<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-30106
PACIFIC CONTINENTAL CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-1269184
(State of Incorporation) (IRS Employer Identification No)
111 West 7th Avenue
Eugene, Oregon 97401
(Address of principal executive offices)
(541) 686-8685
(Registrant's telephone number)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
$1.00 Par Value Common Stock
Check 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 ___
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates was
$58,287,007, based on the closing price at February 29, 1999 of $12.75.
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 29, 2000 was 4,571,530 shares of $1.00 par value Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates by reference information from the registrant's Annual
Report to Shareholders for the period ended December 31, 1999. Parts I and II
incorporates by reference information from the registrant's definitive proxy
statement for the annual meeting of shareholders scheduled for April 25, 2000.
<PAGE>
PACIFIC CONTINENTAL CORPORATION
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART 1 Page
- ------ ----
<C> <S> <C>
Item 1: Business 3
Item 2: Properties 14
Item 3: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 15
PART II (Items 5 through 8 are incorporated by reference from Pacific
- ------- Continental Corporation's 1999 Annual Report to Shareholders)
Item 5: Market for Registrant's Common Equity and Related 15
Stockholder Matters
Item 6: Selected Financial Data 16
Item 7: Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7a: Quantitative and Qualitative Disclosures About Market Risk 16
Item 8: Financial Statements and Supplementary Data 16
Item 9: Changes In and Disagreements with Accountants 16
on Accounting and Financial Disclosure
PART III (Items 10 through 13 are incorporated by reference from
- -------- Pacific Continental Corporation's definitive proxy statement for the
annual meeting of shareholders scheduled for April 25, 2000)
Item 10: Directors and Executive Officers of the Registrant 16
Item 11: Executive Compensation 16
Item 12: Security Ownership of Certain Beneficial Owners 16
and Management
Item 13: Certain Relationships and Related Transactions 17
PART IV
- -------
Item 14: Exhibits, Financial Statement Schedules, and Reports 17
on Form 8-K
SIGNATURES 18
- ----------
</TABLE>
<PAGE>
PART I
------
ITEM 1. Business
- ------------------
General
Pacific Continental Corporation (the "Company", or the "Registrant"), an Oregon
corporation and one-bank holding company located in Eugene, Oregon. The Company
was organized on June 7, 1999, pursuant to a holding company reorganization of
Pacific Continental Bank, its wholly owned subsidiary.
The Company's principal business activities are conducted through its full-
service commercial bank subsidiary, Pacific Continental Bank (the "Bank"), an
Oregon state-chartered bank with deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"). At December 31, 1999, the Bank had facilities
in six Oregon cities and towns and operated eight full-service and one limited-
service offices.
Results
For the year ended December 31, 1999, the operations of the Registrant on a
combined basis earned net income of $5.4 million or $1.12 per diluted share.
The combined equity of the Registrant at December 31, 1999, was $27.1 million
with 4.6 million shares outstanding and a book value of $5.90 per share. Net
loans, including loans held for sale, of $209.5 at December 31, 1999,
represented 77 percent of total assets. Deposits total $224.2 million at year-
end 1999. For more information regarding the Company's results, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Financial Statements and Supplementary Data" incorporated by
reference from the Company's Annual Report.
Holding Company Formation
At the 1999 Annual Shareholder Meeting, the shareholders of the Bank approved a
plan of corporate reorganization in which the Bank became a wholly owned
subsidiary of the newly formed bank holding company, Pacific Continental
Corporation. Under the terms of this reorganization, all Bank shares of common
stock were exchanged for common stock of the Company on a share-for-share basis.
The Bank's common stock was registered as a class with the FDIC, under Section
12(g) of the Securities and Exchange Act of 1934 (the "Act"). As a result of
the reorganization, the Company became the successor registrant under Section
12(g) pursuant to SEC Rule 12g-3.
THE BANK
General
The Bank commenced operations on August 15, 1972. The Bank is engaged in
general commercial banking, with emphasis on lending to small and medium-sized
businesses and construction lending for commercial facilities and single family
residences. The Bank operates under the banking laws of the State of Oregon and
the rules and regulations of the FDIC.
The Bank provides a wide range of financial services tailored to the needs of
the community. The Bank's strategy is to emphasize its local affiliations and
to provide high quality banking services to individuals and businesses.
Primary Market Area
The Bank's markets consist of Lane, Washington, and Linn Counties in the State
of Oregon. The Bank has six full-service offices in Lane County, two full-
service offices in Washington County, and one limited-service office in Linn
County. Within Lane County, the Bank has its administrative office and three
branch offices in Eugene, one branch office in Springfield, and one branch
office in Junction City.
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The Bank has received regulatory approval to open a new office in Eugene, which
is tentatively scheduled to open in the Spring of 2000. Within Washington
County, the Bank has a branch office in Beaverton and one branch office in
Tualatin. Within Linn County, the Bank has one limited-service branch office in
Halsey.
Competition
The Bank competes with a number of commercial banks, savings banks, and credit
unions. Commercial banking within the State of Oregon is highly competitive for
both deposit dollars and loans. The Bank differentiates itself by providing
superior levels of service for its selected client base. The Bank focuses on
small to medium-size businesses, their owners and professionals in addition to
local construction lending.
Services Provided
Lending Activities
The Bank emphasizes two areas of lending within its primary market area: loans
to small and medium-size businesses and loans to builders for the construction
of commercial facilities and single family residences.
Commercial loans, secured and unsecured are made primarily to small and medium-
size businesses operating in Lane and Washington Counties and surrounding areas.
These loans are available for general operating purposes, acquisition of fixed
assets, purchases of equipment and machinery, financing of inventory and
accounts receivable, and other business purposes. The Bank also originates
Small Business Administration ("SBA") loans and loans guaranteed by the Farm
Service Agency. The Bank has a preferred lender status with the SBA.
Within its primary markets, the Bank concentrates on construction loan financing
for commercial facilities and for pre-sold, custom, and speculative home
construction. The major thrust of residential construction lending is for the
construction of single family residences. The Bank also finances requests for
duplexes and other multi-family residences.
Fixed-rate and variable rate residential mortgage loans are offered through the
Bank's mortgage loan department. Nearly 95% of the residential mortgage loans
originated are sold in the secondary market along with the mortgage loan
servicing rights.
The Bank makes secured and unsecured loans to individuals for various purposes
including purchases of automobiles, mobile homes, boats and other recreational
vehicles, home improvements, education, and personal investment.
The Bank offers credit card services to its consumer and business customers.
The Bank uses an outside vendor for credit card processing. In addition, the
Bank provides merchant bankcard processing services to the Bank's business
customers through an outside processor.
The Board of Directors has approved specific lending policies and procedures for
the Bank and is responsible for implementation of the policies. The lending
policies and procedures include guidelines for loan term, loan-to-value rates,
collateral appraisals, and interest rates. The loan policies also vest varying
levels of loan authority in management, the Bank's Asset and Liability
Committee, and the Board of Directors. Management of the Bank monitors lending
activities through weekly management meetings, monthly reporting, and periodic
review of loans.
Deposit Services
The Bank offers a full range of deposit services that are typically available in
most banks and savings banks, including checking accounts, savings, money market
accounts, and time deposits. The transaction
4
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accounts and time deposits are tailored to the Bank's primary market area at
rates competitive with those offered in the area. Additional funds are generated
through national networks for institutional deposits of $99,000 or more. All
deposit accounts are insured by the FDIC to the maximum amount permitted by law.
The Bank has invested in image technology for the processing of checks. The Bank
is the only financial institution in Lane, Washington, and Linn Counties
offering this service. In addition, the Bank allows 24-hour customer access to
deposit and loan information via telephone and cash management products.
Subsequent to year-end 1999, the Bank began to offer an online internet banking
product to individuals and businesses.
Other Services
The Bank provides other traditional commercial and consumer banking services,
including safe deposit services, debit and ATM cards, savings bonds, cashier's
checks, travelers checks, notary services and others. The Bank is a member of
the Star, Explore, and Plus ATM networks and utilizes an outside processor for
the processing of these automated transactions.
Employees
At December 31, 1999, the Bank employed 121 full time equivalent employees.
None of these employees are represented by labor unions. A number of benefit
programs are available to eligible employees, including group medical plans,
paid sick leave, paid vacation, group life insurance, 401(k) plans, and stock
option plans.
Supervision and Regulation
General
The Company and subsidiaries are extensively regulated under federal and state
law. These laws and regulations are primarily intended to protect depositors,
not shareholders. The discussion below describes and summarizes certain
statutes and regulations. These descriptions and summaries are qualified in
their entirety by reference to the particular statute or regulation. Changes in
applicable laws or regulations may have a material effect on the business and
prospects of the Company. The operations of the Company may also be affected by
changes in the policies of banking and other government regulators. The Company
cannot accurately predict the nature or extent of the effects on its business
and earnings that fiscal or monetary policies, or new federal or state laws, may
have in the future.
Changes in Banking Laws and Regulations
The laws and regulations that affect banks and bank holding companies have
recently undergone significant changes. On November 12, 1999, the president
signed into law the Financial Services Modernization Act of 1999. Generally,
the act (i) repeals the historical restrictions on preventing banks from
affiliating with securities firms, (ii) provides a uniform framework for the
activities of banks, savings institutions, and their holding companies, (iii)
broadens the activities that may be conducted by national banks and banking
subsidiaries of bank holding companies, (iv) provides an enhanced framework for
protecting the privacy of consumers' information, and (v) addresses a variety of
other legal and regulatory issues affecting both day-to-day operations and long-
term activities of financial institutions.
Bank holding companies are permitted to engage in a wider variety of financial
activities than permitted under previous law, particularly with respect to
insurance and securities activities. In addition, in a change from previous
law, bank holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially related activities, so long as
such company meets certain regulatory requirements. The act also permits
national banks (and, in states with wildcard statutes, certain state
5
<PAGE>
banks), either directly or through operating subsidiaries, to engage in certain
non-banking financial activities.
The Company does not believe that the act will negatively affect the operations
of it or the Bank. However, to the extent the legislation permits banks,
securities firms, and insurance companies to affiliate, the financial services
industry may experience further consolidation. This consolidation could result
in a growing number of larger financial institutions that offer a wider variety
of financial services than the Company currently offers and that can
aggressively compete in the markets currently served by the Company and the
Bank.
Federal Bank Holding Company Regulation
The Company is a bank holding company as defined in the Bank Holding Company Act
of 1956, as amended (the "BHCA"), and is therefore subject to regulation,
supervision and examination by the Federal Reserve. In general, the BHCA limits
the business of bank holding companies to owning or controlling banks and
engaging in other activities closely related to banking. The Company must file
quarterly and annual reports with the Federal Reserve and must provide it with
such additional information as it may require.
Holding Company Bank Ownership. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve before (i) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5
percent of such shares, (ii) acquiring all or substantially all of the assets of
another bank or bank holding company, or (iii) merging or consolidating with
another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also
prohibits a bank holding company from acquiring or retaining direct or indirect
ownership of control of more than 5 percent of the voting shares of any company
which is not a bank or bank holding company, or from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or providing services for its subsidiaries. The principal exceptions to
these prohibitions involve certain non-bank activities closely related to the
business of banking or of managing or controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company are
subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities and on the use of their securities as collateral for loans to any
borrower. The regulations and restrictions limit the Company's ability to
obtain funds from the Bank for its cash needs, including, funds for payment of
dividends, interest, and operational expenses.
Tying Arrangements. Under the Federal Reserve Act and certain regulations of
the Federal Reserve, a bank holding company and its subsidiaries are prohibited
from engaging in certain tying arrangements in connections with any extension of
credit, lease or sale of property, or furnishing or services. For example,
Pacific Continental Bank may not generally require a customer to obtain other
services from it or the Company, and may not require that the customer promise
not to obtain other services from a competitor as a condition to an extension of
credit to the customer.
State Law Restrictions. As an Oregon corporation, the Company is subject to
certain limitations and restrictions under applicable Oregon corporate law. For
example, state law restrictions in Oregon include limitations and restrictions
relating to: indemnification of directors, distributions to shareholders,
transactions involving directors, officers or interest shareholders, maintenance
of books, records and minutes, and observance of certain corporate formalities.
6
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Federal and State Regulation of Pacific Continental Bank
The Bank is an Oregon stock bank with deposits insured by the FDIC and is
subject to the supervision and regulation of the Oregon Director of Banks and
the FDIC. These agencies have the authority to prohibit banks from engaging in
what they believe constitute unsafe or unsound banking practices.
CRA. The Community Reinvestment Act (the "CRA") requires that, in conjunction
with or examinations of financial institutions within their jurisdiction, the
Federal Reserve or the FDIC evaluates the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those banks. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders, or any related interest of such
persons. Extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral as, and follow credit underwriting
procedures that are not less stringent than, those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees, and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; (ii) places restraints on lending by a bank to its executive
officers, directors, principal shareholders, and their related interests; (iii)
prohibits management personnel of a bank from serving as a director or in other
management positions of another financial institution whose assets exceed a
specified amount or which has an office within a specified geographic area.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act (the
"FDICIA"), each federal banking agency has prescribed, by regulation, non-
capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution, which fails to meet
these standards, must develop a plan acceptable to the agency, specifying the
steps that the institution will take to meet the standards. Failure to submit
or implement such a plan may subject the institution to regulatory sanctions.
Management believes that Pacific Continental Bank meets all such standards, and
therefore does not believe that these regulatory standards materially affect the
Company's business operations.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking.
Currently, bank holding companies may purchase banks in any state, and states
may not prohibit such purchases. Additionally, banks are permitted to merge
with banks in other states as long as the home state of neither merging bank has
opted out. The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Oregon enacted "opting in" legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to
certain "aging" requirements. Branches may not be
7
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acquired or opened separately in Oregon by an out-of-state bank, but once an
out-of-state bank has acquired a bank within Oregon, either through merger or
acquisition of all or substantially all of the bank's assets, the out-of-state
bank may open additional branches within Oregon. Under FDIC regulations, banks
are prohibited from using their interstate branches primarily for deposit
production. The FDIC has accordingly implemented a loan-to-deposit ratio screen
to ensure compliance with this prohibition.
Deposit Insurance
The deposits of Pacific Continental Bank are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF") administered by
the FDIC. The Bank is required to pay semiannual deposit insurance premium
assessments to the FDIC.
The FDICIA included provisions to reform the Federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. The
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance premiums based on much risk they present to BIF. Banks with higher
levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
Dividends
The principal source of the Company's cash revenues is dividends received from
Pacific Continental Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends, which would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above which apply to all banks and bank holding companies,
neither the Company nor the Bank are currently subject to any regulatory
restrictions on its dividends.
Capital Adequacy
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital
falls below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for banks and
bank holding companies. These are designed to make such capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current
guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier I capital. Tier I capital for bank holding companies includes
common shareholders' equity, certain qualifying perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
intangibles except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to risk-
based guidelines.
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The principal objective of the leverage ratio is to constrain the maximum degree
to which a bank holding company may leverage its equity capital base. The
Federal Reserve requires a minimum leverage ratio of 3%. However, for all but
the most highly rated bank holding companies and for bank holding companies
seeking to expand, the Federal Reserve expects an additional cushion of at least
1% to 2%.
Effects of Government Monetary Policy
The earnings and growth of the Company are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence the growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on the Company
cannot be predicted with certainty.
Statistical Information
The following charts present certain expanded financial information not
otherwise contained in the Company's Annual Report to Shareholders. Most of the
information is required by Guide 3, as adopted by the Securities and Exchange
Commission.
Selected Quarterly Information
The following chart contains data for the last eight quarters ending December
31, 1999. All data, except per share data, is in thousands of dollars.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
QUARTER Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $6,085 $5,721 $5,513 $5,305 $5,290 $4,995 $4,935 $4,622
Interest expense 1,839 1,640 1,579 1,585 1,503 1,534 1,457 1,467
Net interest income 4,246 4,081 3,934 3,720 3,787 3,461 3,478 3,155
Provision for loan loss 35 200 200 300 200 200 210 200
Noninterest income 1,108 967 1,121 997 1,174 934 1,102 846
Noninterest expense 2,954 2,674 2,631 2,441 2,654 2,281 2,358 2,076
Net income 1,453 1,342 1,364 1,215 1,297 1,177 1,251 1,048
- -------------------------
PER COMMON
SHARE DATA
- -------------------------
Net income (basic) $ 0.31 $0.29 $ 0.28 $0.25 $ 0.27 $0.25 $ 0.26 $0.23
Cash dividends declared 0.15 - 0.13 0.12 - 0.12 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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Investment Portfolio
The following chart contains information regarding the Company's investment
portfolio. All of the Company's investment securities are accounted for as
available-for-sale and are reported at estimated market value. The difference
between estimated fair value and amortized cost, net of deferred taxes, is a
separate component of stockholder's equity.
INVESTMENT PORTFOLIO
ESTIMATED MARKET VALUE
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31
------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US Treasury, US Government agencies and corporations,
and agency mortgage-backed securities $31,933 $26,693 $23,639
Taxable obligations of states and political subdivisions 907 921 1,075
Other mortgage-backed securities & corporate notes 2,010 3,516 5,663
------------------------------------------------
Total $34,850 $31,130 $30,377
</TABLE>
The following chart presents the amount of each investment category by maturity
date and includes a weighted average yield for each period. Mortgage-backed
securities have been classified based on their December 31, 1999, projected
average life.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years
----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury, US
Government agencies
and agency mortgage-
backed securities $7,692 6.49% $14,424 6.32% $2,816 6.72% $7,001 6.49%
Obligations of states and
Political subdivisions - - - - - - 907 7.94%
Other securities & corp. - - 2,010 7.00% - - - -
notes
----------------------------------------------------------------------------------------------
Total $7,692 6.49% $16,434 6.40% $2,816 6.72% $7,908 6.66%
</TABLE>
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Loan Portfolio
The following charts contains information related to the Company's loan
portfolio for the five-year period ending December 31, 1999.
LOAN PORTFOLIO
(dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Loan Portfolio
<S> <C> <C> <C> <C> <C>
Commercial Loans $ 56,485 $ 50,847 $ 35,475 $ 32,065 $26,528
Real Estate Loans 144,869 123,427 100,351 85,440 56,650
Loans held for sale 2,767 6,996 5,497 2,023 2,364
Consumer Installment Loans 8,984 7,185 5,515 4,417 3,900
---------------------------------------------------------------------
213,105 188,455 146,838 123,945 89,442
Deferred loan origination fees (1,125) (1,094) (1,132) (1,002) (560)
---------------------------------------------------------------------
211,980 187,361 145,706 122,943 88,882
Allowance for loan loss (2,448) (2,070) (1,504) (949) (807)
---------------------------------------------------------------------
$209,532 $185,291 $144,202 $121,994 $88,075
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Nonperforming Assets
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,422 $ 873 $ 139 $ 14 $ -
90 or more days past due and still accruing 464 247 655 86 18
-----------------------------------------------------------------------
Total nonperforming loans 1,886 1,120 794 100 18
Other real estate 125 200
-----------------------------------------------------------------------
Total nonperforming assets $2,011 $1,120 $ 994 $ 100 $ 18
Nonperforming assets as a percentage of
of total loans 0.95% 0.60% 0.68% 0.08% 0.02%
</TABLE>
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The following table presents loan portfolio information by loan category related
to maturity and repricing sensitivity. Variable rate loans are included in the
time frame in which the interest rate on the loan could be first adjusted.
Nonaccrual loans, totaling $1,422 are included.
MATURITY AND REPRICING DATA FOR LOANS
December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Commercial Real Estate Consumer Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months or less $43,792 $ 47,114 $ 8,609 $ 99,515
Over three months through 12 months 915 2,488 454 3,857
Over 1 year through 3 years 4,064 28,115 1,845 34,024
Over 3 years through 5 years 2,774 67,052 1,089 70,915
Over 5 years through 15 years 2,826 0 1,968 4,794
---------------------------------------------------------------------------
Total loans $54,504 $145,552 $13,049 $213,105
</TABLE>
Allowance for Loan Loss
The following chart presents information about the Company's allowances for loan
loss. The Company does not allocate the allowance among specific loan types or
categories. In management's opinion such allocation has limited value.
Management evaluates the allowance monthly and considers the amount to be
adequate to absorb possible loan losses.
ALLOWANCES FOR LOAN LOSS
(dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
Balance at beginning of year $2,070 $1,504 $ 949 $ 807 $ 732
Charges to the allowance
Real estate loans (248) (0) (84) (0) (0)
Consumer installment loans (80) (57) (74) (41) (20)
Commercial (49) (256) (125) (125) (138)
---------------------------------------------------------------------
Total charges to the allowance (377) (313) (283) (166) (174)
Recoveries 20 69 108 18 39
Provisions 735 810 730 290 210
---------------------------------------------------------------------
Balance at end of the year $2,448 $2,070 $1,504 $ 949 $ 807
Net charge offs as a percentage of total
average loans 0.18% 0.15% 0.12% 0.13% 0.16%
</TABLE>
12
<PAGE>
Deposits
Deposits represent a significant portion of the Company's liabilities. Average
balance and average rates paid by category of deposit is included in Table I,
Average Balance Analysis of Net Interest Earnings, within the Company's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference. The chart below details the Company's
time deposits at December 31, 1999. The Company does not have any foreign
deposits. Variable rate deposits are listed by first repricing opportunity.
TIME DEPOSITS
(dollars in thousands)
<TABLE>
<CAPTION>
Time Deposits Time Deposits
of $100,000 of less than Total
or more $100,000 Time Deposits
---------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $12,329 $ 8,676 $21,005
Over three months through twelve months 13,803 12,854 26,657
Over one year through three years 1,324 2,983 4,307
Over three years 112 805 917
-----------------------------------------------------------
$27,568 $ 25,318 $52,886
</TABLE>
13
<PAGE>
Short-term Borrowings
The Company uses short-term borrowings to fund fluctuations in deposits and loan
demand. The Company's only subsidiary, Pacific Continental Bank, has access to
both secured and unsecured overnight borrowing lines. At December 31, 1999,
available unsecured borrowing lines with various correspondent banks totaled
$27,500. The Federal Home Loan Bank of Seattle (FHLB) also provides a secured
overnight borrowing line using a blanket pledge of various Bank assets. The
Bank's FHLB borrowing limit, subject to sufficient collateral and stock
investment, is 15% of the Bank's December 31, 1998, total assets, or
approximately $36,300 million. In addition at year-end, the Bank established a
secured overnight borrowing line with the Federal Reserve Bank of San Francisco
totaling $18,902. This borrowing line was established in the event of Y2K
liquidity issues. Subsequent to year-end, the Bank reduced the Federal Reserve
Bank secured borrowing line to $2,500. The following table presents additional
information on the Bank's short-term borrowing for the three years ended
December 31, 1999.
SHORT TERM BORROWINGS
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Federal Funds Purchased
Average interest rate
At year end 5.97% 4.55% 6.27%
For the year 5.29% 5.69% 5.66%
Average amount outstanding for the year $ 7,786 $ 6,274 $2,439
Maximum amount outstanding at any month end $11,200 $12,500 $7,150
Amount outstanding at year end $ 5,800 $ 8,600 $7,150
</TABLE>
ITEM 2 Properties
- --------------------
The principal properties of the registrant are comprised of the banking
facilities owned by the Bank and subsidiaries of the Bank. The Bank operates
eight full service facilities and one limited service facility. A ninth full
service facility is scheduled to open during the 2nd quarter 2000. The Bank and
Bank subsidiaries own a total of six buildings and owns the land under four of
the buildings. Significant properties owned by the Bank are as follows:
1) Three-story building with approximately 30,000 square feet located on Olive
Street in Eugene, Oregon. The Bank occupies the first two floors and rents
out the third floor to various tenants. The building is on leased land.
2) Building and land with approximately 8,000 square feet located on High
Street in Eugene, Oregon.
3) Three-story building and land with approximately 31,000 square feet located
in the Gateway area of Springfield, Oregon. The Bank occupies approximately
5,500 square feet of the first floor and leases out or is seeking to lease
out the remaining space.
4) Building and land with approximately 3,500 square feet located in
Beaverton, Oregon.
5) Building and land with approximately 2,000 square feet located in Junction
City, Oregon.
The Bank leases facilities for one branch office in Tualatin, Oregon, one
limited service office in Halsey, Oregon, and two branch offices located in
Eugene, Oregon. In addition, the Bank leases a portion of an adjoining building
to the High Street office for various data processing functions.
The Bank will own the building for the full service facility located on West
11th Avenue in Eugene, Oregon, which is scheduled to open during the 2nd quarter
2000. The West 11th office will be on leased
14
<PAGE>
land. During the year 2000, the Bank plans to move its data processing functions
to the 3rd floor of the Olive Street building.
ITEM 3 Legal Proceedings
- ---------------------------
As of the date of this report, neither the Company nor the Bank is party to any
material pending legal proceedings, including proceedings of governmental
authorities, other than ordinary routine litigation incidental to the business
of the Bank.
ITEM 4 Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None
PART II
-------
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
Pacific Continental Corporation common stock trades on the NASDAQ OTC Bulletin
Board under the symbol PCBK. The primary market makers currently are Pacific
Crest Securities and Ragen MacKenzie, Inc. At February 29, 2000, the Company
had 4,571,530 shares of common stock outstanding held by approximately 1,224
shareholders.
The high, low and closing sales prices for the last eight quarters are shown in
the table below. Figures have been retroactively adjusted to reflect the 3 for
2 stock split in 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEAR 1999 1998
---------------------------------------- -----------------------------------------
QUARTER Fourth Third Second First Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market value:
High $14.00 $16.38 $15.50 $17.50 $19.00 $20.00 $23.25 $22.50
Low 12.75 13.75 13.00 14.00 14.00 15.50 18.00 15.00
Close 13.00 14.00 13.75 15.38 17.88 15.50 18.50 22.00
</TABLE>
The Company has a history of paying semi-annual cash dividends, typically in
June and December. A history of cash dividends declared and paid is included in
Item 1: Business, under the section titled "Selected Quarterly Information".
15
<PAGE>
ITEM 6 Selected Financial Data
- ---------------------------------
The information regarding "Selected Financial Data" is incorporated by reference
from portions of the Company's 1999 Annual Report to Shareholders, which are
included in Exhibit 13 to this report.
ITEM 7 Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
---------------------
The information regarding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated by reference from portions
of the Company's 1999 Annual Report to Shareholders, which are included in
Exhibit 13 to this report.
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information regarding "Quantitative and Qualitative Disclosures About Market
Risk" is incorporated by reference from portions of the Company's 1999 Annual
Report to Shareholders, which are included in Exhibit 13 to this report.
ITEM 8 Financial Statements and Supplementary Data
- -----------------------------------------------------
The information regarding "Financial Statements and Supplementary Data" is
incorporated by reference from portions of the Company's 1999 Annual Report to
Shareholders, which are included in Exhibit 13 to this report.
ITEM 9 Changes In and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
--------
ITEM 10 Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information regarding "Directors and Executive Officers of the Registrant"
of the Bank is incorporated by reference from the sections entitled "PROPOSAL
NO. 1 - ELECTION OF DIRECTORS--Nominees and Continuing Directors," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "COMPLIANCE WITH
SECTION 16(a) FILING REQUIREMENTS" of the Company's 2000 Annual Meeting Proxy
Statement (the "Proxy Statement").
ITEM 11 Executive Compensation
- ---------------------------------
The information regarding "Executive Compensation" is incorporated by reference
from the sections entitled "INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS
COMMITTEES--Compensation of Directors," and "EXECUTIVE COMPENSATION" of the
Proxy Statement.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information regarding "Security Ownership of Certain Beneficial Owners and
Management" is incorporated by reference from the sections entitled "PROPOSAL
NO. 1 - ELECTION OF
16
<PAGE>
DIRECTORS--Nominees and Continuing Directors," and "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement.
ITEM 13 Certain Relationships and Related Transactions
- ---------------------------------------------------------
The information regarding "Certain Relationships and Related Transactions" is
incorporated by reference from the section entitled "TRANSACTIONS WITH
MANAGEMENT" of the Proxy Statement.
PART IV
-------
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements
Financial Statements are incorporated by reference to the Bank's Annual Report
to Shareholders for the fiscal year ended December 31, 1999, included as part of
exhibit 13 to this Report.
(a)(2) Financial Statement Schedules
All other schedules to the financial statements required by Regulation S-X are
omitted because they are not applicable, not material, or because the
information is included in the financial statements or related notes
(a)(3) Exhibit Index
Exhibit
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 1992 Incentive Stock Option Plan (1)
10.2 1995 Incentive Stock Option Plan (1)
10.3 1999 Employee Stock Option Plan (1)
10.4 1995 Directors' Stock Option Plan (1)
10.5 1999 Directors' Stock Option Plan (1)
10.6 Form of Executive Severance Agreement (1)
13.1 Selected Financial Data, Management's Discussion and Analysis, and
Audited Financial Statements And Notes from the Company's 1999 Annual
Report to Shareholders
23.1 Accountants Consent of Zirkle Long & Triguiero LLC
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Quarterly Report on 10-Q for the
Quarter ended June 30, 1999.
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned on March 27, 2000.
PACIFIC CONTINENTAL CORPORATION
(Registrant)
By: /s/ J. Bruce Riddle
------------------------------------
J. Bruce Riddle
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 20th day of March, 2000.
Principal Executive Officer
By /s/ J. Bruce Riddle President and Chief Executive Officer
-------------------------------- and Director
J. Bruce Riddle
Principal Financial and Accounting Officer
By /s/ Michael A. Reynolds Vice President and
-------------------------------- Controller
Michael A. Reynolds
Remaining Directors
By /s/ Kevin G. Murphy Director and
-------------------------------- Chairman of the Board
Kevin G. Murphy
<TABLE>
<S> <C> <C> <C>
By /s/ Robert A. Ballin Director By /s/ Donald G. Montgomery Director
-------------------------------- -----------------------------
Robert A. Ballin Donald G. Montgomery
By /s/ Donald A. Bick Director By /s/ James W. Putney Director
-------------------------------- -----------------------------
Donald A. Bick James W. Putney
By /s/ Larry G. Campbell Director By /s/ Ronald F. Taylor Director
-------------------------------- -----------------------------
Larry G. Campbell Ronald F. Taylor
By /s/ Michael Holcomb Director
--------------------------------
Michael Holcomb
</TABLE>
18
<PAGE>
EXHIBIT 13.1
Pacific Continental Corporation
Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
For the year
Net interest income $ 15,981 $ 13,881 $ 12,304 $ 9,974 $ 8,168
Provision for loan losses $ 735 $ 810 $ 730 $ 290 $ 210
Noninterest income $ 4,193 $ 4,056 $ 2,595 $ 2,192 $ 2,117
Noninterest expense $ 10,700 $ 9,369 $ 7,521 $ 6,459 $ 5,416
Income taxes $ 3,364 $ 2,985 $ 2,431 $ 2,074 $ 1,656
Net income $ 5,374 $ 4,773 $ 4,217 $ 3,343 $ 3,004
Cash dividends $ 1,323 $ 1,149 $ 976 $ 863 $ 677
Per common share data (1)
Net income
Basic $ 1.13 $ 1.01 $ 0.95 $ 0.77 $ 0.70
Diluted $ 1.12 $ 0.99 $ 0.92 $ 0.75 $ 0.68
Cash dividends $ 0.28 $ 0.24 $ 0.21 $ 0.20 $ 0.16
Market value, end of year $ 13.00 $ 17.88 $ 15.33 $ 10.00 $ 9.57
At year end
Assets $271,088 $241,944 $200,120 $160,685 $122,843
Loans, less allowance for loan loss $209,533 $185,292 $144,112 $121,994 $ 88,075
Deposits $224,175 $194,329 $167,295 $135,419 $100,863
Shareholders' equity $ 27,111 $ 27,126 $ 21,991 $ 17,230 $ 14,376
Average for the year
Assets $255,271 $214,247 $183,821 $144,959 $112,637
Earning assets $230,303 $193,163 $165,994 $130,573 $100,391
Loans, less allowance for loan loss $195,355 $162,780 $141,050 $110,229 $ 81,683
Deposits $207,224 $172,081 $153,050 $119,791 $ 90,613
Interest paying liabilities $169,054 $140,869 $123,735 $ 96,942 $ 74,755
Shareholders' equity $ 28,173 $ 24,787 $ 19,279 $ 15,968 $ 12,787
Financial ratios
Return on average:
Assets 2.11% 2.23% 2.29% 2.31% 2.67%
Shareholders' equity 19.08% 19.26% 21.87% 20.94% 23.49%
Average shareholders' equity/average assets 11.04% 11.57% 10.49% 11.02% 11.35%
Dividend payout ratio 24.62% 24.07% 22.54% 26.09% 22.92%
Risk based capital:
Tier I capital 12.07% 12.99% 13.81% 12.93% 14.69%
Tier II capital 13.15% 13.98% 14.75% 13.64% 15.52%
</TABLE>
(1) Per common share data is retroactively adjusted to reflect the stock splits
and stock dividends of 1998,1997 and 1996.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Consolidated Financial Statements alone. The discussion should
be read in conjunction with the audited financial statements and the notes
thereto included later in this annual report. All numbers, except per share
data, are expressed in thousands of dollars.
This discussion contains 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.
Holding Company Reorganization. Effective June 7, 1999, Pacific Continental
Bank completed its reorganization and formation of a bank holding company,
Pacific Continental Corporation (the Company). At that time, the Bank ceased
reporting under the Securities Exchange Act of 1934 with the FDIC, 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 income.
HIGHLIGHTS
Pacific Continental Corporation earned $5,374 or $1.13 per share in 1999
compared with $4,773 or $1.01 per share and $4,217 or $0.95 per share in 1998
and 1997, respectively.
At December 31, 1999, total assets were $271,088 an increase of 12% over 1998
year-end total assets of $241,944. Total deposits were $224,175 an increase of
15% over the 1998 total of $194,329. Shareholders' equity decreased to $27,111
in 1999 from $27,126 in 1998. During the last six months of 1999, the Company
repurchased 243,000 shares of stock on the open market. The board of directors
has approved the repurchase of an additional 147,000 shares in 2000.
Return on average assets was 2.11% in the current year, compared to 2.23% in
1998. Return on average equity for 1999 was 19.08% compared to 19.26% for the
previous year.
During 1999 the Company opened its ninth banking office in Tualatin, Oregon
located in the Portland Metropolitan Area. In 1999, the Company received
regulatory approval to open its tenth office to be located on West 11th Avenue
in Eugene, Oregon. The West 11th office is expected to open in the Spring of
2000.
RESULTS OF OPERATIONS
Net Interest Income
The largest component of the Company's earnings is from net interest income.
Net interest income is the difference between interest income derived from
earning assets, principally loans, and the interest expense associated with
interest bearing liabilities, principally deposits.
2
<PAGE>
The volume and mix of earning assets and funding sources, market rates of
interest, demand for loans, and the availability of deposits affect net interest
income.
Two tables follow which analyze the change in net interest income for 1999, 1998
and 1997. Table I, Average Balance, Analysis of Net Interest Earnings, provides
information with regard to average balances of assets and liabilities, as well
as associated dollar amounts of interest income and interest expense, relevant
average yields or rates, and net interest income as a percent of average earning
assets. Table II, Analysis of Changes in Interest Income and Interest Expense,
shows the increase (decrease) in the dollar amount of interest income and
interest expense and the differences attributable to changes in either volume or
rates. Changes not solely due to volume or rate are allocated to volume.
1999 Compared to 1998
Net interest income for 1999 was $15,981, an increase of 15% over 1998 net
interest income of $13,881. For 1999 net interest income, expressed as a
percent of average earning assets, was 6.94%, a decline from 7.19% for the year
1998.
Interest and fees on earning assets increased 14%, or $2,782, to $22,624. This
increase is primarily due to growth in earning assets. Average earning assets
grew $37,140 or 19%. The growth in earning assets was primarily in loans,
$32,575, and securities, $5,123. A decrease in average yield on earning assets
from 10.27% in 1998 to 9.82% in 1999 and a decline in loan fees of $183,
partially offset the gains attributable to increased volume. The decline in
yields, excluding loan fees, reflects the national decline in interest rates
experienced in the first eight months of 1999. The decline in loan fees
resulted from competitive pressures in local markets.
Interest expense on interest bearing liabilities increased 11%, or $682, to
$6,643. The increase in interest expense is primarily attributable to increased
volume of interest bearing liabilities. Money market and NOW accounts, up
$24,306 or 37% accounted for over 80% of the increase in interest expense
related to volume. The growth of these core deposits allowed the Company to
reduce more expensive time deposits and rely less on purchased funds and term
borrowings to fund asset growth. The general decline in interest rates during
the first eight months of 1999 resulted in lower rates paid on interest bearing
liabilities helped offset a portion of the increased expense due to volume. In
particular, the rate paid on savings deposits, time deposits, and federal funds
purchased all show decreases ranging from 0.34% to 0.40%, reflecting the general
decline in national rates through most of 1999.
The Company continues to benefit from funding with noninterest bearing sources.
Average demand deposits increased 21% over 1998. Noninterest bearing
liabilities represent 23% of total assets at December 31, 1999, a percentage
well above peer group banks' ratio of 15%.
1998 Compared to 1997
Net interest income for 1998 was $13,881, an increase of 13% over 1997 net
interest income of $12,304. Interest and fees on earning assets increased 13%
or $2,231 to $19,842. The increase is due primarily to higher volumes of
earning assets, which was partially offset by a decline in yields on earning
assets from 10.61% in 1997 to 10.27% in 1998. Interest expense for 1998 of $654
was up 12% or $5,961. Increased volume of interest bearing liabilities was the
most significant factor in the rise in interest expense. While the general
decline in interest rates in late 1998 limited the increase in interest expense
to some extent, use of higher cost deposit liabilities, term borrowings, and
federal funds purchased prevented costs of interest bearing liabilities to fall
3
<PAGE>
as fast as the yield on earning assets. The overall rate on interest bearing
liabilities fell only 0.06% from 1997, while the yield on earning assets fell
0.34%.
Provision for Possible Loan Losses
Management provides for possible loan losses by maintaining an allowance. The
level of the allowance is determined based upon judgments regarding the size and
nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of non-performing loans, and anticipated
general economic conditions. Additions to the allowance are charged to expense.
Loans are charged against the allowance when management believes the collection
of principal is unlikely.
The provision for loan losses totaled $735 in 1999, $810 in 1998, and $730 in
1997. The allowance for loan loss was $2,448, $2,070 and $1,503 at year-end
1999, 1998, and 1997, respectively. The provision for loan losses for 1999, 1998
and 1997 and the resulting increase in the allowance reflects growth in the loan
portfolio and an increase in the level of nonperforming assets at year-end
December 31, 1999.
Nonperforming assets, which includes nonaccrual loans, loans 90 days past due
and still accruing interest, and other real estate owned, were $2,011, $1,120,
and $793 at years ended 1999, 1998 and 1997, respectively. The December 31,
1999, nonperforming assets include $160 of government guaranteed loans and $345
of loans secured by cash deposits. At years ended 1998 and 1997, nonperforming
assets include $94 and $0 of guaranteed government loans. As a percent of
outstanding loans (excluding loans held for sale), the allowance for loan loss
was 1.17% at the end of 1999. This compares to 1.15% and 1.08% at year-end 1998
and 1997. For the years 1999, 1998 and 1997 net loan charge-offs were $357,
$244, and $175, respectively.
Noninterest Income
Noninterest income is income derived from sources other than fees and interest
on earning assets. The Company's primary sources of noninterest income are
service charge fees on deposit accounts, merchant bankcard activity, income
derived from mortgage banking services, and gains on the sale of loans.
1999 Compared to 1998
In 1999, noninterest income was $4,193, up 3% over 1998 income of $4,056. For
1999, noninterest income accounted for 21% of total operating revenue, compared
to 22% and 17% in 1998 and 1997, respectively. Several categories showed
significant growth during the year, which was offset by declines in mortgage
banking revenue and gains on the sales of loans. Service charges on deposit
accounts grew by $158 or 19% due to growth in the number of accounts and
increased fees. Merchant bankcard activities generated $1,369 in revenues, up
$217 or 26%. As a result of the sale and participation of loans in late 1998,
loan servicing fees grew by $105, from $355 in 1998 to $460 in 1999. The growth
in these categories was significantly offset by a decline of $192 or 36% in
mortgage banking income and a decline of $307 or 30% in the gains on sales of
loans. The mortgage banking operation was slowed in 1999 by higher interest
rates, a drop in the level of refinancing, and a downsizing of the operation.
In previous years, the Company routinely sold, at significant gains, guaranteed
government Small Business Administration (SBA) loans. In 1999, the deposit
growth was more than sufficient to fund asset growth, thus the Company was able
to retain loan assets thereby reducing gains on the sales of loans.
4
<PAGE>
1998 Compared to 1997
In 1998, noninterest income totaled $4,056 an increase of 56% over 1997
noninterest income of $2,595. Several categories showed significant growth
during the year. Revenue from merchant bankcard activities increased 47% to
$1,050, primarily due to an increase in marketing efforts. Gains from sales of
mortgage and government guaranteed loans more than doubled in 1998 over 1997.
Both mortgage origination and government guaranteed lending through the SBA
showed significant volume increases. In conjunction with loan sales, loan-
servicing fees also increased significantly growing 32% to a 1998 total of $355.
During 1998, the Company also saw an increase in mortgage activities reflecting
the favorable mortgage interest rate environment and the increase in consumer
refinancing.
Noninterest Expense
Noninterest expense represents all expenses other than interest costs associated
with deposits and other interest bearing liabilities. It incorporates
personnel, premises and equipment, data processing and other operating expenses.
1999 Compared to 1998
For 1999, noninterest expense increased $1,331 or 14% over 1998. Total
personnel expense, which accounts for 53% of total noninterest expense, was up
$636 or 13%. Premises and equipment expense was up $148 or 12% over the
previous year. The full year effect of the new Springfield, Oregon office,
which opened in September 1998 and the opening of the Tualatin, Oregon office in
June 1999 created additions to staff and occupancy costs. In addition, the
Company commenced lease payments on its new West 11th Avenue location in Eugene,
Oregon in September 1999. This office is scheduled to open in the Spring of
2000. Growth in the merchant bankcard processing operation increased processing
expenses by $311 or 38%. An increase in the number of merchants and
corresponding volumes, combined with increased fees from the Company's outside
processor were responsible for the increased expense.
1998 Compared to 1997
For 1998, noninterest expense increased $1,848 or 25%. Salaries and employee
benefits accounted for the largest increase growing 24% for the year. The
addition of staff at the Beaverton office throughout the year and the staffing
of the new Springfield location during the 3rd Quarter 1998 contributed to the
increase. Expenses associated with the processing of merchant bankcard activity
increased 43%. This increase was due to the substantial increase in volume and
processing fee increases received from VISA and MasterCard. During 1998 the
Company completed a large portion of its year 2000 preparation which added
approximately $150 to noninterest expense.
LIQUIDITY
Liquidity is the term used to define the Company's ability to meet its financial
commitments. The Company maintains sufficient liquidity to ensure funds are
available for both lending needs and the withdrawal of deposit funds. The
Company derives liquidity primarily through core deposit growth, maturity of
investment securities and loan payments. Core deposits include demand, interest
checking, money market, savings, and local time deposits. Additional liquidity
5
<PAGE>
is provided through the sale of loans, access to national CD markets, and both
secured and unsecured borrowings.
In 1999, the Company experienced strong growth in core deposits. Core deposits
at December 31, 1999 represent 90% of total deposits as compared to 85% at year-
end 1998. Year-end 1999 core deposits are up 23% or $37,498 over last year.
This has resulted in less reliance on funding from the national CD markets and
public deposits. It has also reduced the need for the sale of government
guaranteed loans and other commercial loans for reasons of liquidity in 1999.
Overnight-unsecured borrowing lines have been established at various
correspondent banks with a December 31, 1999 capacity of $27,500. At year-end,
the Bank had $1,800 in borrowings outstanding from correspondent banks leaving
$25,700 available. In addition, the Bank is a member of the Federal Home Loan
Bank of Seattle (FHLB). The FHLB provides secured borrowings using a blanket
pledge of various Bank assets. The Bank uses the FHLB borrowing line for both
term advances and overnight borrowings. The Bank's FHLB borrowing limit,
subject to sufficient collateral and stock investment, is 15% of the Bank's
December 31, 1998 assets, or $36,300. At December 31, 1999, the Bank had
$13,000 in term advances outstanding and $4,000 in overnight borrowings
outstanding leaving $19,300 available for overnight borrowing or additional term
advances. In total, at year-end December 31, 1999, the Bank had $63,800 in
overnight borrowing capacity with $45,000 in unused borrowing capacity.
YEAR 2000
The Year 2000 or Y2K problem is a result of the inability of computer software
programs to recognize the year 2000, as most programs and systems were designed
to store calendar years in the 1900s by assuming the "19" and storing only the
last two digits of the year. As the Company has reported in the past, it has
spent considerable effort in preparing for Y2K in the period leading up to
January 1, 2000.
The Company has not experienced any significant Y2K problems and has not been
informed of any material Y2K problems by its customers or vendors. However,
although January 1, 2000 is past, it is possible that some problems have gone
undetected, or that other dates in the future may further affect computer
software and systems, or equipment with embedded chip technology.
The Company will continue to monitor the Y2K compliance of its own computer
systems and equipment with embedded technology, as well as any Y2K related
problems that may be reported to it by third parties with whom it does business.
As discussed in the Company's Form 10-Q for the fiscal quarter ended September
30, 1999, the estimated costs of remediation associated with the Y2K issue were
$220. The Company believes, based on its review of such costs to February 22,
2000, that total remediation costs will not be materially higher than the amount
previously estimated. However, as noted above, it is possible that additional
costs will be incurred in connection with Y2K problems that may still occur in
the future.
The discussion above regarding the Company's Y2K status includes certain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PLSRA"). The Company desires to take
advantage of the "safe harbor" provisions of the PLSRA as they apply to forward-
looking statements. The Company's ability to predict the results of future
plans is inherently uncertain, and is subject to factors that may cause actual
results to differ materially from those projected. Factors that could affect
the actual results
6
<PAGE>
include the possibility that systems modifications will not operate as intended,
and that the Company or its significant customers or vendors have not yet
detected Y2K problems that have arisen or will arise in the future.
CAPITAL RESOURCES
Capital is the shareholder's investment in the Company. Capital grows through
the retention of earnings and the issuance of new stock through the exercise of
incentive options. Capital formation allows the Company to grow assets and
provides flexibility in times of adversity.
Banking regulations require the Company to maintain minimum levels of capital.
The Company manages its capital to maintain a "well capitalized" designation
(the FDIC's highest rating). At December 31, 1999, the Company's total capital
to risk weighted assets was 13.15%, compared to 13.98% at December 31, 1998.
In June 1999, the Company announced plans to buy back up to 240,000 shares on
the open market. In December 1999, the Company announced plans to purchase up
to an additional 150,000 shares. Through December 31, 1999, the Company had
purchased 243,000 of its own shares on the open market at an average price per
share of $15.70, leaving 147,000 shares still authorized to be repurchased.
The Company pays semi-annual cash dividends, usually in June and December, with
payments representing approximately 25% of the previous six month's earnings.
During 1999 the Company paid cash dividends of $1,323, an increase of 15% over
1998 cash dividends of $1,149.
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth and the stock repurchase plan, while
maintaining a well-capitalized designation from the FDIC.
INFLATION
Substantially all of the assets and liabilities of the Company are monetary.
Therefore, inflation has a less significant impact on the Company than does
fluctuation in market interest rates. Inflation can lead to accelerated growth
in noninterest expenses, which impacts net earnings. During the last two years
inflation, as measured by the Consumer Price Index, has not changed
significantly. The effects of this inflation have not had a material impact on
the Company.
MARKET RISK AND BALANCE SHEET MANAGEMENT
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. The Company does
not use derivatives such as forward and futures contracts, options, or interest
rate swaps to manage interest rate risk. 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.
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
7
<PAGE>
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.
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 changes in interest
rates have on net interest income. Interest rate shock scenarios are modeled in
1 percent increments (plus or minus) 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 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. Evaluations of the forecasting model at December 31,
1999 indicate the Company is well within the established guidelines.
The following tables show the estimated impact of interest rate changes on net
interest income. Tables depict software results of Company supplied data for
both the rate shock and gradual interest rate scenarios. The base figure of
$15,981 used in both analyses represents actual net interest income for the year
1999. Due to the various assumptions used for this modeling, no assurance can be
given that projections will reflect actual results.
8
<PAGE>
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 17,034 1,053 6.59%
+100 16,500 519 3.25%
Base 15,981 0 0.00%
-100 15,498 (483) -3.02%
-200 15,231 (750) -4.69%
- -------------------------------------------------------------------------
</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% 16,051 70 0.44%
Base 15,981 0 0.00%
Declining 2.40% 15,697 (284) -1.78%
- --------------------------------------------------------------------------
</TABLE>
FORM 10-K
A copy of the Company's annual report of Form 10-K which is filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
available to shareholders, at no charge, upon written request to: Pacific
Continental Bank, PO Box 10727, Eugene, OR 97440-2727.
9
<PAGE>
Table I
Average Balance Analysis of Net Interest Earnings
$ Thousands
<TABLE>
<CAPTION>
1999 1998
-------- --------
Average Interest Average Average Interest Average
Balance Income/(Expense Yield/(Cost) Balance Income/(Expense Yield/(Cost)
-------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal funds sold and interest
bearing deposits in banks $ 604 $ 37 6.15% $ 1,072 $ 55 5.13%
Securities available for sale:
Taxable (1) $ 34,344 $ 2,195 6.39% $ 29,221 $ 1,818 6.22%
Tax-exempt (2) $ 0 $ 0 0.00% $ 90 $ 4 4.13%
Loans, net of allowance for loan $195,355 $ 20,392 10.44% $162,780 $ 17,965 11.04%
losses(3)(4)(5) -------- -------- -------- --------
Total interest earning assets $230,303 $ 22,624 9.82% $193,163 $ 19,842 10.27%
Non Interest Assets
Cash and due from banks $ 11,524 $ 10,004
Premises and equipment $ 11,087 $ 9,092
Interest receivable and other $ 2,357 $ 1,988
-------- --------
Total non interest assets $ 24,968 $ 21,084
Total assets $255,271 $214,247
Interest Bearing Liabilities
Money market and NOW accounts $ 90,655 ($2,852) -3.15% $ 66,349 ($2,084) -3.14%
Savings deposits $ 11,324 ($303) -2.68% $ 8,633 ($261) -3.02%
Time deposits $ 48,944 ($2,501) -5.11% $ 50,388 ($2,742) -5.44%
Federal funds purchased $ 7,786 ($412) -5.29% $ 6,274 ($357) -5.69%
Term borrowings $ 10,345 ($575) -5.56% $ 9,225 ($517) -5.60%
-------- -------- -------- --------
Total interest bearing liabilities $169,054 ($6,643) -3.93% $140,869 ($5,961) -4.23%
Non Interest Bearing Liabilities
Demand deposits $ 56,301 $ 46,711
Interest payable and other $ 1,743 $ 1,880
-------- --------
Total non interest liabilities $ 58,044 $ 48,591
-------- --------
Total liabilities $227,098 $189,460
Stockholders' equity $ 28,173 $ 24,787
-------- --------
Total liabilities and stockholders $255,271 $214,247
equity
Net Interest Income $ 15,981 $ 13,881
Net Interest Income as a Percent of Earning 6.94% 7.19%
Assets
<CAPTION>
1997
--------
Average Interest Average
Balance Income/(Expense Yield/(Cost)
-------- --------------- -----------
Interest Earning Assets
Federal funds sold and interest
bearing deposits in banks $ 2,481 $ 130 5.24%
Securities available for sale:
Taxable (1) $ 22,032 $ 1,425 6.47%
Tax-exempt (2) $ 431 $ 15 3.48%
Loans, net of allowance for loan $141,050 $ 16,041 11.37%
losses(3)(4)(5) -------- --------
Total interest earning assets $165,994 $ 17,611 10.61%
Non Interest Assets
Cash and due from banks $ 8,738
Premises and equipment $ 7,418
Interest receivable and other $ 1,672
--------
Total non interest assets $ 17,828
Total assets $183,822
Interest Bearing Liabilities
Money market and NOW accounts $ 61,329 ($1,978) -3.23%
Savings deposits $ 7,105 ($238) -3.35%
Time deposits $ 44,900 ($2,538) -5.65%
Federal funds purchased $ 2,439 ($138) -5.66%
Term borrowings $ 7,962 ($415) -5.21%
-------- --------
Total interest bearing liabilities $123,735 ($5,307) -4.29%
Non Interest Bearing Liabilities
Demand deposits $ 39,716
Interest payable and other $ 1,092
--------
Total non interest liabilities $ 40,808
--------
Total liabilities $164,543
Stockholders' equity $ 19,279
--------
Total liabilities and stockholders $183,822
equity
Net Interest Income $ 12,304
Net Interest Income as a Percent of Earning 7.41%
Assets
</TABLE>
10
<PAGE>
NOTES TO TABLE 1
1. Federal Home Loan Bank stock is included in securities available for sale.
2. Interest income does not include a taxable equivalent adjustment.
3. Nonaccrual loans are included in average balance totals.
4. Interest income includes recognized loan origination fees of $954, $1,137,
and $1,120 for the years ended 1999, 1998, and 1997, respectively.
5. Total includes loans held for sale.
11
<PAGE>
Table II
Analysis of Changes in Interest Income and Interest Expense
$ Thousands
<TABLE>
<CAPTION>
1999 compared to 1998 1998 compared to 1997
Increase (decrease) due to Increase (decrease) due to
--------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------------- -------- ------ ---------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold and interest
bearing deposits in banks ($24) $ 6 ($18) ($74) ($1) ($75)
Securities available for sale:
Taxable $ 319 $ 58 $ 377 $ 465 ($72) $ 393
Tax-exempt ($4) $ 0 ($4) ($12) $ 1 ($11)
Loans, net of allowance for loan losses $3,595 ($1,168) $2,427 $2,471 ($547) $1,924
------ -------- ------ ------ ------ ------
Total interest income $3,886 ($1,104) $2,783 $2,851 ($620) $2,231
Interest paid on:
Money market and NOW accounts ($763) ($4) ($768) ($162) $ 56 ($106)
Savings deposits ($81) $ 39 ($42) ($51) $ 28 ($23)
Time deposits $ 79 $ 163 $ 241 ($310) $ 106 ($204)
Federal funds purchased ($86) $ 31 ($55) ($217) ($2) ($219)
Term borrowings ($63) $ 5 ($58) ($66) ($36) ($102)
Total interest expense ($915) $ 233 ($682) ($806) $ 152 ($654)
------ -------- ------ ------ ------ ------
Net interest income $2,971 ($870) $2,101 $2,044 ($468) $1,577
</TABLE>
12
<PAGE>
Pacific Continental Corporation and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
ZIRKLE, LONG & TRIGUEIRO, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
Pacific Continental Corporation and Subsidiaries
<PAGE>
C O N T E N T S
- --------------------------------------------------------------------------------
Page
----
Independent Auditors' Report 2
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
<PAGE>
ZIRKLE, LONG & TRIGUEIRO, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditors' Report
The Board of Directors and Stockholders
Pacific Continental Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Continental Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Continental Corporation
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Eugene, Oregon
February 1, 2000
<PAGE>
Pacific Continental Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,269,481 $ 10,634,832
Federal funds sold 682,565 354,809
------------------- -------------------
Total cash and cash equivalents 9,952,046 10,989,641
Securities available-for-sale 34,849,960 31,130,053
Loans held for sale 2,767,274 6,996,494
Loans, less allowance for loan losses 206,765,352 178,295,561
Interest receivable 1,552,894 1,308,758
Federal Home Loan Bank stock 2,155,500 2,003,900
Property, net of accumulated depreciation 11,763,770 10,716,420
Deferred income taxes 594,183 92,579
Other assets 686,910 410,352
------------------- -------------------
Total assets $271,087,889 $241,943,758
=================== ===================
LIABILITIES and STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 62,531,496 $ 56,556,255
Savings and interest-bearing demand 108,757,023 81,089,456
Time, $100,000 and over 27,568,215 24,977,941
Other time 25,318,034 31,705,171
------------------- -------------------
224,174,768 194,328,823
Federal funds purchased 5,800,000 8,600,000
Federal Home Loan Bank term borrowings 13,000,000 11,000,000
Accrued interest and other liabilities 1,001,802 889,285
------------------- -------------------
Total liabilities 243,976,570 214,818,108
------------------- -------------------
Stockholders' equity:
Common stock, $1 par value; 10,000,000 shares
authorized; 4,595,622 and 4,803,053 shares
outstanding in 1999 and 1998, respectively 4,595,622 4,803,053
Surplus 14,134,993 14,572,528
Retained earnings 8,874,307 7,657,712
Accumulated other comprehensive income (loss) (493,603) 92,357
------------------- -------------------
Total stockholders' equity 27,111,319 27,125,650
------------------- -------------------
Total liabilities and stockholders' equity $271,087,889 $241,943,758
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans $ 20,392,668 $ 17,951,609 $ 16,041,382
Securities 2,041,920 1,674,387 1,303,844
Dividends on Federal Home Loan Bank stock 151,881 146,929 136,230
Federal funds sold 37,170 69,088 129,580
---------------- ---------------- ----------------
22,623,639 19,842,013 17,611,036
---------------- ---------------- ----------------
Interest expense:
Deposits 5,655,472 5,148,415 4,753,881
Federal Home Loan Bank borrowings 575,209 517,157 415,048
Federal funds purchased 412,257 295,049 137,709
---------------- ---------------- ----------------
6,642,938 5,960,621 5,306,638
---------------- ---------------- ----------------
Net interest income 15,980,701 13,881,392 12,304,398
Provision for loan losses 735,000 810,000 730,000
---------------- ---------------- ----------------
Net interest income after provision for
loan losses 15,245,701 13,071,392 11,574,398
---------------- ---------------- ----------------
Noninterest income:
Service charges on deposit accounts 977,151 818,932 690,262
Other fee income, principally bankcard processing 1,505,863 1,160,458 814,196
Loan servicing 459,606 355,185 268,509
Mortgage banking income and gains on sales
of loans 1,026,466 1,525,263 717,537
Gains (losses) on sales of securities 30,490 6,146 (18,985)
Other 193,017 189,965 123,287
---------------- ---------------- ----------------
4,192,593 4,055,949 2,594,806
---------------- ---------------- ----------------
Noninterest expense:
Salaries and employee benefits 5,638,406 5,002,377 4,032,148
Premises and equipment 1,353,447 1,205,330 1,025,578
Bankcard processing 1,119,924 808,766 566,683
Business development 755,928 688,024 537,777
Other 1,832,722 1,664,980 1,358,984
---------------- ---------------- ----------------
10,700,427 9,369,477 7,521,170
---------------- ---------------- ----------------
Income before income taxes 8,737,867 7,757,864 6,648,034
Provision for income taxes 3,364,000 2,985,000 2,431,000
---------------- ---------------- ----------------
Net income $ 5,373,867 $ 4,772,864 $ 4,217,034
================ ================ ================
Earnings per share:
Basic $ 1.13 $ 1.01 $ .95
Diluted $ 1.12 $ .99 $ .92
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Changes Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Number Common Retained Comprehensive
of Shares Stock Surplus Earnings Income (Loss) Total
------------ ------------- -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,344,506 $2,344,506 $12,094,035 $2,792,539 $ (789) $17,230,291
---------------- --------------
Net income 4,217,034 4,217,034
Other comprehensive income:
Unrealized gains on
investment securities 26,529
Reclassification of losses
realized 18,985
Deferred income taxes (17,458)
-------------- -------------
Other comprehensive
income 28,056 28,056
-------------- -------------
Comprehensive income 4,245,090
Stock options exercised and
related tax benefits 33,726 33,726 438,765 472,491
Stock split (5 shares for 4) 593,100 593,100 (593,100) -
Shares issued in correction
of previous grants of stock
options and related tax
benefit (Note 12) 93,156 93,156 402,086 495,242
Cash dividends (976,214) (976,214)
Dividends reinvested 28,772 28,772 495,762 524,534
Transfer from retained
earnings to surplus 2,000,000 (2,000,000) -
------------ ------------- -------------- ------------- ------------
Balance, December 31, 1997 3,093,260 3,093,260 14,837,548 4,033,359 27,267 21,991,434
------------- ------------
Net income 4,772,864 4,772,864
Other comprehensive income:
Unrealized gains on
investment securities 111,742
Reclassification of
gains realized (6,146)
Deferred income taxes (40,506)
-------------
Other comprehensive income 65,090 65,090
------------- -----------
Comprehensive income 4,837,954
Stock options exercised and
related tax benefits 148,779 148,779 1,053,986 1,202,765
Stock split (3 shares for 2) 1,549,894 1,549,894 (1,549,894) -
Cash dividends (1,148,511) (1,148,511)
Dividends reinvested 11,556 11,556 238,516 250,072
Fractional shares
repurchased and retired (436) (436) (7,628) (8,064)
----------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 4,803,053 4,803,053 14,572,528 7,657,712 92,357 27,125,650
----------- -----------
Net income 5,373,867 5,373,867
Other comprehensive income
(loss):
Unrealized losses
on securities (920,074)
Reclassification of gains
realized (30,490)
Deferred income taxes 364,604
------------
Other comprehensive loss (585,960) (585,960)
------------ -----------
Comprehensive income 4,787,907
Stock options exercised and
related tax benefit 35,902 35,902 305,847 341,749
Cash dividends (1,323,255) (1,323,255)
Shares repurchased and retired (243,333) (243,333) (743,382) (2,834,017) (3,820,732)
----------- ----------- ------------ ------------ ------------
Balance, December 31, 1999 4,595,622 $4,595,622 $14,134,993 $ 8,874,307 $ (493,603) $27,111,319
------------ ----------- ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,373,867 $ 4,772,864 $ 4,217,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 780,647 621,111 548,609
Amortization 112,560 259,796 96,178
Provision for loan losses 735,000 810,000 730,000
Deferred income taxes (137,000) (122,000) (121,000)
Origination of loans for sale (23,140,515) (39,857,910) (21,172,091)
Proceeds from sales of loans 27,387,185 39,304,528 18,117,711
Gains on sales of loans (636,520) (801,801) (408,038)
(Gains) losses on sale of securities (30,490) (6,146) 18,985
Stock dividends from Federal Home Loan Bank (151,600) (146,600) (136,000)
Change in:
Interest receivable (244,136) (126,439) (162,459)
Deferred loan fees 30,471 (37,976) 130,128
Capitalized loan servicing rights (126,573) (67,739) (2,166)
Accrued interest and other liabilities 232,248 38,271 139,837
Income taxes payable (76,731) 678,158 603,242
Other assets (149,985) 184,591 (274,356)
-------------- -------------- --------------
Net cash provided by operating activities 9,958,428 5,502,708 2,325,614
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sales and maturities of securities 16,266,537 18,625,628 17,194,926
Purchase of securities (21,019,078) (19,526,404) (29,946,603)
Loans made net of principal collections received (32,364,336) (46,061,559) (31,290,418)
Proceeds from sales of loans 3,748,144 10,141,574 12,793,948
Purchase of loans - (4,676,657) (1,107,500)
Purchase of property (1,827,997) (3,701,532) (794,435)
-------------- -------------- --------------
Net cash used in investing activities (35,196,730) (45,198,950) (33,150,082)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in deposits 29,845,945 27,033,705 31,876,190
Change in federal funds purchased (2,800,000) 1,450,000 6,750,000
Change in Federal Home Loan Bank term borrowings 2,000,000 8,000,000 (4,000,000)
Proceeds from stock options exercised 298,749 855,774 366,491
Dividends paid, net of reinvested in 1998 and 1997 (1,323,255) (898,439) (451,680)
Repurchase of shares (3,820,732) (8,064) -
-------------- -------------- --------------
Net cash provided by financing activities 24,200,707 36,432,976 34,541,001
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (1,037,595) (3,263,266) 3,716,533
Cash and cash equivalents, beginning of year 10,989,641 14,252,907 10,536,374
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 9,952,046 $ 10,989,641 $ 14,252,907
============== ============== ==============
Supplemental information:
Noncash investing and financing activities:
Dividends reinvested $ - $ 250,072 $ 524,534
Change in unrealized gain on securities, net of
deferred income taxes 585,960 65,090 28,056
Cash paid during the year for:
Income taxes 3,577,732 2,428,840 1,864,000
Interest 6,644,367 5,987,928 5,219,026
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Principles of Consolidation -- The consolidated financial statements
include the accounts of Pacific Continental Corporation ("Company"), a
bank holding company formed in 1999, and its wholly-owned subsidiary,
Pacific Continental Bank (the "Bank") and the Bank's wholly-owned
subsidiaries, PCB Service Corporation (which owns and operates bank-
related real estate) and PCB Loan Services Corporation (which owns and
operates certain repossessed or foreclosed collateral -- inactive in
1999). The Bank provides commercial banking, financing, mortgage lending
and other services in Western Oregon. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents -- For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from or deposited
with banks, interest-bearing balances due from banks, and federal funds
sold. Generally, federal funds are sold for one-day periods.
The Bank is required to maintain certain reserves as defined by
regulation. Such reserves were maintained in cash at December 31, 1999.
Securities Available-for-Sale -- Securities available-for-sale are held
for indefinite periods of time and may be sold in response to movements in
market interest rates, changes in the maturity mix of bank assets and
liabilities or demand on liquidity. The Bank classified all securities as
available-for-sale throughout 1999 and 1998. Securities classified as
available-for-sale are reported at estimated fair value, net of deferred
taxes. The difference between estimated fair value and amortized cost is a
separate component of stockholders' equity (accumulated other
comprehensive income). Management determines the appropriate
classification of securities at the time of purchase.
Interest income on debt securities is included in income using the level
yield method. Gains and losses on sales of securities are recognized on
the specific identification basis.
7
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Loans Held for Sale and Mortgage Banking Activities -- The Bank originates
residential real estate loans for resale in the secondary market. The Bank
also originates government guaranteed loans, a portion of which are held
for sale. Sales are without recourse. Loans held for sale are carried at
the lower of cost or market.
Loans and Income Recognition -- Loans are stated at the amount of unpaid
principal, reduced by deferred loan origination fees, discounts associated
with retained portions of loans sold, and an allowance for loan losses.
Interest on loans is calculated using the simple-interest method on daily
balances of the principal amount outstanding. Accrual of interest is
discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of the interest is
doubtful. Loan origination fees are amortized over the lives of the loans
as adjustments to yield.
Allowance for Loan Losses -- The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount
that management considers adequate to absorb possible losses on existing
loans that may become uncollectible based on evaluations of the
collectibility of loans and prior loss experience. The evaluations take
into consideration such factors as changes in the nature of the loan
portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrower's ability to
pay.
Servicing -- Servicing assets are recognized as separate assets when
rights are acquired through sale of loans. Capitalized servicing rights
are reported in other assets and are amortized into noninterest income in
proportion to, and over the period of, the estimated future net servicing
income of the underlying loans. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to
amortized cost. Fair value is determined based upon discounted cash flows
using market-based assumptions.
Federal Home Loan Bank Stock -- The Bank's investment in Federal Home Loan
Bank ("FHLB") stock is carried at par value, which approximates its fair
value. As a member of the FHLB system, the Bank is required to maintain a
minimum level of investment in FHLB stock based on specific percentages of
its outstanding mortgages, total assets or FHLB advances. For 1999, the
Bank's minimum required investment was $725,000. The Bank may request
redemption at par value of any stock in excess of the amount the Bank is
required to hold. Stock redemptions are at the discretion of the FHLB.
8
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Property -- Property is stated at cost, net of accumulated depreciation.
Additions, betterments and replacements of major units are capitalized.
Expenditures for normal maintenance, repairs and replacements of minor
units are charged to expense as incurred. Gains or losses realized from
sales or retirements are reflected in operations currently.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
calculated using tax rates in effect for the year in which the differences
are expected to reverse.
Stockholders' Equity and Earnings Per Share -- Basic earnings per share
are computed on the basis of the weighted average number of shares
outstanding. Diluted earnings per share include the effect of common stock
equivalents that would arise from the exercise of stock options discussed
in Note 12. Weighted shares outstanding are adjusted retroactively for the
effect of stock splits and stock dividends.
Weighted average shares outstanding at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Basic 4,748,868 4,739,919 4,453,758
Common stock equivalents
attributable to stock options 45,056 80,095 118,121
---------------- ---------------- ----------------
Diluted 4,793,924 4,820,014 4,571,879
---------------- ---------------- ----------------
</TABLE>
During 1999, the Company repurchased and retired 243,000 shares of common
stock costing $3,821,000. The Company has also approved the repurchase of
up to 147,000 additional shares during 2000.
Financial Accounting Standards Board ("FASB") -- In June 1998, FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial condition
and measure those instruments at fair value. The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. SFAS No. 133
is effective in 2001. The Bank has no derivative instruments at December
31, 1999.
9
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
In October 1998, FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise. This Statement requires that after
securitization of mortgage loans for sale, any retained mortgage-backed
securities be classified in accordance with the provisions of SFAS No.115,
Accounting for Investments in Debt and Equity Securities. SFAS No. 134 is
effective in 1999. The Bank did not engage in securitization of mortgage
loans during 1999 or 1998.
Reclassifications -- The 1998 and 1997 figures have been reclassified where
appropriate to conform with the financial statement presentation used in
1999. These reclassifications had no effect on previously reported net
income.
2. Securities Available-for-Sale:
The amortized cost and estimated market values of securities available-for-
sale at December 31 are as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government agencies $ 3,920,245 $ - $ 63,583 $ 3,856,662
Obligations of states and political
subdivisions (taxable) 906,400 537 - 906,937
Corporate notes 2,014,694 - 4,294 2,010,400
Mortgage-backed securities 28,809,353 - 733,392 28,075,961
--------------- -------------- -------------- ---------------
$35,650,692 $ 537 $801,269 $34,849,960
=============== ============== ============== ===============
1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government agencies $ 1,850,125 $ - $ 1,805 $ 1,848,320
Obligations of states and political
subdivisions (taxable) 925,556 - 4,900 921,193
Mortgage-backed securities 28,204,540 243,350 86,813 28,361,077
--------------- -------------- -------------- ---------------
$30,980,221 $243,350 $ 93,518 $31,130,590
=============== ============== ============== ===============
</TABLE>
10
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Securities Available-for-Sale, Continued:
The amortized cost and estimated market value of securities at December 31,
by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due after one year through 5 years 4,965,135 4,911,599 - -
Due after 5 years through 15 years 1,876,204 1,862,400 2,775,681 2,768,976
Mortgage-backed securities 28,809,353 28,075,961 28,204,540 28,361,077
--------------- -------------- -------------- ---------------
$35,650,692 $34,849,960 $30,980,221 $31,130,053
=============== ============== ============== ===============
</TABLE>
Gross realized gains on sales of securities were $30,490 in 1999. Gross
realized gains and losses were $7,716 and $1,570, respectively, in 1998;
and $10,211 and $29,196, respectively, in 1997.
At December 31, 1999, mortgage-backed securities with amortized costs of
$4,961,143 (estimated market values of $4,864,748) were pledged to secure
certain Treasury and public deposits as required by law.
11
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. Loans:
Major classifications of loans at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Commercial loans $ 56,485,265 $ 50,847,412
Real estate loans 144,868,751 123,426,554
Consumer loans 8,984,009 7,185,511
------------------ ------------------
210,338,025 181,459,477
Deferred loan origination fees (1,124,773) (1,094,302)
------------------ ------------------
209,213,252 180,365,175
Allowance for loan losses (2,447,900) (2,069,614)
------------------ ------------------
$206,765,352 $178,295,561
================== ==================
</TABLE>
Scheduled maturities or repricing of loans at December 31, 1999 are as
follows:
Three months or less $ 96,748,312
Three months to one year 3,856,957
One year to three years 34,023,684
Three years to five years 70,914,836
Thereafter 4,794,236
------------------
$210,338,025
------------------
Allowance for Loan Losses:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Balance, beginning of year $ 2,069,614 $ 1,503,870
Provision charged to income 735,000 810,000
Loans charged against the allowance (376,706) (312,939)
Recoveries credited to allowance 19,992 68,683
------------------ ------------------
Balance, end of year $ 2,447,900 $ 2,069,614
------------------ ------------------
</TABLE>
12
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. Loans, Continued:
There were no loans outstanding at December 31, 1999 or 1998 that were
impaired or modified as to the original agreement to more favorable terms.
Loans on nonaccrual status were $1,422,344 and $872,771 at December 31,
1999 and 1998, respectively. Interest income which would have been
realized on nonaccrual loans if they had remained current was
approximately $102,000 and $67,000 during 1999 and 1998, respectively.
Loans contractually past due 90 days or more on which interest was still
accruing totaled $464,003 and $246,730 at December 31, 1999 and 1998,
respectively.
A substantial portion of the Bank's loan portfolio is collateralized by
real estate and is, therefore, susceptible to changes in local market
conditions. Management believes that the loan portfolio is diversified
among industry groups and does not contain a direct concentration of loans
in a single industry (other than the construction industry) which exceeds
10% of the portfolio. It is management's opinion that the allowance for
loan losses is adequate to absorb known and inherent risks in the loan
portfolio. However, actual results may differ from estimates.
4. Servicing:
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of serviced
loans at December 31, 1999 and 1998 were $39,071,356 and $40,728,630,
respectively.
The balance of capitalized loan servicing rights, net of valuation
allowances, included in other assets was $284,344 and $157,770 at December
31, 1999 and 1998, respectively.
5. Foreclosed Assets:
Foreclosed real estate of $125,000 at December 31, 1999 is included in
other assets and recorded at fair value less estimated selling costs.
13
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. Property:
Property at December 31 consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Land $ 1,662,107 $ 1,659,632
Buildings and improvements 9,723,385 8,393,333
Furniture and equipment 3,772,375 3,276,905
------------------ -----------------
15,157,867 13,329,870
Less accumulated depreciation 3,394,097 2,613,450
------------------ -----------------
$11,763,770 $10,716,420
================== =================
</TABLE>
During 1998 and 1999, the Springfield Gateway office building was
constructed. The three-story office building has approximately 31,000
square feet, of which the Bank occupies 5,500 square feet and leases the
remainder.
The Bank will construct a branch office in West Eugene during the first
half of 2000. Construction costs are projected to be $600,000.
Lease Commitments -- The Bank leases certain facilities for office
locations under noncancelable operating lease agreements expiring through
2020. Rent expense totaled $186,149, $111,388 and $102,744 in 1999, 1998
and 1997, respectively, related to these leases.
Property Leased to Others -- The Bank leases a portion of its Gateway
building to others under noncancelable operating lease agreements extending
through 2005.
Future minimum payments required under these leases are:
<TABLE>
<CAPTION>
Property
Lease Leased
Commitments to Others
------------------ -----------------
<S> <C> <C>
2000 $ 218,383 $ 272,495
2001 215,963 310,326
2002 215,963 314,234
2003 221,963 321,888
2004 218,733 226,704
Thereafter 1,469,562 24,957
------------------ -----------------
$2,560,567 $1,470,604
================== =================
</TABLE>
14
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
7. Deposits:
Scheduled maturities or repricing of time deposits at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Less than three months $21,005,239 $26,400,801
Three months to one year 26,657,362 24,205,007
One to three years 4,306,405 5,465,752
Thereafter 917,243 611,552
</TABLE>
8. Federal Funds Purchased:
Federal funds purchased consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
FHLB overnight borrowings $ 4,000,000 $ -
Federal funds purchased from correspondent banks 1,800,000 8,600,000
----------------- -----------------
$ 5,800,000 $ 8,600,000
----------------- -----------------
</TABLE>
Excel Schedule
The Bank maintains uncollateralized federal funds borrowing lines with
correspondent banks totaling $27,500,000 ($25,700,000 available at December
31, 1999).
The Bank has a borrowing limit with the FHLB totaling $36,300,000
($19,300,000 available at December 31, 1999). FHLB stock, funds on deposit
with FHLB, securities and loans are pledged as collateral for borrowings
from FHLB.
9. Federal Home Loan Bank Term Borrowings:
Federal Home Loan Bank term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Due January 2000, 5.67% interest payable at maturity $ 7,000,000 $ -
Due January 2003, 5.76% interest payable monthly 6,000,000 6,000,000
Paid 1999 - 5,000,000
---------------- -----------------
$13,000,000 $11,000,000
---------------- -----------------
</TABLE>
FHLB borrowing limit and collateralization are discussed in Note 8 above.
15
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
10. Income Taxes:
The provision for income taxes for the years ended December 31 consist of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Currently payable:
Federal $2,899,000 $2,574,000 $2,285,000
State 602,000 533,000 267,000
---------------- ---------------- ----------------
3,501,000 3,107,000 2,552,000
---------------- ---------------- ----------------
Deferred:
Federal (114,000) (103,000) (108,000)
State (23,000) (19,000) (13,000)
---------------- ---------------- ----------------
(137,000) (122,000) (121,000)
---------------- ---------------- ----------------
Total provision for income taxes $3,364,000 $2,985,000 $2,431,000
================ ================ ================
</TABLE>
The provision for deferred income taxes results from timing differences in
the recognition of revenue and expenses for financial statement and tax
purposes. The nature and tax effect of these differences for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Loan fees and other loan basis adjustment
differences between financial
statement and tax purposes $ (34,792) $ 24,472 $ 17,821
Loan loss deduction for tax purposes
less than provision for financial
reporting purposes (103,666) (164,102) (165,163)
Depreciation deduction differences
between financial statement and
tax purposes (20,044) (9,407) 2,811
Federal Home Loan Bank stock dividends 47,503 46,037 42,245
State income tax and other (26,001) (19,000) (18,714)
---------------- ---------------- ----------------
$(137,000) $(122,000) $(121,000)
================ ================ ================
</TABLE>
16
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
10. Income Taxes, Continued:
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected federal income tax provision
at 34% $2,971,000 $2,638,000 $2,260,000
State income tax, net of federal income
tax effect 393,000 347,000 171,000
---------------- ---------------- ----------------
Provision for income taxes $3,364,000 $2,985,000 $2,431,000
================ ================ ================
</TABLE>
The tax benefit associated with the Bank's stock option plans reduced taxes
payable by $43,000, $346,991 and $601,242 at December 31, 1999, 1998 and
1997, respectively. Such benefit is credited to surplus.
The components of deferred tax assets and liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Assets:
Allowance for loan losses $ 826,373 $699,475 $499,038
Basis adjustments on loans 65,966 29,626 67,199
Net unrealized losses on securities 307,129 - -
---------------- ---------------- ----------------
Total deferred tax assets 1,199,468 729,101 566,237
---------------- ---------------- ----------------
Liabilities:
Federal Home Loan Bank stock dividends 316,629 258,481 202,251
Excess tax over book depreciation 198,617 218,120 221,965
Net unrealized gains on securities - 57,470 16,967
Other, principally loan origination costs 90,039 102,451 113,785
---------------- ---------------- ----------------
Total deferred tax liabilities 605,285 636,522 554,968
---------------- ---------------- ----------------
Net deferred tax assets $ 594,183 $ 92,579 $ 11,269
================ ================ ================
</TABLE>
17
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
11. Retirement Plan:
The Bank has a 401(k) profit sharing plan covering substantially all
employees. The plan provides for employee and employer contributions. The
total plan expenses, including employer contributions, were $349,455,
$324,261 and $239,118 in 1999, 1998 and 1997, respectively.
12. Stock Option Plans:
The Bank has Employee and Nonemployee Director Stock Option Plans that
reserve shares of stock for issuance to executives, employees and
directors. Information with respect to options granted under the stock
option plans, adjusted for stock splits and dividends, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Average Average Average
Options Price Options Price Options Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
------------- ----------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year 200,785 $11.05 328,222 $ 7.51 295,923 $6.89
Grants - 26,700 24.22 95,813 9.66
Exercised (35,902) 8.32 (152,059) 5.63 (58,358) 6.32
Expired (2,108) (2,078) (5,156)
------------- ------------- -------------
Balance, end of year 162,775 $11.49 200,785 $11.05 328,222 $7.51
============= ============= =============
Options available for
grant at end of year 600,000 13,834 38,456
</TABLE>
The Bank has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for
the plans been determined based on the fair value at the grant date for
awards in 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Bank's net income and earnings per share would have been the pro forma
amounts indicated below (no options granted in 1999):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net income-as reported $4,772,864 $4,217,034
Net income-pro forma 4,625,458 4,039,356
Basic earnings per share-as reported 1.01 0.95
Basic earnings per share-pro forma 0.98 0.90
</TABLE>
18
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plans, Continued:
The fair value of options granted in 1998 and 1997 was estimated using the
Black-Scholes option-pricing model.
During 1997, there were 93,156 shares issued in correction of grants issued
in prior years due to failure to adjust shares under option for stock
dividends. The value of the shares issued resulted in taxable income to the
option holders and tax benefit to the Bank. Such tax benefit, net of
related costs, was credited to surplus.
Outstanding options at December 31, 1999 are as follows:
Price
Shares Per Share Expiration
----------------- --------------- --------------
80,328 $ 9.12 May 2001
59,047 9.66 April 2002
23,400 24.22 June 2003
13. Loans to Related Parties:
The Bank has granted loans to officers and directors of the Bank and to
companies with which they are associated. Such loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
parties. The aggregate dollar amount of these loans outstanding was
$442,879, $500,655 and $577,887 at December 31, 1999, 1998 and 1997,
respectively.
In addition, there were $485,780 in commitments to extend credit to
directors and officers at December 31, 1999, which are included as part of
commitments in Note 14.
19
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
14. Financial Instruments with Off-Balance-Sheet Credit Risk:
In order to meet the financing needs of its customers, the Bank commits to
extensions of credit and issues letters of credit. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for other products. In the event of nonperformance by the customer,
the Bank's exposure to credit loss is represented by the contractual amount
of the instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Off-balance-sheet instruments at December 31 consist of the following:
1999 1998
------------- -------------
Commitments to extend credit $37,907,524 $37,770,800
Letters of credit and financial
guarantees written 1,075,725 1,302,500
20
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
15. Fair Value Disclosures of Financial Instruments:
The following disclosures are made in accordance with provisions of SFAS
No. 107, Disclosures About Fair Value of Financial Instruments. The use of
different assumptions and estimation methods could have a significant
effect on fair value amounts. Accordingly, the estimates of fair value
herein are not necessarily indicative of the amounts that might be realized
in a current market exchange.
The estimated fair values of the Bank's financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ -----------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,952,046 $ 9,952,046 $ 10,989,641 $ 10,989,641
Securities 34,849,960 34,849,960 31,130,053 31,130,053
Loans held for sale 2,767,274 2,848,312 6,996,494 7,252,574
Loans, net of allowance
for loan losses 206,765,352 205,911,521 178,295,561 179,574,078
Interest receivable 1,552,894 1,552,894 1,308,758 1,308,758
Federal Home Loan
Bank stock 2,155,500 2,155,500 2,003,900 2,003,900
Financial liabilities:
Deposits 224,174,768 223,964,768 194,328,823 194,730,823
Federal funds purchased 1,800,000 1,800,000 8,600,000 8,600,000
Federal Home Loan
Bank borrowings 17,000,000 16,809,000 11,000,000 11,124,000
Accrued interest payable 258,540 258,540 259,969 259,969
</TABLE>
Cash and Cash Equivalents -- The fair value approximates carrying amount.
Securities -- Fair value is based on quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices from similar securities.
Loans Held-for-Sale -- Fair value represents the anticipated proceeds from
sale of the loans.
21
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
15. Fair Value Disclosures of Financial Instruments, Continued:
Loans -- Fair value of fixed-rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. Variable rate loans have carrying amounts that are a reasonable
estimate of fair value.
Deposits -- Fair value of demand, interest-bearing demand and savings
deposits is the amount payable on demand at the reporting date. Fair value
of time deposits is estimated using the interest rates currently offered
for the deposits of similar remaining maturities. In accordance with
provisions of SFAS No. 107, the estimated fair values of deposits do not
take into account the benefit that results from low-cost funding such
deposits provide.
Federal Funds Purchased -- The carrying amount is a reasonable estimate of
fair value because of the short-term nature of these borrowings.
Federal Home Loan Bank Borrowings -- Fair value of Federal Home Loan Bank
borrowings is estimated by discounting future cash flows at rates currently
available for debt with similar terms and remaining maturities.
Off-Balance-Sheet Financial Instruments -- The carrying amount and fair
value are based on fees charged for similar commitments and are not
material.
22
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
16. Regulatory Matters:
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation ("FDIC"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets, and of Tier I capital to leverage assets.
Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized. To be categorized as well
capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ---------- -------------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk
weighted assets) $29,980,906 13.15% $18,242,320 8% $20,802,900 10%
Tier I capital (to risk
weighted assets) 27,533,006 12.07% 9,121,160 4% 13,681,740 6%
Tier I capital (to leverage
assets) 27,533,006 10.15% 10,853,560 4% 13,566,950 5%
As of December 31, 1998:
Total capital (to risk
weighted assets) $29,094,574 13.98% $16,647,360 8% $20,809,200 10%
Tier I capital (to risk
weighted assets) 27,024,960 12.99% 8,323,680 4% 12,485,520 6%
Tier I capital (to leverage
assets) 27,024,960 11.18% 9,673,200 4% 12,091,500 5%
</TABLE>
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
17. Parent Company Financial Information:
Financial information for Pacific Continental Corporation (Parent Company
only) is presented below:
BALANCE SHEET
December 31, 1999
Assets:
Cash ($37,409 deposited with the Bank) $ 37,690
Deferred income taxes 13,000
Investment in the Bank, at cost plus equity in earnings 27,060,629
----------------
$27,111,319
================
Liabilities and stockholders' equity:
Liabilities $ -
Stockholders' equity 27,111,319
----------------
$27,111,319
================
STATEMENT OF INCOME
For the Period June 7, 1999 through December 31, 1999
Cash dividends from the Bank $ 4,514,000
Interest income 411
Organizational expense (38,029)
Legal expense (7,103)
----------------
Income before income tax benefit
and distributions in excess of
earnings of the Bank 4,469,279
Income tax benefit 13,000
----------------
Income before distributions in
excess of earnings of the Bank 4,482,279
Distributions in excess of earnings of the Bank (1,267,015)
----------------
Net income $ 3,215,264
================
24
<PAGE>
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
17. Parent Company Financial Information, Continued:
STATEMENT OF CASH FLOWS
For the Period June 7, 1999 through December 31, 1999
Cash flows from operating activities:
Net income $ 3,215,264
Adjustments to reconcile net income to net
cash provided by operating activities:
Distributions in excess of earnings of the Bank 1,267,015
Deferred income taxes (13,000)
----------------
Net cash provided by operating activities 4,469,279
----------------
Cash flows from financing activities:
Proceeds from stock options exercised 84,208
Dividends paid (695,394)
Shares repurchased and retired (3,820,403)
----------------
Net cash used in financing activities (4,431,589)
----------------
Net increase in cash and cash at end of year $ 37,690
================
25
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF ZIRKLE, LONG & TRIGUEIRO LLC]
CONSENT OF INDEPENDENT AUDITORS'
We consent to the incorporation by reference in the Annual Report on Form 10-K
for the year ended December 31, 1999 of our report on the consolidated financial
statements of Pacific Continental Corporation, included in the Annual Report to
Shareholders of Pacific Continental Corporation for the year ended December 31,
1999.
By /s/ ZIRKLE, LONG & TRIGUEIRO LLC
---------------------------------
Eugene, Oregon
March 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,269
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 683
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,617
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 209,213
<ALLOWANCE> 2,448
<TOTAL-ASSETS> 271,088
<DEPOSITS> 224,175
<SHORT-TERM> 5,800
<LIABILITIES-OTHER> 1,002
<LONG-TERM> 13,000
0
0
<COMMON> 27,111
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 271,088
<INTEREST-LOAN> 20,393
<INTEREST-INVEST> 2,042
<INTEREST-OTHER> 189
<INTEREST-TOTAL> 22,624
<INTEREST-DEPOSIT> 5,655
<INTEREST-EXPENSE> 6,643
<INTEREST-INCOME-NET> 15,981
<LOAN-LOSSES> 735
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 10,700
<INCOME-PRETAX> 8,738
<INCOME-PRE-EXTRAORDINARY> 8,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,374
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 9.82
<LOANS-NON> 1,422
<LOANS-PAST> 464
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,070
<CHARGE-OFFS> 377
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 2,448
<ALLOWANCE-DOMESTIC> 2,448
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
