<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER 0-22732
PACIFIC CREST CAPITAL, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4437818
- -------------------------------------- ---------------------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30343 CANWOOD STREET
AGOURA HILLS, CALIFORNIA 91301
- -------------------------------------- ---------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 865-3300
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS
OF AUGUST 13, 1997.
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
------------------- ----------------------------
COMMON STOCK, $.01 PAR VALUE 2,968,449
<PAGE>
PACIFIC CREST CAPITAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - FINANCIAL INFORMATION................................................ 1
Item I: Financial Statements........................................ 1
Consolidated Balance Sheets................................. 1
Consolidated Statements of Operations....................... 2
Consolidated Statements of Shareholders' Equity............. 3
Consolidated Statements of Cash Flows....................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Part II - OTHER INFORMATION................................................... 24
SIGNATURES.................................................................... 25
</TABLE>
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,683 $ 2,572
Securities purchased under resale agreements 221 262
- ----------------------------------------------------------------------------------------
Cash and cash equivalents 1,904 2,834
- ----------------------------------------------------------------------------------------
U.S. government sponsored agency securities (Note 5):
Held to maturity, at amortized cost 40,962 30,960
Available for sale, at market 95,368 52,534
Loans
Commercial mortgage 221,149 206,172
Business Loans - SBA 4,289 2,363
Residential mortgage 1,595 1,596
Commercial business/other 633 1,581
- ----------------------------------------------------------------------------------------
Total loans 227,666 211,712
Deferred loan fees 603 617
Allowance for loan losses 3,795 3,400
- ----------------------------------------------------------------------------------------
Net loans 223,268 207,695
Accrued interest receivable 2,958 1,966
Prepaid expenses and other assets 914 772
Investment in joint venture 95 -
Deferred income taxes 3,197 3,302
Other real estate owned 1,914 3,469
Premises and equipment 546 553
- ----------------------------------------------------------------------------------------
Total assets $371,126 $304,085
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings accounts $181,657 $157,789
Certificates of deposit 105,020 88,826
Money market checking 18,277 20,080
- ----------------------------------------------------------------------------------------
Total deposits 304,954 266,695
Other borrowings 36,900 10,000
Accrued interest and other liabilities 2,984 2,922
- ----------------------------------------------------------------------------------------
Total liabilities 344,838 279,617
- ----------------------------------------------------------------------------------------
Shareholders' equity (Notes 6 and 7):
Preferred stock, $.01 par value, 2,000,000
shares authorized, no shares issued and
outstanding at June 30, 1997 and December 31, 1996 - -
Common stock, $.01 par value, 10,000,000
shares authorized, 2,968,449 shares issued and
outstanding at June 30, 1997, 2,959,698 shares
issued and outstanding at December 31, 1996 27,910 27,838
Accumulated deficit (1,129) (2,859)
Unrealized loss on securities available for sale, net (238) (256)
Common stock in treasury, at cost, 30,000 shares (255) (255)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 26,288 24,468
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $371,126 $304,085
- ----------------------------------------------------------------------------------------
Book value per common share (Note 3) $ 8.95 $ 8.35
- ----------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans, including fees $5,960 $5,240 $11,700 $10,922
Securities purchased under resale agreements 23 725 27 1,672
Certificates of deposit - 4 - 8
U.S. government sponsored agency securities
Available for sale 1,307 301 2,426 301
Held to maturity 873 293 1,687 327
- -------------------------------------------------------------------------------------------------------------
Total interest income 8,163 6,563 15,840 13,230
Interest expense:
Savings accounts 2,325 2,343 4,434 4,807
Certificates of deposit 1,488 806 2,854 1,636
Money market checking accounts 221 227 451 290
Other borrowings 355 - 604 -
- -------------------------------------------------------------------------------------------------------------
Total interest expense 4,389 3,376 8,343 6,733
- -------------------------------------------------------------------------------------------------------------
Net interest income 3,774 3,187 7,497 6,497
Provision for loan losses 300 575 530 1,100
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,474 2,612 6,967 5,397
Noninterest income:
Gain on investment securities - 350 - 350
Other noninterest income 349 181 450 344
- -------------------------------------------------------------------------------------------------------------
Total noninterest income 349 531 450 694
- -------------------------------------------------------------------------------------------------------------
Noninterest expense:
Valuation adjustments to other real estate owned 210 5 340 70
Other real estate owned expenses 4 15 18 23
Salaries and employee benefits 1,276 1,042 2,522 2,105
Net occupancy expenses 393 431 754 782
FDIC insurance premiums 29 17 54 33
Credit and collection expenses 12 13 12 25
Communications and data processing 157 137 322 256
Other expenses 237 277 519 430
- -------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,318 1,937 4,541 3,724
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 1,505 1,206 2,876 2,367
Income tax provision (Note 2) 599 460 1,146 910
- -------------------------------------------------------------------------------------------------------------
Net income $ 906 746 $1,730 $1,457
=============================================================================================================
Per share data (Note 3):
Primary earnings per common share $ 0.30 $ 0.25 $ 0.57 $0.49
- -------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding (in thousands) 3,049 3,005 3,044 3,000
=============================================================================================================
Fully diluted earnings per common share $ 0.30 $ 0.25 $ 0.57 $0.49
- -------------------------------------------------------------------------------------------------------------
Weighted average fully diluted common shares
outstanding (in thousands) 3,057 3,024 3,051 3,015
=============================================================================================================
See accompanying notes.
</TABLE>
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Common stock Treasury stock Securities
------------ -------------- Available Accumulated
(Dollars and shares in thousands) Shares Amount Shares Amount for Sale Deficit
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 2,954 $27,813 - $ - $ - $ (5,862)
- -------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan 6 25 - - - -
Net changes in unrealized loss on securities
available for sale, net of taxes - - - - (256) -
Purchase of treasury shares - - (30) (255) - -
Net Income - - - - - 3,003
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 2,960 $27,838 (30) $(255) $ (256) $ (2,859)
- -------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan 6 52 - - - -
Issuance of stock under non-employee
directors' stock purchase plan 2 20 - - - -
Net changes in unrealized loss on securities
available for sale, net of taxes - - - - 18 -
Net income - - - - - 1,730
- -------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 2,968 $27,910 (30) $(255) $ (238) $ (1,129)
===================================================================================================================
See accompanying notes
</TABLE>
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,730 $ 1,457
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Provision for loan losses 530 1,100
Valuation adjustments to OREO 340 70
Loss on investment in joint venture 5 -
Depreciation and amortization 126 115
Amortization of deferred loan fees (172) (677)
Amortization/accretion of securities (8) 47
Changes in operating assets and liabilities:
Accrued interest receivable (992) (247)
Prepaid expenses and other assets (142) (816)
Deferred income taxes 91 415
Accrued interest and other liabilities 62 (406)
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities 1,570 1,058
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored agency securities:
Held to maturity (14,997) (33,900)
Available for sale (55,799) (54,590)
Proceeds from U.S. government sponsored agency securities:
Held to maturity 5,000 8,000
Available for sale 13,000 16,031
Net (increase)/decrease in loans (17,315) 5,483
Proceeds from sale of loans - 7,141
Proceeds from sale of notes 600 -
Investment in joint venture (100) -
Purchases of equipment and leasehold improvements, net (119) (80)
Proceeds from sale of other real estate owned 1,999 2,420
- ---------------------------------------------------------------------------------------
Net cash used in investing activities (67,731) (49,495)
FINANCING ACTIVITIES:
Net increase/(decrease) in certificates of deposit 16,194 (2,308)
Net (decrease)/increase in money market checking (1,803) 21,154
Net increase in savings accounts 23,868 11,424
Net increase in other borrowings 26,900 -
Proceeds from the issuance of common stock 72 25
- ---------------------------------------------------------------------------------------
Net cash provided by financing activities 65,231 30,295
Net decrease in cash and cash equivalents (930) (18,142)
Cash and cash equivalents at beginning of period 2,834 56,167
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,904 $38,025
=======================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,220 $ 6,745
Income taxes $ 965 $ 670
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ 657 $ 1,179
=======================================================================================
See accompanying notes.
4
</TABLE>
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The interim financial statements included herein have been prepared by
Pacific Crest Capital, Inc. ("Pacific Crest"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Pacific
Crest together with its subsidiaries is referred to as the "Company". Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to SEC rules and regulations; nevertheless, the
Company believes that the disclosures and information presented are adequate
and, therefore, not misleading. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's latest Annual Report. In the opinion of management,
all adjustments, including normal recurring adjustments necessary to present
fairly the financial position of the Company with respect to the interim
financial statements, and the results of its operations for the interim period
ended June 30, 1997, have been included. Certain reclassifications have been
made to prior year amounts to conform to the 1997 presentation. The results of
operations for interim periods are not necessarily indicative of results for the
full year.
Effective August 1, 1997, the Company's wholly owned subsidiary changed its
name from Pacific Crest Investment and Loan to Pacific Crest Bank. The change is
a change in name only with no changes in the charter or powers.
- --------------------------------------------------------------------------------
NOTE 2. INCOME TAXES
- --------------------------------------------------------------------------------
For the quarters ended June 30, 1997 and 1996, the Company's provision for
income taxes was $599,000 and $460,000, or 39.8% and 38.1%, respectively. For
the six months ended June 30, 1997 and 1996, the Company's provision for income
taxes was $1,146,000 and $910,000, or 39.8% and 38.4%, respectively. The
difference between the Company's statutory tax rate of 41.5% and its effective
rate for these periods is primarily due to California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
- --------------------------------------------------------------------------------
NOTE 3. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Book value per common share was calculated by dividing total shareholders'
equity by the number of common shares outstanding at June 30, 1997 and December
31, 1996. The number of common shares outstanding was 2,968,449 at June 30, 1997
and 2,959,698 at December 31, 1996.
The primary earnings per common share for the quarter and six months ended
June 30, 1997 were determined by dividing net income of $906,000 and $1,730,000,
respectively, by the weighted average common shares outstanding of 3,049,000 and
3,044,000, respectively. The fully diluted earnings per common share for the
quarter and six months ended June 30, 1997, was determined by dividing net
income of $906,000 and $1,730,000, respectively, by the weighted average fully
diluted common shares outstanding of 3,057,000 and 3,051,000, respectively. The
common shares outstanding were adjusted to reflect the number of common stock
equivalents outstanding based on the number of outstanding stock options issued
by the Company utilizing the treasury stock method.
The primary earnings per common share for the quarter and six months ended
June 30, 1996 were determined by dividing net income of $746,000 and $1,457,000,
respectively, by the weighted average common shares outstanding of 3,005,000 and
3,000,000, respectively. The fully diluted earnings per common share for the
quarter and six months ended June 30, 1996, was determined by dividing net
income of $746,000 and $1,457,000, respectively, by the weighted average fully
diluted common shares outstanding of 3,024,000 and 3,015,000, respectively. The
common shares outstanding were adjusted to reflect the number of common stock
equivalents outstanding based on the number of outstanding stock options issued
by the Company utilizing the treasury stock method.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" which specified this computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The objective of SFAS No. 128 is to
simplify the computation of EPS and to make the U.S. standard for computing EPS
more compatible with the standards of other countries. SFAS No. 128 eliminated
both the "primary" and "fully diluted" EPS and required the computation and
disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128 should be effective
for financial statements for both interim and annual periods ending after
December 15, 1997, and earlier application is not permitted. The Company's
analysis of SFAS No. 128 concluded that it would have no impact on the EPS
disclosures contained herein.
5
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. CONTINGENCIES
- --------------------------------------------------------------------------------
LITIGATION
As an incident to normal operations, the Company is, from time to time,
named as a defendant in lawsuits, some of which seek monetary damages.
Management, after review, including consultation with counsel, believes that any
ultimate liability which could arise from these lawsuits and claims would not
materially affect the consolidated financial position or results of operations
of the Company.
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
U.S. government sponsored agency securities have been classified in the
consolidated balance sheets according to management's intent. The carrying
amount of securities and their approximate fair values at June 30, 1997 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government sponsored agency securities
Held to maturity $ 40,962 $ 25 $(152) $ 40,835
Available for sale 95,778 5 (415) 95,368
- --------------------------------------------------------------------------------------------------
Total investment securities $136,740 $ 30 $(567) $136,203
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company's security portfolio consists of Federal Home Loan Bank (FHLB)
and Federal National Mortgage Association (FNMA) securities. These securities
have call features that allow the issuing agency to retire (call) the security
prior to its stated maturity date. The Company's security portfolio has call
dates ranging between three months and four years. The Company believes that the
majority of its securities will be called by the issuing agency before the final
maturity date. The following table reflects the scheduled maturities of
securities in both the held-to-maturity portfolio and the available-for-sale
portfolio at June 30, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
Due from five to ten years $ 19,997 $ 19,959 7.60% 8.7 years
Due after ten years 20,965 20,876 7.88% 14.5 years
-------------------------------------------
Total held-to-maturity securities: $ 40,962 $ 40,835 7.75% 11.7 years
-------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
Due from one to five years $ 15,000 $ 14,930 6.74% 4.8 years
Due from five to ten years 80,778 80,438 7.13% 7.6 years
-------------------------------------------
Total available-for-sale securities: $ 95,778 $ 95,368 7.07% 7.2 years
-------------------------------------------
-------------------------------------------
Total investment securities $136,740 $136,203 7.27% 8.5 years
-------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $38.8 million were
pledged to secure other borrowings aggregating $36.9 million at June 30, 1997.
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
- --------------------------------------------------------------------------------
At June 30, 1997, 10,000,000 shares of $0.01 par value common stock were
authorized of which, 2,968,449 shares were issued and outstanding. The Company
issued 6,921 shares of common stock on January 2, 1997 for employees
participating in the Employee Stock Purchase Plan. The Company also issued 748
shares of common stock on January 23, 1997 and 782 shares of common stock on May
8, 1997, for the non-employee directors participating in the Non-Employee
Directors' Stock Purchase Plan. The Company issued 300 shares of common stock
under the Equity Incentive Plan for the six months ended June 30, 1997.
6
<PAGE>
Pacific Crest Bank is required to maintain certain minimum capital levels
under federal banking law. The following table sets forth Pacific Crest Bank's
regulatory capital ratios at June 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS(1) AT JUNE 30, 1997 AT DECEMBER 31, 1996
==================================== =======================================
Minimum Minimum
Required Actual Excess Required Actual Excess
----------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio(2) 4.00% 7.07% 3.07% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 10.00% 6.00% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 11.25% 3.25% 8.00% 11.56% 3.56%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Capital ratios of Pacific Crest Bank only.
(2) Calculation based on quarter end asset balances of Pacific Crest Bank.
- --------------------------------------------------------------------------------
NOTE 7. DIVIDENDS
- --------------------------------------------------------------------------------
As a Delaware corporation, Pacific Crest may pay common dividends out of
surplus or, if there is no surplus, from net profits for the current and
preceding fiscal year. Pacific Crest has approximately $233,000 in cash plus
investments less current liabilities at June 30, 1997. Without dividends from
Pacific Crest Bank, Pacific Crest must rely solely on existing cash and
investments which total $243,000 at June 30, 1997. This amount is also necessary
to pay future operating expenses and existing current liabilities of Pacific
Crest, and for the future possible infusion of capital into Pacific Crest Bank.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that retained earnings are
available to pay such dividends. Pacific Crest Bank had retained earnings of
$1.5 million at June 30, 1997. The total amount of retained earnings is
unrestricted and available for dividend payments.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major factors
that influenced the consolidated financial performance of the Company for the
quarter and six months ended June 30, 1997. This analysis should be read in
conjunction with the Company's 1996 Annual Report on Form 10-K and with the
unaudited financial statements and notes as set forth on pages 1 through 7 of
this report.
The following table sets forth certain selected financial data concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCES
Average loans $ 221,270 $ 210,606 $ 195,691 $ 183,738 $ 189,004
Average earning assets 342,090 316,846 276,083 273,636 279,720
Average assets 348,968 325,690 282,341 282,184 287,411
Average deposits 297,936 280,133 254,264 256,359 262,243
Average equity 25,423 24,739 24,108 23,483 22,894
PERFORMANCE RATIOS
Return on average assets(1) 1.04% 1.02% 1.11% 1.08% 1.04%
Return on average common equity(1) 14.25% 13.32% 12.99% 12.98% 13.03%
Net interest margin(2) 4.42% 4.77% 4.77% 4.74% 4.58%
CAPITAL AND LEVERAGE RATIOS(3)
Risk-based capital ratios:
Tier one 10.00% 10.23% 10.31% 11.33% 10.90%
Total 11.25% 11.48% 11.56% 12.59% 12.16%
Leverage capital ratio(4) 7.07% 7.36% 7.96% 8.92% 7.87%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.67% 1.62% 1.61% 1.69% 1.82%
Allowance for loan losses to nonaccrual loans 176.10% 506.98% 245.31% 192.09% 77.57%
Total nonperforming assets to total assets(5) 1.10% 1.02% 1.60% 1.97% 2.51%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations based on annualized net income.
(2) Net interest margin is calculated by dividing annualized net interest income
by average earning assets.
(3) Capital ratios of Pacific Crest Bank only.
(4) Calculation based on quarter end asset balances of Pacific Crest Bank.
(5) Nonperforming assets include nonaccrual loans and other real estate loans
("OREO") and exclude performing troubled debt restructurings.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter and six months ended June 30, 1997
and 1996, present the distribution of average assets, liabilities and
shareholders' equity, the total dollar amount of interest income from average
interest-earning assets, the resultant yields and the interest expense on
average interest-bearing liabilities, expressed in both dollars and rates. All
average balances are daily average balances. Nonaccrual loans have been included
in the table as loans having a zero yield.
<TABLE>
<CAPTION>
Quarter Ended June 30,
------------------------------------------------------------------
1997 1996
------------------------------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
(DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $221,270 $5,960 10.80% $189,004 $5,240 11.15%
Repurchase agreements 1,694 23 5.45% 55,453 729 5.29%
U.S. government sponsored
agency securities:
Available for sale 73,769 1,307 7.11% 19,306 301 6.27%
Held to maturity 45,357 873 7.72% 15,957 293 7.39%
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 342,090 8,163 9.57% 279,720 6,563 9.44%
OREO 2,316 4,391
Other noninterest-earning assets 8,175 8,033
Less allowance for loan losses 3,613 4,733
- ---------------------------------------------------------------------------------------------------------------
Total assets $348,968 $287,411
- ---------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $177,041 $2,325 5.27% $183,568 $2,343 5.13%
Certificates of deposit 102,597 1,488 5.82% 60,158 806 5.39%
Money market checking 18,298 221 4.84% 18,517 227 4.93%
Other borrowings 24,685 355 5.77% - - -
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 322,621 4,389 5.46% 262,243 3,376 5.18%
Non interest-bearing liabilities 924 2,274
Shareholders' equity 25,423 22,894
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $348,968 $287,411
- ---------------------------------------------------------------------------------------------------------------
Net interest income $3,774 $3,187
Net interest rate spread 4.11% 4.26%
Net interest-earning assets $ 19,469 $ 17,477
Net interest margin 4.42% 4.58%
Average interest-earning assets to
average interest-bearing liabilities 106.0% 106.7%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------
1997 1996
------------------------------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
(DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $215,968 $11,700 10.92% $192,010 $10,922 11.44%
Repurchase agreements 1,019 27 5.34% 63,670 1,680 5.31%
U.S. government sponsored
agency securities:
Available for sale 68,746 2,426 7.12% 9,653 301 6.27%
Held to maturity 43,805 1,687 7.77% 9,279 327 7.09%
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 329,538 15,840 9.69% 274,612 13,230 9.69%
OREO 2,847 4,380
Other noninterest-earning assets 9,318 7,912
Less allowance for loan losses 3,569 4,808
- -----------------------------------------------------------------------------------------------------------------
Total assets $338,134 $282,096
- -----------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $170,686 $ 4,434 5.24% $185,194 $ 4,807 5.22%
Certificates of deposit 99,643 2,854 5.78% 60,070 1,636 5.48%
Money market checking 18,755 451 4.85% 11,845 290 4.92%
Other borrowings 21,437 604 5.68% - - -
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 310,521 8,343 5.42% 257,109 6,733 5.27%
Non interest-bearing liabilities 2,530 2,454
Shareholders' equity 25,083 22,533
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $338,134 $282,096
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 7,497 $ 6,497
Net interest rate spread 4.27% 4.42%
Net interest-earning assets $ 19,017 $ 17,503
Net interest margin 4.59% 4.76%
Average interest-earning assets to
average interest-bearing liabilities 106.1% 106.8%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following tables present the dollar amount of changes in interest
income and interest expense of major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to changes due to
volume and changes due to rate.
10
<PAGE>
<TABLE>
<CAPTION>
-------------------------------- --------------------------------
For the Quarter Ended For the Six Months Ended
June 30, 1997 June 30, 1997
-------------------------------- --------------------------------
1997 compared to 1996 1997 compared to 1996
Increase (decrease) due to Increase (decrease) due to
-------------------------------- --------------------------------
Net Net
(DOLLARS IN THOUSANDS) Volume Rate Change Volume Rate Change
- ----------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans $ 873 $(153) $ 720 $ 1,314 $(536) $ 778
Repurchase agreements (730) 24 (706) (1,659) 6 (1,653)
U.S. government agency securities:
Available for sale 960 46 1,006 2,081 44 2,125
Held to maturity 565 15 580 1,327 33 1,360
- -----------------------------------------------------------------------------------------------------------------
Total change in interest income 1,668 (68) 1,600 3,063 (453) 2,610
- -----------------------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts (84) 66 (18) (376) 3 (373)
Certificates of deposit 611 71 682 1,129 89 1,218
Money market checking (3) (3) (6) 166 (5) 161
Other borrowings 355 - 355 604 - 604
- -----------------------------------------------------------------------------------------------------------------
Total change in interest expense 879 134 1,013 1,523 87 1,610
- -----------------------------------------------------------------------------------------------------------------
Changes in net interest income $ 789 $(202) $ 587 $ 1,540 $(540) $1,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
DETAILED COMPARISON OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $906,000 (or $0.30 per common share on a fully diluted
basis) for the quarter ended June 30, 1997, compared to $746,000 (or $0.25 per
common share on a fully diluted basis) for the corresponding period in 1996. Net
income for the six months ended June 30, 1997 was $1.7 million (or $0.57 per
common share on a fully diluted basis) compared to $1.5 million (or $0.49 per
common share on a fully diluted basis) for the corresponding period in 1996. The
increase in net income during the quarter and six months ended June 30, 1997,
was primarily the result of an increase in average interest-earning assets, and
the reduced provision for loan losses, between the 1997 and 1996 periods.
NET INTEREST INCOME
Net interest income increased by $587,000, or 18.4%, to $3.8 million for
the quarter ended June 30, 1997, compared to the same period of 1996. Net
interest income increased by $1.0 million, or 15.4%, to $7.5 million for the six
months ended June 30, 1997, compared to the same period in 1996. The increase
in net interest income during the quarter and six months ended June 30, 1997 was
primarily the result of an increase of $62.4 million and $54.9 million,
respectively, in the Company's average balance of interest-earning assets
between the 1997 and 1996 periods.
The net interest rate spread is defined as the yield on interest-earning
assets less the rates paid on interest-bearing liabilities. The net interest
rate spread for the quarter ended June 30, 1997 and 1996 was 4.11% and 4.26%,
respectively, and for the six months ended June 30, 1997 and 1996, 4.27% and
4.42%, respectively. The decline in the spread between the 1996 and 1997 periods
is the result of an increase in the rates paid on interest-bearing liabilities
that exceeds the increase on yields received on interest-earnings assets.
The net interest margin is defined as the difference between interest
income and interest expense divided by average interest-earning assets. The net
interest margin for the quarter ended June 30, 1997 and 1996, was 4.42% and
4.58%, respectively, and for the six months ended June 30, 1997 and 1996, 4.59%
and 4.76%, respectively. The decline in the margin is the result of the reduced
net interest rate spread, and the change in the composition of the balance
sheet. Loans, the highest yielding asset, have decreased as a percentage of
average interest-earning assets while the Company's holdings in the lower
yielding U.S. government sponsored agency securities have increased as a
percentage of average interest-earning assets. Additionally, the Company has
financed a portion of these security purchases with other borrowings which, on
average, cost the Company more than deposits.
11
<PAGE>
TOTAL INTEREST INCOME
Total interest income increased by $1.6 million, or 24.4%, to $8.2 million
for the quarter ended June 30, 1997, and increased by $2.6 million, or 19.7%, to
$15.8 million for the six months ended June 30, 1997, compared to the same
periods in 1996. These increases were primarily due to increases in the average
balance of interest-earning assets of $62.4 million and $54.9 million,
respectively, for the quarter and six months ended June 30, 1997, over the
comparable periods in 1996. The overall yields on the Company's interest-earning
assets increased by 13 basis points, to 9.57% from 9.44%, for the quarter ended
June 30, 1997, compared to the same period of 1996. For the six months ended
June 30, 1997, the yield remained at the June 30, 1996 level of 9.69%.
Interest income on loans increased by $720,000 to $6.0 million, a 13.7%
increase for the quarter ended June 30, 1997, compared to the same period in
1996. Interest income on loans increased by $778,000 to $11.7 million, a 7.1%
increase for the six months ended June 30, 1997, compared to the same period in
1996. Contributing to the increase in loan interest income was an increase of
$32.3 million in average loan balances for the second quarter of 1997 compared
to the second quarter of 1996, and an increase of $24.0 million in average loan
balances for the six months ended June 30, 1997 compared to the first six months
of 1996. Partially offsetting these increases were declines in the average
yields of 35 basis points for the quarter ended June 30, 1997 and 52 basis
points for the six months ended June 30, 1997, compared to the same periods in
1996. The primary reason for the decline in the overall loan portfolio yield is
due to lower yielding loans being added to the portfolio subsequent to June 30,
1996. The decline in yields on new loans reflects increased competitive rate
pressure in the marketplace.
Interest earned on the Company's securities purchased under resale
agreements decreased by $706,000 and $1.7 million, respectively, for the quarter
and six months ended June 30, 1997, when compared to the same periods in 1996.
These decreases were primarily attributable to decreases of $53.8 million and
$62.7 million, respectively, in the average balances during the quarter and six
months ended June 30, 1997 compared to 1996. The decline in the average balance
of repurchase agreements during 1997 as compared to 1996, reflects the shift in
the Company's investments to U.S. government sponsored agency securities from
the lower yielding securities purchased under resale agreements. These decreases
were partially offset by increases in the yield of 16 basis points for the
quarter and three basis points for the six months ended June 30, 1997. These
increases reflect the change in market interest rates between these periods.
Interest income on U.S. government sponsored agency securities classified
as available-for-sale increased by $1.0 million to $1.3 million for the quarter
ended June 30, 1997, compared to the same period in 1996. Interest income on
securities classified as available-for-sale increased by $2.1 million to $2.4
million for the six months ended June 30, 1997, compared to the same period in
1996.
Interest income on U.S. government sponsored agency securities classified
as held-to-maturity increased by $580,000 to $873,000 for the quarter ended June
30, 1997, compared to the same period in 1996. Interest income on securities
classified as held-to-maturity increased by $1.4 million to $1.7 million for the
six months ended June 30, 1997, compared to the same period in 1996.
The increased interest income on U.S. government sponsored agency
securities for the quarter and six months ended June 30, 1997, was primarily the
result of the increase in the average balances of securities classified as
available-for-sale and those classified as held-to-maturity, over the same
periods in 1996 and, to a lesser extent, due to improved security yields as
illustrated in the preceding table. The increased average balances reflect the
Company's effort to optimize earnings by more effectively leveraging capital,
with the purchase of U.S. government sponsored agency securities, and an
investment shift from securities purchased under resale agreements, to the
higher yielding agency securities.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter and six months ended June 30, 1997
increased by $1.0 million and $1.6 million, or 30.0% and 23.9%, respectively,
compared to the same periods of 1996. The increase in interest expense resulted
from an increase in the average balance of interest-bearing deposits of $60.4
million and $53.4 million, respectively, for the quarter and six months ended
June 30, 1997, as compared to the same periods of 1996. Contributing to these
increases, were increases in the rates paid on interest-bearing liabilities
during 1997. The rates paid on the Company's interest-bearing liabilities
increased from 5.18% to 5.46%, or 28 basis points, during the quarter ended June
30, 1997, and increased from 5.27% to 5.42%, or 15 basis points, for the six
months
12
<PAGE>
ended June 30, 1997, compared to the same periods in 1996. The increases in
the rates paid on the Company's interest-bearing liabilities reflect the change
in market interest rates between the 1997 and 1996 periods.
Interest expense on savings accounts decreased by $18,000 to $2.3 million
for the quarter ended June 30, 1997, when compared to the same period in 1996,
due to a decrease in the average balance of savings deposits. Average
outstanding savings deposit balances decreased by $6.5 million for the quarter
ended June 30, 1997, compared to the same period in 1996. Partially offsetting
this decrease was a savings deposit rate increase of 14 basis points from 5.13%
for the quarter ended June 30, 1996 to 5.27% for the quarter ended June 30,
1997.
Interest expense on savings accounts decreased by $373,000 to $4.4
million for the six months ended June 30, 1997 when compared to the same period
in 1996, due to a decrease in the average balance of savings deposits. Average
outstanding savings deposit balances decreased by $14.5 million for the six
months ended June 30, 1997, compared to the same period in 1996. Partially
offsetting this decrease was a savings deposit rate increase of two basis points
from 5.22% for the six months ended June 30, 1996 to 5.24% for the six months
ended June 30, 1997.
Interest expense on certificates of deposit increased by $682,000, or
84.6%, for the quarter ended June 30, 1997, compared to the same period in 1996,
due to an increase of $42.4 million in the average balance of certificates of
deposit for the quarter ended June 30, 1997, compared to the same period in
1996. Also contributing to this increase in interest expense was a 43 basis
point increase on rates paid on certificates of deposit from 5.39% for the
quarter ended June 30, 1996 to 5.82% for the quarter ended June 30, 1997. The
increase in rates paid reflects the change in market interest rates for
certificates of deposit between the 1997 and 1996 periods.
Interest expense on certificates of deposit increased by $1.2 million, or
74.4%, for the six months ended June 30, 1997, compared to the same period in
1996, due to an increase of $39.6 million in the average balance of
certificates of deposit for the six months ended June 30, 1997, compared to the
same period in 1996. Contributing to this increase in interest expense was a 30
basis point increase in rates paid on certificates of deposit from 5.48% for the
six months ended June 30, 1996, to 5.78% for the six months ended June 30, 1997.
The increase in rates paid reflects the change in market interest rates for
certificates of deposit between the 1997 and 1996 periods.
Interest expense on money market checking decreased by $6,000 to $221,000
for the quarter ended June 30, 1997, when compared to the same period in 1996,
due to a decrease in the average balance of money market checking deposits.
Average outstanding money market checking balances decreased by $219,000 for the
quarter ended June 30, 1997. Also, contributing to this decrease was a decrease
of nine basis points in the money market checking rate.
Interest expense on money market checking increased by $161,000 to
$451,000 for the six months ended June 30, 1997, when compared to the same
period in 1996, due to an increase in the average balance of money market
checking deposits. Average outstanding balances increased by $6.9 million for
the six months ended June 30, 1997, as compared to 1996. Partially offsetting
this increase was a seven basis point decrease in the rate paid on these
deposits. The Company introduced the money market checking product during the
first quarter of 1996 and attracted $21 million by June 30, 1996.
The Company posted interest expense of $355,000 and $604,000,
respectively, on other borrowings during the quarter and six months ended June
30, 1997. The Company's borrowings in reverse repurchase agreements during the
quarter and six months ended June 30, 1997, financed the purchase of investment
securities. The Company did not utilize other borrowings during the quarter or
the six months ended June 30, 1996.
PROVISION FOR LOAN LOSSES
During the quarter ended June 30, 1997, the Company's provision for loan
loss declined by $275,000 to $300,000, compared to the same period in 1996. For
the six months ended June 30, 1997, the provision for loan losses declined by
$570,000 to $530,000, compared to the same period in 1996. The decline in the
provision is the result of management's evaluation of current portfolio loan
loss exposure. Contributing to the decline in the provision was the decline in
nonaccrual loans between June 30, 1996 and June 30, 1997, from $4.2 million to
$2.2 million. Although the Company maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations. The calculation of the
adequacy of the allowance for loan losses is based on several factors, including
underlying loan collateral values, delinquency trends and historical loan loss
experience. The ratio of nonaccrual loans to total loans was 0.95% at June 30,
1997 and 0.66% at December 31, 1996. The ratio of the allowance for loan losses
to nonaccrual loans was 176% at June 30, 1997 and 245% at December 31, 1996. The
allowance for loan losses as a percentage of loans stood at 1.67% at June 30,
1997, compared to 1.61% at December 31, 1996.
13
<PAGE>
NONINTEREST INCOME
Noninterest income for the quarter and six months ended June 30, 1997
decreased by $182,000 and $244,000, respectively, compared to the same periods
in 1996. The major components of noninterest income include late fees and loan
prepayment fees. The decrease for the quarter and six months ended June 30,
1997, is due to a recovery of $350,000, during the second quarter of 1996, on a
corporate debt security that had been written off during 1994.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter and six months ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
-------------------------------- ---------------------------------
For the Quarter Ended For the Six Months Ended
June 30 June 30
-------------------------------- ---------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
DOLLARS IN THOUSANDS 1997 1996 $ % 1997 1996 $ %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustments to OREO $ 210 $ 5 $ 205 4100% $ 340 $ 70 $270 386%
Other real estate owned expense 4 15 (11) -73% 18 23 (5) -22%
Salaries and employee benefits 1,276 1,042 234 22% 2,522 2,105 417 20%
Net occupancy expenses 393 431 (38) -9% 754 782 (28) -4%
FDIC insurance premiums 29 17 12 71% 54 33 21 64%
Credit and collections expenses 12 13 (1) -8% 12 25 (13) -52%
Communication and data processing 157 137 20 15% 322 256 66 26%
Other expenses 237 277 (40) -14% 519 430 89 21%
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 2,318 $ 1,937 $ 381 20% $4,541 $3,724 $817 22%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the quarter and six months ended June 30, 1997
increased by $381,000 and $817,000, respectively, compared to the same periods
in 1996. These changes are detailed on the table above and significant changes
in noninterest expense are described below.
The valuation adjustment to OREO for the quarter and six months ended
June 30, 1997, increased by $205,000 and $270,000, respectively, compared to the
same periods in 1996. The increases were the result of the Company recording
partial write downs on two OREO properties during 1997.
Salaries and employee benefits for the quarter and six months ended June
30, 1997 increased by $234,000 and $417,000, respectively, compared to the same
periods in 1996. These increases were primarily the result of marketing and
administrative bonus accruals of $164,000 and $284,000 for the quarter and six
months ended June 30, 1997, compared to $15,000 and $64,000, respectively,
during the same periods in 1996. In addition, the Company established a SBA
lending department during the second and third quarters of 1996, which was fully
staffed for all of 1997. The Company also provided an approximate 4% salary
increase to most employee base salaries in January of 1997.
Communication and data processing expense for the quarter and six months
ended June 30, 1997, increased by $20,000 and $66,000, respectively, compared to
the same periods in 1996. These increase were primarily the result of the
Company's establishment of the SBA lending department during the second and
third quarters of 1996, which increased communication and telephone usage.
Other expenses for the quarter ended June 30, 1997, decreased by $40,000
compared to the same period in 1996, due to a recovery of loan servicing
expenses during the second quarter of 1997. Other expenses for the six months
ended June 30, 1997, increased by $89,000 compared to the same period in 1996,
due to an increase in advertising expense during 1997 and a reduction in the
accrual for Delaware franchise taxes, which occurred in the second quarter of
1996.
INCOME TAX PROVISION
For the quarters ended June 30, 1997 and 1996, the Company's provision
for income taxes was $599,000 and $460,000, or 39.8% and 38.1%, respectively.
For the six months ended June 30, 1997 and 1996, the Company's provision for
income taxes was $1,146,000 and $910,000, or 39.8% and 38.4%, respectively. The
difference between the Company's statutory tax rate of 41.5% and its effective
rate for these periods is primarily due to California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
14
<PAGE>
FINANCIAL CONDITION
Total assets of the Company increased to $371.1 million at June 30, 1997
from $304.1 million at December 31, 1996, a $67.0 million increase. This
increase reflects the purchase of approximately $52.8 million of investment
securities, net of maturities, sales and calls, and $15.9 million of loan
originations, net of loan maturities and payoffs, during the first six months of
1997. The Company funded this asset growth by increasing its interest-bearing
liabilities by $65.2 million to $341.9 million at June 30, 1997 from $276.7
million at December 31, 1996. The increase in interest-bearing liabilities
reflects an increase in deposits of $38.3 million, primarily due to the growth
in the Company's savings account balances that grew $23.9 million and
certificates of deposit balances that grew $16.2 million during the six months
ended June 30, 1997. Other borrowings were increased by $26.9 million to $36.9
million during the six months ended June 30, 1997.
Loans, net of deferred fees and the allowance for loan losses, increased
by $15.6 million to $223.3 million at June 30, 1997, from $207.7 million at
December 31, 1996. The Company originated $29.0 million in new real estate and
business loans during the first six months ended June 30, 1997. Off-setting
these originations, the Company experienced $12.8 million in loan payoffs, $1.1
million in gross loan transfers prior to write-offs to OREO and $152,000 in
actual loan write-offs during the six months ended June 30, 1997.
15
<PAGE>
LOAN PORTFOLIO
Pacific Crest Bank focuses its lending activities on commercial real estate
loans to individuals and small businesses. At June 30, 1997, $221.1 million, or
$97.1%, of Pacific Crest Bank's loans consisted of loans secured by commercial
real estate. Commercial real estate loans are generally made for terms between
one to ten years at adjustable rates of interest, with interest floors.
Virtually all of Pacific Crest Bank's adjustable rate commercial real estate
loans adjust quarterly. The following table sets forth certain information
regarding the real property collateral securing Pacific Crest Bank's commercial
real estate loans at June 30, 1997:
<TABLE>
<CAPTION>
At June 30, 1997
----------------------------------------------------------------------------
NUMBER AVERAGE PERCENT OF
(DOLLARS IN THOUSANDS) OF LOANS AMOUNT LOAN SIZE TOTAL
- -------------------------------------------------- ------------------- ---------------------- --------------------- -----------
<S> <C> <C> <C> <C>
Industrial-manufacturing 19 $ 11,411 $ 601 5.16%
Industrial-warehouse 35 19,216 549 8.69%
Industrial-multi-use 20 12,365 618 5.59%
------------------- ---------------------- --------------------- -----------
Total loans secured by industrial buildings 74 42,992 581 19.44%
------------------- ---------------------- --------------------- -----------
Medical-other 1 794 794 0.36%
Medical-office buildings 13 8,633 664 3.90%
------------------- ---------------------- --------------------- -----------
Total loans secured by medical buildings 14 9,427 673 4.26%
------------------- ---------------------- --------------------- -----------
Retail-strip centers 85 67,402 793 30.48%
Auto repair facilities 25 10,727 429 4.85%
Motel and hotel 16 11,397 712 5.15%
Retail and office use 33 24,514 743 11.08%
Restaurants 25 12,272 491 5.55%
Grocery and supermarket 4 1,751 438 0.79%
Recording studio 3 1,791 597 0.81%
Self storage 1 840 840 0.38%
Single retail properties 16 7,940 496 3.59%
Retail and office units 15 9,057 604 4.10%
Retail and residential 6 3,577 596 1.62%
Retail and industrial 3 2,171 724 0.98%
Land 2 409 205 0.18%
Construction strip center 1 725 725 0.33%
Other miscellaneous 29 14,157 488 6.41%
------------------- ---------------------- --------------------- -----------
Total retail and other collateral 264 168,730 639 76.30%
=================== ====================== ===================== ===========
Total commercial real estate mortgage loans 352 221,149 $ 628 100.00%
------------------- ---------------------- --------------------- -----------
</TABLE>
16
<PAGE>
As of June 30, 1997, Pacific Crest Bank's real estate commercial loans were
geographically distributed as follows:
<TABLE>
<CAPTION>
At June 30, 1997
----------------------------------------------------------------
NUMBER OUTSTANDING % TO
OF BALANCES AT TOTAL
(DOLLARS IN THOUSANDS) LOANS JUNE 30, 1997 OUTSTANDING
- -------------------------------------------------- ------------------- ---------------------- ---------------------
<S> <C> <C> <C>
SOUTHERN CALIFORNIA COUNTIES
- ----------------------------
Los Angeles 184 $ 108,474 49.05%
Orange 48 35,378 16.00%
San Diego 23 16,294 7.37%
Ventura 11 5,550 2.51%
Riverside 9 4,701 2.13%
San Bernardino 7 4,439 2.01%
Kern 3 1,689 0.76%
Santa Barbara 1 96 0.04%
------------------- ---------------------- ---------------------
Total Southern California Counties 286 $ 176,621 79.87%
------------------- ---------------------- ---------------------
NORTHERN CALIFORNIA COUNTIES
- ----------------------------
Santa Clara 12 $ 8,408 3.80%
Sacramento 8 6,108 2.76%
Contra Costa 7 4,204 1.90%
Alameda 6 3,087 1.40%
San Francisco 6 6,312 2.85%
San Mateo 6 3,160 1.43%
Fresno 3 3,467 1.57%
Monterey 2 1,332 0.60%
Merced 2 477 0.21%
Other 9 5,960 2.70%
------------------- ---------------------- ---------------------
Total Northern California Counties 61 $ 42,515 19.22%
------------------- ---------------------- ---------------------
Washington 3 371 0.17%
Oregon 2 1,642 0.74%
------------------- ---------------------- ---------------------
Total commercial real estate mortgage loans 352 $ 221,149 100.00%
------------------- ---------------------- ---------------------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1997 increased by $395,000 from
the level at December 31, 1996, and represents 1.67% of outstanding loans at
June 30, 1997. The slight increase in the general loan loss allowance from $3.4
million at year end 1996 to $3.8 million at June 30, 1997 reflects net
charge-offs of $135,000 offset by the addition of $530,000 in loan loss
provision. Management believes that the allowance for loan losses at June 30,
1997 was adequate to absorb known and inherent risks in the loan portfolio.
Management reviews the adequacy of the allowance for loan losses on a
quarterly basis. Management utilizes its best judgement in providing for
possible loan losses and establishing the allowance for loan losses. However,
the allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. In addition, regulatory agencies as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgement of the information available to them at the
time of their examination.
Adverse economic conditions or a declining real estate market in California
could adversely affect Pacific Crest Bank's borrowers' abilities to
contractually repay their loans. A decline in the California economy could
result in deterioration in the quality of the loan portfolio and could result in
high levels of nonperforming assets and charge-offs, which would adversely
affect the financial condition and results of operations of the Company.
17
<PAGE>
The following table sets forth certain information with respect to the
Company's allowance for loan losses and valuation adjustment to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period: $ 3,400 $ 4,500
Commercial real estate mortgages:
Charge-offs (152) (2,466)
Recoveries 17 158
Provision for loan losses: 530 1,100
- ------------------------------------------------------------------------------------------
Balance at end of period: $ 3,795 $ 3,292
- ------------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.67% 1.82%
Net loan charge-offs $ 135 $ 2,308
Valuation adjustment to OREO 340 70
- ------------------------------------------------------------------------------------------
Total net loan charge-offs & OREO valuation adjustment $ 475 $ 2,378
- ------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING AND RESTRUCTURED ASSETS
The following table sets forth loans accounted for on a nonaccrual basis,
OREO and loans that were impaired due to the loans being restructured at the
dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 2,155 $ 1,386
OREO 1,914 3,469
- ------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO $ 4,069 $ 4,855
- ------------------------------------------------------------------------------------------
Total nonperforming assets to total loans and OREO 1.78% 2.26%
- ------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 1.10% 1.60%
- ------------------------------------------------------------------------------------------
Troubled debt restructurings $ 719 $ 719
- ------------------------------------------------------------------------------------------
</TABLE>
NONACCRUAL LOANS
Nonaccrual loans are loans, not classified as troubled debt restructurings
or OREO, that show little or no current payment ability. These loans are
supported, however, by collateral or cash flow that support the collectibility
of the Company's remaining book balance, after consideration of the allowance
for loan losses. The Company had three nonaccrual loans at June 30, 1997,
totaling $2,155,000. During the six months ended June 30, 1997, the Company
transferred four loans from accrual to nonaccrual status totaling $2,774,000,
transferred one loan of $269,000 from nonaccrual to accrual status, transferred
two loans totaling $657,000 from nonaccrual to OREO status, had two nonaccrual
loans totaling $916,000 payoff, and had charge-offs totaling $152,000 related to
nonaccrual loans. Nonaccrual loan balances are net of any prior write-offs, but
any specifically assigned portions of the general allowance for loan losses are
not deducted from the nonaccrual loan balances above.
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had three properties in this category at June 30, 1997,
totaling $1,914,000. The Company had one property with $1,086,000 in net book
value, or 56.7% of the Company's OREO balance. The remaining $828,000 in OREO
balances consisted of two properties.
The Company's OREO balance declined to $1,914,000 at June 30, 1997, from
$3,469,000 at December 31, 1996, a decline of $1,555,000 or 44.8%. This reflects
the sale of four properties with a combined net balance of $1,793,000 during the
six months ended June 30, 1997. The Company transferred two nonaccrual loans
with a combined fair value of $657,000 into OREO for the six months ended June
30, 1997. The Company recorded partial write downs on two OREO properties of
$340,000 for the six months ended June 30, 1997, as compared to $70,000 for the
same period in 1996. The increase in the OREO valuation adjustment between the
two periods reflects a downward revision in the estimated liquidation value of
two OREO properties.
18
<PAGE>
TROUBLED DEBT RESTRUCTURINGS
A troubled debt restructuring ("TDR") is a loan in which the Company, for
reasons related to the borrowers financial difficulties, grants a permanent
concession to the borrower, such as a reduction in the loan's fully-indexed
interest rate, a reduction in the face amount of the debt, or an extension of
the maturity date of the loan, that the Company would not otherwise consider. At
June 30, 1997, the Company had one loan with a principal balance of $719,000
that was categorized as a TDR. TDR balances are net of any prior write-offs, but
any specifically assigned portions of the allowance for loan losses are not
deducted from the TDR loan balance.
INVESTMENT SECURITIES
The Company's investment portfolio is used for both liquidity purposes and
for investment income. For additional information on the composition of the
investment portfolio and the scheduled maturities of securities in both the
held-to-maturity portfolio and available-for-sale portfolio at June 30, 1997,
see Note 5 of Notes to Consolidated Financial Statements (Unaudited) in this
Quarterly Report on Form 10-Q.
SOURCES OF FUNDS
DEPOSITS
The Company's major sources of funds is FDIC-insured deposits, raised
through its subsidiary, Pacific Crest Bank. At June 30, 1997, the Company had
total deposits of $305.0 million, compared to $266.7 million at December 31,
1996. The Company offers money market checking accounts, money market savings
accounts and term certificates of deposit, with maturities ranging from 30 days
to five years. The Company attracts the depositors by offering rates that
are generally higher than rates offered by independent commercial banks that
offer a broader array of services. The Company also conducts a wholesale deposit
operation through which deposits from other financial institutions located
throughout the United States are solicited. Information concerning the
composition of the Company's deposit mix at June 30, 1997 and December 31, 1996
are set forth on the Consolidated Balance Sheets included in this Quarterly
Report on Form 10-Q.
The following table sets forth maturities of certificates of deposit at
June 30, 1997:
<TABLE>
<CAPTION>
3 MONTHS OVER 3 TO OVER 6 TO OVER 12
(Dollars in thousands) OR LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
- --------------------------------------------- ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 22,556 $ 21,510 $ 40,706 $ 10,542 $ 95,314
Certificates of deposit $100,000 or more 2,267 1,647 4,706 1,086 9,706
- --------------------------------------------- ----------- ----------- ------------ ---------- -------------
Total certificates of deposit $ 24,823 $ 23,157 $ 45,412 $ 11,628 $ 105,020
- --------------------------------------------- ----------- ----------- ------------ ---------- -------------
</TABLE>
OTHER BORROWINGS
The Company had $36.9 million in short term borrowings at June 30, 1997,
compared to $10.0 million at December 31, 1996. The rates paid during 1997 on
the Company's short term borrowings ranged from 5.65% to 6.80%. The repayment
terms on this short-term debt ranged from one day to four weeks. The interest
rate paid can vary daily, but typically approximates the federal fund rates plus
50 basis points. This debt is secured by the Company's U.S. government sponsored
agency securities. The Company utilizes these lines to cover short-term
financing needs for loan fundings or security purchases.
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital to support
consistent and sustained asset growth, to anticipate credit risks, and to ensure
that regulatory and industry capital guidelines and standards are maintained.
Pacific Crest Bank is subject to leverage and risk-based capital adequacy
standards applicable to FDIC-insured institutions. At June 30, 1997, Pacific
Crest Bank was in compliance with all such capital requirements.
19
<PAGE>
Shareholders' equity increased by $1.8 million to $26.3 million during the
six months ended June 30, 1997. This increase reflects the increase to
shareholders' equity by the six months of net income of $1.7 million and a
$72,000 increase resulting from the purchase of stock under the employee and
directors' stock purchase plans. Also, contributing to this increase was an
$18,000 decrease to the unrealized loss on securities available-for-sale.
Pacific Crest Bank is required to maintain certain minimum capital levels
under federal banking law. The following table sets forth Pacific Crest Bank's
regulatory capital ratios at June 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS (1) AT JUNE 30, 1997 AT DECEMBER 31, 1996
================================ ================================
Minimum Minimum
Required Actual Excess Required Actual Excess
------------ --------- ---------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio (2) 4.00% 7.07% 3.07% 4.00% 7.96% 3.96%
Tier 1 risk-based capital ratio 4.00% 10.00% 6.00% 4.00% 10.31% 6.31%
Total risk-based capital ratio 8.00% 11.25% 3.25% 8.00% 11.56% 3.56%
========================================================================================================
</TABLE>
(1) Capital ratios of Pacific Crest Bank only.
(2) Calculation based on quarter end asset balances of Pacific Crest Bank.
LIQUIDITY
The Company's primary sources of funds are deposits and payments of
principal and interest on loans. While maturities and scheduled principal
amortization on loans are a reasonable predictable source of funds, deposit
flows and mortgage loan prepayments are greatly influenced by the level of
interest rates, economic conditions, and competition.
The Company's holdings of cash and cash equivalents during the six months
ended June 30, 1997 decreased by $930,000 to $1.9 million at June 30, 1997, from
$2.8 million at December 31, 1996. The Company purchased $52.8 million, net of
maturities, calls and sales, of U.S. government sponsored agency securities
during the six months ended June 30, 1997. The Company funded both the growth in
securities and the net increase in the loan portfolio, of $15.6 million, by
raising $38.3 million of interest-bearing deposits, and by borrowing an
additional $26.9 million under reverse repurchase agreements.
Loans, net of deferred fees and the allowance for loan losses, increased by
$15.6 million to $223.3 million at June 30, 1997, from $207.7 million at
December 31, 1996. The Company originated $29.0 million in real estate and
business loans during the six months ended June 30, 1997. Off-setting these
originations, the Company experienced $12.8 million in loan payoffs, $1.1
million in gross loan transfers prior to write-offs to OREO and $152,000 in
actual loan write-offs during the six months ended June 30, 1997.
The liquidity of the parent company, Pacific Crest, is primarily dependent
on the payment of cash dividends by its subsidiary, Pacific Crest Bank. Without
dividends from Pacific Crest Bank, Pacific Crest must rely solely on existing
cash and investments which total $243,000 at June 30, 1997. This amount is also
necessary to pay future operating expenses and existing current liabilities, and
for the possible infusion of capital into Pacific Crest Bank.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that sufficient retained
earnings are available to pay the dividend. Pacific Crest Bank had retained
earnings of $1.5 million at June 30, 1997. The total amount of retained earnings
is unrestricted and available for dividend payments.
ASSET/LIABILITY MANAGEMENT
The purpose of asset liability management is to minimize the risk of loss
resulting from changes in interest rates. One method of assessing the potential
risk associated with changes in the interest rates is to examine the extent to
which assets and liabilities are "interest rate sensitive" and by monitoring the
institution's interest rate sensitivity "gap". An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the
20
<PAGE>
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 June 30, 1997, total interest-bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
repricing or maturing in the same period by $123.0 million, representing a
negative cumulative one-year gap of 33.1%. The shortcomings associated with
using a static gap analysis to evaluate interest rate risk are described below.
To the extent consistent with its interest rate spread objectives, the
Company attempts to reduce its interest rate risk and has taken actions to
minimize the potential negative impact of changing interest rates. In addition
to focusing on making commercial real estate loans which provide for quarterly
repricing, the Company has written most of its loans with interest rate floors.
The fully indexed rate on these loans were, generally, equal to or in excess of
the interest rate floors. It may be anticipated that loans with interest rate
floors will increase the net interest income in a declining interest rate
environment as affected loans do not reprice downward to their fully indexed
rate when interest rates fall. No assurances can be given that such will be the
case, however, particularly if borrowers are able to refinance or renegotiate
their loans when interest rates decline.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at June 30, 1997, based on certain assumptions.
Except as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular period were determined in accordance with the
earlier of the repricing timing or maturity date of the asset or liability. The
Company has assumed, for purposes of this table only, that its savings accounts,
money market accounts, and other borrowings, which totaled $181.7 million, $18.3
million and $36.9 million, respectively at June 30, 1997, reprice immediately.
Certain shortcomings are inherent in the method of using static gap
analysis to evaluate interest rate risk as presented in the following table.
For example, static gap analysis assumes that when interest rates change, all
rates change by the same amount and at the same time. Although certain assets
and liabilities may be available for repricing at the same time, assets and
liabilities often react independently to market interest rate changes, resulting
in variable degrees of change dependent on the type of asset or liability.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag changes in market rates. Additionally, some adjustable
rate loans have features, which restrict changes in interest rates on a short-
term basis and over the life of the asset. Loan prepayments and early
withdrawal of certificates of deposit could also cause the interest
sensitivities to vary from those reflected in the table. Due to these factors,
the interest rate sensitivity static gap report may not provide a complete or
accurate assessment of the Company's exposure to changes in interest rates.
In response to the limitations inherent with static gap analysis, the
impact of fluctuations in interest rates on the Company's net interest income
has been evaluated through an interest rate shock analysis. This analysis
applies "change ratios" to assets and liabilities based upon various assumptions
regarding their repricing characteristics. This enhanced interest rate risk
management tool is used by the Company to more accurately evaluate and manage
the degree of interest rate risk. As of June 30, 1997, management's analysis
indicates that the Company's net interest income would decrease a maximum of 5%
if rates rose 200 basis points.
21
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Immediate Over One
Through Year Through Over
(DOLLARS IN THOUSANDS) One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS SUBJECTS TO INTEREST RATE ADJUSTMENT:
Repurchase agreements $ 221 $ - $ - $ 221
Investment securities - held to maturity - - 40,962 40,962
Investment securities - available for sale - 14,930 80,438 95,368
Total loans, net of deferred fees 207,019 18,775 1,269 227,063
- -------------------------------------------------------------------------------------------------------------------
Total $ 207,240 $ 33,705 $ 122,669 363,614
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES SUBJECT TO INTEREST RATE ADJUSTMENT:
Certificate of deposit $ 93,392 $ 11,628 - $ 105,020
Savings accounts 181,657 - - 181,657
Money market checking 18,277 - - 18,277
Other borrowings 36,900 - - 36,900
- -------------------------------------------------------------------------------------------------------------------
Total $ 330,226 $ 11,628 - $ 341,854
- -------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of rate-sensitive
assets over rate-sensitive liabilities $(122,986) $ 22,077 $ 122,669 $ 21,760
===================================================================================================================
Cumulative excess (deficiency) of
rate-sensitive assets over rate-sensitive liabilities $(122,986) $ (100,909) $ 21,760
===================================================================================================================
As a percent of total assets (33.1)% (27.2)% 5.9%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain matters discussed in this Quarterly Report on Form 10-Q may
constitute forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 which are not
historical facts. The Company cautions readers that the following important
factors could affect the Company's business and cause actual results to differ
materially from those expressed in forward-looking statements made by, on or
behalf of, the Company.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are primarily located in California and
concentrated primarily in Southern California. As a result of the geographic
concentration, the Company's results depend largely upon economic conditions in
this area. A deterioration in economic conditions in the Company's market
areas, particularly in the real estate industry, could have a material adverse
impact on the quality of the Company's loan portfolio and the demand for its
products and services, and accordingly, its results of operations.
LENDING CONCENTRATION
Pacific Crest Bank currently engages in commercial real estate lending,
including loans secured by multifamily residential property, primarily in
California. At June 30, 1997, $221.1 million (or 97.1%) of Pacific Crest Bank's
loans consisted of loans secured by commercial real estate. Collateral for
Pacific Crest Bank's loans includes retail strip centers, industrial income-
producing and owner/user properties, small office buildings, mixed-use
retail/office and retail/residential buildings, and special purpose properties
such as auto repair facilities, restaurants and motels.
Commercial real estate loans generally present a higher level of risk than
do loans secured by one-to-four family residences. This greater risk is due to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on commercial
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed or, in the case of owner-occupied real property, if
the business of the borrower deteriorates), the borrower's ability to repay the
loan may be impaired.
22
<PAGE>
CREDIT QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrower's guarantors and related parties
may fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. Such policies and procedures, however, may not
prevent unexpected losses that could materially adversely affect the Company's
results of operations.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between the
cost of funds, primarily deposits, and the yield on earning assets. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence interest rates,
the volume and mix of interest-earning assets and interest-bearing liabilities,
and the level of nonperforming assets. Fluctuations in interest rates affect the
demand of customers for the Company's products and services. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities reprice or mature more slowly or more rapidly or on a different
basis than its interest-earning assets. Although the Company believes its
current level of interest rate sensitivity is reasonable, significant
fluctuations in interest rates may have an adverse affect on the Company's
results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY
The banking industry is subject to extensive federal and state supervision
and regulation. Such regulation limits the manner in which the Company conducts
its business, undertakes new investments and activities and obtains financing.
This regulation is designed primarily for the protection of the deposit
insurance funds and consumers, and not to benefit holders of the Company's
securities. Financial institution regulation has been the subject of significant
legislation in recent years, and may be the subject of further significant
legislation in the future, none of which is in the control of the Company.
Significant new laws or changes in, or repeals of, existing laws may cause the
Company's results to differ materially. Further, federal monetary policy,
particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for the Company, primarily through open market
operations in United States government securities, the discount rate for bank
borrowings and bank reserve requirements, and a material change in these
conditions would be likely to have a material impact on the Company's results of
operations.
COMPETITION
The banking and financial services business in California generally, and in
Pacific Crest Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. Pacific
Crest Bank competes for loans, deposits and customers for financial services
with other commercial banks, thrift and loans, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions, and other nonbank
financial service providers. Many of these competitors are much larger in total
assets and capitalization, have greater access to capital markets and offer a
broader array of financial services than Pacific Crest Bank. There can be no
assurance that Pacific Crest Bank will be able to compete effectively in its
markets and the results of operations of the Company could be adversely affected
if circumstances affecting the nature or level of competition change.
While management believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance that
the results described in such forward-looking statements will, in fact, be
achieved.
23
<PAGE>
PART II-OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable.
ITEM 2 CHANGES IN SECURITIES
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 1997, the Annual Meeting of Shareholders of the Company was
held for the purpose of electing one person to the Board of Directors
for a term of three years and to serve until his or her successor is
elected and qualified. The nominee was Rudolph I. Estrada. A total of
2,819,477 shares were represented at the Meeting. 2,816,884 shares were
cast "For" the election of Mr. Estrada, and 2,593 shares were "WITHHELD"
from voting for the nominee.
In addition, a proposal to re-approve the 1993 Equity Incentive Plan
("Plan") was voted on. 2,680,322 shares were cast "For" the approval of
the Plan, 32,057 shares were cast "Against" the Plan. There was a total
of 2,483 shares that "ABSTAINED" from casting a vote on the Plan.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Financial data schedules.
(b) REPORTS ON FORM 8-K:
-------------------
The Company filed no reports on Form 8-K during the quarter ended June
30, 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
Date: August 13, 1997 /s/Gary Wehrle
--------------------- ----------------------
Gary Wehrle
President and Chief Executive Officer
Date: August 13, 1997 /s/Robert J. Dennen
--------------------- ----------------------
Robert J. Dennen
Vice President, Chief Financial Officer
Corporate Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,683
<INT-BEARING-DEPOSITS> 304,954
<FED-FUNDS-SOLD> 221
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,368
<INVESTMENTS-CARRYING> 40,962
<INVESTMENTS-MARKET> 40,835
<LOANS> 227,063
<ALLOWANCE> 3,795
<TOTAL-ASSETS> 371,126
<DEPOSITS> 304,954
<SHORT-TERM> 36,900
<LIABILITIES-OTHER> 2,984
<LONG-TERM> 0
0
0
<COMMON> 26,288
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 371,126
<INTEREST-LOAN> 5,960
<INTEREST-INVEST> 2,203
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,163
<INTEREST-DEPOSIT> 4,034
<INTEREST-EXPENSE> 4,389
<INTEREST-INCOME-NET> 3,774
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,318
<INCOME-PRETAX> 1,505
<INCOME-PRE-EXTRAORDINARY> 1,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 906
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 4.42
<LOANS-NON> 2,155
<LOANS-PAST> 2,155
<LOANS-TROUBLED> 719
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,400
<CHARGE-OFFS> (152)
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 3,795
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
