<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, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number 0-22732
PACIFIC CREST CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4437818
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30343 Canwood Street
Agoura Hills, California 91301
(Address of principal executive offices) (Zip Code)
(818) 865-3300
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of November 13, 1997.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value 2,971,674
<PAGE>
PACIFIC CREST CAPITAL, INC.
FORM 10-Q
INDEX
Page No.
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
Item 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES OF
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash $ 3,255 $ 2,572
Securities purchased under resale agreements 11,573 262
--------- ---------
Cash and cash equivalents 14,828 2,834
--------- ---------
U.S. government sponsored agency securities (Note 5):
Held to maturity, at amortized cost 25,963 30,960
Available for sale, at market 131,210 52,534
Loans
Commercial mortgage 224,521 206,172
Business Loans - SBA 4,579 2,363
Residential mortgage 1,594 1,596
Commercial business/other 661 1,581
--------- ---------
Total loans 231,355 211,712
Deferred loan fees 737 617
Allowance for loan losses 3,866 3,400
--------- ---------
Net loans 226,752 207,695
Accrued interest receivable 3,872 1,966
Prepaid expenses and other assets 1,494 772
Deferred income taxes 2,951 3,302
Other real estate owned 1,565 3,469
Premises and equipment 563 553
--------- ---------
Total assets $ 409,198 $ 304,085
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings accounts $ 191,833 $ 157,789
Certificates of deposit 125,502 88,826
Money market checking 16,722 20,080
--------- ---------
Total deposits 334,057 266,695
Other borrowings 1,000 10,000
Term borrowings 25,000
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures 17,250 -
--------- ---------
Total interest-bearing liabilities 377,307 276,695
Accrued interest and other liabilities 4,058 2,922
--------- ---------
Total liabilities 381,365 279,617
--------- ---------
Shareholders' equity (Notes 6 and 7):
Preferred stock, $.01 par value, 2,000,000
shares authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,969,061 shares issued and outstanding at
September 30, 1997, 2,959,698 shares issued and
outstanding at December 31, 1996 27,919 27,838
Accumulated deficit (170) (2,859)
Net unrealized gain/(loss) on available for sale securities 339 (256)
Common stock in treasury, at cost, 30,000 shares (255) (255)
--------- ---------
Total shareholders' equity 27,833 24,468
--------- ---------
Total liabilities and shareholders' equity $ 409,198 $ 304,085
--------- ---------
--------- ---------
Book value per common share (Note 3) $ 9.47 $ 8.35
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans, including fees $ 6,205 $ 5,086 $ 17,905 $ 16,008
Securities purchased under resale agreements 47 356 74 2,028
Certificates of deposit - 4 - 12
U.S. government sponsored agency securities
Available for sale 1,937 645 4,364 946
Held to maturity 658 491 2,345 818
-------- -------- -------- --------
Total interest income 8,847 6,582 24,688 19,812
Interest expense:
Savings accounts 2,487 2,305 6,920 7,112
Certificates of deposit 1,679 740 4,533 2,376
Money market checking accounts 221 279 673 569
Other borrowings 433 - 1,037
Term borrowings 36 - 36 -
Trust preferred capital securities 40 - 40 -
-------- -------- -------- --------
Total interest expense 4,896 3,324 13,239 10,057
-------- -------- -------- --------
Net interest income 3,951 3,258 11,449 9,755
Provision for loan losses 280 550 810 1,650
-------- -------- -------- --------
Net interest income after provision for loan losses 3,671 2,708 10,639 8,105
Noninterest income:
Gain on sale of investment securities - 75 - 425
Gain on sale of deposits - 264 - 264
Other noninterest income 167 330 617 674
-------- -------- -------- --------
Total noninterest income 167 669 617 1,363
-------- -------- -------- --------
Noninterest expense:
Valuation adjustments to other real estate owned 30 - 370 70
Other real estate owned expenses 31 72 48 95
Salaries and employee benefits 1,257 1,273 3,779 3,378
Net occupancy expenses 399 357 1,154 1,139
FDIC insurance premiums 9 20 63 53
Credit and collection expenses 69 23 80 48
Communication and data processing 161 132 483 388
Other expenses 286 267 807 697
-------- -------- -------- --------
Total noninterest expense 2,242 2,144 6,784 5,868
-------- -------- -------- --------
Income before income taxes 1,596 1,233 4,472 3,600
Income tax provision (Note 2) 637 471 1,783 1,381
-------- -------- -------- --------
Net income $ 959 $ 762 $ 2,689 $ 2,219
-------- -------- -------- --------
-------- -------- -------- --------
Per share data (Note 3):
Primary earnings per common share $ 0.31 $ 0.25 $ 0.88 $ 0.74
-------- -------- -------- --------
Weighted average common shares
outstanding (in thousands) 3,081 2,995 3,060 2,999
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earnings per common share $ 0.31 $ 0.25 $ 0.88 $ 0.74
-------- -------- -------- --------
Weighted average fully diluted common shares
outstanding (in thousands) 3,096 2,995 3,070 3,004
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN/LOSS ON
COMMON STOCK TREASURY STOCK SECURITIES
------------------------------------- AVAILABLE ACCUMULATED
(DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT FOR SALE DEFICIT
------ ------ ------ ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 2,954 $ 27,813 - $ - $ - $ (5,862)
----- -------- ----- -------- ---------- ----------
Issuance of stock under employee
stock purchase plan 6 25 - - - -
Net changes in unrealized loss on securities
available for sale, net of taxes - - - - (256) -
Purchase of treasury shares - - (30) (255) - -
Net income - - - - - 3,003
----- -------- ----- -------- ---------- ----------
Balances at December 31, 1996 2,960 $ 27,838 (30) $ (255) $ (256) $ (2,859)
----- -------- ----- -------- ---------- ----------
Issuance of stock under employee
stock purchase plan 6 52 - - - -
Issuance of stock under non-employee
directors' stock purchase plan 3 29 - - - -
Net changes in unrealized gain/loss on securities
available for sale, net of taxes - - - - 595 -
Net income - - - - - 2,689
----- -------- ----- -------- ---------- ----------
Balances at September 30, 1997 2,969 $ 27,919 (30) $ (255) $ 339 $ (170)
----- -------- ----- -------- ---------- ----------
----- -------- ----- -------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,689 $ 2,219
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Recovery on investment securities - (425)
Provision for loan losses 810 1,650
Valuation adjustments to OREO 370 70
Loss on investment in joint venture 7 -
Depreciation and amortization 186 166
Amortization of deferred loan fees (270) (795)
Amortization/accretion of securities (7) 36
Changes in operating assets and liabilities:
Accrued interest receivable (1,906) (1,255)
Prepaid expenses and other assets (629) (483)
Deferred income taxes (80) 739
Accrued interest and other liabilities 1,136 208
-------- --------
Net cash provided by operating activities 2,306 2,130
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored agency securities:
Held to maturity (15,000) (33,900)
Available for sale (128,446) (54,568)
Proceeds from U.S. government sponsored agency securities:
Held to maturity 20,000 8,000
Available for sale 50,800 21,531
Proceeds from recovery on investment securities - 380
Net increase in loans (21,174) (4,455)
Proceeds from sale of loans - 9,032
Proceeds from sale of notes 600 -
Investment in joint venture (100) -
Purchases of equipment and leasehold improvements, net (196) (142)
Proceeds from sale of other real estate owned 2,511 3,481
-------- --------
Net cash used in investing activities (91,005) (50,641)
FINANCING ACTIVITIES:
Reduction of savings deposits from branch sale - (20,989)
Reduction of time deposits from branch sale - (7,202)
Net increase in certificates of deposit 36,676 3,433
Net (decrease)/increase in money market checking (3,358) 21,834
Net increase in savings accounts 34,044 6,722
Net increase in other borrowings 16,000 -
Purchase of treasury stock, at cost - (255)
Proceeds from the issuance of common stock 81 25
Proceeds from issuance of trust preferred capital securities 17,250 -
-------- --------
Net cash provided by financing activities 100,693 3,568
Net increase/(decrease) in cash and cash equivalents 11,994 (44,943)
Cash and cash equivalents at beginning of period 2,834 56,167
-------- --------
Cash and cash equivalents at end of period $ 14,828 $ 11,224
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,048 $ 10,083
Income taxes $ 1,895 $ 745
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ 836 $ 2,836
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
NOTE 1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by
Pacific Crest Capital, Inc. ("Pacific Crest"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Pacific Crest together with its subsidiaries is referred to as the "Company".
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, the Company believes that the disclosures and
information presented are adequate and, therefore, 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, 1997, have been included. Certain reclassifications have been
made to prior year amounts to conform to the 1997 presentation. The results
of operations for interim periods are not necessarily indicative of results
for the full year.
Effective August 1, 1997, the Company's wholly owned subsidiary changed
its name from Pacific Crest Investment and Loan to Pacific Crest Bank. The
change is a change in name only with no changes in the charter or powers.
NOTE 2. INCOME TAXES
For the quarters ended September 30, 1997 and 1996, the Company's
provision for income taxes was $637,000 and $471,000, or 39.9% and 38.2%,
respectively. For the nine months ended September 30, 1997 and 1996, the
Company's provision for income taxes was $1,783,000 and $1,381,000, or 39.9%
and 38.4%, respectively. The difference between the Company's statutory tax
rate of 41.5% and its effective rate for these periods is primarily due to
California tax deductions (credits) generated by the Company on loans made in
special tax zones within California.
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, less
treasury shares, at September 30, 1997 and December 31, 1996. The number of
common shares used in this calculation was 2,969,061, less 30,000 of treasury
shares, at September 30, 1997 and 2,959,698, less 30,000 of treasury shares,
at December 31, 1996.
Primary and fully diluted earnings per common share for the quarter and
nine months ended September 30, 1997 were determined by dividing net income
by the weighted average common shares outstanding. The common shares
outstanding were adjusted to reflect the number of common stock equivalents
outstanding based on the number of outstanding stock options issued by the
Company utilizing the treasury stock method. See table below for computations:
<TABLE>
<CAPTION>
PRIMARY EPS FULLY DILUTED EPS
----------- -----------------
QUARTER ENDED NINE MONTHS QUARTER ENDED NINE MONTHS
9/30/97 ENDED 9/30/97 9/30/97 ENDED 9/30/97
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 959,000 $ 2,689,000 $ 959,000 $ 2,689,000
Weighted average shares 3,081,000 3,060,000 3,096,000 3,070,000
----------- ------------ ----------- -----------
Earnings per share $ 0.31 $ 0.88 $ 0.31 $ 0.88
----------- ------------ ----------- -----------
</TABLE>
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" which specified this computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS No. 128 eliminated both the
"primary" and "fully diluted" EPS and required the computation and
disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after
December 15, 1997, with earlier application not permitted. The Company's
analysis of SFAS No. 128 concluded that it would have no impact on the EPS
disclosures contained herein.
5
<PAGE>
NOTE 4. CONTINGENCIES
LITIGATION
As an incident to normal operations, the Company is, from time to time,
named as a defendant in lawsuits, some of which seek 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 or results of
operations of the Company.
NOTE 5. INVESTMENT SECURITIES
U.S. government sponsored agency securities have been classified in the
consolidated balance sheets according to management's intent. The carrying
amount of securities and their approximate fair values at September 30, 1997
were as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. government sponsored agency securities
Held to maturity $ 25,963 $ 96 $ (54) $ 26,005
Available for sale 130,644 734 (168) 131,210
--------- ----- ------ ---------
Total investment securities $ 156,607 $ 830 $ (222) $ 157,215
--------- ----- ------ ---------
--------- ----- ------ ---------
</TABLE>
The Company's security portfolio consists of Federal Home Loan Bank
(FHLB) and Federal National Mortgage Association (FNMA) securities. These
securities have call features that allow the issuing agency to retire (call)
the security prior to its stated maturity date. The Company's security
portfolio has call dates ranging from immediately callable through four
years. The Company believes that the majority of its securities will be
called by the issuing agency before the final maturity date. The following
table reflects the scheduled maturities of securities in both the
held-to-maturity portfolio and the available-for-sale portfolio at September
30, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
Due from five to ten years $ 9,998 $ 10,070 7.7% 9.2 years
Due after ten years 15,965 15,935 7.8% 14.4 years
--------- --------- ----- ----------
Total held-to-maturity securities: $ 25,963 $ 26,005 7.8% 12.4 years
--------- --------- ----- ----------
AVAILABLE-FOR-SALE SECURITIES:
Due from one to five years $ 5,000 $ 5,023 6.4% 4.2 years
Due from five to ten years 82,979 83,671 7.1% 8.3 years
Due after ten years 42,665 42,516 7.1% 10.0 years
--------- --------- ----- ----------
Total available-for-sale securities: $ 130,644 $ 131,210 7.1% 8.7 years
--------- --------- ----- ----------
--------- --------- ----- ----------
Total investment securities $ 156,607 $ 157,215 7.2% 9.3 years
--------- --------- ----- ----------
--------- --------- ----- ----------
</TABLE>
U.S. government sponsored agency securities carried at $29.3 million
were pledged to secure term and other borrowings aggregating $26.0 million at
September 30, 1997.
NOTE 6. CAPITAL
At September 30, 1997, 10,000,000 shares of $0.01 par value common stock
were authorized of which, 2,969,061 shares were issued and outstanding.
Pacific Crest Bank is required to maintain certain minimum capital levels
under federal banking law. The following table sets forth Pacific Crest Bank's
regulatory capital ratios at September 30, 1997, and December 31, 1996:
6
<PAGE>
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS (1) AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
---------------------------- ----------------------------
---------------------------- ----------------------------
Minimum Minimum
Required Actual Excess Required Actual Excess
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio(2) 4.00% 8.22% 4.22% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 12.04% 8.04% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 13.17% 5.17% 8.00% 11.56% 3.56%
---- ----- ---- ---- ----- ----
</TABLE>
(1) Capital ratios of Pacific Crest Bank only.
(2) Calculation based on quarter end asset balances of Pacific Crest Bank.
NOTE 7. DIVIDENDS
As a Delaware corporation, Pacific Crest may pay common dividends out of
surplus or, if there is no surplus, from net profits for the current and
preceding fiscal year. Pacific Crest has approximately $11.1 million in cash
plus investments less current liabilities at September 30, 1997. Without
dividends from Pacific Crest Bank, Pacific Crest must rely either on existing
cash and investments which total $11.7 million at September 30, 1997 or the
ability to secure borrowings. This amount is also necessary to pay future
operating expenses, existing current liabilities and the interest cost
associated with the subordinated debt security issued in September of 1997 by
Pacific Crest, and for the future possible infusion of capital into Pacific
Crest Bank. Pacific Crest has approximately $417,000 in quarterly, or $1.6
million in annual, interest payments to PCC Capital I as a result of the
issuance of the subordinated debt issued by the Parent. These payments from
the Parent to PCC Capital I are utilized by PCC Capital I to make its
quarterly dividend payments on the Trust Preferred Securities.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that retained earnings are
available to pay such dividends. Pacific Crest Bank had retained earnings of
$2.5 million at September 30, 1997. The total amount of retained earnings is
unrestricted and available for dividend payments.
NOTE 8. OFFERING OF CAPITAL SECURITIES BY PCC CAPITAL I
On September 22, 1997, PCC Capital I (the "Trust"), a wholly owned
subsidiary of Pacific Crest, completed the sale of $17.25 million of 9.375%
Cumulative Capital Trust Securities. The net proceeds of approximately $16.1
million after payment of sales commissions and other offering costs were
invested, by the Trust, in Junior Subordinated Debentures issued by the
Parent Company in connection with this public offering. The interest on the
Junior Subordinated Debentures will be paid by the Parent Company to the
Trust, and represents the sole revenues of the Trust and the source of
dividend distributions by the Trust to the holders of the Capital Securities.
For financial reporting purposes, the Trust is treated as a subsidiary
of Pacific Crest and, accordingly, the accounts of the Trust are included in
the consolidated financial statements of Pacific Crest. The Capital
Securities are presented as a separate line item in the consolidated balance
sheets under the caption "Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures." For financial reporting purposes, Pacific Crest records the
dividend distributions payable on the Cumulative Capital Trust Securities as
interest expense in the consolidated statements of operations.
The Parent Company, upon issuance of the Junior Subordinated
Debentures, and receipt of approximately $16.1 million in cash from the
trust, subsequently contributed $5.0 million of capital into Pacific Crest
Bank. The balance of the net proceeds will be used by the Parent Company for
general corporate purposes. The Capital Securities qualify as Tier 1 capital
under the capital guidelines of the Federal Reserve subject to regulatory
limitations.
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 consolidated financial performance of the Company
for the quarter and nine months ended September 30, 1997. This analysis
should be read in conjunction with the Company's 1996 Annual Report on Form
10-K and with the unaudited financial statements and notes as set forth on
pages 1 through 7 of this report.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company.
The following discussion should be read in conjunction with the information
in the Company's consolidated financial statements and notes thereto and
other financial data included elsewhere herein. Certain statements under this
caption constitute "forward-looking statements" within the meaning of the
Private Securities Reform Act of 1995, and as such, may involve risks and
uncertainties. The Company's actual results, performance and achievements may
differ materially from the results, performance and achievements expressed or
implied in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, economic conditions, competition
in the geographic and business areas in which the Company conducts its
operations, fluctuations in interest rates, credit quality and governmental
regulation.
The following table sets forth certain selected financial data
concerning the Company for the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCES
Average loans $ 227,533 $ 221,270 $ 210,606 $ 195,691 $ 183,738
Average earning assets 373,817 342,090 316,846 276,083 273,636
Average assets 380,467 348,968 325,690 282,341 282,184
Average deposits 316,474 297,936 280,133 254,264 256,359
Average equity 26,811 25,423 24,739 24,108 23,483
PERFORMANCE RATIOS
Return on average assets(1) 1.01% 1.04% 1.02% 1.11% 1.08%
Return on average common equity(1) 14.31% 14.25% 13.32% 12.99% 12.98%
Net interest margin(2) 4.19% 4.42% 4.77% 4.77% 4.74%
CAPITAL AND LEVERAGE RATIOS(3)
Risk-based capital ratios:
Tier one 11.95% 10.00% 10.23% 10.31% 11.33%
Total 13.21% 11.25% 11.48% 11.56% 12.59%
Leverage capital ratio(4) 8.24% 7.07% 7.36% 7.96% 8.92%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.68% 1.67% 1.62% 1.61% 1.69%
Allowance for loan losses to nonaccrual loans 187.31% 176.10% 506.98% 245.31% 192.09%
Total nonperforming assets to total assets(5) 0.89% 1.10% 1.02% 1.60% 1.97%
----------------------------------------------------------------
</TABLE>
(1) Calculations based on annualized net income.
(2) Net interest margin is calculated by dividing annualized net interest
income by average earning assets.
(3) Capital ratios of Pacific Crest Bank only.
(4) Calculation based on quarter end asset balances of Pacific Crest Bank.
(5) Nonperforming assets include nonaccrual loans and other real estate loans
("OREO") and exclude performing troubled debt restructurings.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter and nine months ended September 30,
1997 and 1996, present the distribution of average assets, liabilities and
shareholders' equity, the total dollar amount of interest income from average
interest-earning assets, the resultant yields and the interest expense on
average interest-bearing liabilities, expressed in both dollars and rates. All
average balances are daily average balances. Nonaccrual loans have been included
in the table as loans having a zero yield.
<TABLE>
<CAPTION>
Quarter Ended September 30,
----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
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 $ 227,533 $ 6,205 10.82% $ 183,738 $ 5,086 11.01%
Repurchase agreements 3,405 47 5.48% 27,017 360 5.30%
U.S. government sponsored
agency securities:
Available for sale 108,982 1,937 7.11% 36,981 645 6.98%
Held to maturity 33,897 658 7.76% 25,900 491 7.58%
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 373,817 8,847 9.39% 273,636 6,582 9.57%
OREO 1,643 3,492
Other noninterest-earning assets 8,832 8,215
Less allowance for loan losses 3,825 3,159
---------- ----------
Total assets $ 380,467 $ 282,184
---------- ----------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 185,401 $ 2,487 5.32% $ 179,031 $ 2,305 5.12%
Certificates of deposit 113,390 1,679 5.87% 54,822 740 5.37%
Money market checking 17,683 221 4.96% 22,506 279 4.93%
Other borrowings 32,029 469 5.81% - - -
Trust preferred capital securities 1,688 40 9.40% - - -
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities 350,191 4,896 5.55% 256,359 3,324 5.16%
Non interest-bearing liabilities 3,465 2,342
Shareholders' equity 26,811 23,483
---------- ----------
Total liabilities and
shareholders' equity $ 380,467 $ 282,184
---------- -------- ---------- --------
Net interest income $ 3,951 $ 3,258
Net interest rate spread 3.84% 4.41%
Net interest-earning assets $ 23,626 $ 17,277
Net interest margin 4.19% 4.74%
Average interest-earning assets to
average interest-bearing liabilities 106.75% 106.74%
-------- --------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
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 $ 219,865 $ 17,905 10.89% $ 189,233 $ 16,008 11.30%
Repurchase agreements 1,823 74 5.43% 51,363 2,040 5.31%
U.S. government sponsored
agency securities:
Available for sale 82,306 4,364 7.07% 18,829 946 6.70%
Held to maturity 40,466 2,345 7.73% 14,859 818 7.34%
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 344,460 24,688 9.58% 274,284 19,812 9.65%
OREO 2,441 4,082
Other noninterest-earning assets 9,154 8,014
Less allowance for loan losses 3,655 4,254
---------- ----------
Total assets $ 352,400 $ 282,126
---------- ----------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 175,645 $ 6,920 5.27% $ 183,125 $ 7,112 5.19%
Certificates of deposit 104,276 4,533 5.81% 58,308 2,376 5.44%
Money market checking 18,393 673 4.89% 15,424 569 4.93%
Other borrowings 25,006 1,073 5.74% - - -
Trust preferred capital securities 569 40 9.40% - - -
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities 323,889 13,239 5.46% 256,857 10,057 5.23%
Non interest-bearing liabilities 2,845 2,417
Shareholders' equity 25,666 22,852
---------- ----------
Total liabilities and
shareholders' equity $ 352,400 $ 282,126
---------- -------- ---------- --------
Net interest income $ 11,449 $ 9,755
Net interest rate spread 4.12% 4.42%
Net interest-earning assets $ 20,571 $ 17,427
Net interest margin 4.44% 4.75%
Average interest-earning assets to
average interest-bearing liabilities 106.35% 106.78%
-------- --------
</TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following tables present 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 in 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.
10
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------------- ---------------------------------
1997 compared to 1996 1997 compared to 1996
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 $ 1,196 $ (77) $ 1,119 $ 2,512 $ (615) $ 1,897
Repurchase agreements (326) 13 (313) (2,011) 45 (1,966)
U.S. government agency securities:
Available for sale 1,290 2 1,292 3,354 64 3,418
Held to maturity 156 11 167 1,478 49 1,527
-------- -------- -------- -------- -------- --------
Total change in interest income 2,316 (51) 2,265 5,333 (457) 4,876
-------- -------- -------- -------- -------- --------
CHANGES IN INTEREST EXPENSE:
Savings accounts 84 98 182 (293) 101 (192)
Certificates of deposit 861 78 939 1,987 170 2,157
Money market checking (60) 2 (58) 108 (4) 104
Other borrowings 469 - 469 1,073 - 1,073
Trust preferred capital securities 40 - 40 40 - 40
-------- -------- -------- -------- -------- --------
Total change in interest expense 1,394 178 1,572 2,915 267 3,182
-------- -------- -------- -------- -------- --------
Changes in net interest income $ 922 $ (229) $ 693 $ 2,418 $ (724) $ 1,694
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
DETAILED COMPARISON OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $959,000 (or $0.31 per common share on a fully diluted
basis) for the quarter ended September 30, 1997, compared to $762,000 (or
$0.25 per common share on a fully diluted basis) for the corresponding period
in 1996, representing the sixth consecutive quarter of growth in net income.
Net income for the nine months ended September 30, 1997 was $2.7 million (or
$0.88 per common share on a fully diluted basis) compared to $2.2 million (or
$0.74 per common share on a fully diluted basis) for the corresponding period
in 1996. The increase in net income during the quarter and nine months ended
September 30, 1997, was primarily the result of an increase in net interest
income, and the reduced provision for loan losses, between the 1997 and 1996
periods.
NET INTEREST INCOME
Net interest income increased by $693,000, or 21.3%, to $3.95 million
for the quarter ended September 30, 1997, compared to the same period of
1996. Net interest income increased by $1.7 million, or 17.4%, to $11.4
million for the nine months ended September 30, 1997, compared to the same
period in 1996. The components describing these changes are described in the
following paragraphs and table.
The net interest rate spread is defined as the yield on interest-earning
assets less the rates paid on interest-bearing liabilities. The net interest
rate spread for the quarter ended September 30, 1997 and 1996 was 3.84% and
4.41%, respectively, and for the nine months ended September 30, 1997 and
1996 was 4.12% and 4.42%, respectively. The decline in the spread between the
1997 and 1996 periods is the result of an increase in the rates paid on
interest-bearing liabilities that exceeds the increase on yields received on
interest-earning assets.
The net interest margin is defined as the difference between interest
income and interest expense divided by the average interest-earning assets.
The net interest margin for the quarter ended September 30, 1997 and 1996,
was 4.19% and 4.74%, respectively, and for the nine months ended September
30, 1997 and 1996, 4.44% and 4.75%, respectively. The decline in the margin
is the result of the reduced net interest rate spread, and the change in the
composition of the balance sheet. Loans, the highest yielding asset, have
decreased as a percentage of average interest-earning assets while the
Company's holdings in the lower yielding U.S. government sponsored agency
securities have increased as a percentage of average interest-earning assets.
Additionally, the Company has financed a portion of these security purchases
with borrowings including the issuance of the trust preferred capital
securities, which on average, cost the Company more than deposits.
11
<PAGE>
The following table sets forth the composition of average
interest-earning and average interest-bearing liabilities by category and by
the percentage of each category to the total for the nine months ended
September 30, 1997 and 1996, including the change in average balance and
yield/rate between these respective periods:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 Avg. Bal. Net Change
-------------------------------- ------------------------------ ---------------------------
% Avg. % Avg. Yield/
Average Compo- Yield/ Average Compo- Yield/ Rate
(DOLLARS IN THOUSANDS) Balance sition Rate Balance sition Rate $ % Change
---------- -------- ------- --------- -------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $ 219,865 63.8% 10.89% $ 189,233 69.0% 11.30% $ 30,632 16.2% (0.41%)
Repurchase agreements 1,823 0.5% 5.43% 51,363 18.7% 5.31% (49,540) (96.5%) 0.12%
U.S. government agency
securities 122,772 35.7% 7.29% 33,688 12.3% 6.98% 89,084 264.4% 0.31%
---------- ----- ----- --------- ----- ----- -------- ----- -----
Total interest earning assets 344,460 100.0% 9.58% 274,284 100.0% 9.65% 70,176 25.6% (0.07%)
INTEREST BEARING LIABILITIES:
Deposits 298,314 92.1% 5.43% 256,857 100.0% 5.23% 41,457 16.1% 0.20%
Borrowings 25,006 7.7% 5.74% - - - 25,006 - -
Trust preferred capital
securities 569 0.2% 9.40% - - - 569 - -
Total interest bearing
liabilities $ 323,889 100.0% 5.46% $ 256,857 100.0% 5.23% $ 67,032 26.1% 0.23%
</TABLE>
TOTAL INTEREST INCOME
Total interest income increased by $2.3 million, or 34.4%, to $8.8
million for the quarter ended September 30, 1997, and increased by $4.9
million, or 24.6%, to $24.7 million for the nine months ended September 30,
1997, compared to the same periods in 1996. These increases were primarily
due to increases in the average balance of interest-earning assets of $100.2
million and $70.2 million, respectively, for the quarter and nine months
ended September 30, 1997, over the comparable periods in 1996. Average
interest-earning assets continue to rise with the growth of the Company. The
growth has been concentrated in U.S. government sponsored agency securities
and commercial loans. Partially offsetting these increases, the overall
yields on the Company's interest-earning assets decreased by 18 basis points
and seven basis points, respectively, for the quarter and nine months ended
September 30, 1997 from the comparable periods in 1996. This decline is due
to the change in the composition of interest-earning assets which is detailed
above and the reduced yields earned on commercial loans. The primary reason
for the decline in the overall loan portfolio yield is due to lower yielding
loans being added to the loan portfolio during 1997, reflecting the increased
competitive rate pressure in the marketplace. In addition, higher yielding
loans have been paying off during 1997, adding to the overall yield decline.
The substantial increase in the average balances of the Company's U.S.
government sponsored agency securities for both the quarter and nine months
ended September 30, 1997, reflects the Company's effort to optimize earnings
by more effectively leveraging capital with the purchase of these securities.
In addition to reducing the balance of the lower yielding repurchase
agreements, with higher yielding U.S. government agency securities.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter and nine months ended September
30, 1997 increased by $1.6 million and $3.2 million, or 47.3% and 31.6%,
respectively, compared to the same periods of 1996. The increase in interest
expense resulted from an increase in the average balance of interest-bearing
liabilities of $93.8 million and $67.0 million, respectively, for the quarter
and nine months ended September 30, 1997, as compared to the same periods of
1996. Average interest-bearing liabilities continue to rise to fund the
growth of the Company. The growth has been primarily in certificates of
deposits, but also includes growth in borrowings and trust preferred capital
securities. Contributing to these increases, were increases in the rates paid
on interest-bearing liabilities during 1997. The rates paid on the Company's
interest-bearing liabilities increased from 5.16% to 5.55%, or 39 basis
points, during the quarter ended September 30, 1997, and increased from 5.23%
to 5.46%, or 23 basis points, for the nine months ended September 30, 1997,
compared to the same periods in 1996. The increases in the rates paid on the
Company's interest-bearing liabilities reflect the change in the composition
of interest bearing liabilities as detailed above, and the change in market
interest rates between the 1997 and 1996 periods. The change in the
composition of the interest-bearing liabilities For the quarter and nine
months ended September 30, 1997, reflects a shift in the Company's strategy
to fund a portion of the growth in assets from sources other than deposit
liabilities. This shift reflects the growth in other borrowings and the
issuance of the trust preferred capital securities.
PROVISION FOR LOAN LOSSES
During the quarter ended September 30, 1997, the Company's provision for
loan loss declined by $270,000 to $280,000, compared to the same period in
1996. For the nine months ended September 30, 1997, the provision for loan
12
<PAGE>
losses declined by $840,000 to $810,000, compared to the same period in 1996.
The decline in the provision is the result of management's evaluation of
current portfolio loan loss exposure. 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 .89% at September 30, 1997 and 0.66% at
December 31, 1996. The ratio of the allowance for loan losses to nonaccrual
loans was 187% at September 30, 1997 and 245% at December 31, 1996. The
allowance for loan losses as a percentage of loans stood at 1.68% at
September 30, 1997, compared to 1.61% at December 31, 1996.
NONINTEREST INCOME
Noninterest income for the quarter and nine months ended September 30,
1997 decreased by $502,000 and $746,000, respectively, compared to the same
periods in 1996. The decrease for the quarter and nine months ended September
30, 1997, is due primarily to a recovery of $425,000, during the second and
third quarters of 1996, on a corporate debt security that had been written
off during 1994. Contributing to this change was a $264,000 gain recorded on
the sale of $28.2 million of the Company's San Francisco branch deposits in
the third quarter of 1996. The major components of other noninterest income
include late fees and loan prepayment fees.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter and nine months ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
------------------------------------------ ------------------------------------------
For the Quarter Ended For the Nine Months Ended
September 30 September 30
------------------------------------------ ------------------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
(DOLLARS IN THOUSANDS) 1997 1996 $ % 1997 1996 $ %
-------- -------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustments to OREO 30 - 30 370 70 300 429%
Other real estate owned expense 31 72 (41) (57%) 48 95 (47) (49%)
Salaries and employee benefits 1,257 1,273 (16) (1%) 3,779 3,378 401 12%
Net occupancy expenses 399 357 42 12% 1,154 1,139 15 1%
FDIC insurance premiums 9 20 (11) (55%) 63 53 10 19%
Credit and collections expenses 69 23 46 200% 80 48 32 67%
Communication and data processing 161 132 29 22% 483 388 95 24%
Other expenses 286 267 19 7% 807 697 110 16%
----- ----- --- --- ----- ----- --- ---
Total noninterest expense 2,242 2,144 98 5% 6,784 5,868 916 16%
----- ----- --- --- ----- ----- --- ---
</TABLE>
Noninterest expense for the quarter and nine months ended September 30,
1997 increased by $98,000 and $916,000, respectively, compared to the same
periods in 1996. These changes are detailed on the table above and
significant changes in noninterest expense are described below.
The valuation adjustment to OREO for the quarter and nine months ended
September 30, 1997, increased by $30,000 and $300,000, respectively, compared
to the same periods in 1996. The increases were the result of the Company
recording partial write downs on two OREO properties during 1997.
Salaries and employee benefits for the nine months ended September 30,
1997 increased by $401,000 compared to the same period in 1996. This increase
was primarily the result of marketing and administrative bonus accruals
during 1997, which exceeded those of 1996. In addition, the Company
established a SBA lending department during the second and third quarters of
1996, which was fully staffed for all of 1997. The Company also provided an
approximate 4% salary increase to most employee base salaries in January of
1997.
Communication and data processing expense for the quarter and nine
months ended September 30, 1997, increased by $29,000 and $95,000,
respectively, compared to the same periods in 1996. These increases were
primarily the result of the Company's establishment of the SBA lending
department during the second and third quarters of 1996, which increased
communication and telephone usage.
Other expenses for the nine months ended September 30, 1997, increased
by $110,000 compared to the same period in 1996, due to an increase in
advertising expense during 1997 and a reduction in the accrual for Delaware
franchise taxes, which occurred in the second quarter of 1996.
13
<PAGE>
INCOME TAX PROVISION
For the quarters ended September 30, 1997 and 1996, the Company's
provision for income taxes was $637,000 and $471,000, or 39.9% and 38.2%,
respectively. For the nine months ended September 30, 1997 and 1996, the
Company's provision for income taxes was $1,783,000 and $1,381,000, or 39.9%
and 38.4%, respectively. The difference between the Company's statutory tax
rate of 41.5% and its effective rate for these periods is primarily due to
California tax deductions (credits) generated by the Company on loans made in
special tax zones within California.
FINANCIAL CONDITION
Total assets of the Company increased to $409.2 million at September 30,
1997 from $304.1 million at December 31, 1996, a $105.1 million increase.
This increase reflects the purchase of approximately $73.7 million of
investment securities, net of maturities, sales and calls, and $19.6 million
of loan originations, net of loan maturities and payoffs, during the first
nine months of 1997. The Company funded this asset growth by increasing its
interest-bearing liabilities by $100.6 million to $377.3 million at September
30, 1997 from $276.7 million at December 31, 1996. The increase in
interest-bearing liabilities reflects an increase in deposits of $67.4
million, primarily due to the growth in the Company's savings account
balances that grew $34.0 million and certificates of deposit balances that
grew $36.7 million during the nine months ended September 30, 1997.
Borrowings were increased by $16.0 million to $26.0 million and the Company
issued $17.25 million of trust preferred capital securities during the nine
months ended September 30, 1997.
Loans, net of deferred fees and the allowance for loan losses, increased
by $19.1 million to $226.8 million at September 30, 1997, from $207.7 million
at December 31, 1996. The Company originated $40.5 million in new real estate
and business loans during the first nine months ended September 30, 1997.
Off-setting these originations, the Company experienced $18.5 million in loan
payoffs, $1.4 million in gross loan transfers prior to write-offs to OREO and
$368,000 in actual loan write-offs during the nine months ended September 30,
1997.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1997 increased by
$466,000 from the level at December 31, 1996, and represents 1.68% of
outstanding loans at September 30, 1997. The increase in the general loan
loss allowance from $3.4 million at year end 1996 to $3.9 million at
September 30, 1997 reflects net charge-offs of $344,000 offset by the
addition of $810,000 in loan loss provision. Management believes that the
allowance for loan losses at September 30, 1997 was adequate to absorb known
and inherent risks in the loan portfolio.
Management reviews the adequacy of the allowance for loan losses on a
quarterly basis. Management utilizes its best judgement in providing for
possible loan losses and establishing the allowance for loan losses. However,
the allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. In addition, regulatory agencies as an integral
part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based upon their judgement of the information
available to them at the time of their examination.
Adverse economic conditions or a declining real estate market in
California could adversely affect Pacific Crest Bank's borrowers' abilities
to contractually repay their loans. A decline in the California economy could
result in deterioration in the quality of the loan portfolio and could result
in high levels of nonperforming assets and charge-offs, which would adversely
affect the financial condition and results of operations of the Company.
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 NINE MONTHS
ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996
-------------------------
<S> <C> <C>
Balance at beginning of period $ 3,400 $ 4,500
Charge-offs (368) (3,202)
Recoveries 24 210
Provision for loan losses 810 1,650
-------- --------
Balance at end of period $ 3,866 $ 3,158
-------- --------
-------- --------
Allowance for loan losses as a % of loans 1.68% 1.69%
Net loan charge-offs $ 344 $ 2,992
Valuation adjustment to OREO 370 70
-------- --------
Total net loan charge-offs & OREO valuation adjustment $ 714 $ 3,062
-------- --------
</TABLE>
14
<PAGE>
NONPERFORMING AND RESTRUCTURED ASSETS
The following table sets forth loans accounted for on a nonaccrual
basis, OREO and loans that were impaired due to the loans being restructured
at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997 1996
------------- ------------
Nonaccrual loans $ 2,064 $ 1,386
OREO 1,565 3,469
-------- --------
Total nonaccrual loans and OREO $ 3,629 $ 4,855
-------- --------
Total nonperforming assets to total loans and OREO 1.56% 2.26%
-------- --------
Total nonperforming assets to total assets 0.89% 1.60%
-------- --------
Troubled debt restructurings $ 719 $ 719
-------- --------
-------- --------
15
<PAGE>
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. 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. The following table represents the major components of the changes in
the nonaccrual loans for the quarter and nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NONACCRUAL LOAN ACTIVITY SEPTEMBER 30, 1997
-------------------------------------------------------
FOR THE THREE # OF FOR THE NINE # OF
(DOLLAR IN THOUSANDS) MONTHS ENDED PROPERTIES MONTHS ENDED PROPERTIES
------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Nonaccrual loans at beginning of period $ 2,155 3 $ 1,386 4
Nonaccrual loan additions 551 2 3,325 6
Loans returned to accrual status - (269) (1)
Loans transferred to OREO (179) (1) (836) (3)
Net loan chargeoffs (216) (1) (368)
Loan payments/payoffs 247 (1,174) (3)
------------- ---------- ------------ ----------
Nonaccrual loans at end of period 2,064 3 2,064 3
------------- ---------- ------------ ----------
Net change/activity $ 91 - $ 678 (1)
------------- ---------- ------------ ----------
</TABLE>
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company makes valuation adjustments to its OREO, based on the
most recent collateral appraisal data and other relevant information which
effectively reduce the book value of such assets to the estimated fair market
value less selling costs of the properties. The fair value of the real
estate takes into account the real estate values net of expenses such as
brokerage commission, past due property taxes, property repair expenses, and
other items. The estimated sale price does not necessarily reflect appraisal
values which management believes, in some cases, may be higher than what
could be realized in a sale of OREO. The following table represents the major
components of the changes in the OREO assets for the quarter and nine
months ended September 30, 1997:
<TABLE>
<CAPTION>
OTHER REAL ESTATE OWNED ACTIVITY SEPTEMBER 30, 1997
-------------------------------------------------------
FOR THE THREE # OF FOR THE NINE # OF
(DOLLAR IN THOUSANDS) MONTHS ENDED PROPERTIES MONTHS ENDED PROPERTIES
------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
OREO at beginning of period $ 1,914 3 $ 3,469 5
Transfers from loans 179 1 836 3
OREO write downs (30) (370)
Payments/other (16) (95)
Sales of OREO properties (482) (1) (2,275) (5)
------------- ---------- ------------ ----------
OREO balance at end of period 1,565 3 1,565 3
------------- ---------- ------------ ----------
Net change/activity $ (349) - $ (1,904) (2)
------------- ---------- ------------ ----------
</TABLE>
TROUBLED DEBT RESTRUCTURINGS
A troubled debt restructuring ("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, 1997, the Company had one loan with a
principal balance of $719,000 that was categorized as a TDR. 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 TDR loan balance.
BORROWINGS
The Company had $1.0 million in short term borrowings at September 30,
1997, compared to $10.0 million at December 31, 1996. The rates paid during
1997 on the Company's short term borrowings ranged from 5.65% to 6.80%. The
repayment terms on this short-term debt ranged from one day to four weeks.
The interest rate paid can vary daily, but typically approximates the federal
fund rates plus 15-40 basis points. This debt is secured by the Company's
U.S. government sponsored agency securities. The Company utilizes these lines
to cover short-term financing needs for loan fundings or security purchases.
16
<PAGE>
The Company secured $25.0 million in term borrowings on September 22,
1997 that was outstanding at September 30, 1997. The rate paid on this
instrument is 5.82% and the term is five years with a two year call option.
This debt is secured by the Company's U.S. government sponsored agency
securities.
TRUST PREFERRED CAPITAL SECURITIES
On September 22, 1997, PCC Capital I (the "Trust"), a wholly owned
subsidiary of Pacific Crest, completed the sale of $17.25 million of 9.375%
Cumulative Capital Trust Securities. The net proceeds of approximately $16.1
million after payment of sales commissions and other offering costs were
invested, by the Trust, in Junior Subordinated Debentures issued by the Parent
Company in connection with this public offering. The interest on the Junior
Subordinated Debentures will be paid by the Parent Company to the Trust, and
represents the sole revenues of the Trust and the source of dividend
distributions by the Trust to the holders of the Capital Trust Securities.
For financial reporting purposes, the Trust is treated as a subsidiary
of Pacific Crest and, accordingly, the accounts of the Trust are included in
the consolidated financial statements of Pacific Crest. The Capital Trust
Securities are presented as a separate line item in the consolidated balance
sheets under the caption "Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures." For financial reporting purposes, Pacific Crest records the
dividend distributions payable on the Capital Trust Securities as interest
expense in the consolidated statements of operations.
The Parent Company, upon issuance of the Junior Subordinated Debentures,
and receipt of approximately $16.1 million in cash from the trust,
subsequently contributed $5.0 million of capital into Pacific Crest Bank. The
balance of the net proceeds will be used by the Parent Company for general
corporate purposes. The Capital Securities qualify as Tier 1 capital under
the capital guidelines of the Federal Reserve subject to regulatory
limitations.
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital to support
consistent and sustained asset growth, to anticipate credit risks, and to ensure
that regulatory and industry capital guidelines and standards are maintained.
Pacific Crest Bank is subject to leverage and risk-based capital adequacy
standards applicable to FDIC-insured institutions. At September 30, 1997,
Pacific Crest Bank was in compliance with all such capital requirements.
Shareholders' equity increased by $3.4 million to $27.8 million during the
nine months ended September 30, 1997. This increase reflects the increase to
shareholders' equity by the nine months of net income of $2.7 million and an
$81,000 increase resulting from the purchase of stock under the employee and
directors' stock purchase plans. Also, contributing to this increase was the
elimination of the unrealized loss on securities available-for-sale and the
establishment of the $339,000 unrealized gain on securities available for sale.
Pacific Crest Bank is required to maintain certain minimum capital levels
under federal banking law. The following table sets forth Pacific Crest Bank's
regulatory capital ratios at September 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS (1) AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
---------------------------- ----------------------------
---------------------------- ----------------------------
Minimum Minimum
Required Actual Excess Required Actual Excess
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio(2) 4.00% 8.22% 4.22% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 12.04% 8.04% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 13.17% 5.17% 8.00% 11.56% 3.56%
-------- -------- -------- -------- -------- --------
</TABLE>
(1) Capital ratios of Pacific Crest Bank only.
(2) Calculation based on quarter end asset balances of Pacific Crest Bank.
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.
The Company's holdings of cash and cash equivalents during the nine
months ended September 30, 1997 increased by $12.0 million to $14.8 million
at September 30, 1997 from $2.8 million at December 31, 1996. The Company
purchased $73.7 million, net of maturities, calls and sales, of U.S.
government sponsored agency securities during the nine months ended September
30, 1997. The Company funded both the growth in securities and the net
17
<PAGE>
increase in the loan portfolio, of $19.6 million, by raising $100.6 million of
interest-bearing liabilities.
Loans, net of deferred fees and the allowance for loan losses, increased
by $19.1 million to $226.8 million at September 30, 1997, from $207.7 million
at December 31, 1996. The Company originated $40.5 million in new real estate
and business loans during the first nine months ended September 30, 1997.
Off-setting these originations, the Company experienced $18.5 million in loan
payoffs, $1.4 million in gross loan transfers prior to write-offs to OREO and
$368,000 in actual loan write-offs during the nine months ended September 30,
1997.
The Company funded its asset growth for the nine months ended September
30, 1997 by raising $34.0 million in savings deposits, and $36.7 million in
certificates of deposits. These deposit increases were slightly offset by a
decrease of $3.3 million in its money market checking accounts. The Company
shifted its strategy in funding a portion of its asset growth from sources
other than deposit liabilities. This shift reflects the growth in other
borrowings of $16.0 million and the raising of $17.25 million in trust
preferred capital securities.
The liquidity of the parent company, Pacific Crest, is dependent on
several factors, including the payment of cash dividends by its subsidiary,
Pacific Crest Bank, or the ability to secure borrowings. Without dividends from
Pacific Crest Bank, Pacific Crest must rely solely on existing cash and
investments which total $11.7 million at September 30, 1997 or the ability to
secure borrowings. This amount is also necessary to pay future operating
expenses, existing current liabilities, the interest cost associated with the
subordinated debt security issued in September of 1997 and for the possible
infusion of capital into Pacific Crest Bank. The interest on the Junior
Subordinated Debentures will be paid by Pacific Crest to the Trust, and
represents the sole revenues of the Trust and the source of dividend
distributions by the Trust to the holders of the Capital Trust Securities.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that sufficient retained
earnings are available to pay the dividend. Pacific Crest Bank had retained
earnings of $2.5 million at September 30, 1997. The total amount of retained
earnings is unrestricted and available for dividend payments.
ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK
Not applicable.
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
(a) FINANCIAL DATA SCHEDULES.
(b) REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1997.
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 13, 1997 /s/ Gary Wehrle
-----------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: November 13, 1997 /s/ Robert J. Dennen
-----------------------------------------
Vice President, Chief Financial Officer
Corporate Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,255
<INT-BEARING-DEPOSITS> 334,057
<FED-FUNDS-SOLD> 11,573
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,210
<INVESTMENTS-CARRYING> 25,963
<INVESTMENTS-MARKET> 26,005
<LOANS> 231,355
<ALLOWANCE> 3,866
<TOTAL-ASSETS> 409,198
<DEPOSITS> 334,057
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 4,058
<LONG-TERM> 25,000
0
0
<COMMON> 27,833
<OTHER-SE> 17,250
<TOTAL-LIABILITIES-AND-EQUITY> 409,198
<INTEREST-LOAN> 6,205
<INTEREST-INVEST> 2,642
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,847
<INTEREST-DEPOSIT> 4,387
<INTEREST-EXPENSE> 4,896
<INTEREST-INCOME-NET> 3,951
<LOAN-LOSSES> 280
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,242
<INCOME-PRETAX> 1,596
<INCOME-PRE-EXTRAORDINARY> 1,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 959
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 4.19
<LOANS-NON> 2,064
<LOANS-PAST> 2,064
<LOANS-TROUBLED> 719
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,400
<CHARGE-OFFS> (368)
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 3,866
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
