10-Q 1 service_1q08.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ____________ to ____________ Commission file number 000-50323 SERVICE 1ST BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) State of California 32-0061893 -------------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 49 W. 10th Street, Tracy, California 95376 ------------------------------------------ (Address of principal executive offices) (209) 956-7800 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) 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 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 [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: No par value common stock - 2,388,739 shares outstanding at May 14, 2008. The Index to Exhibits is located at page 26. INDEX TO SERVICE 1ST BANCORP FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 31, 2008

2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements SERVICE 1ST BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated statements. 3 SERVICE 1ST BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the periods ending (unaudited)

The accompanying notes are an integral part of these consolidated statements. 4 SERVICE 1ST BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)

The accompanying notes are an integral part of the financial statements. 5 SERVICE 1ST BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended March 31, (unaudited)

The accompanying notes are an integral part of the financial statements. 6 SERVICE 1ST BANCORP AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION The accompanying unaudited consolidated financial statements of Service 1st Bancorp (the "Company") have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include information or footnote disclosures required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and related footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2007. In the opinion of management, the financial statements presented herein include all adjustments (consisting of normal recurring accruals) necessary to present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and the Company's income statement for the three months ended March 31, 2008 and 2007, and the statement of cash flows for the three months ended March 31, 2008 and 2007. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. The balance sheet as of December 31, 2007, has been derived from the audited balance sheet as of that date. Reclassifications Certain reclassifications were made to prior periods presented to conform to the current year. These reclassifications are of a normal recurring nature. Stock-Based Compensation On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No. 123R), "Share-Based Payment," which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by issuance of such equity instruments. In January 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and instead generally requires that such transactions be accounted for using a fair-value-based method. SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes Model for option valuation. This model incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected life of the Company's stock options adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The assumptions used for the three-month period ended March 31, 2008 and 2007 are as follows: WEIGHTED AVERAGE ASSUMPTIONS FOR OPTIONS GRANTED DURING THE PERIOD ENDED: March 31, 2008 March 31, 2007 -------------- -------------- Expected Life N/A 72 months Stock Volatility N/A 55.58% Risk free interest rate N/A 4.77% Dividend yield N/A 0.00% 7 SERVICE 1ST BANCORP AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - EARNINGS PER SHARE (EPS) Basic EPS excludes dilution and is computed by dividing income available to common shareholders' by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the entity as of March 31, 2008 and 2007. Weighted average shares outstanding used in the computation of basic earnings per share for the three months ended March 31, 2008 and 2007 were 2,388,739 and 2,388,739 respectively. Weighted average shares outstanding used in the computation of diluted earnings per share for the three months ended March 31, 2008 and 2007 were 2,395,191 and 2,548,089, respectively. NOTE 3 - SECURITIES Securities are classified in two categories and accounted for as follows: debt and equity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; and equity securities classified as available-for-sale and are measured at fair value, with unrealized gains and losses, net of applicable taxes reported in a separate component of stockholders' equity. Any gains or losses on sales of investments are computed on a specific identification basis. The tables below reflect the composition of investment securities, amortized cost, unrealized gains and losses and estimated fair values as of March 31, 2008. The amortized cost or fair values of investment securities available-for-sale at March 31, 2008 were:

The amortized cost or fair values of investment securities held-to-maturity at March 31, 2008 were:

Securities carried at approximately $63,166,000 were pledged to secure deposits of public funds and borrowing arrangements. 8 SERVICE 1ST BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SECURITIES cont'd The tables below reflect the composition of investment securities, amortized cost, unrealized gains and losses and estimated fair values as of December 31, 2007.

Securities carried at approximately $63,146,000 were pledged to secure deposits of public funds and borrowing arrangements. 9 NOTE 4 - LOANS Service 1st Bank's customers are primarily located in San Joaquin County. At March 31, 2008, approximately 60.1% of the Bank's loans are for real estate and construction loans and approximately 20.2% of the Bank's loans are for general commercial users including professional, retail, and small businesses. Consumer loans make up approximately 9.2% of the loan portfolio, leases make up 6.5% of the loan portfolio, with agricultural loans making up the remaining 4.0%. Generally, real estate loans are collateralized by real property while commercial and other loans are collateralized by funds on deposit, business or personal assets. Repayment is generally expected from the sale of property for real estate loans and cash flows of the borrowers for other loans. Major classifications of loans were: 3/31/2008 12/31/2007 ------------- ------------- Construction and land development loans $ 26,922,692 $ 29,541,045 Real estate loans 50,117,076 45,002,196 Commercial loans 25,834,798 23,029,593 Leases 8,291,218 8,560,166 Agricultural loans 5,095,448 4,713,710 Consumer loans 11,811,503 4,041,061 ------------- ------------- 128,072,735 114,887,771 Deferred loan fees and costs (114,312) (160,557) Allowance for loan losses (1,861,050) (1,558,050) ------------- ------------- Total net loans $ 126,097,373 $ 113,169,164 ============= ============= 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a decline in real estate values in the Company's operating market areas; (14) the effects of earthquakes, floods, fires and other natural disasters, (15) terrorism, the threat of terrorism or the impact of the current military conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. The factors set forth under "Item 1A-Risk Factors" in the Annual Report on Form 10-K for the year ended December 31, 2007 and other cautionary statements and information set forth in this quarterly report on Form 10-Q should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report, when evaluating the business prospects of the Company and its subsidiaries. Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K. BUSINESS ORGANIZATION Service 1st Bancorp (the "Company") is a California corporation and was incorporated on January 23, 2004 to act as a holding company for Service 1st Bank (the "Bank"). The Bank became a subsidiary of the Company effective June 26, 2004. As of March 31, 2008, the Company maintained its administrative office in Tracy, San Joaquin County and the Bank operated three full-service offices in the cities of Stockton, Tracy, and Lodi in San Joaquin County. The Bank offers a full range of commercial banking services to individuals, small and medium-sized businesses, municipalities and professionals in San Joaquin County and the surrounding communities. On August 18, 2006, the Company established a new subsidiary, Charter Services Group, Inc. ("Charter"). Charter assists new (de novo) banks in filing applications for regulatory approval to organize and to commence business as a commercial bank. Charter also provide consulting services to new banks including formulating policies and providing other ongoing services. The following analysis is designed to provide a more complete understanding of the material changes and trends related to the Company's financial condition, results of operations, cash flows, and capital resources. This discussion should be read in conjunction with the audited financial statements included in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2007. 11 CRITICAL ACCOUNTING POLICIES Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 1 to the financial statements describes the significant accounting policies used in the preparation of the financial statements. A critical accounting policy is defined as one that is both material to the presentation of the Company's financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on the Company's financial condition and results of operations. Management believes that the matters described below are critical accounting policies. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentration, specific problem loans, commitments, and current economic conditions that may affect the borrowers' ability to pay. Summary of Financial Condition The Company's total consolidated assets increased 5.5% from December 31, 2007 to March 31, 2008. As of March 31, 2008, total consolidated assets were $243,713,538 compared to $231,075,943 as of December 31, 2007, and $211,903,081 at March 31, 2007. The increase in total assets from December 31, 2007 was primarily due to an increase in loans. Total net loans at March 31, 2008 were $126,283,373compared $113,169,164 at December 31, 2007 and $112,991,094 at March 31, 2007. This represents an increase in net loans of 11.6% from December 31, 2007. Cash and due from banks declined from $6,636,751 at December 31, 2007 to $3,528,293 at March 31, 2008. The reduction in cash was used to fund loan originations. Total deposits were $214,727,862 at March 31, 2008 compared to $202,405,646 at December 31, 2007 and $183,901,805 at March 31, 2007. Noninterest-bearing DDA accounts decreased from $26,697,543 at December 31, 2007 to $25,836,066 at March 31, 2008. Money market, NOW, and savings accounts increased to $92,778,739 at March 31, 2008 from $86,305,530 at December 31, 2007. Time deposits under $100,000 increased from $69,781,685 at December 31, 2007 to $69,087,219 at March 31, 2008. The increase in time deposits under $100,000 was primarily from the Bank's participation in the national Certificate of Deposit Account Registry (CDARS) program. Through this program, the Bank can offer $50,000,000 of FDIC insurance coverage for time deposits. When the Bank places these deposits into the CDARS network, it has the option of receiving reciprocal deposits from other banks in the network. Reciprocal deposits from the CDARS program increased from $61,284,069 at December 31, 2007 to $62,160,164 at March 31, 2008. Other borrowings at March 31, 2008 and December 31, 2007 were $9,155,000. The borrowings consist of $4,000,000 from the Federal Home Loan Bank of San Francisco and $5,155,000 of Trust Preferred Securities. Results of Operations Net income for the three months ended March 31, 2008 was $159,265 compared to $113,139 for 2007. The increase in net income for the three months ended March 31, 2008 was from an increase in net interest income and a reduction in operating expenses. Basic earnings per share for the three months ended March 31, 2008 was $0.07 per share compared to $0.05 for the three months ended March 31, 2007. Diluted earnings per share for the three months ended March 31, 2008 and 2007 were $0.07 and $0.04, respectively. 12 Net Interest Income and Net Interest Margin Net interest income, the primary component of the net earnings of a financial institution, refers to the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Please see the tables of average balance sheet and net interest income below. The following table sets forth average balance sheet information, interest income and expense, average yields and rates, and net interest income and margin for the three months ended March 31, 2008 and 2007:

1. Average loan balances include average deferred loan fees of $143,886 and $211,479 for the three months ended March 31, 2008 and 2007, respectively. 2. Interest on loans includes fees of $45,303 and $62,848 for the three month periods ended March 31, 2008 and 2007, respectively. 3. Net interest margin is computed by dividing net interest income by total average earning assets. All average balances have been computed using daily balances. 13 Net interest income for the three months ended March 31, 2008 was $1,858,712 compared to $1,719,291for 2007. Average interest-earning assets for the three months ended March 31, 2008 were $221,485,982 compared to $206,063,678 during the same three months of 2007. The Federal Reserve started lowering interest rates beginning in September of 2007. The prime rate has dropped from 8.25% in September 2007 to 5.25% at March 31, 2008. As a result of the Federal Reserve's action, the yield earned on average interest-earning assets during the first quarter of 2008 was 6.59% compared to 7.11% during the same quarter of 2007. The average rate paid on interest bearing-liabilities decreased from 4.42% for the first quarter of 2007 to 3.68% during the first quarter of 2008. While the yield earned on interest earning assets declined from March 2007, the net interest margin remained steady. Allowance and Provision for Loan Losses The Company assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring, and established formal lending policies. Additionally, the Bank contracts with an outside source to periodically review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio is critical for profitability and growth. Management strives to reduce credit losses by continuing its emphasis on credit quality in the loan approval process, active credit administration, and regular monitoring. Management has implemented a loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. In extending credit and commitments to borrowers, the Bank generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Bank's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the creditworthiness of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences, and other real property. Construction loans and other real estate secured loans comprised 60.1% of total loans outstanding at March 31, 2008. Although management believes such loans have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Company's primary operating market areas in particular, could have an adverse impact on the collectibility of such loans. In addition, such an occurrence could result in an increase in loan losses and an increase in the provision for loan losses, which could adversely affect the Company's future prospects, results of operations, overall profitability, and the market price of the Company's common stock. The provision for loan losses for the three months ended March 31, 2008 was $303,000 compared to $0 during the same quarter of 2007. At March 31, 2008, the allowance for loan losses was $1,861,050 compared to $1,558,050 at December 31, 2007 and $1,429,050 at March 31, 2007. The ratio of allowance for loan losses to gross loans was 1.30% at March 31, 2008 compared to 1.36% at December 31, 2007 and 1.25% at March 31, 2007. The allowance for loan losses is adjusted by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Additional provisions will be added as new loans are placed on the books in an amount necessary to support the risks inherent in the portfolio. 14 The following table summarizes the changes in the allowances for loan losses arising from loans charged-off, recoveries on loans previously charged-off, and additions to the allowance which have been charged to operating expenses and certain ratios relating to the allowance for loan losses.

Nonaccrual Loans, Loans Past Due 90 Days and OREO Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. There were nonaccrual loans of $814,493 at March 31, 2008, $356,042 at March 31, 2007, and $2,006,029 at December 31, 2007. At March 31, 2008, there were loans totaling $4,300,674 that were considered impaired or troubled debt restructurings compared to $356,042 at March 31, 2007 and $2,006,029 at December 31, 2007. These loans were delinquent and placed on nonaccrual, but management currently believes that there will be no material losses on these loans. The loans were placed on nonaccrual to defer future income recognition until the delinquent payments have been received. During the first quarter of 2008, the Bank foreclosed on a delinquent loan. The current net realizable value of the foreclosed property at March 31, 2008 is $1,614,000. There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of March 31, 2008 or December 31, 2007. Management is not aware of any potential problem loans, which were accruing and current at March 31, 2008 or December 31, 2007, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. There was no other real estate owned at March 31, 2008 and December 31, 2007. 15 Other Income Other income for the three months ended March 31, 2008 was $156,822 compared to $205,177 for the same period during 2007. The Bank offers fixed rate commercial real estate loans through a third party lender. The Bank receives fees for packaging the loans provided to the third party lender. The loans are funded by and become assets of the third party lender. The fees on such loans for the three months ended March 31, 2008 were $0 compared to $36,900 for the same quarter in 2007. The Bank originates loans through various government guarantee programs. The guaranteed portion of these loans can be sold in the secondary market. Gains on loans sold in the secondary market and the fees for servicing of these loans for the three months ended March 31, 2008 were $10,381 compared to $21,844 during the same period in 2007. Other Expense Salaries and employee benefits for the three months ended March 31, 2008 were $799,251 compared to $1,019,221 for the three months ended March 31, 2007. The reduction in salaries and employee benefits was from a reduction of 8 employees through attrition and layoffs. Occupancy and equipment expense for the three months ended March 31, 2008 was $244,871 compared to $239,714 for the same period of 2007. Data processing and other professional fees expense was $148,042 for the three months ended March 31, 2008 compared to $150,210 for the three months ended March 31, 2007. Loan department expense for the three months ended March 31, 2007 was $43,906 compared to $20,245 for the same period of 2007. During the first quarter of 2008, the Company foreclosed on real estate securing collateral for one loan. The increase in costs are related to foreclosure expenses of $32,045. Capital Resources Total shareholders' equity at March 31, 2008 was $17,575,058 compared to $17,648,014 December 31, 2007. The primary changes in shareholders' equity were net income for the three months ended March 31, 2008 of $159,265, an increase in additional paid in capital of $38,505 related to stock-based compensation, and a decrease in accumulated other comprehensive income (net of tax of $270,726). The Company and the Bank are subject to regulations issued by the Board of Governors of the Federal Reserve System and the FDIC, which require maintenance of a certain level of capital. Under the regulations, capital requirements are based upon the composition of an institution's asset base and the risk factors assigned to those assets. The guidelines characterize an institution's capital as being "Tier 1" capital (defined to be principally shareholders' equity less intangible assets) and "Tier 2" capital (defined to be principally the allowance for loan losses, limited to one and one-fourth percent of gross risk weighted assets). The guidelines require the Company and the Bank to maintain a risk-based capital target ratio of 8%, one-half or more of which should be in the form of Tier 1 capital. 16 The following table shows the Company's and the Bank's actual capital amounts and ratios at March 31, 2008 and December 31, 2007, as well as the minimum capital ratios for capital adequacy under the regulatory framework (dollar amounts are in thousands).

The Bank met the "well capitalized" capital ratio measures at both March 31, 2008 and December 31, 2007. Liquidity Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding letters of credit at March 31, 2008 and December 31, 2007 were approximately $42,677,929 and $38,038,672, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company's sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. At March 31, 2008, consolidated liquid assets totaled $27,980,736 or 11.48% of total assets compared to $36,075,272 or 15.61% of total assets on December 31, 2007. In addition to liquid assets, the Company maintains short-term lines of credit in the amount of $41,300,000 with correspondent banks. At March 31, 2008, the Company had $41,300,000 available under these credit lines. Additionally, Service 1st Bank is a member of the FHLB. At March 31, 2008, Service 1st Bank could have arranged for up to $17,454,796 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans. At March 31, 2008, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $4,000,000, leaving $13,454,796 available under these FHLB secured borrowing arrangements. Service 1st Bank also has informal agreements with various other banks to sell participations in loans, if necessary. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets and borrowing capacity to volatile and cyclical deposits. 17 Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. These securities are also available to pledge as collateral for borrowings if the need should arise. Service 1st Bank has established a master repurchase agreement with a correspondent bank to enable such transactions. Service 1st Bank can also pledge securities to borrow from the FRB and the FHLB. The principal cash requirements of the Company are for expenses incurred in the support of administration and operations. Inflation The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and the Bank indirectly through its effect on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's and the Bank's capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings, which the Company may generate in the future. In addition to its effects on interest rates, inflation directly affects the Company by increasing operating expenses. The effects of inflation were not material to the Company's results of operations during the periods ending March 31, 2008 and 2007. Off-Balance Sheet Items The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As of March 31, 2008 and December 31, 2007, commitments to extend credit and standby letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and standby letters of credit were $42,677,929 and $38,038,672 at March 31, 2008 and December 31, 2007, respectively. As a percentage of gross loans and leases these off-balance sheet items represent 33.27% and 33.13%, respectively. The Company has certain ongoing commitments under operating leases. The minimum commitment under these operating leases for 2008 is $470,247. Effects of Terrorism The terrorist actions on September 11, 2001 and thereafter and the conflicts in Afghanistan and Iraq have had significant adverse effects upon the United States economy. Whether the terrorist activities in the future and the actions of the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company and the extent of such impact is uncertain. Such economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for loans and other products and services offered by the Bank, increasing nonperforming loans and the amounts reserved for loan losses, and causing a decline in the Company's stock price. Website Access Information regarding the Company, the Bank, and Charter may be obtained from the Company's website at www.service1stbank.com. Copies of the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Section 16 reports by Company insiders, including exhibits and amendments thereto, are available free of charge on the Company's website as soon as they are published by the Securities and Exchange Commission through a link to the Edgar reporting system maintained by the Securities and Exchange Commission. To access Company filings, select "Go to Service 1st Bancorp" at the bottom of the Company website page, then select "Click here to view Service 1st Bancorp SEC Filings", followed by selecting "Continue to view SEC Filings" to view or download copies of reports including Form 10-K, 10-Q or 8-K, or select "Click here to view Section 16 Reports," followed by selecting "Continue to view Section 16 Reports," to view or download reports on Forms 3, 4 or 5 of insider transactions in Company securities. 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk The types of market risk exposures generally faced in the banking industry include interest rate risk, liquidity risk, equity price risk, foreign currency risk, and commodity price risk. Due to the nature of our operations, foreign currency and commodity price risk are not significant to us. See "Management's Discussion and Analysis of Financial Condition and Operations - Liquidity" for a discussion of our liquidity risk. Our interest rate risk and equity market price risk are described below. Interest Rate Risk The Company manages its interest rate risk within an overall asset and liability management framework that includes attention to credit risk, liquidity risk, and capital structure. A principal objective of asset/liability management is to manage the sensitivity of net interest income to changing interest rates. Asset and liability management activity is governed by a policy reviewed and approved annually by the Board of Directors. The Board of Directors has delegated the administration of this policy to the Funds Management Committee, a committee of the Board of Directors, which is comprised of senior executive management, and four independent directors. Two common measures used to monitor interest rate risk are economic value interest rate sensitivity and forecasted net interest income rate sensitivity. Economic Value Interest Rate Sensitivity Interest rate sensitivity is computed by estimating percentage changes in the economic value of our equity over a range of potential yield curve shocks. Economic value sensitivity is defined as the economic value of our assets less the economic value of our liabilities plus or minus the economic value of off-balance sheet items. The economic value of each asset, liability and off-balance sheet item is its discounted present value of expected cash flows. Discount rates are based on implied forward market rates of interest, adjusted for assumed shock scenario interest rate changes. The following table shows our projected percentage change in economic value sensitivity for parallel yield curve shocks as of the dates indicated relative to the value if wholesale market rates follow implied forward rates. Projected change in economic value ---------------------------------- Change in interest rates March 31, 2008 December 31, 2007 -------------------------------- -------------- ----------------- 100 basis point rise (3.45)% (3.28)% 100 basis point decline 2.17% 1.61% The economic value of portfolio equity sensitivity from March 31, 2008 to December 31, 2007 has shifted due to changes in wholesale rates, a change in the composition of customer loans, leases, investments, and deposits, and shortened wholesale borrowing maturities. Forecasted Net Interest Income Interest Rate Sensitivity The impact of interest rate changes on the next 12 months' net interest income is measured using income simulation. The various products in our balance sheet are modeled to simulate their income (and cash flow) behavior in relation to interest rate movements. Income for the next 12 months is calculated using the implied forward curve and for immediate and sustained yield curve shocks. 19 The income simulation model includes various assumptions about the repricing behavior for each product and new business volumes and pricing behaviors. Many of our assets are floating rate loans, which would subsequently reprice in response to changes in market interest rates with the repricing being the same extent as the change in the underlying contracted index. Our Liquid Gold account deposit products are assumed to reprice gradually in response to wholesale rate changes. The following table shows our projected percentage change in 12 month net interest income as a consequence of parallel yield curve shocks from the implied forward curve: Projected change in net interest income --------------------------------------- Change in interest rates March 31, 2008 December 31, 2007 ------------------------------ -------------- ----------------- 100 basis point rise 0.21% 0.09% 100 basis point decline (0.05)% 0.07% Net interest income sensitivity from March 31, 2008 to December 31, 2007 evolved from a slightly asset-sensitive position to a relatively neutral position. Equity Market Price Risk We are not exposed to equity market risk through our investments in stocks. The only stocks owned are 9,716 shares of FHLB of San Francisco and 400 shares of Pacific Coast Bankers' Bank. These stocks are not actively traded on any exchange, but their market value exceeds their cost. Item 4. Controls and Procedures (a) Disclosure Controls and Procedures An evaluation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and other members of the Company's senior management as of the end of the period covered by this quarterly report on Form 10-Q. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Internal Control Over Financial Reporting An evaluation of any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company's fiscal quarter ended March 31, 2008, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 4T. Controls and Procedures Not Applicable PART II - OTHER INFORMATION Item 1. Legal Proceedings On May 6, 2008, the Registrant's bank subsidiary, Service 1st Bank, was served with a Summons and Complaint, which was filed on May 1, 2008 in the Superior Court of the State of California in the County of Sacramento, Case No. 34-2008 -00009879, by Plaintiff, Regent Hotel LLC, a California limited liability company and subsidiary of Regent Development, Inc., a California corporation. The full details of the lawsuit are included in the Company's Form 8-K filed with the Securities and Exchange Commission on May 15, 2008. After evaluating the potential loss related to this loan, the Bank increased its reserve for possible loan loss by $186,000 which is reflected in the Consolidated Statement of Income for the three months ended March, 31, 2008. 20 Item 1A. Risk Factors None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits (2.1) Plan of Reorganization and Merger Agreement (included in Annex A) incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (3.1) Articles of Incorporation, as amended, incorporated by reference from the Registrant's Form 10-QSB for the quarter ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005. (3.2) Bylaws, as amended, incorporated by reference from the Registrant's Form 8-K, filed with the Securities and Exchange Commission on July 23, 2007. (4.1) Specimen form of certificate for Service 1st Bancorp common stock incorporated by reference from Registrant's Form 10-QSB for the quarterly period ended September 30, 2003, filed with the Securities and Exchange Commission on November 14, 2003. (4.2) Trust Preferred Security Indenture dated August 17, 2006 between Service 1st Bancorp and Wells Fargo Bank, National Association, incorporated by reference from the Registrant's Form 10-Q for the quarterly period ended June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007. (4.3) Trust Preferred Security Amended and Restated Declaration of Trust dated August 17, 2006 between Service 1st Capital Trust I and Wells Fargo Bank, National Association, incorporated by reference from the Registrant's Form 10-Q for the quarterly period ended June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007. (4.4) Trust Preferred Security Guarantee Agreement dated August 17, 2006 between Service 1st Bancorp and Wells Fargo Bank, National Association, incorporated by reference from the Registrant's Form 10-Q for the quarterly period ended June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007. 21 (4.5) Trust Preferred Security Junior Subordinated Debt Security dated August 17, 2006 between Service 1st Bancorp and Wells Fargo Bank, National Association, incorporated by reference from the Registrant's Form 10-Q for the quarterly period ended June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007. (4.6) Trust Preferred Security Trust Preferred Security Certificate dated August 17, 2006 between Service 1st Capital Trust I and Wells Fargo Bank, National Association, incorporated by reference from the Registrant's Form 10-Q for the quarterly period ended June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007. (10.1) Lease agreement dated May 3, 2002, related to 2800 West March Lane, Suite 120, Stockton, CA 95219 incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (10.2) Lease agreement dated April 13, 1999 and amendment thereto dated June 17, 1999, related to 60 West 10th Street, Tracy, CA 95376, incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (10.3)* 1999 Service 1st Bancorp Stock Option Plan, Amendment No. 1 thereto, and related forms of Incentive and Nonstatutory Stock Option Agreements entered into with executive officers and directors, incorporated by reference from the Registrant's Form S-8, Registration No. 333-107346, filed with the Securities and Exchange Commission on July 25, 2003. (10.4) Agreement dated July 27, 1999 with BancData Solutions, Inc. for service bureau and data processing services, incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (10.5) Agreement with Financial Marketing Services dated February 1, 2000, incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (10.6)* Service 1st Bank 401(k) Profit Sharing Plan and Trust Summary Plan Description, dated January 1, 2000, incorporated by reference from the Registrant's Form S-4EF, Registration No. 333-104244, filed with the Securities and Exchange Commission on April 1, 2003. (10.7)* John O. Brooks Salary Continuation Agreement dated September 10, 2003, incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 30, 2004. (10.8)* Bryan R. Hyzdu Salary Continuation Agreement dated September 10, 2003, incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 30, 2004. (10.9)* Robert E. Bloch Salary Continuation Agreement dated September 10, 2003, incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 30, 2004. (10.10)* Patrick Carman Salary Continuation Agreement dated September 10, 2003, incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 30, 2004. (10.11)* 2004 Stock Option Plan and Forms of Incentive and Nonstatutory Stock Option Agreements, incorporated by reference from the Registrant's Form S-8, Registration No. 333-116818, filed with the Securities and Exchange Commission on June 24, 2004. 22 (10.12)* John O. Brooks Employment Agreement dated July 15, 2004, incorporated by reference from the Registrant's Form 10-QSB, for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004. (10.13)* Bryan R. Hyzdu Employment Agreement dated July 15, 2004, incorporated by reference from the Registrant's Form 10-QSB, for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004. (10.14)* Robert E. Bloch Employment Agreement dated July 15, 2004, incorporated by reference from the Registrant's Form 10-QSB, for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004. (10.15)* Patrick Carman Employment Agreement dated July 15, 2004, incorporated by reference from the Registrant's Form 10-QSB, for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004. (10.16)* Shannon Reinard Employment Agreement dated July 15, 2004, incorporated by reference from the Registrant's Form 10-QSB, for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004. (10.17) Fiserv Solutions, Inc. Agreement dated October 7, 2004, for service bureau, data processing, and item processing, incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 30, 2005. (10.18) Lease agreement dated May 1, 2005, related to 49 W. 10th Street, Tracy, CA 95378 incorporated by reference from the Registrant's Form 10-QSB for the quarterly period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005. (10.19) Lease agreement dated October 3, 2005, related to 1901 W. Kettleman Lane, Building A, Suite 1A and 1B, Lodi, CA 95242, incorporated by reference from the Registrant's Form 10-QSB for the quarterly period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005. (10.20)* Shannon Reinard Salary Continuation Agreement dated August 8, 2005, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.21)* Bryan R. Hyzdu First Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.22)* Bryan R. Hyzdu Second Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.23)* Patrick Carman First Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. 23 (10.24)* Patrick Carman Second Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.25)* Robert E. Bloch First Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.26)* Robert E. Bloch Second Amendment dated August 8, 2005 to Salary Continuation Agreement dated September 10, 2003, incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. (10.27)* Director Emeritus Program approved by Board of Directors effective June 30, 2006, incorporated by reference from Registrant's Form 8-K, filed with the Securities and Exchange Commission on July 7, 2006. (10.28) Lease option exercise letter dated September 12, 2006, related to 60 West 10th Street, Tracy, CA 95376, incorporated by reference from Registrant's Form 10-K, filed with the Securities and Exchange Commission on April 2, 2007. (10.29) Lease option exercise letter dated September 12, 2006, related to 60 West 10th Street, Tracy, CA 95376, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 14, 2007. (10.30)* Thomas A. Vander Ploeg Employment Agreement dated November 16, 2007, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 31, 2008. (10.31) Resignation letter from Thomas A. Vander Ploeg dated May 7, 2008, incorporated by reference from Registrant's Form 8-K, filed with the Securities and Exchange Commission on May 9, 2008. (10.32)* Thomas A. Vander Ploeg Settlement Agreement and Release of All Claims, incorporated by reference from Registrant's Form 8-K, filed with the Securities and Exchange Commission on May 15, 2008. (14.1) Code of Ethics, incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 30, 2004. (21.1) Registrant's only subsidiaries are Service 1st Bank and Charter Services Group, Inc. (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification of Service 1st Bancorp by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Denotes management compensatory plans or arrangements. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15d) 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. SERVICE 1ST BANCORP Date: May 20, 2008 By: /s/ JOHN O. BROOKS ----------------------------------------- John O. Brooks Chief Executive Officer (Principal Executive Officer) Date: May 20, 2008 By: /s/ ROBERT E. BLOCH ----------------------------------------- Robert E. Bloch Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25 EXHIBIT INDEX ------------- Exhibit Sequential Number Description Page Number --------- ------------------------------------------------------ ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 27 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 28 32.1 Certification of Service 1st Bancorp by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 29 26

SERVICE 1ST BANCORP 10-Q