 2007, representing a decrease of $215 thousand or
7.9%.  This decrease reflects decreases in salaries and benefits of
$214 thousand or 14.4% which is the result of positions remaining open for
longer periods of time.  The decrease in occupancy expense is
primarily attributable to decreased depreciation expense associated with assets
being fully depreciated and efforts focused on controlling facility
costs.





The
following table sets forth a summary of non-interest expense for the three
months periods ended March 31, 2008 and 2007:





Three
      Months EndedMarch
      31,
            
            
            March
      31,(In
      thousands)
            
            2008
            
            
            2007Non-interest
      Expense:Salaries
      & Benefits
            
            $
            1,268
            
            
            $
            1,482Occupancy
            
            
            263
            
            
            
            286Furniture
      and Equipment
            
            
            179
            
            
            
            167Other
      Expense
            
            
            785
            
            
            
            775Total
      Non-Interest Expenses
            
            $
            2,495
            
            
            $
            2,710





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, 2008 decreased slightly to
35.1% from 38.1% for the same period in 2007.  The decrease was due to
the increased level of income derived from company owned life insurance and tax
advantaged securities.





The
following table reflects the Company’s tax provision and the related effective
tax rate for the three months periods ended March 31, 2008 and
2007:





Three
      Months EndedMarch
      31,
            
            
            March
      31,(In
      thousands)
            
            2008
            
            
            2007Tax
      Provision
            
            $
            592
            
            
            $
            816Effective
      Tax Rate
            
            
            35.1
            %
            
            
            38.1
            %




-17-


FINANCIAL
CONDITION





Total
assets at March 31, 2008 were $443,680,000, an increase of $12,606,000 or 2.9%
(11.9% annualized), from the $431,074,000 at December 31, 2007.  The
growth in assets was primarily in the Company’s level of loans and
investments.  Investments grew $6,187,000 or 15.0% (60.8% annualized)
to $47,539,000 at March 31, 2008 from $41,352,000 at December 31,
2007.  Loans grew by $16,583,000 or 5.4% (21.9% annualized) to
$325,041,000 at March 31, 2008 from $308,458,000 at December 31,
2007.  The growth in loans and investments was funded by a decrease in
federal funds sold of $10,164,000 and an increase in deposits of
13,495,000.





The
increase in deposits was comprised of a decrease in non-interest bearing
deposits of $6.7 million or 10.1% (40.9% annualized) to $60.3 million at March
31, 2008 from $67.1 million at December 31, 2007; this decrease was offset by
increases in interest bearing deposits of $20.1 million or 7.4% (29.9%
annualized) to $295.0 million at March 31, 2008 from $274.8 million at December
31, 2007. The change in the mix of deposit is the result of disintermediation in
which depositors seek higher yields on deposits by placing the deposits in
higher yield term accounts.





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
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.  Commercial loans increased $5.3 million or 6.4% (25.9%
annualized) to $88.3 million from $83.0 million at December 31,
2007.  Agricultural loans increased by $416 thousand or 3.3% (13.4%
annualized). Real estate – commercial loans increased by $2.8 million or 2.3%
(9.3% annualized) to $123.9 million from $121.2 million at December 31, 2007.
Real estate – construction loans increased $9.4 million or 11.7% (47.5%
annualized) to $89.5 million from $80.2 million at December 31, 2007.
Installment and other loans decreased $1.5 million or 9.8% (39.9% annualized) to
$13.7 million from $15.2 million at December 31, 2007. The portfolio mix has
varied compared to 2007 due to different rates of growth in each segment of the
portfolio.  Commercial and agricultural loans now represents 30.9% of
total loans compared to 28.2% in the prior year, real estate construction loans
now represents 27.3% compared to 22.1% in the prior year, commercial real estate
loans now represents 37.7% compared to 45.9% in the prior year, and installment
loans now represents 4.1% compared to 3.8% in the prior year.





-18-




Nonperforming
loans.The Bank has experienced an increase in nonperforming
loans from $432,000 at December 31, 2007 to $2,177,000 or 0.66% of gross loans
at March 31, 2008.  Current nonperforming loans consisted of two
commercial loans.  Management has recorded chargeoffs of $533,000
through March 31, 2008, consisting primarily of the loan which was nonperforming
at December 31, 2007.  At present, Management believes that the level
of allowance for loan losses currently recorded is sufficient for probable
losses.  The loan portfolio has continued to perform well in 2008 with
credit problems remaining confined to specific customers.




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.





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
provision for loan losses increased to $210,000 for the three months ended March
31, 2008 compared to $165,000 for the same period in 2007. The increase in the
amount of the provision is a direct result of the Company’s analysis of the loan
portfolio and the loan loss history of the Company.  Management does
not believe that there were any adverse trends indicated by the detail of the
aggregate charge-offs for any of the periods discussed.





-19-




The
following table summarizes the activity in the ALL for the periods
indicated:





Three
      Months Ended(In
      thousands)
            
            March
      31,2008
            
            
            2007Beginning
      Balance:
            
            $
            3,948
            
            
            $
            2,478Provision
      for loan losses
            
            
            210
            
            
            
            165Charge-offs:Commercial
            
            
            533
            
            
            
            -Real
      Estate
            
            
            -
            
            
            
            -Other
            
            
            -
            
            
            
            -Total
      Charge-offs
            
            
            533
            
            
            
            -Recoveries:Commercial
            
            
            4
            
            
            
            -Other
            
            
            -
            
            
            
            3Total
      Recoveries
            
            
            4
            
            
            
            -Ending
      Balance
            
            $
            3,629
            
            
            $
            2,646ALL
      to total loans
            
            
            1.11
            %
            
            
            0.91
            %Net
      Charge-offs to average loans-annualized
            
            
            0.67
            %
            
            
            0.00
            %





Investment
securities.  SFAS No. 157 defines fair value, establishes
a framework for measuring fair value under GAAP, and expands disclosures about
fair value measurement. Upon adoption of SFAS No. 157, there was no
cumulative effect adjustment to beginning retained earnings and no impact on the
financial statements, other than in conjunction with the adoption of SFAS
No. 159, in the three months ended March 31, 2008.





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 inputs other than 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 in its
entirety. 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.  Currently
the Company records only available for sale securities at fair
value.





-20-




Fair
values for investment securities are based on quoted market prices when
available or through the use of alternative approaches, such as matrix or model
pricing, when market quotes are not readily accessible or
available.  The company uses level 1 inputs, or quoted market prices,
to value approximately $9,290,000.  The remaining $38,195,000 of
available securities uses level 2 inputs or matrix pricing and model
pricing.





Investment
securities increased $6.2 million to $47.5 million at March 31, 2008, from $41.4
million at December 31, 2007. Federal funds sold decreased $10.2 million to
$21.7 million at March 31, 2008, from $31.9 million at December 31,
2007.





The
Company’s investment in U.S. Treasury securities decreased to 21.0% of the
investment portfolio at March 31, 2008 compared to 42.3% at December 31,
2007.  Obligations of U.S. Agencies increased to 31.7% of the
investment portfolio at March 31, 2008 compared to 7.2% at December 31,
2007.  The Company’s investment in corporate bonds decreased to 40.8%
of the investment portfolio at March 31, 2008 compared to 42.8% at December 31,
2007. Tax-exempt municipal obligation bonds decreased to 6.5% of the investment
portfolio at March 31, 2008 compared to 7.7% at December 31, 2007.





Deposits.Total
deposits were $355.3 million as of March 31, 2008 an increase of $13.5 million
or 4.0% from the December 31, 2007 balance of $341.8 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 22.7% of total deposits down from 24.9% at
December 31, 2007.  Money market and savings accounts decreased to
15.2% of total deposits from 17.4% at December 31, 2007.  Time
deposits increased to 62.1% of total deposits from 57.7% at December 31,
2007





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.





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, 2008 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. Management believes that the Company
met all of its capital adequacy requirements.


-21-


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:




Actual
            
            
            For Capital Adequacy
    Purposes
            
            
            To Be Well Capitalized Under Prompt Corrective
      Action ProvisionsMarch
      31, 2008:
            
            Amount
            
            
            Ratio
            
            
            Minimum Amount
            
            
            Minimum Ratio
            
            
            Minimum Amount
            
            
            Minimum RatioCompany:Total
      capital (to risk-weighted assets)
            
            $
            47,425
            
            
            
            12.3
            %
            
            $
            30,886
            
            
            
            8.0
            %
            
            
            N/A
            
            
            
            N/ATier
      1 capital (to risk weighted assets)
            
            $
            43,574
            
            
            
            11.3
            %
            
            $
            15,443
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ATier
      1 capital (to average assets)
            
            $
            43,574
            
            
            
            10.3
            %
            
            $
            16,974
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABank:Total
      capital (to risk-weighted assets)
            
            $
            44,695
            
            
            
            11.6
            %
            
            $
            30,720
            
            
            
            8.0
            %
            
            $
            38,401
            
            
            
            10.0
            %Tier
      1 capital (to risk-weighted assets)
            
            $
            40,844
            
            
            
            10.6
            %
            
            $
            15,360
            
            
            
            4.0
            %
            
            $
            23,040
            
            
            
            6.0
            %Tier
      1 capital (to average assets)
            
            $
            40,844
            
            
            
            9.7
            %
            
            $
            16,881
            
            
            
            4.0
            %
            
            $
            21,102
            
            
            
            5.0
            %December
      31, 2007:Company:Total
      capital (to risk-weighted assets)
            
            $
            46,285
            
            
            
            12.6
            %
            
            $
            29,433
            
            
            
            8.0
            %
            
            
            N/A
            
            
            
            N/ATier
      1 capital (to risk weighted assets)
            
            $
            42,018
            
            
            
            11.4
            %
            
            $
            14,717
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ATier
      1 capital (to average assets)
            
            $
            42,018
            
            
            
            10.2
            %
            
            $
            16,524
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABank:Total
      capital (to risk-weighted assets)
            
            $
            44,368
            
            
            
            12.1
            %
            
            $
            29,256
            
            
            
            8.0
            %
            
            $
            36,570
            
            
            
            10.0
            %Tier
      1 capital (to risk-weighted assets)
            
            $
            40,198
            
            
            
            11.0
            %
            
            $
            14,628
            
            
            
            4.0
            %
            
            $
            21,942
            
            
            
            6.0
            %Tier
      1 capital (to average assets)
            
            $
            40,198
            
            
            
            9.8
            %
            
            $
            16,428
            
            
            
            4.0
            %
            
            $
            20,535
            
            
            
            5.0
            %





-22-


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 $82.3 million or 18.5% of total assets at March 31, 2008 compared to
$87.0 million or 20.2% of total assets at December 31, 2007. The Company expects
that its primary source of liquidity will be earnings of the Company,
acquisition of core 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 s 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.





-23-




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,
2008 compared to December 31, 2007 as discussed under the caption "Liquidity and
Market Risk" and "Net Interest Income Simulation" in the Company's 2007 Annual
Report to Shareholders filed as an exhibit with the Company’s 2007 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:





March
      31, 2008Change
      in Rates
            
            Adjusted
      Net Interest Income
            
            
            Percent
      change from(in
      thousands)
            
            
            BaseUp
      200 basis points
            
            $
            17,090
            
            
            
            3.59
            %Up
      150 basis points
            
            
            16,950
            
            
            
            2.75
            %Up
      100 basis points
            
            
            16,804
            
            
            
            1.86
            %Base
      Scenario
            
            
            16,497
            
            
            
            0.00
            %Down
      100 basis points
            
            
            16,159
            
            
            
            -2.05
            %Down
      150 basis points
            
            
            15,979
            
            
            
            -3.14
            %Down
      200 basis points
            
            $
            15,793
            
            
            
            -4.27
            %


-24-
  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.





ITEM
4T.  CONTROLS AND PROCEDURES





Not
applicable.




Part
II – Other Information





ITEM
1A RISK FACTORS





In
addition to the other information set forth in this report, 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, 2007, which could materially
affect our business, financial condition or future results. 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





-25-





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 BancorpMay
      15, 2008
            By:
            /s/ Steven
      A. RossoSteven
      A. RossoPresident
      and Chief Executive Officer




Pacific State
      BancorpMay
      15, 2008
              By:
              /s/ JoAnne
      RobertsJoAnne
      RobertsSenior
      Vice President and Chief Financial Officer





-26-