<PAGE>
As Filed with the Securities & Exchange Commission on October 26, 1999
SECURITIES & EXCHANGE COMMISSION
------------------------------
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999.
------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
________________
SEC File Number: 0-30106
-----------------
PACIFIC CONTINENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
OREGON 93-1269184
---------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 West 7th Avenue
Eugene, Oregon 97401
(address of Principal Executive Offices) (Zip Code)
(541) 686-8685
(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 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.[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $1.00 par value, outstanding as of October 31, 1999: 4,642,189
-------------
<PAGE>
PACIFIC CONTINENTAL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
-------------
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income: 3
Nine months ended September 30, 1999, and September 30, 1998
Consolidated Statements of Comprehensive Income 4
Nine months ended September 30, 1999 and September 30, 1998
Consolidated Balance sheets: 5
September 30, 1999, December 31, 1998 and September 30, 1998
Consolidated Statements of Cash Flows: 6
Nine months ended September 30, 1999 and September 30, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings none
Item 2. Changes in Securities 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 and Reports on Form 8-K none
</TABLE>
SIGNATURES 14
Page 2
<PAGE>
PART I
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Amounts in $1,000's
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Sept. 30, Year to date Sept. 30,
1999 1998 1999 1998
----------------------- ----------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 5,147 $4,581 $ 14,945 $13,085
Interest on investment securities 562 401 1,567 1,418
Interest on federal funds sold 12 13 26 49
----------------------- ----------------------
5,721 4,995 16,538 14,552
----------------------- ----------------------
Interest expense
Interest on deposits 1,446 1,303 4,100 3,816
Interest on borrowings 194 231 704 642
----------------------- ----------------------
1,640 1,534 4,804 4,458
----------------------- ----------------------
Net interest income 4,081 3,461 11,734 10,094
Provision for possible loan losses 200 200 700 610
----------------------- ----------------------
Net interest income after provision 3,881 3,261 11,034 9,484
----------------------- ----------------------
Noninterest income
Service charges on deposit accounts 285 210 741 583
Other fee income, principally bankcard 342 299 1,005 791
Loan servicing fees 133 100 430 251
Mortgage banking income and gains
on loan sales 111 263 678 1,085
Gain on sale of securities 14 0 31 6
Other noninterest income 82 62 200 166
----------------------- ----------------------
967 934 3,085 2,882
----------------------- ----------------------
Noninterest expense
Salaries and employee benefits 1,358 1,227 4,064 3,576
Premises and equipment 368 283 985 849
Bankcard processing 296 229 775 566
Business development 190 166 532 484
Other noninterest expense 462 376 1,390 1,241
----------------------- ----------------------
2,674 2,281 7,746 6,716
----------------------- ----------------------
Income before income taxes 2,174 1,914 6,373 5,650
Provision for income taxes 832 737 2,451 2,174
----------------------- ----------------------
Net income $ 1,342 $1,177 $ 3,922 $ 3,476
----------------------- ----------------------
</TABLE>
Page 3
<PAGE>
<TABLE>
Earnings per share
<S> <C> <C> <C> <C>
Basic $0.28 $ 0.25 $0.82 $ 0.74
-------------------------- ---------------------------
Diluted $0.28 $ 0.24 $0.81 $ 0.72
-------------------------- ---------------------------
Weighted average shares outstanding
Basic 4,728 4,795 4,788 4,720
Common stock equivalents
attributable to stock options 52 91 49 93
-------------------------- ---------------------------
Diluted 4,780 4,886 4,837 4,811
-------------------------- ---------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Year to date
September 30, September 30,
1999 1998 1999 1998
------------------- --------------------
<S> <C> <C> <C> <C>
Net income $ 1,342 $ 1,177 $ 3,922 $ 3,476
------------------- --------------------
Unrealized gains (losses) on Investment Securities
Unrealized gains (losses) arising during the
period 47 303 (536) 338
Reclassification for (gains) losses included in
statement of income (14) 0 (31) (6)
------------------- --------------------
33 303 (567) 332
Income tax (expense) benefit (13) (116) 218 (127)
------------------- --------------------
Net unrealized gains (losses) on securities
available for sale 20 187 (369) 205
------------------- --------------------
Comprehensive Income $ 1,362 $ 1,364 $ 3,553 $ 3,681
------------------- --------------------
</TABLE>
Page 4
<PAGE>
CONSOLIDATED BALANCE SHEETS
Amounts in $1,000's
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
--------------------------------------------------------
Assets
<S> <C> <C> <C>
Cash and due from banks $ 12,113 $ 10,635 $ 10,226
Federal funds sold 911 355 1,097
--------------------------------------------------------
Total cash and cash equivalents 13,024 10,990 11,323
Investment securities 36,848 31,130 26,323
Loans, less allowance for loan losses 201,595 185,450 176,064
Federal home loan bank stock 2,117 2,004 1,965
Property, net of accumulated depreciation 11,366 10,716 10,038
Interest receivable 1,488 1,309 1,265
Other assets 723 345 775
--------------------------------------------------------
Total assets 267,161 241,944 227,753
--------------------------------------------------------
Liabilities and stockholders' equity
Deposits
Noninterest-bearing demand 63,265 56,556 51,362
Savings and interest-bearing checking 115,280 81,090 74,645
Time 42,129 56,683 54,442
--------------------------------------------------------
220,674 194,329 180,449
Federal funds purchased 7,000 8,600 10,000
Other borrowings 11,000 11,000 9,000
Accrued interest and other payables 1,316 849 2,152
Other liabilities 25 40 13
--------------------------------------------------------
Total liabilities 240,015 214,818 201,614
--------------------------------------------------------
Stockholders' equity
Common stock 19,668 19,376 18,970
Retained earnings 10,953 7,658 6,937
Treasury stock (3,198) 0 0
Accumulated other comprehensive income (277) 92 232
--------------------------------------------------------
Total stockholders' equity 27,146 27,126 26,139
--------------------------------------------------------
Total liabilities and stockholders' equity $267,161 $241,944 $227,753
--------------------------------------------------------
</TABLE>
Page 5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
<TABLE>
<CAPTION>
For nine months ended September 30,
1999 1998
--------------- --------------
Cash flows from operating activity:
<S> <C> <C>
Net income $ 3,922 $ 3,476
Adjustments to reconcile net income to net cash provided
By operating activities
Depreciation 571 433
Amortization 97 78
Provision for loan losses 700 610
Deferred income taxes (254) 356
Origination of loans held for sale (27,517) (32,517)
Proceeds from sale of loans held for sale 24,433 32,896
Gain on sales of loans (291) (537)
Gain on sales of securities (31) (6)
Stock dividends from federal home loan bank (113) (109)
Change in interest receivable and other assets (557) (246)
Change in payables and other liabilities 452 1,482
Other adjustments (83) (159)
--------------- --------------
Net cash provided by operating activities 1,329 5,757
--------------- --------------
Cash flows from investing activities
Change in investment securities (5,784) 3,984
Loans made net of principal collections (17,219) (45,072)
Proceeds from sales of loans 3,748 12,757
Purchase of loans - -
Purchase of property (1,220) (2,835)
--------------- --------------
Net cash used in investing activities (20,475) (31,165)
--------------- --------------
Cash flows from financing activities
Net increase in deposits 26,346 13,154
Increase (decrease) in fed funds purchased (1,600) 2,850
Increase (decrease) in other borrowings - 6,000
Proceeds from stock options exercised 261 797
Dividends paid, net of reinvestment (628) (323)
Share repurchases (3,198) -
--------------- --------------
Net cash provided by financing activities 21,181 22,478
--------------- --------------
Net increase (decrease) in cash and cash equivalents 2,035 (2,930)
Cash and cash equivalents, beginning of period 10,990 14,253
--------------- --------------
Cash and cash equivalents, end of period $ 13,024 $ 11,323
--------------- --------------
</TABLE>
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A complete set of Notes to Consolidated Financial Statements is a part of the
Annual Report to Shareholders for the period ended December 31, 1998, included
as exhibit 13 within the Bank's Form 10-K filed with the Federal Deposit
Insurance Corporation ("FDIC") on March 30, 1999. The notes below are included
for Pacific Continental Bank (the "Bank") because of material changes in the
financial statements or to provide the reader with additional information not
otherwise available.
Holding Company Reorganization
Effective June 7, 1999, the Bank completed its reorganization and formation of a
bank holding company, Pacific Continental Corporation (the "Company"). At that
time, the Bank ceased reporting with the FDIC under the Securities Exchange Act
of 1934, and the Company became the successor registrant reporting with the SEC.
The reorganization was accounted for as a pooling of interests and required no
restatement of previously reported results.
Allowance for Loan Losses and Nonperforming Assets
1999
------------
Balance, December 31, 1998 $2,070
Provision charged to income 700
Loans charged off 121
Recoveries credited to allowance 16
------------
Balance, September 30, 1999 $2,665
------------
Net charge offs were $13 in the third quarter 1999, $54 in the second quarter
1999, and $38 in the first quarter of 1999. This compares to net charge offs of
$83 in the third quarter 1998, $17 in the second quarter of 1998 and $11 in the
first quarter of 1998. Through September 30, 1999 annualized net charge offs
were 0.07% of average loans compared to 0.09% through September 30, 1998.
Below is a summary of nonaccrual loans, loans past due 90 days or more and still
accruing interest, and other real estate owned for the periods covered in this
report:
<TABLE>
<CAPTION>
Sept. 30, 1999 December 31, 1998 Sept. 30, 1998
-------------- ----------------- --------------
<S> <C> <C> <C>
Nonaccrual loans $1,107 $873 $304
90 days past due and accruing interest $ 20 $247 $754
Other real estate owned $ 129 $ 0 $ 0
</TABLE>
Share Repurchase Plan
On July 14, 1999, the Board of Directors approved a stock repurchase plan to
purchase up to 240,000 shares of the Company's stock over the next year through
open market and block purchases. Through September 30, 1999, the Company has
purchased 196,280 shares of its stock for $3,198 at an average price of $16.29
per share. Below is a summary of shares outstanding at September 30, 1999.
Outstanding shares January 1, 1999 4,803
New shares issued through stock options 35
Shares repurchased through September 30, 1999 (196)
-----
Outstanding shares September 30, 1999 4,642
Page 7
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion contains a review of the Company's operating results
and financial condition for the third quarter and year to date 1999. When
appropriate, comparisons are made to the same period in 1998 and to the previous
year ended December 31, 1998. The discussion should be read in conjunction with
the financial statements (unaudited) contained elsewhere in this report. The
reader is assumed to have access to the Bank's Form 10-K as filed with the FDIC
for the previous year ended December 31, 1998, which contains additional
statistics and explanations. All numbers, except per share data, are expressed
in thousands of dollars.
This discussion may contain certain forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
stated. Readers are cautioned not to place undue reliance on these forward-
looking statements.
Highlights
Net income in the third quarter 1999 was $1,342 an increase of 14% over second
quarter 1998 income of $1,177. Return on average assets and return on average
equity in the current quarter were 2.06% and 18.97%, respectively and 2.10% and
18.47% in the same quarter one year ago.
For the first nine months of 1999 the Company earned $3,922 a 13% increase over
nine month 1998 earnings of $3,476. Per share earnings on a diluted basis for
the first nine months of 1999 and 1998 were $0.81 and $0.72, respectively.
Comparing the first nine months of 1999 to the same period in 1998, return on
average assets was 2.16% and 2.23%, while return on average equity decreased to
18.23% from 19.22%.
At September 30, 1999, total assets were $267,161 or 10% more than December 31,
1998, and 17% more than September 30, 1998.
The Company presently operates nine banking offices in the state of Oregon. The
Bank has received regulatory approval to open its tenth banking office on West
11th Avenue in Eugene, Oregon. The office will open during the first quarter
2000.
Results of Operations
Net Interest Income
Net interest income is the primary source of the Company's revenue. Net
interest income is the difference between interest earned on earning assets and
interest paid on paying liabilities. Net interest income as a percent of
average earning assets is referred to as the interest margin. The interest
margin can be examined more closely by considering the interest income and
interest expense components separately.
For the quarter ended September 30, 1999, net interest income, prior to the
provision for loan loss, totaled $4,081 an 18% increase over the same period in
1998. Average earning assets for the current quarter increased 20% over the
same quarter last year. Net interest income for the current quarter as a
percent of earning assets or net interest margin was 6.87% down from 6.99% for
the same period in 1998. The yield on earning assets declined 0.46% due to
lower loan yields while the Bank's cost of funds fell only 0.34% as interest
bearing deposits repriced more slowly than loans. A significant portion of the
Company's loan portfolio is variable rate tied to the prime-lending rate. The
Company's net interest margin improved in the latter portion of the current
quarter as the prime-lending rate increased by 0.25% on July 1, 1999, and
another 0.25% increase on August 25, 1999. However, the increase was not
sufficient to completely offset the decline of 0.75% in the prime-lending rate
in late 1998. The Company expects improvement in the net
Page 8
<PAGE>
interest margin in the fourth quarter, as it will receive the full effect for
all three months of the recent increases in the prime-lending rate.
Net interest income for the first nine months showed similar results. For the
first nine months of 1999, net interest income, prior to the provision for loan
loss, totaled $11,734, an increase of 16% from the same period in 1998. Year-
to-date average earning assets increased 20% as compared to the same period in
1998. However, net interest income as a percent of earning assets declined from
7.13% in 1998 to 6.88% in 1999. This decline results from loan yields falling
at a faster rate than interest bearing liabilities. Net interest income for the
first nine months of 1999 was $1,640 higher than the same period in 1998. A
rate volume analysis indicates that net interest income increased by $2,161 due
to higher volumes, which was offset by a decline in net interest income of $522
due to lower rates.
Noninterest Income
Year-to-date noninterest income of $3,085 was up 7% over 1998 noninterest
income for the same time period. Three categories of noninterest income showed
significant growth. Service charges on deposit accounts increased $158 or 27%
due to growth in the number of accounts and price changes, which took effect in
the fourth quarter 1998. In addition, lower earnings credit for analyzed
business accounts resulted in more service charge revenue, as deposit balances
did not fully offset the cost to service these business accounts. The Company
also continued to be successful in expanding its merchant banking activity.
Revenues in this category increased by $214 or 27% when compared to the first
nine months of 1998. Through September 30, 1999, loan servicing income was $430
an increase of 71% over 1998 levels, resulting from loan sales and
participations that occurred in the second half of 1998.
The growth in noninterest income in these three categories was offset by a
decline of $407 in gains on loan sales and mortgage-banking income. The Company
continued to be very successful in generating government guaranteed loans.
Through September 30, 1999, the Bank originated $11,119 of government guaranteed
Small Business Administration loans. This compares to $8,088 originated during
the same period in 1998. However, due to strong core deposit growth experienced
in the first nine months of the year, the Company elected to retain the
government guaranteed loans in its loan portfolio rather than selling them. The
last sale of guaranteed Small Business Administration loans by the Company
occurred in June 1999. Retention of the government guaranteed loans combined
with lower premiums on 1999 sales has resulted in gains on loan sales dropping
from $563 in 1998 to $279 in 1999. Year-to-date 1999 mortgage-banking revenues
have declined by $186 from $537 to $351. Higher interest rates in 1999 have
slowed refinancing activity reducing originations of mortgage loans during the
first nine months by $8,030 from 1998 levels thus reducing mortgage banking
revenues.
Noninterest Expense
Year-to-date September 30, 1999 noninterest expense increased $1,030 or 15% from
the same period in 1998. Three expense categories accounted for $833 or 81% of
the total dollar increase in expenses. Salaries and employee benefits through
the first nine months of 1999 increased $488 or 14% over the same period in
1998. Premises and equipment expenses increased $136 or 16% over 1998.
Merchant banking processing expense was also up $209 or 37%. The increase in
compensation costs and premises and equipment result primarily from opening two
new offices. The Gateway Office in Springfield, Oregon opened in September 1998
and the Tualatin Office in Tualatin, Oregon opened in June 1999. The increase
in merchant processing expenses relates directly to increased volumes and
increased processing costs not passed onto customers due to competitive pricing.
Liquidity
The Company derives liquidity through the growth of core deposits and the
maturity of investment securities and loans. Core deposits include demand,
interest checking, money market, savings and local time deposits. Other deposit
funding is provided through access to national CD markets and public
Page 9
<PAGE>
deposits. Additional liquidity is provided through secured and unsecured
borrowings and the Company's established ability to sell loans to other
financial institutions and sales of government guaranteed loans in the secondary
market. In 1999 the Company has experienced strong growth in core deposits.
Total deposits at September 30, 1999 are $26,345 or 14% higher than December 31,
1998 deposits and are $40,225 or 22% higher than September 30, 1998 deposits. At
September 30, 1999, core deposits represent 92% of total deposits and are up 22%
from December 31, 1998 levels and up 35% from September 30, 1998. This has
resulted in less reliance on funding from national CD markets and public
deposits. It has also reduced the need for loan sales and loan participations in
1999. Through the first nine months of 1999, the Company has sold or
participated $8,046 in loans compared to $19,422 during the same period in 1998.
Capital Resources
Capital is the shareholder's investment in the Company. Capital grows through
the retention of earnings and the issuance of new stock. Capital formation
allows the Company to grow assets and provides flexibility in times of
adversity.
At September 30, 1999, capital as a percent of total period end assets was
10.16% down from 11.48% in 1998 as a result of the Company's share repurchase
plan. The Company is subject to various regulatory capital requirements
administered by Federal regulators. The following schedule shows that the
Company is considered "well capitalized" under regulatory guidelines.
<TABLE>
<CAPTION>
Regulatory Guidelines
-----------------------------
At 9/30/99 Adequate Well Capitalized
---------- --------- -----------------
<S> <C> <C> <C>
Total capital to risk based assets 13.45% 8.00% 10.00%
Tier 1 capital to risk based assets 12.26% 4.00% 6.00%
</TABLE>
Expected earnings are considered sufficient to meet all anticipated capital
expenditures and any expenditures related to the year 2000 project. The Bank
has received regulatory approval to open a new office on West 11/th/ Avenue in
Eugene, Oregon. Construction is expected to commence in the fourth quarter
1999.
Year 2000
The year 2000 presents a unique problem for all software and hardware users.
The "Y2K" problem results from the use of only 2 digits to represent the year in
many computer programs. Therefore these computer programs may not properly
recognize a year that begins with "20" instead of the familiar "19." If not
corrected, many computer applications could fail or create erroneous results.
The global extent of the Y2K problem is not yet known and it is prudent for all
companies to evaluate their exposure and to work towards mitigating any harmful
results.
The Company has identified several areas of potential concern, these being
computer operations, third party processors, client preparedness, and the need
for Y2K liquidity reserves.
The Company relies heavily on computers to process its daily work and to
maintain client records for loans and deposits. The Company has a wide area
network used for word processing, internal communications, loan document
preparation, and spreadsheet applications. The Company processes daily postings
of loan and deposit information using an "in-house" software and hardware
solution. The Company also utilizes a number of third party vendors for the
processing of various transactions such as automated teller, automated
clearinghouse, and bankcard transactions.
The Company is also exposed to the degree that its clients have or have not
prepared for Y2K. The client's ability to continue servicing their debts can,
in many cases, be dependent on their ability to process work for themselves and
from their third party vendors.
Page 10
<PAGE>
The Company has completed and established a detailed plan to prepare for the
year 2000. The Federal Financial Institutions Examination Counsel (FFIEC) has
made recommendations to the financial community for preparing for Y2K. The
Company has incorporated their suggestions and timelines within its Y2K plan.
The plan has five distinct phases, these being: awareness, assessment,
renovation, validation, and implementation. The following table shows the
Company's progress in each of these phases.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Phase FFIEC mandated Bank's date of Comments
date completion
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Awareness 06-30-1998 09-30-1997 Established Y2K Team
- ----------------------------------------------------------------------------------------------------------------
Assessment 09-01-1998 03-01-1998 The assessment phase was conducted with the help
of a consultant. The software vendor assessed
core-processing systems.
- ----------------------------------------------------------------------------------------------------------------
Renovation 12-31-1998 09-30-1998 Renovation is complete. All hardware has been
upgraded or replaced. All required software has
been purchased and installed.
- ----------------------------------------------------------------------------------------------------------------
Validation 03-31-1999 01-31-1999 The Company's wide area network and software used
throughout the network has been validated. The
Company completed testing released versions of
its core banking software for loan, deposit, and
check processing software.
- ----------------------------------------------------------------------------------------------------------------
Implementation 06-30-1999 03-31-1999 Completed testing all of the Company's "Mission
Critical" hardware and software. Developed a
viable contingency plan.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
As the table above shows the Company has successfully completed the five phases
outlined by the FFIEC. Testing all of the Company's internal systems has been
completed, and the Company feels confident all systems will be fully functional
in the year 2000. The Company is working with our third party suppliers to
encourage, aid, and monitor their progress. Contingency plans are in place to
ensure minimal inconvenience to our clients come January 1, 2000. The Company
spent approximately $220 for the Y2K problem. This expense was allocated among
consultants, hardware upgrades, and software enhancements. In some cases
remediation of the problem resulted in an escalation of hardware and software
replacement.
The Company has held a number of Y2K seminars, which were well attended by
clients and the community. The Company has identified which clients represent
the most exposure to the Company and has a systematic calling program in place
to assess the client's degree of preparedness. To date the Company has not
identified any clients requiring a specific Y2K loan loss reserve allocation.
While liquidity needs are not presently known, the Company has formulated plans
to increase liquidity for the Y2K event should it become necessary. Such plans
include additional lines of credit with various lenders including the Federal
Reserve, the Federal Home Loan Bank and correspondent banks. The Company
presently has in excess of $80,000 in overnight or term credit available. In
addition the Company will consider asset sales and out of area liability
acquisition to supplement core deposit growth. It is hoped that local and
national education programs dissuade panic among consumers and alleviate the
need for exceptional liquidity measures.
The discussion above regarding the century date change for the year 2000
includes certain "forward looking statements" concerning the future operations
of the Company. The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 as they apply
to forward looking statements. This statement is for the express purpose of
availing the Company of the protection of such safe harbor with respect to all
"forward looking statements". Management's ability to predict results of the
effect of future plans is inherently uncertain, and is subject to factors that
may
Page 11
<PAGE>
cause actual results to differ materially from those projected. Factors that
could effect the actual results include the Company's success in identifying
systems and programs that are not Year 2000 compliant; the possibility that
systems modifications will not operate as intended; unexpected costs associated
with remediation, including labor and consulting costs; the uncertainty
associated with the impact of the century change on the Company's clients,
vendors and third-party service providers; and the economy in general.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have a significant effect on
the Company's financial condition and results of operations. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Company's business activities. The
Company does not use derivatives such as forward and futures contracts, options,
or interest rate swaps to manage interest rate risk.
Interest rate risk generally arises when the maturity or repricing structure of
the Company's assets and liabilities differ significantly. Asset and liability
management, which among other things, addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income while maintaining sufficient liquidity. This process includes
monitoring contractual maturity and prepayment expectations together with
expected repricing of assets and liabilities under different interest rate
scenarios. Generally the Company seeks a structure that insulates net interest
income from large deviations attributable to changes in market rates by
balancing the repricing characteristics of assets and liabilities.
The Company's liability structure is composed primarily of noninterest bearing
corporate checking accounts and non-maturing saving and money market deposit
accounts. Other liabilities include time deposits with various maturities of
generally one year or less and borrowings.
The Company's assets are primarily composed of loans and investment securities.
Investment securities generally have fixed rates with maturities of less than
five years. The loan portfolio is made up of two distinct interest rate risk
profiles. Approximately half of the Company's loans are variable rate loans
subject to immediate change. In many cases these loans have interest rate
floors which insulate the Company from declining market rates. The other
portion of the loan portfolio is comprised of fixed rate installment loans and
commercial real estate loans with interest rates fixed for up to five years.
Interest rate risk is managed through the monitoring of the Company's balance
sheet by subjecting various asset and liability categories to interest rate
shocks and gradual interest rate movements over a one year period of time.
Interest rate shocks use an instantaneous adjustment in market rates of large
magnitudes on a static balance sheet to determine the effect such a change in
interest rates would have on the Company's net interest income and capital for
the succeeding twelve-month period. Such an extreme change in interest rates
and the assumption that management would take no steps to restructure the
balance sheet does limit the usefulness of this type of analysis. This type of
analysis tends to provide a best case or worst case scenario. A more reasonable
approach utilizes gradual interest rate movements over a one-year period of time
to determine the effect on the Company's net interest income.
The Company utilizes the services of The Federal Home Loan Bank's
asset/liability modeling software to determine the effect of a simultaneous
shift in interest rates. Interest rate shock scenarios are provided quarterly,
while the gradual interest rate movement forecast is provided semi-annually in
March and September. Interest rate shock scenarios are modeled in 100 basis
point increments for shifts of plus or minus 4 percent in the federal funds
rate. The more realistic forecast assumes a gradual interest rate movement of
plus or minus 2.40% change in the federal funds rate over a one-year period of
time with rates moving up or down 0.60% each quarter. The model used is based
on the concept that all rates do not move by the same amount. Although certain
assets and liabilities may have similar repricing characteristics, they may not
react correspondingly to changes in market interest rates. In the event of a
change in interest rates, prepayment of
Page 12
<PAGE>
loans and early withdrawal of time deposits would likely deviate from those
previously assumed. Increases in market rates may also affect the ability of
certain borrowers to make scheduled principal payments.
The model attempts to account for such limitations by imposing weights on the
differences between repricing assets and repricing liabilities within each time
segment. These weights are based on the ratio between the amount of rate change
of each category of asset or liability, and the amount of change in the federal
funds rate. Certain non-maturing liabilities such as checking accounts and
money market deposit accounts are allocated among the various repricing time
segments to meet local competitive conditions and management's strategies
The Company strives to manage the balance sheet so that net interest income is
not negatively impacted more than 15% given a change in interest rates of plus
or minus 200 basis points. Current evaluations show the Bank is within its
established guidelines.
The following table shows the estimated impact of the various interest rate
scenarios used in the software modeling based on data provided by the Company to
the Federal Home Loan Bank as of June 30, 1999 for the interest rate shock
analysis and as of March 31, 1999 for the gradual interest rate movement
forecast. The table shows estimates of changes in net interest income. For
illustrative purposes the base figure of $15,245 used in the interest rate shock
analysis is the annualized actual net interest income for the first six months
of 1999. The base figure of $14,627 used in the gradual interest rate movement
forecast is the annualized actual net interest income for the first three months
of 1999. Due to the various assumptions used for this modeling, no assurance
can be given that projections will reflect actual results.
Interest Rate Shock Analysis
Net Interest Income and Market Value Performance
(dollars in thousands)
<TABLE>
<CAPTION>
-------------------- -----------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
-------------------- -----------------------------------------------
<S> <C> <C> <C>
+200 16,389 1,144 7.50%
+100 15,807 562 3.69%
Base 15,245 0 0.00%
-100 14,749 (496) -3.26%
-200 14,240 (1,005) -6.59%
-------------------------------------------------------------------------
</TABLE>
Gradual Interest Rate Movement Forecast
Net Interest Income and Market Value Performance
(dollars, in thousands)
<TABLE>
<CAPTION>
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
-------------------- -----------------------------------------------
<S> <C> <C> <C>
Rising 2.40% 14,737 110 0.75%
Base 14,627 0 0.00%
Declining 2.40% 14,545 (82) -0.56%
--------------------------------------------------------------------------
</TABLE>
Page 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CONTINENTAL CORPORATION
(Registrant)
Dated October 26, 1999 /s/ J. Bruce Riddle
-------------------- -------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated October 26, 1999 /s/ Hal Brown
------------------- -------------------------------------
Hal Brown
Senior Vice President and Chief Financial Officer
Page 14
