<PAGE>
PROSPECTUS
1,500,000 TRUST PREFERRED SECURITIES
PCC CAPITAL I
9.375% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
PACIFIC CREST CAPITAL, INC.
The 9.375% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") offered hereby represent preferred undivided beneficial interests
in the assets of PCC Capital I, a statutory business trust created under the
laws of the State of Delaware ("PCC Capital"). Pacific Crest Capital, Inc., a
Delaware corporation (referred to as the "Company" when such reference includes
Pacific Crest Capital, Inc. and its
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SEE "RISK FACTORS" COMMENCING ON PAGE 16 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, BY ANY OTHER
GOVERNMENTAL AGENCY, OR OTHERWISE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PCC
PUBLIC DISCOUNT(1) CAPITAL(2)
<S> <C> <C> <C>
Per Trust Preferred Security.............. $10 (2) $10
Total(3).................................. $15,000,000 (2) $15,000,000
</TABLE>
(1) Pacific Crest and PCC Capital have each agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended the ("Securities Act"). See "Underwriting."
(2) In view of the fact that all of the proceeds of the sale of the Trust
Preferred Securities will be used to purchase the Junior Subordinated
Debentures, Pacific Crest has agreed to pay the Underwriters as compensation
for arranging the investment therein of such proceeds, $0.45 per Trust
Preferred Security, or $675,000 in the aggregate. See "Underwriting."
Pacific Crest has also agreed to pay the expenses of the offering estimated
to be $300,000.
(3) PCC Capital has granted the Underwriters an option exercisable within 30
days from the date of this Prospectus to purchase up to 225,000 additional
Trust Preferred Securities on the same terms and conditions set forth above
to cover over-allotments, if any. If all such additional Trust Preferred
Securities are purchased, the total Price to Public and Proceeds to PCC
Capital will be $17,250,000. See "Underwriting."
The Trust Preferred Securities are being offered by the Underwriters named
herein subject to prior sale and when, as and if delivered to and accepted by
the Underwriters. It is expected that the Trust Preferred Securities will be
ready for delivery in book-entry form only through the facilities of The
Depository Trust Company in New York, New York, on or about September 22, 1997,
against payment therefor in immediately available funds.
SANDLER O'NEILL & PARTNERS, L.P. SUTRO & CO. INCORPORATED
September 17, 1997
<PAGE>
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subsidiaries, collectively, or "Pacific Crest" when referring only to the parent
company), will be the owner of all of the beneficial interests represented by
common securities of PCC Capital (the "Common Securities" and, collectively with
the Trust Preferred Securities, the "Trust Securities"). PCC Capital exists for
the sole purpose of issuing the Trust Securities and investing the proceeds
thereof in an equivalent amount of 9.375% Junior Subordinated Deferrable
Interest Debentures (the "Junior Subordinated Debentures") to be issued by
Pacific Crest. The Junior Subordinated Debentures will mature on October 1,
2027, which date may be shortened (such date, as it may be shortened, the
"Stated Maturity") to a date not earlier than October 1, 2002 if certain
conditions are met (including Pacific Crest having received any necessary
regulatory approval to do so if then required under applicable capital
guidelines or policies). Although Pacific Crest is not currently subject to
capital requirements, it is possible that in the future it could become subject
to capital requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve") as a result of, among other things, the acquisition of a
bank or a change in law or applicable regulations that subjects Pacific Crest to
such Federal Reserve requirements. The Trust Preferred Securities will have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the Common
Securities, which will be held by Pacific Crest. See "Description of the Trust
Preferred Securities--Subordination of Common Securities of PCC Capital Held by
Pacific Crest."
Holders of the Trust Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the 15th day of March, June,
September and December of each year (subject to possible deferral as described
below), commencing December 15, 1997, at the annual rate of 9.375% of the
Liquidation Amount (as defined herein) of $10 per Trust Preferred Security
("Distributions"). The amount of each Distribution due with respect to the Trust
Preferred Securities will include amounts accrued through the date the
Distribution payment is due. Pacific Crest will have the right, so long as no
Debenture Event of Default (as defined below) has occurred and is continuing, to
defer payments of interest on the Junior Subordinated Debentures at any time or
from time to time for a period not exceeding 20 consecutive quarters with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, Pacific Crest may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions on
the Trust Preferred Securities will also be deferred and Pacific Crest will not
be permitted, subject to certain exceptions described herein, to declare or pay
any cash distributions with respect to its capital stock or to make any payment
with respect to its debt securities that rank PARI PASSU with or junior to the
Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Trust Preferred Securities are entitled
will accumulate) at the rate of 9.375% per annum, compounded quarterly, and
holders of the Trust Preferred Securities will be required to accrue income and
will be required to pay United States federal income tax on that income. See
"Description of Junior Subordinated Debentures--Option to Defer Interest Payment
Period" and "Certain Federal Income Tax Consequences--Interest Income and
Original Issue Discount."
Pacific Crest has, through the Guarantee, the Guarantee Agreement, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement (each as defined herein), taken together, fully, irrevocably and
unconditionally guaranteed all of PCC Capital's obligations under the Trust
Preferred Securities. See "Relationship Among the Trust Preferred Securities,
the Junior Subordinated Debentures and the Guarantee--Full and Unconditional
Guarantee." Under the Guarantee, Pacific Crest guarantees the payment of
Distributions by PCC Capital and payments on liquidation of or redemption of the
Trust Preferred Securities (subordinate to the right to payment of Senior and
Subordinated Debt of
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2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Pacific Crest, as defined herein) to the extent of funds held by PCC Capital.
See "Description of Guarantee." If Pacific Crest does not make required payments
on the Junior Subordinated Debentures held by PCC Capital, PCC Capital will have
insufficient funds to pay Distributions on the Trust Preferred Securities. The
Guarantee does not cover payment of Distributions when PCC Capital does not have
sufficient funds to pay such Distributions. In such event, a holder of the Trust
Preferred Securities may institute a legal proceeding directly against Pacific
Crest pursuant to the terms of the Indenture to enforce payment of such
Distributions to such holder. See "Description of Junior Subordinated
Debentures-- Enforcement of Certain Rights by Holders of Trust Preferred
Securities." The obligations of Pacific Crest under the Guarantee and the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior and Subordinated Debt (as defined in "Description of Junior Subordinated
Debentures--Subordination") of Pacific Crest.
The Trust Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at the Stated
Maturity or their earlier redemption in each case at a redemption price equal to
the aggregate liquidation preference of the Trust Preferred Securities plus any
accumulated and unpaid Distributions thereon to the date of redemption. Subject
to regulatory approval, if then required under applicable regulatory policies,
the Junior Subordinated Debentures are redeemable prior to maturity at the
option of Pacific Crest (i) on or after October 1, 2002, in whole at any time or
in part from time to time, or (ii) at any time, in whole (but not in part),
within 90 days following the occurrence of a Tax Event, an Investment Company
Event or a Capital Treatment Event (each as defined herein), in each case at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures to the date fixed for redemption, plus 100% of the
principal amount thereof. See "Description of the Trust Preferred
Securities--Redemption."
Pacific Crest will have the right at any time to dissolve PCC Capital and,
after satisfaction of liabilities to creditors of PCC Capital as provided by
applicable law, cause a Like Amount (as defined herein) of the Junior
Subordinated Debentures to be distributed to the holders of the Trust Securities
in liquidation of PCC Capital, subject to Pacific Crest having received prior
approval of the primary federal regulator of Pacific Crest if then required
under applicable capital guidelines or policies of such primary regulator. See
"Description of the Trust Preferred Securities--Liquidation Distribution Upon
Dissolution."
In the event of the dissolution of PCC Capital, after satisfaction of
liabilities to creditors of PCC Capital as required by applicable law, the
holders of Trust Preferred Securities will be entitled to receive a liquidation
amount of $10 per Trust Preferred Security ("Liquidation Amount"), plus
accumulated and unpaid Distributions thereon to the date of payment, which may
be in the form of a Distribution of such Like Amount of Junior Subordinated
Debentures, subject to certain exceptions. See "Description of the Trust
Preferred Securities--Liquidation Distribution Upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior and Subordinated Debt. As of June 30, 1997, Pacific Crest had no Senior
and Subordinated Debt outstanding. The terms of the Junior Subordinated
Debentures place no limitation on the amount of Senior and Subordinated Debt
that Pacific Crest can issue. See "Risk Factors--Ranking of Pacific Crest's
Obligations Under the Junior Subordinated Debentures and the Guarantee" and
"Description of Junior Subordinated Debentures-- Subordination."
The Trust Preferred Securities have been approved for listing on The Nasdaq
Stock Market's National Market (the "Nasdaq National Market"), subject to
official notice of issuance. Although the Underwriters have indicated an
intention to make a market in the Trust Preferred Securities, the Underwriters
are not obligated to do so, and any market making may be discontinued at any
time at the sole discretion of either Underwriter. There can be no assurance
that a market will develop for the Trust Preferred Securities. See "Risk
Factors--Absence of Existing Public Market; Market Prices" and "Underwriting."
(CONTINUED ON NEXT PAGE)
3
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company (the
"Depositary") or its nominee. Beneficial interests in the Trust Preferred
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by participants in the Depositary. Except as
described herein, the Trust Preferred Securities in certificate form will not be
issued in exchange for global certificates. See "Book-Entry Issuance."
AS USED HEREIN, (I) THE "INDENTURE" MEANS THE JUNIOR SUBORDINATED INDENTURE
DATED AS OF SEPTEMBER 22, 1997, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME,
BETWEEN PACIFIC CREST AND WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "INDENTURE
TRUSTEE"), UNDER WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED, (II)
THE "TRUST AGREEMENT" MEANS THE AMENDED AND RESTATED TRUST AGREEMENT RELATING TO
PCC CAPITAL AMONG PACIFIC CREST, AS DEPOSITOR, WILMINGTON TRUST COMPANY, AS
PROPERTY TRUSTEE (THE "PROPERTY TRUSTEE"), WILMINGTON TRUST COMPANY, AS DELAWARE
TRUSTEE (THE "DELAWARE TRUSTEE"), THE ADMINISTRATIVE TRUSTEES NAMED THEREIN
(COLLECTIVELY, WITH THE PROPERTY TRUSTEE AND DELAWARE TRUSTEE, THE "ISSUER
TRUSTEES") AND THE HOLDERS, FROM TIME TO TIME, OF THE TRUST SECURITIES, (III)
THE "GUARANTEE AGREEMENT" MEANS THE GUARANTEE AGREEMENT RELATING TO THE
GUARANTEE BETWEEN PACIFIC CREST AND WILMINGTON TRUST COMPANY, AS GUARANTEE
TRUSTEE, AND (IV) THE "EXPENSE AGREEMENT" MEANS THE EXPENSE AGREEMENT BETWEEN
PACIFIC CREST AND PCC CAPITAL.
4
<PAGE>
AVAILABLE INFORMATION
Pacific Crest and PCC Capital have jointly filed with the Commission a
Registration Statement on Form S-2 (together with all amendments and exhibits
thereto the "Registration Statement") under the Securities Act, with respect to
the offering of the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, PCC Capital and
the securities offered hereby, reference is made to the Registration Statement
and the exhibits and the financial statements, notes and schedules filed as a
part thereof or incorporated by reference therein, which may be inspected at the
public reference facilities of the Commission, at the addresses set forth below.
Statements made in this Prospectus concerning the contents of any documents
referred to herein are not necessarily complete, and in each instance are
qualified in all respects by reference to the copy of such document filed as an
exhibit to the Registration Statement.
Pacific Crest is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by Pacific Crest can be inspected and copies of such material can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C.
20549, and at the following Regional Offices of the Commission: Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048. The Commission also maintains a Web site (http://www.sec.gov) at
which reports, proxy and information statements and other information regarding
Pacific Crest may be accessed. In addition, such reports, proxy statements and
other information can also be inspected at the offices of The Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006.
No separate financial statements of PCC Capital have been included herein.
Pacific Crest and PCC Capital do not consider that such financial statements
would be material to holders of the Trust Preferred Securities because PCC
Capital is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated
Debentures of Pacific Crest and issuing the Trust Securities. See "Prospectus
Summary--PCC Capital," "Description of the Trust Preferred Securities,"
"Description of Junior Subordinated Debentures" and "Description of Guarantee."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996; (attached hereto as Appendix A); and
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (attached hereto as Appendix B); and
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
4. The Company's Proxy Statement dated April 7, 1997.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
5
<PAGE>
As used herein, the terms "Prospectus" and "herein" means this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO: PACIFIC
CREST CAPITAL, INC., 30343 CANWOOD STREET, AGOURA HILLS, CALIFORNIA 90343, ATTN:
CHIEF FINANCIAL OFFICER (TELEPHONE (818) 865-3300).
The Company will provide to the holders of the Trust Preferred Securities
quarterly reports containing unaudited financial statements and annual reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish annual reports on Form 10-K and quarterly reports
on Form 10-Q free of charge to holders of the Trust Preferred Securities who so
request in writing to the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TRUST PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING THE TRUST PREFERRED
SECURITIES AND BIDDING FOR AND PURCHASING SUCH TRUST PREFERRED SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
6
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL INFORMATION APPEARING ELSEWHERE OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS THE CONTEXT CLEARLY
SUGGESTS OTHERWISE, REFERENCES TO THE "COMPANY" INCLUDE PACIFIC CREST CAPITAL,
INC. AND ITS SUBSIDIARIES, COLLECTIVELY, AND REFERENCES TO "PACIFIC CREST"
INCLUDE THE PARENT COMPANY ONLY. IN ADDITION TO THE HISTORICAL INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE HEREIN, CERTAIN STATEMENTS IN THIS
PROSPECTUS CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT") WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS" AS WELL AS
THOSE DISCUSSED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
INCLUDING UNDER THE CAPTION "CAUTIONARY STATEMENTS FOR PURPOSES OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997, WHICH IS ATTACHED HERETO AS
APPENDIX B. SEE "RISK FACTORS--FORWARD-LOOKING STATEMENTS."
THE COMPANY
Pacific Crest is a financial institution holding company based in Agoura
Hills, California that was organized in 1993 to hold 100% of the stock of
Pacific Crest Bank which was being distributed in a spin-off from The Foothill
Group, Inc. As a result of the 1993 spin-off, Pacific Crest became a public
company with common and preferred stock traded on the Nasdaq National Market.
The Company operates primarily through its wholly owned subsidiary, Pacific
Crest Bank, a California industrial loan company. Pacific Crest is not a bank
holding company under the Bank Holding Company Act of 1956, as amended, or a
savings and loan association holding company under the Home Owners Loan Act, as
amended, and, therefore, is not regulated or supervised by the Federal Reserve
or the Office of Thrift Supervision. At June 30, 1997, the Company had
consolidated assets of $371.1 million, total loans of $227.7 million, total
deposits of $305.0 million and total shareholders' equity of $26.3 million.
PACIFIC CREST BANK
Pacific Crest Bank commenced operation in 1974 and until 1993 was known as
Foothill Thrift and Loan. From 1994 through July 31, 1997 Pacific Crest Bank was
known as Pacific Crest Investment and Loan until the name was changed in August
1997. Pacific Crest Bank is subject to regulation by the California Department
of Financial Institutions and the Federal Deposit Insurance Corporation (the
"FDIC"). The deposits of Pacific Crest Bank are insured by the FDIC up to
applicable limits.
Pacific Crest Bank is headquartered in Agoura Hills, California and operates
three California deposit gathering branches located in Beverly Hills, Encino,
and San Diego and loan production offices in Northern and Southern California
and Portland, Oregon. As a specialized deposit institution, Pacific Crest Bank
offers a select number of competitive savings programs designed for customers
seeking high yield and liquidity. As a niche commercial real estate lender,
Pacific Crest Bank focuses on meeting the needs of entrepreneurs and investors.
In addition, Pacific Crest Bank expanded its federal Small Business
Administration ("SBA") lending program in mid-1996 by adding a dedicated staff
to run the program. While its deposit gathering activities are predominantly in
Southern California, and to a lesser extent national in scope through the use of
national media and electronic communication, lending activities target virtually
the entire West Coast.
Management's strategy is focused on reducing credit and collateral risk in
its lending operations, generating a higher level of fee income, controlling
general and administrative expense, maximizing investment portfolio yield
consistent with safety and liquidity goals and reducing funding costs.
Management attempts to achieve these goals while providing an exceptional level
of personal service in response to its customers needs. In furtherance of this
strategy, Pacific Crest Bank intends to continue to emphasize
7
<PAGE>
the SBA program as a way to reduce lending risk because of the government
guarantees and to increase fee income potential to the extent government
guaranteed loans are sold into the secondary market.
At June 30, 1997, Pacific Crest Bank had total assets of $371.1 million,
total loans of $227.7 million and total deposits of $305.0 million. At June 30,
1997, $221.1 million, or 97.1% of loans consisted of loans secured by commercial
real estate, which were primarily made for terms between one and ten years at
adjustable interest rates. In addition, as of June 30, 1997, Pacific Crest Bank
had $4.3 million in SBA loans of which $3.4 million were fully guaranteed by the
SBA.
PACIFIC COMMERCIAL REAL ESTATE LENDING, INC.
In April 1997, Pacific Crest formed a new corporation in partnership with
Barry S. Slatt Mortgage Company ("Slatt"), based in the San Francisco Bay area,
to focus on generating mortgage loans of between $2.0 million and $20.0 million
for funding by conduits, insurance companies and banks. The new corporation,
Pacific Commercial Real Estate Lending, Inc. ("PCREL"), will earn fees for
originating loans, but will not fund the loans or retain any credit risk. PCREL
is 50% owned by Pacific Crest and 50% by Slatt. Pacific Crest does not expect
that the operations of PCREL will be material to the financial condition and
results of operations of the Company in 1997.
PCC CAPITAL
PCC Capital is a statutory business trust created under Delaware law
pursuant to (i) the Trust Agreement and (ii) the filing of a Certificate of
Trust with the Delaware Secretary of State on August 18, 1997, as amended. PCC
Capital's business and affairs are conducted by the Property Trustee, Delaware
Trustee and three individual Administrative Trustees who are officers of the
Company. PCC Capital exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debentures issued by Pacific
Crest, and (iii) engaging in only those other activities necessary, advisable or
incidental thereto. The Junior Subordinated Debentures will be the sole assets
of PCC Capital, and payments by Pacific Crest under the Junior Subordinated
Debentures and the Expense Agreement will be the sole revenues of PCC Capital.
All of the Common Securities will be owned by Pacific Crest. The Common
Securities will rank PARI PASSU, and payments will be made thereon pro rata,
with the Trust Preferred Securities, except that upon the occurrence and during
the continuance of an event of default under the Trust Agreement resulting from
an event of default under the Indenture, the rights of Pacific Crest as holder
of the Common Securities to payment in respect of Distributions and payments
upon liquidation, redemption or otherwise will be subordinated to the rights of
the holders of the Trust Preferred Securities. See "Description of the Trust
Preferred Securities--Subordination of Common Securities of PCC Capital Held by
Pacific Crest." Pacific Crest will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of PCC Capital. PCC Capital
has a term of 31 years, but may dissolve earlier as provided in the Trust
Agreement.
PCC Capital's principal offices are located at 30343 Canwood Street, Agoura
Hills, California 91301 and its telephone number is (818) 865-3300.
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Trust Preferred Securities issuer... PCC Capital
Securities offered.................. 1,500,000 Trust Preferred Securities having a
Liquidation Amount of $10 per Trust Preferred
Security. The Trust Preferred Securities represent
preferred undivided beneficial interests in PCC
Capital's assets, which will consist solely of the
Junior Subordinated Debentures and payments
thereunder. PCC Capital has granted the Underwriters
an option, exercisable within 30 days after the date
of this Prospectus, to purchase up to an additional
225,000 Trust Preferred Securities at the initial
offering price, solely to cover over-allotments, if
any.
Distributions....................... The Distributions payable on each Trust Preferred
Security will be fixed at a rate per annum of 9.375%
of the Liquidation Amount of $10 per Trust Preferred
Security, will be cumulative, will accrue from the
date of issuance of the Trust Preferred Securities,
and will be payable quarterly in arrears on the 15th
day of March, June, September and December of each
year, commencing on December 15, 1997 (subject to
possible deferral as described below). The amount of
each Distribution due with respect to the Trust
Preferred Securities will include amounts accrued
through the date the Distribution payment is due. See
"Description of the Trust Preferred Securities."
Extension periods................... So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, Pacific Crest
will have the right, at any time, to defer payments
of interest on the Junior Subordinated Debentures by
extending the interest payment period thereon for a
period not exceeding 20 consecutive quarters with
respect to each deferral period (each an "Extension
Period"), provided that no Extension Period may
extend beyond the Stated Maturity of the Junior
Subordinated Debentures. If interest payments are so
deferred, Distributions on the Trust Preferred
Securities will also be deferred and Pacific Crest
will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash
distributions with respect to Pacific Crest's capital
stock or debt securities that rank PARI PASSU with or
junior to the Junior Subordinated Debentures. During
an Extension Period, Distributions will continue to
accumulate with income thereon compounded quarterly.
Because interest would continue to accrue and
compound on the Junior Subordinated Debentures, to
the extent permitted by applicable law, holders of
the Trust Preferred Securities will be required to
accrue income for United States federal income tax
purposes. See "Description of Junior Subordinated
Debentures--Option to Defer Interest Payment Period"
and "Certain Federal Income Tax
</TABLE>
9
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<TABLE>
<S> <C>
Consequences--Interest Income and Original Issue
Discount."
Maturity............................ The Junior Subordinated Debentures will mature on
October 1, 2027 which date may be shortened (such
date, as it may be shortened, the "Stated Maturity")
to a date not earlier than October 1, 2002 if certain
conditions are met (including Pacific Crest having
received prior approval of the primary federal
regulator of Pacific Crest to do so if then required
under applicable capital guidelines or policies of
such primary regulator).
Redemption.......................... The Trust Preferred Securities are subject to
mandatory redemption upon repayment of the Junior
Subordinated Debentures at their stated maturity or
their earlier redemption at a redemption price equal
to the aggregate Liquidation Amount of the Trust
Preferred Securities plus accumulated and unpaid
Distributions thereon to the date of redemption.
Subject to regulatory approval, if then required
under applicable regulatory policies, the Junior
Subordinated Debentures are redeemable prior to
maturity at the option of Pacific Crest (i) on or
after October 1, 2002 in whole at any time or in part
from time to time, or (ii) at any time, in whole (but
not in part), within 90 days following the occurrence
of a Tax Event, an Investment Company Event or a
Capital Treatment Event, in each case at a redemption
price equal to 100% of the principal amount of the
Junior Subordinated Debentures so redeemed, together
with any accrued but unpaid interest to the date
fixed for redemption. See "Description of the Trust
Preferred Securities--Redemption" and "Description of
Junior Subordinated Debentures--Redemption."
Distribution of Junior Subordinated
Debentures........................ Pacific Crest has the right at any time to dissolve
PCC Capital, and, after satisfaction of creditors of
PCC Capital as required by applicable law, cause the
Junior Subordinated Debentures to be distributed to
holders of Trust Preferred Securities in liquidation
of PCC Capital, subject to Pacific Crest having
received prior approval of the primary federal
regulator of Pacific Crest to do so if then required
under applicable capital guidelines or policies of
such primary regulator. See "Description of the Trust
Preferred Securities--Distribution of Junior
Subordinated Debentures."
Guarantee........................... Taken together, Pacific Crest's obligations under
various documents described herein, including the
Guarantee Agreement, provide a full guarantee of
payments by PCC Capital of Distributions and other
amounts due on the Trust Preferred Securities. Under
the Guarantee Agreement, Pacific Crest guarantees the
payment of Distributions by PCC Capital and payments
on liquidation of or redemption of the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Trust Preferred Securities (subordinate to the right
to payment of Senior and Subordinated Debt of Pacific
Crest, as defined herein) to the extent of funds held
by PCC Capital. If PCC Capital has insufficient funds
to pay Distributions on the Trust Preferred
Securities (i.e., if Pacific Crest has failed to make
required payments under the Junior Subordinated
Debentures), a holder of the Trust Preferred
Securities would have the right to institute a legal
proceeding directly against Pacific Crest to enforce
payment of such Distributions to such holder. See
"Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders
of the Trust Preferred Securities," "Description of
Junior Subordinated Debentures--Debenture Events of
Default" and "Description of Guarantee."
Ranking............................. The Trust Preferred Securities will rank PARI PASSU,
and payments thereon will be made pro rata, with the
Common Securities of PCC Capital held by Pacific
Crest, except as described under "Description of the
Trust Preferred Securities--Subordination of Common
Securities of PCC Capital Held by Pacific Crest." The
obligations of Pacific Crest under the Guarantee, the
Junior Subordinated Debentures and other documents
described herein are unsecured and rank subordinate
and junior in right of payment to all current and
future Senior and Subordinated Debt, the amount of
which is unlimited. At June 30, 1997, Pacific Crest
had no outstanding Senior and Subordinated Debt. In
addition, because Pacific Crest is a holding company,
all obligations of Pacific Crest relating to the
securities described herein will be effectively
subordinated to all existing and future liabilities
of Pacific Crest's subsidiaries, including Pacific
Crest Bank. Pacific Crest may cause additional Trust
Preferred Securities to be issued by trusts similar
to PCC Capital in the future, and there is no limit
on the amount of such securities that may be issued.
In this event, Pacific Crest's obligations under the
Junior Subordinated Debentures to be issued to such
other trusts and Pacific Crest's guarantees of the
payments by such trusts will rank PARI PASSU with
Pacific Crest's obligations under the Junior
Subordinated Debentures and the Guarantee,
respectively.
Voting rights....................... The holders of the Trust Preferred Securities will
generally have limited voting rights relating only to
the modification of the Trust Preferred Securities,
the dissolution, winding-up or termination of PCC
Capital and certain other matters described herein.
See "Description of the Trust Preferred
Securities--Voting Rights; Amendment of the Trust
Agreement."
ERISA considerations................ Prospective purchasers must carefully consider the
information set forth under "ERISA Considerations."
</TABLE>
11
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<TABLE>
<S> <C>
Nasdaq National Market symbol....... PCCIP.
Use of proceeds..................... The proceeds to PCC Capital from the sale of the
Trust Preferred Securities offered hereby will be
invested by PCC Capital in the Junior Subordinated
Debentures of Pacific Crest. Pacific Crest intends to
invest $5.0 million of the net proceeds in Pacific
Crest Bank to increase its capital level to support
future growth. Pacific Crest intends to use the
remaining net proceeds for general corporate
purposes, which may include without limitation,
funding additional investments in, or extensions of
credit to, Pacific Crest Bank and possible future
acquisitions if and when suitable opportunities
arise. See "Use of Proceeds."
</TABLE>
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial information of the Company and
its subsidiaries as of and for the years ended December 31, 1996, 1995, 1994,
1993 and 1992 has been derived from the Company's audited consolidated financial
statements. The following summary consolidated financial information as of and
for the six months ended June 30, 1997 and 1996 has been derived from the
Company's unaudited consolidated quarterly financial statements which, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The summary
consolidated financial information should be read in conjunction with the
Company's consolidated financial statements and related notes incorporated
herein by reference. The consolidated financial information for the six months
ended June 30, 1997 is not necessarily indicative of the operating results to be
expected for the entire year.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment securities........................ $ 136,330 $ 64,392 $ 83,494 -- $ 55,248 $ 898 $ 1,705
Total loans, net of deferred fees............ 227,063 181,344 211,095 $ 196,778 182,461 204,406 218,828
Allowance for loan losses.................... 3,795 3,292 3,400 4,500 8,075 3,910 3,195
Other real estate owned...................... 1,914 3,044 3,469 4,355 5,724 9,092 8,065
Other assets................................. 7,710 6,930 6,593 6,309 6,958 5,329 3,666
Total assets................................. 371,126 290,443 304,085 259,109 248,520 242,443 243,549
Total deposits............................... 304,954 264,780 266,695 234,510 226,350 213,162 222,598
Other borrowings............................. 36,900 -- 10,000 -- -- -- --
Subordinated debt............................ -- -- -- -- -- -- 1,000
Shareholders' equity......................... 26,288 23,422 24,468 21,952 19,628 27,179 15,830
STATEMENT OF OPERATION DATA:
Total interest income........................ $ 15,840 $ 13,230 $ 26,567 $ 23,799 $ 21,114 $ 21,583 $ 22,814
Total interest expense....................... 8,343 6,733 13,500 12,084 9,358 9,365 11,229
Net interest income.......................... 7,497 6,497 13,067 11,715 11,756 12,218 11,585
Provision for loan losses.................... 530 1,100 1,917 960 8,343 4,398 1,893
Net interest income after provision for loan
losses..................................... 6,967 5,397 11,150 10,755 3,413 7,820 9,692
Noninterest income:
Gain (loss) on investment securities......... -- 350 413 851 (780) (277) (71)
Other noninterest income(1).................. 450 344 1,068 470 404 375 295
Total noninterest income..................... 450 694 1,481 1,321 (376) 98 224
Noninterest expense:
Valuation adjustments to OREO................ 340 70 155 344 1,719 3,314 1,179
OREO expenses................................ 18 23 150 203 850 1,166 375
Other general & administrative expenses...... 4,183 3,631 7,818 8,362 8,841 6,794 7,596
Total noninterest expense.................... 4,541 3,724 8,123 8,909 11,410 11,274 9,150
Income (loss) before income taxes and
cumulative effect of accounting change..... 2,876 2,367 4,508 3,167 (8,373) (3,356) 766
Income tax provision (benefit)............... 1,146 910 1,505 (77) (1,914) (1,303) 203
Cumulative effect of accounting change(2).... -- -- -- -- -- (560) --
Net income (loss)............................ 1,730 1,457 3,003 3,244 (6,459) (1,493) 563
Preferred dividends declared................. -- -- -- (920) (1,104) -- --
Net income (loss) applicable to common
stock...................................... $ 1,730 $ 1,457 $ 3,003 $ 2,324 $ (7,563) $ (1,493) $ 563
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL RATIOS:(3)
Return on average total assets(4)............ 1.03% 1.04% 1.06% 1.34% (2.56)% (0.62)% 0.24%
Return on average shareholders' equity(5).... 13.91 13.00 12.96 16.02 (24.73) (8.91) 3.54%
Net interest rate spread(6).................. 4.27 4.42 4.41 4.60 4.49 5.18 4.74
Net interest margin(7)....................... 4.59 4.76 4.76 4.98 4.82 5.33 5.03
Ratio of other general & administrative
expenses to average total assets........... 2.49 2.59 2.77 3.46 3.50 2.84 3.23
Total average shareholders' equity to total
average assets............................. 7.42 7.99 8.20 8.38 10.34 7.01 6.75
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends:
Excluding interest paid on deposits........ 5.01x 21.65x 17.75x 2.93x * * 3.66x
Including interest paid on deposits........ 1.34x 1.35x 1.33x 1.17x 0.11x 0.65x 1.07x
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end
of period(8)............................... 1.10% 2.51% 1.60% 3.60% 6.24% 6.26% 6.83%
Total nonaccrual loans & OREO as a percent of
total loans & OREO......................... 1.78 3.95 2.26 4.63 8.24 6.69 6.58
Net loan charge-offs to average loans........ 0.13 2.42 1.68 2.45 2.14 1.73 0.61
Net loan charge-offs & OREO valuation
adjustments to average loans and OREO...... 0.44 2.44 1.73 2.57 2.92 3.16 1.14
Allowance for loan losses to total loans net
of deferred fees........................... 1.67 1.82 1.61 2.29 4.43 1.91 1.46
Allowance for loans losses to nonaccrual
loans...................................... 176.10 77.57 245.31 90.27 82.57 75.40 46.58
PER SHARE DATA(9)(10) (IN THOUSANDS):
Common shares outstanding.................... 2,968 2,960 2,960 2,954 1,102 1,099 N/A
Common stock equivalents of preferred
stock(11).................................. -- -- -- -- 1,558 1,558 N/A
Treasury shares.............................. (30) -- (12) -- -- N/A N/A
Other common stock equivalents............... 113 55 94 -- -- N/A N/A
Total common stock equivalents, assuming full
conversion of preferred stock.............. 3,051 3,015 3,042 2,954 2,660 2,657 N/A
Book value per common share.................. $ 8.95 $ 7.91 $ 8.35 $ 7.43 $ 7.38 $ 10.23 N/A
Fully diluted earnings (loss) per common
share...................................... 0.57 0.49 1.00 1.20 (6.88) N/A N/A
PACIFIC CREST BANK REGULATORY CAPITAL RATIOS:
Tier 1 risk-based capital.................... 10.00% 10.90% 10.31% 9.48% 8.87% 9.52% 6.71%
Total risk-based capital..................... 11.25 12.16 11.56 10.74 9.01 10.72 8.39
Leverage ratio(12)........................... 7.07 7.82 7.96 7.82 7.15 8.98 6.50
</TABLE>
- ------------------------
(1) 1996 includes a $264,000 gain on the sale of $28.2 million in deposits.
(2) Represents the cumulative effect of implementing Statement of Financial
Accounting Standards No. 109.
(3) The Company's performance ratios are based on actual daily averages and are
annualized where appropriate.
(4) Net income (loss) divided by average total assets.
(5) Net income (loss) divided by total average shareholders' equity.
(6) Average yield earned on interest-earning assets less the average rate paid
on interest-bearing liabilities.
(7) Net interest income divided by total average interest-earning assets.
(8) Nonperforming assets include total nonaccrual loans, OREO and nonperforming
investments.
(9) The Company did not have any assets and did not conduct any significant
business prior to December 23, 1993 when The Foothill Group, Inc.
contributed 100% of the outstanding shares of Pacific Crest Bank common
stock to Pacific Crest in exchange for 1,099,490 shares of its common stock.
Upon completion of a preferred stock offering by the Company, The Foothill
Group, Inc. then distributed to its shareholders as a stock dividend 100% of
the outstanding shares of the Company's common stock.
14
<PAGE>
(10) Per share data is based on actual daily averages.
(11) The conversion price of the preferred stock for these calculations is $9.00
per share. The preferred stock was converted into common stock of the
Company in December 1995.
(12) Based on quarter end asset balances of Pacific Crest Bank.
* The ratios of earnings to fixed charges and preferred stock dividends were
computed by dividing (x) income (loss) before income taxes and cumulative
effect of an accounting change, plus fixed charges by (y) fixed charges and
preferred stock dividends. Fixed charges represent total interest expense,
including and excluding interest on deposits, as applicable, as well as the
interest component of rental expense. Earnings for the years ended December
31, 1994 and 1993 were inadequate to cover fixed charges by $8.2 million and
$3.1 million, respectively.
15
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING
FACTORS IN CONNECTION WITH A DECISION TO PURCHASE THE TRUST PREFERRED
SECURITIES.
RANKING OF PACIFIC CREST'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES
AND THE GUARANTEE
All obligations of Pacific Crest under the Guarantee, the Junior
Subordinated Debentures and other documents described herein are unsecured and
rank subordinate and junior in right of payment to all current and future Senior
and Subordinated Debt, the amount of which is unlimited. At June 30, 1997,
Pacific Crest had no Senior and Subordinated Debt outstanding. In addition,
because Pacific Crest is a holding company, all obligations of Pacific Crest
relating to the securities described herein will be effectively subordinated to
all existing and future liabilities of Pacific Crest's subsidiaries, including
Pacific Crest Bank. As a holding company, the right of Pacific Crest to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Trust Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary,
except to the extent that Pacific Crest may itself be recognized as a creditor
of that subsidiary. Accordingly, the Junior Subordinated Debentures and all
obligations of Pacific Crest relating to the Trust Preferred Securities will be
effectively subordinated to all existing and future liabilities of Pacific Crest
Bank, and holders of the Trust Preferred Securities should look only to the
assets of Pacific Crest, and not of its subsidiaries, for principal and interest
payments on the Junior Subordinated Debentures. None of the Indenture, the
Guarantee, the Guarantee Agreement or the Trust Agreement places any limitation
on the amount of secured or unsecured debt, including Senior and Subordinated
Debt, that may be incurred by Pacific Crest or its subsidiaries. Further, there
is no limitation on Pacific Crest's ability to issue additional Junior
Subordinated Debentures in connection with any further offerings of Trust
Preferred Securities, and such additional debentures would rank PARI PASSU with
the Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Subordination" and "Description of Guarantee--Status of the
Guarantee."
OPTION TO DEFER INTEREST PAYMENT PERIOD; TAX CONSEQUENCES OF A DEFERRAL OF
INTEREST PAYMENTS
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, Pacific Crest has the right under the Indenture to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such deferral, quarterly Distributions on the Trust Preferred Securities by PCC
Capital will be deferred (and the amount of Distributions to which holders of
the Trust Preferred Securities are entitled will accumulate additional amounts
thereon at the rate of 9.375% per annum, compounded quarterly, from the relevant
payment date for such Distributions, to the extent permitted by applicable law)
during any such Extension Period. During any such Extension Period, Pacific
Crest will be prohibited from making certain payments or distributions with
respect to Pacific Crest's capital stock (including dividends on or redemptions
of common or preferred stock) and from making certain payments with respect to
any debt securities of Pacific Crest that rank pari passu with or junior in
interest to the Junior Subordinated Debentures; however, Pacific Crest will not
be restricted from (a) paying dividends or distributions in common stock of
Pacific Crest, (b) redeeming rights or taking certain other actions under a
shareholders' rights plan, (c) making payments under the Guarantee or (d) making
purchases of common stock related to the issuance of common stock or rights
under any of Pacific Crest's benefit plans for its directors, officers or
employees. Further, during an Extension Period, Pacific Crest would have the
ability to continue to make payments on Senior and Subordinated Debt. Prior to
the termination of any Extension Period, Pacific Crest may further extend such
Extension Period provided that such extension does not cause such Extension
Period to exceed 20 consecutive quarters or to extend beyond the Stated
Maturity. Upon the termination of any Extension
16
<PAGE>
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the annual rate of 9.375%, compounded quarterly, to the
extent permitted by applicable law), Pacific Crest may elect to begin a new
Extension Period subject to the above requirements. There is no limitation on
the number of times that Pacific Crest may elect to begin an Extension Period.
See "Description of the Trust Preferred Securities--Distributions" and
"Description of Junior Subordinated Debentures--Option to Defer Interest Payment
Period."
Because Pacific Crest has no current plan to exercise its option to defer
payments of interest, the Junior Subordinated Debentures will be treated as
issued without "original issue discount" for United States federal income tax
purposes. As a result, holders of Trust Preferred Securities will include
interest in taxable income under their own methods of accounting (i.e., cash or
accrual). If Pacific Crest exercises its right to defer payments of interest,
the holders of Trust Preferred Securities will be required to include their pro
rata share of original issue discount in gross income as it accrues for United
States federal income tax (and possibly other) purposes in advance of the
receipt of cash. See "Certain Federal Income Tax Consequences--Interest Income
and Original Issue Discount." Pacific Crest has no current intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Junior Subordinated Debentures. However, should Pacific
Crest elect to exercise its right to defer payments of interest in the future,
the market price of the Trust Preferred Securities is likely to be adversely
affected. A holder that disposes of such holder's Trust Preferred Securities
during an Extension Period, therefore, might not receive the same return on such
holder's investment as a holder that continues to hold the Trust Preferred
Securities.
TAX EVENT REDEMPTION, INVESTMENT COMPANY ACT REDEMPTION OR CAPITAL TREATMENT
EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event (whether occurring before
or after October 1, 2002), Pacific Crest has the right, if certain conditions
are met, to redeem the Junior Subordinated Debentures in whole (but not in part)
at 100% of the principal amount together with accrued but unpaid interest to the
date fixed for redemption within 90 days following the occurrence of such Tax
Event, Investment Company Event or Capital Treatment Event and therefore cause a
mandatory redemption of the Trust Securities. See "Description of the Trust
Preferred Securities--Redemption."
A "Tax Event" means the receipt by Pacific Crest and PCC Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement or decision is announced on or after the
original issuance of the Trust Preferred Securities, there is more than an
insubstantial risk that (i) PCC Capital is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Junior Subordinated Debentures, (ii)
interest payable by Pacific Crest on the Junior Subordinated Debentures is not,
or within 90 days of such opinion, will not be, deductible by Pacific Crest, in
whole or in part, for United States federal income tax purposes, or (iii) PCC
Capital is, or will be within 90 days of the date of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges. See "--Possible Tax Law Changes Affecting the Trust Preferred
Securities" below for a discussion of certain legislative proposals that, if
adopted, could give rise to a Tax Event, which may permit Pacific Crest to cause
a redemption of the Junior Subordinated Debentures (and therefore the Trust
Preferred Securities) prior to October 1, 2002.
An "Investment Company Event" means the receipt by Pacific Crest and PCC
Capital of an opinion of counsel experienced in such matters to the effect that,
as a result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, PCC Capital is or will be considered an
"investment company" that is
17
<PAGE>
required to be registered under the Investment Company Act, which change becomes
effective on or after the original issuance of the Trust Preferred Securities.
A "Capital Treatment Event" means, in the event that Pacific Crest becomes
subject to capital adequacy guidelines, the reasonable determination by Pacific
Crest that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such prospective change, pronouncement, or decision is announced on
or after the date of issuance of the Trust Preferred Securities under the Trust
Agreement, there is more than an insubstantial risk of impairment of Pacific
Crest's ability to treat an amount equal to the Liquidation Amount of the Trust
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof) for
purposes of the capital adequacy guidelines of the primary federal regulator of
Pacific Crest, as then in effect and applicable to Pacific Crest.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
Congress and the Clinton Administration have recently considered proposals
that would deny an issuer a deduction for United States income tax purposes for
the payment of interest on instruments with characteristics similar to the
Junior Subordinated Debentures. While no such adverse legislation has been
enacted, there can be no assurance that similar legislation enacted after the
date hereof would not adversely affect the tax treatment of the Junior
Subordinated Debentures. Such a change would give rise to a Tax Event which may
permit Pacific Crest to cause a redemption of the Trust Preferred Securities by
electing to prepay the Junior Subordinated Debentures. See "Description of the
Trust Preferred Securities--Redemption"; "Description of Junior Subordinated
Debentures--Redemption"; and "Certain Federal Income Tax Consequences."
POSSIBLE DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST
PREFERRED SECURITIES
Pacific Crest will have the right at any time to dissolve PCC Capital and,
after satisfaction of liabilities to creditors of PCC Capital as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities in liquidation of PCC Capital.
Because holders of the Trust Preferred Securities may receive Junior
Subordinated Debentures in liquidation of PCC Capital and because Distributions
are otherwise limited to payments on the Junior Subordinated Debentures,
prospective purchasers of the Trust Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and should
carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution" and "Description of
Junior Subordinated Debentures."
Under current United States federal income tax law and interpretations and
assuming, as expected, PCC Capital is classified as a grantor trust for such
purposes, a distribution of the Junior Subordinated Debentures upon a
liquidation of PCC Capital should not be a taxable event to holders of the Trust
Preferred Securities. However, if a Tax Event were to occur which would cause
PCC Capital to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by PCC Capital could be a taxable event to
PCC Capital and the holders of the Trust Preferred Securities. See "Certain
Federal Income Tax Consequences--Distribution of Junior Subordinated Debentures
to Holders of Trust Preferred Securities."
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
Pacific Crest will have the right at any time to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than five years from the
date of issuance and thereby cause the Trust
18
<PAGE>
Preferred Securities to be redeemed on such earlier date. The exercise of such
right is subject to Pacific Crest having received prior approval of the primary
federal regulator of Pacific Crest if then required under applicable capital
guidelines or policies of such primary regulator. See "Description of Junior
Subordinated Debentures--Redemption."
LIMITATIONS ON DIRECT ACTIONS AGAINST PACIFIC CREST AND ON RIGHTS UNDER THE
GUARANTEE
The Guarantee guarantees to the holders of the Trust Preferred Securities
the following payments, to the extent not paid by PCC Capital: (i) any
accumulated and unpaid Distributions required to be paid on the Trust Preferred
Securities, to the extent that PCC Capital has funds on hand available therefor
at such time, (ii) the redemption price with respect to any Trust Preferred
Securities called for redemption, to the extent that PCC Capital has funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of PCC Capital (unless the Junior
Subordinated Debentures are distributed to holders of the Trust Preferred
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment to the extent that
PCC Capital has funds on hand available therefor at such time (the "Liquidation
Distribution") and (b) the amount of assets of PCC Capital remaining available
for distribution to holders of the Trust Preferred Securities after satisfaction
of liabilities to creditors of PCC Capital as required by applicable law. The
holders of not less than a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee Agreement. Any holder of the
Trust Preferred Securities may institute a legal proceeding directly against
Pacific Crest to enforce its rights under the Guarantee without first
instituting a legal proceeding against PCC Capital, the Guarantee Trustee or any
other person or entity. If Pacific Crest were to default on its obligation to
pay amounts payable under the Junior Subordinated Debentures, PCC Capital would
lack funds for the payment of Distributions or amounts payable on redemption of
the Trust Preferred Securities or otherwise, and, in such event, holders of the
Trust Preferred Securities would not be able to rely upon the Guarantee for
payment of such amounts. Instead, in the event a Debenture Event of Default
shall have occurred and be continuing and such event is attributable to the
failure of Pacific Crest to pay interest on or principal of the Junior
Subordinated Debentures on the payment date on which such payment is due and
payable, then a holder of Trust Preferred Securities may institute a legal
proceeding directly against Pacific Crest for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the Trust
Preferred Securities of such holder (a "Direct Action"). In connection with such
Direct Action, Pacific Crest will have a right of set-off under the Indenture to
the extent of any payment made by Pacific Crest to such holder of Trust
Preferred Securities in the Direct Action. Except as described herein, holders
of Trust Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights by
Holders of Trust Preferred Securities" and "Description of Guarantee." The Trust
Agreement provides that each holder of Trust Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee Agreement and the Indenture.
ABILITY TO MAKE PAYMENTS ON THE TRUST PREFERRED SECURITIES AND JUNIOR
SUBORDINATED DEBENTURES
Pacific Crest is a legal entity separate and distinct from its subsidiaries,
including Pacific Crest Bank. The ability of PCC Capital to pay amounts due on
the Trust Preferred Securities is solely dependent upon Pacific Crest making
payments on the Junior Subordinated Debentures as and when required. As a
holding company without significant assets other than its equity interest in
Pacific Crest Bank, Pacific Crest's ability to pay interest on the Junior
Subordinated Debentures to PCC Capital (and consequently, PCC Capital's ability
to pay distributions on the Trust Preferred Securities and Pacific Crest's
ability to pay its obligations under the Guarantee) depends primarily on cash
and liquid investments at Pacific Crest and upon cash
19
<PAGE>
dividends Pacific Crest may receive in the future from Pacific Crest Bank.
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 $1.5 million at June
30, 1997, which amount of retained earnings is unrestricted and available for
dividend payments to Pacific Crest. At June 30, 1997, Pacific Crest had cash and
liquid investments of approximately $243,000. See "Use of Proceeds."
LIMITED COVENANTS
The covenants in the Indenture are limited, and there are no covenants
relating to Pacific Crest in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior Subordinated
Debentures, or Trust Preferred Securities, respectively, in the event of a
material adverse change in Pacific Crest's or the Company's financial condition
or results of operations or limits the ability of Pacific Crest or any
subsidiary to incur additional indebtedness. Therefore, the provisions of these
governing instruments should not be considered a significant factor in
evaluating whether Pacific Crest will be able to comply with its obligations
under the Junior Subordinated Debentures or the Guarantee.
LIMITED VOTING RIGHTS
Holders of Trust Preferred Securities will generally have limited voting
rights relating only to the modification of the Trust Preferred Securities, the
dissolution, winding-up or liquidation of PCC Capital, and the exercise of PCC
Capital's rights as holder of Junior Subordinated Debentures. Holders of Trust
Preferred Securities will not be entitled to vote to appoint, remove or replace
the Property Trustee or the Delaware Trustee, and such voting rights are vested
exclusively in the holder of the Common Securities except upon the occurrence of
certain events described herein. In no event will the holders of the Trust
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights are vested exclusively in the holder
of the Common Securities. The Property Trustee, the Administrative Trustees and
Pacific Crest may amend the Trust Agreement without the consent of holders of
Trust Preferred Securities to ensure that PCC Capital will be classified for
United States federal income tax purposes as a grantor trust or to ensure that
PCC Capital will not be required to register as an "investment company," even if
such action adversely affects the interests of such holders. See "Description of
the Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement"
and "--Removal of Trustees."
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no existing market for the Trust Preferred Securities. The Trust
Preferred Securities have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance. There can be no assurance that
an active and liquid trading market for the Trust Preferred Securities will
develop or that a continued listing of the Trust Preferred Securities will be
available on the Nasdaq National Market. Although the Underwriters have informed
PCC Capital and the Company that the Underwriters intend to make a market in the
Trust Preferred Securities offered hereby, the Underwriters are not obligated to
do so and any such market making activity may be terminated at any time without
notice to the holders of the Trust Preferred Securities. Future trading prices
of the Trust Preferred Securities will depend on many factors including, among
other things, prevailing interest rates, the operating results and financial
condition of the Company, and the market for similar securities. As a result of
the existence of Pacific Crest's right to defer interest payments on or shorten
the Stated Maturity of the Junior Subordinated Debentures, the market price of
the Trust Preferred Securities may be more volatile than the market prices of
debt securities that are not subject to such optional deferrals or reduction in
maturity. There can be no assurance as to the market prices for the Trust
Preferred Securities or the Junior Subordinated Debentures that may be
distributed in exchange for the Trust Preferred Securities if Pacific Crest
exercises its right to terminate PCC Capital. Accordingly, the Trust Preferred
Securities that an investor may purchase, or the
20
<PAGE>
Junior Subordinated Debentures that a holder of the Trust Preferred Securities
may receive in liquidation of PCC Capital, may trade at a discount from the
price that the investor paid to purchase the Trust Preferred Securities offered
hereby.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including, without limitation, statements containing the words
"believes," "anticipates," "intends," "expects" and words of similar import,
constitute "forward-looking statements" within the meaning of the Reform Act.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economics and business
conditions in those areas in which the Company operates; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; the
availability of capital to fund the expansion of the Company's business; and
other factors referenced in this Prospectus or incorporated by reference herein,
including, without limitation, under the captions "Prospectus Summary" and "Risk
Factors." Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company disclaims
any obligation to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained or incorporated
by reference herein to reflect future events or developments.
21
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of Trust Preferred Securities will be
invested by PCC Capital in the Junior Subordinated Debentures. The net proceeds
to Pacific Crest from the sale of the Junior Subordinated Debentures are
estimated to be $14,025,000 ($16,173,750 if the Underwriters' over-allotment
option is exercised in full), net of estimated underwriting commission and other
estimated offering expenses. Pacific Crest intends to invest $5.0 million of the
net proceeds in Pacific Crest Bank to increase its capital level to support
future growth. Pacific Crest intends to use the remaining net proceeds for
general corporate purposes, which may include without limitation, funding
additional investments in, or extensions of credit to, Pacific Crest Bank and
possible future acquisitions if and when suitable opportunities arise. The
Company is not currently engaged in negotiations with respect to any
acquisitions. Pending their application, the net proceeds may be invested in
investment grade financial securities.
ACCOUNTING TREATMENT
For financial reporting purposes, PCC Capital will be treated as a
subsidiary of Pacific Crest and, accordingly, the accounts of PCC Capital will
be included in the consolidated financial statements of the Company. The Trust
Preferred Securities will be presented as a separate line item in the
consolidated balance sheet of the Company under the caption "Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures," and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to consolidated financial statements. For financial
reporting purposes, the Company will record Distributions payable on the Trust
Preferred Securities as an interest expense in the consolidated statements of
operations.
Future reports of Pacific Crest filed under the Securities Exchange Act of
1934, as amended ("the Exchange Act"), will include a footnote to the financial
statements stating that (i) PCC Capital is wholly owned, (ii) the sole assets of
PCC Capital are the Junior Subordinated Debentures (specifying the principal
amount, interest rate and maturity date of such Junior Subordinated Debentures),
and (iii) the back up obligations, in the aggregate, constitute a full and
unconditional guarantee by Pacific Crest of the obligations of PCC Capital under
the Trust Preferred Securities. PCC Capital will not provide separate reports
under the Exchange Act.
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1997 and as adjusted to give effect to the issuance of the
Trust Preferred Securities offered by PCC Capital and receipt by Pacific Crest
of the proceeds from the corresponding sale of the Junior Subordinated
Debentures to PCC Capital and assuming the Underwriters' over-allotment option
was not exercised.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Company obligated mandatorily redeemable trust preferred securities of
subsidiary trust holding solely junior subordinated debentures(1)... $ -- $ 15,000
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: 2,000,000 shares authorized, none
issued............................................................ -- --
Common stock, $.01 par value: 10,000,000 shares authorized,
2,968,449 outstanding............................................. 27,910 27,910
Accumulated deficit................................................. (1,129) (1,129)
Net unrealized loss on securities, available for sale............... (238) (238)
Common stock in treasury, at cost, 30,000 shares.................... (255) (255)
--------- -----------
Total shareholders' equity........................................ $ 26,288 $ 26,288
--------- -----------
Total capitalization................................................ $ 26,288 $ 41,288
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) The subsidiary trust is PCC Capital, which will hold the Junior Subordinated
Debentures as its sole asset. The Trust Preferred Securities are issued by
PCC Capital. The sole assets of PCC Capital consist of the Junior
Subordinated Debentures issued by Pacific Crest to PCC Capital. The Junior
Subordinated Debentures will bear interest at the rate of 9.375% per annum
and will mature on October 1, 2027 which date may be shortened to a date not
earlier than October 1, 2002 if certain conditions are met. The Junior
Subordinated Debentures are redeemable prior to maturity at the option of
Pacific Crest, subject to Pacific Crest having received prior approval of
the primary federal regulator of Pacific Crest if then required under
applicable capital guidelines or policies of such primary regulator, (i) on
or after October 1, 2002, in whole at any time or in part from time to time,
or (ii) at any time, in whole (but not in part), within 90 days following
the occurrence and continuation of a Tax Event, an Investment Company Event
or a Capital Treatment Event (each as defined herein). See "Description of
Junior Subordinated Debentures--Redemption." Pacific Crest owns all of the
Common Securities of PCC Capital.
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<PAGE>
MANAGEMENT
The table below sets forth certain information for the directors and certain
executive officers of the Company, as of June 30, 1997.
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
- ------------------------------ --------------------------------------------------------------------------- ---
<S> <C> <C>
Gary L. Wehrle................ Chairman of the Board, President and Chief Executive Officer of the Company 54
and Pacific Crest Bank
Rudolph I. Estrada............ Director 49
Martin J. Frank............... Director 60
Richard S. Orfalea............ Director 55
Steven J. Orlando............. Director 45
Barry L. Otelsberg............ Executive Vice President of the Company, Executive Vice President of 46
Pacific Crest Bank
Lyle C. Lodwick............... Executive Vice President of the Company and Pacific Crest Bank 43
Gonzalo Fernandez............. Executive Vice President of the Company and Pacific Crest Bank 54
Robert J. Dennen.............. Vice President and Chief Financial Officer of the Company and Pacific Crest 44
Bank
Joseph Finci.................. Senior Vice President of the Company and Pacific Crest Bank 39
</TABLE>
GARY L. WEHRLE, Chairman of the Board and Chief Executive Officer of Pacific
Crest. Mr. Wehrle has served as Chairman of the Board of Pacific Crest since
October 1993, and President and Chief Executive Officer of Pacific Crest since
September 1993. Mr. Wehrle has served as President and Chief Executive Officer
of Pacific Crest Bank since 1984. Mr. Wehrle served as Executive Vice President
of The Foothill Group, Inc. from 1980 to 1993.
RUDOLPH I. ESTRADA, Director of Pacific Crest since October 1993. Mr.
Estrada has served as President and Chief Executive Officer of The Summit Group,
a banking and business consulting company, since 1988, as Chairman of the
California Small Business Roundtable since 1995, and as Professor (Adjunct) of
Finance and Management and Director of the Small Business Institute at
California State University since 1986. Mr. Estrada served as Presidential
appointee to the White House Commission on Small Business in 1993, as Corporate
Lending Manager, Tokai Bank, from 1982 to 1987, and as Los Angeles District
Director, U.S. Small Business Administration, from 1980 to 1982.
MARTIN J. FRANK, Director of Pacific Crest since October 1993. Mr. Frank is
self-employed in movie development and currently serves as a Managing Member of
Cadillac LLC, a movie production company. Mr. Frank has also served as Chairman
of Moonshadow Entertainment, a movie production company, since January 1995. Mr.
Frank served as Chairman of A. Frank Productions, a movie production company,
from February 1992 to December 1993. Mr. Frank was the owner of Martin J. Frank
Consulting, a management consulting company, from February 1992 to December
1996, and served as Managing Director of Towers, Perrin, Forster & Crosby, Inc.
from 1969 to 1992.
RICHARD S. ORFALEA, Director of Pacific Crest since October 1993. Mr.
Orfalea has served as Director of Mergers and Acquisitions and Director of
International Expansion at Kinko's Graphics Corp., from 1990 to present. Mr.
Orfalea served as Manager of the Merchant Banking Unit in the Los Angeles
Commercial Banking Office of California Federal Bank from 1983 to 1990.
24
<PAGE>
STEVEN J. ORLANDO, Director of Pacific Crest since May 1995. Mr. Orlando is
a Certified Public Accountant and currently serves as Chief Financial Officer of
Java Centrale, Inc., a gourmet coffee franchiser which has a class of securities
registered under Section 12 of the Exchange Act. Mr. Orlando also has served as
Director and President of RJN Enterprises, a private investment company, from
July 1988 to present, as Director of Bel Foods, a company supplying products to
ice cream manufacturers, from 1988 to present, and as Director and a consultant
to Southwest Products Company, an aerospace specialty bearing manufacturer, from
1988 to present. Mr. Orlando served as a Director and consulting Chief Financial
Officer of FRS, Inc. from 1988 to 1994, and was self-employed as a financial
advisor and consultant from 1988 to 1994.
BARRY L. OTELSBERG, Executive Vice President of the Company since 1993;
Executive Vice President of Pacific Crest Bank since 1985.
LYLE C. LODWICK, Executive Vice President of the Company since 1993;
Executive Vice President of Pacific Crest Bank since 1992.
GONZALO FERNANDEZ, Executive Vice President of the Company since 1994;
Executive Vice President of Pacific Crest Bank since 1994.
ROBERT J. DENNEN, Vice President and Chief Financial Officer of the Company
since 1993; Vice President and Chief Financial Officer of Pacific Crest Bank
since 1993.
JOSEPH FINCI, Senior Vice President of the Company since 1995; Senior Vice
President of Pacific Crest Bank since 1995.
25
<PAGE>
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Trust Agreement. The Trust Agreement will be qualified as an indenture under the
Trust Indenture Act. Initially, Wilmington Trust Company will be the Delaware
Trustee and the Property Trustee and will act as trustee for the purpose of
complying with the Trust Indenture Act. The terms of the Trust Preferred
Securities will include those stated in the Trust Agreement and those made part
of the Trust Agreement by the Trust Indenture Act. This summary of certain terms
and provisions of the Trust Preferred Securities and the Trust Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Trust Agreement, including the
definitions therein of certain terms, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement (as amended or supplemented from
time to time) are referred to herein, such defined terms are incorporated
herein. The form of the Trust Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Administrative Trustees on
behalf of PCC Capital will issue the Trust Preferred Securities and the Common
Securities (collectively, the "Trust Securities"). The Trust Preferred
Securities will represent preferred undivided beneficial interests in the assets
of PCC Capital and the holders thereof will be entitled to a preference over the
Common Securities of PCC Capital (which will be held by Pacific Crest) in
certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation, as well as other benefits as described in the Trust
Agreement.
The Trust Preferred Securities will rank PARI PASSU, and payments will be
made thereon pro rata, with the Common Securities of PCC Capital except as
described under "Subordination of Common Securities of PCC Capital Held by
Pacific Crest" below. Legal title to the Junior Subordinated Debentures will be
held by the Property Trustee in trust for the benefit of the holders of the
Trust Securities. The Guarantee executed by Pacific Crest for the benefit of the
holders of the Trust Preferred Securities (the "Guarantee") will be a guarantee
on a subordinated basis with respect to the Trust Preferred Securities but will
not guarantee payment of Distributions or amounts payable on redemption or on
liquidation of the Trust Preferred Securities if PCC Capital does not have funds
on hand available to make such payments. See "Description of Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. Distributions on the Trust Preferred Securities
will be payable at the annual rate of 9.375% of the stated Liquidation Amount of
$10, payable quarterly in arrears on the 15th day of March, June, September and
December in each year to the holders of the Trust Preferred Securities on the
relevant record dates (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). The amount of each
Distribution due with respect to the Trust Preferred Securities will include
amounts accrued through the date the Distribution payment is due. Distributions
on the Trust Preferred Securities will be payable to the holders thereof as they
appear on the register of PCC Capital on the relevant record date which, for so
long as the Trust Preferred Securities remain in book-entry form, will be one
Business Day (as defined below) prior to the relevant Distribution Date and, in
the event the Trust Preferred Securities are not in book-entry form, will be the
first day of the month in which the relevant Distribution Date occurs.
Distributions will accumulate from the date of original issuance. The first
Distribution Date for the Trust Preferred Securities will be December 15, 1997.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Trust Preferred Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next Business Day (and without any interest or other payment in respect to
any such delay), with the same force
26
<PAGE>
and effect as if made on the date such payment was originally payable. As used
in this Prospectus, a "Business Day" shall mean any day other than a Saturday or
a Sunday, or a day on which banking institutions in the State of California are
authorized or required by law or executive order to remain closed or a day on
which the corporate trust office of the Property Trustee or the Indenture
Trustee is closed for business.
The funds of PCC Capital available for distribution to holders of its Trust
Preferred Securities will be limited to payments by Pacific Crest under the
Junior Subordinated Debentures in which PCC Capital will invest the proceeds
from the issuance and sale of its Trust Preferred Securities. See "Description
of Junior Subordinated Debentures." If Pacific Crest does not make interest
payments on the Junior Subordinated Debentures, the Property Trustee will not
have funds available to pay Distributions on the Trust Preferred Securities. The
payment of Distributions (if and to the extent PCC Capital has funds legally
available for the payment of such Distributions and cash sufficient to make such
payments) is guaranteed by Pacific Crest. See "Description of Guarantee."
EXTENSION PERIOD. So long as no Debenture Event of Default has occurred and
is continuing, Pacific Crest has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such election, quarterly Distributions on
the Trust Preferred Securities will be deferred by PCC Capital during any such
Extension Period. Distributions to which holders of Trust Preferred Securities
are entitled will accumulate additional amounts thereon at the rate per annum of
9.375% thereof, compounded quarterly from the relevant Distribution Date, to the
extent permitted under applicable law. The term "Distributions" as used herein
shall include any such additional accumulated amounts. During any such Extension
Period, Pacific Crest may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of Pacific Crest's capital stock (which includes common and preferred
stock), (ii) make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Pacific Crest that rank PARI
PASSU with or junior in interest to the Junior Subordinated Debentures or make
any guarantee payments with respect to any guarantee by Pacific Crest of the
debt securities of any subsidiary of Pacific Crest if such guarantee ranks PARI
PASSU with or junior in interest to the Junior Subordinated Debentures (other
than (a) dividends or distributions in common stock of Pacific Crest, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee and (d) purchases of common stock for issuance of
common stock or rights under any of Pacific Crest's benefit plans for its
directors, officers or employees) or (iii) redeem, purchase or acquire less than
all of the Junior Subordinated Debentures or any of the Trust Preferred
Securities. Prior to the termination of any such Extension Period, Pacific Crest
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarters or extend beyond
the Stated Maturity. Upon the termination of any such Extension Period and the
payment of all amounts then due, and subject to the foregoing limitations,
Pacific Crest may elect to begin a new Extension Period. Subject to the
foregoing, there is no limitation on the number of times that Pacific Crest may
elect to begin an Extension Period. Pacific Crest has no current intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Junior Subordinated Debentures.
REDEMPTION
MANDATORY REDEMPTION. Upon the repayment or redemption at any time, in
whole or in part, of any Junior Subordinated Debentures, the proceeds from such
repayment or redemption shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice of a date of redemption (the "Redemption Date"),
at the Redemption Price (as defined below). See "Description of Junior
Subordinated Debentures--Redemption." If less than
27
<PAGE>
all of the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Trust Securities PRO RATA. The amount of
premium, if any, paid by Pacific Crest upon the redemption of all or any part of
the Junior Subordinated Debentures to be repaid or redeemed on a Redemption Date
shall be allocated to the redemption pro rata of the Trust Securities.
OPTIONAL REDEMPTION. Pacific Crest will have the right to redeem the Junior
Subordinated Debentures (i) on or after October 1, 2002, in whole at any time or
in part from time to time at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, or (ii) at any time, in
whole (but not in part), upon the occurrence of a Tax Event, an Investment
Company Event or a Capital Treatment Event at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus 100% of the principal amount thereof, in
each case subject to Pacific Crest having received prior approval of the primary
federal regulator of Pacific Crest if then required under applicable capital
guidelines or policies of such primary regulator. See "Description of Junior
Subordinated Debentures--Redemption."
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION, CAPITAL TREATMENT
EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES. If a Tax
Event, a Capital Treatment Event or an Investment Company Event shall occur and
be continuing, Pacific Crest has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Trust Securities in whole (but not in part) at the Redemption Price (as
defined below) within 90 days following the occurrence of such Tax Event,
Capital Treatment Event or Investment Company Event. If a Tax Event, Capital
Treatment Event or an Investment Company Event has occurred and is continuing
and Pacific Crest does not elect to redeem the Junior Subordinated Debentures
and thereby cause a mandatory redemption of the Trust Securities or to liquidate
PCC Capital and cause the Junior Subordinated Debentures to be distributed to
holders of the Trust Securities in liquidation of PCC Capital as described
below, such Trust Securities will remain outstanding and Additional Sums (as
defined below) may be payable on the Junior Subordinated Debentures.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be
paid by Pacific Crest with respect to the Junior Subordinated Debentures in
order that the amount of Distributions then due and payable by PCC Capital on
the outstanding Trust Securities of PCC Capital shall not be reduced as a result
of any additional taxes, duties and other governmental charges to which PCC
Capital has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Trust Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of PCC Capital, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, allocated on a pro rata basis (based on
Liquidation Amounts) among the Trust Securities.
28
<PAGE>
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to Pacific Crest and PCC Capital having received an opinion of
counsel to the effect that such distribution will not be a taxable event to the
holders of the Trust Preferred Securities, Pacific Crest will have the right at
any time to dissolve PCC Capital and, after satisfaction of the liabilities of
creditors of PCC Capital as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of Trust Securities in
liquidation of PCC Capital. After the liquidation date fixed for any
distribution of Junior Subordinated Debentures for Trust Preferred Securities
(i) such Trust Preferred Securities will no longer be deemed to be outstanding,
(ii) the Depositary or its nominee, as the record holder of the Trust Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution and (iii) any certificates representing Trust Preferred Securities
not held by the Depositary or its nominee will be deemed to represent the Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of such Trust Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the Trust
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Preferred Securities if a dissolution and liquidation of
PCC Capital were to occur. Accordingly, the Trust Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that the investor
may receive on dissolution and liquidation of PCC Capital, may trade at a
discount to the price that the investor paid to purchase the Trust Preferred
Securities offered hereby.
REDEMPTION PROCEDURES
Trust Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Junior Subordinated Debentures. Redemptions of
the Trust Preferred Securities shall be made and the Redemption Price shall be
payable on each Redemption Date only to the extent that PCC Capital has funds on
hand available for the payment of such Redemption Price. See "--Subordination of
Common Securities of PCC Capital Held by Pacific Crest" herein and "Description
of Guarantee."
If PCC Capital gives a notice of redemption in respect of the Trust
Preferred Securities, then, by 12:00 noon, Eastern time on the Redemption Date,
to the extent funds are available, the Property Trustee will deposit with the
Depositary funds sufficient to pay the aggregate Redemption Price and will give
the Depositary irrevocable instructions and authority to pay the Redemption
Price to the holders of such Trust Preferred Securities. See "Book-Entry
Issuance." If such Trust Preferred Securities are no longer in book-entry form,
the Property Trustee, to the extent funds are available, will deposit with the
paying agent for such Trust Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Trust Preferred Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date shall be payable to the holders of such Trust Preferred
Securities on the relevant record dates for the related Distribution Dates. If
notice of redemption shall have been given and funds deposited as required, then
upon the date of such deposit, all rights of the holders of the Trust Preferred
Securities will cease, except the right of the holders of the Trust Preferred
Securities to receive the applicable Redemption Price, but without interest on
such Redemption Price, and such Trust Preferred Securities will cease to be
outstanding. In the event that any date fixed for redemption of such Trust
Preferred Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding Business Day (and
without any interest or other payment in respect of any such delay), with the
same force and effect as if made on the date such payment was originally
payable. In the event that payment of the Redemption Price in respect of Trust
Preferred Securities called for redemption is improperly withheld or refused and
not paid either by PCC
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Capital or by Pacific Crest pursuant to the Guarantee, Distributions on such
Trust Preferred Securities will continue to accrue at the then applicable rate,
from the Redemption Date originally established by PCC Capital for such Trust
Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price. See "Description of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that Pacific Crest is not then
exercising its right to defer interest payments on the Junior Subordinated
Debentures, the Company (other than PCC Capital) may at any time and from time
to time purchase outstanding Trust Preferred Securities by tender, in the open
market or by private agreement.
Payment of the Redemption Price on the Trust Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Trust Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register of such Trust Preferred Securities on the relevant record date,
which date shall be one Business Day prior to the relevant Redemption Date or
Liquidation Date, as applicable; provided, however, that in the event that any
Trust Preferred Securities are not in book-entry form, the relevant record date
for such Trust Preferred Securities shall be a date at least 15 days prior to
the Redemption Date or Liquidation Date, as applicable. In the case of a
liquidation, the record date shall be no more than 45 days before the
Liquidation Date.
If less than all of the Trust Securities issued by PCC Capital are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata to the Trust
Preferred Securities and Common Securities based upon the relative Liquidation
Amounts of such classes. The particular Trust Preferred Securities to be
redeemed shall be selected by the Property Trustee from the outstanding Trust
Preferred Securities not previously called for redemption, by such method as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $10 or an integral multiple
thereof) of the Liquidation Amount of Trust Preferred Securities. The Property
Trustee shall promptly notify the Security registrar in writing of the Trust
Preferred Securities selected for redemption and, in the case of any Trust
Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of Trust
Preferred Securities shall relate to the portion of the aggregate Liquidation
Amount of Trust Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities at such
holder's registered address. Unless PCC Capital defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Trust Preferred Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES OF PCC CAPITAL HELD BY PACIFIC CREST
Payment of Distributions on, and the Redemption Price of, the Trust
Preferred Securities and Common Securities, as applicable, shall be made PRO
RATA based on the Liquidation Amounts of the Trust Preferred Securities and
Common Securities; provided, however, that if on any Distribution Date or
Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Trust Preferred Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price the full amount of such Redemption Price on all of
the outstanding Trust Preferred Securities then called for redemption, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of, the Trust Preferred Securities then due and payable.
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In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, Pacific Crest as holder of the Common Securities
will be deemed to have waived any right to act with respect to any such Event of
Default until the effect of all such Events of Default have been cured, waived
or otherwise eliminated. Until any such Events of Default have been so cured,
waived or otherwise eliminated, the Property Trustee shall act solely on behalf
of the holders of the Trust Preferred Securities and not on behalf of Pacific
Crest as holder of the Common Securities, and only the holders of the Trust
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pacific Crest will have the right at any time to dissolve PCC Capital and,
after satisfaction of liabilities to creditors of PCC Capital as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities. Such right is subject to Pacific
Crest having received prior approval of the primary federal regulator of Pacific
Crest if then required under applicable capital guidelines or policies of such
primary regulator. See "-- Distribution of Junior Subordinated Debentures"
above.
In addition, pursuant to the Trust Agreement, PCC Capital shall
automatically dissolve upon expiration of its term and shall earlier dissolve on
the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of Pacific Crest; (ii) the distribution of a Like Amount of the
Junior Subordinated Debentures to the holder of its Trust Securities, if Pacific
Crest, as Depositor, has delivered written direction to the Property Trustee to
dissolve PCC Capital (which direction is optional and, except as described
above, wholly within the discretion of Pacific Crest, as Depositor); (iii)
redemption of all of the Trust Preferred Securities as described under
"--Redemption--Mandatory Redemption"; and (iv) the entry of an order for the
dissolution of PCC Capital by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii), or (iv)
above, PCC Capital shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of PCC Capital as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of PCC Capital available for distribution to holders, after
satisfaction of liabilities to creditors of PCC Capital as provided by
applicable law, an amount equal to, in the case of holders of Trust Preferred
Securities, the aggregate of the Liquidation Amount plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because PCC Capital has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by PCC
Capital on the Trust Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation pro rata with the holders of the Trust Preferred
Securities, except that if a Debenture Event of Default has occurred and is
continuing, the Trust Preferred Securities shall have a priority over the Common
Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, PCC Capital is treated as a grantor trust, a distribution
of the Junior Subordinated Debentures should not be a taxable event to holders
of the Trust Preferred Securities. Should there be a change in law, a change in
legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Trust Preferred
Securities. See "Certain Federal Income Tax Consequences." If Pacific Crest
elects neither to redeem the Junior Subordinated Debentures prior to maturity
nor to liquidate PCC Capital and distribute the Junior Subordinated Debentures
to holders of the Trust Preferred Securities, the Trust Preferred Securities
will remain outstanding until the repayment of the Junior Subordinated
Debentures.
If Pacific Crest elects to dissolve PCC Capital and thereby causes the
Junior Subordinated Debentures to be distributed to holders of the Trust
Preferred Securities in liquidation of PCC Capital, Pacific Crest
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shall continue to have the right to shorten the maturity of such Junior
Subordinated Debentures, subject to certain conditions. See "Description of
Junior Subordinated Debentures--General."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Trust Preferred Securities (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures--Debenture Events of Default"); or
(ii) default by the Property Trustee in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Property Trustee in the Trust Agreement
(other than a default or breach in the performance of a covenant or warranty
which is addressed in clause (ii) or (iii) above), and continuation of such
default or breach, for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Property Trustee by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Trust Preferred Securities, a written notice specifying such default or
breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by Pacific Crest to appoint
a successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Trust Preferred
Securities, the Administrative Trustees and Pacific Crest, as Depositor, unless
such Event of Default shall have been cured or waived. Pacific Crest as
Depositor, and the Administrative Trustees are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing, the Trust
Preferred Securities shall have a preference over the Common Securities upon
termination of PCC Capital as described above. See "--Liquidation Distribution
upon Dissolution" herein. Upon a Debenture Event of Default, unless the
principal of all the Junior Subordinated Debentures has already become due and
payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due and
payable immediately by giving notice in writing to Pacific Crest (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of at
least 25% in Liquidation Amount of the Trust Preferred Securities then
outstanding shall have the right to declare the Junior Subordinated Debentures
immediately due and payable. In either event, payment of principal and interest
on the Junior Subordinated Debentures shall remain subordinated to the extent
provided in the Indenture. In addition, holders of the Trust Preferred
Securities have the right in certain circumstances to bring a Direct Action (as
hereinafter defined). See "Description of Junior Subordinated Debentures--
Enforcement of Certain Rights by Holders of Trust Preferred Securities."
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REMOVAL OF TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any of
the Property Trustee, the Depositary Trustee or the Administrative Trustees may
be removed at any time by the holder of the Common Securities. If a Debenture
Event of Default has occurred and is continuing, the Property Trustee and the
Delaware Trustee may be removed at such time by the holders of a majority in
Liquidation Amount of the outstanding Trust Preferred Securities. In no event
will the holders of the Trust Preferred Securities have the right to vote to
appoint, remove or replace the Administrative Trustees, which voting rights are
vested exclusively in Pacific Crest as the holder of the Common Securities. No
resignation or removal of a Trustee and no appointment of a successor trustee
shall be effective until the acceptance of appointment by the successor trustee
in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of Trust Property may at
the time be located, Pacific Crest, as the holder of the Common Securities, and
the Administrative Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be consolidated,
or any Person resulting from any merger, conversion or consolidation to which
such Issuer Trustee shall be a party, or any person succeeding to all or
substantially all the corporate trust business of such Issuer Trustee, shall be
the successor of such Issuer Trustee under the Trust Agreement, provided such
corporation shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF PCC CAPITAL
PCC Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below or as described in "--Liquidation Distribution Upon
Dissolution." PCC Capital may, at the request of Pacific Crest, with the consent
of the Administrative Trustees and without the consent of the holders of the
Trust Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of PCC Capital with respect to the Trust Preferred Securities or (b)
substitutes for the Trust Preferred Securities other securities having
substantially the same terms as the Trust Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Trust
Preferred Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) Pacific Crest expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee as the holder of the Junior Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Preferred
Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, conveyance, transfer or lease does not cause the Trust Preferred
Securities to be downgraded by any nationally recognized statistical rating
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organization which gives ratings to the Trust Preferred Securities; (v) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Trust Preferred Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of PCC Capital, (vii) the Successor Securities will be listed
or traded on any national securities exchange or other organization on which the
Trust Preferred Securities may then be listed, (viii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, Pacific
Crest has received an opinion from independent counsel to PCC Capital
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither PCC Capital nor such
successor entity will be required to register as an investment company under the
Investment Company Act and (ix) Pacific Crest or any permitted successor or
designee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, PCC Capital shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Preferred Securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to any other entity or permit
any other entity to consolidate, amalgamate, merge with or into, or replace it
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause PCC Capital or the successor entity to be classified as
other than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Trust Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by Pacific Crest, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that PCC Capital will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that PCC Capital will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in the case of clause (i), such action shall not adversely affect
in any material respect the interests of any holder of Trust Securities, and any
such amendments of the Trust Agreement shall become effective when notice
thereof is given to the holders of the Trust Securities. The Trust Agreement may
be amended by the Issuer Trustees and the Company with (i) the consent of
holders representing not less than a majority of the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) receipt by the Issuer
Trustees of an opinion of counsel to the effect that such amendment or the
exercise of any power granted to the Issuer Trustees in accordance with such
amendment will not affect PCC Capital's status as a grantor trust for United
States federal income tax purposes or PCC Capital's exemption from status as an
"investment company" under the Investment Company Act, provided that without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (i) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date or (ii)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
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So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding the Trust
Preferred Securities; provided, however, that where a consent under the
Indenture would require the consent of each holder of Junior Subordinated
Debentures affected thereby, no such consent shall be given by the Property
Trustee without the prior consent of each holder of the Trust Preferred
Securities. The Issuer Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Trust Preferred
Securities except by subsequent vote of the holders of the Trust Preferred
Securities. The Property Trustee shall notify each holder of the Trust Preferred
Securities of any notice of default with respect to the Junior Subordinated
Debentures. In addition to obtaining the foregoing approvals of such holders of
the Trust Preferred Securities, prior to taking any of the foregoing actions,
the Issuer Trustees shall obtain an opinion of counsel experienced in such
matters to the effect that PCC Capital will not be classified as other than a
grantor trust for United States federal income tax purposes.
Any required approval of holders of the Trust Preferred Securities may be
given at a meeting of holders of Trust Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Trust Preferred Securities are entitled
to vote, or of any matter upon which action by written consent of such holders
is to be taken, to be given to each holder of record of the Trust Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Trust Preferred Securities will be
required for PCC Capital to redeem and cancel the Trust Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Trust Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Trust Preferred Securities that are owned by Pacific Crest, the Trustees or any
affiliate of Pacific Crest or any Trustees, shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
GLOBAL TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Trust Preferred Security"). Beneficial interests in the Trust Preferred
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by participants in the Depositary. Except as
described below, Trust Preferred Securities in certificated form will not be
issued in exchange for the global certificates. See "Book-Entry Issuance."
A global security shall be exchangeable for Trust Preferred Securities
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies Pacific Crest that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Exchange Act, at a time when the Depositary
is required to be so registered to act as such depositary, (ii) Pacific Crest in
its sole discretion determines that such global security shall be so
exchangeable, or (iii) there shall have occurred and be continuing an Event of
Default under the Indenture. Any global security that is exchangeable pursuant
to the preceding sentence shall be exchangeable for definitive certificates
registered in such names as the Depositary shall direct. It is expected that
such instructions will be based upon directions received by the Depositary with
respect to ownership of beneficial interests in such global security. In the
event that Trust Preferred Securities are issued in definitive form, such Trust
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Preferred Securities will be in denominations of $10 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
Trust Preferred Securities represented thereby, a Global Trust Preferred
Security may not be transferred except as a whole by the Depositary to a nominee
of such the Depositary or by a nominee of such the Depositary to such Depositary
or another nominee of such Depositary or by the Depositary or any nominee to a
successor Depositary or any nominee of such successor.
Payments on Trust Preferred Securities represented by a global security will
be made to the Depositary, as the depositary for the Trust Preferred Securities.
In the event the Trust Preferred Securities are issued in definitive form,
Distributions will be payable, the transfer of the Trust Preferred Securities
will be registrable, and Trust Preferred Securities will be exchangeable for
Trust Preferred Securities of other denominations of a like aggregate
Liquidation Amount, at the corporate office of the Property Trustee, or at the
offices of any paying agent or transfer agent appointed by the Administrative
Trustees, provided that payment of any Distribution may be made at the option of
the Administrative Trustees by check mailed to the address of the persons
entitled thereto or by wire transfer. In addition, if the Trust Preferred
Securities are issued in certificated form, the record dates for payment of
Distributions will be the first day of the month in which the relevant
Distribution Date occurs. For a description of the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Trust Preferred Security, and the deposit of
such Global Trust Preferred Security with or on behalf of the Depositary, the
Depositary for such Global Trust Preferred Security or its nominee will credit,
on its book-entry registration and transfer system, the respective aggregate
Liquidation Amounts of the individual Trust Preferred Securities represented by
such Global Trust Preferred Securities to the accounts of Participants. Such
accounts shall be designated by the dealers, underwriters or agents with respect
to such Trust Preferred Securities. Ownership of beneficial interests in a
Global Trust Preferred Security will be limited to Participants or persons that
may hold interests through Participants. Ownership of beneficial interests in
such Global Trust Preferred Security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
Depositary or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Trust Preferred Security.
So long as the Depositary for a Global Trust Preferred Security, or its
nominee, is the registered owner of such Global Trust Preferred Security, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Trust Preferred Securities represented by such Global
Trust Preferred Security for all purposes under the Trust Agreement governing
such Trust Preferred Securities. Except as provided below, owners of beneficial
interests in a Global Trust Preferred Security will not be entitled to have any
of the individual Trust Preferred Securities represented by such Global Trust
Preferred Security registered in their names, will not receive or be entitled to
receive physical delivery of any such Trust Preferred Securities in definitive
form and will not be considered the owners or holders thereof under the Trust
Agreement.
None of Pacific Crest, the Property Trustee, any Paying Agent, or the
Securities Registrar (defined below) for such Trust Preferred Securities will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global
Trust Preferred Security representing such Trust Preferred Securities or for
maintaining supervising or reviewing any records relating to such beneficial
ownership interests.
Pacific Crest expects that the Depositary for Trust Preferred Securities or
its nominee, upon receipt of any payment of the Liquidation Amount or
Distributions in respect of a permanent Global Trust Preferred
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Security immediately will credit Participants' accounts with payments in amounts
proportionate to their respective beneficial interest in the aggregate
Liquidation Amount of such Global Trust Preferred Security as shown on the
records of such Depositary or its nominee. Pacific Crest also expects that
payments by Participants to owners of beneficial interests in such Global Trust
Preferred Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.
If the Depositary for the Trust Preferred Securities is at any time
unwilling, unable or ineligible to continue as depositary and a successor
depositary is not appointed by Pacific Crest within 90 days, PCC Capital will
issue individual Trust Preferred Securities in exchange for the Global Trust
Preferred Security. In addition, PCC Capital may at any time and in its sole
discretion, subject to any limitations described herein relating to such Trust
Preferred Securities, determine not to have any Trust Preferred Securities
represented by one or more Global Trust Preferred Securities and, in such event,
will issue individual Trust Preferred Securities in exchange for the Global
Trust Preferred Security or Securities representing the Trust Preferred
Securities. Further, if PCC Capital so specifies with respect to the Trust
Preferred Securities, an owner of a beneficial interest in a Global Trust
Preferred Security representing Trust Preferred Securities may, on terms
acceptable to Pacific Crest, the Property Trustee and the Depositary for such
Global Trust Preferred Security, receive individual Trust Preferred Securities
in exchange for such beneficial interests, subject to any limitations described
herein. In any such instance, an owner of a beneficial interest in a Global
Trust Preferred Security will be entitled to physical delivery of individual
Trust Preferred Securities represented by such Global Trust Preferred Security
equal in Liquidation Amount to such beneficial interest and to have such Trust
Preferred Securities registered in its name. Individual Trust Preferred
Securities so issued will be issued in denominations, unless otherwise specified
by PCC Capital, of $10 and integral multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Trust Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any of the Trust Preferred Securities are
not held by the Depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
Register. The paying agent (the "Paying Agent") shall initially be the Property
Trustee and any co-paying agent chosen by the Property Trustee and acceptable to
the Administrative Trustees and Pacific Crest. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Property
Trustee and Trust Preferred. In the event that the Property Trustee shall no
longer be the Paying Agent, the Administrative Trustees shall appoint a
successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and Pacific Crest) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the Trust
Preferred Securities. Registration of transfers of the Trust Preferred
Securities will be effected without charge by or on behalf of PCC Capital, but
upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. PCC Capital will not be required to
register or cause to be registered the transfer of the Trust Preferred
Securities after such Trust Preferred Securities have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would
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exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of Trust
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Trust
Preferred Securities are entitled under the Trust Agreement to vote, then the
Property Trustee shall take such action as is directed by Pacific Crest and if
not so directed, shall take such action as it deems advisable and in the best
interests of the holders of the Trust Securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate PCC Capital in such a way that PCC Capital will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or fail to be classified as a grantor trust for United
States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of Pacific Crest for United States
federal income tax purposes. In this connection, Pacific Crest and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of PCC Capital or the Trust Agreement,
that Pacific Crest and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the Trust Preferred
Securities. Holders of the Trust Preferred Securities have no preemptive or
similar rights.
PCC Capital may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the Trust Preferred Securities, PCC
Capital will invest the proceeds thereof, together with the consideration paid
by Pacific Crest for the Common Securities, in Junior Subordinated Debentures
issued by Pacific Crest. The Junior Subordinated Debentures will be issued as
unsecured debt under the Junior Subordinated Indenture, dated as of September
22, 1997 (the "Indenture"), between Pacific Crest and the Indenture Trustee. The
following summary of the terms and provisions of the Junior Subordinated
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture, which has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, and to the Trust Indenture Act. The Indenture is qualified under the
Trust Indenture Act. Whenever particular defined terms of the Indenture are
referred to herein, such defined terms are incorporated herein or therein by
reference.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
9.375% of the principal amount thereof, payable quarterly in arrears on the 15th
day of March, June, September and December of each year (each, an "Interest
Payment Date"), commencing December 15, 1997, to the person in whose name each
Junior Subordinated Debenture is registered, subject to certain exceptions, at
the close of business on the Business Day next preceding such Interest Payment
Date. Notwithstanding the above, in the event that either the (i) Junior
Subordinated Debentures are held by the Property Trustee and the Trust Preferred
Securities are no longer in book-entry only form or (ii) the Junior Subordinated
Debentures are not represented by a Global Subordinated Debenture (as defined
herein), the record date for such payment shall be the first day of the month in
which such payment is made. The amount of each interest payment due with respect
to the Junior Subordinated Debentures will include amounts accrued through the
date the interest payment is due. It is anticipated that, until the liquidation,
if any, of PCC Capital, each Junior Subordinated Debenture will be held in the
name of the Property Trustee in trust for
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the benefit of the holders of the Trust Preferred Securities. The amount of
interest payable for any period will be computed on the basis of a 360-day year
of twelve 30-day months. In the event that any date on which interest is payable
on the Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next Business Day (and without
any interest or other payment in respect of any such delay), in each case with
the same force and effect as if made on the date such payment was originally
payable. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of % thereof, compounded quarterly.
The term "interest" as used herein shall include quarterly interest payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on October 1, 2027 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened at any time by Pacific Crest to any date not earlier
than October 1, 2002, subject to prior regulatory approval, if then required. In
the event that Pacific Crest elects to shorten the Stated Maturity of the Junior
Subordinated Debentures, it shall give notice to the Indenture Trustee, and the
Indenture Trustee shall give notice of such shortening to the holders of the
Junior Subordinated Debentures no less than 90 days prior to the effectiveness
thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior and Subordinated Debt of
Pacific Crest. Because Pacific Crest is a holding company, the right of Pacific
Crest to participate in any distribution of assets of any subsidiaries,
including Pacific Crest Bank, upon any such subsidiaries' liquidation or
reorganization or otherwise (and thus the ability of holders of the Trust
Preferred Securities to benefit indirectly from such distribution), is subject
to the prior claims of creditors of that subsidiary, except to the extent that
Pacific Crest may itself be recognized as a creditor of that subsidiary.
Accordingly, the Junior Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of Pacific Crest Bank, and holders of
Junior Subordinated Debentures should look only to the assets of Pacific Crest
for payments on the Junior Subordinated Debentures. The Indenture does not limit
the incurrence or issuance of other secured or unsecured debt of Pacific Crest,
including Senior and Subordinated Debt, whether under the Indenture or any
existing or other indenture that Pacific Crest may enter into in the future or
otherwise. See "-- Subordination" below.
OPTION TO DEFER INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
Pacific Crest has the right under the Indenture at any time during the term of
the Junior Subordinated Debentures to defer the payment of interest at any time
or from time to time for a period not exceeding 20 consecutive quarters (each
such period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity. At the end of such Extension Period, Pacific Crest
must pay all interest then accrued and unpaid (together with interest thereon at
the annual rate of 9.375%, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures will be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, Pacific Crest may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of Pacific Crest's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of Pacific Crest (including other
Junior Subordinated Debentures) that rank PARI PASSU with or junior in interest
to the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by Pacific Crest of the debt securities of any
subsidiary of Pacific Crest if such guarantee ranks PARI PASSU with or junior in
interest to the Junior
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Subordinated Debentures (other than (a) dividends or distributions in common
stock of Pacific Crest, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, and (d) purchases of common
stock related to the issuance of common stock or rights under any of Pacific
Crest's benefit plans for its directors, officers or employees) or (iv) redeem,
purchase or acquire less than all of the Junior Subordinated Debentures or any
of the Trust Preferred Securities. Prior to the termination of any such
Extension Period, Pacific Crest may further extend such Extension Period,
provided that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due on any
Interest Payment Date, Pacific Crest may elect to begin a new Extension Period
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. Pacific Crest must give the
Property Trustee, the Administrative Trustees and the Indenture Trustee notice
of its election of any Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Trust Preferred Securities
would have been payable except for the election to begin or extend such
Extension Period or (ii) the date the Administrative Trustees are required to
give notice to the New York Stock Exchange, the Nasdaq National Market or any
applicable stock exchange or automated quotation system on which the Trust
Preferred Securities are then listed or quoted or to the holders of the Trust
Preferred Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Indenture Trustee shall give notice of Pacific Crest's election to
begin or extend a new Extension Period the holders of the Trust Preferred
Securities. There is no limitation on the number of times that Pacific Crest may
elect to begin an Extension Period.
Distributions on the Trust Preferred Securities will be deferred by PCC
Capital during any such Extension Period. See "Description of the Trust
Preferred Securities--Distributions." For a description of certain federal
income tax consequences and special considerations applicable to any such Junior
Subordinated Debentures, see "Certain Federal Income Tax Consequences."
ADDITIONAL SUMS
If PCC Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, Pacific Crest will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
PCC Capital shall not be reduced as a result of any such additional taxes,
duties or other governmental charges.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of Pacific Crest (i) on or after October 1, 2002, in whole at any time or
in part from time to time, or (ii) at any time in whole (but not in part),
within 90 days upon the occurrence of a Tax Event, a Capital Treatment Event or
an Investment Company Event, in each case at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus 100% of the principal amount thereof.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless Pacific
Crest defaults in payment of the redemption price, on and after the redemption
date interest ceases to accrue on such Junior Subordinated Debentures or
portions thereof called for redemption.
If PCC Capital is required to pay additional taxes, duties or other
governmental charges as a result of a Tax Event, Pacific Crest will pay as
additional amounts on the Junior Subordinated Debentures the Additional Sums (as
defined herein).
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The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution," under certain
circumstances involving the dissolution of PCC Capital, the Junior Subordinated
Debentures may be distributed to the holders of the Trust Preferred Securities
in liquidation of PCC Capital after satisfaction of liabilities to creditors of
PCC Capital as provided by applicable law and subject to prior regulatory
approval, if then required. If distributed to holders of the Trust Preferred
Securities in liquidation, the Junior Subordinated Debentures will initially be
issued in the form of one or more global securities and the Depositary, or any
successor depositary for the Trust Preferred Securities, will act as depositary
for the Junior Subordinated Debentures. It is anticipated that the depositary
arrangements for the Junior Subordinated Debentures would be substantially
identical to those in effect for the Trust Preferred Securities. If the Junior
Subordinated Debentures are distributed to the holders of Trust Preferred
Securities upon the liquidation of PCC Capital, Pacific Crest will use its best
efforts to list the Junior Subordinated Debentures on the Nasdaq National Market
or such other stock exchanges or automated quotation system, if any, on which
the Trust Preferred Securities are then listed or quoted. There can be no
assurance as to the market price of any Junior Subordinated Debentures that may
be distributed to the holders of Trust Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred a Debenture Event of Default,
(ii) Pacific Crest shall have given notice of its election of an Extension
Period as provided in the Indenture with respect to the Junior Subordinated
Debentures and shall not have rescinded such notice, or such Extension Period,
or any extension thereof, shall be continuing, or (iii) while the Junior
Subordinated Debentures are held by PCC Capital, Pacific Crest shall be in
default with respect to its payment of any obligation under the Guarantee, then
Pacific Crest will not (1) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
Pacific Crest's capital stock, (2) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of
Pacific Crest (including other Junior Subordinated Debt) that rank PARI PASSU
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by Pacific Crest of the debt
securities of any subsidiary of Pacific Crest if such guarantee ranks PARI PASSU
with or junior in interest to the Junior Subordinated Debentures (other than (a)
dividends or distributions in common stock of Pacific Crest, (b) any declaration
of a dividend in connection with the implementation of a stockholders' rights
plan, or the issuance of stock under any such plan in the future or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the Guarantee and (d) purchases of common stock related to issuance of common
stock or rights under any of Pacific Crest's benefit plans for its directors,
officers or employees) or (3) redeem, purchase or acquire less than all of the
Junior Subordinated Debentures or any of the Trust Preferred Securities.
SUBORDINATION
In the Indenture, Pacific Crest has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior and Subordinated Debt to the extent provided in
the Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of Pacific Crest, the holders of Senior and Subordinated
Debt will first be entitled to receive payment in full of principal of all
Allocable Amounts (as defined below) on such Senior and Subordinated Debt before
the holders of Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect thereof.
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In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior and Subordinated Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated Debt
or an event of default with respect to any Senior and Subordinated Debt
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Allocable Amounts," when used with respect to any Senior and Subordinated
Debt, means all amounts due or to become due on such Senior and Subordinated
Debt less, if applicable, any amount which would have been paid to, and retained
by, the holders of such Senior and Subordinated Debt (whether as a result of the
receipt of payments by the holders of such Senior and Subordinated Debt from
Pacific Crest or any other obligor thereon or from any holders of, or trustee in
respect of, other indebtedness that is subordinate and junior in right of
payment to such Senior and Subordinated Debt pursuant to any provision of such
indebtedness for the payment over of amounts received on account of such
indebtedness to the holders of such Senior and Subordinated Debt or otherwise)
but for the fact that such Senior and Subordinated Debt is subordinated or
junior in right of payment to (or subject to a requirement that amounts received
on such Senior and Subordinated Debt be paid over to obligees on) trade accounts
payable or accrued liabilities arising in the ordinary course of business.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such person; (vi) all
indebtedness of such person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another person and all dividends
of another person the payment of which, in either case, such person has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Pacific Crest whether
or not such claim for post-petition interest is allowed in such proceeding), on
Debt of Pacific Crest whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Junior Subordinated
Debentures or to other Debt which is PARI PASSU with, or subordinated to, the
Junior Subordinated Debentures; provided, however, that Senior and Subordinated
Debt shall not be deemed to include (i) any Debt of Pacific Crest which when
incurred and without respect to any election under section 1111(b) of the United
States Bankruptcy Code of 1978, as amended, was without recourse to Pacific
Crest, (ii) any Debt of Pacific Crest to any of its subsidiaries, (iii) Debt to
any employee of Pacific Crest, and (iv) any other debt securities issued
pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by Pacific Crest. Pacific Crest expects
from time to time to incur additional indebtedness constituting Senior and
Subordinated Debt.
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DENOMINATIONS, REGISTRATION AND TRANSFER
The Junior Subordinated Debentures will be represented by global
certificates registered in the name of the Depositary or its nominee ("Global
Subordinated Debenture"). Beneficial interests in the Junior Subordinated
Debentures will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary. Except as described below, Junior
Subordinated Debentures in certificated form will not be issued in exchange for
the global certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual Junior Subordinated Debentures represented thereby, it
may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies Pacific Crest that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Securities Exchange Act, at a time when the
Depositary is required to be so registered to act as such depositary, (ii)
Pacific Crest in its sole discretion determines that such global security shall
be so exchangeable or (iii) there shall have occurred and be continuing a
Debenture Event of Default with respect to such global security. Any global
security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names as the
Depositary shall direct. It is expected that such instructions will be based
upon directions received by the Depositary from its Participants with respect to
ownership of beneficial interests in such global security. In the event that
Junior Subordinated Debentures are issued in definitive form, such Junior
Subordinated Debentures will be in denominations of $10 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Payments on Junior Subordinated Debentures represented by a global security
will be made to the Depositary, as the depositary for the Junior Subordinated
Debentures. In the event Junior Subordinated Debentures are issued in definitive
form, principal and interest will be payable, the transfer of the Junior
Subordinated Debentures will be registrable, and Junior Subordinated Debentures
will be exchangeable for Junior Subordinated Debentures of other denominations
of a like aggregate principal amount, at the corporate office of the Indenture
Trustee, or at the offices of any paying agent or transfer agent appointed by
Pacific Crest, provided that payment of interest may be made at the option of
Pacific Crest by check mailed to the address of the persons entitled thereto or
by wire transfer. In addition, if the Junior Subordinated Debentures are issued
in certificated form, the record dates for payment of interest will be the first
day of the month in which such payment is to be made. For a description of the
Depositary and the terms of the depositary arrangements relating to payments,
transfers, voting rights, redemptions and other notices and other matters, see
"Book-Entry Issuance."
Pacific Crest will appoint the Indenture Trustee as securities registrar
under the Indenture (the "Securities Registrar"). Junior Subordinated Debentures
may be presented for exchange as provided above, and may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. Pacific Crest may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts, provided that Pacific Crest maintains a transfer agent
in the place of payment. Pacific Crest may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither Pacific Crest nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated
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Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption or (ii) transfer or exchange any Junior
Subordinated Debentures so selected for redemption, except, in the case of any
Junior Subordinated Debentures being redeemed in part, any portion thereof not
to be redeemed.
GLOBAL SUBORDINATED DEBENTURES
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Junior Subordinated Debentures represented by such
Global Subordinated Debenture to the accounts of persons that have accounts with
such Depositary ("Participants"). Ownership of beneficial interests in a Global
Subordinated Debenture will be limited to Participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Subordinated Debenture will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the applicable Depositary or its
nominee (with respect to interests of Participants) and the records of
Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Junior Subordinated Debentures represented by such Global
Subordinated Debenture for all purposes under the Indenture governing such
Junior Subordinated Debentures. Except as provided below, owners of beneficial
interests in a Global Subordinated Debenture will not be entitled to have any of
the individual Junior Subordinated Debentures represented by such Global
Subordinated Debenture registered in their names, will not receive or be
entitled to receive physical delivery of any such Junior Subordinated Debentures
in definitive form and will not be considered the owners or holders thereof
under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures represented by a Global Subordinated Debenture registered in the name
of the Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner of the Global Subordinated Debenture
representing such Junior Subordinated Debentures. None of Pacific Crest, the
Indenture Trustee, any Paying Agent, or the Securities Registrar for such Junior
Subordinated Debentures will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of the Global Subordinated Debenture representing such Junior
Subordinated Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Pacific Crest expects that the Depositary or its nominee, upon receipt of
any payment of principal or interest in respect of a permanent Global
Subordinated Debenture representing the Junior Subordinated Debentures,
immediately will credit Participants' accounts with payments in amounts
proportionate to their respective beneficial interest in the principal amount of
the Global Subordinated Debenture as shown on the records of such Depositary or
its nominee. Pacific Crest also expects that payments by Participants to owners
of beneficial interests in such Global Subordinated Debenture held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by Pacific Crest
within 90 days, Pacific Crest will issue individual
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Junior Subordinated Debentures in exchange for the Global Subordinated
Debenture. In addition, Pacific Crest may at any time and in its sole
discretion, determine not to have the Junior Subordinated Debentures represented
by one or more Global Junior Subordinated Debentures and, in such event, will
issue individual Junior Subordinated Debentures in exchange for the Global
Subordinated Debenture. Further, if Pacific Crest so specifies with respect to
the Junior Subordinated Debentures, an owner of a beneficial interest in a
Global Subordinated Debenture representing Junior Subordinated Debentures may,
on terms acceptable to Pacific Crest, the Indenture Trustee and the Depositary
for such Global Subordinated Debenture, receive individual Junior Subordinated
Debentures in exchange for such beneficial interests. In any such instance, an
owner of a beneficial interest in a Global Subordinated Debenture will be
entitled to physical delivery of individual Junior Subordinated Debentures equal
in principal amount to such beneficial interest and to have such Junior
Subordinated Debentures registered in its name. Individual Junior Subordinated
Debentures so issued will be issued in denominations, unless otherwise specified
by Pacific Crest, of $10 and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Indenture Trustee, except that at
the option of Pacific Crest payment of any interest may be made (i) except in
the case of Global Junior Subordinated Debentures, by check mailed to the
address of the person entitled thereto as such address shall appear in the
securities register or (ii) by transfer to an account maintained by the person
entitled thereto as specified in the securities register, provided that proper
transfer instructions have been received by the regular record date. Payment of
any interest on Junior Subordinated Debentures will be made to the person in
whose name such Junior Subordinated Debenture is registered at the close of
business on the regular record date for such interest. Pacific Crest may at any
time designate additional Paying Agents or rescind the designation of any Paying
Agent; however Pacific Crest will at all times be required to maintain a Paying
Agent in each place of payment for the Junior Subordinated Debentures. Any
moneys deposited with the Indenture Trustee or any Paying Agent, or then held by
Pacific Crest in trust, for the payment of the principal of or interest on the
Junior Subordinated Debentures and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at the request of
Pacific Crest, be repaid to Pacific Crest and the holder of such Junior
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to Pacific Crest for payment thereof.
MODIFICATION OF INDENTURE
From time to time Pacific Crest and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Trust Preferred Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting
Pacific Crest and the Indenture Trustee, with the consent of the holders of not
less than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner affecting the rights of the
holders of the Junior Subordinated Debentures; provided, that no such
modification may, without the consent of the holder of each outstanding
Subordinated Debenture, (i) change the Stated Maturity of the Junior
Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon or (ii) reduce the
percentage of principal amount of Junior Subordinated Debentures, the holders of
which are required to consent to any such modification of the Indenture,
provided that so long as any of the Trust Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Trust Preferred Securities in any material respect, and no termination
of the Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective,
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without the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Trust Preferred Securities unless and until the
principal of the Junior Subordinated Debentures and all accrued and unpaid
interest thereon have been paid in full and certain other conditions are
satisfied. Where a consent under the Indenture would require the consent of each
holder of Junior Subordinated Debentures, no such consent shall be given by the
Property Trustee without the prior consent of each holder of Trust Preferred
Securities. In addition, Pacific Crest and the Indenture Trustee may execute,
without the consent of any holder of Junior Subordinated Debentures, any
supplemental Indenture for the purpose of creating any new series of Junior
Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption by declaration or otherwise;
or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
Pacific Crest from the Indenture Trustee or to Pacific Crest and the
Indenture Trustee by the holders of at least 25% in aggregate outstanding
principal amount of the Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
Pacific Crest.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default. If
the Indenture Trustee or such holders of such Junior Subordinated Debentures
fail to make such declaration, the holders of at least 25% in aggregate
Liquidation Amount of the Trust Preferred Securities shall have such right. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Trust Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal or interest (unless such default has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Junior Subordinated Debenture.
In case a Debenture Event of Default shall occur and be continuing as to the
Junior Subordinated Debentures, the Property Trustee will have the right to
declare the principal of and the interest on such Junior Subordinated
Debentures, and any other amounts payable under the Indenture, to be forthwith
due
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and payable and to enforce its other rights as a creditor with respect to such
Junior Subordinated Debentures.
Pacific Crest is required to file annually with the Indenture Trustee a
certificate as to whether or not Pacific Crest is in compliance with all the
conditions and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of Pacific Crest to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of Trust Preferred Securities may
institute a legal proceeding directly against Pacific Crest for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Trust Preferred Securities of such holder ("Direct
Action"). Pacific Crest may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of the holders
of all of the Trust Preferred Securities outstanding. If the right to bring a
Direct Action is removed, PCC Capital may become subject to the reporting
obligations under the Exchange Act. Pacific Crest shall have the right under the
Indenture to set-off any payment made to such holder of Trust Preferred
Securities by Pacific Crest in connection with a Direct Action.
The holders of the Trust Preferred Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of the Trust Preferred Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that Pacific Crest shall not consolidate with or
merge into any other Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, and no Person shall
consolidate with or merge into Pacific Crest or convey, transfer or lease its
properties and assets substantially as an entirety to Pacific Crest, unless (i)
in case Pacific Crest consolidates with or merges into another Person or conveys
or transfers its properties and assets substantially as an entirety to any
Person, the successor Person is organized under the laws of the United States or
any state or the District of Columbia, and such successor Person expressly
assumes Pacific Crest's obligations on the Junior Subordinated Debentures issued
under the Indenture; (ii) immediately after giving effect thereto, no Debenture
Event of Default, and no event which, after notice or lapse of time or both,
would become a Debenture Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions as prescribed in the Indenture
are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving Pacific Crest that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and Pacific Crest deposits or causes
to be deposited with the Indenture Trustee trust funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Indenture Trustee for cancellation, for the principal and interest to the
date of the deposit or to the Stated Maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to Pacific Crest's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers'
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certificates and opinions of counsel described therein), and Pacific Crest will
be deemed to have satisfied and discharged the Indenture.
COVENANTS OF PACIFIC CREST
Pacific Crest will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) PCC Capital is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of PCC Capital has
occurred and is continuing and (iii) Pacific Crest has elected, and has not
revoked such election, to pay Additional Sums (as defined under "Description of
the Trust Preferred Securities--Redemption") in respect of the Trust Preferred
Securities, Pacific Crest will pay to PCC Capital such Additional Sums. Pacific
Crest will also covenant, as to the Junior Subordinated Debentures, (i) to
maintain directly or indirectly 100% ownership of the Common Securities of PCC
Capital to which Junior Subordinated Debentures have been issued, provided that
certain successors which are permitted pursuant to the Indenture may succeed to
Pacific Crest's ownership of the Common Securities, (ii) not to voluntarily
dissolve, wind up or liquidate PCC Capital, without prior approval of the
primary federal regulator of Pacific Crest if then so required under applicable
capital guidelines or policies of such primary regulator, and except (a) in
connection with a distribution of Junior Subordinated Debentures to the holders
of the Trust Preferred Securities in liquidation of PCC Capital or (b) in
connection with certain mergers, consolidations, or amalgamations permitted by
the Trust Agreement and (iii) to use its reasonable efforts, consistent with the
terms and provisions of the Trust Agreement, to cause PCC Capital to remain
classified as a grantor trust and not as an association taxable as a corporation
for United States federal income tax purposes.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of California, except that
the immunities and standard of care of the Indenture Trustee will be governed by
Delaware law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Trust
Preferred Securities and the Junior Subordinated Debentures. The Trust Preferred
Securities and the Junior Subordinated Debentures will be issued only as
fully-registered securities registered in the name of Cede & Co. (the
Depositary's nominee). One or more fully-registered global certificates will be
issued for the Trust Preferred Securities and the Junior Subordinated Debentures
and will be deposited with the Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary also facilitates
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the settlement among Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. "Direct Participants" include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. The Depositary is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the Depositary system is also available to others such as securities brokers
and dealers, banks and trust companies that clear through or maintain custodial
relationships with Direct Participants, either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Participants are
on file with the Commission.
Purchases of Trust Preferred Securities or Junior Subordinated Debentures
within the Depositary system must be made by or through Direct Participants,
which will receive a credit for the Trust Preferred Securities or Junior
Subordinated Debentures on the Depositary's records. The ownership interest of
each actual purchaser of each Trust Preferred Securities and each Junior
Subordinated Debenture ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from the Depositary of their purchases, but Beneficial
Owners are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the Direct
or Indirect Participants through which the Beneficial Owners purchased Trust
Preferred Securities or Junior Subordinated Debentures. Transfers of ownership
interests in the Trust Preferred Securities or Junior Subordinated Debentures
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Trust Preferred Securities or Junior
Subordinated Debentures, except in the event that use of the book-entry system
for the or Junior Subordinated Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the Trust
Preferred Securities or Junior Subordinated Debentures; the Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
Trust Preferred Securities or Junior Subordinated Debentures are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Trust Preferred Securities or Junior Subordinated Debentures. If less than
all of the Trust Preferred Securities or the Junior Subordinated Debentures are
being redeemed, the Depositary will determine by lot or PRO RATA the amount of
the Trust Preferred Securities of each Direct Participant to be redeemed.
Although voting with respect to the Trust Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Trust
Preferred Securities or Junior Subordinated Debentures, as applicable, in those
instances in which a vote is required, neither the Depositary nor Cede & Co.
will itself consent or vote with respect to Trust Preferred Securities or Junior
Subordinated Debentures. Under its usual procedures, the Depositary would mail
an omnibus proxy (the "Omnibus Proxy") to the relevant Trustee as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts such
Trust Preferred Securities or Junior Subordinated Debentures are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
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Distribution payments on the Trust Preferred Securities or the Junior
Subordinated Debentures will be made by the relevant Trustee to the Depositary.
The Depositary's practice is to credit Direct Participants' accounts on the
relevant payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, PCC Capital or Pacific Crest, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to the Depositary is the responsibility of the relevant
Trustee, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Trust Preferred Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the relevant
Trustee and Pacific Crest. In the event that a successor securities depositary
is not obtained, definitive Trust Preferred Securities or Subordinated Debenture
certificates representing such Trust Preferred Securities or Junior Subordinated
Debentures are required to be printed and delivered. Pacific Crest, at its
option, may decide to discontinue use of the system of book-entry transfers
through the Depositary (or a successor depositary). After a Debenture Event of
Default, the holders of a majority in liquidation preference of Trust Preferred
Securities or aggregate principal amount of Junior Subordinated Debentures may
determine to discontinue the system of book-entry transfers through the
Depositary. In any such event, definitive certificates for such Trust Preferred
Securities or Junior Subordinated Debentures will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that PCC Capital
and Pacific Crest believe to be accurate, but PCC Capital and Pacific Crest
assume no responsibility for the accuracy thereof. Neither PCC Capital nor
Pacific Crest has any responsibility for the performance by the Depositary or
its Participants of their respective obligations as described herein or under
the rules and procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Guarantee Agreement will be executed and delivered by Pacific Crest
concurrently with the issuance of the Trust Preferred Securities for the benefit
of the holders of the Trust Preferred Securities. Wilmington Trust Company will
act as Guarantee Trustee under the Guarantee Agreement for the purposes of
compliance with the Trust Indenture Act, and the Guarantee will be qualified as
an Indenture under the Trust Indenture Act. The following summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Guarantee Agreement, including the definitions therein of certain terms, and the
Trust Indenture Act. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Trust
Preferred Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
PCC Capital's obligations under the Trust Preferred Securities, but will apply
only to the extent that PCC Capital has funds sufficient to make such payments,
and is not a guarantee of collection.
Pacific Crest will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Trust Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that PCC Capital may have or assert
other than the defense of payment. The following payments with respect to the
Trust Preferred Securities, to the
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extent not paid by or on behalf of PCC Capital (the "Guarantee Payments"), will
be subject to the Guarantee: (i) any accumulated and unpaid Distributions
required to be paid on the Trust Preferred Securities, to the extent that PCC
Capital has funds on hand available therefor at such time, (ii) the redemption
price with respect to any Trust Preferred Securities called for redemption, to
the extent that PCC Capital has funds on hand available therefor at such time,
and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation
of PCC Capital (unless the Junior Subordinated Debentures are distributed to
holders of the Trust Preferred Securities), the lesser of (a) the Liquidation
Distribution and (b) the amount of assets of PCC Capital remaining available for
distribution to holders of Trust Preferred Securities after satisfaction of
liabilities to creditors of PCC Capital as required by law. Pacific Crest's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by Pacific Crest to the holders of the Trust Preferred
Securities or by causing PCC Capital to pay such amounts to such holders.
If Pacific Crest does not make interest payments on the Junior Subordinated
Debentures held by PCC Capital, PCC Capital will not be able to pay
Distributions on the Trust Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior and Subordinated Debt of Pacific Crest. See "Status of the
Guarantee" below. Because Pacific Crest is a holding company, the right of
Pacific Crest to participate in any distribution of assets of any subsidiary
upon such subsidiary's liquidation or reorganization or otherwise, is subject to
the prior claims of creditors of that subsidiary, except to the extent Pacific
Crest may itself be recognized as a creditor of that subsidiary. Accordingly,
Pacific Crest's obligations under the Guarantee will be effectively subordinated
to all existing and future liabilities of Pacific Crest's subsidiaries, and
claimants should look only to the assets of Pacific Crest for payments
thereunder. Except as otherwise described herein, the Guarantee does not limit
the incurrence or issuance of other secured or unsecured debt of Pacific Crest,
including Senior and Subordinated Debt whether under the Indenture, any other
indenture that Pacific Crest may enter into in the future, or otherwise.
Pacific Crest has, through the Guarantee, the Guarantee Agreement, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of PCC Capital's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of PCC Capital's obligations under the Trust Preferred
Securities. See "Relationship Among the Trust Preferred Securities, the Junior
Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of Pacific Crest and
will rank subordinate and junior in right of payment to all Senior and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against Pacific Crest to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The Guarantee
will be held for the benefit of the holders of the Trust Preferred Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by PCC Capital or upon distribution to the
holders of the Trust Preferred Securities of the Junior Subordinated Debentures
to the holders of the Trust Preferred Securities. The Guarantee does not place a
limitation on the amount of additional Senior and Subordinated Debt that may be
incurred by Pacific Crest. Pacific Crest expects from time to time to incur
additional indebtedness constituting Senior and Subordinated Debt.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantee Agreement may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of such outstanding Trust Preferred Securities. See "Description of the
Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement."
All guarantees and agreements contained in the Guarantee Agreement shall bind
the successors, assigns, receivers, trustees and representatives of Pacific
Crest and shall inure to the benefit of the holders of the Trust Preferred
Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee Agreement will occur upon the
failure of Pacific Crest to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate Liquidation
Amount of the Trust Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee
Agreement. Any holder of the Trust Preferred Securities may institute a legal
proceeding directly against Pacific Crest to enforce its rights under the
Guarantee without first instituting a legal proceeding against PCC Capital, the
Guarantee Trustee or any other person or entity.
Pacific Crest, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not Pacific Crest is in compliance with
all the conditions and covenants applicable to it under the Guarantee Agreement.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by Pacific Crest in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee Agreement and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee Agreement
at the request of any holder of the Trust Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Trust Preferred Securities, upon full
payment of the amounts payable upon liquidation of PCC Capital or upon
distribution of Junior Subordinated Debentures to the holders of the Trust
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Trust Preferred
Securities must restore payment of any sums paid under the Trust Preferred
Securities or the Guarantee.
GOVERNING LAW
The Guarantee Agreement will be governed by and construed in accordance with
the laws of the State of California.
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EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by Pacific Crest under the
Trust Agreement, Pacific Crest will irrevocably and unconditionally guarantee to
each person or entity to whom PCC Capital becomes indebted or liable, the full
payment of any costs, expenses or liabilities of PCC Capital, other than
obligations of PCC Capital to pay to the holders of the Trust Preferred
Securities or other similar interests in PCC Capital of the amounts due such
holders pursuant to the terms of the Trust Preferred Securities or such other
similar interests, as the case may be.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent PCC Capital has funds available for the payment of
such Distributions) are irrevocably guaranteed by Pacific Crest as and to the
extent set forth under "Description of Guarantee." Taken together, Pacific
Crest's obligations under the Junior Subordinated Debentures, the Indenture, the
Trust Agreement, the Expense Agreement, the Guarantee Agreement and the
Guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the Trust
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of those documents that has the
effect of providing a full, irrevocable and unconditional guarantee of PCC
Capital's obligations under the Trust Preferred Securities. If and to the extent
that Pacific Crest does not make payments on the Junior Subordinated Debentures,
PCC Capital will not pay Distributions or other amounts due on the Trust
Preferred Securities. The Guarantee does not cover payment of Distributions when
PCC Capital does not have sufficient funds to pay such Distributions. In such
event, the remedy of a holder of the Trust Preferred Securities is to institute
a legal proceeding directly against Pacific Crest for enforcement of payment of
such Distributions to such holder. The obligations of Pacific Crest under the
Guarantee are subordinate and junior in right of payment to all Senior and
Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate Liquidation Amount of the
Trust Preferred Securities and Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Trust Preferred Securities; (iii) Pacific Crest shall pay for all and any costs,
expenses and liabilities of PCC Capital except PCC Capital's obligations to
holders of Trust Preferred Securities; and (iv) the Trust Agreement further
provides that PCC Capital will not engage in any activity that is not consistent
with its limited purposes.
Notwithstanding anything to the contrary in the Indenture, Pacific Crest has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent Pacific Crest has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE TRUST PREFERRED SECURITIES UNDER THE
GUARANTEE
A holder of any the Trust Preferred Securities may institute a legal
proceeding directly against Pacific Crest to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, PCC Capital or any other person or entity.
53
<PAGE>
A default or event of default under any Senior and Subordinated Debt would
not constitute a default or Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures until such Senior and
Subordinated Debt has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF PCC CAPITAL
The Trust Preferred Securities evidence a beneficial interest in PCC
Capital, and PCC Capital exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in Junior Subordinated Debentures.
A principal difference between the rights of a holder of the Trust Preferred
Securities and a holder of a Junior Subordinated Debenture is that a holder of a
Junior Subordinated Debenture is entitled to receive from Pacific Crest the
principal amount of and interest accrued on Junior Subordinated Debentures held,
while a holder of the Trust Preferred Securities is entitled to receive
Distributions from PCC Capital (or from Pacific Crest under the Guarantee) if
and to the extent PCC Capital has funds available for the payment of such
Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
PCC Capital involving the liquidation of the Junior Subordinated Debentures,
after satisfaction of liabilities to creditors of PCC Capital as provided by
applicable law, the holders of Trust Preferred Securities will be entitled to
receive, out of assets held by PCC Capital, the Liquidation Distribution in
cash. See "Description of the Trust Preferred Securities--Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of Pacific Crest, the Property Trustee, as holder of the Junior
Subordinated Debentures, would be a subordinated creditor of Pacific Crest,
subordinated in right of payment to all Senior and Subordinated Debt as set
forth in the Indenture, but entitled to receive payment in full of principal and
interest, before any stockholders of Pacific Crest receive payments or
distributions. Since Pacific Crest is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of PCC Capital (other than
PCC Capital's obligations to the holders of its Trust Preferred Securities), the
positions of a holder of the Trust Preferred Securities and a holder of Junior
Subordinated Debentures relative to other creditors and to stockholders of
Pacific Crest in the event of liquidation or bankruptcy of Pacific Crest are
expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Manatt, Phelps & Phillips, LLP, counsel to the Company
("Counsel"), the following summary accurately describes the material United
States federal income tax consequences that may be relevant to the purchase,
ownership and disposition of Trust Preferred Securities. Unless otherwise
stated, this summary deals only with Trust Preferred Securities held as capital
assets by United States Persons (defined below) who purchase the Trust Preferred
Securities upon original issuance at their original offering price. As used
herein, a "United States Person" means a person that is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust the
income of which is subject to United States federal income taxation regardless
of its source; provided, however, that for taxable years beginning after
December 31, 1996 (or, if a trustee so elects, for taxable years ending after
August 20, 1996), a "United States Person" shall include any trust if a court is
able to exercise primary supervision over the administration of such trust and
one or more United States fiduciaries have the authority to control all
substantial decisions of such trust. The tax treatment of holders may vary
depending on their particular situation. This summary does not address all the
tax consequences that may be relevant to a
54
<PAGE>
particular holder or to holders who may be subject to special tax treatment,
such as banks, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
or foreign investors. In addition, this summary does not include any description
of any alternative minimum tax consequences or the tax laws of any state, local
or foreign government that may be applicable to a holder of Trust Preferred
Securities. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
The following discussion does not discuss the tax consequences that might be
relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as to
the specific United States federal income tax consequences of the purchase,
ownership and disposition of Trust Preferred Securities.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a challenge. Nevertheless, Counsel has
advised that it is of the view that, if challenged, the opinions expressed
herein more likely than not would be sustained by a court with jurisdiction in a
properly presented case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE
TRUST PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE
"DESCRIPTION OF THE TRUST PREFERRED SECURITIES--REDEMPTION."
CLASSIFICATION OF PCC CAPITAL
In connection with the issuance of the Trust Preferred Securities, Counsel
is of the opinion that, under current law and assuming compliance with the terms
of the Trust Agreement, and based on certain facts and assumptions contained in
such opinion, PCC Capital will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each beneficial owner of the Trust Preferred Securities
(a "Securityholder") will be treated as owning an undivided beneficial interest
in the Junior Subordinated Debentures. Accordingly, each Securityholder will be
required to include in its gross income its pro rata share of the interest
income or original issue discount that is paid or accrued on the Junior
Subordinated Debentures. See "--Interest Income and Original Issue Discount"
herein. No amount included in income with respect to the Trust Preferred
Securities will be eligible for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Trust
Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Trust Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures. No
assurance can be given, however, that such position of the Company will not be
challenged by the Internal Revenue Service or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Junior Subordinated Debentures will be classified for United States federal
income tax purposes as indebtedness of the Company. See "Risk Factors--Possible
Tax Law Changes Affecting the Trust Preferred Securities."
55
<PAGE>
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the time
such interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
Pacific Crest believes that, under the applicable Treasury regulations, the
Junior Subordinated Debentures will not be considered to have been issued with
"original issue discount" ("OID") within the meaning of Section 1273(a) of the
Code. If, however, Pacific Crest exercises its right to defer payments of
interest on the Junior Subordinated Debentures, the Junior Subordinated
Debentures will become OID instruments at such time and all Securityholders will
be required to accrue the stated interest on the Junior Subordinated Debentures
on a daily basis during the Extension Period, even though Pacific Crest will not
pay such interest until the end of the Extension Period, and even though some
Securityholders may use the cash method of tax accounting. Moreover, thereafter
the Junior Subordinated Debentures will be taxed as OID instruments for as long
as they remain outstanding. Thus, even after the end of the Extension Period,
all Securityholders would be required to continue to include the stated interest
on the Junior Subordinated Debentures in income on a daily economic accrual
basis, regardless of their method of tax accounting and in advance of receipt of
the cash attributable to such interest income. Under the OID economic accrual
rules, a Securityholder would accrue an amount of interest income each year that
approximates the stated interest payments called for under the Junior
Subordinated Debentures, and actual cash payments of interest on the Junior
Subordinated Debentures would not be reported separately as taxable income.
The Treasury regulations described above have not yet been addressed in any
definitive interpretations by the Service, and it is possible that the Service
could take a contrary position. If the Service were to assert successfully that
the stated interest on the Junior Subordinated Debentures was OID regardless of
whether Pacific Crest exercises its right to defer payments of interest on such
debentures, all Securityholders would be required to include such stated
interest in income on a daily economic accrual basis as described above.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST PREFERRED
SECURITIES
Under current law, a distribution by PCC Capital of the Junior Subordinated
Debentures as described under the caption "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution" will be non-taxable and
will result in the Securityholder receiving directly its pro rata share of the
Junior Subordinated Debentures previously held indirectly through PCC Capital,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Trust Preferred Securities
before such distribution. If, however, the liquidation of PCC Capital were to
occur because PCC Capital is subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debentures as a
result of a Tax Event or otherwise, the distribution of Junior Subordinated
Debentures to Securityholders by PCC Capital could be a taxable event to PCC
Capital and each Securityholder, and a Securityholder would recognize gain or
loss as if the Securityholder had exchanged its Trust Preferred Securities for
the Junior Subordinated Debentures it received upon the liquidation of PCC
Capital. A Securityholder would recognize interest income in respect of Junior
Subordinated Debentures received from PCC Capital in the manner described above
under "--Interest Income and Original Issue Discount" herein.
SALES OR REDEMPTION OF TRUST PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Trust
Preferred Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized (which for this purpose, will exclude
amounts attributable to accrued interest or OID not previously included in
income) and the Securityholder's adjusted tax basis in the Trust Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Trust Preferred Securities held for more than one year will generally
56
<PAGE>
be taxable as long-term capital gain or loss. Under recent tax legislation, the
maximum federal income tax rate applicable to net long term capital gains will
depend upon whether the capital asset sold or exchanged had a holding period in
excess of one year or a holding period in excess of 18 months. Amounts
attributable to accrued interest with respect to a Securityholder's pro rata
share of the Junior Subordinated Debentures not previously included in income
will be taxable as ordinary income.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of OID accrued on the Trust Preferred Securities held of record
by United States Persons (other than corporations and other exempt
Securityholders), if any, will be reported to the Service. "Backup" withholding
at a rate of 31% will apply to payments of interest to non-exempt United States
Persons unless the Securityholder furnishes its taxpayer identification number
in the manner prescribed in applicable Treasury Regulations, certifies that such
number is correct, certifies as to no loss of exemption from backup withholding
and meets certain other conditions. Any amounts withheld from a Securityholder
under the backup withholding rules will be allowed as a refund or a credit
against such Securityholder's United States federal income tax liability,
provided the required information is furnished to the Service.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
There can be no assurance that future legislative proposals or final
legislation will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Such a change could give rise to a Tax Event,
which may permit Pacific Crest to cause a redemption of the Trust Preferred
Securities. See "Description of the Trust Preferred Securities--Redemption--Tax
Event Redemption" and "Description of Junior Subordinated
Debentures--Redemption."
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Plans"), generally may purchase Trust Preferred Securities subject to the
investing fiduciary's determination that the investment in Trust Preferred
Securities satisfies ERISA's fiduciary standards and other requirements
applicable to investments by the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
within the meaning of Section 4975 of the Code) with respect to certain Plans
(generally, those Plans maintained or sponsored by, or contributed to by, any
such persons with respect to which the Company or an affiliate is a fiduciary or
Plans for which the Company or an affiliate provide services). The acquisition
and ownership of Trust Preferred Securities by a Plan (or by an individual
retirement arrangement or other Plans described in Section 4975(e)(1) of the
Code ) with respect to which the Company or any of its affiliates is considered
a party in interest or a disqualified person may constitute or result in a
prohibited transaction under ERISA or Section 4975 of the Code, unless such
Trust Preferred Securities are acquired pursuant to and in accordance with an
applicable exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Trust Preferred Securities unless such Trust Preferred Securities are acquired
pursuant to and in accordance with an applicable exemption. Any other Plans or
other entities whose assets include Plan assets subject to ERISA or Section 4975
of the Code proposing to acquire Trust Preferred Securities should consult with
their own counsel.
57
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Sandler O'Neill & Partners,
L.P. and Sutro & Co. Incorporated (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, to purchase from PCC Capital
the number of Trust Preferred Securities set forth opposite their respective
names below. The several Underwriters have agreed in the Underwriting Agreement,
subject to the terms and conditions set forth therein, to purchase all the Trust
Preferred Securities offered hereby if any of the Trust Preferred Securities are
purchased. In the event of default by an Underwriter, the Underwriting Agreement
provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
<TABLE>
<CAPTION>
NUMBER OF TRUST
PREFERRED
UNDERWRITER SECURITIES
- -------------------------------------------------------------------------- ------------------
<S> <C>
Sandler O'Neill & Partners, L.P........................................... 750,000
Sutro & Co. Incorporated.................................................. 750,000
----------
Total................................................................. 1,500,000
----------
----------
</TABLE>
The Representatives have advised Pacific Crest and PCC Capital that they
propose initially to offer the Trust Preferred Securities to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $0.20 per Trust
Preferred Security. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $0.10 per Trust Preferred Security to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
In view of the fact that the proceeds of the sale of the Trust Preferred
Securities will be used to purchase the Junior Subordinated Debentures of the
Company, the Underwriting Agreement provides that Pacific Crest will pay as
compensation to the Underwriters arranging the investment therein of such
proceeds, an amount in immediately available funds of $0.45 per Trust Preferred
Security (or $675,000 in the aggregate) for the accounts of the several
Underwriters.
PCC Capital has granted the Underwriters an option to purchase up to an
additional 225,000 Trust Preferred Securities at the public offering price Such
option, which expires 30 days from the date of this Prospectus, may be exercised
solely to cover over-allotments. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of the
additional Trust Preferred Securities that the number of Trust Preferred
Securities to be purchased initially by the Underwriter is of the 1,500,000
Trust Preferred Securities initially purchased by the Underwriters.
To the extent that the Underwriters exercise their option to purchase
additional Trust Preferred Securities, PCC Capital will issue and sell to
Pacific Crest additional Common Securities in such aggregate Liquidation Amount
as is required for Pacific Crest to continue to hold Common Securities in an
aggregate Liquidation Amount equal to at least 3% of the total capital of PCC
Capital and Pacific Crest will issue and sell to PCC Capital Junior Subordinated
Debentures in an aggregate principal amount equal to the total aggregate
Liquidation Amount of the additional Trust Preferred Securities being purchased
pursuant to the option and the additional Common Securities.
In connection with the offering of the Trust Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Trust Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account
58
<PAGE>
by selling more Trust Preferred Securities than they are committed to purchase
from PCC Capital. In such case, to cover all or part of the short position, the
Underwriters may exercise the over-allotment option described above or may
purchase Trust Preferred Securities in the open market following completion of
the initial offering of the Trust Preferred Securities. The Underwriters may
also engage in stabilizing transactions in which they bid for, and purchase,
shares of the Trust Preferred Securities at a level above that which might
otherwise prevail in the open market for the purpose of preventing or retarding
a decline in the market price of the Trust Preferred Securities. The
Underwriters also may reclaim any selling concession allowed to an Underwriter
or dealer if the Underwriters repurchase shares distributed by that Underwriter
or dealer. Any of the foregoing transactions may result in the maintenance of a
price for the Trust Preferred Securities at a level above that which might
otherwise prevail in the open market. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Trust Preferred Securities. The Underwriters are not required to
engage in any of the foregoing transactions and, if commenced, such transactions
may be discontinued at any time without notice.
During a period of 180 day from the date of this Prospectus, neither PCC
Capital nor the Company will, subject to certain exceptions, without the prior
written consent of the Representatives, directly or indirectly, sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any Trust Preferred
Securities, any security convertible into or exchangeable into or exercisable
for Trust Preferred Securities or Junior Subordinated Debentures or any debt
securities substantially similar to the Junior Subordinated Debentures or equity
securities substantially similar to the Trust Preferred Securities (except for
Junior Subordinated Debentures and the Trust Preferred Securities offered
hereby).
Because the National Association of Securities Dealer, Inc. ("NASD") is
expected to view the Trust Preferred Securities as interests in a direct
participation program, the offering of the Trust Preferred Securities is being
made in compliance with the applicable provisions of Rule 2810 of the NASD's
Conduct Rules.
The Trust Preferred Securities are a new issue of securities with no
established trading market. The Trust Preferred Securities have been approved
for listing on the Nasdaq National Market, subject to official notice of
issuance. The Representatives have advised PCC Capital that they presently
intend to make a market in the Trust Preferred Securities after the commencement
of trading on the Nasdaq National Market, but no assurances can be made as to
the liquidity of such Trust Preferred Securities or that an active and liquid
trading market will develop or, if developed, that it will continue. The
offering price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriters, and the offering price of
the Trust Preferred Securities may not be indicative of the market price
following the Offering. The Representatives will have no obligation to make a
market in the Trust Preferred Securities, however, and may cease market-making
activities, if commenced, at any time.
PCC Capital and Pacific Crest have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act.
Sandler O'Neill & Partners, L.P. engages in transactions with, and, from
time to time, has performed services for, the Company in the ordinary course of
business.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Trust
Preferred Securities, the enforceability of the Trust Agreement and the creation
of PCC Capital will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, special counsel to Pacific Crest and PCC Capital. The
validity of the Guarantee and the Junior Subordinated Debentures will be passed
upon for the Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California,
counsel to the Company. Certain legal matters in connection with this Offering
will be passed upon for the Underwriters by Elias, Matz, Tiernan &
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<PAGE>
Herrick L.L.P. Manatt, Phelps & Phillips, LLP and Elias, Matz, Tiernan & Herrick
L.L.P. will rely on the opinions of Richards, Layton & Finger, P.A. as to
matters of Delaware law. Certain matters relating to United States federal
income tax considerations will be passed upon for the Company by Manatt, Phelps
& Phillips, LLP.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, and for the year ended December 31, 1996, included and incorporated by
reference in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports which are included and
incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The 1995 and 1994 consolidated financial statements of the Company included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
60
<PAGE>
APPENDIX A
<PAGE>
As filed with the Securities and Exchange Commission on March 25, 1997
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
[ ] 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
30343 Canwood Street 91301
Agoura Hills, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 865-3300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 12, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $36,478,000.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Part of Form 10-K into which Incorporated
--------------------- -----------------------------------------
Definitive Proxy Statement for the Part III
1997 Annual Meeting of Stockholders
At March 12, 1997, registrant had 2,967,367 shares of Common Stock, $.01
par value, outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I
Page
----
<S> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-16
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 16
Item 4(a). Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . 18
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . 19-20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 21-33
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . 34-53
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 54
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 55
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . 55
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 55
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K . . . . . . . . . . 56
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Pacific Crest Capital, Inc. ("Pacific Crest" or "parent company") is a
financial services company principally engaged in commercial and industrial real
estate lending through its wholly owned subsidiary, Pacific Crest Investment and
Loan ("Pacific Crest Investment"). Unless the context otherwise indicates, the
"Company" refers to Pacific Crest and its wholly owned subsidiary, Pacific Crest
Investment.
PACIFIC CREST INVESTMENT AND LOAN
Pacific Crest Investment is a California licensed industrial loan company
that commenced business in 1974 and is supervised and regulated by the
California Department of Corporations and the Federal Deposit Insurance
Corporation ("FDIC"). The deposits of Pacific Crest Investment are insured by
the FDIC up to applicable limits.
Pacific Crest Investment concentrates on marketing to and serving the
needs of individuals and small and medium sized businesses in California.
Pacific Crest Investment conducts its operations through three branch offices,
located in Beverly Hills, Encino and San Diego, California. Pacific Crest
Investment offers savings accounts, money market checking accounts and
certificates of deposit, but does not offer traditional banking services, such
as demand deposit checking accounts, travelers' checks or safe deposit boxes.
In addition, Pacific Crest Investment offers VISA and MasterCard credit cards on
an agency basis and is a member of Cirrus, Star and Explore ATM networks.
Pacific Crest Investment has focused its lending activities on real estate loans
secured by commercial real estate.
COMPETITION
Pacific Crest Investment faces significant competition in California for
new loans from industrial loan companies, commercial banks, savings and loan
associations, credit unions, credit companies, mortgage bankers, life insurance
companies and pension funds. Some of the largest savings and loans and banks in
the United States are headquartered in California, and have extensive branch
systems and advertising programs which Pacific Crest Investment does not have.
Large banks frequently also enjoy a lower cost of funds than Pacific Crest
Investment and can therefore charge less than Pacific Crest Investment for
loans. Pacific Crest Investment attempts to compensate for competitive
disadvantages that may exist by providing a higher level of personal service to
borrowers and "hands-on" involvement by senior officers to meet borrower's
needs.
Pacific Crest Investment also faces competition for depositor's funds from
other industrial loan companies, banks, savings and loans, credit unions and
increasingly, from brokerage firms, mutual funds and life insurance annuity
products. Many of Pacific Crest Investment's competitors offer a greater array
of products to customers than Pacific Crest Investment. Pacific Crest Investment
does not offer demand deposit checking accounts, travelers' checks or safe
deposit boxes and thus has a competitive disadvantage to commercial banks and
savings associations in attracting depositors. Pacific Crest Investment attempts
to compensate for the lack of a full array of services in its branches by
offering slightly higher interest rates for deposits than most of its
competitors.
LOAN ORIGINATION AND UNDERWRITING
Pacific Crest Investment's loans are primarily originated through
referrals from commercial loan brokers, banks, realtors, and other third parties
for which the borrower pays a referral fee ranging from 1/2% to 1% of the loan
amount. Pacific Crest Investment currently employs four commercial marketing
representatives, who maintain contacts with loan referral sources in California,
screen referred transactions and provide customer service. The credit approval
process includes an examination of the cash flow and debt service coverage of
the property serving as loan collateral, as well as the financial condition and
credit references of the borrower. Following analysis of the borrower's credit,
cash flows and collateral, loans are submitted to the Credit Committee for
approval. Pacific Crest Investment's senior management is actively involved in
its commercial lending activities and collateral valuation process. Pacific
Crest Investment obtains independent third party appraisals of all properties
securing its loans. In addition, Pacific Crest Investment employs individuals
which serve as internal property analysts to inspect properties and review the
third party appraisals for the benefit of Pacific Crest's Credit Committee. The
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Credit Committee consists of Pacific Crest's President and Chief Executive
Officer, three Executive Vice Presidents, one Senior Vice President, Vice
President-Credit and the Chief Financial Officer.
At December 31, 1996, the maximum amount that Pacific Crest Investment
could loan to one borrower was approximately $4.8 million. At December 31,
1996, the largest loan to one borrower was $3.0 million. It is anticipated by
management that Pacific Crest Investment's Board of Directors will periodically
adjust and modify its underwriting criteria in response to economic conditions
and business opportunities.
LENDING
Pacific Crest Investment's primary focus in lending activities is the
origination of adjustable rate commercial real estate loans and Small Business
Administration (SBA) loans in California. Loans are generally made for terms of
one to ten years. At December 31, 1996, 80.8% of Pacific Crest Investment's
loans were priced at a margin over Bank of America's prime lending rate, 14.5%
were priced at a margin over the Federal Home Loan Bank Board's 11th District
Cost of Funds Index, 1.0% were priced at a margin over either the 6-month or 1-
year Treasury bill rate, 2.6% were priced at a margin over the 6 month LIBOR
rate and 1.1% represented fixed rate loans. Virtually all of Pacific Crest
Investment's adjustable rate loans adjust quarterly. As of December 31, 1996,
the loan portfolio was comprised of 339 commercial real estate loans.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by Pacific Crest
Investment on its deposits and its other borrowings and the interest rate
received by Pacific Crest Investment on loans extended to its customers and
securities held in its portfolio comprises the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company. Accordingly, the earnings and growth of the Company are
subject to the influence of domestic and foreign economic conditions, including
inflation, recession and unemployment.
Pacific Crest Investment's business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve Systems (the "Federal Reserve
Board"). The Federal Reserve Board implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its open-market
operations in United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve requirements
and by varying the discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial service providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial service providers are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Company are impossible to predict. See "Item 1. Business Supervision and
Regulation."
SUPERVISION AND REGULATION
Pacific Crest Investment is subject to regulation, supervision and
examination under both California and federal law. Pacific Crest Investment is
currently subject to supervision and regulation by the Commissioner of
Corporations of the State of California through the Department of Corporations
and, as a nonmember bank, by the FDIC. Effective July 1, 1997, California's
supervision and regulation of Pacific Crest Investment will be taken over by the
Commissioner of Financial Institutions through the newly created Department of
Financial Institutions. Throughout this report, references to the
"Commissioner" should be construed to mean the Commissioner of Corporations
prior to July 1, 1997, and the Commissioner of Financial Institutions on or
after July 1, 1997. Similarly, references to the "Department" should be
construed to mean the Department of Corporations prior to July 1, 1997, and the
Department of Financial Institutions on or after July 1, 1997. Pacific Crest
Investment is not regulated or supervised by the Office of Thrift Supervision,
which regulates savings and loan institutions.
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Pacific Crest (Parent Company) is not directly regulated or supervised by
the Commissioner, the FDIC, the Federal Reserve Board or any other bank
regulatory authority, except with respect to the general regulatory and
enforcement authority of the Commissioner and the FDIC over transactions and
dealings between Pacific Crest and Pacific Crest Investment, and except with
respect to both the specific limitations regarding ownership of the capital
stock of the parent corporation of any industrial loan company, and the specific
limitations regarding the payment of dividends from Pacific Crest Investment.
CALIFORNIA LAW
The industrial loan business conducted by Pacific Crest Investment is
currently governed by the California Industrial Loan Law and the rules and
regulations of the Commissioner which, among other things, regulate collateral
requirements and maximum maturities of the various types of loans that are
permitted to be made by California-chartered industrial loan companies, also
known as thrift and loan companies.
Subject to restrictions imposed by applicable California law, Pacific
Crest Investment is permitted to make secured and unsecured consumer and
non-consumer loans. The maximum term of repayment of loans made by
industrial loan companies ranges up to 40 years and 30 days depending upon
collateral and priority of the secured position, except that loans with
repayment terms in excess of 30 years and 30 days may not in the aggregate
exceed 5% of the total outstanding loans and obligations of the company.
Although secured loans may generally be repayable in unequal periodic
payments during their respective terms, consumer loans secured by real
property with terms in excess of three years must be repayable in
substantially equal periodic payments unless such loans are covered under the
Garn-St. Germain Depository Institutions Act of 1982 (primarily single-family
residential mortgage loans). Real property loans in excess of $10,000 must be
secured by real or personal property having a combined fair market value at
the time the loan is made of at least 110% of the principal amount owing on
the loan and on prior encumbrances, except tax liens, secured by the same
real property. This requirement does not apply to loans to facilitate the
sale of other real estate owned ("OREO"). In addition, the term of a
nonconsumer loan secured solely or primarily by personal property may not
exceed 15 years and 30 days from the date the loan is made or acquired by the
company. California law limits lending activities outside of California by
industrial loan companies to no more than 20% of total assets unless the
Commissioner has authorized a higher level.
California law contains extensive requirements for the diversification of
the loan portfolios of industrial loan companies. An industrial loan company
with outstanding investment certificates may not, among other things, place more
than 25% of its loans or other obligations in loans or obligations which are
secured only partially, but not primarily, by real property; may not make any
one loan secured primarily by improved real property which exceeds 20% of its
paid-up and unimpaired capital stock and surplus not available for dividends;
may not lend an amount in excess of 5% of its paid-up and unimpaired capital
stock and surplus not available for dividends upon the security of the stock of
any one corporation; may not make loans to, or hold the obligations of, any one
person as primary obligor in an aggregate principal amount exceeding 20% of its
paid-up and unimpaired capital stock and surplus not available for dividends;
and may have no more than 70% of its total assets in loans which have remaining
terms to maturity in excess of seven years which are secured solely or primarily
by real property. Based on existing loans in Pacific Crest Investment's
portfolio at December 31, 1996, the ratio of loans secured solely or primarily
by real property with terms in excess of seven years to total assets was
approximately 29%. At December 31, 1996, Pacific Crest Investment satisfied all
of the above requirements.
An industrial loan company generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the Commissioner. Nor may an industrial loan company make any
loan to, or hold an obligation of, any of its shareholders or any shareholder or
its holding company or affiliates, except that this prohibition does not apply
to persons who own less than 10% of the stock of a holding company or affiliate
which is listed on a national securities exchange. Any person who wishes to
acquire 10% or more of the capital stock of a California industrial loan company
or 10% or more of the voting capital stock or other securities giving control
over management of its parent company must obtain the prior written approval of
the Commissioner.
An industrial loan company is subject to certain leverage limitations
which are not generally applicable to commercial banks or savings and loan
associations. In particular, industrial loan companies which have been in
operation in excess of 60 months may, with written approval of the
Commissioner, have outstanding at any time investment certificates not to
exceed 20 times paid-up and unimpaired capital and surplus. Increases in
leverage under California law must also meet specified minimum standards for
liquidity reserves in cash, loan loss reserves, minimum capital stock levels
and minimum unimpaired paid-in surplus levels. In order for an industrial
loan
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company to increase its deposits to in excess of 15 times the aggregate
amount of its paid-up and unimpaired capital and unimpaired surplus not
available for dividends, the thrift must, among other things, maintain a
liquidity reserve in cash or cash equivalent equal to 1 1/2 % of its total
deposits outstanding and maintain a special allowance for losses as required
by the Commissioner. Pacific Crest Investment satisfied all of these
standards at December 31, 1996. As approved by the Commissioner, Pacific
Crest Investment can currently operate with an investment certificate to
unimpaired capital and unimpaired surplus ratio of 18.5 to 1. At December
31, 1996, Pacific Crest Investment's investment certificate to capital ratio
was approximately 11.0 to 1. Limitations have also been imposed with respect
to a depository institution's authority to accept, renew or rollover brokered
deposits. Pacific Crest Investment had no brokered deposits as of December
31, 1996.
Industrial loan companies are not permitted to borrow, except by the sale
of investment or thrift certificates, in an amount exceeding 300% of outstanding
capital stock, surplus and undivided profits, without the Commissioner's prior
consent. All sums borrowed in excess of 150% of outstanding capital stock,
surplus and undivided profits must be unsecured borrowings or, if secured,
approved in advance by the Commissioner, and be included as investment or thrift
certificates for purposes of computing the maximum amount of certificates an
industrial loan company may issue.
Under California law, industrial loan companies are generally permitted to
invest their funds in investments which are legal investments for California
commercial banks. In general, California commercial banks are prohibited from
investing an amount exceeding 15% of shareholders' equity in the security of any
one issuer, except for specified obligations of the United States, California,
and local governments and agencies. An industrial loan company may acquire real
property only in satisfaction of debts previously contracted, pursuant to
certain foreclosure transactions or as may be necessary as premises for the
transaction of its business, in which case such investment is limited to one
third of an industrial loan company's paid in capital stock and surplus not
available for dividends.
California industrial loan law allows an industrial loan company to
increase its secondary capital by issuing interest bearing capital notes in the
form of subordinated notes and debentures. Such notes are not deposits and are
not insured by the FDIC or any other governmental agency, and are generally
required to have an initial maturity of at least seven years and are
subordinated to deposit holders, general creditors and secured creditors of the
issuing thrift. Pacific Crest Investment had no subordinated debentures
outstanding at December 31, 1996.
Although investment authority and other activities that may be engaged in
by Pacific Crest Investment generally are prescribed under the California
Industrial Loan Law, certain provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, (the "FDICIA"), may limit Pacific Crest
Investment's ability to engage in certain activities that otherwise are
authorized under the California Industrial Loan Law.
FEDERAL LAW
Pacific Crest Investment's deposits are insured by the FDIC to the full
extent permissible by law. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports and generally
supervises the operations of institutions to which it provides deposit
insurance. Among the numerous applicable regulations are those issued under the
Community Reinvestment Act of 1977 ("CRA") to encourage members of insured state
nonmember banks to meet the credit needs of local communities, including low and
moderate income neighborhoods consistent with safety and soundness, and a rating
system to measure performance. Inadequacies of performance may result in
regulatory action by the FDIC.
Pacific Crest Investment is subject to the rules and regulations of the
FDIC to the same extent as other financial institutions which are insured by
that entity. The approval of the FDIC is required prior to any merger,
consolidation or change in control, or the establishment or relocation of any
branch office of Pacific Crest Investment. This supervision and regulation is
intended primarily for the protection of the deposit insurance funds.
CAPITAL STANDARDS
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for
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assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The FDIC
measures risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 Capital and limited
amounts of Tier 2 Capital) and Tier 1 Capital. Tier 1 Capital consists of,
among other things, (i) common stockholders' equity capital (includes common
stock and related surplus, and undivided profits); (ii) noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank
holding companies), including any related surplus; and (iii) minority
interests in certain subsidiaries, less most intangible assets. Tier 2
Capital may consist of: (i) a limited amount of the allowance for possible
loan and lease losses; (ii) cumulative perpetual preferred stock; (iii)
perpetual preferred stock (and any related surplus); (iv) term subordinated
debt and certain other instruments with some characteristics of equity. The
inclusion of elements of Tier 2 Capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 Capital to
risk-adjusted assets of 4%.
In addition to the risked-based guidelines, the FDIC requires banking
organizations to maintain a minimum amount of Tier 1 Capital to total assets,
referred to as the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking organizations,
the minimum leverage ratio of Tier 1 Capital to total assets must be 3%. For
all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the FDIC has the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios. See "Item 1. Business -
Effect of Government Policies and Recent Legislation." At the present time,
Pacific Crest, unlike Pacific Crest Investment, is not subject to any minimum
capital requirements.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses ("ALLL") which,
among other things, establishes certain benchmark ratios of loan loss
reserves to classified assets. The benchmark set forth by such policy
statement is the sum of (a) 100% of assets classified loss; (b) 50% of assets
classified doubtful; (c) 15% of assets classified substandard; and (d)
estimated credit losses on other assets over the upcoming 12 months. This
amount is neither a "floor" nor a "safe harbor" level for an institution's
ALLL.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies issued final rules governing banks and bank holding
companies which became effective April 1, 1995, which limit the amount of
deferred tax assets that are allowable in computing an institution's
regulatory capital. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable
temporary differences are generally not limited. Deferred tax assets that
can only be realized through future taxable earnings are limited for
regulatory capital purposes to the lesser of (i) the amount that can be
realized within one year of the quarter-end report date based on projected
taxable income for that year, or (ii) 10% of Tier 1 Capital. The amount of
any deferred tax in excess of this limit is excluded from Tier 1 Capital and
total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of Pacific Crest Investment to grow and could restrict the
amount of profits, if any, available for the payment of dividends. Pacific
Crest Investment was able to fully utilize the $3.3 million in deferred tax
assets at December 31, 1996 for the FDIC capital ratio calculations.
The following table sets forth Pacific Crest Investment's regulatory
capital ratios at December 31, 1996 and December 31, 1995:
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<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
-------------------------- -------------------------
PACIFIC CREST INVESTMENT REQUIRED ACTUAL EXCESS REQUIRED ACTUAL EXCESS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.96% 3.96% 4.00% 7.82% 3.82%
Tier 1 risk-based capital ratio 4.00% 10.31% 6.31% 4.00% 9.48% 5.48%
Total risk-based capital ratio 8.00% 11.56% 3.56% 8.00% 10.74% 2.74%
- ----------------------------------------------------------------------------------------
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. In accordance with federal law, each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An insured
depository institution generally will be classified in the following categories
based on capital measures indicated below:
<TABLE>
<CAPTION>
<S> <C>
"Well capitalized" "Adequately capitalized"
- ------------------------------------------------- -------------------------------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
- ------------------------------------------------- -------------------------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
- -------------------------------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited
exceptions, making capital distributions if after such transaction the
institution would be undercapitalized. If an insured depository institution
is undercapitalized, it will be closely monitored by the appropriate federal
banking agency, subject to asset growth restrictions and required to obtain
prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit
an acceptable capital restoration plan to the appropriate federal banking
agency 45 days after receiving notice, or it is deemed to have notice, that
the institution is undercapitalized. The appropriate federal banking agency
cannot accept a capital plan unless, among other things, it determines that
the plan (i) specifies: (a) the steps the institution will take to become
adequately capitalized; (b) the levels of capital to be attained during each
year in which the plan will be in effect; (c) how the institution will comply
with the restrictions or requirements then in effect under Section 38 of the
Federal Deposit Insurance Act ("FDIA"); and (d) the types and levels of
activities in which the institution will engage; (ii) is based on realistic
assumptions and is likely to succeed in restoring the depository
institution's capital; and (iii) would not appreciably increase the risk
(including credit risk, interest rate risk, and other types of risk) to which
the institution is exposed. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution
will comply with the capital plan until the depository institution has been
adequately capitalized on average during each of four consecutive calendar
quarters and must otherwise provide appropriate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the depository institution's total assets at the time
the institution became undercapitalized or (b) the amount which is necessary
to bring the institution into compliance with all capital standards
applicable to such institution as of the time the
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institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further
the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to: (i) force a sale of shares
or obligations of the bank, or require the bank to be acquired by or combine
with another institution; (ii) impose restrictions on affiliate transactions and
(iii) impose restrictions on rates paid on deposits unless it determines that
such actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement
with the agency. See "Item 1. Business - Supervision and Regulation -
Potential Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. These
standards are designed to identify potential safety-and-soundness concerns and
ensure that action is taken to address those concerns before they pose a risk to
the deposit insurance funds. The standards relate to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation,
fees and benefits. If a federal banking agency determines that an institution
fails to meet any of these standards, the agency may require the institution to
submit to the agency an acceptable plan to achieve compliance with the standard.
In the event the institution fails to submit an acceptable plan within the time
allowed by the agency or fails in any material respect to implement an accepted
plan, the agency must, by order, require the institution to correct the
deficiency.
Effective October 1, 1996, the federal banking agencies promulgated safety
and soundness regulations and accompanying interagency compliance guidelines on
asset quality and earnings standards. These new guidelines provide six
standards for establishing and maintaining a system to identify problem assets
and prevent those assets from deteriorating. The institution should: (i)
conduct periodic asset quality reviews to identify problem assets; (ii) estimate
the inherent losses in those assets and establish reserves that are sufficient
to absorb estimated losses; (iii) compare problem asset totals to capital (iv)
take appropriate corrective action to resolve problem assets: (v) consider the
size and potential risks of material asset concentrations; and (vi) provide
periodic asset reports with adequate information for management and the board of
directors to assess the level of asset risk. These new
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guidelines also set forth standards for evaluating and monitoring earnings
and for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves. If an institution fails to comply with a safety and
soundness standard, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan
or to implement an accepted plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposits to 27 cents per $100 of deposits applicable to members of
the Bank Insurance Fund ("BIF"). To determine the risk-based assessment for
each institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios using the
same standards used by the FDIC for its prompt corrective action regulations. A
well-capitalized institution is generally one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1
leverage capital ratio. An adequately capitalized institution will generally
have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based
capital ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized
institution will generally be one that does not meet either of the above
definitions. The FDIC will also assign each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other information
relevant to evaluating the risk posed by the institution. The three supervisory
categories are: financially sound with only a few minor weaknesses (Group A),
demonstrates weaknesses that could result in significant deterioration (Group
B), and poses a substantial probability of loss (Group C).
The BIF assessment rates are set forth below for institutions based on
their risk-based assessment categorization:
ASSESSMENT RATES EFFECTIVE THROUGH JANUARY 1, 1997*
---------------------------------------------------
GROUP A GROUP B GROUP C
------- ------- -------
Well Capitalized . . . . . . 0 3 17
Adequately Capitalized . . . 3 10 24
Undercapitalized . . . . . . 10 24 27
*Assessment figures are expressed in terms of cents per $100 of deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized
the Savings Association Insurance Fund ("SAIF") through a special assessment
on SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to
help fund the federal government costs associated with the savings and loan
crisis of the late 1980's. The special thrift SAIF assessment has been set
at 65.7 cents per $100 insured by the thrift funds as of March 31, 1995.
Effective January 1, 1997, for the FICO payments, SAIF-insured institutions
will pay 3.2 cents per $100 in domestic deposits and BIF-insured
institutions, like Pacific Crest Investment, will pay 0.64 cents per $100 in
domestic deposits. Full pro rata sharing of the FICO interest payments takes
effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%)
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain approval
under the Bank Holding Company Act (the "BHCA") to acquire an existing bank
located in another state without regard to state law. A bank holding company is
not permitted to make such an acquisition if, upon consummation, it would
control (a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such limitation does not discriminate against out-of-state
banks or bank holding companies. An out-of-state bank holding
8
<PAGE>
company may not acquire a state bank in existence for less than a minimum
length of time that may be prescribed by state law except that a state may
not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirements and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October
1995, California adopted an early "opt in" statute under the Interstate Act
that permits out-of-state banks to acquire California banks that satisfy a
five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition form
out-of-state banks in the markets in which the Company operates, although it
is difficult to assess the impact that such increased competition may have on
the Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Crest Investment is subject to certain fair lending requirements
and reporting obligations involving home mortgage lending operations and
Community Reinvestment Act ("CRA") activities. The CRA generally requires the
federal banking agencies to evaluate the record of a financial institution in
meeting the credit needs of their local communities, including low and
moderate income neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of certain fair
lending laws, the federal banking agencies may take compliance with such laws
and CRA into account when regulating and supervising other activities
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institutions actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements.
In March 1994, the Federal Interagency Task Force on Fair Lending issued
a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In connection with its assessment of CRA performance, the FDIC assigns a
rating of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Based on an examination conducted during the third quarter
of 1995, Pacific Crest was rated satisfactory.
RESTRICTIONS ON TRANSFERS OF FUNDS TO PACIFIC CREST BY PACIFIC CREST INVESTMENT
Pacific Crest is a legal entity separate and distinct from Pacific Crest
Investment. Pacific Crest's ability to pay cash dividends is limited by
Delaware state law. At present, substantially all of the Pacific Crest's
revenues, including funds available for the payment of dividends and other
operating expenses will be dependent in the future on dividends paid by
Pacific Crest Investment.
Under California law, an industrial loan company is not permitted to
declare dividends on its capital stock unless it has at least $750,000 of
unimpaired capital plus additional capital of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless:
(i) such distribution would not exceed retained earnings; or, (ii) in the
alternative, after giving effect to the distribution, (y) the sum of assets
(net of goodwill, capitalized research and development expenses and deferred
charges) would be not less than 125% of its liabilities (net of deferred
taxes, income and other credits), or (z) current assets would be not less
than current liabilities (except that if average earnings before taxes for
the last two years had been less than average interest expenses, current
assets must be not less than 125% of current liabilities).
9
<PAGE>
In addition, an industrial loan company is prohibited from paying
dividends from that portion of capital which its board of directors has
declared restricted for dividend payment purposes. The amount of restricted
capital maintained by an industrial loan company provides the basis of
establishing the maximum permissible loan to one single borrower. Pacific
Crest Investment is prohibited from any dividend payments since its Board of
Directors has declared its capital accounts restricted at December 31, 1996.
In policy statements, the FDIC has advised insured institutions that the
payment of cash dividends in excess of current earnings from operations is
inappropriate and may be cause for supervisory action. Under the Financial
Institutions Supervisory Act and Financial Institutions Reform, Recovery, and
Enforcement Act ("FIRREA"), federal regulators also have authority to
prohibit financial institutions from engaging in business practices which are
considered to be unsafe or unsound.
Pacific Crest Investment'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. At December 31, 1996, Pacific
Crest Investment had deficit retained earnings of $358,000. 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 its parent company.
It is unlikely Pacific Crest Investment will pay dividends to Pacific Crest
prior to the third quarter of 1997. Pacific Crest Investment is subject to
certain restrictions imposed by federal law on any extensions of credit to,
or investments in stock or other securities thereof, the taking of such
securities as collateral for loans and the purchase of assets of Pacific
Crest or other affiliates. Such restrictions prevent Pacific Crest and such
other affiliates from borrowing from Pacific Crest Investment unless the
loans are secured by marketable obligations of designated amounts. Further,
such secured loans and investments by Pacific Crest Investment to or in
Pacific Crest or to or in any other affiliate is limited to 10% of Pacific
Crest Investment's capital and surplus (as defined by federal regulations)
and such secured loans and investments are limited, in the aggregate, to 20%
of Pacific Crest Investment's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect
to transactions involving Pacific Crest and other affiliates of Pacific Crest
Investment. See "Item 1. Business - Supervision and Regulation - California
Law." Additional restrictions on transactions with affiliates may be imposed
on Pacific Crest Investment under the prompt corrective action provisions of
federal law. See "Item 1. Business Supervision and Regulation - Prompt
Corrective Action and Other Enforcement Mechanisms."
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as Pacific Crest Investment, and
their institution-affiliated parties, which includes Pacific Crest, may be
subject to potential enforcement actions by the FDIC and the DOC for unsafe
or unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of
deposits (in the case of Pacific Crest Investment), the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of
the FDIC Improvement Act. In the event Pacific Crest Investment is placed in
conservatorship or receivership, the Company's ability to perform its
obligations would be adversely impacted.
During 1996, Pacific Crest Investment was subject to a Memorandum of
Understanding ("MOU") with the FDIC and the Commissioner, which required Pacific
Crest Investment to (i) maintain certain capital and ALLL levels; (ii) limit the
increase in total assets; (iii) have and retain qualified management; (iv)
notify the FDIC and the Department in writing of any changes in directors and
certain executive officers; (v) eliminate from its books certain "loss" and
"substandard" assets; (vi) amend its written investment policies; and (vii)
restrict payment of cash dividends without prior written consent of FDIC and the
Department. The MOU was terminated on February 5, 1997 following regulatory
examinations by the FDIC and the Department completed during the fourth quarter
of 1996.
ACCOUNTING CHANGES
In June 1996, the Federal Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement provides accounting and reporting standards for
transfers and
10
<PAGE>
servicing of financial assets and extinguishments of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received in
exchange. This statement also requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial assets
be initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interests, if any, based on their relative fair value at
the date of the transfer. Furthermore, this statement requires that debtors
reclassify financial assets pledged as collateral, and that secured parties
recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those assets.
In addition, the statement requires that a liability be derecognized if and
only if either (a) the debtor pays the creditor and is relieved of its
obligation for the liability or (b) the debtor is legally released from being
the primary obligor under the liability either judicially or by the creditor.
Accordingly, a liability is not considered extinguished by an in-substance
defeasance. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996,
and is to be applied prospectively. This statement was adopted by the Company
as of January 1, 1997. Management does not believe that the application of
this statement will have a material impact on Pacific Crest Investment's
financial statements in future years.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-based Compensation." This statement establishes a fair value based
method of accounting for stock based compensation plans and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The accounting
and disclosure requirements of this statement are effective for Pacific Crest
Investment's fiscal year ending December 31, 1996. Pacific Crest has elected
to continue to account for its stock-based compensation plans under
Accounting Principles Board ("APB") 25. Adoption of this pronouncement by the
Company has not had a material impact on Pacific Crest Investment's financial
statements for 1996.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights." SFAS 122 amends certain provisions of SFAS No. 65
"Accounting for Certain Mortgage Banking Activities" to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without
the mortgage servicing rights) based on their relative fair value, if it is
practicable to estimate those fair values. If it is not practicable to
estimate those fair values, the entire cost of the acquisition should be
allocated to the mortgage loans only. SFAS 122 is effective for Pacific Crest
Investment's fiscal year covered by this annual report. Adoption of this
pronouncement did not have a material impact on Pacific Crest Investment's
financial statements.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. An impairment loss shall be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. After an impairment is recognized, the reduced
carrying amount of the asset shall be accounted for as its new cost. SFAS No.
121 is effective for Pacific Crest Investment's fiscal year covered by this
annual report. Adoption of this statement did not have a material impact on
Pacific Crest Investment's financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contracted terms of the loan agreement. A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by
determining that foreclosure is probable. SFAS No. 114 also clarifies the
existing accounting for in-substance foreclosures by stating that a
collateral-dependent real estate loan would be reported as real estate owned
only if the lender had taken possession of collateral.
11
<PAGE>
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that it eliminated the provisions in SFAS No. 114 that described how a
creditor should report income on an impaired loan. SFAS No. 118 did not
change the provisions in SFAS No. 114 that require a creditor to measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of
the collateral if the loan is collateral dependent. SFAS No. 118 amends the
disclosure requirements in SFAS No. 114 to require information about the
recorded investments in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. Pacific Crest
Investment adopted SFAS No. 114 and No. 118 for the year ended December 31,
1995. Adoption of these statements has not had a material impact on Pacific
Crest Investment's financial statements.
EMPLOYEES
As of December 31, 1996, the Company employed 62 persons. Management
believes that its relations with its employees are good. The Company is not a
party to any collective bargaining agreement.
SELECTED STATISTICAL DISCLOSURE REGARDING THE BUSINESS OF THE COMPANY
The following statistical data relating to the Company's operations
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements and Notes to Consolidated Financial Statements. Average balances
are determined on a daily basis.
LOAN PORTFOLIO
Pacific Crest Investment focuses its lending activities on commercial
real estate loans to investors and small and medium sized businesses. At
December 31, 1996, approximately 97% of the loan portfolio was secured by
commercial real property. The following table presents the categories of
Pacific Crest Investment's loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
(DOLLARS IN THOUSANDS) BALANCE % BALANCE % BALANCE % BALANCE % BALANCE %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES:
Commercial real estate mortgage $206,107 97% $193,332 97% $183,173 98% $205,075 99% $220,223 100%
Real estate construction 65 -- -- -- -- -- 1,181 1% 567 --
Residential mortgage 1,596 1% 3,169 2% 1,336 1% -- -- -- --
Commercial business loans 3,912 2% 2,232 1% 1,125 1% -- -- -- --
Installment and other 32 -- 10 -- 8 -- 77 -- 168 --
- ------------------------------------------------------------------------------------------------------------------
Gross loans 211,712 100% 198,743 100% 185,642 100% 206,333 100% 220,958 100%
Less deferred loan fees 617 1,965 3,181 1,927 2,130
- ------------------------------------------------------------------------------------------------------------------
Total loans 211,095 196,778 182,461 204,406 218,828
Less allowance for loan losses 3,400 4,500 8,075 3,910 3,195
- ------------------------------------------------------------------------------------------------------------------
Net loans $207,695 $192,278 $174,386 $200,496 $215,633
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Real estate mortgage loans include loans primarily to investors and
small and middle market businesses for industrial and commercial use. These
loans are secured by the property underlying the loan.
12
<PAGE>
MATURITIES AND INTEREST SENSITIVITIES OF LOAN PORTFOLIO
The first table below sets forth the contractual maturities of Pacific
Crest Investment's loan portfolio at December 31, 1996. The second table
below sets forth the amounts of such loans that have fixed interest rates and
floating or adjustable interest rates. Loans which have adjustable or
floating interest rates are shown as maturing in the period during which the
contract is due. The following tables do not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN YEARS BUT WITHIN AFTER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MATURITY DISTRIBUTION OF LOAN BY CATEGORY:
Commercial real estate mortgage $ 25,586 $ 90,727 $ 63,125 $ 26,256 $ 205,694
Residential mortgage loans -- 1,028 -- 568 1,596
Commercial business loans 664 566 323 2,252 3,805
- ------------------------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $ 26,250 $ 92,321 $ 63,448 $ 29,076 $ 211,095
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN YEARS BUT WITHIN AFTER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MATURITY DISTRIBUTION OF LOAN BY
INTEREST RATE TYPE:
Loans with fixed interest rates -- -- $ 2,397 -- $ 2,397
Loans with variable interest rates $ 26,250 $ 92,321 61,051 $ 29,076 208,698
- ------------------------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $ 26,250 $ 92,321 $ 63,448 $ 29,076 $ 211,095
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
CLASSIFIED ASSETS
In connection with examinations of insured institutions, the FDIC and
the DOC examiners have the authority to identify problem assets and, if
necessary, require them to be classified. There are three primary
classifications for problem assets: "substandard," "doubtful" and "loss".
"Substandard" assets are assets that are characterized by the "distinct
possibility" that the institution will sustain "some loss" if deficiencies
are not corrected. "Doubtful" assets have all of the weaknesses inherent in
"substandard" loans, but also have the characteristic that, on the basis of
existing facts, conditions and values, "collection or liquidation in full" is
"highly questionable and improbable." "Loss" assets are assets that are
considered uncollectible. Assets that are classified "loss" require the
institution either to establish a specific reserve in the amount of 100% of
the portion of the asset classified "loss" or to charge-off the asset. In
addition, the FDIC characterizes certain assets as "special mention". These
are assets which do not currently warrant classification but possess
weaknesses deserving management's close attention.
In addition, the Company utilizes an internally developed loan grading
and monitoring system in determining the appropriate level of the allowance
for loan losses. This system involves periodic reviews of the entire loan
portfolio and loan classifications based on that review.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in the loan
portfolio. Since the Company's loan portfolio consists almost exclusively of
term loans secured by commercial real property, general loan loss reserves
are typically established by assigning all loans to specified risk categories
and then determining the appropriate levels of reserve for each risk
category. A special management "Reserve Committee" meets monthly to review
the loan portfolio and delinquency trends, collateral value trends,
nonperforming asset data and other material. The amount of the allowance is
based upon management's evaluation of numerous factors, including the
adequacy of collateral securing the loans in the Company's portfolio,
delinquency trends and historical loan loss experience.
Based on evaluations of the aforementioned considerations, the Company
establishes its allowance for loan losses. The allowance for loan losses
expressed as a percentage of total net loans was 1.6% at December 31, 1996,
2.3% at December 31, 1995, 4.4% at December 31, 1994, and 1.9% at December
31, 1993.
<PAGE>
The Board of Directors reviews the adequacy of the allowance for loan
losses on a quarterly basis. Management utilizes its best judgment 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 judgment 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 certain Pacific Crest Investment 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 adjustments to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 4,500 $ 8,075 $ 3,910 $ 3,195 $ 2,600
Chargeoffs: Commercial real estate mortgage 3,452 4,757 4,278 3,683 1,298
Recoveries: Commercial real estate mortgage 244 222 100 - -
- ------------------------------------------------------------------------------------------------------
Net loan charge-offs 3,208 4,535 4,178 3,683 1,298
Purchased loan reserve 191 - - - -
Provision for loan losses 1,917 960 8,343 4,398 1,893
- ------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,400 $ 4,500 $ 8,075 $ 3,910 $ 3,195
Net loan charge-offs $ 3,208 $ 4,535 $ 4,178 $ 3,683 $ 1,298
Valuation adjustments to OREO 155 344 1,719 3,314 1,179
- ------------------------------------------------------------------------------------------------------
Total net loan charge-offs &
OREO valuation adjustments $ 3,363 $ 4,879 $ 5,897 $ 6,997 $ 2,477
- ------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans 1.68% 2.45% 2.14% 1.73% 0.61%
Net loan charge-offs & OREO valuation
adjustments to average loans and OREO 1.73% 2.57% 2.92% 3.16% 1.14%
Allowance for loan losses to total loans,
net of deferred fees 1.61% 2.29% 4.43% 1.91% 1.46%
Allowance for loan losses
to nonperforming loans 245% 90% 83% 75% 47%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL
DOLLARS IN THOUSANDS LOSSES ALLL LOSSES ALLL LOSSES ALLL LOSSES ALLL LOSSES ALLL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES:
Commercial
real estate mortgage $ 3,172 93% $ 4,365 97% $ 7,913 98% $ 3,910 100% $ 3,195 100%
Residential Mortgage 155 5% 90 2% 81 1% - - - -
Commercial
business loans 73 2% 45 1% 81 1% - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 3,400 100% $ 4,500 100% $ 8,075 100% $ 3,910 100% $ 3,195 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Activities
The Company's investment portfolio is used for both liquidity purposes and
for investment income. The following table sets forth certain information
regarding the Company's investment portfolio as of the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------
Book % of Book % of Book % of
(DOLLARS IN THOUSANDS) Balance Total Balance Total Balance Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. government sponsored agency issued securities
- --------------------------------------------------------------------------------------------------------------------
Available for sale 52,534 63% - - - -
Held to maturity 30,960 37% - - $ 55,248 100%
- --------------------------------------------------------------------------------------------------------------------
Total investment securities 83,494 100% - - $ 55,248 100%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
OTHER INTEREST EARNING ASSETS:
Interest earning deposits $ - - $ 300 1% $ 395 8%
Repurchase agreements 262 100% 53,749 99% 4,614 92%
- --------------------------------------------------------------------------------------------------------------------
Total other interest-earning assets $ 262 100% $ 54,049 100% $ 5,009 100%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
For additional information on the investment portfolio, see Note 4 of Notes
to Consolidated Financial Statements.
REPURCHASE AGREEMENTS
The Company invests excess cash overnight and up to 3 months in securities
purchased under agreements to resell ("repurchase agreements"). The maximum
investment with one brokerage firm or bank may not exceed $25 million. The
Company has master repurchase agreements with several nationally recognized
banks and broker/dealers. Collateral securing repurchase agreements is limited
to U.S. Treasury bonds, notes and bills, and securities issued by either U.S.
government agencies or U.S. government sponsored agencies. Collateral securing
the repurchase agreements is restricted to non derivative types of securities by
the aforementioned agencies. Collateral securing repurchase agreements is held
for safekeeping under third-party custodial agreements and is required to be
segregated and separately accounted for from all other securities held by the
custodian for its other customers or for its own account.
SOURCES OF FUNDS
DEPOSITS
The Company's major source of funds is FDIC-insured deposits, raised
through its subsidiary Pacific Crest Investment, which consists of term
certificates of deposit and money market savings accounts. At December 31,
1996, the Company had total deposits of $266.7 million with 8,478 accounts.
The Company has deposit-gathering branches located in Beverly Hills, Encino
and San Diego, California. The Company's headquarters office in Agoura Hills is
an administrative office and does not take deposits. The Company offers money
market checking accounts, money market savings accounts and term certificates of
deposit, with maturities from 30 days to 5 years. The Company attracts
depositors by offering rates that are generally higher than rates offered by
independent commercial banks that offer a broader array of services. The
Company also conducts a wholesale deposit operation through which deposits from
other financial institutions located throughout the United States are solicited.
The Company does not purchase brokered deposits. Management believes its
deposits are a stable and reliable funding source.
The following table sets forth information regarding the composition of the
Company's deposit mix for average balances and rates paid on deposits for the
years indicated:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Rate Average Rate Average Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEPOSIT CATEGORIES:
Savings accounts $ 176,742 5.19% $ 141,981 5.55% $ 79,053 4.11%
Certificates of deposit 62,747 5.51% 76,600 5.48% 145,569 4.20%
Money market checking 16,717 4.92% - - - -
- ------------------------------------------------------------------------------------------------------------
Total deposits $ 256,206 5.25% $ 218,581 5.52% $ 224,622 4.17%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The remaining maturities of the certificates of deposit at December 31,
1996 are set forth in the following table:
15
<PAGE>
<TABLE>
<CAPTION>
3 MONTHS OVER 3 TO OVER
(DOLLARS IN THOUSANDS) OR LESS 12 MONTHS 12 MONTHS TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 23,030 $ 40,681 $ 21,182 $ 84,893
Certificates of deposit of $100,000 or more 1,110 1,505 1,318 3,933
----------- ----------- ----------- -----------
Total certificates of deposit $ 24,140 $ 42,186 $ 22,500 $ 88,826
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER BORROWINGS
The Company had $10.0 million in short term borrowings which represented
40.9% of shareholders equity at December 31, 1996. The rates paid during the
year on the Company's short term borrowing ranged from 5.4% to 6.0%. The
Company set up borrowing lines with two brokers aggregating $50 million in
availability during 1996. The repayment terms on this short term debt range
from one day to two weeks. The interest rate paid can vary daily, but typically
approximates the federal funds rate plus 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. At December 31, 1996, the Company had $40.0 million in
borrowing availability under its broker lines.
At December 31, 1996, Pacific Crest Investment had borrowing lines of $6.7
million available through the Federal Reserve Bank's discount window. Pacific
Crest Investment has never had to utilize its line of credit at the Federal
Reserve Bank.
ITEM 2. PROPERTIES.
The Company leases all of its offices. Information with respect to such
offices is as follows:
FLOOR SPACE IN ANNUAL LEASE EXPIRATION
LOCATION SQUARE FEET RENT DATE
- --------------------------------------------------------------------------------
PACIFIC CREST INVESTMENT:
Agoura Hills, California (1) 16,361 $ 266,000 1999
Beverly Hills, California 3,104 162,000 2000
Encino, California 3,300 65,000 1998
San Diego, California 4,505 175,000 2000
(1) Office also used by Pacific Crest.
ITEM 3. LEGAL PROCEEDINGS.
There are several lawsuits and claims pending against the Company which
management considers incidental 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 financial position, results
of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
<PAGE>
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals are executive officers of the Company.
Pertinent information relating to these individuals is set forth below. There
are no family relationships between any of the officers. All of the Company's
officers hold their respective offices at the pleasure of the Board of
Directors, subject to the rights, if any, of an officer under any contract of
employment.
GARY L. WEHRLE - CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF PACIFIC
CREST - AGE 54
Mr. Wehrle has served as Chairman of the Board of Pacific Crest since October
20, 1993, and President and Chief Executive Officer of Pacific Crest since
September 10, 1993. Mr. Wehrle has served as President and Chief Executive
Officer of Pacific Crest Investment since 1984.
GONZALO FERNANDEZ - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 54
Mr. Fernandez has served as Executive Vice President of Pacific Crest since
June 20, 1994. Mr. Fernandez has served as Executive Vice President of
Pacific Crest Investment since June 20, 1994.
LYLE C. LODWICK - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 43
Mr. Lodwick has served as Executive Vice President of Pacific Crest since
September 10, 1993. Mr. Lodwick has served as Executive Vice President of
Pacific Crest Investment since 1992 and, prior to that, served as Senior Vice
President of Pacific Crest Investment from 1988 to 1992.
BARRY L. OTELSBERG - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 46
Mr. Otelsberg has served as Executive Vice President of Pacific Crest since
September 10, 1993. Mr. Otelsburg has served as Executive Vice President of
Pacific Crest Investment since 1985.
ROBERT J. DENNEN - VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY OF
PACIFIC CREST - AGE 44
Mr. Dennen has served as Chief Financial Officer and Secretary of Pacific
Crest since September 10, 1993. Mr. Dennen has served as Vice President and
Controller/Treasurer of Pacific Crest Investment since 1986.
JOSEPH FINCI - SENIOR VICE PRESIDENT OF PACIFIC CREST - AGE 39
Mr. Finci has served as Senior Vice President of Pacific Crest since November
1, 1995. Mr. Finci has served as Senior Vice President of Pacific Crest
Investment since November 1, 1995 and, prior to that, served as Vice
President since 1990.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value (the "Common Stock") is
traded on the Nasdaq National Market under the Nasdaq symbol "PCCI".
The following table presents the high and low sales prices for the Common
Stock during each quarter commencing January 1, 1995. There were
approximately 1,500 holders of the Common Stock as of March 12, 1997:
QUARTER ENDED HIGH LOW
------------------- -------- -------
3/31/95 $5.25 $3.50
6/30/95 $5.75 $4.25
9/30/95 $8.00 $5.50
12/31/95 $7.75 $6.75
3/31/96 $8.25 $7.38
6/30/96 $9.00 $7.50
9/30/96 $9.00 $8.25
12/31/96 $11.75 $8.13
The Company has never paid a cash dividend on its Common Stock and it is
unlikely that it will pay dividends prior to the third quarter of 1997. The
Company's ability to pay dividends is subject to restrictions set forth in
the Delaware General Corporation Law. The Delaware General Corporation Law
provides that a Delaware corporation may pay dividends either (i) out of the
corporation's surplus (as defined by Delaware law), or (ii) if there is no
surplus, out of the corporation's net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year. Furthermore, if
the Company were determined to be a quasi-California corporation, the Company
would have to comply with California law with respect to, among other things,
distributions to stockholders. Under California law, a corporation is
prohibited from paying dividends unless (i) the retained earnings of the
corporation immediately prior to the distribution exceeds the amount of the
distribution, (ii) the assets of the corporation exceed 1-1/4 times its
liabilities; or (iii) the current assets of the corporation exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1-1/4 times it current
liabilities. Management believes that the Company is not a quasi-California
corporation by virtue of the Common Stock being listed on the Nasdaq
National Market and the Company having more than 800 holders of its equity
securities. However, no assurances can be given that this will continue to be
the case in the future. The Company's ability to pay cash dividends in the
future will depend in large part on the ability of Pacific Crest Investment
to pay dividends on its capital stock to the Company. The ability of Pacific
Crest Investment to pay dividends to the Company is subject to restrictions
set forth in the California Industrial Loan Law and the provisions of the
California General Corporation Law described above. See "Item 1.
Business - Supervision and Regulation - California Law."
Management is aware of six securities dealers who currently make a market
in the Common Stock: Friedman, Billings, Ramsey & Co. Inc.; Sandler O'Neill &
Partners; Herzog, Heine, Geduld, Inc.; Hill, Thompson, Magid & Co.; Torrey
Pines Securities, Inc. and Sutro & Co., Inc.
RECENT SALES OF UNREGISTERED SECURITIES
On January 23, 1997, in reliance on an exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, the Company issued an
aggregate of 748 shares of Common Stock to its four non-employee directors
pursuant to the Company's 1996 Non-Employee Director's Stock Plan which
provides that such directors may elect to receive all or a portion of their
director fees in shares of Common Stock. The aggregate consideration received
by the Company for such shares was $8,976.
18
<PAGE>
PACIFIC CREST CAPITAL, INC.
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited
consolidated financial statements of Pacific Crest Capital, Inc. The data
should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,834 $ 56,167 $ 6,204 $ 26,628 $ 14,480
Investment securities 83,494 -- 55,248 898 1,705
Total loans, net of deferred fees 211,095 196,778 182,461 204,406 218,828
Allowance for loan losses 3,400 4,500 8,075 3,910 3,195
Other real estate owned 3,469 4,355 5,724 9,092 8,065
Other assets 6,593 6,309 6,958 5,329 3,666
Total assets 304,085 259,109 248,520 242,443 243,549
Total deposits 266,695 234,510 226,350 213,162 222,598
Other borrowings 10,000 -- -- -- --
Subordinated debt -- -- -- -- 1,000
Shareholders' equity 24,468 21,952 19,628 27,179 15,830
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Total interest income $ 26,567 $ 23,799 $ 21,114 $ 21,583 $ 22,814
Total interest expense 13,500 12,084 9,358 9,365 11,229
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,067 11,715 11,756 12,218 11,585
Provision for loan losses 1,917 960 8,343 4,398 1,893
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,150 10,755 3,413 7,820 9,692
Noninterest income:
Gain (loss) on investment securities 413 851 (780) (277) (71)
Other non interest income (10) 1,068 470 404 375 295
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,481 1,321 (376) 98 224
Noninterest expense:
Valuation adjustment to OREO 155 344 1,719 3,314 1,179
OREO expenses 150 203 850 1,166 375
Other general & administrative expenses 7,818 8,362 8,841 6,794 7,596
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 8,123 8,909 11,410 11,274 9,150
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change 4,508 3,167 (8,373) (3,356) 766
Income tax provision (benefit) 1,505 (77) (1,914) (1,303) 203
Cumulative effect of accounting change(1) -- -- -- (560) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 3,003 3,244 (6,459) (1,493) 563
- ------------------------------------------------------------------------------------------------------------------------------
Preferred dividends declared -- (920) (1,104) -- --
Net income (loss) applicable to common stock $ 3,003 $ 2,324 $ (7,563) $ (1,493) $ 563
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS: (2)
Return on average total sales (3) 1.06% 1.34% (2.56)% (0.62)% 0.24%
Return on average shareholders' equity (4) 12.96% 16.02% (24.73)% (8.91)% 3.54%
Net interest rate spread (5) 4.41% 4.60% 4.49% 5.18% 4.74%
Net interest margin (6) 4.76% 4.98% 4.82% 5.33% 5.03%
Ratio of other general & administrative
expenses to average total assets 2.77% 3.46% 3.50% 2.84% 3.23%
Nonperforming assets to total assets at
end of period (7) 1.60% 3.60% 6.24% 6.26% 6.83%
Net loan charge-offs to average loans 1.68% 2.45% 2.14% 1.73% 0.61%
Net loan charge-offs & OREO valuation
adjustments to average loans and OREO 1.73% 2.57% 2.92% 3.16% 1.14%
Allowance for loan losses to total loans
net deferred fees 1.61% 2.29% 4.43% 1.91% 1.46%
Allowance for loan losses and OREO valuation
allowances to nonperforming assets 70.58% 52.68% 61.72% 33.60% 24.04%
Allowance for loan losses to nonaccrual loans 245.31% 90.27% 82.57% 75.40% 46.58%
Total average shareholders' equity to total
average assets 8.20% 8.38% 10.34% 7.01% 6.75%
- ----------------------------------------------------------------------------------------------------
PER SHARE DATA (8) (IN THOUSANDS):
Common shares outstanding 2,960 2,954 1,102 1,099 -
Common stock equivalents of preferred stock (9) - - 1,558 1,558 -
Treasury shares (12) - - - -
Other common stock equivalents 94 - - - -
- ----------------------------------------------------------------------------------------------------
Total common stock equivalents, assuming
full conversion of preferred stock 3,042 2,954 2,660 2,657 -
Book value per common share $8.35 $7.43 $7.38 $10.23
Fully diluted earnings (loss) per common share $1.00 $1.20 ($6.88) - -
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the cumulative effect of implementing Statement of Financial
Accounting Standards No. 109.
(2) Pacific Crest's performance ratios are based on actual daily averages.
(3) Net income (loss) divided by average total assets.
(4) Net income (loss) divided by total average shareholders' equity.
(5) Average yield earned on interest-earning assets less the average rate paid
on interest-bearing liabilities.
(6) Net interest income divided by total average interest-earning assets.
(7) Nonperforming assets include total nonaccrual loans, OREO and nonperforming
investments.
(8) Pacific Crest did not have any assets and did not conduct any significant
business prior to December 23, 1993 when The Foothill Group, Inc.
contributed 100% of the outstanding shares of Pacific Crest Investment
common stock to the Company in exchange for 1,099,490 shares of its common
stock. Upon completion of a preferred stock offering by the Company,
The Foothill Group, Inc. then distributed to its shareholders as a stock
dividend 100% of the outstanding shares of Pacific Crest common stock.
(9) The conversion price of the preferred stock for these calculations is $9.00
per share. The preferred stock was converted into common stock of the
Company in December of 1995.
(10) 1996 includes a $264,000 gain on the sale of $28.2 million in deposits.
20
<PAGE>
PACIFIC CREST CAPITAL, INC.
- -------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Pacific Crest Capital, Inc. ("the Company"), is a Delaware corporation
incorporated as a financial institution holding company to hold 100% of the
stock of Pacific Crest Investment and Loan ("Pacific Crest Investment")
formerly known as Foothill Thrift and Loan.
The consolidated financial statements and financial data as of December
31, 1996, 1995, 1994 and 1993 include the Company and its wholly owned
subsidiary Pacific Crest Investment. The balance sheets as of December 31,
1992 and the statement of operations and cash flows for the year ended
December 31, 1992 represent the financial condition and results of operations
for Pacific Crest Investment. For convenience, these financial statements
are referred to as the financial statements of the Company (Pacific Crest).
RESULTS OF OPERATIONS
EARNINGS PERFORMANCE
The Company's pre-tax income for the year ended December 31, 1996 was
$4.5 million, compared to $3.2 million for the same period in 1995. The
increase of $1.3 million, or 40.6% was due to several factors. Net interest
income for the year ended December 31, 1996 increased by $1.4 million,
noninterest income increased by $160,000, and noninterest expense decreased
by $786,000, when compared to the same period in 1995. Partially offsetting
these changes was an increase of $957,000 in the provision for loan losses.
NET INTEREST INCOME
Net interest income increased by $1.4 million, or 11.5%, to $13.1
million for the year ended December 31, 1996 as compared to the same period
in 1995. This was primarily due to the increase in the Company's average
interest earning assets of $39.2 million during the period ending December
31, 1996.
Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. The Company attempts
to minimize the effect of interest rate fluctuations on net interest margin
by matching as nearly as possible interest sensitive assets and interest
sensitive liabilities.
Net interest income can also be affected by a change in the composition
of assets and liabilities; for example, if higher yielding loan assets were
to replace a like amount of lower yielding short-term government securities.
Net interest income is affected by changes in volume and changes in rates.
Volume changes are caused by differences in the level of earning assets and
interest-bearing liabilities. Rate changes result from differences in yields
earned on assets and rates paid on liabilities.
The following table presents 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 and nonperforming assets have been included in the table as
loans and investments, respectively, having a zero yield.
21
<PAGE>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $190,856 $21,384 11.20% $185,135 $20,773 11.22% $195,239 $18,630 9.54%
Repurchase agreements 42,547 2,255 5.30% 18,325 1,065 5.81% 21,342 854 4.08%
Interest-bearing deposits 286 15 5.24% 331 16 4.83% 316 10 3.15%
Investment securities - - - - - - 711 - -
U.S. government agency securities
Available for sale 23,874 1,632 6.84% - - - - - -
Held to maturity 17,173 1,281 7.46% 31,291 1,945 6.22% 26,271 1,620 6.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets(1) 274,736 26,567 9.57% 235,082 23,399 10.12% 243,879 21,114 8.66%
Other real-estate owned 3,938 4,607 6,560
Other non-interest earning assets 7,980 7,623 6,272
Less allowance for loan(l) losses 4,013 5,753 4,510
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $282,641 $241,559 $252,601
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Savings accounts 176,742 9,179 5.19% 141,981 7,873 5.55% 79,053 3,247 4.11%
Certificatse of deposit 62,747 3,456 5.51% 76,600 4,196 5.48% 145,569 6,111 4.20%
Money market checking 16,717 822 4.92% - - - - - -
Other borrowings 671 43 6.41% 238 15 6.30% - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 256,877 13,500 5.26% 218,819 12,084 5.52% 224,622 9,358 4.17%
Non interest-bearing liabilities 2,597 2,495 1,861
Shareholders' equity 23,167 20,245 26,118
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $282,641 $241,559 $252,601
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $13,067 $11,715 $11,756
Net interest rate spread(2) 4.41% 4.60% 4.49%
Net interest-earning assets $ 17,899 $ 16,263 $ 12,257
Net interest margin(3) 4.76% 4.98% 4.82%
Average interest-earning assets to
average interset-bearing liabilities 107.0% 107.0% 109.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees. The amount of interest foregone
on nonaccrual loans was $547,000, $803,000 and $972,000 for 1996, 1995
and 1994, respectively.
(2) Net interest rate spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
The following table presents the dollar amount of changes in interest
income and interest expense for 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.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-----------------------------------------------------------------
DOLALRS IN THOUSANDS VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans(1) $ 642 $ (31) $ 611 $ (964) $3,107 $2,143
Repurchase agreements 1,407 (217) 1,190 (121) 332 211
Interest-bearing deposits (2) (1) - 6 6
U.S. government agency securities - - - - - -
Available for sale 1,632 - 1,632 - -
Held to maturity (878) 214 (664) 310 15 325
- -------------------------------------------------------------------------------------------------------
Total change in interest income 2,801 (33) 2,768 (775) 3,460 2,685
- -------------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts 1,929 (623) 1,306 2,585 2,041 4,626
Certificates of deposit (759) 19 (740) (2,895) 980 (1,915)
Money market checking 822 - 822 - - -
Other borrowings 27 1 28 - 15 15
- -------------------------------------------------------------------------------------------------------
Total change in interest expense 2,019 (603) 1,416 (310) 3,036 2,726
- -------------------------------------------------------------------------------------------------------
Net change in net interest income $ 782 $ 570 $1,352 $ (465) $ 424 $ (41)
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include interest income which would have been earned on nonaccrual
loans.
TOTAL INTEREST INCOME
Total interest income increased by $2.8 million or 11.6% to $26.6
million for 1996 compared to 1995, due primarily to an increase in the
average interest earning asset balances of $39.7 million or 16.9%. Partially
offsetting this increase was a decline in the yield on interest earning
assets of 45 basis points. The overall yield on the Company's
interest-earning assets decreased from 10.12% for 1995 to 9.67% for 1996.
The decrease in the yield was primarily the result of the increase in lower
yielding U.S. government sponsored agency securities, compared to the
Company's higher yielding loan assets. The decline in market interest rates
on repurchase agreements was largely offset by increased yields in U.S.
government sponsored agency securities.
Interest income on loans increased $611,000 or 2.9% for 1996 compared to
1995. This increase was attributable to the volume increase of $5.7 million
during 1996 which was partially offset by a 2 basis point decrease in the
yield.
The Company purchased a net of $83.5 million of U.S. government
sponsored agency securities in 1996. The Company recorded $1.6 million in
income on securities classified as available for sale yielding 6.84% for the
year ending December 31, 1996. The Company held no securities within this
category during 1995. The Company recorded $1.3 million in income on U.S.
government sponsored agency securities classified as held to maturity
yielding 7.46% for the year ending December 31, 1996. This represented a
$664,000 or 34.1% decrease in interest earned as compared to the same period
in 1995, due to the smaller balance of securities being held in this category
during 1996. The increase in yield of 124 basis points, was due to the
purchase of higher yielding securities complemented with longer term
maturities during 1996 as compared with 1995.
Interest earned on the Company's securities purchased under resale
agreements increased by $1.2 million or 112% for the year ending December 31,
1996. This was due to an increase of $24.2 million in the average balance of
these securities during 1996. This increase was partially offset by a 51
basis point decrease in the yield during 1996. The decrease in yield
reflects the decline in market interest rates between these periods.
TOTAL INTEREST EXPENSE
Total interest expense for 1996 increased by $1.4 million, or 11.7%, from
$12.1 million in 1995 to $13.5 million in 1996. The primary increase in
interest cost resulted from an increase in the average interest bearing deposits
of $38.1 million, or 17.4%, for the year ending December 31, 1996 as compared to
the same period in 1995. Partially offsetting these increases was a decline in
the rates paid on interest bearing liabilities during this same period. The
rate paid on the Company's interest bearing
23
<PAGE>
liabilities declined from 5.52% to 5.26% or 26 basis points for the year
ending December 31, 1996. The decline in the rates paid on the Company's
interest bearing liabilities 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 deposit.
Interest expense on certificates of deposit decreased by $740,000, or
17.6%, for 1996 compared to 1995, due primarily to a $13.9 million decline in
the average certificates of deposits outstanding. This decline was partially
offset by an increase in the rates paid on these deposits from 5.48% in 1995
to 5.51% in 1996.
Interest expense on savings accounts increased by $1.3 million, or
16.6%, for 1996 when compared to 1995, due to a $34.8 million increase in
average savings deposits for the year ended December 31, 1996. Partially
offsetting this increase was a 36 basis point decrease in the rate paid on
savings accounts from 5.55% for 1995 to 5.19% for 1996. The decrease in the
rate paid reflects the decline in market interest rates between these periods.
The Company introduced a money market checking product during the first
quarter of 1996. The introduction of this product resulted in attracting
$20.1 million in deposits during 1996. The Company paid 4.92% on this
product for the year ended December 31, 1996.
Interest expense on other borrowings increased by $28,000, or 187% from
$15,000 for the year ended December 31, 1995 to $43,000 for the same period
in 1996. The increase was due primarily to an increase in borrowing by the
Company during 1996.
PROVISION FOR LOAN LOSSES
During 1996, the Company increased its provision for loan losses to $1.9
million from $960,000 for 1995 The increase of $957,000 between 1996 and 1995
in the loan loss provision reflects the additional expense provided in June
of 1996 in connection with the sale of $9.5 million in nonaccrual and TDR
loans.
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 a variety of
factors, including underlying loan collateral values, delinquency trends and
historical loan loss experience. Commercial real estate serves as collateral
for virtually all of the Company's loan portfolio. The ratio of nonaccrual
loans to total loans, net of deferred loan fees was 0.66% at December 31,
1996 and 2.53% at December 31, 1995. The ratio of the allowance for loan
losses to nonaccrual loans increased to 245% at December 31, 1996 from 90% at
December 31, 1995.
NONINTEREST INCOME
Noninterest income for the year ended December 31,1996 increased by
$160,000, or 12.1% over the same period in 1995. The gain of $413,000 on
investment securities for the year ended December 31, 1996 represented the
final recovery on a corporate debt security that had been written off in
1994. This compares with the gain on investment securities for 1995 which
included a gain of $195,000 from the sale of a collateralized mortgage
obligation (CMO residual)and a recovery of $656,000 from the corporate debt
security written off during 1994.
Other noninterest income increased by $334,000, or 71.1%, as a result of
increases in late fees, loan prepayment fees, and rents received on OREO
properties.
In addition, 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.
24
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
NONINTEREST EXPENSE ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
YEAR ENDED DECEMBER 31, CHANGE CHANGE +/- CHANGE CHANGE +/-
- ------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994 1996/1995 1996/1995 1995/1994 1995/1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustment to $ 155 $ 344 $ 1,719 $ (189) -54.94% $ (1,375) -79.99%
other real estate owned
Other real estate owned expense 150 203 850 (53) -26.11% (647) -76.12%
Salaries and employee benefits 4,664 4,147 3,692 517 12.47% 455 12.32%
Net occupancy expense 1,534 1,470 1,453 64 4.35% 17 1.17%
FDIC insurance premiums 72 337 598 (265) -78.64% (261) -43.65%
Credit and collections expenses 94 485 1,100 (391) -80.62% (615) -95.91%
Communication and data processing 551 467 484 84 17.99% (17) -3.51%
Other expenses 903 1,456 1,514 (553) -37.98% (58) -3.83%
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 8,123 $ 8,909 $ 11,410 $ (786) -8.82% $ (2,501) -21.92%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation adjustment to OREO and other real estate owned expense
during 1996 decreased due, primarily, to the stabilization of commercial real
estate values in California, resulting in a decrease in write downs on
foreclosed real estate property subsequent to its foreclosure.
Salaries and employee benefits during 1996 increased as a result of the
hiring of four individuals to manage the Company's newly established SBA
department during the second quarter of 1996, severance packages paid to
employees of the San Francisco branch which was sold in September of 1996,
and employee bonuses earned in 1996 which were not earned in 1995.
FDIC insurance premiums declined for the year ended December 31, 1996
due to a reduction of the FDIC insurance premium rates in 1996.
Credit and collections costs during 1996 decreased as a result of the
Company having fewer delinquent nonaccrual accounts in 1996 as compared to
1995.
Other expenses during 1996 decreased partially, as a result of a
reduction in the accrual of Delaware franchise taxes in the first quarter of
1996 and legal and consulting fees paid in 1995 in connection with the 1995
exchange offer of the Company's Preferred Stock.
INCOME TAX PROVISION
The Company's income tax provision for the year ended December 31, 1996
was $1.5 million producing an effective tax rate of 33.4%. The difference
between the Company's statutory tax rate of 41.5% and its effective tax rate
for the year ended December 31, 1996 was due to both the reversal of a
portion of the Company's tax valuation reserve of approximately $305,000
against the Company's tax provision, as well as California tax deductions
(credits) generated by the Company on loans made in special tax zones within
California.
The Company's income tax provision for 1995 was reduced by a like
reduction in the Company's tax valuation reserves. The combined statutory
tax provision of approximately $1.4 million representing a combined statutory
tax rate of approximately 41.6% was reduced by a reduction in the Company's
tax valuation reserve of approximately $1.5 million. The Company's tax
valuation reserve established during 1994 was applied to the 1995 tax
provision.
FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
Total assets increased by $45.0 million to $304.1 million at December
31, 1996 from $259.1 million at December 31, 1995. The increase was
partially due to the Company's purchase of U.S. government sponsored agency
securities, net of maturities, totaling $83.5 million at December 31, 1996.
The Company purchased these securities intending to maximize the earnings of
cash held in securities purchased under resale agreements which yielded a
lower return.
Total loans increased by $13.0 million to $211.7 million from $198.7
million at December 31, 1995. The increase in loans was primarily due to
1996 loan originations of $44.4 million and fourth quarter loan purchases of
$20.2 million, reduced by $48.0 million in loan payoffs, loan transfers to
OREO, and loan chargeoffs. Included in
25
<PAGE>
the $48.0 million loan payoff figure was a bulk loan sale of $9.5 million of
nonaccrual and loans classified as troubled debt restructurings. The
increases in investment securities and loans were funded primarily through a
reduction of $53.3 million in cash and cash equivalents, with the remainder
being provided from the increased deposit balances and other borrowings.
Total deposits increased by $32.2 million to $266.7 million at December
31, 1996 from $234.5 million at December 31, 1995. Savings accounts
decreased by $15.9 million to $157.8 million at December 31, 1996. This
decrease was more than offset by the increase of $20.1 million in the
Company's newly introduced money market checking account and the $28.0
million increase in certificates of deposit as of December 31, 1996, when
compared to the same period in 1995, despite 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 Company sold its San Francisco
branch to reduce expenses associated with deposit gathering.
In 1996, the Company set up borrowing lines with two brokers aggregating
$50 million in availability. As of December 31, 1996, other borrowings
totaled $10 million. The Company uses these lines to cover short term
financing needs for loan fundings or security purchases.
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
The Company's general policy is to discontinue accrual of interest on a
loan when any installment payment is 61 days or more past due or, when
management otherwise determines the collectibility of principal or interest
is unlikely prior to the loan becoming 61 days past due.
Interest income on nonaccrual loans is subsequently recognized when the
loan becomes contractually current. Accounts which are deemed uncollectible
by management or for which no payment has been received for five months are
charged off for the amount that exceeds the estimated net realizable value of
the underlying real estate collateral.
The Company's general policy is to initiate foreclosure proceedings when
loans are more than 30 days past due. Some loans that are more than 30 days
past due are never actually foreclosed, however, because the borrower brings
the account current either before a formal notice of default is filed or
before the property goes to foreclosure sale.
On loans that are more than 60 days past due, updated third party
appraisals are generally ordered to ascertain the current fair market value
of the loan collateral. Between the time the updated appraisals are ordered
and the time they are received, (normally about a 60 day period), management
evaluates the loan collateral position to ascertain the amount of general
loan loss reserves that should be allocated to the loan. Upon receipt of the
third party appraisal, further general loan loss reserves are allocated, if
necessary based on the estimated net realizable value of the collateral
(which is calculated based on the estimated sales price of the collateral
less all selling costs).
The calculation of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and not directly tied to the level of nonperforming
loans which are comprised entirely of nonaccrual loans. Therefore, changes
in the amount of nonaccrual loans will not necessarily result in an
associated increase or decrease in the allowance for loan losses. The ratio
of nonaccrual loans to total loans, net of deferred fees was 0.65% at
December 31, 1996 and 2.53% at December 31, 1995.
Total nonperforming assets declined in 1996 from $9.3 million or 3.6% of
total assets at December 31, 1995 to $4.8 million or 1.60% of total assets
at December 31, 1996. The following table sets forth, by accrual status, the
number and remaining balances of commercial real estate loans that were more
than 30 days delinquent at December 31, 1996:
<TABLE>
<CAPTION>
LOANS DELINQUENT AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
30-59 DAYS 60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT
-------------------------------------------------------------------------------------------------
NO. % OF NO. % OF NO. % OF NO. % OF
OF LOAN TOTAL OF LOAN TOTAL OF LOAN TOTAL OF LOAN TOTAL
(DOLLARS IN THOUSANDS) LOANS AMOUNT LOANS LOANS AMOUNT LOANS LOANS AMOUNT LOANS LOANS AMOUNT LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate loans:
Nonaccrual loans -- $ -- -- -- -- -- 4 $1,386 0.65% 4 $1,386 0.65%
Loans accruing 2 659 0.31% 1 318 0.15% -- -- -- 3 977 0.46%
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 2 $ 659 0.31% 1 $ 318 0.15% 4 $1,386 0.65% 7 $2,363 1.11%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
NONPERFORMING AND RESTRUCTURED ASSETS
The following table sets forth (a) loans accounted for on a nonaccrual
basis, (b) OREO, (c) nonperforming investments and (d) loans that were
"troubled debt restructurings" at the dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING AND TROUBLED DEBT RESTRUCTURING ASSETS DECEMBER 31,
- -------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans/Commercial Real Estate Loans $1,386 $4,985 $ 9,779 $ 5,186 $ 6,859
Other real estate owned 3,469 4,355 5,724 9,092 8,065
- -------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO 4,855 9,340 15,503 14,278 14,924
Nonperforming investments - - - 898 1,705
- -------------------------------------------------------------------------------------------
Total nonperforming assets 4,855 9,340 15,503 15,176 16,629
Troubled debt restructurings(1) 719 8,757 5,039 4,765 -
- -------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO to total assets 1.60% 3.60% 6.24% 5.89% 6.13%
Total nonperforming assets to total assets 1.60% 3.60% 6.24% 6.26% 6.83%
Allowance for loan losses to nonaccrual loans 245.30% 90.30% 82.60% 75.40% 46.60%
- -------------------------------------------------------------------------------------------
(1) All troubled debt restructurings were performing in accordance with their revised terms
at December 31, 1996
</TABLE>
For 1996 and 1995, gross interest income which would have been recorded
had the nonaccrual loans been current in accordance with their original terms
was $614,000 and $803,000, respectively. The amount that was recorded as
interest income on such loans was $67,000 and $344,000 for 1996 and 1995,
respectively.
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. Nonaccrual loan
balances are net of any prior write-offs, but any specifically assigned general
allowance for loan losses are not deducted from the nonaccrual loan balances.
The following table represents the major components of the changes in the
nonaccrual loans for the year ending December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
NONACCRUAL LOAN ACTIVITY YEAR ENDING
- -------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans at beginning of period $ 4,985 $ 9,779 $ 5,186
Nonaccrual loan additions 4,675 11,835 17,045
Loans returned to accrual status (630) (5,910) (2,342)
Loans transferred to OREO (2,836) (6,790) (5,402)
Loan provision/other - (566) -
Net loan chargeoffs (1,929) (2,014) (4,178)
Loan payments/payoffs (2,879) (1,349) (530)
- -------------------------------------------------------------------------------------------
Nonaccrual loans at end of period 1,386 4,985 9,779
- -------------------------------------------------------------------------------------------
Net change/activity $ (3,599) $ (4,794) $ 4,593
- -------------------------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had a total of five properties in this category at
December 31, 1996, totaling $3.5 million.
Other real estate owned declined to $3.5 million at December 31, 1996,
from $4.3 million at December 31, 1995, a decline of $886,000 or 20.3%. This
reflects the sale of eight properties with a net balance of $3.5 million
during 1996 versus $8.4 million during 1995. The Company provided loan
financing in the aggregate principal amount of $247,000 for one of the
properties sold during 1996. The Company is currently in sales negotiations on
several of its OREO properties.
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
27
<PAGE>
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 $3.5 million balance of OREO at December 31,
1996 reflects reductions of $1.46 million from the original principal
balances of the related loans, through both loan chargeoffs (prior to the
properties becoming OREO) and valuation adjustments (subsequent to the
properties becoming OREO). The $1.46 million of reductions is not included
in the allowance for loan losses.
The following table represents the major components of the changes in
the OREO for the year ending December 31, 1996, 1995 and 1994:
<TABLE>
OTHER REAL ESTATE OWNED ACTIVITY YEAR ENDING
- ------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OREO at beginning of period $ 4,355 $ 5,724 $ 9,092
Transfers from loans 2,836 6,790 5,402
OREO write downs (155) (344) (1,719)
Payments/other (86) 581 (51)
Sales of OREO properties (3,481) (8,396) (7,000)
------------ ------------ ------------
OREO balance at end of period 3,469 4,355 5,724
------------ ------------ ------------
Net change/activity $ (886) $ (1,369) $ 3,368
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
TROUBLED DEBT RESTRUCTURINGS (TDR)
A TDR is a loan in which the Company, for reasons related to the
borrower's 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 December
31, 1996, the Company had one loan in the aggregate principal amount of
$719,000 that was categorized as a TDR. The TDR balance reflected in the
"Nonperforming and Restructured Asset" table is net of any prior write-offs,
but any specifically assigned general allowance for loan losses are not
deducted from the above TDR loan balances.
The Company recorded a charge of $125,000 in 1995, against interest
income related to the TDR loans, to record the difference between the
contractual rate of interest and the modified rate of interest throughout the
term of the loan modification. The Company's total interest income was
reduced by a net charge of $478,000 for all loans qualifying as TDRs during
the year ending December 31, 1995.
The following table represents the major components of the changes in
the TDRs for the year ending December 31, 1996 and 1995:
TROUBLED DEBT RESTRUCTURING ACTIVITY YEAR ENDING
- ------------------------------------ ---------------------------
DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ---------------------- ------------ ------------
TDR balance beginning of period $ 8,757 $ 5,039
Transfers from/(to) accruing loans (948) 4,913
Transfers from/(to) nonaccruing loans (156) 2,624
Loan sale/loan payments (5,538) (1,515)
Net loan charge-offs/other (1,396) (2,304)
------------ ------------
TDR balance end of period 719 8,757
------------ ------------
Net change/activity $ 8,038 $ 3,718
------------ ------------
------------ ------------
OTHER LOANS OF CONCERN (POTENTIAL PROBLEM LOANS)
In addition to nonaccrual loans and TDRs, as of December 31, 1996, the
Company had four loans with aggregate outstanding loan balances of $3.6
million with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the properties securing the
loans have caused management concern about the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such loans in the nonperforming loan category. This compares
with eight loans with aggregate outstanding loan balances of $5.0 million at
December 31, 1995.
28
<PAGE>
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 reasonably predictable source of funds, deposit
flows and mortgage loan prepayments are greatly influenced by the level of
interest rates, economic conditions, and competition.
The primary lending and investment activities of the Company have
generally been the origination of adjustable rate commercial real estate
loans, the purchase of U.S. government sponsored agency securities, and to a
lesser extent, the purchase of short-term investment securities. The
purchase of U.S. government sponsored agency securities and short-term
investment securities provide a source of long- and short-term liquidity.
The lending and investment activities of the Company are funded primarily by
principal and interest payments on loans and interest-bearing deposit growth.
The Company maintains minimum levels of liquidity as defined by Company
policy. The Company's liquidity ratio at December 31, 1996 was approximately
31%, which exceeded the 10.00% minimum required by policy.
The Company's most liquid assets are cash, cash in banks, and short-term
investments. The levels of these assets depend on the Company's operating,
financing, lending and investing activities during any given period.
Liquidity for the Company is monitored daily and evaluated monthly.
Excess funds are invested in short-term investment securities, generally
repurchase agreements. Additional sources of funds are available by the use
of borrowing against the Company's U.S. government sponsored agency
securities portfolio and secondarily by borrowing from the Federal Reserve
Bank's discount window. At December 31, 1996, Pacific Crest Investment had
$10.0 million in outstanding short term borrowings against its $50 million
borrowing line with brokers which left $40 million in unused borrowing
availability against its U.S. government sponsored agency securities. The
Company had a borrowing line of $6.7 million with the Federal Reserve Bank at
December 31, 1996.
At December 31, 1996, the Company had outstanding commitments to fund
adjustable rate loans of $1.6 million.
There has been a significant decrease in the Company's holdings of cash
and cash equivalents during the period ending December 31, 1996 compared to
1995. Cash and cash equivalents decreased $53.3 million to $2.8 million at
December 31, 1996 from December 31, 1995. The Company experienced a decrease
in savings accounts of $15.9 million, an increase of $20.1 million in money
market checking deposits and an increase of certificates of deposits of $28.0
million during 1996. The Company originated and purchased $64.6 million in
new commercial real estate and business loans during 1996. Off-setting these
originations, the Company experienced $40.8 million in loan payoffs, and $3.8
million in loan transfers to OREO, and $3.5 million in loan chargeoffs during
1996.
The Company on an unconsolidated basis, (the "Parent Company") has
approximately $478,000 in cash and cash equivalents at December 31, 1996,
which will be utilized to pay future operating expenses of the parent and
possibly for future capital infusions into Pacific Crest Investment.
Pacific Crest Investment's ability to pay dividends to the Parent
Company is restricted by California state law, which requires that sufficient
retained earnings are available to pay the dividend. At December 31, 1996
Pacific Crest Investment had deficit retained earnings of $358,000. 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 Company.
During 1996, 1995 and 1994, the Company originated and purchased loans
of $64.6 million, $42.4 million and $16.0 million, respectively.
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital that
will support sustained asset growth, anticipated credit risks and to ensure
that regulatory guidelines and industry standards are met.
Pacific Crest Investment is subject to certain leverage and risk-based
capital adequacy standards applicable to FDIC-insured institutions. At
December 31, 1996, Pacific Crest Investment was in compliance with all such
requirements.
Regulations on capital adequacy guidelines required by the FDIC are as
follows. Risk-based capital consists of a core capital component (Tier I),
essentially common stockholders' equity, less intangible assets and a
supplemental component (Tier II), which includes the allowance for loan
losses up to 1.25% of risk-weighted assets, and a system for assigning assets
and off-balance sheet items to one of four risk-weighted categories. These
29
<PAGE>
capital standards require a minimum Tier I risk-based capital ratio of 4.00%
and total risk-based capital ratio (Tier I plus Tier II) of 8.00%.
In addition to the risked-based guidelines, the FDIC requires banking
organizations to maintain a minimum amount of Tier I Capital to total assets,
referred to as the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier I Capital to total assets
must be 3%. For all banking organizations not rated in the highest category,
the minimum leverage ratio must be at least 100 to 200 basis points above the
3% minimum, or 4% to 5%.
The following table sets forth Pacific Crest Investment's capital ratios as
of the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
---------------------------- --------------------------
PACIFIC CREST INVESTMENT REQUIRED ACTUAL EXCESS REQUIRED ACTUAL EXCESS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage Capital ratio 4.00% 7.96% 3.96% 4.00% 7.82% 3.82%
Tier I risk-based capital ratio 4.00% 10.31% 6.31% 4.00% 9.48% 5.48%
Total risk-based captial ratio 8.00% 11.56% 3.56% 8.00% 10.74% 2.74%
- --------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The purpose of asset liability management is to minimize the risk of
loss resulting from changes in interest rates. One method of assessing the
potential risk associated with changes in the interest rates is to examine
the extent to which assets and liabilities are "interest rate sensitive" and
by monitoring the institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to
mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated, based upon certain assumptions, to
mature and reprice within that same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative
gap would generally tend to adversely affect net interest income while a
positive gap would generally tend to result in an increase in net interest
income. During a period of declining interest rates, a negative gap would
generally tend to result in increased net interest income while a positive
gap would generally tend to adversely affect net interest income. At
December 31, 1996, total interest-bearing liabilities maturing or repricing
within one year exceeded total-interest earning assets maturing or repricing
in the same period by $89.0 million, representing a positive cumulative
one-year gap of 30.2%.
To the extent consistent with its interest rate spread objectives, the
Company attempts to reduce its interest rate risk and has taken a number of
steps to match its interest sensitive assets and liabilities to minimize the
potential negative impact of changing interest rates. The Company has
focused on making adjustable rate commercial real estate loans, virtually all
of which adjust quarterly.
While the Company has written many of its loans with interest rate
floors, the fully-indexed rate on the loans at December 31, 1996 were,
generally, in excess (above) or equal to those interest rate floors. It may
be anticipated that loans with interest rate floors will increase net
interest income in a declining interest rate environment because affected
loans do not reprice downward to their fully-indexed rate when interest rates
fall. No assurances can be given that such will be the case, however,
particularly if borrowers are able to refinance or renegotiate their loans
when interest rates fall.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at December 31, 1996 on the basis of certain
assumptions. Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were determined in
accordance with the earlier of the repricing timing or contractual term of
the asset or liability. The Company has assumed that its savings accounts,
money market accounts, and other borrowings which totaled $157.8 million,
$20.1 million and $10.0 million, respectively at December 31, 1996, reprice
immediately. Certificates of deposit are included in the table below at
their dates of maturity.
Certain shortcomings are inherent in the method of analysis presented in
the following table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, some adjustable rate loans
have features which restrict changes in
30
<PAGE>
interest rates on a short-term basis and over the life of the asset. Further,
interest rate floors on some adjustable rate loans can have the effect of
increasing the net interest income as interest rates decline or, conversely,
limiting net interest income as interest rates rise. Also, loan prepayments
and early withdrawal of certificates of deposit could cause the interest
sensitivities to vary from what appears in the table. Finally, the ability of
many borrowers to service their adjustable rate debt may be adversely
affected by an interest rate increase.
<TABLE>
<CAPTION>
AFTER AFTER
NEXT DAY AND THREE MONTHS ONE YEAR
WITHIN BUT WITHIN BUT WITHIN AFTER
(DOLLARS IN THOUSANDS) IMMEDIATELY THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Repurchase agreements $ 262 $ - $ - $ - $ - $ 262
Investment securities-held to maturity - - - 5,000 25,960 30,960
Investment securities-available for sale - - - 12,985 39,549 52,534
Total loans, net of deferred fees 1,386 156,969 6,645 19,955 26,140 211,095
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earnings assets $ 1,648 $ 156,969 6,645 $ 37,940 $ 91,649 $ 294,851
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Certificates of deposit $ - $ 24,140 $ 42,186 $ 22,500 $ - $ 88,826
Savings account 157,789 - - - - 157,789
Money market checking 20,080 20,080
Other borrowings 10,000 10,000
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 187,869 $ 24,140 $ 42,186 $ 22,500 $ - $ 276,695
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (186,221) $ 132,829 $ (35,541) $ 15,440 $ 91,649
Cumulative interest rate sensitivity gap (186,221) (53,392) (89,933) (73,493) 18,156
Interest rate sensitivity gap ratio (1) -63% 45% -12% 5% 31%
Cumulative interest rate - -18% -30% -25% 6%
sensitivity gap ratio (2)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The interest rate sensitivity gap ratio represents the
interest rate sensitivity gap divided by total interest-earning assets.
(2) The cumulative interest rate sensitivity gap ratio represents the
cumulative interest rate sensitivity gap divided by total interest-earning
assets.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost
of the Company's operations. Unlike industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest
rates have a greater impact on the Company's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the price of goods and services.
COMPARISONS OF FINANCIAL RESULTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND 1994
The Company's net income for 1995 was $3.2 million, compared to a net
loss of $6.5 million for 1994. The 1995 increase in net income over 1994 of
$9.7 million was primarily the result from a decrease of $7.4 million in the
provision for loan losses, a decrease of $1.4 million in the valuation
adjustment to other real estate owned, a decrease of $647,000 in other real
estate expense, a $615,000 decrease in credit and collection expense and a
decrease of $261,000 in FDIC insurance premiums. These decreases were
partially offset by an increase in salaries and employee benefits of $455,000
and a decrease of $41,000 to net interest income.
NET INTEREST INCOME
Net interest income for 1995 was $11.7 million, a decrease of $41,000
from the prior year.
31
<PAGE>
TOTAL INTEREST INCOME
Total interest income increased $2.7 million or 12.7% to $23.8 million
for 1995 compared to 1994, due primarily to increased yields on earning
assets, particularly loans, which was offset in part by a reduction in the
volume of loans and repurchase agreements. The yield on the average
interest-earning assets increased from 8.66% for 1994 to 10.12% for 1995.
The increase in the yield was the result of an increase in market interest
rates and the resulting repricing of loans during the last half of 1994.
Interest on loans increased $2.1 million or 11.5% for 1995 compared to
1994. This increase was attributable to a 168 basis point increase in the
yield on the Company's loan portfolio from 9.54% for 1994 to 11.22% for 1995.
The increase in the yield was the result of loans repricing upward during
the third and fourth quarters of 1994 and remaining unchanged during most of
1995.
Interest earned on the U.S. Government sponsored agency securities was
$1.9 million for 1995 compared to $1.6 million in 1994. The purchase of
these securities during the second and third quarters of 1994 provided an
alternative to investing in lower yielding repurchase agreements. The entire
portfolio matured or were called by the issuing agencies during the second,
third and fourth quarters of 1995. The increase in interest in the U.S.
agency securities portfolio was primarily a result of maintaining
approximately $5 million more in average outstandings in these securities
during 1995 as compared to 1994. The yield on these securities increased
from 6.17% in 1994 to 6.22% in 1995.
Interest earned on the Company's repurchase agreement securities
increased by $211,000 or 24.7% for 1995 compared to 1994. This increase was
the result of the yield on these securities increasing from 4.05% in 1994 to
5.81% in 1995.
TOTAL INTEREST EXPENSE
Total interest expense for 1995 increased $2.7 million from 9.4 million
in 1994 to $12.1 million in 1995. The increase in total interest expense in
1995 was primarily attributable to an increase in market interest rates and
the upward repricing of deposits that began in the third and fourth quarters
of 1994. Deposit rates remained relatively constant through most of 1995,
until the fourth quarter of 1995 when market rates began to decline and
deposits began to reprice downward.
Interest on certificates of deposit decreased $1.9 million or 31.3% for
1995 compared to 1994, due primarily from a $69.0 million decline in the
average certificates of deposits outstanding. This decline was partially
offset by an increase in the rates paid on these deposits from 4.20% in 1994
to 5.48% in 1995. The Company did not aggressively marketed its certificate
of deposit accounts and, as a result, had been able to lag interest rate
increases in this product during both 1995 and 1994 which resulted in a
runoff of certificates of deposits.
Interest on savings accounts increased $4.6 million or 142.5% for 1995
when compared to 1994, due to a $62.9 million increase in average savings
deposits for 1995. Also contributing to this increase was a 144 basis point
increase in the average rates paid on savings accounts from 4.11% for 1994 to
5.55% for 1995.
The Company recorded interest expense of $15,000 on other borrowings
during 1995. The Company had no other borrowings during 1994.
PROVISION FOR LOAN LOSSES
During 1995, the Company decreased its provision for loan losses to
$960,000 from $8.3 million for 1994 The decrease of $7.4 million between 1995
and 1994 in the loan provision reflects a stabilization in the collateral
values supporting loans due to the improvement in the regional economy in
Southern California. The erosion of collateral value, along with recession
related loan defaults, resulted in the increased level of loan loss
provisions during 1994. Total nonperforming assets declined in 1995 from
$15.5 million or 6.2% of total assets at December 31, 1994 to $9.3 million or
3.6% of total assets at December 31, 1995.
NONINTEREST INCOME
Noninterest income for 1995 increased $1.7 million over 1994.
Noninterest income for 1995 included a gain of $195,000 from the sale and
receipt of payments on a collateralized mortgage obligation (CMO residual).
The Company sold its remaining interest in its CMO residual during 1995. In
addition, the Company recorded a partial recovery of $656,000 based on the
cash receipts on a corporate debt security that had been written off during
1994. This compares to writedowns of $780,000 during 1994 on the Company's
remaining investment securities.
32
<PAGE>
Other noninterest income increased by $66,000 compared to 1994.
Increases in late fees and loan prepayment fees accounted for these increases.
NONINTEREST EXPENSE
The decrease of $2.5 million in noninterest expenses during 1995 reflect
an overall decrease in most of the Company's expense categories. The
decreases in valuation adjustments to other real estate owned, other real
estate owned expenses and credit and collection expenses are the result of
the improvement in the reduction of the Company's nonearning assets and the
costs associated with the collection of these accounts. The stabilization of
commercial real estate values in California during 1995 resulted in the
Company not having to writedown these OREO properties as aggressively in 1995
as compared to 1994. Several of the OREO properties owned during 1994
required repairs to bring them to a marketable condition. The decline in
these costs also reflect the reduction in delinquent property taxes paid on
OREO accounts during 1995 as compared to 1994.
The increase in salaries and employee benefits expense resulted
primarily from an increase in Company staffing in its commercial real estate
marketing and operations areas due to an anticipated increases in commercial
real estate lending. Also reflected in this increase were general salary
increases for 1995 in addition to amount relating to severance packages paid
to employees of the residential real estate lending department as a result of
discontinuing the residential lending programs. The net occupancy increase
includes rental increases as well as additional costs associated with the
rental of space for the residential real estate department.
Partially offsetting these increases were reductions in FDIC insurance
premiums, communications and data processing expenses and other expenses.
The decrease in FDIC expense reflects the refund of insurance premiums made
by the FDIC in the third quarter of 1995 due to a change in the insurance
rate charged for insured deposits. The FDIC reduced insurance premiums for
all FDIC insured institutions effective May 1, 1995.
INCOME TAX BENEFIT
The Company's income tax provision for 1995 was reduced by a like
reduction in the Company's tax valuation reserves. The combined statutory
tax provision of approximately $1.4 million representing a combined statutory
tax rate of approximately 41.6% was reduced by a reduction in the Company's
tax valuation reserve of approximately $1.5 million. The Company's tax
valuation reserve established during 1994 was applied to the 1995 tax
provision.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
Total assets increased $10.6 million to $259.1 million at December 31,
1995, from $248.5 million at December 31, 1994. Loans net of deferred fees
increased $14.3 million to $196.8 million at December 31, 1995 from $182.5
million at December 31, 1994. The increase in net loans reflects loan
originations in excess of loan transfers to OREO and loan repayments. The
Company purchased U.S. government sponsored agency securities during June
1994 building this securities portfolio to $55.2 million at December 31,
1994. During 1995, these securities matured or were called by the issuing
agency with the funds reinvested primarily in repurchase agreements and loan
fundings.
Total cash and cash equivalents increased by $50.0 million to $56.2
million at December 31, 1995 from $6.2 million at December 31, 1994 primarily
as a result of the liquidation of the Company's investment in U.S. sponsored
agency issued securities.
Total deposits increased by $8.1 million to $234.5 million at December
31, 1995 from $226.4 million at December 31, 1994. The Company shifted its
deposit strategy during 1994, with the introduction of a competitive money
market savings account that was designed to compete with higher yielding
certificates of deposits. Total savings accounts increased $33.7 million to
$173.7 million at December 31, 1995. Certificate of deposits decreased $25.5
million to $60.8 million at December 31, 1995.
33
<PAGE>
Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1996 and 1995 . . . . . . 35
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995. . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 39-51
Report of Deloitte & Touche LLP, Independent Auditors . . . . . . . . 52
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . 53
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pacific Crest Capital, Inc.
- -----------------------------------------------------------------------------------------
December 31
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 2,572 $ 2,118
Certificates of deposit -- 300
Securities purchased under resale agreements 262 53,749
- -----------------------------------------------------------------------------------------
Cash and cash equivalents 2,834 56,167
- -----------------------------------------------------------------------------------------
U.S. Government sponsored agency securities (Note 4)
Held to maturity, at amortized cost 30,960 --
Available for sale, at market 52,534 --
Loans (Note 5)
Commercial mortgage 206,172 193,332
Residential mortgage 1,596 3,169
Commercial business/other 3,944 2,242
- -----------------------------------------------------------------------------------------
Total Loans 211,712 198,743
Deduct:
Deferred loan fees 617 1,965
Allowance for loan losses 3,400 4,500
- -----------------------------------------------------------------------------------------
4,017 6,465
- -----------------------------------------------------------------------------------------
Net loans 207,695 192,278
Accrued interest receivable 1,966 1,547
Prepaid expenses and other assets 772 219
Deferred income taxes, net (Note 10) 3,302 3,979
Other real estate owned (Note 6) 3,469 4,355
Premises and equipment, at cost, net of accumulated
depreciation and amortization (Note 7) 553 564
- -----------------------------------------------------------------------------------------
Total assets $304,085 $259,109
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits (Note 8):
Saving accounts $157,789 $173,725
Money market checking 20,080 --
Certificates of deposit 88,826 60,785
- -----------------------------------------------------------------------------------------
Total deposits 266,695 234,510
Other borrowings (Note 9) 10,000 --
Accrued interest and other liabilities 2,922 2,647
- -----------------------------------------------------------------------------------------
Total liabilities 279,617 237,157
- -----------------------------------------------------------------------------------------
Commitments and contingencies (Notes 14 and 17)
Shareholders' equity (Notes 11, 12, 13, 15 and 16):
Common stock, $.01 par value, 10,000,000 shares authorized,
2,959,698 shares issued and outstanding at December 31, 1996,
2,953,748 shares issued and outstanding at December 31, 1995 27,838 27,813
Accumulated deficit (2,858) (5,861)
Net unrealized loss on available for sale securities (257) --
Common stock in treasury, at cost, 30,000 shares (Note 11) (255) --
- -----------------------------------------------------------------------------------------
Total shareholders' equity 24,468 21,952
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $304,085 $259,109
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Book value per common share (Note 15) $ 8.35 $ 7.43
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Pacific Crest Capital, Inc.
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------
(DOLLARS IN THOUSANDS) 1996 1955 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans, including fees $21,384 $20,773 $18,630
Securities purchased under resale agreements 2,255 1,065 854
Certificates of deposit 15 16 10
U.S. government sponsored agency securities
Held to maturity 1,281 1,945 1,620
Available for sale 1,632 -- --
- ------------------------------------------------------------------------------------------------------
Total interest income 26,567 23,799 21,114
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings accounts 9,179 7,873 3,247
Money market checking 822 -- --
Certificates of deposit 3,456 4,196 6,111
Reverse repurchase agreements 43 15 --
- ------------------------------------------------------------------------------------------------------
Total interest expense 13,500 12,084 9,358
- ------------------------------------------------------------------------------------------------------
Net interest income 13,067 11,715 11,756
Provision for loan losses (Note 2) 1,917 960 8,343
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,150 10,755 3,413
NONINTEREST INCOME:
Gain (loss) on investment securities 413 851 (780)
Gain on sale of deposits 264 -- --
Other noninterest income 804 470 404
- ------------------------------------------------------------------------------------------------------
Total noninterest income 1,481 1,321 (376)
- ------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Valuation adjustments to other real estate owned (Note 6) 155 344 1,719
Other real estate owned expenses 150 203 850
Salaries and employee benefits (Note 17) 4,664 4,147 3,692
Net occupancy expenses 1,534 1,470 1,453
FDIC insurance premiums 72 337 598
Credit and collection expenses 94 485 1,100
Communication and data processing 551 467 484
Other expenses 903 1,456 1,514
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 8,123 8,909 11,410
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 4,508 3,167 (8,373)
Income tax provision (benefit) (Note 9) 1,505 (77) (1,914)
- ------------------------------------------------------------------------------------------------------
Net income (loss) 3,003 3,244 (6,459)
Preferred dividends declared -- (920) (1,104)
- ------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 3,003 $ 2,324 $(7,563)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Per Share Data (Note 15)
Primary earnings (loss) per common share $ 1.00 $ 2.01 $ (6.88)
- ------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (in thousands) 3,004 1,158 1,100
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per common share $ 1.00 $ 1.20 $ (6.88)
- ------------------------------------------------------------------------------------------------------
Weighted average fully diluted common shares outstanding (in thousands) 3,042 2,697 --
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Pacific Crest Capital, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS) 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, 1993 561 $ 12,843 1,099 $ 14,958 $ (622) $ - $ - $ -
Purchase of stock under employee
stock purchase plan (Note 12) - - 3 12 - - - -
Dividends on preferred stock - - - - (1,104) - - -
Net loss - - - - (6,459) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
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 (Note 12) - - 6 $ 25 - - - -
Unrealized loss on securities
available for sale, net of taxes - - - - - (257) - -
Purchase of treasury shares - - - - - - (30) (255)
Net income - - - - 3,003 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 - - 2,960 27,838 $ (2,858) $ (257) (30) $ (255)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,003 $ 3,244 $ (6,459)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Recovery on investment securities (413) (851) 780
Provision for loan loss 1,917 960 8,343
Valuation adjustment to OREO 155 344 1,719
Depreciation and amortization 233 248 232
Amortization of deferred loan fees (907) (588) (853)
Amortization/accretion of securities (37) (67) (114)
Changes in operating assets and liabilities:
Accrued interest receivable (419) 285 (201)
Prepaid expenses and other assets (520) 254 341
Deferred income taxes 863 (79) (1,766)
Accrued interest and other liabilities 275 105 440
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,150 3,855 2,462
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored securities available for sale (106,859) - -
Purchase of U.S. government sponsored securities held to maturity (57,471) - (55,133)
Proceeds from U.S. government sponsored securities available for sale 53,900 - -
Proceeds from U.S. government sponsored securities held to maturity 26,531 55,315
Proceeds from recovery on corporate bond securities 380 851 118
Net (increase)/decrease in loans (8,096) (25,054) 13,217
Purchase of loans (20,200) - -
Proceeds from loan sales 9,032 - -
Purchases of equipment and leasehold improvements, net (222) (59) (235)
Proceeds from sale of other real estate owned 3,567 7,815 7,051
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (99,438) 38,868 (34,982)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Preferred stock cash dividends - (920) (1,104)
Sale of savings deposits in connection with branch sale (20,989) - -
Sale of time deposits in connection with branch sale (7,202) - -
Net increase in money market checking 20,080 - -
Net increase in savings accounts 5,053 33,693 110,388
Net increase/decrease in CDs 35,243 (25,533) (97,200)
Net increase in other borrowings 10,000 - -
Proceeds from issuance of common stock 25 - 12
Purchase of treasury stock, at cost (255) - -
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 41,955 7,240 12,096
- ------------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (53,333) 49,963 (20,424)
Cash and cash equivalents at beginning of period 56,167 6,204 26,628
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,834 $ 56,167 $ 6,204
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,428 $ 12,165 $ 9,499
Income taxes $ 745 $ 2 $ 2
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers of net loans to other real estate owned $ 2,836 $ 6,790 $ 5,402
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 PACIFIC CREST CAPITAL, INC.
- --------------------------------------------------------------------------------
1. ORGANIZATION
Pacific Crest Capital, Inc. ("the Company"), a Delaware corporation, is
incorporated as a financial institution holding company and holds 100% of the
stock of Pacific Crest Investment and Loan ("Pacific Crest Investment")
Pacific Crest Investment conducts an industrial loan business in the state
of California. Pacific Crest Investment is subject to regulation and supervision
by the Department of Corporations of the state of California as specified in the
California Industrial Loan Law, and by the Federal Deposit Insurance Corporation
(FDIC). Deposits are insured up to $100,000 for each depositor by the FDIC.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its wholly
owned subsidiary Pacific Crest Investment. All significant intercompany
transactions have been eliminated.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheets and revenues and expenses for the year. Actual results in future years
could differ from those estimates by management in the current year. Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the valuation allowance for
other real estate owned.
LOAN INCOME
Interest income includes interest on loans, which is recognized as earned,
and amortization of loan fees. Loan fees, net of incremental direct costs are
deferred and recognized by the interest method over the term of the loan.
CASH EQUIVALENTS
Securities purchased under resale agreements and interest earning
certificates of deposit are classified as cash equivalents and are carried at
cost. The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS
The Company invests in securities purchased under resale agreements to
optimize its returns on liquid assets. The Company obtains collateral for these
agreements which normally consist of U.S. Government Agency and U.S. Government
sponsored agency backed securities. The duration of the agreement is typically
from one to 14 days, during which the collateral is held by a third-party
trustee for the Company. The Company has, on occasion, purchased securities
under resale agreements with maturities of up to 90 days.
INVESTMENT SECURITIES
The Company invests in U.S. government sponsored agency issued securities.
At the date of purchase, the Company elects to segregate the security into
either the held to maturity portfolio or the available for sale portfolio,
depending upon management's ability and intent to hold such securities to
maturity. Unrealized gains or losses on securities available for sale are
reflected in a separate component of stockholders equity, net of tax effect.
Income on investments is recognized using the level yield method.
Realized gains or losses on sales are recorded on a specific identification
basis.
ALLOWANCE FOR LOAN LOSSES
The Company charges current income in amounts necessary to maintain a
general allowance for loan losses deemed adequate to cover potential losses on
loans. The amount of the allowance is based on management's evaluation of
numerous factors including adequacy of collateral, delinquency trends and
historical loss experience.
Activity in the allowance for loan losses is as follows:
39
<PAGE>
YEAR ENDED DECEMBER 31
---------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------
Balance at beginning of period $ 4,500 $ 8,075 $ 3,910
Provision for loan losses 1,917 960 8,343
Purchased loan reserve 191 - -
Loans charged off, net (3,208) (4,535) (4,178)
- ----------------------------------------------------------------------------
Balance at end of period $ 3,400 $ 4,500 $ 8,075
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Accounts which are deemed uncollectible by management or for
which no payment has been received for five consecutive months are charged
off for the amount that is not collateralized by the estimated fair value
less selling costs of the underlying real estate collateral.
INCOME ON DELINQUENT LOANS
It is the Company's policy to suspend the recognition of income on any loan
which is 61 days or more contractually delinquent. Recognition of income is
generally resumed and suspended income is recognized, when the loan becomes
contractually current. At December 31, 1996, 1995 and 1994, income recognition
was suspended on loan balances of $1,386,000, $4,985,000 and $9,779,000,
respectively.
The amounts of contractual interest, interest recognized and
interest foregone on nonaccrual loans for the years ended December 31, 1996,
1995 and 1994 are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
Contractual interest $ 614 $ 1,147 $ 1,489
Interest recognized 67 344 517
- --------------------------------------------------------------------------------
Interest foregone $ 547 $ 803 $ 972
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are principally provided on the straight-line
method over the following estimated useful lives:
- --------------------------------------------------------------------------------
Office furniture, fixtures and equipment 3 - 8 years
Leasehold improvements Life of Lease
- --------------------------------------------------------------------------------
INCOME TAXES
Deferred tax assets and liabilities recognize the future tax consequences
of differences between the financial statement amounts of assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting and reporting standards for transfers of financial
assets and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This statement was adopted as of January 1, 1997, and is not expected to have a
material effect on the Company's financial statements.
Statement of Financial Accounting Standards No 123, Accounting for Stock-
Based Compensation," (SFAS 123) was issued by the Financial Accounting Standards
Board in October 1995. SFAS 123 provides for companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based on the fair value of the award on the date of
grant. However, SFAS 123 allows for companies to continue to measure
compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Companies electing to continue accounting for
stock-based compensation plans under ABP 25 must make pro forma disclosures of
net income and earnings per share in the notes to the consolidated financial
40
<PAGE>
statements, as if SFAS 123 had been adopted. SFAS 123 is effective for
fiscal years beginning after December 15, 1995, see note 12, "Stock Purchase
and Option Plans."
3. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimates are required under Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." These estimates may not represent values which would be
received should these financial instruments be sold, liquidated or otherwise
terminated.
The carrying amounts and estimated fair values for certain of the
Company's financial instruments at December 31, 1996 and 1995 are summarized
in the following table:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,834 $ 2,834 $ 56,167 $ 56,167
Investment securities 83,494 83,460 - -
Loans, net 207,695 209,235 192,278 192,168
Accrued interest receivable 1,966 1,966 1,547 1,547
Liabilities
Savings accounts 157,789 157,789 173,725 173,725
Money market checking 20,080 20,080
Certificates of deposit 88,826 88,826 60,785 60,785
Other borrowings 10,000 10,000 - -
Accrued interest payable 275 275 204 204
- ------------------------------------------------------------------------------
The fair value information for financial instruments shown in the
Company's balance sheet was calculated as follows:
CASH AND CASH EQUIVALENTS:
The carrying amounts of cash and cash equivalents approximates their fair
value.
INVESTMENT SECURITIES:
Fair value is based on the quoted market price of these securities by brokers
making a market for these securities.
LOANS:
The Company established the fair market value of the loan portfolio by
segregating the loan portfolio into categories by utilizing selected factors
(i.e., payment history, collateral values, risk classification, cash flows)
and then forecasting an estimated fair market value sale price for each of
the established loan categories.
The estimated market value of the loan portfolio includes categories of
loans the Company believes would sell at par and categories of loans that
would sell at a discount (0% - 60% discount).
A significant number of the Company's variable rate loans contain "floors"
or minimum interest rates. The Company's variable rate loans generally
reprice on a quarterly basis. Many of these same loans also contain
covenants requiring penalties for early repayment. The Company believes that
loans with these characteristics, as well as being well collateralized, with
no history of delinquencies, would sell at a premium. On the other hand,
loans on a nonaccrual basis, or loans that have been classified due to an
identified weakness even though fully secured, could normally only be sold
for a discount depending on the anticipated level of ultimate recovery or the
liquidation of the collateral.
Fair value then, is based upon the estimated sales prices of these loans.
DEPOSITS:
Fair value and carrying value are assumed to be identical due to the
relatively short maturity and repricing of the savings accounts, money market
checking accounts and certificates of deposit maturing within one year.
Certificates of deposit maturing in excess of one year were issued at current
market rates of interest rate and fair value and carrying value are assumed
to be approximately identical.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximates their fair value.
41
<PAGE>
OTHER BORROWINGS:
The carrying amounts of other borrowings approximates their fair value.
Because no conventional market exists for a significant portion of the
Company's financial instruments, and because of the inherent imprecision of
estimating fair values for financial instruments for which no conventional
trading market exists, management believes that the fair market value
estimates utilized under SFAS No. 107 should be viewed as only approximate
values that the Company would receive if the Company's assets and liabilities
were sold.
- -------------------------------------------------------------------------------
4. 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 December 31, 1996
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 issued securities
Held to maturity $30,960 $21 $ 55 $30,926
Available for sale 52,975 11 452 52,534
- --------------------------------------------------------------------------------------------------
Total investment securities $83,935 $32 $507 $83,460
- --------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the scheduled maturities of securities in
both the held-to-maturity portfolio and the available-for-sale portfolio at
December 31, 1996:
HELD-TO-MATURITY
SECURITIES:
--------------------
AMORTIZED FAIR AVERAGE
COST VALUE YIELD LIFE
- ------------------------------------------------------------------------------
Due from one to five years $ 5,000 $ 5,014 7.11% 4.3 years
Due from five to ten years 14,995 14,954 7.66% 9.9 years
Due after ten years 10,965 10,958 7.75% 15.0 years
-----------------------------------------------
$30,960 $30,926 7.60% 10.8 years
-----------------------------------------------
-----------------------------------------------
AVAILABLE-FOR-SALE
SECURITIES:
--------------------
AMORTIZED FAIR AVERAGE
COST VALUE YIELD LIFE
- ------------------------------------------------------------------------------
Due from one to five years $13,000 $12,985 6.76% 4.3 years
Due from five to ten years 39,975 39,549 6.97% 7.6 years
-----------------------------------------------
$52,975 $52,534 6.92% 6.7 years
-----------------------------------------------
-----------------------------------------------
$83,935 $83,460 7.17% 8.2 years
-----------------------------------------------
U.S. government sponsored agency securities carried at $11.5 million
were pledged to secure other borrowings aggregating $10 million at December
31, 1996.
Included in the financial statements for the year ending December 31,
1996 and 1995, are gross realized gains of $413,000 and $851,000,
respectively, resulting from collections of the Company's previously written
off corporate bond security and collateralized mortgage obligation residual,
(CMO Residual) for 1995.
- ------------------------------------------------------------------------------
5. LOANS
The Company is engaged primarily in commercial real estate term lending
in the state of California. Loans are principally secured by commercial real
estate and are generally contractually due over periods of up to ten years.
The maximum loan to one borrower secured by improved real property
cannot exceed 20% of Pacific Crest Investment's shareholders equity at the
time of funding which was $4,833,000 at December 31, 1996. Pacific Crest
Investment's largest loan at December 31, 1996 was $2,992,000 which, at the
time of funding, was in compliance with this regulation.
42
<PAGE>
Loans earned interest during the years ended December 31, 1996, 1995 and
1994 at rates ranging from 7.63% to 13.63%, 4.64% to 13.50% and 4.64% to
13.50%, respectively.
The following table reflects loans classified as trouble debt
restructurings (TDR) that are not accounted for or classified as a nonaccrual:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans classified as trouble debt restructurings net of loan fees
and specific reserves $ 719 $ 8,757 $ 5,039
Contractual interest on loans classified as TDR 408 1,314 1,011
Interest earned on loans classified as TDR 300 961 711
Interest foregone $ 105 $ 353 $ 300
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Financial Accounting Standards Board Statement No. 114, "Accounting by
Creditors for Impairment of a Loan" addresses the accounting by creditors for
impairment of certain loans. It requires that impaired loans generally be
measured based on the present value of expected future cash flows discounted
at the loan's effective rate unless the loan is fully collateralized. This
Statement was implemented by the Company during the first quarter of 1995.
The implementation of the standard had no significant impact on the financial
condition or results of operations of the Company during the year implemented.
The recorded investment in loans considered impaired at December 31,
1996 and 1995 was $2.4 million and $13.7 million, respectively. The
valuation reserve on impaired loans at December 31, 1996 and 1995 was
$337,000 and $960,000, respectively. For the year ended December 31, 1996 and
1995, the average recorded investment in impaired loans was approximately
$7.9 million and $13.5 million, respectively. Cash basis interest income
recognized on those loans was immaterial.
- --------------------------------------------------------------------------------
6. OTHER REAL ESTATE OWNED
Other real estate owned is included in the financial statements at the
lower of cost or fair value less estimated selling costs and is presented net
of a valuation allowance as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other real estate owned $ 3,559 $ 5,243 $ 7,218
Less valuation allowance (90) (888) (1,494)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,469 $ 4,355 $ 5,724
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in valuation allowance are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 888 $ 1,494 $ 1,791
Valuation adjustments 155 344 1,719
Net chargeoffs (953) (950) (2,016)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 90 $ 888 $ 1,494
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture, fixtures and equipment $ 1,369 $ 1,484
Leasehold improvements 426 480
- -----------------------------------------------------------------------------------------------------------------
1,995 1,964
Less accumulated depreciation and amortization (1,442) (1,400)
- -----------------------------------------------------------------------------------------------------------------
Net premises and equipment $ 553 $ 564
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
December 31, 1996 Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------
8. INTEREST BEARING DEPOSITS
Saving accounts include Liquidity Plus and Rate Plus accounts, which
have no contractual maturity and for the years 1996, 1995 and 1994 earned
interest at rates ranging from 2.48% to 5.08% per annum, 2.52% to 5.89% per
annum and 2.52% to 5.13%, respectively. Certificates of deposit have maturities
ranging from 30 days to five years, and for the years ended December 31, 1996,
1995 and 1994 earned interest at rates ranging from 2.96% to 6.06% per annum,
2.0% to 6.95% per annum and 2.0% to 6.78% per annum, respectively. Certificates
of deposit of $100,000 or more at December 31, 1996, 1995 and 1994 were
approximately $3,933,000, $1,608,000, and $2,349,000, respectively.
The approximate contractual maturities of certificates of deposit as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CERTIFICATES OF CERTIFICATES OF TOTAL
DEPOSIT LESS THAN DEPOSIT OF $100,000 CERTIFICATES OF
(DOLLARS IN THOUSANDS) $100,000 OR MORE DEPOSIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 23,030 $ 1,110 $ 24,140
Over three months through twelve months 40,681 1,505 42,186
Over one year through five years 21,182 1,318 22,500
- --------------------------------------------------------------------------------------------------------------
Total maturities $ 84,893 $ 3,933 $ 88,826
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9. OTHER BORROWINGS
The Company has set up borrowing lines with two brokers aggregating $50
million in availability. The repayment terms on this short term debt range
from one day to two weeks. The interest rate paid can vary daily, but typically
approximates the federal funds rate plus 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. The balance outstanding as of December 31, 1996 was $10
million.
The Company also maintains a line of credit with the Federal Reserve
Bank with approximately $6.7 million available for borrowing at December 31,
1996. At December 31, 1996 there were no borrowings under this line of credit.
This agreement is secured by approximately $12.5 million in commercial real
estate loans at December 31, 1996.
- --------------------------------------------------------------------------------
10. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 593 $ (250) $ (805)
State 49 (123) -
- -------------------------------------------------------------------------------------------------------------------
642 (373) (805)
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 573 293 (766)
State 290 3 (343)
- -------------------------------------------------------------------------------------------------------------------
863 296 (1,019)
- -------------------------------------------------------------------------------------------------------------------
$ 1,505 $ (77) $(1,914)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
44
<PAGE> DECEMBER 31,
-----------------
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $2,706 $3,193
Other real estate owned 41 59
Prepaid taxes 493 -
Unrealized loss on securities available for sale 186 -
Reserve and accruals 390 1,261
------ ------
Total deferred tax assets 3,816 4,713
Less valuation allowance (386) (512)
------ ------
Deferred tax liabilities:
Deferred state taxes (128) (222)
------ ------
Net deferred tax asset $3,302 $3,979
------ ------
------ ------
A reconciliation of the provision for income taxes for 1996, 1995 and
1994 at the federal tax rate of 35% to the effective tax rate is as follows:
1996 1995 1994
----- ------ ------
Tax based on statutory tax rate 35.0% 35.0% 35.0%
State franchise tax expense, net of federal benefit 7.3% 7.3% -
Valuation allowance -8.0% -43.8% 12.1%
Other, net -0.9% -0.9% -
----- ------ ------
Effective tax rate 33.4% -2.4% -22.9%
----- ------ ------
----- ------ ------
- --------------------------------------------------------------------------------
11. CAPITAL STOCK
On December 18, 1995, all 561,000 shares (100%) of the 8.75% Series A
Noncumulative Convertible Preferred Stock $.01 par value was converted into
Common Stock of the Company in an exchange offer initiated by the Company.
Based on the exchange offer price of $7.58 per share, the 561,000 shares of
Preferred Stock were converted into 1,851,300 shares of Common Stock.
The exchange offer was made to preserve the current cash position of the
Company, provide the Convertible Preferred Shareholders an incentive to
exchange their shares of Convertible Preferred Stock and strengthen the
Company's capital structure by reducing the number of shares of Convertible
Preferred Stock outstanding.
The Company made three scheduled Preferred Stock dividend payments of
$920,000 or $1.64 per share in 1995 and $1,104,000 or $1.97 per share in 1994.
At December 31, 1996, 10,000,000 shares of $0.01 par value Common Stock
were authorized of which 2,959,698 shares were issued and outstanding.
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. 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.
- --------------------------------------------------------------------------------
12. STOCK PURCHASE AND OPTION PLANS
The 1993 Equity Incentive Plan (the "Plan") is designed to promote and
advance the interests of the Company and its shareholders by enabling the
Company to attract, retain and reward key employees. The Plan offers stock
and cash incentive awards, as well as stock options. The maximum number of
shares of common stock with respect to which awards may be granted under the
Plan, were initially 150,000 shares, as of December 1993. The number of
shares under the Plan are to be increased by two percent (2%) of the total
issued and outstanding shares of the Company's Common Stock as of the first
day of each year, beginning on January 1, 1995. The 2% per year increase of
shares available under the Plan continues through the term of the Plan which
expires on December 31, 2002. The maximum number of shares of Common Stock
to which awards may be granted under the Plan at December 31, 1996 is
231,124, of which 222,663 stock options have been issued and were outstanding
as of December 31, 1996. The number of common shares added, under the Plan,
on January 1, 1997 was 59,194, increasing the cumulative number of shares
that may be awarded under the Plan to 290,318 after January 1, 1997.
45
<PAGE>
The following is a summary of the activity in and outstanding employee
stock options during the year ended December 31, 1996 and 1995:
WEIGHTED
AVERAGE
PRICE EXERCISE
SHARES RANGE PRICE
- --------------------------------------------------------------------------------
Outstanding at December 31, 1993
Stock options granted 143,426 $6.00-$7.00 6.14
Stock options cancelled (1,000) - 6.00
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 142,426 $6.00-$7.00 6.14
- --------------------------------------------------------------------------------
Stock options granted 28,470 $3.50-$5.50 4.61
Stock options cancelled (10,933) - 6.00
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 159,963 $3.50-$7.00 5.90
- --------------------------------------------------------------------------------
Stock options granted 64,500 $7.50-$8.25 7.58
Stock options cancelled (1,800) - 6.00
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 222,663 $3.50-$8.25 6.37
- --------------------------------------------------------------------------------
The Employee Stock Purchase Plan allows employees to purchase shares of
the Company's Common Stock at the lower of fair market value at the beginning
of the Plan year or 90% of fair market value at the end of the Plan year.
Employees' purchases may not exceed the lesser of $25,000 or 15% of their
annual base compensation. Shares of Common Stock purchased under the Plan
are not issuable until the end of the year. The maximum number of shares of
Common Stock which may be issued under this plan is 33,330 shares, of which
5,950 were issued in January of 1996. The Company issued 6,921 shares of
common stock on January 2, 1997 for employees participating in the Plan
during the year ended December 31, 1996. There were 17,501 shares available
for issuance under the plan for 1997.
The Non-Employee Directors' Stock Purchase plan, approved by the
Company's stockholders at the 1996 annual meeting will be effectively
implemented by the Company in 1997. This plan allows the directors to
purchase stock of the Company from proceeds of their Directors' fees.
The following table summarizes information concerning currently
outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
ESTIMATED PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$3.50-$5.50 26,470 8.3 years 4.61 875 4.54
$6.00-$7.00 131,693 7.2 years 6.13 44,846 6.15
$7.50-$8.25 64,500 9.1 years 7.58 - -
----------- ----------- -------- ----------- --------
222,663 7.9 years 6.37 45,721 6.12
----------- ----------- -------- ----------- --------
The estimated fair value of options granted during 1996 and 1995 was
$3.28 and $2.00 per share, respectively. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and earnings per share for the year
ended December 31, 1996 and 1995 and would have been reduced to the pro forma
amounts indicated below:
46
<PAGE>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1996 1995
------------------------
Net Income to Common Shareholders
As reported $ 3,003 $ 3,244
Pro forma $ 2,957 $ 3,239
Fully diluted earnings per common share
As reported $ 1.00 $ 1.20
Pro forma $ 0.97 $ 1.20
Weighted average fully diluted common shares
outstanding (in thousands) 3,042 2,697
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The fair value of options granted under the Company's stock option
plan during 1996 and 1995 were estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used:
1996 1995
- ------------------------------------------------------------------------------
Dividend yield N/A N/A
Expected volatility 25% 45%
Risk free interest rate 6.25% 6.25%
Expected life 7 years 7 years
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
13. DIVIDENDS
As a Delaware corporation, Pacific Crest Capital, Inc., ("the
parent"), may pay common dividends or, if applicable, preferred dividends out
of surplus or, if there is no surplus, from net profits for the current and
preceding fiscal year. The parent has approximately $478,000 in cash and
repurchase agreements at December 31, 1996, however these funds are also
necessary to pay future operating expenses of the parent and possibly for
future capital infusions into Pacific Crest Investment. Pacific Crest
Investment currently does not have the ability, under California state law,
to pay dividends to the parent. Without dividends from Pacific Crest
Investment, the parent must rely solely on existing cash and investments.
Pacific Crest Investment's ability to pay dividends to the parent is
restricted by California state law, which requires that retained earnings be
available to pay the dividend. At December 31, 1996, Pacific Crest
Investment had deficit retained earnings of $358,000. 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. It is
unlikely that Pacific Crest Investment will pay dividends to its parent prior
to the third quarter of 1997.
- ------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its office facilities. Future minimum rental
payments required under operating leases that have initial and remaining
noncancelable terms in excess of one year are approximately as follows as of
December 31, 1996:
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
1997 $ 668
1998 643
1999 453
2000 193
Thereafter 75
- ------------------------------------------------------------------------------
TOTAL LEASE COMMITMENTS $ 2,032
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Certain leases contain rental escalation clauses based on increases
in the Consumer Price Index and renewal options which may be exercised by the
Company. Rent expense for the years ended December 31, 1996, 1995 and 1994
totaled $754,000, $757,000 and $686,000, respectively.
47
<PAGE>
UNFUNDED COMMITMENTS
Pacific Crest Investment makes unfunded commitments with its real
estate term lending activities for building and seismic improvements to
property. As of December 31, 1996, Pacific Crest Investment had unfunded
commitments in the real estate term loan portfolio of $1.6 million.
LITIGATION
There are several lawsuits and claims pending against the Company
which management considers incidental to normal operation. Management, after
review, including consultation with counsel, believes that the ultimate
liability, if any, which could arise from these lawsuits and claims would not
materially affect the financial position, results of operations or liquidity
of the Company.
- ------------------------------------------------------------------------------
15. 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 less treasury shares
outstanding at December 31, 1996 and December 31, 1995. The number of common
shares outstanding was 2,929,698 at December 31, 1996 and 2,953,748 at
December 31, 1995.
The primary earnings of $1.00 and fully diluted earnings per common
share of $1.00 for the year ending December 31, 1996 were determined by
dividing net income for the year ending December 31, 1996 of $3,003,000 by
the weighted average common shares outstanding of 3,004,000 and the weighted
average fully diluted common shares outstanding of 3,042,000.
The primary earnings per common share of $2.01 for the year ending
December 31, 1995 was determined by decreasing the net income of $3,244,000
by the amount of preferred dividends declared for the year ending December
31, 1995 of $920,000, resulting in net income applicable to common stock of
$2,324,000 for the year ending December 31, 1995. This amount was then
divided by the weighted average common shares outstanding of 1,158,000 for
the year ended December 31, 1995.
The fully diluted earnings per common share of $1.20 for the year
ending December 31, 1995 was determined by dividing the net income for the
year ending December 31, 1995 of $3,244,000 by the weighted average fully
diluted common shares outstanding of 2,697,000 for the year ended December
31, 1995.
- ------------------------------------------------------------------------------
16. REGULATORY MATTERS AND RESTRICTIONS ON SHAREHOLDERS' EQUITY
Pacific Crest Investment is subject to legal and regulatory
requirements of the California Industrial Loan Law and the FDIC. These legal
and regulatory requirements specify certain minimum capital ratios and place
limits on the size and type of loans Pacific Crest Investment may make.
The aggregate amount of thrift deposits outstanding is restricted
under the California Industrial Loan Law. Industrial loan companies may be
authorized to accept thrift deposits in amounts ranging from three to twenty
times their restricted equity. Pacific Crest Investment has been authorized
by the California Department of Corporations (DOC) to accept thrift deposits
of up to 18.5 times its restricted shareholder's equity.
Pacific Crest Investment is subject to various regulatory capital
requirements administered by the FDIC. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the FDIC that, if undertaken, could have a direct
material effect on Pacific Crest Investment's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, Pacific Crest Investment must meet specific capital
guidelines that involve quantitative measures of Pacific Crest Investment's
assets, liabilities and certain off balance sheet items as calculated under
regulatory accounting practices. Pacific Crest Investment's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Pacific Crest Investment to maintain minimum amounts and
ratios as set forth in the table below of total and Tier 1 capital to
risk-weighted assets of $236.8 million and $212.0 million at December 31,
1996 and 1995, respectively, and of Tier 1 capital to average quarterly
assets of $283.9 million and $244.5 million at December 31, 1996 and 1995,
respectively. Management believes as of December 31, 1996, that Pacific
Crest Investment meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized Pacific Crest Investment as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, Pacific Crest Investment must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1
48
<PAGE>
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
institution's category.
Pacific Crest Investment's actual capital amounts and ratios are
also presented in the table. No amounts were deducted from capital for
interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- -------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to risk weighted assests) $ 27,389 11.56% $ 18,947 Greater than or equal to 8% $ 23,683 Greater than or equal to 10%
Tier 1 Capital
(to risk weighted assets) $ 24,423 10.31% $ 9,475 Greater than or equal to 4% $ 14,210 Greater than or equal to 6%
Tier 1 Capital
(to average quarterly assets) $ 24,423 8.60% $ 11,357 Greater than or equal to 4% $ 14,196 Greater than or equal to 5%
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
Total Capital
(to risk weighted assets) $ 22,764 10.74% $ 16,958 Greater than or equal to 8% $ 21,198 Greater than or equal to 10%
Tier 1 Capital
(to risk weighted assets) $ 20,091 9.48% $ 8,479 Greater than or equal to 4% $ 12,719 Greater than or equal to 6%
Tier 1 Capital
(to average quarterly assets) $ 20,091 8.22% $ 9,779 Greater than or equal to 4% $ 12,224 Greater than or equal to 5%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, Pacific Crest Investment was subject to a Memorandum of
Understanding ("MOU") with the FDIC and the Commissioner, which imposed
various covenants and restrictions on the Company. The Company's management
believes it was in compliance with the MOU during 1995 and 1996. The MOU was
terminated on February 5, 1997, following regulatory examinations by the FDIC
and the Commission that were completed during the fourth quarter of 1996.
17. RETIREMENT SAVINGS AND SUPPLEMENTAL BENEFIT PLANS
Employees of Pacific Crest Investment participate in the Company's
401(k) Plan (the "Retirement Plan"). The Retirement Plan covers
substantially all employees. Employees may contribute up to 15% of their
salary up to a maximum of $9,240 for calendar 1994 and 1995, and $9,500 for
1996. Pacific Crest Investment matches employee contribution amounts equal to
100% of the first 6% of compensation contributed by each participant.
Amounts charged to expense under the Retirement Plan for these matching
contributions were $167,000, $141,000 and $120,000 for the years ended
December 31, 1996, 1995 and 1994.
The top four executive officers of Pacific Crest Investment
participated in The Company's Supplemental Executive Retirement Plan (the
"Supplemental Plan"). This plan provides for annual retirement benefits that
would be payable to the executives under the plan on their normal retirement
date. The plan provides for the offset for social security benefits and
matching 401(k) contributions made under the Pacific Crest Capital, Inc.
Retirement Plan. Offsets for social security and 401(k) matching
contributions may be substantial. Amounts charged to expense under the
Supplemental Plan were $94,000, $80,000 and ($3,000) for the years ended
December 31, 1996, 1995 and 1994.
49
<PAGE>
18. PARENT COMPANY
The following represents the financial statements of Pacific
Crest Capital, Inc. (parent company only) as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 216 $ 80
Repurchase agreements 262 786
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 478 866
Other assets 56 -
Investment in Pacific Crest Investment 24,165 21,291
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 24,699 $ 22,157
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 231 $ 205
Common stock 27,583 27,813
Accumulated deficit (2,858) (5,861)
Net unrealized loss on available for sale securities (257) -
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity 24,468 21,952
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 24,699 $ 22,157
- ----------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Interest income $ 26 $ 70
Income from subsidiary 3,132 3,672
General and administrative expenses 246 496
- ----------------------------------------------------------------------------------------------------------------------
Net income before taxes 2,912 3,246
Income tax benefit 91 2
- ----------------------------------------------------------------------------------------------------------------------
Net income 3,003 3,244
Preferred dividends declared - (920)
- ----------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 3,003 $ 2,324
- ----------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 3,003 $ 3,244
Adjustments to reconcile net income to net cash used by operating activities:
Net change to other assets and accrued expenses (29) 29
Equity in (income) from subsidiary (3,132) (3,672)
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used by) operating activities (158) (399)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of U.S. government sponsored agency securities - 323
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities - 323
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Preferred stock cash dividends - (920)
Proceeds from issuance of common stock 25 -
Purchase of treasury stock, at cost (255) -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (230) (920)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (388) (996)
Cash and cash equivalents at beginning of period 866 1,862
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 478 $ 866
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Unaudited quarterly financial data for 1996 and 1995 is as follows:
THREE MONTHS ENDED
------------------
(DOLLARS IN THOUSANDS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------------
1996:
<S> <C> <C> <C> <C>
Total interest income $ 6,667 $ 6,563 $ 6,582 $ 6,755
Total interest expense 3,357 3,376 3,324 3,443
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 3,310 3,187 3,258 3,312
Provision for loan losses 525 575 550 267
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for loan losses 2,785 2,612 2,708 3,045
Noninterest income 163 531 669 118
Valuation adjustment to other real estate owned 65 5 - 85
Other real estate owned expense 8 15 72 55
General and administrative expenses 1,714 1,917 2,072 2,116
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,161 1,206 1,233 907
Income tax provision 450 460 471 124
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 711 $ 746 $ 762 $ 783
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Primary earnings per common share $ 0.24 $ 0.25 $ 0.25 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common share $ 0.24 $ 0.25 $ 0.25 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
(DOLLARS IN THOUSANDS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------------
1995:
<S> <C> <C> <C> <C>
Total interest income $ 5,864 $ 5,704 $ 5,948 $ 6,284
Total interest expense 2,983 2,991 2,958 3,153
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 2,881 2,713 2,990 3,131
Provision for loan losses 171 (64) 797 56
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for loan losses 2,710 2,777 2,193 3,075
Noninterest income 125 257 817 122
Valuation adjustment to other real estate owned 26 140 85 95
Other real estate owned expense 45 50 38 70
General and administrative expenses 2,175 2,156 1,967 2,065
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 589 688 920 969
Income tax provision (benefit) 1 - (78) -
- ------------------------------------------------------------------------------------------------------------------------
Net income 588 688 998 969
Preferred dividends declared 307 307 306 -
- ------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 281 $ 381 $ 692 $ 696
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Primary earnings per common share $ 0.25 $ 0.35 $ 0.63 $ 0.73
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common share $ 0.22 $ 0.26 $ 0.38 $ 0.36
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC CREST CAPITAL, INC.
We have audited the accompanying consolidated balance sheet of Pacific Crest
Capital, Inc. and subsidiary (the "Company") as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pacific Crest
Capital, Inc. and subsidiary at December 31, 1996 and the consolidated
results of their operations and their cash flows for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 5, 1997
52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC CREST CAPITAL, INC.
We have audited the accompanying consolidated balance sheet of Pacific Crest
Capital, Inc. and subsidiary as of December 31, 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pacific Crest
Capital, Inc. and subsidiary at December 31, 1995 and the consolidated
results of their operations and their cash flows for the years ended December
31, 1995 and 1994, in conformity with generally accepted accounting
principles.
As discussed in the Notes to Consolidated Financial Statements, in 1994 the
Company changed its method of accounting for investment securities.
ERNST & YOUNG LLP
Los Angeles, California
February 1, 1996
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In March 1996, the Company terminated its engagement of Ernst & Young
LLP, and retained Deloitte & Touche LLP, as its independent public
accountants to audit its financial statements for the year ended December 31,
1996. The decision to terminate the Company's engagement of Ernst & Young
LLP and select Deloitte & Touche LLP was unanimously recommended by the
Company's Audit Committee and approved by the Company's Board of Directors.
The Company has selected Deloitte & Touche LLP to serve as its independent
accountants for the 1997 fiscal year.
During the two most recent fiscal years of the Company, there were no
adverse opinions, disclaimers of opinion or qualifications or modifications
as to uncertainty, audit scope or accounting principles regarding the reports
of Ernst & Young LLP on the Company's financial statements. There were no
reportable disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference is the information from the section
entitled "Election of Directors" from the Company's definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Reference is also made in connection with the
list of Executive Officers, which is provided under Section 4(a), "Executive
Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference is the information from the sections
entitled "Election of Directors - Compensation of Board of Directors" and
"Executive Compensation" from the Company's definitive Proxy Statement, to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference is the information from the section
entitled "Beneficial Ownership of Principal Stockholders and Management" from
the Company's definitive Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference is the information from the section
entitled "Election of Directors - Executive Compensation -Compensation
Committee Interlocks and Insider Participation" and the information from the
section entitled "Certain Transactions" from the Company's definitive Proxy
Statement, to be filed with the Securities and Exchange Commission within 120
days after December 31, 1996.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 AND 2. FINANCIAL STATEMENTS
The financial statements listed on the Index to Financial Statements
included under "Item 8. Financial Statements and Supplemental
Data." are filed as part of this Form 10-K. All schedules have
been omitted since the required information is not present or is
not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements and related notes.
3. LIST OF EXHIBITS.
NUMBER DESCRIPTION
- ------ -----------
3(i).1 Amended and restated Certificate of Incorporation (3)
3(ii).1 Amended and restated Bylaws of Pacific Crest Capital, Inc. (3)
10.1 Form of Indemnification Agreement (4) *
10.2 Pacific Crest Capital, Inc. 1993 Equity Incentive Plan (6) (7) *
10.3 Pacific Crest Capital, Inc. Retirement Plan and Trust (4) *
10.4 1993 Employee Stock Purchase Plan (4) (8) *
10.5 Form of Split Dollar Agreement (4) *
10.6 Pacific Crest Capital, Inc. Supplemental Executive Retirement
Plan (4) *
10.7 Form of Distribution Agreement (3)
10.8 Form of Tax Sharing Agreement between Pacific Crest Capital, Inc. and
The Foothill Group, Inc. (4)
10.9 Office Lease by and between Wilshire Masterpiece, Inc. and Pacific
Crest Investment and Loan, dated October 31, 1990 (Beverly Hills
Branch) (5)
10.10 Office Lease between Fifth and Beech Associates and Pacific Crest
Investment and Loan (San Diego Branch) (5)
10.11 Shopping Center Lease dated April 18, 1978, between Frances Sarno and
Robert Sarno, as Trustees, and Le Chateau Boutiques, Inc. (Encino
Branch) (5)
10.11.1 Assignment, Assumption and Consent to Assignment of Lease dated October
16, 1980, between Pacific Crest Investment and Loan, Frances Sarno and
Robert Sarno, as Trustees, and Le Chateau Boutiques, Inc. (5)
10.11.2 Exercise of Option to Renew Lease dated January 23, 1990 (5)
10.12 Lease dated April 22, 1992, between The Klussman Family Trust and
Pacific Crest Investment and Loan (Agoura Hills office) (5)
10.14.1 Employment Agreement between the Company and Gary Wehrle (6) *
10.14.2 Employment Agreement between the Company and Barry Otelsberg (6) *
10.14.3 Employment Agreement between the Company and Lyle Lodwick (6) *
10.14.4 Employment Agreement between the Company and Robert J. Dennen (6) *
10.14.5 Employment Agreement between the Company and Gonzalo Fernandez (9) *
10.15 1996 Non-Employee Directors' Stock Plan (10) *
21.1 Subsidiary of the Registrant (9)
23.1 Consent of Independent Auditors (1)
23.2 Consent of Independent Auditors (1)
27 Financial Data Schedule (1)
______________
* Management contracts and compensatory plan or arrangements.
(1) Filed herewith
(2) Reserved
(3) Incorporated herein by reference from Registrant's Amendment No. 2 to Form
S-1 Registration Statement No. 33-68718, filed December 3, 1993.
(4) Incorporated herein by reference from Registrant's Amendment No. 1 to Form
S-1 Registration Statement No. 33-68718, filed October 28, 1993.
(5) Incorporated herein by reference from Registrant's Form S-1 Registration
Statement No. 33-68717, filed September 13, 1993.
(6) Incorporated herein by reference from Registrant's Annual Report on Form
10-K dated December 31, 1993, filed March 31, 1994.
(7) Incorporated herein by reference from Registrant's Form S-8 Registration
Statement No. 33-87990 filed December 27, 1994. Pacific Crest Capital,
Inc. 1993 Equity Incentive Plan.
(8) Incorporated herein by reference from Registrant's Form S-8 Registration
Statement No. 33-87988 filed December 27, 1994. Pacific Crest Capital,
Inc. 1995 Employee Stock Purchase Plan.
(9) Incorporated herein by reference from Registrant's Annual Report on Form
10K dated December 31, 1994 filed March 30, 1995.
(10) Incorporated herein by reference from Registrant's Form S-8 Registration
Statement No. 333-23849, filed March 23, 1997. Pacific Crest Capital,
Inc. 1996 Non-Employee Directors' Stock Plan.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Item 14(a)(3).
56
<PAGE>
APPENDIX B
<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 June 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 CAPTIAL, 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 (Zip Code)
offices)
(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 August 13, 1997.
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
Common Stock, $.01 par value 2,968,449
<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
Part II - OTHER INFORMATION.............................................. 24
SIGNATURES............................................................... 25
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,683 $ 2,572
Securities purchased under resale agreements 221 262
- -------------------------------------------------------------------------------
Cash and cash equivalents 1,904 2,834
- -------------------------------------------------------------------------------
U.S. government sponsored agency securities (Note 5):
Held to maturity, at amortized cost 40,962 30,960
Available for sale, at market 95,368 52,534
Loans
Commercial mortgage 221,149 206,172
Business Loans - SBA 4,289 2,363
Residential mortgage 1,595 1,596
Commercial business/other 633 1,581
- -------------------------------------------------------------------------------
Total loans 227,666 211,712
Deferred loan fees 603 617
Allowance for loan losses 3,795 3,400
- -------------------------------------------------------------------------------
Net loans 223,268 207,695
Accrued interest receivable 2,958 1,966
Prepaid expenses and other assets 914 772
Investment in joint venture 95 -
Deferred income taxes 3,197 3,302
Other real estate owned 1,914 3,469
Premises and equipment 546 553
- -------------------------------------------------------------------------------
Total assets $ 371,126 $ 304,085
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings accounts $ 181,657 $ 157,789
Certificates of deposit 105,020 88,826
Money market checking 18,277 20,080
- -------------------------------------------------------------------------------
Total deposits 304,954 266,695
Other borrowings 36,900 10,000
Accrued interest and other liabilities 2,984 2,922
- -------------------------------------------------------------------------------
Total liabilities 344,838 279,617
- -------------------------------------------------------------------------------
Shareholders' equity (Notes 6 and 7):
Preferred stock $.01 par value 2,000,000
shares authorized, no shares issued and
oustanding at June 30, 1997 and December 31, 1996
Common stock, $.01 par value, 10,000,000
shares authorized 2,968,449 shares issued and
outstanding at June 30, 1997, 2,959,698 shares
issued and outstanding at December 31, 1996 27,910 27,838
Accumulated deficit (1,129) (2,859)
Unrealized loss on securities available for sale, net (238) (256)
Common stock in treasury, at cost 30,000 shares (255) (255)
- -------------------------------------------------------------------------------
Total shareholders' equity 26,288 24,468
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 371,126 $ 304,085
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Book value per common share (Note 3) $ 8.95 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans, including fees $ 5,960 $ 5,240 $ 11,700 $ 10,922
Securities purchased under resale agreements 23 725 27 1,672
Certificates of deposit - 4 - 8
U.S. government sponsored agency securities
Available for sale 1,307 301 2,426 301
Held to maturity 873 293 1,687 327
- ------------------------------------------------------------------------------------------------------------
Total interest income 8,163 6,563 15,840 13,230
Interest expense:
Savings accounts 2,325 2,343 4,434 4,807
Certificates of deposit 1,488 806 2,854 1,636
Money market checking accounts 221 227 451 290
Other borrowings 355 - 604 -
- ------------------------------------------------------------------------------------------------------------
Total interest expense 4,389 3,376 8,343 6,733
- ------------------------------------------------------------------------------------------------------------
Net interest income 3,774 3,187 7,497 6,497
Provision for loan losses 300 575 530 1,100
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,474 2,612 6,967 5,397
Noninterest income:
Gain on investment securities - 350 - 350
Other noninterest income 349 181 450 344
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 349 531 450 694
- ------------------------------------------------------------------------------------------------------------
Noninterest expense:
Valuation adjustments to other real estate owned 210 5 340 70
Other real estate owned expenses 4 15 18 23
Salaries and employee benefits 1,276 1,042 2,522 2,105
Net occupancy expenses 393 431 754 782
FDIC insurance premiums 29 17 54 33
Credit and collection expenses 12 13 12 25
Communication and data processing 157 137 322 256
Other expenses 237 277 519 430
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,318 1,937 4,541 3,724
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 1,505 1,206 2,876 2,367
Income tax provision (Note 2) 599 460 1,146 910
- ------------------------------------------------------------------------------------------------------------
Net income $ 906 $ 746 $ 1,730 $ 1,457
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Per share data (Note 3):
Primary earnings per common share $ 0.30 $ 0.25 $ 0.57 $ 0.49
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding (in thousands) 3,049 3,005 3,044 3,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common share $ 0.30 $ 0.25 $ 0.57 $ 0.49
- ------------------------------------------------------------------------------------------------------------
Weighted average fully diluted common shares
outstanding (in thousands) 3,057 3,024 3,051 3,015
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
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 employeee stock
purchase plan 6 52 - - - -
Issuance of stock under non-employee
directors' stock purchase plan 2 20 - - - -
Net changes in unrealized loss on
securities available for sale, net of
taxes - - - - 18 -
Net income - - - - - 1,730
- -----------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 2,968 $27,910 (30) $(255) $ (238) $ (1,129)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,730 $ 1,457
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Provision for loan losses 530 1,100
Valuation adjustments to OREO 340 70
Loss on investment in joint venture 5 -
Depreciation and amortization 126 115
Amortization of deferred loan fees (172) (677)
Amortization/accretion of securities (8) 47
Changes in operating assets and liabilities:
Accrued interest receivable (992) (247)
Prepaid expenses and other assets (142) (816)
Deferred income taxes 91 415
Accrued interest and other liabilities 62 (406)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,570 1,058
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored agency securities:
Held to maturity (14,997) (33,900)
Available for sale (55,799) (54,590)
Proceeds from U.S. government sponsored agency securities:
Held to maturity 5,000 8,000
Available for sale 13,000 16,031
Net (increase)/decrease in loans (17,315) 5,483
Proceeds from sale of loans - 7,141
Proceeds from sale of notes 600 -
Investment in joint venture (100) -
Purchases of equipment and leasehold improvements, net (119) (80)
Proceeds from sale of other real estate owned 1,999 2,420
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (67,731) (49,495)
FINANCING ACTIVITIES:
Net increase/(decrease) in certificates of deposit 16,194 (2,308)
Net (decrease)/increase in money market checking (1,803) 21,154
Net increase in savings accounts 23,868 11,424
Net increase in other borrowings 26,900 -
Proceeds from the issuance of common stock 72 25
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 65,231 30,295
Net decrease in cash and cash equivalents (930) (18,142)
Cash and cash equivalents at beginning of period 2,834 56,167
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,904 $ 38,025
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,220 $ 6,745
Income taxes $ 965 $ 670
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ 657 $ 1,179
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCCOMPANYING NOTES.
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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
June 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 June 30, 1997 and 1996, the Company's provision
for income taxes was $599,000 and $460,000, or 39.8% and 38.1%, respectively.
For the six months ended June 30, 1997 and 1996, the Company's provision for
income taxes was $1,146,000 and $910,000, or 39.8% 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 at June 30,
1997 and December 31, 1996. The number of common shares outstanding was
2,968,449 at June 30, 1997 and 2,959,698 at December 31, 1996.
The primary earnings per common share for the quarter and six months
ended June 30, 1997 were determined by dividing net income of $906,000 and
$1,730,000, respectively, by the weighted average common shares outstanding
of 3,049,000 and 3,044,000, respectively. The fully diluted earnings per
common share for the quarter and six months ended June 30, 1997, was
determined by dividing net income of $906,000 and $1,730,000, respectively,
by the weighted average fully diluted common shares outstanding of 3,057,000
and 3,051,000, 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 quarter and six months
ended June 30, 1996 were determined by dividing net income of $746,000 and
$1,457,000, respectively, by the weighted average common shares outstanding
of 3,005,000 and 3,000,000, respectively. The fully diluted earnings per
common share for the quarter and six months ended June 30, 1996, was
determined by dividing net income of $746,000 and $1,457,000, respectively,
by the weighted average fully diluted common shares outstanding of 3,024,000
and 3,015,000, 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.
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
5
<PAGE>
potential common stock. The objective of SFAS No. 128 is to simplify the
computation of EPS and to make the U.S. standard for computing EPS more
compatible with the standards of other countries. 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 should be
effective for financial statements for both interim and annual periods ending
after December 15, 1997, and earlier application is not permitted. The
Company's analysis of SFAS No. 128 concluded that it would have no impact on
the EPS disclosures contained herein.
- --------------------------------------------------------------------------------
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 June 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. governmental sponsored agency securities
Held to maturity $ 40,962 $ 25 $ (152) $ 40,835
Available for sale 95,778 5 (415) 95,368
- --------------------------------------------------------------------------------------------------
Total investment securities $ 136,740 $ 30 $ (567) $ 136,203
- --------------------------------------------------------------------------------------------------
</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 between three months and 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 June 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 $ 19,997 $ 19,959 7.60% 8.7 years
Due after ten years 20,965 20,876 7.88% 14.5 years
-------------------------------------------------------
Total held-to-maturity securities: $ 40,962 $ 40,835 7.75% 11.7 years
-------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
Due from one to five years $ 15,000 $ 14,930 6.74% 4.8 years
Due from five to ten years 80,778 80,438 7.13% 7.6 years
-------------------------------------------------------
Total available-for-sale securities: $ 95,778 $ 95,368 7.07% 7.2 years
-------------------------------------------------------
-------------------------------------------------------
Total investment securities $ 136,740 $ 136,203 7.27 8.5 years
-------------------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $38.8 million
were pledged to secure other borrowings aggregating $36.9 million at June 30,
1997.
6
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
- --------------------------------------------------------------------------------
At June 30, 1997, 10,000,000 shares of $0.01 par value common stock were
authorized of which, 2,968,449 shares were issued and outstanding. The
Company issued 6,921 shares of common stock on January 2, 1997 for employees
participating in the Employee Stock Purchase Plan. The Company also issued
748 shares of common stock on January 23, 1997 and 782 shares of common stock
on May 8, 1997, for the non-employee directors participating in the
Non-Employee Directors' Stock Purchase Plan. The Company issued 300 shares of
common stock under the Equity Incentive Plan for the six months ended June
30, 1997.
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 June 30, 1997, and December 31,
1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS(1) AT JUNE 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% 7.07% 3.07% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 10.00% 6.00% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 11.25% 3.25% 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 $233,000 in cash plus
investments less current liabilities at June 30, 1997. Without dividends from
Pacific Crest Bank, Pacific Crest must rely solely on existing cash and
investments which total $243,000 at June 30, 1997. This amount is also
necessary to pay future operating expenses and existing current liabilities
of Pacific Crest, and for the future possible infusion of capital into
Pacific Crest Bank.
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
$1.5 million at June 30, 1997. The total amount of retained earnings is
unrestricted and available for dividend payments.
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 six months ended June 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 table sets forth certain selected financial data
concerning the Company for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
---------------------------------------------------------
(DOLLARS IN THOUSANDS) 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCES
Average loans $ 221,270 $ 210,606 $ 195,691 $ 183,738 $ 189,004
Average earning assets 342,090 316,846 276,083 273,636 279,720
Average assets 348,968 325,690 282,341 282,184 287,411
Average deposits 297,936 280,133 254,264 256,359 262,243
Average equity 25,423 24,739 24,108 23,483 22,894
PERFORMANCE RATIOS
Return on average assets(1) 1.04% 1.02% 1.11% 1.08% 1.04%
Return on average common equity(1) 14.25% 13.32% 12.99% 12.98% 15.03%
Net interest margin(2) 4.42% 4.77% 4.77% 4.74% 4.58%
CAPITAL AND LEVERAGE RATIOS(3)
Risk-based capital ratios:
Tier one 10.00% 10.23% 10.31% 11.33% 10.90%
Total 11.25% 11.48% 11.56% 12.59% 12.16%
Leverage capital ratio(4) 7.07% 7.36% 7.96% 8.92% 7.87%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.67% 1.62% 1.61% 1.69% 1.82%
Allowance for loan losses to nonaccrual loans 176.10% 506.98% 245.31% 192.09% 77.57%
Total nonperforming assets to total assets(5) 1.10% 1.02% 1.60% 1.97% 2.51%
- ---------------------------------------------------------------------------------------------------------
</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 six months ended June 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 June 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 $ 221,270 $ 5,960 10.80% $ 189,004 $ 5,240 11.15%
Repurchase agreements 1,694 23 5.45% 55,453 729 5.29%
U.S. government sponsored
agency securities:
Available for sale 73,769 1,307 7.11% 19,306 301 6.27%
Held to maturity 45,357 873 7.72% 15,957 293 7.39%
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 342,090 8,163 9.57% 279,720 6,563 9.44%
OREO 2,316 4,391
Other noninterest-earning assets 8,175 8,033
Less allowance for loan losses 3,613 4,733
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 348,968 $ 287,411
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 177,041 $ 2,325 5.27% $ 183,568 $ 2,343 5.13%
Certificates of deposit 102,597 1,488 5.82% 60,158 806 5.39%
Money market checking 18,298 221 4.84% 18,517 227 4.93%
Other borrowings 24,685 355 5.77% - - -
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 322,621 4,389 5.46% 262,243 3,376 5.18%
Non interest-bearing liabilities 924 2,274
Shareholders' equity 25,423 22,894
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 348,968 $ 287,411
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,774 $ 3,187
Net interest rate spread 4.11% 4.26%
Net interest-earning assets $ 19,469 $ 17,477
Net interest margin 4.42% 4.58%
Average interest-earning assets to
average interest-bearing liabilities 106.0% 106.7%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 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 $ 215,968 $ 11,700 10.92% $ 192,010 $ 10,922 11.44%
Repurchase agreements 1,019 27 5.34% 63,670 1,680 5.31%
U.S. government sponsored
agency securities:
Available for sale 68,746 2,426 7.12% 9,653 301 6.27%
Held to maturity 43,805 1,687 7.77% 9,279 327 7.09%
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 329,538 15,840 9.69% 274,612 13,230 9.69%
OREO 2,847 4,380
Other noninterest-earning assets 9,318 7,912
Less allowance for loan losses 3,569 4,808
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 338,134 $ 282,096
- ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 170,686 $ 4,434 5.24% $ 185,194 $ 4,807 5.22%
Certificates of deposit 99,643 2,854 5.78% 60,070 1,636 5.48%
Money market checking 18,755 451 4.85% 11,845 290 4.92%
Other borrowings 21,437 604 5.68% - - -
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 310,521 8,343 5.42% 257,109 6,733 5.27%
Non interest-bearing liabilities 2,530 2,454
Shareholders' equity 25,083 22,533
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 338,134 $ 282,096
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,497 $ 6,497
Net interest rate spread 4.27% 4.42%
Net interest-earning assets $ 19,017 $ 17,503
Net interest margin 4.59% 4.76%
Average interest-earning assets to
average interest-bearing liabilities 106.1% 106.8%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</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 Six Months Ended
June 30, 1997 June 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 $ 873 $(153) $ 720 $ 1,314 $(536) $ 778
Repurchase agreements (730) 24 (706) (1,639) 6 (1,653)
U.S. government agency securities:
Available for sale 960 46 1,006 2,081 44 2,125
Held to maturity 565 15 580 1,327 33 1,360
- ---------------------------------------------------------------- --------------------------
Total change in interest income 1,668 (68) 1,600 3,063 (453) 2,610
- ---------------------------------------------------------------- --------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts (84) 66 (18) (376) 3 (373)
Certificates of deposit 611 71 682 1,129 89 1,218
Money market checking (3) (3) (6) 166 (5) 161
Other borrowings 355 - 355 604 - 604
- ---------------------------------------------------------------- --------------------------
Total change in interest expense 879 134 1,013 1,523 87 1,610
- ---------------------------------------------------------------- --------------------------
Changes in net interest income $ 789 $(202) $ 587 $ 1,540 $(540) $ 1,000
- ---------------------------------------------------------------- --------------------------
</TABLE>
DETAILED COMPARISON OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $906,000 (or $0.30 per common share on a fully diluted
basis) for the quarter ended June 30, 1997, compared to $746,000 (or $0.25 per
common share on a fully diluted basis) for the corresponding period in 1996.
Net income for the six months ended June 30, 1997 was $1.7 million (or $0.57
per common share on a fully diluted basis) compared to $1.5 million (or $0.49
per common share on a fully diluted basis) for the corresponding period in
1996. The increase in net income during the quarter and six months ended June
30, 1997, was primarily the result of an increase in average interest-earning
assets, and the reduced provision for loan losses, between the 1997 and 1996
periods.
NET INTEREST INCOME
Net interest income increased by $587,000, or 18.4%, to $3.8 million for
the quarter ended June 30, 1997, compared to the same period of 1996. Net
interest income increased by $1.0 million, or 15.4%, to $7.5 million for the
six months ended June 30, 1997, compared to the same period in 1996. The
increase in net interest income during the quarter and six months ended June
30, 1997 was primarily the result of an increase of $62.4 million and $54.9
million, respectively, in the Company's average balance of interest-earning
assets, between the 1997 and 1996 periods.
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 June 30, 1997 and 1996 was 4.11% and 4.26%,
respectively, and for the six months ended June 30, 1997 and 1996, 4.27% and
4.42%, respectively. The decline in the spread between the 1996 and 1997
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 average interest-earning assets. The
net interest margin for the quarter ended June 30, 1997 and 1996, was 4.42%
and 4.58%, respectively, and for the six months ended June 30, 1997 and 1996,
4.59% and 4.76%, 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 other
borrowings which, on average, cost the Company more than deposits.
11
<PAGE>
TOTAL INTEREST INCOME
Total interest income increased by $1.6 million, or 24.4%, to $8.2
million for the quarter ended June 30, 1997, and increased by $2.6 million,
or 19.7%, to $15.8 million for the six months ended June 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 $62.4 million and $54.9
million, respectively, for the quarter and six months ended June 30, 1997,
over the comparable periods in 1996. The overall yields on the Company's
interest-earning assets increased by 13 basis points, to 9.57% from 9.44%,
for the quarter ended June 30, 1997, compared to the same period of 1996. For
the six months ended June 30, 1997, the yield remained at the June 30, 1996
level of 9.69%.
Interest income on loans increased by $720,000 to $6.0 million, a 13.7%
increase for the quarter ended June 30, 1997, compared to the same period in
1996. Interest income on loans increased by $778,000 to $11.7 million, a 7.1%
increase for the six months ended June 30, 1997, compared to the same period
in 1996. Contributing to the increase in loan interest income was an increase
of $32.3 million in average loan balances for the second quarter of 1997
compared to the second quarter of 1996, and an increase of $24.0 million in
average loan balances for the six months ended June 30, 1997 compared to the
first six months of 1996. Partially offsetting these increases were declines
in the average yields of 35 basis points for the quarter ended June 30, 1997
and 52 basis points for the six months ended June 30, 1997, compared to the
same periods in 1996. The primary reason for the decline in the overall loan
portfolio yield is due to lower yielding loans being added to the portfolio
subsequent to June 30, 1996. The decline in yields on new loans reflects
increased competitive rate pressure in the marketplace.
Interest earned on the Company's securities purchased under resale
agreements decreased by $706,000 and $1.7 million, respectively, for the
quarter and six months ended June 30, 1997, when compared to the same periods
in 1996. These decreases were primarily attributable to decreases of $53.8
million and $62.7 million, respectively, in the average balances during the
quarter and six months ended June 30, 1997 compared to 1996. The decline in
the average balance of repurchase agreements during 1997 as compared to 1996,
reflects the shift in the Company's investments to U.S. government sponsored
agency securities from the lower yielding securities purchased under resale
agreements. These decreases were partially offset by increases in the yield
of 16 basis points for the quarter and three basis points for the six months
ended June 30, 1997. These increases reflect the change in market interest
rates between these periods.
Interest income on U.S. government sponsored agency securities
classified as available-for-sale increased by $1.0 million to $1.3 million
for the quarter ended June 30, 1997, compared to the same period in 1996.
Interest income on securities classified as available-for-sale increased by
$2.1 million to $2.4 million for the six months ended June 30, 1997, compared
to the same period in 1996.
Interest income on U.S. government sponsored agency securities
classified as held-to-maturity increased by $580,000 to $873,000 for the
quarter ended June 30, 1997, compared to the same period in 1996. Interest
income on securities classified as held-to-maturity increased by $1.4 million
to $1.7 million for the six months ended June 30, 1997, compared to the same
period in 1996.
The increased interest income on U.S. government sponsored agency
securities for the quarter and six months ended June 30, 1997, was primarily
the result of the increase in the average balances of securities classified
as available-for-sale and those classified as held-to-maturity, over the same
periods in 1996 and, to a lesser extent, due to improved security yields as
illustrated in the preceding table. The increased average balances reflect
the Company's effort to optimize earnings by more effectively leveraging
capital, with the purchase of U.S. government sponsored agency securities,
and an investment shift from securities purchased under resale agreements, to
the higher yielding agency securities.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter and six months ended June 30,
1997 increased by $1.0 million and $1.6 million, or 30.0% and 23.9%,
respectively, compared to the same periods of 1996. The increase in interest
expense resulted from an increase in the average balance of interest-bearing
deposits of $60.4 million and $53.4 million, respectively, for the quarter
and six months ended June 30, 1997, as compared to the same periods of 1996.
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 5.18% to 5.46%, or 28 basis
points, during the quarter ended June 30, 1997, and increased from 5.27% to
5.42%, or 15 basis points, for the six months
12
<PAGE>
ended June 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 market interest rates between the 1997 and 1996 periods.
Interest expense on savings accounts decreased by $18,000 to $2.3
million for the quarter ended June 30, 1997, when compared to the same period
in 1996, due to a decrease in the average balance of savings deposits.
Average outstanding savings deposit balances decreased by $6.5 million for
the quarter ended June 30, 1997, compared to the same period in 1996.
Partially offsetting this decrease was a savings deposit rate increase of 14
basis points from 5.13% for the quarter ended June 30, 1996 to 5.27% for the
quarter ended June 30, 1997.
Interest expense on savings accounts decreased by $373,000 to $4.4
million for the six months ended June 30, 1997 when compared to the same
period in 1996, due to a decrease in the average balance of savings deposits.
Average outstanding savings deposit balances decreased by $14.5 million for
the six months ended June 30, 1997, compared to the same period in 1996.
Partially offsetting this decrease was a savings deposit rate increase of two
basis points from 5.22% for the six months ended June 30, 1996 to 5.24% for
the six months ended June 30, 1997.
Interest expense on certificates of deposit increased by $682,000, or
84.6%, for the quarter ended June 30, 1997, compared to the same period in
1996, due to an increase of $42.4 million in the average balance of
certificates of deposit for the quarter ended June 30, 1997, compared to the
same period in 1996. Also contributing to this increase in interest expense
was a 43 basis point increase on rates paid on certificates of deposit from
5.39% for the quarter ended June 30, 1996 to 5.82% for the quarter ended June
30, 1997. The increase in rates paid reflects the change in market interest
rates for certificates of deposit between the 1997 and 1996 periods.
Interest expense on certificates of deposit increased by $1.2 million,
or 74.4%, for the six months ended June 30, 1997, compared to the same period
in 1996, due to an increase of $39.6 million in the average balance of
certificates of deposit for the six months ended June 30, 1997, compared to
the same period in 1996. Contributing to this increase in interest expense
was a 30 basis point increase in rates paid on certificates of deposit from
5.48% for the six months ended June 30, 1996, to 5.78% for the six months
ended June 30, 1997. The increase in rates paid reflects the change in market
interest rates for certificates of deposit between the 1997 and 1996 periods.
Interest expense on money market checking decreased by $6,000 to
$221,000 for the quarter ended June 30, 1997, when compared to the same
period in 1996, due to a decrease in the average balance of money market
checking deposits. Average outstanding money market checking balances
decreased by $219,000 for the quarter ended June 30, 1997. Also, contributing
to this decrease was a decrease of nine basis points in the money market
checking rate.
Interest expense on money market checking increased by $161,000 to
$451,000 for the six months ended June 30, 1997, when compared to the same
period in 1996, due to an increase in the average balance of money market
checking deposits. Average outstanding balances increased by $6.9 million for
the six months ended June 30, 1997, as compared to 1996. Partially offsetting
this increase was a seven basis point decrease in the rate paid on these
deposits. The Company introduced the money market checking product during the
first quarter of 1996 and attracted $21 million by June 30, 1996.
The Company posted interest expense of $355,000 and $604,000,
respectively, on other borrowings during the quarter and six months ended
June 30, 1997. The Company's borrowings in reverse repurchase agreements
during the quarter and six months ended June 30, 1997, financed the purchase
of investment securities. The Company did not utilize other borrowings during
the quarter or the six months ended June 30, 1996.
PROVISION FOR LOAN LOSSES
During the quarter ended June 30, 1997, the Company's provision for loan
loss declined by $275,000 to $300,000, compared to the same period in 1996.
For the six months ended June 30, 1997, the provision for loan losses
declined by $570,000 to $530,000, 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. Contributing to the decline in the provision
was the decline in nonaccrual loans between June 30, 1996 and June 30, 1997,
from $4.2 million to $2.2 million. 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 0.95% at June 30, 1997 and 0.66% at
December 31, 1996. The ratio of the allowance for loan losses to nonaccrual
loans was 176% at June 30, 1997 and 245% at December 31, 1996. The allowance
for loan losses as a percentage of loans stood at 1.67% at June 30, 1997,
compared to 1.61% at December 31, 1996.
13
<PAGE>
NONINTEREST INCOME
Noninterest income for the quarter and six months ended June 30, 1997
decreased by $182,000 and $244,000, respectively, compared to the same
periods in 1996. The major components of noninterest income include late fees
and loan prepayment fees. The decrease for the quarter and six months ended
June 30, 1997, is due to a recovery of $350,000, during the second quarter of
1996, on a corporate debt security that had been written off during 1994.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter and six months ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 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 $ 210 $ 5 $205 4100% $ 340 $ 70 $270 386%
Other real estate owned expense 4 15 (11) -73% 18 23 (5) -22%
Salaries and employee benefits 1,276 1,042 234 22% 2,522 2,105 417 20%
Net occupancy expenses 393 431 (38) -9% 754 782 (28) -4%
FDIC insurance premiums 29 17 12 71% 54 33 21 64%
Credit and collections expenses 12 13 (1) -8% 12 25 (13) -52%
Communication and data processing 157 137 20 15% 322 256 66 26%
Other expenses 237 277 (40) -14% 519 430 89 21%
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,318 $1,937 $381 20% $4,541 $3,724 $817 22%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the quarter and six months ended June 30, 1997
increased by $381,000 and $817,000, 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 six months ended
June 30, 1997, increased by $205,000 and $270,000, 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 quarter and six months ended June
30, 1997 increased by $234,000 and $417,000, respectively, compared to the
same periods in 1996. These increases were primarily the result of marketing
and administrative bonus accruals of $164,000 and $284,000 for the quarter
and six months ended June 30, 1997, compared to $15,000 and $64,000,
respectively, during the same periods in 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 six months
ended June 30, 1997, increased by $20,000 and $66,000, 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 quarter ended June 30, 1997, decreased by $40,000
compared to the same period in 1996, due to a recovery of loan servicing
expenses during the second quarter of 1997. Other expenses for the six months
ended June 30, 1997, increased by $89,000 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.
INCOME TAX PROVISION
For the quarters ended June 30, 1997 and 1996, the Company's provision
for income taxes was $599,000 and $460,000, or 39.8% and 38.1%, respectively.
For the six months ended June 30, 1997 and 1996, the Company's provision for
income taxes was $1,146,000 and $910,000, or 39.8% 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.
14
<PAGE>
FINANCIAL CONDITION
Total assets of the Company increased to $371.1 million at June 30, 1997
from $304.1 million at December 31, 1996, a $67.0 million increase. This
increase reflects the purchase of approximately $52.8 million of investment
securities, net of maturities, sales and calls, and $15.9 million of loan
originations, net of loan maturities and payoffs, during the first six months
of 1997. The Company funded this asset growth by increasing its
interest-bearing liabilities by $65.2 million to $341.9 million at June 30,
1997 from $276.7 million at December 31, 1996. The increase in
interest-bearing liabilities reflects an increase in deposits of $38.3
million, primarily due to the growth in the Company's savings account
balances that grew $23.9 million and certificates of deposit balances that
grew $16.2 million during the six months ended June 30, 1997. Other
borrowings were increased by $26.9 million to $36.9 million during the six
months ended June 30, 1997.
Loans, net of deferred fees and the allowance for loan losses, increased
by $15.6 million to $223.3 million at June 30, 1997, from $207.7 million at
December 31, 1996. The Company originated $29.0 million in new real estate
and business loans during the first six months ended June 30, 1997.
Off-setting these originations, the Company experienced $12.8 million in loan
payoffs, $1.1 million in gross loan transfers prior to write-offs to OREO and
$152,000 in actual loan write-offs during the six months ended June 30, 1997.
15
<PAGE>
LOAN PORTFOLIO
Pacific Crest Bank focuses its lending activities on commercial real
estate loans to individuals and small businesses. At June 30, 1997, $221.1
million, or 97.1%, of Pacific Crest Bank's loans consisted of loans secured
by commercial real estate. Commercial real estate loans are generally made
for terms between one to ten years at adjustable rates of interest, with
interest floors. Virtually all of Pacific Crest Bank's adjustable rate
commercial real estate loans adjust quarterly. The following table sets forth
certain information regarding the real property collateral securing Pacific
Crest Bank's commercial real estate loans at June 30, 1997:
At June 30, 1997
--------------------------------
Average Percent
Number Loan of
(DOLLARS IN THOUSANDS) of Loans Amount Size Total
- -------------------------------------------------------------------------------
Industrial-manufacturing 19 $ 11,411 $601 5.16%
Industrial-warehouse 35 19,216 549 8.69%
Industrial-multi-use 20 12,365 618 5.59%
--------------------------------
Total loans secured by industrial buildings 74 42,992 581 19.44%
--------------------------------
Medical-other 1 794 794 0.36%
Medical-office buildings 13 8,633 664 3.90%
--------------------------------
Total loans secured by medical buildings 14 9,427 673 4.26%
--------------------------------
Retail-strip centers 85 67,402 793 30.48%
Auto repair facilities 25 10,727 429 4.85%
Motel and hotel 16 11,397 712 5.15%
Retail and office use 33 24,514 743 11.08%
Restaurants 25 12,272 491 5.55%
Grocery and supermarket 4 1,751 438 0.79%
Recording studio 3 1,791 597 0.81%
Self storage 1 840 840 0.38%
Single retail properties 16 7,940 496 3.59%
Retail and office units 15 9,057 604 4.10%
Retail and residential 6 3,577 596 1.62%
Retail and industrial 3 2,171 724 0.98%
Land 2 409 205 0.18%
Construction strip center 1 725 725 0.33%
Other miscellaneous 29 14,157 488 6.41%
--------------------------------
Total retail and other collateral 264 168,730 639 76.30%
--------------------------------
--------------------------------
Total commercial real estate mortgage loans 352 221,149 $628 100.00%
--------------------------------
16
<PAGE>
As of June 30, 1997, Pacific Crest Bank's real estate commercial loans
were geographically distributed as follows:
At June 30, 1997
---------------------------------
NUMBER OUTSTANDING % TO
OF BALANCES AT TOTAL
(DOLLARS IN THOUSANDS) LOANS JUNE 30, 1997 OUTSTANDING
- -------------------------------------------------------------------------------
SOUTHERN CALIFORNIA COUNTIES
Los Angeles 184 $ 108,474 49.05%
Orange 48 35,378 16.00%
San Diego 23 16,294 7.37%
Ventura 11 5,550 2.51%
Riverside 9 4,701 2.13%
San Bernadino 7 4,439 2.01%
Kern 3 1,689 0.76%
Santa Barbara 1 96 0.04%
---- ---------- --------
Total Southern California Counties 286 $ 176,621 79.87%
---- ---------- --------
NORTHER CALIFORNIA COUNTIES
Santa Clara 12 $ 8,408 3.80%
Sacramento 8 6,108 2.76%
Contra Costa 7 4,204 1.90%
Alameda 6 3,087 1.40%
San Francisco 6 6,312 2.85%
San Mateo 6 3,160 1.43%
Fresno 3 3,467 1.57%
Monterey 2 1,332 0.60%
Merced 2 477 0.21%
Other 9 5,960 2.70%
---- ---------- --------
Total Northern California Counties 61 $ 42,515 19.22%
---- ---------- --------
Washington 3 371 0.17%
Oregon 2 1,642 0.74%
---- ---------- --------
Total commercial real estate mortgage loans 352 $ 221,149 100.00%
---- ---------- --------
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1997 increased by $395,000
from the level at December 31, 1996, and represents 1.67% of outstanding
loans at June 30, 1997. The slight increase in the general loan loss
allowance from $3.4 million at year end 1996 to $3.8 million at June 30, 1997
reflects net charge-offs of $135,000 offset by the addition of $530,000 in
loan loss provision. Management believes that the allowance for loan losses
at June 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.
17
<PAGE>
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 SIX MONTHS
ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period: $ 3,400 $ 4,500
Commercial real estate mortgages:
Charge-offs (152) (2,466)
Recoveries 17 158
Provision for loan losses: 530 1,100
- ----------------------------------------------------------------------------------------------
Balance at end of period: $ 3,795 $ 3,292
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.67% 1.82%
Net loan charge-offs $ 135 $ 2,308
Valuation adjustment to OREO 340 70
- ----------------------------------------------------------------------------------------------
Total net loan charge-offs & OREO valuation adjustment $ 475 $ 2,378
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 2,155 $ 1,386
OREO 1,914 3,469
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO $ 4,069 $ 4,855
- ----------------------------------------------------------------------------------------------
Total nonperforming assets to total loans and OREO 1.78% 2.26%
- ----------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 1.10% 1.60%
- ----------------------------------------------------------------------------------------------
Troubled debt restructurings $ 719 $ 719
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</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 three nonaccrual loans at
June 30, 1997, totaling $2,155,000. During the six months ended June 30,
1997, the Company transferred four loans from accrual to nonaccrual status
totaling $2,774,000, transferred one loan of $269,000 from nonaccrual to
accrual status, transferred two loans totaling $657,000 from nonaccrual to
OREO status, had two nonaccrual loans totaling $916,000 in payoffs, and had
charge-offs totaling $152,000 related to nonaccrual loans. 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 three properties in this category at June 30, 1997,
totaling $1,914,000. The Company had one property with $1,086,000 in net book
value, or 56.7% of the Company's OREO balance. The remaining $828,000 in OREO
balances consisted of two properties.
The Company's OREO balance declined to $1,914,000 at June 30, 1997, from
$3,469,000 at December 31, 1996, a decline of $1,555,000 or 44.8%. This reflects
the sale of four properties with a combined net balance of $1,793,000 during the
six months ended June 30, 1997. The Company transferred two nonaccrual loans
with a combined fair value of $657,000 into OREO for the six months ended
June 30, 1997. The Company recorded partial write downs on two OREO properties
of $340,000 for the six months ended June 30, 1997, as compared to $70,000 for
the same period in 1996. The increase in the OREO valuation adjustment
between the two periods reflects a downward revision in the estimated
liquidation value of two OREO properties.
18
<PAGE>
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 June 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.
INVESTMENT SECURITIES
The Company's investment portfolio is used for both liquidity purposes
and for investment income. For additional information on the composition of
the investment portfolio and the scheduled maturities of securities in both
the held-to-maturity portfolio and available-for-sale portfolio at June 30,
1997, see Note 5 of Notes to Consolidated Financial Statements (Unaudited) in
this Quarterly Report on Form 10-Q.
SOURCES OF FUNDS
DEPOSITS
The Company's major sources of funds is FDIC-insured deposits, raised
through its subsidiary, Pacific Crest Bank. At June 30, 1997, the Company had
total deposits of $305.0 million, compared to $266.7 million at December 31,
1996. The Company offers money market checking accounts, money market savings
accounts and term certificates of deposit, with maturities ranging from 30
days to five years. The Company attracts the depositors by offering rates
that are generally higher than rates offered by independent commercial banks
that offer a broader array of services. The Company also conducts a wholesale
deposit operation through which deposits from other financial institutions
located throughout the United States are solicited. Information concerning
the composition of the Company's deposit mix at June 30, 1997 and December
31, 1996 are set forth on the Consolidated Balance Sheets included in this
Quarterly Report on Form 10-Q.
The following table sets forth maturities of certificates of deposit at
June 30, 1997:
<TABLE>
<CAPTION>
3 MONTHS OVER 3 TO OVER 6 TO OVER 12
DOLLARS IN THOUSANDS OR LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
- --------------------------------------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 22,556 $ 21,510 $ 40,706 $ 10,542 $ 95,314
Certificates of deposit $100,000 or more 2,267 1,647 4,706 1,086 9,706
- --------------------------------------------- ------------ ------------ ------------ ------------ -----------
Total certificates of deposit $ 24,823 $ 23,157 $ 45,412 $ 11,628 $ 105,020
- --------------------------------------------- ------------ ------------ ------------ ------------ -----------
</TABLE>
OTHER BORROWINGS
The Company had $36.9 million in short term borrowings at June 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 50 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.
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 June
30, 1997, Pacific Crest Bank was in compliance with all such capital
requirements.
19
<PAGE>
Shareholders' equity increased by $1.8 million to $26.3 million during
the six months ended June 30, 1997. This increase reflects the increase to
shareholders' equity by the six months of net income of $1.7 million and a
$72,000 increase resulting from the purchase of stock under the employee and
directors' stock purchase plans. Also, contributing to this increase was an
$18,000 decrease to the unrealized loss 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 June 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS (1) AT JUNE 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% 7.07% 3.07% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 10.00% 6.00% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 11.25% 3.25% 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 Coast 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 six
months ended June 30, 1997 decreased by $930,000 to $1.9 million at June 30,
1997 from $2.8 million at December 31, 1996. The Company purchased $52.8
million, net of maturities, calls and sales, of U.S. government sponsored
agency securities during the six months ended June 30, 1997. The Company
funded both the growth in securities and the net increase in the loan
portfolio, of $15.6 million, by raising $38.3 million of interest-bearing
deposits, and by borrowing an additional $26.9 million under reverse
repurchase agreements.
Loans, net of deferred fees and the allowance for loan losses,
increased by $15.6 million to $223.3 million at June 30, 1997, from $207.7
million at December 31, 1996. The Company originated $29.0 million in real
estate and business loans during the six months ended June 30, 1997.
Off-setting these originations, the Company experienced $12.8 million in loan
payoffs, $1.1 million in gross loan transfers prior to write-offs to OREO and
$152,000 in actual loan write-offs during the six months ended June 30, 1997.
The liquidity of the parent company, Pacific Crest, is primarily
dependent on the payment of cash dividends by its subsidiary, Pacific Crest
Bank. Without dividends from Pacific Crest Bank, Pacific Crest must rely
solely on existing cash and investments which total $243,000 at June 30,
1997. This amount is also necessary to pay future operating expenses and
existing current liabilities, and for the possible infusion of capital into
Pacific Crest Bank.
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 $1.5 million at June 30, 1997. The total amount of retained
earnings is unrestricted and available for dividend payments.
ASSET/LIABILITY MANAGEMENT
The purpose of asset liability management is to minimize the risk of
loss resulting from changes in interest rates. One method of assessing the
potential risk associated with changes in the interest rates is to examine
the extent to which assets and liabilities are "interest rate sensitive" and
by monitoring the institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to
mature or reprice within a
20
<PAGE>
specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature and reprice within
that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend
to adversely affect net interest income while a positive gap would generally
tend to result in an increase in net interest income. During a period of
declining interest rates, a negative gap would generally tend to result in
increased net interest income while a positive gap would generally tend to
adversely affect net interest income. At June 30, 1997, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets repricing or maturing in the same period by
$123.0 million, representing a negative cumulative one-year gap of 33.1%. The
shortcomings associated with using a static gap analysis to evaluate interest
rate risk are described below.
To the extent consistent with its interest rate spread objectives, the
Company attempts to reduce its interest rate risk and has taken actions to
minimize the potential negative impact of changing interest rates. In
addition to focusing on making commercial real estate loans which provide for
quarterly repricing, the Company has written most of its loans with interest
rate floors. The fully indexed rate on these loans were, generally, equal to
or in excess of the interest rate floors. It may be anticipated that loans
with interest rate floors will increase the net interest income in a
declining interest rate environment as affected loans do not reprice downward
to their fully indexed rate when interest rates fall. No assurances can be
given that such will be the case, however, particularly if borrowers are able
to refinance or renegotiate their loans when interest rates decline.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at June 30, 1997, based on certain
assumptions. Except as stated below, the amount of assets and liabilities
shown which reprice or mature during a particular period were determined in
accordance with the earlier of the repricing timing or maturity date of the
asset or liability. The Company has assumed, for purposes of this table only,
that its savings accounts, money market accounts, and other borrowings, which
totaled $181.7 million, $18.3 million and $36.9 million, respectively at June
30, 1997, reprice immediately.
Certain shortcomings are inherent in the method of using static
gap analysis to evaluate interest rate risk as presented in the following
table. For example, static gap analysis assumes that when interest rates
change, all rates change by the same amount and at the same time. Although
certain assets and liabilities may be available for repricing at the same
time, assets and liabilities often react independently to market interest
rate changes, resulting in variable degrees of change dependent on the type
of asset or liability. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag changes in market rates.
Additionally, some adjustable rate loans have features, which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Loan prepayments and early withdrawal of certificates of deposit could
also cause the interest sensitivities to vary from those reflected in the
table. Due to these factors, the interest rate sensitivity static gap report
may not provide a complete or accurate assessment of the Company's exposure
to changes in interest rates.
In response to the limitations inherent with static gap analysis, the
impact of fluctuations in interest rates on the Company's net interest income
has been evaluated through an interest rate shock analysis. This analysis
applies "change ratios" to assets and liabilities based upon various
assumptions regarding their repricing characteristics. This enhanced interest
rate risk management tool is used by the Company to more accurately evaluate
and manage the degree of interest rate risk. As of June 30, 1997,
management's analysis indicates that the Company's net interest income would
decrease a maximum of 5% if rates rose 200 basis points.
21
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Immediate Over One
Through Year Through Over
(DOLLARS IN THOUSANDS) One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS SUBJECT TO INTEREST RATE ADJUSTMENT:
Repurchase agreements $ 221 $ - $ - $ 221
Investment securities - held to maturity - - 40,962 40,962
Investment securities - available for sale - 14,930 80,438 95,368
Total loans, net of deferred fees 207,019 18,775 1,269 227,063
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 207,240 $ 33,705 $ 122,669 $ 363,614
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES SUBJECT TO INTEREST RATE ADJUSTMENT:
Certificates of deposit $ 93,392 $ 11,628 - $ 105,020
Savings accounts 181,657 - - 181,657
Money market checking 18,277 - - 18,277
Other Borrowings 36,900 - - 36,900
- ---------------------------------------------------------------------------------------------------------------------------------
Total $330,226 $ 11,628 - $ 341,854
- ---------------------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of rate-sensitive
assets over rate-sensitive liabilities ($122,986) $22,077 $122,669 $21,760
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
rate-sensitive assets over rate-sensitive liabilities ($122,986) ($100,909) $21,760
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
As a percent of total assets (33.1%) (27.2%) 5.9%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain matters discussed in this Quarterly Report on Form 10-Q may
constitute forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 which are
not historical facts. The Company cautions readers that the following
important factors could affect the Company's business and cause actual
results to differ materially from those expressed in forward-looking
statements made by, on or behalf of, the Company.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are primarily located in California and
concentrated primarily in Southern California. As a result of the geographic
concentration, the Company's results depend largely upon economic conditions
in this area. A deterioration in economic conditions in the Company's market
areas, particularly in the real estate industry, could have a material
adverse impact on the quality of the Company's loan portfolio and the demand
for its products and services, and accordingly, its results of operations.
LENDING CONCENTRATION
Pacific Crest Bank currently engages in commercial real estate lending,
including loans secured by multi-family residential property, primarily in
California. At June 30, 1997, $221.1 million (or 97.1%) of Pacific Crest
Bank's loans consisted of loans secured by commercial real estate. Collateral
for Pacific Crest Bank's loans includes retail strip centers, industrial
income-producing and owner/user properties, small office buildings, mixed-use
retail/office and retail/residential buildings, and special purpose
properties such as auto repair facilities, restaurants and motels.
Commercial real estate loans generally present a higher level of risk
than do loans secured by one-to-four family residences. This greater risk is
due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
commercial properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured
by commercial real estate is typically dependent upon the successful
operation of the related real estate project. If the cash flow from the
project is reduced (for example, if leases are not obtained or renewed or, in
the case of owner-occupied real estate property, if the business of the
borrower deteriorates), the borrower's ability to repay the loan may be
impaired.
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CREDIT QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrower's guarantors and related
parties may fail to perform in accordance with the terms of their loans. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Company's credit portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the Company's results of operations.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between
the cost of funds, primarily deposits, and the yield on earning assets. This
relationship, known as the interest rate spread, is subject to fluctuation
and is affected by economic and competitive factors which influence interest
rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of nonperforming assets. Fluctuations in interest
rates affect the demand of customers for the Company's products and services.
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities reprice or mature more slowly or more rapidly or
on a different basis than its interest-earning assets. Although the Company
believes its current level of interest rate sensitivity is reasonable,
significant fluctuations in interest rates may have an adverse affect on the
Company's results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY
The banking industry is subject to extensive federal and state
supervision and regulation. Such regulation limits the manner in which the
Company conducts its business, undertakes new investments and activities and
obtains financing. This regulation is designed primarily for the protection
of the deposit insurance funds and consumers, and not to benefit holders of
the Company's securities. Financial institution regulation has been the
subject of significant legislation in recent years, and may be the subject of
further significant legislation in the future, none of which is in the
control of the Company. Significant new laws or changes in, or repeals of,
existing laws may cause the Company's results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit conditions for the Company,
primarily through open market operations in United States government
securities, the discount rate for bank borrowings and bank reserve
requirements, and a material change in these conditions would be likely to
have a material impact on the Company's results of operations.
COMPETITION
The banking and financial services business in California generally, and
in Pacific Crest Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers.
Pacific Crest Bank competes for loans, deposits and customers for financial
services with other commercial banks, thrift and loans, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions,
and other nonbank financial service providers. Many of these competitors are
much larger in total assets and capitalization, have greater access to
capital markets and offer a broader array of financial services than Pacific
Crest Bank. There can be no assurance that Pacific Crest Bank will be able to
compete effectively in its markets and the results of operations of the
Company could be adversely affected if circumstances affecting the nature or
level of competition change.
While management believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance
that the results described in such forward-looking statements will, in fact,
be achieved.
23
<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
On May 8, 1997, the Annual Meeting of Shareholders of the Company was
held for the purpose of electing one person to the Board of Directors
for a term of three years and to serve until his or her successor is
elected and qualified. The nominee was Rudolph I. Estrada. A total of
2,819,477 shares were represented at the Meeting. 2,816,884 shares were
cast "For" the election of Mr. Estrada, and 2,593 shares were
"WITHHELD" from voting for the nominee.
In addition, a proposal to re-approve the 1993 Equity Incentive Plan
("Plan") was voted on. 2,680,322 shares were cast "For" the approval of
the Plan, 32,057 shares were cast "Against" the Plan. There was a total
of 2,483 shares that "ABSTAINED" from casting a vote on the Plan.
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
June 30, 1997.
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<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: August 13, 1997 /s/ Gary Wehrle
--------------- -------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: August 13, 1997 /s/ Robert J. Dennen
--------------- -------------------------------
Vice President, Chief Financial Officer
Corporate Secretary
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information..................................................... 5
Incorporation of Certain Documents by Reference........................... 5
Prospectus Summary........................................................ 7
Summary Consolidated Financial Data....................................... 13
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 22
Accounting Treatment...................................................... 22
Capitalization............................................................ 23
Management................................................................ 24
Description of the Trust Preferred Securities............................. 26
Description of Junior Subordinated Debentures . 38
Book-Entry Issuance....................................................... 48
Description of Guarantee.................................................. 50
Expense Agreement......................................................... 53
Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee............................................ 53
Certain Federal Income Tax Consequences................................... 54
ERISA Considerations...................................................... 57
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 60
Appendix A--Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1996
Appendix B--Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997
</TABLE>
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1,500,000 TRUST
PREFERRED SECURITIES
PCC CAPITAL I
9.375% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
PACIFIC CREST CAPITAL, INC.
---------------------
PROSPECTUS
---------------------
SANDLER O'NEILL & PARTNERS, L.P.
SUTRO & CO. INCORPORATED
SEPTEMBER 17, 1997
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