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As filed with the Securities and Exchange Commission on March 25, 1997
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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 Part III
the 1997 Annual Meeting of
Stockholders
At March 12, 1997, registrant had 2,967,367 shares of Common Stock, $.01
par value, outstanding.
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INDEX
PART I
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Page
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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
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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
tke 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
l-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 l,
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 l, 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 capitol 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 previsions 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 l 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>
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At December 31, 1996 At December 31, 1995
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Pacific Crest Investment Required Actual Excess Required Actual Excess
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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:
"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 Tier 1 risk-based capital less than
than 4%; or 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
- --------------------------------------
Tangible equity to total assets
less than 2%.
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 l, 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
7
<PAGE>
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:
<TABLE>
<CAPTION>
Assessment Rates Effective through January 1, 1997*
---------------------------------------------------
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized................. 0 3 17
Adequately Capitalized........... 3 10 24
Undercapitalized................. 10 24 27
</TABLE>
*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.
13
<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:
14
<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:
<TABLE>
<CAPTION>
Floor Space in Annual Lease Expiration
Location Square Feet Rent Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
(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. Otelsberg 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:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ -----
<S> <C> <C>
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
</TABLE>
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 net 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>
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 borowings 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 and
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 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 assets(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 and
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 and 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 and
OREO valuation allowance 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>
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 4.05%
Interest-bearing
deposits 286 15 5.24% 331 16 4.83% 316 10 3.16%
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 9.67% 235,082 23,799 10.12% 243,879 21,114 8.66%
Other real-estate owned 3,938 4,607 6,960
Other non-interest
earning assets 7,980 7,623 6,272
Less allowance for
loan(1) 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%
Certificates 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 $ 17,859 $ 16,263 $ 19,257
Net interest margin(3) 4.76% 4.98% 4.82%
Average interest-
earning assets to
average interest-
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.
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
Increase (decrease) due to Increase (decrease) due to
- --------------------------------------------------------------------------------------------------------------------
(Dollars 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 (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
23
<PAGE>
liabilities during this same period. The rate paid on the Company's interest
bearing 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 adjustments 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) -55.91%
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%
====================================================================================================================================
</TABLE>
(1) All troubled debt restructurings were performing in accordance with their
revised terms at December 31,1996
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,
(Dollar 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 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>
<CAPTION>
OTHER REAL ESTATE OWNED ACTIVITY Year Ending
- --------------------------------------------------------------------------------
December 31, December 31, December 31,
(Dollar 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:
<TABLE>
<CAPTION>
TROUBLED DEBT RESTRUCTURING ACTIVITY Year Ending
- --------------------------------------------------------------------------------
December 31, December 31,
(Dollar in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
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
================================================================================
</TABLE>
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 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%.
The following table sets forth Pacific Crest Investment's capital ratios as
of the dates indicated:
<TABLE>
<CAPTION>
Regulatory Capital Ratios
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>
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-earning 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 accounts 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) (88,933) (73,493) 18,156
Interest rate sensitivity gap(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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
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):
Savings 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
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Pacific Crest Capital, Inc.
-----------------------------------------------
Year Ended December 31
-----------------------------------------------
(Dollars in Thousands) 1996 1995 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 -
====================================================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
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>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pacific Crest Capital, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
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>
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(Dollars in Thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Contractual interest $ 614 $ 1,147 $ 1,489
Interest recognized 67 344 517
- ----------------------------------------------------------------------------
Interest foregone $ 547 $ 803 $ 972
- ----------------------------------------------------------------------------
</TABLE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are principally provided on the straight-line
method over the following estimated useful lives:
<TABLE>
- ----------------------------------------------------------------------------------
<S> <C>
Office furniture, fixtures and equipment 3-8 years
Leasehold improvements Life of lease
- ----------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Held-to-maturity securities:
---------------------------
Amortized Fair Average
Cost Value Yield Life
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=====================================================
<CAPTION>
Available-for-sale securities:
------------------------------
Amortized Fair Average
Cost Value Yield Life
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=====================================================
</TABLE>
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 405 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 $ 1,569 $ 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>
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 (1,109)
- ----------------------------------------------------------------------------------------------------
$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>
<TABLE>
<CAPTION>
December 31,
-------------------
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $2,706 $3,393
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
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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%
==== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Weighted
Average
Price Exercise
Shares Range Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
======= ========= ==== ====== ====
</TABLE>
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>
<TABLE>
<CAPTION>
Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995
---------------------
<S> <C> <C>
Net Income to Common Stockholders
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
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield N/A N/A
Expected volatility 25% 45%
Risk free interest rate 6.25% 6.25%
Expected life 7 years 7 years
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 668
1998 643
1999 453
2000 193
Thereafter 75
- --------------------------------------------------------------------------------
Total Lease Commitments $2,032
================================================================================
</TABLE>
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 assets) $27,389 11.56% $18,947 >8% $23,683 >10%
- -
Tier 1 Capital
(to risk weighted assets) $24,423 10.31% $ 9,473 >4% $14,210 > 6%
- -
Tier 1 Capital
(to average quarterly assets) $24,423 8.60% $11,357 >4% $14,196 > 5%
- -
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
Total Capital
(to risk weighted assets) $22,764 10.74% $16,958 >8% $21,198 >10%
- -
Tier 1 Capital
(to risk weighted assets) $20,091 9.48% $ 8,479 >4% $12,719 > 6%
- -
Tier 1 Capital
(to average quarterly assets) $20,091 8.22% $ 9,779 >4% $12,224 > 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 liabilites $ 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
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
8. QUARTERLY FINANCIAL DATA (Unaudited)
- --------------------------------------------------------------------------------
Unaudited quarterly financial data for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------------------
(Dollars in Thousands) March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
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 provision 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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
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 provision 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 93
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 $ 969
====================================================================================================================================
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>
51
<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>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
BY: /s/ GARY WEHRLE
---------------------------
GARY WEHRLE
CHIEF EXECUTIVE OFFICER
DATE: MARCH 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GARY WEHRLE Chairman of the Board, President March 25, 1997
- ---------------------- and Chief Executive Officer
Gary Wehrle
/s/ ROBERT J. DENNEN Vice President, Chief Financial March 25, 1997
- ---------------------- Officer and Secretary
Robert J. Dennen
/s/ RUDOLPH I. ESTRADA Director March 25, 1997
- ----------------------
Rudolph I. Estrada
/s/ MARTIN J. FRANK Director March 25, 1997
- ----------------------
Martin J. Frank
/s/ RICHARD S. ORFALEA Director March 25, 1997
- ----------------------
Richard S. Orfalea
/s/ STEVEN J. ORLANDO Director March 25, 1997
- ----------------------
Steven J. Orlando
</TABLE>
57
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-23849, 33-87988 and 33-87990) pertaining to the 1996 Non-
Employee Directors' Stock Plan, the 1994 Employee Stock Purchase Plan and the
1993 Equity Incentive Plan of Pacific Crest Capital, Inc. of our report dated
February 1, 1996, with respect to the 1995 and 1994 consolidated financial
statements of Pacific Crest Capital, Inc. included in its Annual Report
(Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
March 21, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements No.
333-23849, 33-87988 and 33-87990 of Pacific Crest Capital, Inc. on Forms S-8 of
our report dated February 5, 1997, appearing in this Annual Report on Form 10-K
of Pacific Crest Capital, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,572
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 262
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,534
<INVESTMENTS-CARRYING> 30,960
<INVESTMENTS-MARKET> 30,926
<LOANS> 211,095
<ALLOWANCE> 3,400
<TOTAL-ASSETS> 304,085
<DEPOSITS> 266,695
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 2,922
<LONG-TERM> 0
<COMMON> 24,468
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 304,085
<INTEREST-LOAN> 21,384
<INTEREST-INVEST> 2,913
<INTEREST-OTHER> 2,270
<INTEREST-TOTAL> 26,567
<INTEREST-DEPOSIT> 13,500
<INTEREST-EXPENSE> 13,500
<INTEREST-INCOME-NET> 13,067
<LOAN-LOSSES> 1,917
<SECURITIES-GAINS> 413
<EXPENSE-OTHER> 8,123
<INCOME-PRETAX> 4,508
<INCOME-PRE-EXTRAORDINARY> 3,003
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,003
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 0
<LOANS-NON> 1,386
<LOANS-PAST> 977
<LOANS-TROUBLED> 719
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,500
<CHARGE-OFFS> 3,492
<RECOVERIES> 244
<ALLOWANCE-CLOSE> 3,400
<ALLOWANCE-DOMESTIC> 3,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
