-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IAXvN+Tq0pHpc45W/Ar5p3ZjVPEPl2IayzjiN7bXO0+LcAGXN+zTVfLsgYD7/EO5 aIOmBQmoZC9R7Sk/b00vlw== 0001047469-99-021015.txt : 19990518 0001047469-99-021015.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC CREST CAPITAL INC CENTRAL INDEX KEY: 0000912048 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 954437818 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22732 FILM NUMBER: 99626401 BUSINESS ADDRESS: STREET 1: 30343 CANWOOD ST CITY: AGOURA HILLS STATE: CA ZIP: 91301 BUSINESS PHONE: 8188653300 MAIL ADDRESS: STREET 1: 30343 CANWOOD STREET CITY: AGOURA HILLS STATE: CA ZIP: 91301 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR ( ) 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 0-22732 PACIFIC CREST CAPITAL, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4437818 ------------------------------- ------------------- (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 30343 CANWOOD STREET AGOURA HILLS, CALIFORNIA 91301 - ---------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (818) 865-3300 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE ---------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 X NO -------- -------- NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF MAY 13, 1998. TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING - ---------------------------- ---------------------------- COMMON STOCK, $.01 PAR VALUE 2,671,439 9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I GUARANTEE OF PACIFIC CREST CAPITAL, INC. WITH RESPECT TO THE 9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I PACIFIC CREST CAPITAL, INC. FORM 10-Q INDEX
Page No. Part I - FINANCIAL INFORMATION.......................................................... 1 Item 1: Financial Statements.................................................. 1 Consolidated Balance Sheets........................................... 1 Consolidated Statements of Operations................................. 2 Consolidated Statements of Shareholders' Equity....................... 3 Consolidated Statements of Cash Flows................................. 4 Notes to Consolidated Financial Statements............................ 5 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 7 Part II - OTHER INFORMATION............................................................. 18 SIGNATURES.............................................................................. 19
PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PACIFIC CREST CAPITAL, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS (UNAUDITED) (AUDITED) Cash $ 1,765 $ 3,592 Securities purchased under resale agreements 3,113 22,048 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 4,878 25,640 - ------------------------------------------------------------------------------------------------------------ Investment securities (Note 4): Available for sale, at market 236,685 321,261 Loans Commercial mortgage 328,033 278,614 Residential mortgage 1,056 1,194 Commercial business/SBA/other 5,864 4,476 SBA loans held for sale 4,057 4,784 - ----------------------------------------------------------------------------------------------------------- Total loans 339,010 289,068 Deferred loan fees 422 582 Allowance for loan losses 5,692 5,024 - ----------------------------------------------------------------------------------------------------------- Net loans 332,896 283,462 Accrued interest receivable 6,293 8,241 Prepaid expenses and other assets 2,295 2,102 Deferred income taxes 3,697 2,911 Other real estate owned 510 806 Premises and equipment 919 881 - ----------------------------------------------------------------------------------------------------------- Total assets $ 588,173 $ 645,304 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Savings accounts $ 258,441 $ 276,011 Certificates of deposit 172,869 182,979 Money market checking 23,774 23,849 - ----------------------------------------------------------------------------------------------------------- Total deposits 455,084 482,839 Reverse repurchase agreements 6,500 30,779 Term borrowings 73,950 79,450 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 17,250 17,250 - ----------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 552,784 610,318 Accrued interest and other liabilities 5,878 4,846 - ----------------------------------------------------------------------------------------------------------- Total liabilities 558,662 615,164 - ----------------------------------------------------------------------------------------------------------- Shareholders' equity (Notes 5 and 6): Preferred stock, $.01 par value, 2,000,000 shares authorized no shares issued or outstanding - - Common stock, $.01 par value, 10,000,000 shares authorized, 2,986,264 shares issued at March 31, 1999, and December 31, 1998 28,026 28,087 Retained earnings 6,753 5,559 Accumulated other comprehensive income (loss) (486) 1,199 Common stock in treasury, at cost, 300,988 shares at March 31, 1999, 295,500 shares at December 31, 1998 (4,782) (4,705) Total shareholders' equity 29,511 30,140 - ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 588,173 $ 645,304 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Book value per common share (Note 3) $ 10.99 $ 11.20 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
1 PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE QUARTER ENDED MARCH 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 - --------------------------------------------------------------------------------------------------- Interest income: Interest on loans, including fees $ 7,505 $ 6,219 Securities purchased under resale agreements 211 4 Investment securities Held to maturity - 95 Available for sale 4,733 4,269 - --------------------------------------------------------------------------------------------------- Total interest income 12,449 10,587 Interest expense: Interest expense on interest-bearing deposits Savings accounts 3,107 2,572 Certificates of deposit 2,430 1,948 Money market checking 257 216 - --------------------------------------------------------------------------------------------------- Total interest expense on deposits 5,794 4,736 Reverse repurchase agreements 354 496 Term borrowings 1,094 785 Trust preferred securities 405 404 - --------------------------------------------------------------------------------------------------- Total interest expense 7,647 6,421 - --------------------------------------------------------------------------------------------------- Net interest income 4,802 4,166 Provision for loan losses 660 200 - --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,142 3,966 NONINTEREST INCOME: Gain on sale of SBA Loans 96 - Gain on sale of investment securities 515 - Loan prepayment and late fees 99 98 Other noninterest income 261 103 - --------------------------------------------------------------------------------------------------- Total noninterest income 971 201 - --------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Valuation adjustments to other real estate owned 43 - Other real estate owned expenses 18 44 Salaries and employee benefits 1,740 1,357 Net occupancy expenses 442 391 Communication and data processing 212 191 Advertising and promotion 192 64 FDIC insurance premiums 12 10 Credit and collection expenses 10 13 Other expenses 267 231 - --------------------------------------------------------------------------------------------------- Total noninterest expense 2,936 2,301 - --------------------------------------------------------------------------------------------------- Income before income taxes 2,177 1,866 Income tax provision (Note 2) 849 765 - --------------------------------------------------------------------------------------------------- Net income $ 1,328 $ 1,101 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Per share data (Note 3): Basic earnings per common share $ 0.49 $ 0.38 - --------------------------------------------------------------------------------------------------- Weighted average basic common shares outstanding (in thousands) 2,691 2,893 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.47 $ 0.36 - --------------------------------------------------------------------------------------------------- Weighted average diluted common shares outstanding (in thousands) 2,823 3,058 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
2 PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
ACCUMULATED COMMON TREASURY OTHER TOTAL TOTAL ---------------- ---------------- RETAINED COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS' (DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) INCOME (LOSS) EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1997 2,972 $27,944 (85) $(1,174) $ 849 $ 1,189 - $ 28,808 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income: - - - - 4,847 - $ 4,847 4,847 Other comprehensive income, net of tax Unrealized gain on securities, available for sale - - - - - 10 10 10 ------- Total Comprehensive income: $ 4,857 ------- Issuance of common stock: Under employee stock purchase plan 6 63 - - - - 63 Under non-employee directors' stock purchase plan 2 44 - - - - 44 Under employee stock option plan 6 36 - - - - 36 Purchase of treasury shares - - (211) (3,531) - - (3,531) Cash dividends paid - - - - (137) - (137) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1998 2,986 $28,087 (296) $(4,705) $5,559 $ 1,199 - $30,140 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income (loss): Net income: - - - - 1,328 - $ 1,328 1,328 Other comprehensive income (loss), net of tax Unrealized income (loss) on securities, available for sale - - - - - (1,685) (1,685) (1,685) ------- Total Comprehensive income (loss): $ (357) ------- Issuance of treasury shares: Under employee stock purchase plan - (12) 4 66 - - 54 Under non-employee directors' stock purchase plan - - 1 10 - - 10 Under employee stock option plan - (49) 5 74 - - 25 Purchase of treasury shares - - (15) (227) - - (227) Cash dividends paid - - - - (134) - (134) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1999 2,986 $28,026 (301) $(4,782) $6,753 $ (486) - $29,511 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES.
3 PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ---------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (DOLLARS IN THOUSANDS) 1999 1998 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 1,328 $ 1,101 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 660 200 Valuation adjustments to OREO 43 - Depreciation and amortization 77 73 Amortization of deferred loan fees (128) (109) Amortization/accretion of securities (19) (1) Gain on sale of SBA Loans (96) - Gain on sale of investment securities (515) - Changes in operating assets and liabilities: Accrued interest receivable 1,948 (1,412) Prepaid expenses and other assets (193) 24 Deferred income taxes 435 (147) Accrued interest and other liabilities 1,032 1,355 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,572 1,084 - ---------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of investment securities: Available for sale (3,000) (30,000) Proceeds from sales and calls of investment securities: Available for sale 85,204 - Net increase in loans (42,234) (4,684) Proceeds from sale of SBA loans 1,381 - Purchase of loans (9,017) - Purchases of equipment and leasehold improvements, net (115) (70) Proceeds from sale of other real estate owned 253 - - ---------------------------------------------------------------------------------------------- Net cash provided by/(used in) investing activities 32,472 (34,754) - ---------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net decrease in savings accounts (17,570) (1,384) Net (decrease)/increase in certificate of deposits (10,110) 9,470 Net (decrease)/increase in money market checking (75) 1,588 Net (decrease)/increase in reverse repurchase agreements (24,279) 12,600 Net (decrease)/increase in term borrowings (5,500) 10,000 Proceeds from stock options exercised 89 - Proceeds from the issuance of common stock - 92 Cash dividends paid (134) - Purchase of treasury stock, at cost (227) - - ---------------------------------------------------------------------------------------------- Net cash (used in)/provided by investing activities (57,806) 32,366 - ---------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (20,762) (1,304) Cash and cash equivalents at beginning of period 25,640 2,392 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 4,878 $ 1,088 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 7,803 $ 6,593 Income taxes $ - $ 150 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
4 PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1999 - ------------------------------------------------------------------------------- NOTE 1. BASIS OF PRESENTATION - ------------------------------------------------------------------------------- The interim financial statements included herein have been prepared by Pacific Crest Capital, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Pacific Crest Capital, Inc. together with its subsidiaries is referred to as the "Company". Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's latest Annual Report. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim financial statements, and the results of its operations for the interim period ended March 31, 1999, have been included. Certain reclassifications have been made to prior year amounts to conform to the 1999 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year. - ------------------------------------------------------------------------------- NOTE 2. INCOME TAXES - ------------------------------------------------------------------------------- For the quarters ended March 31, 1999 and 1998, the Company estimated its provision for income taxes at $849,000 or 39.0% and $765,000 or 41.0%, respectively. The difference between the Company's statutory tax rate and its effective tax rate, for the quarters ended March 31, 1999 and 1998, are due to California tax deductions (credits) generated by the Company on loans made in special tax zones within California. In addition, adjustments have been made to tax valuation reserves for the quarter ending March 31, 1999 as a result of settlements made with the IRS on prior year income tax returns. - ------------------------------------------------------------------------------- NOTE 3. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE - ------------------------------------------------------------------------------- Book value per common share was calculated by dividing total shareholders' equity by the number of common shares issued, less common shares repurchased by the Company "treasury shares", at March 31, 1999 and December 31, 1998. The number of common shares used in this calculation was 2,986,264 of common shares issued less 300,988 of treasury shares resulting in 2,685,276 of common shares issued and outstanding at March 31, 1999, and 2,986,264 of common shares issued less 295,500 treasury shares resulting in 2,690,764 of common shares issued and outstanding at December 31, 1998. Basic and diluted earnings per common share for the quarter ended March 31, 1999 and 1998, were determined by dividing net income by the weighted average common shares outstanding. For the diluted earnings per share computation, the common shares outstanding were adjusted to reflect the number of common stock equivalents outstanding based on the number of outstanding stock options issued by the Company utilizing the treasury stock method. See table below for the diluted earnings per share computations:
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER ENDED 3/31/99 QUARTER ENDED 3/31/98 - ----------------------------------------------------------------------------------------------------------------------------- PER SHARE PER SHARE NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT - ----------------------------------------------------------------------------------------------------------------------------- BASIC EPS Income available to common stockholders $1,328 2,691 $ 0.49 $1,101 2,893 $ 0.38 ----------------------------------------------------------------------------- EFFECT OF DILUTIVE SECURITIES Stock Options - 132 (0.02) - 165 (0.02) DILUTED EPS ----------------------------------------------------------------------------- Income available to common stockholders $1,328 2,823 $ 0.47 $1,101 3,058 $ 0.36 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- NOTE 4. INVESTMENT SECURITIES - ------------------------------------------------------------------------------- Investment agency securities have been classified in the consolidated balance sheets according to management's intent and ability. The carrying amount of securities and their approximate fair values at March 31, 1999 were as follows:
- ------------------------------------------------------------------------------------------------ AMORTIZED GROSS UNREALIZED ESTIMATED (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ------------------------------------------------------------------------------------------------- Investment securities Available for sale $237,465 261 1,040 236,685 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
The Company's security portfolio at March 31, 1999 consists of investments in U.S. government sponsored agency securities. The U.S. government sponsored agency securities consist of Federal Home Loan Bank (FHLB) callable securities, Federal National Mortgage Association (FNMA) callable securities, Federal Home Loan Mortgage Corporation (FHLMC) callable 5 securities, and Government National Mortgage Association (GNMA) mortgage backed securities. These securities have call features that allow the issuing agency to retire (call) an individual security prior to that security's stated maturity date. This portfolio has call dates ranging between three months through four years. The Company believes that the majority of these securities will be called by the issuing agency prior to their final maturity date. The following table reflects the scheduled maturities in the Company's investment securities portfolio at March 31, 1999:
AMORTIZED FAIR AVERAGE (DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE - ----------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES: Due from one to five years $ 5,000 $ 5,031 6.44% 2.8 years Due from five to ten years 190,855 190,298 6.66% 8.8 years Due over ten years 41,610 41,356 6.62% 12.1 years ------------------------------------------------------------ Total Investment securities: $237,465 $236,685 6.64% 9.1 years ------------------------------------------------------------ ------------------------------------------------------------
U.S. government sponsored agency securities carried at $82.1 million were pledged to secure borrowings aggregating $80.4 million at March 31, 1999. - ------------------------------------------------------------------------------- NOTE 5. CAPITAL - ------------------------------------------------------------------------------- At March 31, 1999, 10,000,000 shares of $0.01 par value common stock were authorized of which, 2,986,264 shares were issued and 2,685,276 outstanding. Pacific Crest Bank is required to maintain certain minimum capital levels and must maintain certain capital ratios to be considered "well capitalized" under the prompt corrective action provisions of the FDIC Improvement Act. The following table sets forth Pacific Crest Bank's regulatory capital ratios at March 31, 1999, and December 31, 1998:
AT MARCH 31, 1999 AT DECEMBER 31, 1998 REGULATORY CAPITAL RATIOS ------------------------------------------------------------------------------ PACIFIC CREST BANK Required Actual Excess Required Actual Excess - ----------------------------------------------------- ----------- ------------- ------------ ------------- ------- Leverage capital ratio 4.00% 6.83% 2.83% 4.00% 6.81% 2.81% Tier I risk-based capital ratio 4.00% 10.46% 6.46% 4.00% 10.67% 6.67% Total risk-based capital ratio 8.00% 11.71% 3.71% 8.00% 11.92% 3.92% - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- NOTE 6. DIVIDENDS - ------------------------------------------------------------------------------- As a Delaware corporation, Pacific Crest Capital, Inc., ("the parent"), may pay common dividends out of surplus or, if there is no surplus, from net profits for the current and preceding fiscal year. The parent has approximately $5.8 million in cash and investments less current liabilities and short-term debt at March 31, 1999. However, these funds are also necessary to pay future operating expenses of the parent company, interest expense on the $17.25 million subordinated debentures, and possibly future capital infusions into Pacific Crest Bank. Without dividends from Pacific Crest Bank, the parent must rely solely on existing cash, investments and borrowings. The Company declared and paid a $0.05 cent per share common stock cash dividend for the first quarter of 1999. The Company anticipates that it will continue to declare and pay quarterly dividends during 1999. Pacific Crest Bank's ability to pay dividends to the parent is restricted by California State law which requires that retained earnings be available to pay the dividend. At March 31, 1999, Pacific Crest Bank had retained earnings of $10.5 million of which $1.5 million was unrestricted and available for dividend payments. The Bank declared and paid a $280,000 first quarter cash dividend, to the Parent Company on March 18, 1999. The Bank anticipates that it will continue to declare and pay quarterly dividends to the Parent Company during 1999. - ------------------------------------------------------------------------------- NOTE 7. OTHER COMPREHENSIVE INCOME - ------------------------------------------------------------------------------- The following table reflects the tax effect of other comprehensive income:
FOR THE QUARTER ENDED MARCH 31 (DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------ Other comprehensive income (loss): Unrealized gain (loss) on U.S. agency securities $(2,905) $ (280) Tax expense (benefit) (1,220) (115) - ------------------------------------------------------------------------------------ Total other comprehensive income (loss), net of taxes $(1,685) $ (165) - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the major factors that influenced the consolidated financial performance of the Company for the quarter ended March 31, 1999. This analysis should be read in conjunction with the Company's 1998 Annual Report on Form 10-K and with the unaudited financial statements and notes as set forth on pages 1 through 6 of this report. The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with the information in the Company's consolidated financial statements and notes thereto and other financial data included elsewhere herein. Certain statements under this caption constitute "forward-looking statements" within the meaning of the Private Securities Reform Act of 1995, and as such, may involve risks and uncertainties. The Company's actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which the Company conducts its operations, fluctuations in interest rates, credit quality and governmental regulation. The following table sets forth certain selected financial data concerning the Company for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED SELECTED FINANCIAL DATA ------------------------------------------------------------- (DOLLARS IN THOUSANDS) 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 - ------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCE Average Loans $ 315,498 $ 264,167 $ 230,400 $ 230,476 $ 230,479 Average Investment Securities 285,243 320,632 311,378 263,990 250,763 Average Earning Assets 617,191 597,675 542,745 496,927 481,503 Average Assets 626,086 603,560 550,803 506,418 491,140 Average Deposits 467,770 456,129 391,301 366,195 351,178 Average Borrowings 121,255 112,765 125,361 106,710 106,140 Average Equity 30,013 32,076 30,262 29,833 29,405 PERFORMANCE RATIOS Return on average assets (1) 0.85% 0.78% 0.92% 1.03% 0.90% Return on average common equity (1) 18.20% 16.79% 17.63% 18.09% 15.73% Net interest margin (2) 3.16% 2.81% 2.99% 3.41% 3.51% CAPITAL AND LEVERAGE RATIOS (3) Risk-based capital ratios: Tier one 10.46% 10.67% 12.44% 12.85% 12.22% Total 11.71% 11.92% 13.69% 14.10% 13.47% Leverage capital ratio (4) 6.83% 6.81% 7.23% 7.60% 7.45% ASSET QUALITY RATIOS Allowance for loan losses to total loans 1.68% 1.74% 2.00% 2.01% 1.83% Allowance for loan losses to nonaccrual loans 2.25% - - - 1889.04% Total nonperforming assets to total assets (5) 0.52% 0.12% 0.17% 0.19% 0.45% - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
(1) Calculations based upon annualized net income, excluding accumulated other comprehensive income. (2) Net interest margin is calculated by dividing annualized net income by average earning assets. (3) Capital ratios of Pacific Crest Bank only. (4) Calculation is based on quarter end asset balances of Pacific Crest Bank. (5) Non-performing assets include nonaccrual loans and other real estate owned ("OREO") and exclude troubled debt restructurings. 7 RESULTS OF OPERATIONS NET INTEREST INCOME ANALYSIS The following tables, for the quarter ended March 31, 1999 and 1998, present the distribution of average assets, liabilities and stockholders' equity, the total dollar amount of interest income from average interest-earning assets, the resultant yields and the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans, having a zero yield. AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Three Months Ended March 31, ---------------------------------------------------------------------- 1999 1998 ---------------------------------------------------------------------- Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ (DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans (1) $ 315,498 $ 7,505 9.65% $230,479 $ 6,219 10.94% Repurchase agreements 16,450 211 5.20% 261 4 6.22% U.S. government agency securities Available for sale 275,267 4,580 6.66% 245,765 4,269 6.95% Held to maturity - - - 4,998 95 7.60% Corporate debt securities Available for sale 9,976 153 6.13% - - - - --------------------------------------------------------------------------------------------------------------------------------- Total investment securities 285,243 4,733 6.64% 250,763 4,364 6.96% - --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (1) 617,191 12,449 8.18% 481,503 10,587 8.92% - --------------------------------------------------------------------------------------------------------------------------------- Other real estate owned 784 2,042 Other noninterest earning assets 13,425 11,808 Less allowance for loan losses (1) 5,314 4,213 - --------------------------------------------------------------------------------------------------------------------------------- Total assets 626,086 491,140 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Savings accounts 264,228 3,107 4.77% 198,878 2,572 5.24% Certificates of deposit 179,803 2,430 5.48% 134,664 1,948 5.87% Money market checking 23,739 257 4.39% 17,636 216 4.97% - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 467,770 5,794 5.02% 351,178 4,736 5.47% - --------------------------------------------------------------------------------------------------------------------------------- Reverse repurchase agreements 26,266 354 5.47% 34,557 496 5.82% Term borrowings 77,739 1,094 5.71% 54,333 785 5.86% Trust preferred securities 17,250 405 9.39% 17,250 404 9.37% - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 589,025 7,647 5.27% 457,318 6,421 5.69% Non interest-bearing liabilities 7,048 4,417 Shareholders' equity 30,013 29,405 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders equity 626,086 491,140 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 4,802 $ 4,166 Net interest rate spread (2) 2.91% 3.23% Net interest-earning assets $ 28,166 $ 24,185 Net interest margin (3) 3.16% 3.51% Average interest-earning assets to average interest-bearing liabilities 104.8% 105.3% - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Calculated net of deferred loan fees. (2) Net interest rate spread represents the average yield earned on interest-earning assets, less the average rate paid on interest-bearing liabilities. (3) Net interest margin is computed by dividing net interest income by total average earning assets. 8 ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE The following table presents the dollar amount of changes in interest income and interest expense of major components of interest-earning assets and interest-bearing liabilities due to changes in outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes on volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to changes due to volume and changes due to rate.
-------------------------------------------- For the Quarter Ended March 31, 1999 -------------------------------------------- 1999 compared to 1998 Increase (decrease) due to -------------------------------------------- Net (DOLLARS IN THOUSANDS) Volume Rate Change - ----------------------------------------------------------------------------------------- CHANGES IN INTEREST INCOME: Loans $ 2,088 $ (802) $ 1,286 Repurchase agreements 208 (1) 207 U.S. government agency securities: Available for sale 490 (179) 311 Held to maturity (95) - (95) Corporate Bonds: Available for sale 153 - 153 - ----------------------------------------------------------------------------------------- Total change in interest income 2,844 (982) 1,862 - ----------------------------------------------------------------------------------------- CHANGES IN INTEREST EXPENSE: Savings accounts 785 (250) 535 Certificates of deposit 617 (135) 482 Money market checking 68 (27) 41 Reverse repurchase agreements (113) (29) (142) Term borrowings 330 (21) 309 Trust preferred securities - 1 1 - ----------------------------------------------------------------------------------------- Total change in interest expense 1,687 (461) 1,226 - ----------------------------------------------------------------------------------------- Changes in net interest income $ 1,157 $ (521) $ 636 - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
DETAILED COMPARISONS OF FINANCIAL RESULTS EARNINGS PERFORMANCE Net income was $1.3 million (or $0.47 per common share on a diluted basis) for the quarter ended March 31, 1999, compared to $1.1 million (or $0.36 per common share on a diluted basis) for the corresponding period in 1998. The improvement in the first quarter of 1999 over the comparable period in 1998 is primarily attributable to increases in the Company's net interest income, and noninterest income, partially offset by increases in the provision for loan losses and noninterest expense. NET INTEREST INCOME Net interest income increased by $636,000 or 15.3% to $4.8 million for the quarter ended March 31, 1999 compared to the same period of 1998. The increase in net interest income during the quarter ended March 31, 1999 was primarily the result of an increase of $135.7 million in the Company's average balance of interest earning assets between the 1999 and 1998 periods. The Company's net interest rate spread and net interest margin, both declined in 1999 when compared to the same period in 1998. The net interest rate spread is defined as the yield on interest-earning assets less the rates paid on interest-bearing liabilities. The net interest rate spread for the quarter ended March 31, 1999 and 1998 was 2.91% and 3.23%, respectively. The decline in the spread between the 1999 and 1998 periods is the result of a decrease of 74 basis points in the yields paid on interest-earning assets between the two periods, partially offset by a decline of 42 basis points on the interest-bearing liabilities. The decline in the yield of the interest-earning asset yield is the result of the selected following items. The decline of market interest rates and the repricing of the Company's variable rate loan portfolio downward in response to overall lower market interest rates. In addition the purchase of investment securities that increased the securities portfolio, as well as the purchase of securities to replace securities being called during the second, third, and fourth quarters of 1998 were invested in U.S. Agency Securities yielding less than the securities portfolio prior to March of 1998. The loan yields on the Company's new loan originations made during 1998 and 1999 have generally been lower than the yields on loans within the portfolio made prior to the first quarter of 1998. 9 The net interest margin is defined as the difference between interest income and interest expense divided by the average interest-earning assets. The net interest margin for the quarter ended March 31, 1999 and 1998, was 3.16% and 3.51%, respectively. The decline in the margin is the result of the reduced net interest rate spread. The following table sets forth the composition of average interest-earning and average interest-bearing liabilities by category, and by the percentage of each category to the total, for the three months ended March 31, 1999 and 1998, including the change in average balance and yield/rate between these respective periods:
------------------------------------------------------------------------------- March 31, 1999 March 31, 1998 Avg. Bal. Net Change ------------------------------------------------------------------------------- % Avg. % Avg. Yield/ Average Compo- Yield/ Average Compo- Yield/ Rate (DOLLARS IN THOUSANDS) Balance sition Rate Balance sition Rate $ % Change - ------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Loans $ 315,498 51.1% 9.65% $ 230,479 47.9% 10.94% $ 85,019 3.3% -1.29% Repurchase agreements 16,450 2.65% 5.20% 261 0% 6.22% 16,189 2.6% -1.02% Investment securities 285,243 46.2% 6.64% 250,763 52.1% 6.96% 34,480 -5.9% -0.32% - ------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 617,191 100.0% 8.18% 481,503 100.0% 8.92% 135,688 -0.74% - ------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Deposits 467,770 79.4% 5.02% 351,178 76.8% 5.47% 116,592 2.6% -0.45% Borrowings 104,005 17.7% 5.65% 88,890 19.4% 5.84% 15,115 -1.7% -0.19% Trust preferred securities 17,250 2.9% 9.39% 17,250 3.8% 9.37% - -0.9% 0.02% - ------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities $ 589,025 100.0% 5.27% $ 457,318 100.0% 5.69% $131,707 -0.42% - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME Total interest income increased by $1.9 million or 17.6% to $12.5 million for the quarter ended March 31, 1999 compared to the same period of 1998. This increase was primarily due to an increase in the average balance of interest earning assets of $135.7 million for the quarter ended March 31, 1999 over the comparable period in 1998. Average interest-earning assets increased between the first quarter of 1999 and 1998 as a result of the growth in the loan portfolio and the purchase of investment securities. Partially offsetting these increases, the overall yields on the Company's interest-earning assets decreased by 74 basis points for the quarter ended March 31, 1999 from the comparable periods in 1998. This decline is due to the change in the composition of interest-earning assets which is detailed above and the reduced yields earned on commercial loans and investment securities. The primary reason for the decline in the overall loan portfolio yield is due to the continued replacement of higher yielding loans being paid off, with newly originated lower yielding loans. This reflects the increased competitive rate pressure within the lending marketplace. The increase in the average balances of the Company's U.S. government sponsored agency securities for the quarter ended March 31, 1999, reflects the purchase of slightly lower yielding investment securities during the second, third and fourth quarters of 1998. TOTAL INTEREST EXPENSE Total interest expense for the quarter ended March 31, 1999 increased by $1.2 million or 19.1% to $7.6 million compared to the same period of 1998. The increase in interest expense resulted entirely from an increase in the average balance of interest-bearing liabilities of $131.7 million for the quarter ended March 31, 1999, as compared to the same period of 1998. The average interest-bearing liabilities rose between these respective periods primarily reflects the growth in the Company's savings and time deposit accounts during the third and fourth quarters of 1998. The rates paid on the Company's interest-bearing liabilities decreased from 5.69% to 5.27%, or 42 basis points, during the quarter ended March 31, 1999, compared to the same period in 1998. The decrease in the rates paid on the Company's interest-bearing liabilities reflects both the decline in market interest rates between these periods and the rate reduction on the Company's savings products at the beginning of the first quarter of 1999. The increase to the interest bearing liabilities average balances for the first quarter of 1999 as compared to 1998 reflects the aggressive growth in the Company's savings products during the third and fourth quarters of 1998. While the first quarter of 1999 reflected an overall runoff in deposit liabilities, this decline did not exceed the cumulative growth in these products during the second, third and fourth quarters of 1998. Interest expense on savings accounts increased $535,000 or 20.8% to $3.1 million for the quarter ending March 31, 1999 compared to the first quarter of 1998. This increase was the result of a $65.3 million or a 32.9% increase in the average balance of savings accounts. This increase was partially offset by a decline of 47 basis points in the rates paid on the Company's savings accounts. Interest expense on certificates of deposits increased $482,000 or 24.7% to $2.4 million for the quarter ended 1999 as compared to 1998. This increase reflects a $45.1 million or 33.5% increase in the average balances of certificates of deposits. Partially offsetting this increase was a 39 basis point decrease in the rates paid on the Company's certificates of deposits. Interest expense on money market checking accounts increased $41,000 or 19.0% during the first quarter of 1999 as compared to 1998. This increase reflects a $6.1 million or 34.6% increase in the average balances in the Company's money market 10 checking accounts. Partially offsetting this increase was a 58 basis point decrease in the rates paid on the Company's money market checking. Interest expense on term borrowing increased $309,000 or 39.4% during the first quarter of 1999 as compared to 1998. This increase reflects a $23.4 million or 43.1% increase in the average balance of term borrowings. This was partially offset by a 15 basis point decline in the rates paid for term borrowings. Interest expense on reverse repurchase agreements decreased $142,000 or 28.6% during the first quarter of 1999 as compared to 1998. This decrease reflects a $8.3 million or 24.0% decrease in the average balance of reverse repurchase agreements. PROVISION FOR LOAN LOSSES During the quarter ended March 31, 1999, the Company's provision for loan loss increased by $460,000 to $660,000, compared to the same period in 1998. The increase in the provision is the result of management's evaluation of current portfolio loan loss exposure. The increase to the provision for the first quarter of 1999, primarily reflects the growth in the Company's loan portfolio. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for loan losses is based on several factors, including underlying loan collateral values, delinquency trends and historical loan loss experience. The ratio of nonaccrual loans to total loans, net of deferred loan fees, was 0.75% at March 31, 1999 and 0.00% at December 31, 1998. The ratio of the allowance for loan losses to nonaccrual loans was 2.25% at March 31, 1999 and 0.00% at December 31, 1998. The allowance for loan losses as a percentage of loans stood at 1.68% at March 31, 1999, compared to 1.74% at December 31, 1998. NONINTEREST INCOME Noninterest income for the quarter ended March 31, 1999 increased by $770,000 to $971,000. This increase was primarily the result of $515,000 gains on the sale of investment securities, $96,000 gains on the sale of SBA loans, and a higher loan origination income. NONINTEREST EXPENSE The following table sets forth certain information with respect to the Company's noninterest expenses for the quarter ended March 31, 1999:
NONINTEREST EXPENSE ANALYSIS For the Quarter Ended March 31 - -------------------------------------------------------------------------------------------------------------------- AMOUNTS CHANGE (DOLLARS IN THOUSANDS) 1999 1998 $ % - -------------------------------------------------------------------------------------------------------------------- Valuation adjustments to other real estate owned $ 43 $ - $ 43 100.0% Other real estate owned expense 18 44 (26) (144.4%) Salaries and employee benefits 1,740 1,357 383 22.0% Net occupancy expenses 442 391 51 11.5% Advertising and promotion 192 64 128 66.7% FDIC insurance premiums 12 10 2 16.7% Credit and collections expenses 10 13 (3) (30.0%) Communication and information systems 212 191 21 9.9% Other expenses 267 231 36 13.5% - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense $2,936 $2,301 635 21.6% - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
Noninterest expense for the quarter ended March 31, 1999 increased $635,000, or 21.63%, over the same period in 1998. These changes are detailed on the table above and significant changes in noninterest expense are described below. The valuation adjustment to OREO for the first quarter ended March 31, 1999 increased by $43,000 compared to the same period in 1998. The Company recorded OREO valuation adjustment on two OREO properties in 1999, while no OREO property writedowns were necessary during the first quarter of 1998. Salaries and employee benefits for the quarter ended March 31, 1999, increased by $383,000, or 22.0%, as compared to the same period in 1998. The increase is partially the result of an increased to the Company's marketing and administrative bonus accrual made during the first quarter in 1999 versus 1998. In addition, the Company provided an approximate 4% salary increase to most employee base salaries in January 1999. In addition, the Company has increased its overall staffing levels between these respective periods. Net occupancy expense increased by $51,000 or 11.5% compared to the same period of last year. This increase reflects the opening of the Company's loan production offices in Oregon, Washington, and Arizona. Advertising and promotional cost increased for the quarter ended March 31, 1999 by $128,000 or 66.7% compared to the same period in 1998. This increase reflects the advertising program implemented by the Company beginning in the third quarter of 1998. The Company has implemented a commercial real estate loan advertising program that will be applied consistently throughout the remainder of 1999. 11 Communication and information systems cost increased $21,000 or 9.9% as compared to the same period of last year. This increase also reflects the opening of the Company's loan production offices, in addition to installing and upgrading a portion of the Company's computer hardware and software systems. Other expenses increased by $36,000 or 13.5% for the quarter ended March 31, 1999 as compared to 1998. This increase reflects the additional cost associated with the higher volume in loan origination activity for the quarter ending March 31, 1999. INCOME TAX PROVISION For the quarters ended March 31, 1999 and 1998, the Company estimated its provision for income taxes at $849,000 or 39.0% and $765,000 or 41.0%, respectively. The difference between the Company's statutory tax rate and its effective tax rate, for the quarters ended March 31, 1999 and 1998, was due to California tax deductions (credits) generated by the Company on loans made in special tax zones within California. In addition adjustments have been made to tax valuation reserves for the quarter ended March 31, 1999, as a result of settlements made with the IRS on prior year tax returns. FINANCIAL CONDITION SUMMARY OF CHANGES IN BALANCE SHEET MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998 Total assets of the Company decreased to $588.2 million at March 31, 1999 from $645.3 million at December 31, 1998, a $57.1 million decrease. The investment securities portfolio decreased by $84.6 million through active liquidation of investment securities. Borrowings in reverse repurchase agreements were reduced by $24.3 million to $6.5 million at March 31, 1999. Additionally, the Company decreased its term borrowings by $5.5 million to $73.9 million at March 31, 1999. The Company increased its holdings in investment securities during the first three quarters of 1998 with the intention of liquidating a portion of these securities to fund loans as anticipated loan demand improved during 1999. In the first quarter of 1999, this began to occur as the Company was able to sell selected investment securities and use the proceeds to fund higher rate yielding loans. As of March 31, 1999, net loans, had increased by $49.4 million while investment securities had declined by $84.6 million during this same period. Investment securities liquidation, in addition to funding loan growth, was used to cover the decline in deposit runoff experienced by the Bank in the first quarter. Loans, net of deferred fees and the allowance for loan losses, increased by $49.4 million to $332.9 million at March 31, 1999, from $283.5 million at December 31, 1998. The Company originated and purchased $61.8 million in new real estate and business loans during the first three months ended March 31, 1999. Off-setting these originations, the Company experienced $10.9 million in loan payoffs and sold $1.3 million of SBA loans during the three months ended March 31, 1999. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses at March 31, 1999 increased by $668,000 from the level at December 31, 1998, and represents 1.68% of outstanding loans at March 31, 1999. The increase in the general loan loss reserve from $5.02 million at December 31, 1998 to $5.69 million at March 31, 1999 reflects a recovery of $8,000, in addition to the $660,000 in loan loss provision added to the reserve for the first quarter of 1999. The increase in the provision for loan losses directly increased the allowance for loan losses, and reflects the growth in the Company's loan portfolio. Management and the Board of Directors regularly review loan performance and the adequacy of the allowance for loan losses. The following table sets forth certain information with respect to the Company's allowance for loan losses and valuation adjustment to OREO as of the dates or for the periods indicated:
AT OR FOR THE PERIOD ENDED MARCH 31, ALLOWANCE FOR LOAN LOSSES ---------------------- (DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------ Balance at beginning of period $ 5,024 $ 4,100 Commercial real estate mortgages: Chargeoffs - - Recoveries 8 7 Provision for loan losses: 660 200 - ------------------------------------------------------------------------------------------ Balance at end of period: $ 5,692 $ 4,307 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Allowance for loan losses as a % of loans 1.68% 1.83% Net loan (recoveries)/charge-offs $ (8) $ (7) Valuation adjustment to OREO 43 - - ------------------------------------------------------------------------------------------ Total net loan (recoveries)/charge-offs & OREO valuation adjustment $ 35 $ (7) - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
12 NON-PERFORMING AND RESTRUCTURED ASSETS The following table sets forth loans accounted for on a nonaccrual basis, OREO and loans that were impaired due to the loans being restructured at the dates indicated:
MARCH 31, DECEMBER 31, (DOLLARS IN THOUSANDS) 1999 1998 - -------------------------------------------------------------------------------- Nonaccrual loans $2,527 $ - Other real estate owned 510 806 - -------------------------------------------------------------------------------- Total nonaccrual loans and OREO $3,037 $ 806 - -------------------------------------------------------------------------------- Total nonperforming assets to total assets 0.52% 0.12% - -------------------------------------------------------------------------------- Other impaired loans (restructured loans) $ - $ - - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NONACCRUAL LOANS Nonaccrual loans are loans, not classified as "troubled debt restructurings" or OREO, and that are 60 days or more delinquent and show little or no current payment ability. These loans are supported, however, by collateral or cash flow that support the collectibility of the Company's remaining book balance, after consideration of the allowance for loan losses. The Company had four nonaccrual loans at March 31, 1999, totaling $2.53 million. Nonaccrual loan balances are net of any prior write-offs, but any specifically assigned portions of the general allowance for loan losses are not deducted from the nonaccrual loan balances above. OTHER REAL ESTATE OWNED Assets classified as OREO include foreclosed real estate owned by the Company. The Company had one property in this category at March 31, 1999, totaling $510,000. The Company recorded a valuation write down of $13,000 on the OREO that it sold during the first quarter of 1999, and $30,000 on the one property remaining in this category at March 31, 1999. The Company makes valuation adjustments to its OREO, based on the most recent collateral appraisal data and other relevant information which effectively reduces the book value of such assets to the estimated fair market value less selling cost of the properties. The fair value of the real estate takes into account the real estate values net of expenses such as brokerage commission, past due property taxes, property repair expenses, and other items. The estimated sale price does not necessarily reflect the appraisal values which management believes, in some cases, may be higher than what could be realized in a sale of the OREO. REVERSE REPURCHASE AGREEMENTS The Company decreased its short term borrowing at March 31, 1999 by $24.3 million to $6.5 million, from $30.8 million at December 31, 1998. The rates paid on this short term debt average 5.47% during the first quarter of 1999. The Company continued to utilize these borrowing lines to cover short term financing needs for loan originations and fundings. The Company maintains four short term borrowing lines with national brokers aggregating $95.0 million in availability. At March 31, 1999 the Company had $88.5 million in unused short term borrowing availability against these four borrowing facilities. TERM BORROWINGS The Company reduced its term borrowings by $5.5 million during the first quarter of 1999. The Company has a total of $140.0 million of term borrowing lines, of which $73.9 million had been borrowed against at March 31, 1999. This debt is secured by pledging specific amounts of specific securities of the Company's U.S. government sponsored agency securities portfolio. Several of these secured borrowing have an original five year maturity with a two-year, one-time call option. The table reflects the attributes of the Company's term borrowings.
(DOLLARS IN THOUSANDS) RATE CALL DATE MATURITY DATE AMOUNT - ---------------------------------------------------------------------------------------------------------------- 5.82% five-year term borrowings 5.82% 09/99 09/02 $ 25,000 5.78% five-year term borrowings 5.78% 10/99 10/02 10,000 5.63% five-year term borrowings 5.63% 12/99 12/02 10,000 5.48% five-year term borrowings 5.48% 01/00 01/03 10,000 5.64% one-year term borrowings 5.64% - 04/99 18,950 - ---------------------------------------------------------------------------------------------------------------- Total term borrowings $ 73,950 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
CAPITAL RESOURCES The Company's objective is to maintain a strong level of capital that will support consistent and sustained asset growth, anticipated credit risks and to ensure that regulatory and industry capital guidelines and standards are maintained. Pacific Crest Bank is subject to leverage and risk-based capital adequacy standards applicable to FDIC insured institutions. At March 31, 1999, Pacific Crest Bank was in compliance with all such capital requirements. 13 Shareholders' equity decreased by $629,000 to $29.5 million at March 31, 1999. This decrease reflects the following activity. Other comprehensive income net of tax decreased by $1.69 million as the investment securities portfolio was repriced downward due to an increase in market interest rates at March 31, 1999. The Company purchased 15,000 shares of common stock under its stock repurchase plan. These treasury shares cost the Company $227,000. The Company declared and paid a cash dividend of $0.05 per common share during the first quarter of 1999, totaling $134,000. Partially offsetting the decrease to capital was the recording of $1.3 million of net income for the first quarter of 1999, and the increase to capital of $89,000 for the issuance of stock to employees and directors, under the Company's employee stock purchase plan, non-employee directors' stock purchase plan and the employee's stock option plan. On May 11, 1999, the Company announced that the Board of Directors had declared a $0.06 per common share cash dividend for the second quarter of 1999. The dividend will be paid to shareholders of record at the close of business June 4, 1999 and is payable on June 18, 1999. Pacific Crest Bank is required to maintain certain minimum capital levels and must maintain certain capital ratios to be considered "well capitalized" under the prompt corrective action provisions of the FDIC Improvement Act. The following table sets forth Pacific Crest Bank's regulatory capital ratios at March 31, 1999, and December 31, 1998:
AT MARCH 31, 1999 AT DECEMBER 31, 1998 REGULATORY CAPITAL RATIOS -------------------------------------------------------------------------------- PACIFIC CREST BANK Required Actual Excess Required Actual Excess - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Leverage capital ratio 4.00% 6.83% 2.83% 4.00% 6.81% 2.81% Tier 1 risk-based capital ratio 4.00% 10.46% 6.46% 4.00% 10.67% 6.67% Total risk-based capital ratio 8.00% 11.71% 3.71% 8.00% 11.92% 3.92% - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
LIQUIDITY The Company's primary sources of funds are deposits, borrowings and payments of principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonable predictable source of funds, deposit flows and mortgage loan prepayments are greatly influenced by the level of interest rates, economic conditions, and competition. The Company's holdings of cash and cash equivalents during the three months ended March 31, 1999 decreased $20.7 million to $4.9 million at March 31, 1999 from $25.6 million at December 31, 1998. The decline in the Company's cash equivalents during the first quarter of 1999 was utilized in financing the Company's first quarter net loan growth, deposit liability runoff and paying down a portion of the Company's term borrowings. Loans, net of deferred fees and the allowance for loan losses, increased by $49.4 million to $332.9 million at March 31, 1999, from $283.5 million at December 31, 1998. The Company originated $52.8 million and purchased 9.0 million, for a total of $61.8 million in new real estate and business loans during the quarter ended March 31, 1999. Off-setting these originations, the Company experienced $10.9 million in loan payoffs and sold $1.3 million in SBA loans during the quarter ended March 31, 1999. The Company experienced a decline in its interest bearing deposits of $27.8 million during the first quarter of 1999. This decline was primarily the result of the Company lowering rates on its savings, money market checking, and time deposits at the beginning of January 1999. The Company lowered deposit rates by approximately 61 basis points on both its saving and money market checking accounts at that time. The Company had anticipated between a 4 and 6% runoff in deposit liability would be experienced after its deposit rate decline, as the interest sensitivity accounts would be redeemed. The Company experienced a $17.6 million deposit runoff in its saving accounts, and $10.1 million deposit runoff in its certificates of deposits. In order to reduce its overnight short term borrowings, the Company paid down its reverse repurchase agreements by $24.3 million and paid down its term borrowings by $5.5 million during 1999. The growth of the Company's loans, the decline in the Company's deposit liabilities and the payoff of the Company's short term and term borrowings were financed in part through liquidating $85.2 million in the Company's investment securities portfolio. The partial liquidation of the securities portfolio to finance the Company's net loan growth, to cover the deposit liability runoff and to pay down term borrowings were consistent with the Company's 1999 strategic operating plan. The liquidity of the parent company, Pacific Crest, is dependent on several factors, including the payment of cash dividends by its subsidiary, Pacific Crest Bank, or the ability to secure borrowings. Without dividends from Pacific Crest Bank, Pacific Crest must rely solely on existing cash, investments, or the ability to secure borrowings. On May 11, 1999, the Company announced that the Board of Directors had declared a $0.06 per common share cash dividend for the second quarter of 1999. The dividend will be paid to shareholders of record at the close of business June 4, 1999 and is payable on June 18, 1999. Cash plus investments less current liabilities and short-term debt totaled $5.8 million at March 31, 1999. This amount is necessary to pay future operating expenses, existing current liabilities, the interest cost associated with the subordinated debt security and for the possible infusion of capital into Pacific Crest Bank. The interest on the Junior Subordinated Debentures will be paid by Pacific Crest to the Trust, and represents the sole revenues of the Trust and the source of dividend distributions by the Trust to the holders of the Capital Trust Securities. Pacific Crest Bank's ability to pay dividends to Pacific Crest is restricted by California state law, which requires that sufficient retained earnings are available to pay the dividend. Pacific Crest Bank had retained earnings of $10.5 million of which $1.5 million was unrestricted and available for dividend payments at March 31, 1999. The Bank declared and paid a $280,000 first quarter 1999 cash dividend to the Parent Company on March 18, 1999. On May 11, 1999, the Bank announced that the Board of Directors had declared a $300,000 second quarter cash dividend payable to the parent Company on June 18, 1999. The Bank anticipates that it will continue to declare and pay quarterly dividends to the Parent Company during 1999. 14 YEAR 2000 COMPLIANCE The financial institutions industry, as with other industries, is faced with Year 2000 issues. These issues center around computer programs that do not recognize a year which begins with "20" instead of "19", or uses only 2 digits for the year. This could result in major systems failures or miscalculations. This Year 2000 issue creates risks for the Company from unforeseen or unanticipated problems in its internal computer systems, as well as from computer systems of the Federal Reserve Bank, correspondent banks, customers, vendors, and utility providers. Failures of these systems or untimely corrections could have a material adverse impact on the Company's ability to conduct its business and results of operations. Certain statements in this section constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995 which involve risk and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward-looking statements. Such factors include, but are not limited to, the estimated costs of remediation, the preparedness of third party vendors, timetables for implementation of future remediation and testing, contingency plans, and estimated future costs due to business disruption caused by affected third parties. The Company's computer systems and programs are designed and supported by companies specifically in the business of providing such products and services. The Company has formed a Year 2000 committee comprised of certain officers to evaluate and address the Year 2000 issue for both information technology and non-information technology systems. As of the date of this 10q filing, the Company has successfully completed the awareness and assessment phases of the Year 2000 plan and is currently in the remediation, testing and validation phases of the plan. None of the Company's critical systems were programmed by internal staff; rather, they are serviced or provided by outside system vendors. The systems that were identified in the assessment phase as critical to the Company's operations are expected to be remediated, tested, and certified as compliant by the end of the second quarter of 1999. The Company has notified its customers by means of statement stuffers of Year 2000 issues. It is also in the process of contacting each of its major borrowing customers to make them aware of the issues and to seek information regarding its customers' preparedness for the Year 2000. Any borrowers unable to confirm Year 2000 compliance in a timely manner will be evaluated to ensure an adequate specific allocation to the allowance for loan losses. Year 2000 compliance will be a factor in all credit decisions and in the specific allocations of a required allowance for loan losses. Management believes the Year 2000 does represent an area of potential risk for credit losses, but also believes the risk is manageable. However, credit losses could be realized by the Company due to Year 2000 problems affecting the businesses of borrowers. The amount of such losses would be a function of the value of the collateral associated with the individual credits. Whether such potential losses would require an additional provision for loan losses would be determined in conjunction with the normal quarterly analysis of the adequacy of the allowance for loan losses. Vendors and utilities have informed the Company that their Year 2000 projects are on schedule and their progress is being monitored by Company personnel. An expected reasonable "worst case" scenario is that, notwithstanding the testing and certification of all the Company's critical systems beforehand, a problem is discovered in the year 2000 that impacts the core accounting systems. In this event, the Company would be required to perform many business functions manually until such time as the responsible vendor corrected the problem. Such manual processing of functions is provided for in the Company's contingency plans. As of the date of this 10q filing, the total cost of software & hardware corrections and modifications related to the year 2000 issue, was approximately $30,000. The total cost estimated to correct the new computer software systems, or to have existing systems modified, is not expected to exceed $150,000, in total, over the second, third and fourth quarters of 1999. Although the Company does not expect any material adverse consequences to occur as a result of year 2000 issue, there can be no assurance that the Company will be able to identify all year 2000 issues, or that all contingency plans will assure uninterrupted business operations across the millennium. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. On June 8, 1998, the Company executed a five-year interest rate cap agreement for a notional amount of $100 million. Under the cap agreement, the Company earns income when the 90-day London Interbank Offered Rate (LIBOR) exceeds 6.70%. The interest rate cap was purchased as a hedge instrument for the Company's deposit liabilities which reprice in one year or less. It was designed to hedge the risk that interest rates may rise, which would produce an increase in the rates paid on these deposit liabilities, resulting in an increase in interest expense and a reduction in net interest margin. The interest rate cap mitigates this risk somewhat since it earns income for the Company if interest rates rise beyond a certain level. The interest rate cap does not expose the Company to any additional risk beyond the initial investment of $925,000. With the exception of the interest rate cap, the Company is not currently engaged in transactions involving derivative financial instruments. The Company's primary market risk is interest rate risk. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time to maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Pacific Crest's exposure to market risk is reviewed on a regular basis by the Asset/Liability committee. Tools used by management include the standard GAP report. The Company has no market risk sensitive instruments held for trading purposes. Management believes that the Company's market risk is reasonable at this time. The table below provides information about the Company's balance sheet non-derivative financial instruments that are sensitive to changes in interest rates. For all outstanding financial instruments, the table presents the principal outstanding balance at March 31, 1999 and the weighted average interest yield/rate of the instruments by either the date the instrument can be repriced for variable rate financial instruments or the expected maturity date for fixed rate financial instruments. 16
AT MARCH 31, 1999 EXPECTED MATURITY DATES OR REPRICING DATE BY YEAR ------------------------------------------------------------------------------------------ FAIR VALUE AT (DOLLARS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 3/31/98 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET FINANCIAL INSTRUMENTS: ASSETS: Repurchase agreements (1) $ 3,113 $ - $ - $ - $ - $ - $ 3,113 $ 3,113 average yield (variable rate) 4.61% - - - - - 4.61% U.S. Government sponsored agency securities available for sale (2) 5,031 - - - - 231,654 236,685 236,685 average yield (fixed rate) 6.44% - - - - 6.68% 6.67% Total loans gross (3) 183,085 18,309 34,247 16,696 25,616 61,057 339,010 342,400 average yield 10.02% 9.90% 9.20% 8.25% 9.10% 8.40% 9.60% - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES: Savings accounts (1) $ 258,441 - - - - - $258,441 $258,441 average rates (variable rate) 4.70% - - - - - 4.70% Money market checking (1) 23,774 - - - - - 23,774 23,774 average rates (variable rate) 4.38% - - - - - 4.38% Certificates of deposit (4) 169,570 1,982 512 805 - - 172,869 172,869 average rates (fixed rate) 5.43% 5.83% 5.98% 5.75% - - 5.43% Reverse repurchase agreements (1) 6,500 - - - - - 6,500 6,500 average rates (variable rate) 5.65% - - - - - 5.65% Term borrowings (5) 18,950 - 45,000 10,000 - - 73,950 75,042 average rates (fixed rate) 5.64% - 5.77% 5.48% - - 5.69% Trust preferred securities (2) - - - - - 17,250 17,250 17,250 average rates (fixed rate) - - - - - 9.38% 9.38% - ------------------------------------------------------------------------------------------------------------------------------------
The fair value balances reflected in the table were derived as follows: (1) For financial instruments that mature or reprice within 90 days, the carrying amounts and the fair value are considered identical, due to the short term repricing of the financial instruments. (2) For investment securities, and the trust preferred securities, fair value is based on the quoted market price of these securities by broker dealers making a market for these securities on a national exchange. (3) Fair value of loans is based on the value the Company could receive on the loans in a loan sale. The Company estimates that it could sell a majority of its loans at a premium of between 0.0% and 3.0%. (4) Fair value of the Company's fixed maturity deposits are estimated using rates currently offered for deposits of similar remaining maturities. (5) Fair value of term borrowings is estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- Not applicable. (b) REPORTS ON FORM 8-K: The Company filed no reports on Form 8-K during the quarter ended March 31, 1999. 18 SIGNATURES Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFIC CREST CAPITAL, INC. Date: May 17, 1999 /s/ Gary Wehrle --------------------------- -------------------------------------- Gary Wehrle President and Chief Executive Officer Date: May 17, 1999 /s/ Robert J. Dennen --------------------------- -------------------------------------- Robert J. Dennen Senior Vice President, Chief Financial Officer, Corporate Secretary 19 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC CREST CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000912048 PACIFIC CREST CAPITAL, INC. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 4,878 0 0 0 236,685 0 0 338,588 5,692 588,173 455,084 6,500 5,878 91,200 29,511 0 0 0 588,173 7,505 4,733 211 12,449 5,794 7,647 4,802 660 515 2,936 2,177 2,177 0 0 1,328 .49 .47 3.16 2,527 2,527 0 3,000 5,024 0 8 5,692 5,692 0 0
-----END PRIVACY-ENHANCED MESSAGE-----