<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER 0-22732
PACIFIC CREST CAPITAL, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4437818
- ----------------------------- --------------------------
(STATE OF OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30343 CANWOOD STREET
AGOURA HILLS, CALIFORNIA 91301
- ------------------------------- --------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 865-3300
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS
OF OCTOBER 25, 1996.
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
------------------- ----------------------------
COMMON STOCK, $.01 PAR VALUE 2,959,698
<PAGE>
PACIFIC CREST CAPITAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - FINANCIAL INFORMATION................................................. 1
Item I: Financial Statements............................................... 1
Consolidated Balance Sheets............................................ 1
Consolidated Statements of Operations.................................. 2
Consolidated Statements of Shareholders' Equity........................ 3
Consolidated Statements of Cash Flows.................................. 4
Notes to Consolidated Financial Statements............................. 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 8
Part II - OTHER INFORMATION.................................................... 19
SIGNATURES..................................................................... 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
- -----------------------------------------------------------------------------------
September 30, December 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995
- -----------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Assets
Cash $ 2,530 $ 2,118
Certificates of deposit 300 300
Securities purchased under resale agreements 8,394 53,749
- -----------------------------------------------------------------------------------
Cash and cash equivalents 11,224 56,167
- -----------------------------------------------------------------------------------
U.S. government agency securities (Note 5):
Held to maturity, at amortized cost 25,900 -
Available for sale, at market 33,037 -
Loans
Commercial mortgage 181,503 191,481
Residential mortgage 1,972 3,142
Installment and other 3,752 2,155
- -----------------------------------------------------------------------------------
Total loans 187,227 196,778
Allowance for loan losses 3,158 4,500
- -----------------------------------------------------------------------------------
Net loans 184,069 192,278
Accrued interest receivable 2,802 1,547
Prepaid expenses and other assets 747 219
Deferred income taxes 3,225 3,979
Other real estate owned 3,581 4,355
Premises and equipment 540 564
- -----------------------------------------------------------------------------------
Total assets $265,125 $ 259,109
- -----------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Savings accounts $159,458 $ 173,725
Certificates of deposit 57,016 60,785
Money market checking 21,834 -
- -----------------------------------------------------------------------------------
Total deposits 238,308 234,510
Accrued interest and other liabilities 2,855 2,647
- -----------------------------------------------------------------------------------
Total liabilities 241,163 237,157
- -----------------------------------------------------------------------------------
Shareholders' equity (Notes 6 and 7):
Common stock, $.01 par value, 10,000,000
shares authorized, 2,959,698 shares issued and
outstanding at September 30, 1996,
2,953,748 shares issued and outstanding at
December 31, 1995 27,838 27,813
Accumulated deficit (3,642) (5,861)
Unrealized gain on securities available for sale,
net of taxes 21 -
Common stock in Treasury, at cost, 30,000 shares (255) -
- -----------------------------------------------------------------------------------
Total shareholders' equity 23,962 21,952
- -----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $265,125 $ 259,109
===================================================================================
Book value per common share (Note 3) $ 8.10 $ 7.43
===================================================================================
See accompanying notes.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans, including fees $5,086 $5,306 $16,008 $15,191
Securities purchased under resale agreements 356 358 2,028 569
Certificates of deposit 4 4 12 12
U.S. government agency securities
Available for sale 645 - 946 -
Held to maturity 491 280 818 1,743
- ----------------------------------------------------------------------------------------------------------------
Total interest income 6,582 5,948 19,812 17,515
Interest expense:
Savings accounts 2,305 1,940 7,112 5,609
Certificates of deposit 740 1,018 2,376 3,307
Money market checking accounts 279 - 569 -
Reverse repurchase agreements - - - 15
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 3,324 2,958 10,057 8,931
- ----------------------------------------------------------------------------------------------------------------
Net interest income 3,258 2,990 9,755 8,584
Provision for loan losses 550 797 1,650 904
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,708 2,193 8,105 7,680
Noninterest income:
Recovery on investment securities 75 650 425 845
Gain on sale of deposits 264 - 264 -
Other noninterest income 330 167 674 354
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 669 817 1,363 1,199
Noninterest expense:
Valuation adjustments to other real estate owned - 85 70 251
Other real estate owned expenses 72 38 95 133
Salaries and employee benefits 1,273 955 3,378 3,125
Net occupancy expenses 357 367 1,139 1,152
FDIC insurance premiums 20 - 53 301
Credit and collection expenses 23 145 48 262
Communication and data processing 132 114 388 365
Other expenses 267 386 697 1,093
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,144 2,090 5,868 6,682
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 1,233 920 3,600 2,197
Income tax provision (benefit) 471 (78) 1,381 (77)
- ----------------------------------------------------------------------------------------------------------------
Net income 762 998 2,219 2,274
- ----------------------------------------------------------------------------------------------------------------
Preferred dividends declared - (306) - (920)
Net income applicable to common stock $ 762 $ 692 $ 2,219 $ 1,354
================================================================================================================
Per share data (Note 3):
Primary earnings per common share $ 0.25 $ 0.63 $ 0.74 $ 1.23
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding (in thousands) 2,995 1,102 2,999 1,102
================================================================================================================
Fully diluted earnings per common share $ 0.25 $ 0.38 $ 0.74 $ 0.85
- ----------------------------------------------------------------------------------------------------------------
Weighted average fully diluted common shares
outstanding (in thousands) 2,995 2,661 3,004 2,661
================================================================================================================
See accompanying notes.
</TABLE>
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
PREFERRED STOCK COMMON STOCK ACCUM- SECURITIES TREASURY STOCK
(DOLLARS AND SHARES --------------- ------------ ULATED AVAILABLE --------------
IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT DEFICIT FOR SALE SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 561 $ 12,843 1,102 $14,970 $(8,185) $ - - $ -
Dividends on preferred stock - - - - (920) - - -
Conversion of preferred stock (561) (12,843) 1,852 12,843 - - - -
Net income - - - - 3,244 - - -
- --------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 - $ - 2,954 $27,813 $(5,861) $ - - $ -
- --------------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan (unaudited) - - 6 25 - - - -
Unrealized gain on securities
available for sale, net of
taxes (unaudited) - - - - - 21 - -
Purchase of Treasury
shares (unaudited) - - - - - - (30) (255)
Net income (unaudited) - - - - 2,219 - - -
- --------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1996 - $ - 2,960 $27,838 $(3,642) $ 21 (30) $(255)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,219 $ 2,274
Adjustments to reconcile net income
to net cash provided by operating activities:
Recovery on investment securities (425) (845)
Provision for loan losses 1,650 904
Valuation adjustments to OREO 70 251
Depreciation and amortization 166 188
Amortization of deferred loan fees (795) (538)
Amortization/accretion of securities 36 66
Changes in operating assets and liabilities:
Accrued interest receivable (1,255) 201
Prepaid expenses and other assets (483) (494)
Deferred income taxes 739 (79)
Accrued interest and other liabilities 208 224
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,130 2,152
INVESTING ACTIVITIES
Purchase of securities held to maturity (33,900) -
Purchase of securities available for sale (54,568) -
Proceeds from maturities of securities held to maturity 8,000 41,249
Proceeds from maturities of securities available for sale 21,531
Proceeds from recovery on investment securities 380 788
Net increase in loans (4,455) (11,882)
Proceeds from loan sales 9,032 -
Purchases of equipment and leasehold improvements, net (142) (49)
Proceeds from sale of other real estate owned 3,481 1,780
- --------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (50,641) 31,886
FINANCING ACTIVITIES
Preferred stock cash dividends - (920)
Reduction of savings deposits from branch sale (20,989) -
Reduction of time deposits from branch sale (7,202) -
Net increase/(decrease) in CDs 3,433 (21,914)
Net increase in money market checking 21,834 -
Net increase in savings accounts 6,722 9,433
Proceeds from the issuance of common stock 25 -
Purchase of treasury stock, at cost (255) -
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,568 (13,401)
Net (decrease)/increase in cash and cash equivalents (44,943) 20,637
Cash and cash equivalents at beginning of period 56,167 6,204
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,224 $26,841
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,083 $ 9,032
Income taxes $ 745 $ 2
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ 2,836 $ 5,601
- --------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The interim financial statements included herein have been prepared by
Pacific Crest Capital, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Pacific Crest
Capital, Inc. together with its subsidiary is referred to as the "Company".
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's latest Annual Report. In the opinion of
management, all adjustments, including normal recurring adjustments necessary to
present fairly the financial position of the Company with respect to the interim
financial statements, and the results of its operations for the interim period
ended September 30, 1996, have been included. Certain reclassifications have
been made to prior year amounts to conform to the 1996 presentation. The results
of operations for interim periods are not necessarily indicative of results for
the full year.
- --------------------------------------------------------------------------------
NOTE 2. INCOME TAXES
- --------------------------------------------------------------------------------
For the quarter and nine months ended September 30, 1996, the Company
estimated its provision for income taxes at $471,000 and $1.4 million or 38.2%
and 38.4% respectively. The difference between the Company's statutory tax rate
of 41.5% and its effective rates for the quarter and nine months ended September
30, 1996 is due to California tax deductions (credits) generated by the Company
on loans made in special tax zones within California.
The Company's income tax provision for the quarter and nine months ended
September 30, 1995, was offset by a like reduction in the Company's tax
valuation reserves. The 1995 third quarter and nine months tax provision of
$390,000 and $932,000, respectively, representing a combined federal and state
tax rate provision of 42.4%, was offset by tax valuation reserves of $468,000
and $1.0 million for the quarter and nine months ended September 30, 1995,
respectively.
- --------------------------------------------------------------------------------
NOTE 3. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Book value per common share was calculated by dividing total shareholders'
equity by the number of common shares outstanding at September 30, 1996 and
December 31, 1995. The number of common shares outstanding was 2,959,698 at
September 30, 1996 and 2,953,748 at December 31, 1995.
The primary earnings per common share for the third quarter and nine months
ended September 30, 1996 were determined by dividing net income applicable to
common stock of $762,000 and $2,219,000, respectively by the weighted average
common shares outstanding of 2,995,000 and 2,999,000, respectively. The fully
diluted earnings per common share for the third quarter and nine months ended
September 30, 1996, were determined by dividing net income applicable to common
stock of $762,000 and $2,219,000, respectively by the weighted average fully
diluted common shares outstanding of 2,995,000 and 3,004,000, respectively. The
common shares outstanding were adjusted to reflect the number of common stock
equivalents outstanding based on the number of outstanding stock options issued
by the Company utilizing the Treasury stock method.
The primary earnings per common share for the third quarter and nine months
ended September 30, 1995 were determined by decreasing the net income of
$998,000 and $2,274,000, respectively by the amount of preferred dividends
declared of $306,000 and $920,000, respectively, resulting in net income
applicable to common stock of $692,000 for the quarter and $1,354,000 for the
nine months ended September 30, 1995. This amount was then divided by the
weighted average common shares outstanding of 1,102,000 for the quarter and nine
months ended September 30, 1995. The fully diluted earnings per common share
for the third quarter and nine months ended September 30, 1995 was determined by
dividing net income of $998,000 and $2,274,000, respectively by the weighted
average fully diluted common shares outstanding of 2,661,000 for the quarter and
nine months ended September 30, 1995.
5
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. CONTINGENCIES
- --------------------------------------------------------------------------------
LITIGATION
There are several lawsuits and claims pending against the Company which
management considers incident to normal operations, some of which seek
substantial monetary damages. Management, after review, including consultation
with counsel, believes that any ultimate liability which could arise from these
lawsuits and claims would not materially affect the consolidated financial
position of the Company.
REGULATORY MATTERS
On January 27, 1995, the Board of Directors of the Company's subsidiary,
Pacific Crest Investment and Loan (Pacific Crest Investment) entered into a
revised memorandum of understanding ("Memorandum") with the Federal Deposit
Insurance Corporation ("FDIC") and the California Department of Corporations
("DOC"). The provisions of the Memorandum are effective until such time as the
FDIC modifies, terminates or suspends the Memorandum. Under the provisions of
the Memorandum, Pacific Crest Investment agreed to maintain its leverage capital
ratio to at least 7% of total assets. Pacific Crest Investment's leverage
capital ratio was 8.92% as of September 30, 1996. In addition, Pacific Crest
Investment agreed to reduce the level of assets classified as "substandard" by
the FDIC. Management believes Pacific Crest Investment is in compliance with
the Memorandum at September 30, 1996. Under the terms of the Memorandum, cash
dividend payments by Pacific Crest Investment must be approved, in writing, by
the FDIC and are subject to maintenance of the aforementioned leverage capital
ratios.
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities, at September 30, 1996, consist of U.S. government
agency issued securities as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
WEIGHTED CURRENT AMORTIZED FAIR MARKET UNREALIZED
(DOLLARS IN THOUSANDS) AVERAGE LIFE YIELD BOOK VALUE VALUE GAIN/(LOSS)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government agency issued
securities:
Held to maturity 7.0 years 7.59% $ 25,900 $25,903 $ 3
Available for sale: 3.2 years 6.87% 33,000 33,037 37
- -----------------------------------------------------------------------------------------------------------
Total Investment Securities 7.16% $ 58,900 $58,940 $ 40
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent to September 30, 1996, $10.9 million of held to maturity and
$15.0 million of available for sale for a total of $25.9 million of agency
securities were called and redeemed by the issuing agency. Of the $25.9 million
in redemptions, the Company had reinvested $15.0 million in U.S. agency
securities by November 5, 1996.
The Company has an interest in a corporate debt security that was written off
during 1994. The Company recorded a recovery on this security of $350,000 and
$75,000 during the second and third quarter of 1996, respectively. The Company
had recorded a recovery of $650,000 on this same security during the third
quarter of 1995.
Included in the financial statements for the nine months ended September 30,
1995, are gross realized gains of $195,000 resulting from cash receipts from a
collateralized mortgage obligation residual, (CMO Residual).
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
- --------------------------------------------------------------------------------
The Company purchased 30,000 shares of its common stock in the open market on
July 29, 1996 at a purchase price of $8.50 per share. The purchase of these
shares are to be held by the Company at cost, as treasury stock. The 30,000
shares were purchased using excess cash of the Parent Company.
6
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. DIVIDENDS
- --------------------------------------------------------------------------------
As a Delaware corporation, Pacific Crest Capital, Inc., (the parent), may pay
common dividends out of surplus or, if there is no surplus, from net profits for
the current and preceding fiscal year. The parent has approximately $328,000 in
cash plus investments less current liabilities at September 30, 1996. Due to the
financial circumstances affecting the payment of dividends from Pacific Crest
Investment to the parent (as described in the next paragraph), Pacific Crest
Investment does not currently have the ability, under California state law, to
pay dividends to the parent and it is highly unlikely that it will have such
dividend paying ability until 1997. Without dividends from Pacific Crest
Investment, the parent must rely solely on existing cash and investments which
total $409,000 at September 30, 1996. This amount is also necessary to pay
future operating expenses and existing current liabilities of the parent and for
the future possible infusion of capital into Pacific Crest Investment. The
parent also holds 30,000 shares of capital stock, as Treasury Stock, which could
be sold to raise cash if additional liquidity were needed.
Pacific Crest Investment's ability to pay dividends to the parent is
restricted by California state law, which requires that retained earnings are
available to pay such dividends. At September 30, 1996, Pacific Crest
Investment and Loan had deficit retained earnings of $1.2 million. Under
California state law, this deficit would have to be turned into a positive
figure before dividends could be paid from Pacific Crest Investment to the
parent. Therefore, it is unlikely Pacific Crest Investment will be able to pay
dividends to its parent in 1996. Further, Pacific Crest Investment, under the
terms of the Memorandum, as described above, must receive regulatory approval to
pay a dividend to its parent.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major factors
that influenced the financial performance of Pacific Crest Capital and its
wholly owned subsidiary, Pacific Crest Investment for the quarter and nine
months ended September 30, 1996. This analysis should be read in conjunction
with the Company's 1995 Annual Report and with the unaudited financial
statements and notes as set forth on pages 1 through 7 of this report.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
9/30/96 6/30/96 3/31/96 12/31/95 9/30/95
-----------------------------------------------------------
(DOLLARS IN THOUSANDS) Unaudited Unaudited Unaudited Unaudited
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCE
Average Loans $183,738 $189,004 $195,016 $191,249 $182,822
Average Earning Assets 273,636 279,720 269,504 235,968 225,281
Average Assets 282,184 287,411 276,782 246,363 231,800
Average Deposits 256,359 262,243 251,975 222,859 209,695
Average Equity 23,483 22,894 22,172 21,328 20,260
PERFORMANCE RATIOS
Return on average assets 1.08% 1.04% 1.03% 1.57% 1.19%
Return on average common equity 12.98% 13.03% 12.81% 18.17% 13.66%
Net interest margin 4.74% 4.58% 4.93% 5.19% 5.27%
CAPITAL AND LEVERAGE RATIOS
Risk-based capital ratios:
Tier one 11.32% 10.90% 9.80% 9.48% 9.11%
Total 12.57% 12.16% 11.06% 10.74% 10.37%
Leverage capital ratio 8.92% 7.87% 7.29% 7.82% 7.82%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.69% 1.82% 2.56% 2.29% 2.48%
Allowance for loan losses to nonaccrual loans 192.10% 77.60% 70.30% 90.30% 132.20%
Total nonaccrual loans and OREO to total assets 1.97% 2.51% 3.96% 3.60% 3.06%
</TABLE>
FINANCIAL CONDITION
SUMMARY OF CHANGES IN BALANCE SHEET
SEPTEMBER 30, 1996 COMPARED TO DECEMBER 31, 1995
Total assets of the Company increased to $265.1 million at September 30,
1996, from $259.1 million at December 31, 1995, a $6.0 million increase. This
increase reflects the purchase of approximately $58.9 million of investment
securities, net of maturities, during the first nine months of 1996 offset by a
decline of $45.4 million in Repurchase Agreements and a $8.2 million decline in
net loans. The Company funded the purchase of government agency securities by
decreasing its holdings in cash and cash equivalents by $44.9 and by increasing
its interest bearing liabilities by $3.8 million to $238.3 million at September
30, 1996 from $234.5 million at December 31, 1995. The increase in interest
bearing liabilities reflects an increase in new deposits of $32.0 million,
primarily due to the growth in the Company's money market checking account
balances that grew to $21.8 million from January 1996 to September 30, 1996.
Significantly offsetting the growth in deposits was the sale of the Company's
San Francisco branch in September 1996, which resulted in the sale of $21.0
million in savings deposits, $7.2 million in time deposits, for a total sale of
$28.2 million in deposit liabilities. The
8
<PAGE>
Company sold its San Francisco branch as part of a realignment of its strategic
goal in focusing its retail deposit activity in the Southern California area.
Loans, net of deferred fees and the allowance for loan losses, decreased by
$8.2 million to $184.1 million at September 30, 1996, from $192.3 million at
December 31, 1995. The Company originated $31.2 million in new real estate and
business loans during the nine months ended September 30, 1996. Off-setting
these originations, the Company experienced $33.8 million in loan payoffs and
loan sales, and $3.7 million in loan transfers to other real estate owned,
during the nine months ended September 30, 1996. Included in the $33.8 million
loan payoff and sales figure was a bulk loan sale of $9.5 million of nonaccrual
and troubled debt restructured loans. The Company is currently in negotiations
with a Southern California financial institution to purchase between $15 and $22
million in commercial real estate loans. This purchase is expected to close in
the fourth quarter of 1996, however, there can be no assurance that this
transaction will be consummated.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1996, decreased by $1.3
million from the level at December 31, 1995, and represents 1.69% of outstanding
loans at September 30, 1996. This compares with 2.29% of outstanding loans at
December 31, 1995. The overall reduction in the general loan loss reserve from
$4.5 million to $3.2 million during the nine months ended September 30, 1996
reflects net charge-offs of $3.0 million partially offset by the addition of
$1.65 million in loan loss provision. The net loan chargeoffs of $3.0 million
for the nine months ended September 30, 1996 included $2.3 million in chargeoffs
on substandard loans sold in the second and third quarters of 1996. Management
and the Board of Directors regularly review loan performance and the adequacy of
the allowance for loan losses.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and valuation adjustment to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE PERIOD
ALLOWANCE FOR LOAN LOSSES ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period: $4,500 $8,075
Commercial real estate mortgages:
Chargeoffs 3,202 4,245
Recoveries 210 -
Provision for loan losses: 1,650 904
- -----------------------------------------------------------------------------------------
Balance at end of period: $3,158 $4,734
- ----------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.69% 2.48%
Net loan Charge-offs $2,992 $4,245
Valuation adjustment to OREO 70 251
- -----------------------------------------------------------------------------------------
Total net loan Charge-offs & OREO valuation adjustment $3,062 $4,496
- -----------------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING AND RESTRUCTURED ASSETS
The following table sets forth loans accounted for on a nonaccrual basis,
OREO and loans that were "troubled debt restructurings" at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $1,644 $4,985
Other real estate owned 3,581 4,355
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO 5,225 9,340
- ----------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 1.97% 3.60%
- ----------------------------------------------------------------------------------------------
Troubled debt restructurings $719 $8,757
- ----------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
The following tables represent the major components of the changes in the
nonaccrual loans and OREO assets for the nine months ended September 30, 1996
and 1995:
<TABLE>
<CAPTION>
NONACCRUAL LOAN ACTIVITY SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans at the beginning of the period $4,985 $9,779
Nonaccrual loan additions 4,422 7,708
Loans returned to accrual status (377) (4,367)
Loans transferred to OREO (2,836) (5,601)
Net loan charge-offs (1,678) (2,597)
Loan payments and loan sale (2,872) (1,340)
Net change/activity (3,341) (6,197)
- -----------------------------------------------------------------------------------------------
Nonaccrual loans at the end of the period $1,644 $3,582
- -----------------------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED ACTIVITY SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------
OREO at the beginning of the period $4,355 $5,724
Transfers from loans 2,836 5,601
OREO valuation adjustments (70) (251)
Sales of OREO properties (3,540) (7,381)
- -----------------------------------------------------------------------------------------------
Net change/activity (774) (2,031)
- -----------------------------------------------------------------------------------------------
OREO balance at the end of the period $3,581 $3,693
- -----------------------------------------------------------------------------------------------
</TABLE>
NONACCRUAL LOANS
Nonaccrual loans are loans, not classified as "troubled debt restructurings"
or OREO, that show little or no current payment ability. These loans are
supported, however, by collateral or cash flow that support the collectibility
of the Company's remaining book balance, after consideration of the allowance
for loan losses. The Company had four nonaccrual loans at September 30, 1996,
totaling $1.64 million. The Company sold two of its nonaccrual loans during
June of 1996 as part of its bulk loan sale transaction. The contractual loan
balances net of deferred fees of the nonaccrual loans sold in the second quarter
was $2.4 million, the amount of chargeoff taken on these loans was $587,000 and
the net proceeds received on these two loans was $1.81 million. Additionally,
in August, the Company sold a nonaccrual loan independent of the bulk loan sale.
The contractual loan balance of the loan sold was $865,000, the amount of the
chargeoff was $360,000 and the net proceeds were $505,000. Nonaccrual loan
balances are net of any prior write-offs, but any specifically assigned portions
of the general allowance for loan losses are not deducted from the nonaccrual
loan balances above.
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had five properties in this category at September 30,
1996, totaling $3.58 million. The Company had one property with $1.4 million in
net book value, or 39% of the Company's OREO balance. The remaining $2.18
million in OREO balances consisted of four properties.
OREO declined to $3.58 million at September 30, 1996, from $4.36 million at
December 31, 1995, a decline of $774,000 or 17.8%. This reflects the sale of
eight properties with a net balance of $3.5 million during the nine months ended
September 30, 1996. The Company sold three properties with a net book balance
of $1.1 million during the third quarter of 1996. This compares with the sale
of five properties with a net book balance of $2.4 million during the second
quarter of 1996. The Company provided financing for only one OREO sale
transaction during the nine months ended September 30, 1996 in the amount of
$246,000. The sale of the individual OREO properties were separate transactions
from the bulk loan sale transaction. The Company transferred for the quarter
and nine months ending September 30, 1996, $1.66 million consisting of three
loans, and $2.8 million consisting of six loans, respectively of nonaccrual
loans into OREO.
10
<PAGE>
TROUBLED DEBT RESTRUCTURINGS (TDR'S)
A TDR is a loan in which the Company, for reasons related to the borrowers'
financial difficulties, grants a permanent concession to the borrower, such as a
reduction in the loan's fully-indexed interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Company would not otherwise consider. At September 30, 1996, the Company had
one loan with an aggregate principal balance of $719,000 that was categorized as
a TDR. The Company sold five of its TDR loans during June of 1996 as part of its
bulk loan sale transaction. The contractual loan balances of the TDR loans sold
was $7.06 million, expense accruals applied to the sale was $560,000, the amount
of charge-offs taken on these loans was $1.31 million and the net proceeds
received on these five loans was $5.19 million. TDR balances are net of any
prior write-offs, but any specifically assigned portions of the allowance for
loan losses are not deducted from the above TDR loan balance.
CAPITAL
Shareholders' equity increased by $2.0 million to $24.0 million at September
30, 1996. This increase reflects the increase to shareholders' equity by the
nine months of net income of $2.2 million, the $21,000 net unrealized gain on
securities available for sale and the $25,000 purchase of stock under the
employee stock purchase plan, offset by the $255,000 purchase of the Company's
capital stock, held at cost, as treasury stock (described below).
Pursuant to its previously announced stock buy back program, the Company
purchased 30,000 shares of its common stock on July 29, 1996 at $8.50 per share.
The purchase of these shares are to be held by the Company as treasury stock.
The Company's subsidiary, Pacific Crest Investment is required to maintain
certain minimum capital levels. In addition, Pacific Crest Investment must
maintain certain capital ratios to be considered "well capitalized" under the
prompt corrective action provisions of the FDIC Improvement Act.
In addition to these minimums, Pacific Crest Investment is subject to the MOU
that requires it to maintain a leverage capital ratio of 7.0.
The following table sets forth Pacific Crest Investment's regulatory capital
ratios at September 30, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1995
======================= ========================
Minimum Minimum
Required Actual Excess Required Actual Excess
-------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 8.92% 4.92% 4.00% 7.82% 3.82%
Tier 1 risk-based capital ratio 4.00% 11.32% 7.32% 4.00% 9.48% 5.48%
Total risk-based capital ratio 8.00% 12.57% 4.57% 8.00% 10.74% 2.74%
Memorandum leverage capital ratio 7.00% 8.92% 1.92% 7.00% 7.82% 0.82%
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter and nine months ended September 30, 1996
and 1995, present the distribution of average assets, liabilities and
stockholders' equity, the total dollar amount of interest income from average
interest-earning assets, the resultant yields and the interest expense on
average interest-bearing liabilities, expressed in both dollars and rates. All
average balances are daily average balances. Nonaccrual loans and nonperforming
assets have been included in the table as loans and investments, respectively,
having a zero yield.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Three Months Ended September 30,
-----------------------------------------------------------------
1996 1995
-----------------------------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
(DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $183,738 $ 5,086 11.01% $182,822 $ 5,306 11.51%
Repurchase agreements 27,017 360 5.30% 24,870 362 5.77%
U.S. government sponsored
agency securities:
Available for sale 36,981 645 6.98% - - -
Held to maturity 25,900 491 7.58% 17,589 280 6.37%
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $273,636 $ 6,582 9.57% $225,281 $ 5,948 10.47%
Other real estate owned 3,492 3,654
Other noninterest earning assets 8,215 7,025
Less allowance of loan losses 3,159 4,160
Total assets $282,184 $231,800
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $179,031 2,305 5.12% $138,419 1,940 5.56%
Certificates of deposit 54,822 740 5.37% 71,276 1,018 5.67%
Money market checking 22,506 279 4.93% - - -
Other borrowings - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 256,359 3,324 5.16% 209,695 2,958 5.60%
Non interest-bearing liabilities 2,342 1,845
Shareholders' equity 23,483 20,260
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $282,184 $231,800
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,258 $ 2,990
Net interest rate spread 4.41% 4.87%
Net interest-earning assets $ 17,277 $ 15,586
Net interest margin 4.74% 5.27%
Average interest-earning assets to
average interest bearing liabilities 1.07 1.07
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Nine Months Ended September 30,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
(DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 189,233 $16,008 11.30% $183,077 $15,191 11.09%
Repurchase agreements 51,363 2,040 5.31% 13,374 581 5.81%
U.S. government sponsored
agency securities:
Available for sale 18,829 946 6.70% - - -
Held to maturity 14,859 818 7.34% 37,274 1,743 6.23%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 274,284 $19,812 9.65% $233,725 $17,515 10.02%
Other real estate owned 4,082 4,821
Other noninterest earning assets 8,014 7,347
Less allowance of loan assets 4,254 6,131
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 282,126 $239,762
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 183,125 7,112 5.19% $135,764 5,609 5.52%
Certificates of deposit 58,308 2,376 5.44% 81,375 3,307 5.43%
Money market checking 15,424 569 4.93% - - -
Other borrowings - - - 319 15 6.29%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 256,857 10,057 5.23% 217,458 8,931 5.49%
Non interest-bearing liabilities 2,417 2,423
Shareholders' equity 22,852 19,881
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 282,126 $239,762
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,755 $ 8,584
Net interest rate spread 4.42% 4.53%
Net interest-earning assets $ 17,427 $ 16,267
Net interest margin 4.75% 4.91%
Average interest-earning assets to
average interest-bearing liabilities 1.07 1.07
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following table presents the dollar amount of changes in interest income
and interest expense of major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to: (i)
changes on volume (i.e. changes in volume multiplied by old rate) and (ii)
changes in rate (i.e. changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to changes due to volume and
changes due to rate.
13
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ending For the Nine months ending
September 30, 1996 September 30, 1996
--------------------------------------------------------
1996 compared to 1995 1996 compared to 1995
Increase (decrease) due to Increase (decrease) due to
--------------------------------------------------------
Net Net
(DOLLARS IN THOUSANDS) Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME
Loans $ 27 $(247) $(220) $ 511 $ 306 $ 817
Repurchase agreements 31 (33) (2) 1,652 (193) 1,459
U.S. Government agency securities:
Available for sale 645 - 645 946 - 946
Held to maturity 133 78 211 (1,045) 120 (925)
- -----------------------------------------------------------------------------------------------------
Total change in interest income 836 (202) 634 2,064 233 2,297
- -----------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE
Savings accounts 565 (200) 365 1,957 (454) 1,503
Certificates of deposit (233) (45) (278) (938) 7 (931)
Money market checking 279 - 279 569 - 569
Other borrowings - - - (15) - (15)
- -----------------------------------------------------------------------------------------------------
Total change in interest expense 611 (245) 366 1,573 (447) 1,126
- -----------------------------------------------------------------------------------------------------
Changes in net interest income $ 225 $ 43 $ 268 $ 491 $ 680 $1,171
- -----------------------------------------------------------------------------------------------------
</TABLE>
DETAILED COMPARISONS OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $762,000 (or $.25 per common share on a fully diluted basis)
for the quarter ended September 30, 1996, compared to $998,000 (or $0.38 per
common share on a fully diluted basis) for the corresponding period in 1995.
Net income for the nine months ended September 30, 1996 was $2.2 million (or
$.74 per common share on a fully diluted basis) compared to $2.3 million (or
$0.85 per common share on a fully diluted basis) for the corresponding period in
1995. The conversion of the preferred stock during the fourth quarter of 1995
impacted the earnings per share calculation, by increasing the weighted average
common shares outstanding by approximately 293,000 shares. This dilution
impacted the quarterly and nine months 1996 EPS calculation by $.03 and $.08 per
share, respectively.
NET INTEREST INCOME
Net interest income increased by $268,000 or 9.0% to $3.3 million for the
quarter ended September 30, 1996 and increased by $1.17 million or 13.6% to
$9.76 million for the nine months ended September 30, 1996 compared to the same
periods of 1995. The increase in net interest income during the quarter and
nine months ended September 30, 1996 was the result of an increase of $48.4
million and $40.6 million, respectively in the Company's average interest
earning assets between the 1996 and 1995 periods.
TOTAL INTEREST INCOME
Total interest income increased by $634,000 or 10.7% to $6.6 million for the
quarter ended September 30, 1996 and increased by $2.3 million or 13.1% to $19.8
million for the nine months ended September 30, 1996, compared to the same
periods of 1995. These increases were primarily due to an increase in the
average interest earning asset balances of $48.4 million and $40.6 million,
respectively for the quarter and nine months ended September 30, 1996 over the
comparable periods in 1995. Offsetting these increases were declines in the
yield on the interest earning assets by 90 basis points and 37 basis points for
the quarter and nine months ended September 30, 1996 compared to the same
periods of 1995. The overall yields on the Company's interest earning assets
decreased to 9.57% from 10.47% for the quarter ended September 30, 1996 compared
to the same period of 1995. For the nine months ended September 30, 1996, the
yield decreased to 9.65% from 10.02% at September 30, 1995. The decline in the
yield on the Company's earning assets is partially due to the purchase of agency
securities during 1996.
14
<PAGE>
Interest income on loans decreased by $220,000 to $5.1 million, a 4.1%
decrease for the quarter ended September 30, 1996, compared to 1995. The
decline in loan interest income for the third quarter of 1996 was primarily
attributable to a decline in the loan yield, partially offset by a small
increase in the average outstanding loans between the respective quarters. Loan
yields declined 50 basis points from 11.5% to 11.0% for the quarters ended
September 30, 1996 and 1995, respectively. This decline was attributable to the
lower market rate of interest during the third quarter of 1996 compared to 1995.
The average prime rate for the quarter ended September 30, 1996 was 8.25%
compared to 8.75% for the quarter ended September 30, 1995. Average outstanding
loans increased $916,000 between the respective quarters.
Interest income on loans increased by $817,000 to $16.0 million, a 5.4%
increase for the nine months ended September 30, 1996, compared to 1995. The
increase in loan interest income for the nine months ended September 30, 1996
was primarily attributable to an increase in average outstanding loans between
the respective periods. Average outstanding loans increased by $6.2 million to
$189.2 million for the nine months ended September 30, 1996, compared to the
same period of 1995. Also contributing to this increase was an increase of 21
basis points in loan yields. Loan yields increased from 11.1% to 11.3% for the
nine months ended September 30, 1996. The increase in the loan yields between
these respective periods is a result of the decrease in the average outstanding
nonaccrual loan balances during 1996 as compared to 1995.
The Company purchased a net of $58.9 million of U.S. government agency
securities during 1996. The Company posted $645,000 and $946,000 in income on
those securities classified as available for sale that yielded 6.98% and 6.70%
for the quarter and nine months ended September 30, 1996, respectively. The
Company held no securities within this category during 1995. The Company posted
$491,000 and $818,000 in income on U.S. government agency securities that are
classified as held to maturity during the third quarter and nine months ended
September 30, 1996, that yielded 7.58% and 7.34%, respectively. The Company
posted $280,000 and $1.7 million in income on U.S. government agency issued
securities that are classified as held to maturity during the third quarter and
nine months ended September 30, 1995, which represents a yield of 6.37% and
6.23%, respectively on this portfolio.
Interest earned on the Company's securities purchased under resale agreements
decreased by $2,000 and increased by $1.5 million respectively, for the quarter
and nine months ended September 30, 1996, when compared to the same periods of
1995. These changes were primarily attributable to an increase of $2.1 million
and $38.0 million respectively, in the average balance during the quarter and
nine months ended September 30, 1996 compared to 1995. The Company began 1996
with $53.7 million in repurchase agreements. These funds were primarily
utilized to purchase the Company's investment securities during the second and
third quarters of 1996, which resulted in a decrease of $45.3 million by
September 30, 1996. These increases were partially offset by decreases in the
yield of 47 basis points for the quarter and 50 basis points for the nine months
ended September 30, 1996. The yield decreased from 5.77% to 5.30% for the
quarter and decreased from 5.81% to 5.31% for the nine months ended September
30, 1996 compared to 1995. This decrease reflects the decline in market
interest rates between these periods.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter and nine months ended September 30,
1996, increased by $366,000 or 12.4% and $1.1 million or 12.6%, respectively,
compared to the same periods of 1995. The primary increase in interest cost
resulted from an increase in the average interest bearing deposits of $46.7
million and $39.4 million, respectively for the quarter and nine months ended
September 30, 1996, as compared to the same periods of 1995. Partially
offsetting these increases was a decline in the rates paid on savings deposits
during these periods. The rates paid on the Company's interest bearing deposits
declined from 5.60% to 5.16% or 44 basis points during the third quarter and
declined from 5.49% to 5.23% or 26 basis points for the nine months ended
September 30, 1996 compared to the same periods in 1995. The decline in the
rates paid on the Company's deposits reflect the decline in market interest
rates between the 1995 and 1996 periods and the substitution of lower rate money
market checking accounts for higher rate paying certificates of deposits.
Interest on certificates of deposit decreased by $278,000 or 27.3% for the
quarter ended September 30, 1996, compared to the same period in 1995, due to a
decrease of $16.4 million in average certificate of deposits outstanding for the
quarter ended September 30, 1996, compared to the same period in 1995. Also
contributing to this reduction in interest cost was a 30 basis point decrease on
rates paid on certificates of deposit from 5.67% for the quarter ended September
30, 1995 to 5.37% for the quarter ended September 30, 1996.
15
<PAGE>
Interest on certificates of deposit decreased by $931,000 or 28.2% for the
nine months ended September 30, 1996, compared to the same period in 1995, due
to a decrease of $23.1 million in average certificate of deposits outstanding
for the nine months ended September 30, 1996, compared to the same period in
1995. Rates paid on certificates of deposits remained flat increasing one basis
point from 5.43% for the nine months ended September 30, 1995 to 5.44% for the
nine months ended September 30, 1996.
Interest on savings accounts increased by $365,000 or 18.8% for the quarter
ended September 30, 1996, when compared to the same period in 1995, due to an
increase in the average saving deposits. Average outstanding saving deposit
balances increased by $40.6 million for the quarter ended September 30, 1996
compared to the same period in 1995. Partially offsetting this increase was a
savings deposit rate decrease of 44 basis points from 5.56% for the quarter
ended September 30, 1995 to 5.12% for the quarter ended September 30, 1996.
Interest on savings accounts increased by $1.5 million or 26.8% for the nine
months ended September 30, 1996, when compared to the same period in 1995, due
to an increase in the average savings deposits. Average outstanding savings
deposit balances increased by $47.4 million for the nine months ended September
30, 1996 compared to the same period in 1995. Partially offsetting this
increase was a savings deposit rate decrease of 33 basis points from 5.52% for
the nine months ended September 30, 1995 to 5.19% for the nine months ended
September 30, 1996.
The Company posted interest expense of $15,000 on other borrowings during the
nine months ended September 30, 1995. The Company had no other borrowings
during 1996.
The Company introduced a money market checking product during the first
quarter of 1996. The introduction of this product resulted in attracting $21.8
million in deposits during 1996. At September 30, 1996, the Company paid a
deposit rate of 4.93% for the quarter and nine months ended September 30, 1996.
The introduction of the money market checking product has allowed the Company to
diversify its deposits with a lower rate paying savings product.
PROVISION FOR LOAN LOSSES
During the quarter ended September 30, 1996, the Company's loan loss
provision was $550,000 compared to $797,000 for the same period in 1995. For
the nine months ended September 30, 1996, the provision for loan losses was
$1.65 million compared to $904,000 for the same period in 1995. The 1996
provision reflects, among other factors, the sale of $9.5 million in nonaccrual
and TDR loans in the second quarter and the sale of $1.9 million in loans in the
third quarter of 1996. Although the Company maintains its allowance for loan
losses at a level which it considers to be adequate to provide for potential
losses, there can be no assurance that such losses will not exceed the estimated
amounts, thereby adversely affecting future results of operations. The
calculation of the adequacy of the allowance for loan losses is based on several
factors, including underlying loan collateral values, delinquency trends and
historical loan loss experience. The ratio of nonaccrual loans to total loans
was .88% at September 30, 1996 and 2.53% at December 31, 1995. The ratio of the
allowance for loan losses to nonaccrual loans was 192% at September 30, 1996 and
90.3% at December 31, 1995. The allowance for loan losses as a percentage of
loans stood at 1.69% at September 30, 1996, compared to 2.29% at December 31,
1995.
NONINTEREST INCOME
Noninterest income for the quarter and nine months ended September 30, 1996
decreased by $148,000 and increased by $164,000, respectively as compared to the
same periods in 1995. Noninterest income for the third quarter and nine months
ended September 30, 1996 included a recovery on a corporate debt security of
$75,000 and $425,000, respectively as compared to a recovery of $650,000 in the
third quarter of 1995. Included in 1995 was the sale and receipt of payments on
the Company's remaining collateralized mortgage obligation (CMO residual). The
Company sold its remaining interest in its CMO residual during the second
quarter of 1995 for a recovery of $195,000.
Additionally, noninterest income included a $264,000 gain recorded on the
sale of $28.2 million of the Company's San Francisco branch deposits in
September of 1996.
Other noninterest income increased by $163,000 and $320,000 for the quarter
and nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. Increases in late fees and loan prepayment fees and rents
received on OREO properties accounted for these increases.
16
<PAGE>
NONINTEREST EXPENSE ANALYSIS
<TABLE>
<CAPTION>
-------------------------------- -------------------------------
For the Quarter Ended For the Nine Months Ended
September 30 September 30
-------------------------------- -------------------------------
AMOUNTS CHANGE CHANGE AMOUNTS CHANGE CHANGE
DOLLARS IN THOUSANDS 1996 1995 $ % 1996 1995 $ %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustments to other
real estate owned - 85 (85) - 70 251 (181) (72%)
Other real estate owned expense 72 38 34 89% 95 133 (38) (29%)
Salaries and employee benefits 1,273 955 318 33% 3,378 3,125 253 8%
Net occupancy expenses 357 367 (10) (3%) 1,139 1,152 (13) (1%)
FDIC insurance premiums 20 - 20 - 53 301 (248) (82%)
Credit and collections expenses 23 145 (122) (84%) 48 262 (214) (82%)
Communication and data processing 132 114 18 16% 388 365 23 6%
Other expenses 267 386 (119) (31%) 697 1,093 (396) (36%)
- ------------------------------------------------------------------------ -------------------------------
Total noninterest expense 2,144 2,090 54 3% 5,868 6,682 (814) (12%)
- ------------------------------------------------------------------------ -------------------------------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense for the quarter and nine months ended September 30, 1996
increased $54,000 and decreased $814,000, respectively over the same periods in
1995. These changes are detailed on the table above and significant changes in
noninterest expense are described below.
The valuation adjustment to OREO for the third quarter and nine months ended
September 30, 1996 decreased by $85,000 and $181,000, respectively compared to
the same periods in 1995. The decrease to the Company's OREO valuation
adjustment is a result of the stabilization of commercial real estate values in
California resulting in the Company not having to write down foreclosed real
estate property subsequent to its foreclosure.
Salaries and employee benefits for the quarter and nine months ended
September 30, 1996, increased by $318,000 and $253,000, respectively, as
compared to the same period in 1995. The increase is the result of the
establishment and hiring of four individuals to manage the Company's SBA
department during the second and third quarters of 1996, the accrual of employee
bonus' during the third quarter of 1996, which were not accrued for in 1995, and
severance packages paid to employees of the San Francisco branch which was sold
in September of 1996.
FDIC insurance premiums declined by $248,000, for the nine months ended
September 30, 1996 compared to the same period in 1995. FDIC insurance premium
rates were reduced by the FDIC during the third quarter of 1995. FDIC deposit
rates are projected to increase in the near future, which may increase the
Company's deposit premiums.
Credit and collections cost for the quarter and nine months ended September
30, 1996, decreased by $122,000 and $214,000, compared to the same periods in
1995. These decreases were the result of the Company having established expense
accruals on several of the larger nonaccrual accounts at the end of 1995. In
addition, the Company has had a reduction in the number of delinquent nonaccrual
accounts in 1996 compared to 1995.
Other expenses for the quarter and nine months ended September 30, 1996,
decreased by $119,000 and $396,000, respectively. These decreases are the
result of a $100,000 reduction in the accrual of Delaware franchise taxes in the
first quarter of 1996 and other expenses paid in the second and third quarter of
1995 for legal and consulting fees associated with the 1995 exchange offer of
the Company's Preferred Stock.
INCOME TAX PROVISION
For the quarter and nine months ended September 30, 1996, the Company
estimated its provision for income taxes at $471,000 and $1.4 million or 38.2%
and 38.4% respectively. The difference between the Company's statutory tax rate
of 41.5% and its effective rates for the quarter and nine months ended September
30, 1996 is due to California tax deductions (credits) generated by the Company
on loans made in special tax zones within California.
17
<PAGE>
The Company's income tax provision for the quarter and nine months ended
September 30, 1995, was offset by a like reduction in the Company's tax
valuation reserves. The 1995 third quarter and nine months tax provision of
$390,000 and $932,000, respectively, representing a combined federal and state
tax rate provision of 42.4%, was offset by tax valuation reserves of $468,000
and $1.0 million for the quarter and nine months ended September 30, 1995,
respectively.
LIQUIDITY
The Company's primary sources of funds are deposits and payments of principal
and interest on loans. While maturities and scheduled principal amortization on
loans are a reasonable predictable source of funds, deposit flows and mortgage
loan prepayments are greatly influenced by the level of interest rates, economic
conditions, and competition.
There has been an overall decrease in the Company's holdings of cash and cash
equivalents during the nine months ended September 30, 1996. Cash and cash
equivalents declined by $44.9 million to $11.2 million at September 30, 1996
from $56.1 million at December 31, 1995. The decrease in the Company's cash
equivalents was utilized to purchase, net of maturities, $58.9 million of U.S.
governmental agency securities during 1996. In addition, the Company raised
$3.8 million in savings deposits during the nine months ended September 30,
1996. The increase in interest bearing liabilities reflects a gross increase in
new deposits of $32.0 million, primarily from the introduction of the Company's
money market checking accounts of $21.8 million. The increase in new deposits
was partially offset by the San Francisco branch sale in September 1996, which
resulted in the sale of $21.0 million in savings deposits, $7.2 million in time
deposits for a total of $28.2 million in sold deposits.
Loans, net of deferred fees and the allowance for loan losses, decreased by
$8.2 million to $184.1 million at September 30, 1996, from $192.3 million at
December 31, 1995. The Company originated $31.2 million in real estate and
business loans during the nine months ended September 30, 1996. Off-setting
these originations, the Company experienced $33.8 million in loan payoffs and
loan sales, and $3.7 million in gross loan transfers prior to writeoffs to other
real estate owned, ("OREO") during the nine months ended September 30, 1996.
Included in the $8.2 million loan reduction was a bulk loan sale of $9.5 million
of nonaccrual and troubled debt restructured loans in the second quarter and
$1.9 million in loans sales in the third quarter of 1996.
Pacific Crest Investment's ability to pay dividends to the parent is
restricted by California state law, which requires that sufficient retained
earnings are available to pay the dividend. At September 30, 1996 Pacific Crest
Investment and Loan had deficit retained earnings of $1.2 million. Under
California state law, this deficit would have to be turned into a positive
figure before dividends could be paid from Pacific Crest Investment to the
parent. Therefore it is highly unlikely Pacific Crest Investment will be able
to pay dividends to its parent until 1997. Further, Pacific Crest Investment,
under the terms of a regulatory Memorandum of Understanding, must receive
regulatory approval to pay a dividend to its parent.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable.
ITEM 2 CHANGES IN SECURITIES
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Not applicable.
(b) REPORTS ON FORM 8-K:
-------------------
The Company filed no reports on Form-8K during the quarter ended
September 30, 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
Date: November 12, 1996 /s/Gary Wehrle
----------------------------- ------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: November 12, 1996 /s/Robert J. Dennen
------------------------------ ------------------------------------
Robert J. Dennen
Vice President, Chief Financial Officer
Corporate Secretary
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