<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 MARCH 31, 1998
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 May 13, 1998.
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
Common Stock, $.01 par value 2,967,367
9.375% Cumulative Trust Preferred Securities of PCC Capital I
Guarantee of Pacific Crest Capital, Inc. with respect to the
9.375% Cumulative Trust Preferred Securities of PCC Capital I
<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 ............................................. 15
SIGNATURES .............................................................. 16
</TABLE>
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
Cash $ 434 $ 1,966
Securities purchased under resale agreements 654 426
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,088 2,392
- ----------------------------------------------------------------------------------------------------------
U.S. government agency securities (Note 5):
Held to maturity, at amortized cost 4,999 4,998
Available for sale, at market 247,394 217,738
Loans
Commercial mortgage 228,020 223,902
Business Loans - SBA 6,743 5,711
Residential mortgage 1,591 1,593
Commercial business/other 390 690
- ----------------------------------------------------------------------------------------------------------
Total loans 236,744 231,896
Deferred loan fees 770 763
Allowance for loan losses 4,307 4,100
- ----------------------------------------------------------------------------------------------------------
Net loans 231,667 227,033
Accrued interest receivable 6,779 5,367
Prepaid expenses and other assets 1,454 1,478
Deferred income taxes 2,948 2,622
Other real estate owned 2,023 2,064
Premises and equipment 614 617
- ----------------------------------------------------------------------------------------------------------
Total assets $498,966 $464,309
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Savings accounts $198,871 $200,255
Certificates of deposit 140,683 131,213
Money market checking 18,291 16,703
- ----------------------------------------------------------------------------------------------------------
Total deposits 357,845 348,171
Reverse repurchase agreements 34,100 21,500
Term borrowings 55,000 45,000
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures 17,250 17,250
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 464,195 431,921
Accrued interest and other liabilities 4,935 3,580
- ----------------------------------------------------------------------------------------------------------
Total liabilities 469,130 435,501
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 6 and 7):
Preferred stock, $.01 par value, 2,000,000 shares authorized
no shares issued or outstanding - -
Common stock, $.01 par value, 10,000,000
shares authorized, 2,982,807 shares issued and
outstanding at March 31, 1998, 2,971,946 shares
issued and outstanding at December 31, 1997 28,036 27,944
Retained earnings 1,950 849
Accumulated other comprehensive income 1,024 1,189
Common stock in treasury, at cost, 85,000 shares (1,174) (1,174)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 29,836 28,808
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $498,966 $464,309
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Book value per common share (Note 3) $ 10.30 $ 9.97
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest on loans, including fees $6,219 $5,740
Securities purchased under resale agreements 4 4
U.S. government sponsored agency securities
Held to maturity 95 814
Available for sale 4,269 1,119
- ----------------------------------------------------------------------------------------------------------
Total interest income 10,587 7,677
Interest expense:
Interest expense on interest-bearing deposits
Savings accounts 2,572 2,109
Certificates of deposit 1,948 1,366
Money market checking accounts 216 230
- ----------------------------------------------------------------------------------------------------------
Total interest expense on deposits 4,736 3,705
Reverse repurchase agreements 496 249
Term borrowings 785 -
Trust preferred securities 404 -
- ----------------------------------------------------------------------------------------------------------
Total interest expense 6,421 3,954
- ----------------------------------------------------------------------------------------------------------
Net interest income 4,166 3,723
Provision for loan losses 200 230
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,966 3,493
Noninterest income:
Other noninterest income 201 101
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 201 101
- ----------------------------------------------------------------------------------------------------------
Noninterest expense:
Valuation adjustments to other real estate owned - 130
Other real estate owned expenses 44 14
Salaries and employee benefits 1,357 1,246
Net occupancy expenses 409 361
FDIC insurance premiums 10 25
Credit and collection expenses 13 -
Communication and data processing 191 165
Other expenses 277 282
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense 2,301 2,223
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 1,866 1,371
Income tax provision (Note 2) 765 547
- ----------------------------------------------------------------------------------------------------------
Net income $1,101 $ 824
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Per share data (Note 3):
Basic earnings per common share $ 0.38 $ 0.28
- ----------------------------------------------------------------------------------------------------------
Weighted average basic common shares outstanding (in thousands) 2,893 2,937
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.36 $ 0.27
- ----------------------------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding (in thousands) 3,058 3,045
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON TREASURY EARNINGS OTHER TOTAL TOTAL
--------------------------------- (ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT DEFICIT) INCOME EQUITY INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 2,960 $27,838 (30) $(255) $(2,858) $(257) $24,468
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - 3,707 - 3,707 $3,707
Other comprehensive income,
net of tax:
Unrealized gain on securities - - - - - 1,446 1,446 1,446
Total Comprehensive ------------
income: $5,153
Issuance of common stock:
Under employee stock
purchase plan 7 52 - - - - 52
Under non-employee directors'
stock purchase plan 3 39 - - - - 39
Under employee stock option
plan 2 15 - - - - 15
Purchase of treasury shares - - (55) (919) - - (919)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 2,972 $27,944 (85) $(1,174) $849 $1,189 $28,808
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income: - - - - 1,101 - 1,101 $1,101
Other comprehensive income,
net of tax
Unrealized loss on securities - - - - - (165) (165) (165)
Total Comprehensive -----------
income: $ 936
Issuance of common stock:
Under employee stock
purchase plan 6 63 - - - - 63
Under employee stock option plan 5 29 - - - - 29
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 2,983 $28,036 (85) $(1,174) $1,950 1,024 29,836
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,101 $ 824
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 200 230
Valuation adjustments to OREO - 130
Depreciation and amortization 73 67
Amortization of deferred loan fees (109) (73)
Amortization/accretion of securities (1) (5)
Changes in operating assets and liabilities:
Accrued interest receivable (1,412) (2,015)
Prepaid expenses and other assets 24 342
Deferred income taxes (147) 382
Accrued interest and other liabilities 1,355 (722)
- -------------------------------------------------------------------------------------------------------
Net cash provided by /(used in) operating activities 1,084 (840)
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored securities:
Held to maturity - (14,997)
Available for sale (30,000) (20,800)
Net increase in loans (4,684) (4,934)
Purchases of equipment and leasehold improvements, net (70) (42)
Proceeds from sale of other real estate owned - 661
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,754) (40,112)
FINANCING ACTIVITIES:
Net (decrease)/increase in savings accounts (1,384) 14,281
Net increase in CDs 9,470 6,392
Net increase/(decrease) in money market checking 1,588 (1,566)
Net increase in reverse repurchase agreements 12,600 20,000
Net increase in term borrowings 10,000 -
Proceeds from the issuance of common stock 92 61
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,366 39,168
Net decrease in cash and cash equivalents (1,304) (1,784)
Cash and cash equivalents at beginning of period 2,392 2,834
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,088 $1,050
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,593 $ 3,896
Income taxes $ 150 $ -
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ - $ 154
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
- -------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The interim financial statements included herein have been prepared by
Pacific Crest Capital, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Pacific Crest
Capital, Inc. together with its 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 such SEC rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest
Annual Report. In the opinion of management, all adjustments, including
normal recurring adjustments necessary to present fairly the financial
position of the Company with respect to the interim financial statements, and
the results of its operations for the interim period ended March 31, 1998,
have been included. Certain reclassifications have been made to prior year
amounts to conform to the 1998 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 March 31, 1998 and 1997, the Company estimated
its provision for income taxes at $765,000 or 41.0% and $547,000 or 39.9%,
respectively. The difference between the Company's statutory tax rate and its
effective tax rate, for the quarters ended March 31, 1998 and 1997, was due
to California tax deductions (credits) generated by the Company on loans made
in special tax zones within California.
- -------------------------------------------------------------------------------
NOTE 3. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------
Book value per common share was calculated by dividing total
shareholders' equity by the number of common shares outstanding, less
treasury shares, at March 31, 1998 and December 31, 1997. The number of
common shares used in this calculation was 2,982,807, less 85,000 of treasury
shares at March 31, 1998, and 2,971,946, less 85,000 treasury shares at
December 31, 1997.
Basic and diluted earnings per common share for the quarter ended March
31, 1998 and 1997, were determined by dividing net income by the weighted
average common shares outstanding. For the diluted earnings per share
computation, the common shares outstanding were adjusted to reflect the
number of common stock equivalents outstanding based on the number of
outstanding stock options issued by the Company utilizing the treasury stock
method. See table below for the diluted earnings per share computations:
<TABLE>
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA) QUARTER ENDED 3/31/98 QUARTER ENDED 3/31/97
- ------------------------------------------------------------------------------------- -----------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
-------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to common stockholders $1,101 2,893 $0.38 $824 2,937 $ 0.28
-------------------------------------- -----------------------------------
Effect of Dilutive Securities
Stock Options - 165 (0.02) - 108 (0.01)
Diluted EPS
-------------------------------------- -----------------------------------
Income available to common stockholders $1,101 3,058 $0.36 $824 3,045 $0.27
-------------------------------------- -----------------------------------
-------------------------------------- -----------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 4. CONTINGENCIES
- -------------------------------------------------------------------------------
LITIGATION
There is one lawsuit and claim pending against the Company which
management considers incident to normal operation. Management, after review,
including consultation with counsel, believes that any ultimate liability, if
any, which could arise from this lawsuit and claim would not materially affect
the consolidated financial position, results of operations or liquidity 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 March 31, 1998 were
as follows:
5
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government agency securities
Held to maturity $ 4,999 $ 37 $ - $ 5,036
Available for sale 245,710 1,803 117 247,394
- ---------------------------------------------------------------------------------------------------------------
Total investment securities $250,709 $1,840 $117 $252,430
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's security portfolio consists primarily 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 the securities stated maturity date. The Company's
security portfolio have call dates ranging between three months through four
years. The Company believes that the majority of its securities will be called
by the issuing agency prior to their final maturity date. The following table
reflects the scheduled maturities in the Company's investment securities
portfolio at March 31, 1998:
<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 $ 4,999 $ 5,036 7.57% 8.6 years
------------------------------------------------------------
Total held-to-maturity securities: $ 4,999 $ 5,036 7.57% 8.6 years
------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
Due from one to five years $ 15,000 $ 15,056 6.55% 4.2 years
Due from five to ten years 220,710 222,397 7.05% 8.4 years
Due over ten years 10,000 9,941 7.00% 10.8 years
------------------------------------------------------------
Total available-for-sale securities: $245,710 $247,394 7.01% 8.2 years
------------------------------------------------------------
------------------------------------------------------------
Total investment securities $250,709 $252,430 7.03% 8.2 years
------------------------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $96.2 million were
pledged to secure borrowings aggregating $89.1 million at March 31, 1998.
- -------------------------------------------------------------------------------
NOTE 6. CAPITAL
- -------------------------------------------------------------------------------
At March 31, 1998, 10,000,000 shares of $0.01 par value common stock were
authorized of which, 2,982,807 shares were issued and outstanding. The Company
issued 5,608 shares of common stock on January 2, 1998 for employees
participating in the Employee Stock Purchase Plan. The Company also issued 490
shares of common stock on January 21, 1998 for the Non-Employee Directors'
participating in the Non-Employee Directors' Stock Purchase Plan. The Company
issued 4,763 shares of common stock for employees exercising vested stock
options under the Company's stock option plan during the first quarter of 1998.
Pacific Crest Bank is required to maintain certain minimum capital levels
and must maintain certain capital ratios to be considered "well capitalized"
under the prompt corrective action provisions of the FDIC Improvement Act.
The following table sets forth Pacific Crest Bank's regulatory capital
ratios at March 31, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT MARCH 31, 1998 AT DECEMBER 31, 1997
------------------------------------- --------------------------------
PACIFIC CREST BANK REQUIRED ACTUAL EXCESS REQUIRED ACTUAL EXCESS
- ------------------------------------------------ ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.45% 3.45% 4.00% 7.53% 3.53%
Tier I risk-based capital ratio 4.00% 12.22% 8.22% 4.00% 12.02% 8.02%
Total risk-based capital ratio 8.00% 13.47% 5.47% 8.00% 13.27% 5.27%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 7. DIVIDENDS
- -------------------------------------------------------------------------------
As a Delaware corporation, Pacific Crest Capital, Inc., (the parent), may
pay common dividends out of surplus or, if there is no surplus, from net
profits for the current and preceding fiscal year. The parent has approximately
$9.5 million in cash plus investments, less current liabilities and short-term
debt at March 31, 1998. However, these funds are also necessary to pay future
operating expenses of the parent company, interest expense on the $17.3 million
in subordinated debentures, and possibly future capital infusion into Pacific
Crest Bank. Without dividends from Pacific Crest Bank, the parent must rely
solely on existing cash, investments and borrowings.
Pacific Crest Bank's ability to pay dividends to the parent is restricted
by California state law, which requires that retained earnings are available to
pay the dividend. At March 31, 1998, Pacific Crest Bank had unrestricted
retained earnings of $4.9 million available for dividend payments.
6
<PAGE>
- -------------------------------------------------------------------------------
NOTE 8. COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------
The following table reflects the tax effect of other comprehensive income
for the Company as of March 31, 1998:
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED MARCH 31
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Other comprehensive income (loss)
Unrealized gain/(loss) on U.S. agency securities (280) (1,028)
Tax (expense)/benefit 115 423
- --------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of taxes (165) (605)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
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 ended March 31, 1998. This analysis should be read in conjunction with
the Company's 1997 Annual Report on Form 10-K and with the unaudited financial
statements and notes as set forth on pages 1 through 7 of this report.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company.
The following discussion should be read in conjunction with the information in
the Company's consolidated financial statements and notes thereto and other
financial data included elsewhere herein. Certain statements under this caption
constitute "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, and as such, may involve risks and
uncertainties. The Company's actual results, performance and achievements may
differ materially from the results, performance and achievements expressed or
implied in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, economic conditions, competition in
the geographic and business areas in which the Company conducts its operations,
fluctuations in interest rates, credit quality and governmental regulation.
The following table sets forth certain selected financial data concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unaudited Unaudited Unaudited Unaudited Unaudited
AVERAGE BALANCE
Average Loans $230,479 $231,641 $227,533 $221,270 $210,606
Average Earning Assets 481,503 463,862 373,817 342,090 316,846
Average Assets 491,140 472,924 380,467 348,968 325,690
Average Deposits 351,178 345,416 316,474 297,936 280,133
Average Equity 29,405 28,399 26,811 25,423 24,739
PERFORMANCE RATIOS
Return on average assets (1) 0.90% 0.86% 1.01% 1.04% 1.02%
Return on average common equity (1) 14.98% 14.32% 14.31% 14.25% 13.32%
Net interest margin (2) 3.51% 3.67% 4.24% 4.42% 4.77%
CAPITAL AND LEVERAGE RATIOS (3)
Risk-based capital ratios:
Tier one 12.22% 12.02% 12.04% 10.13% 10.23%
Total 13.47% 13.27% 13.29% 11.38% 11.48%
Leverage capital ratio (4) 7.45% 7.53% 8.24% 7.07% 7.36%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.83% 1.77% 1.68% 1.67% 1.62%
Allowance for loan losses to nonaccrual loans 1889.04% 1798.25% 187.31% 176.10% 506.98%
Total nonperforming assets to total assets (5) 0.45% 0.49% 0.89% 1.10% 1.02%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations based upon annualized net income.
(2) Net interest margin is calculated by dividing annualized net income by
average earning assets.
(3) Capital ratios of Pacific Crest Bank only.
(4) Calculation is based on quarter end asset balances of Pacific Crest Bank.
(5) Non-performing assets include nonaccrual loans and other real estate owned
("OREO") and exclude troubled debt restructurings.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter ended March 31, 1998 and 1997,
present the distribution of average assets, liabilities and stockholders'
equity, the total dollar amount of interest income from average interest-
earning assets, the resultant yields and the interest expense on average
interest-bearing liabilities, expressed in both dollars and rates. All average
balances are daily average balances. Nonaccrual loans have been included in the
table as loans, having a zero yield.
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------
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 (1) $230,479 $6,219 10.94% $210,606 $5,740 11.05%
Repurchase agreements 261 4 6.22% 337 4 4.81%
U.S. government sponsored
agency securities:
Available for sale 245,765 4,269 6.95% 63,667 1,119 7.03%
Held to maturity 4,998 95 7.60% 42,236 814 7.71%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) 481,503 10,587 8.92% 316,846 7,677 9.83%
Other real estate owned 2,042 3,385
Other noninterest earning assets 11,808 8,983
Less allowance for loan losses 4,213 3,524
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $491,140 $325,690
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $198,878 2,572 5.24% $164,260 2,109 5.21%
Certificates of deposit 134,664 1,948 5.87% 96,657 1,366 5.73%
Money market checking 17,636 216 4.97% 19,216 230 4.85%
Reverse repurchase agreements 34,557 496 5.82% 18,153 249 5.56%
Term borrowings 54,333 785 5.86% - - -
Trust preferred securities 17,250 404 9.37% - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 457,318 6,421 5.69% 298,286 3,954 5.38%
Non interest-bearing liabilities 4,417 2,665
Shareholders' equity 29,405 24,739
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $491,140 $325,690
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 4,166 $3,723
Net interest rate spread (2) 3.23% 4.45%
Net interest-earning assets $ 24,185 $ 18,560
Net interest margin (3) 3.51% 4.77%
Average interest-earning assets to
average interest bearing liabilities 105.3% 106.2%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Net interest rate spread represents the average yield earned on interest-
earning assets, less the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following table presents the dollar amount of changes in interest
income and interest expense of major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each
9
<PAGE>
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes on volume
(i.e. changes in volume multiplied by old rate) and (ii) changes in rate
(i.e. changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume which cannot be segregated have
been allocated proportionately to changes due to volume and changes due to
rate.
<TABLE>
<CAPTION>
----------------------------------------
For the Quarter Ended
March 31, 1998
----------------------------------------
1998 compared to 1997
Increase (decrease) due to
----------------------------------------
Net
(DOLLARS IN THOUSANDS) Volume Rate Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans $ 537 $ (58) $ 479
Repurchase agreements (1) 1 -
U.S. government agency securities:
Available for sale 3,121 29 3,150
Held to maturity (698) (21) (719)
- -------------------------------------------------------------------------------------------------
Total change in interest income 2,959 (49) 2,910
- -------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts 448 15 463
Certificates of deposit 549 33 582
Money market checking (19) 5 (14)
Reverse repurchase agreements 235 12 247
Term borrowings 785 - 785
Trust preferred securities 404 - 404
- -------------------------------------------------------------------------------------------------
Total change in interest expense 2,402 65 2,467
- -------------------------------------------------------------------------------------------------
Changes in net interest income $ 557 $(114) $ 443
- -------------------------------------------------------------------------------------------------
</TABLE>
DETAILED COMPARISONS OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $1.1 million (or $0.36 per common share on a diluted basis)
for the quarter ended March 31, 1998, compared to $824,000 (or $0. 27 per
common share on a diluted basis) for the corresponding period in 1997. The
improvement in the first quarter of 1998 over the comparable period in 1997 is
primarily attributable to an increase in the Company's net interest income,
which was the result of the Company increase in its interest-earning assets by
$164.7 million.
NET INTEREST INCOME
Net interest income increased by $443,000 or 11.9% to $4.2 million for the
quarter ended March 31, 1998 compared to the same period of 1997. The increase
in net interest income during the quarter ended March 31, 1998 was primarily
the result of an increase of $164.7 million in the Company's average balance of
interest earning assets between the 1998 and 1997 periods. The Company's net
interest rate spread and net interest margin, both decline by approximately 120
basis points between the quarter ended March 31, 1998 and March 31, 1997. These
declines were anticipated by the Company, as the Company implemented a
strategic repositioning of its balance sheet. The Company, in order to more
effectively leverage its capital, increased its holdings of U.S. Agency
Securities during the second, third and fourth quarters of 1997. The increase
of U.S. Agency Securities, while improving both total interest income and net
interest income, resulted in the decline in the net interest margin and net
interest rate spread.
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 March 31, 1998 and 1997 was 3.23% and 4.45%,
respectively. The decline in the spread between the 1998 and 1997 periods is
the result of an increase of 31 basis points in the rates paid on interest-
bearing liabilities between the two periods, in addition to a decline of 91
basis points on the interest-earning assets. The decline in the yield of the
interest-earning asset yield is the result of increasing a greater percentage
of the Company's earning assets into lower yielding U.S. agency securities
versus higher yielding loan assets.
The net interest margin is defined as the difference between interest
income and interest expense divided by the average interest-earning assets. The
net interest margin for the quarter ended March 31, 1998 and 1997, was 3.51%
and 4.77%, respectively. The decline in the margin is the result of the reduced
net interest rate spread, and the change in the composition of the balance
sheet. Loans, the highest yielding asset, have decreased as a percentage of
average interest-earning assets while the Company's holdings in the lower
yielding U.S. government sponsored agency securities have increased as a
percentage of average interest-earning assets. Additionally, the Company has
financed a portion of these security purchases with borrowings, including the
issuance of the trust preferred securities, which on average, cost the Company
more than deposits.
10
<PAGE>
The following table sets forth the composition of average interest-earning
and average interest-bearing liabilities by category, and by the percentage of
each category to the total, for the three months ended March 31, 1998 and 1997,
including the change in average balance and yield/rate between these respective
periods:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
March 31, 1998 March 31, 1997 Avg. Bal. Net Change
-----------------------------------------------------------------------------------------------
% Avg. % Avg. Yield/
Average Compo- Yield/ Average Compo- Yield/ Rate
(DOLLARS IN THOUSANDS) Balance sition Rate Balance sition Rate $ % Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $230,479 47.9% 10.94% $210,606 66.5% 11.05% $ 19,873 (18.6%) (0.11%)
Repurchase agreements 261 0.00 6.22% 337 0.1% 4.81% (76) 0.0% 1.41%
U.S. government agency securities 250,763 52.1% 6.96% 105,903 33.4% 7.30% 144,860 18.7% (0.34%)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 481,503 100.0% 8.92% 316,846 100.0% 9.83% 164,657 (0.91%)
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits 351,178 76.8% 5.47% 280,133 93.9% 5.36% 71,045 (17.1%) 0.11%
Borrowings 88,890 19.4% 5.84% 18,153 6.1% 5.56% 70,737 13.3% 0.28%
Trust preferred securities 17,250 3.8% 9.37% - - - 17,250 3.8% 9.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $457,318 100.0% 5.69% $298,286 100.0% 5.38% $159,032 0.31%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL INTEREST INCOME
Total interest income increased by $2.9 million or 37.9% to $10.6 million
for the quarter ended March 31, 1998 compared to the same period of 1997. This
increase was primarily due to an increase in the average balance of interest
earning assets of $164.7 million for the quarter ended March 31, 1998 over the
comparable period in 1997. Average interest-earning assets increased between
the first quarter of 1997 and 1998 as a result of the growth in the loan
portfolio and the purchase of U.S. government sponsored agency securities.
Partially offsetting these increases, the overall yields on the Company's
interest-earning assets decreased by 91 basis points for the quarter ended
March 31, 1998 from the comparable periods in 1997. This decline is due to the
change in the composition of interest-earning assets which is detailed above
and the reduced yields earned on commercial loans. The primary reason for the
decline in the overall loan portfolio yield is due to the replacement of
seasoned higher yielding loans being paid off, with newly originated lower
yielding loans. This reflects the increased competitive rate pressure in the
marketplace.
The substantial increase in the average balances of the Company's U.S.
government sponsored agency securities for the quarter ended March 31, 1998,
reflects the Company's effort to optimize earnings by more effectively
leveraging capital with the purchase of these securities.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter ended March 31, 1998 increased by
$2.5 million or 62.4% compared to the same period of 1997. The increase in
interest expense resulted from an increase in the average balance of interest-
bearing liabilities of $159.0 million for the quarter ended March 31, 1998, as
compared to the same period of 1997. Average interest-bearing liabilities
continue to rise to fund the growth of the Company. The growth has primarily
been in certificates of deposit, but also includes growth in borrowings and
trust preferred capital securities. Contributing to these increases, were
increases in the rates paid on interest-bearing liabilities during 1998. The
rates paid on the Company's interest-bearing liabilities increased from 5.38%
to 5.69%, or 31 basis points, during the quarter ended March 31, 1998, compared
to the same period in 1997. The increase in the rates paid on the Company's
interest-bearing liabilities reflects the change in the composition of interest
bearing liabilities as detailed above, and the change in market interest rates
between the 1998 and 1997 periods. The change in the composition of the
interest-bearing liabilities for the quarter ended March 31, 1998, reflects a
shift in the Company's strategy to fund a portion of the growth in assets from
sources other than deposit liabilities. This shift is reflected in the growth
of borrowings and the issuance of the trust preferred securities.
PROVISION FOR LOAN LOSSES
During the quarter ended March 31, 1998, the Company's provision for loan
loss declined by $30,000 to $200,000, compared to the same period in 1997. The
decline in the provision is the result of management's evaluation of current
portfolio loan loss exposure. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that such losses will not exceed
the estimated amounts, thereby adversely affecting future results of
operations. The calculation of the adequacy of the allowance for loan losses is
based on several factors, including underlying loan collateral values,
delinquency trends and historical loan loss experience. The ratio of nonaccrual
loans to total loans, net of deferred loan fees, was .10% at March 31, 1998 and
at December 31, 1997. The ratio of the allowance for loan losses to nonaccrual
loans was 1889% at March 31, 1998 and 1798% at December 31, 1997. The allowance
for loan losses as a percentage of loans stood at 1.83% at March 31, 1998,
compared to 1.77% at December 31, 1997.
11
<PAGE>
NONINTEREST INCOME
Noninterest income for the quarter ended March 31, 1998 increased by
$100,000 as compared to the same period in 1997. This increase was primarily
the result of the high volume of loan originations and loan payoffs in the
first quarter of 1998, as compared with the same period in 1997, which resulted
in increased loan origination income and loan prepayment fees.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter ended March 31, 1998:
<TABLE>
<CAPTION>
--------------------------------------------------------
NONINTEREST EXPENSE ANALYSIS For the Quarter Ended March 31
- ------------------------------------------------------------------------------------------------------------------
AMOUNTS CHANGE
(DOLLARS IN THOUSANDS) 1998 1997 $ %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Valuation adjustments to other real estate owned $ - $ 130 (130) (100.0%)
Other real estate owned expense 44 14 30 214.3%
Salaries and employee benefits 1,357 1,246 111 8.9%
Net occupancy expenses 409 361 48 13.3%
FDIC insurance premiums 10 25 (15) (60.0%)
Credit and collections expenses 13 - 13 100.0%
Communication and information systems 191 165 26 15.8%
Other expenses 277 282 (5) (1.8%)
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,301 $2,223 78 3.5%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the quarter ended March 31, 1998 increased
$78,000, or 3.5%, over the same period in 1997. These changes are detailed on
the table above and significant changes in noninterest expense are described
below.
The valuation adjustment to OREO for the first quarter ended March 31,
1998 decreased by $130,000 compared to the same period in 1997. The Company
recorded OREO valuation adjustment on two OREO properties in 1997, while no
OREO property writedowns were necessary during the first quarter of 1998.
Salaries and employee benefits for the quarter ended March 31, 1998,
increased by $111,000, or 8.9%, as compared to the same period in 1997. The
increase is partially the result of an increased marketing and administrative
bonus accrual in 1998 versus 1997. In addition, the Company provided an
approximate 4% salary increase to most employee base salaries in January 1998.
INCOME TAX PROVISION
For the quarters ended March 31, 1998 and 1997, the Company estimated its
provision for income taxes at $765,000 or 41% and $547,000 or 39.9%,
respectively. The difference between the Company's statutory tax rate and its
effective tax rate, for the quarters ended March 31, 1998 and 1997, was due to
California tax deductions (credits) generated by the Company on loans made in
special tax zones within California.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN BALANCE SHEET
MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997
Total assets of the Company increased to $499.0 million at March 31, 1998
from $464.3 million at December 31, 1997, a $34.7 million increase. This
increase reflects the purchase of $30.0 million of investment securities and
$4.7 million of loan originations, net of loan maturities and payoffs, during
the first three months of 1998. The Company funded this asset growth by
increasing its interest bearing liabilities by $32.3 million to $464.2 million
at March 31, 1998 from $431.9 million at December 31, 1997. The increase in
interest bearing liabilities reflects an increase in new deposits of $9.7
million, primarily due to the growth in the Company's certificates of deposit
balances that grew $9.5 million during the first quarter of 1998. Borrowings in
reverse repurchase agreements were increased by $12.6 million to $34.1 million
at March 31, 1998. Additionally, the Company increased its term borrowings by
$10.0 million to $55.0 million at March 31, 1998.
Loans, net of deferred fees and the allowance for loan losses, increased
by $4.6 million to $231.7 million at March 31, 1998, from $227.0 million at
December 31, 1997. The Company originated $17.7 million in new real estate and
business loans during the first three months ended March 31, 1998. Off-setting
these originations, the Company experienced $11.3 million in loan payoffs
during the three months ended March 31, 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at March 31, 1998 increased by $207,000 from
the level at December 31, 1997, and represents 1.83% of outstanding loans at
March 31, 1998. The increase in the general loan loss reserve from $4.1 million
at
12
<PAGE>
December 31, 1997 to $4.3 million at March 31, 1998 reflects a recovery of
$7,000, in addition to the $200,000 in loan loss provision added to the reserve
for the first quarter of 1998. Management and the Board of Directors regularly
review loan performance and the adequacy of the allowance for loan losses.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and valuation adjustment to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES AT OR FOR THE PERIOD ENDED MARCH 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $4,100 $3,400
Commercial real estate mortgages:
Chargeoffs - (152)
Recoveries 7 10
Provision for loan losses: 200 230
- ------------------------------------------------------------------------------------------------------
Balance at end of period: $4,307 $3,488
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.83% 1.62%
Net loan (recoveries)/charge-offs $ (7) $ 142
Valuation adjustment to OREO - 130
- ------------------------------------------------------------------------------------------------------
Total net loan (recoveries)/charge-offs & OREO valuation adjustment $ (7) $ 272
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING 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>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 228 $ 228
Other real estate owned 2,023 2,064
- -----------------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO $2,251 $2,292
- -----------------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 0.45% 0.49%
- -----------------------------------------------------------------------------------------------------
Other impaired loans (restructured loans) $ - $ 899
- -----------------------------------------------------------------------------------------------------
</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 one nonaccrual loan at March 31,
1998, totaling $228,000. Nonaccrual loan balances are net of any prior write-
offs, but any specifically assigned portions of the general allowance for loan
losses are not deducted from the nonaccrual loan balances above.
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had four properties in this category at March 31, 1998,
totaling $2.0 million. The Company makes valuation adjustments to its OREO,
based on the most recent collateral appraisal data and other relevant
information which effectively reduces the book value of such assets to the
estimated fair market value less selling cost of the properties. The fair value
of the real estate takes into account the real estate values net of expenses
such as brokerage commission, past due property taxes, property repair
expenses, and other items. The estimated sale price does not necessarily
reflect the appraisal values which management believes, in some cases, may be
higher than what could be realized in a sale of the OREO.
REVERSE REPURCHASE AGREEMENTS
The Company increased its short term borrowing at March 31, 1998 by $12.6
million to $34.1 million, from $21.5 million at December 31, 1997. The rates
paid on this short term debt average 5.82% during the first quarter of 1998.
The Company continued to utilize these borrowing lines to cover the short term
financing needs for loan fundings and investment security purchases.
TERM BORROWINGS
The Company borrowed an additional $10.0 million of term debt during the
first quarter of 1998. The Company has a total of $85.0 million of term
borrowing lines, of which $55.0 million had been borrowed against at March 31,
1998. This debt is secured by pledging specific amounts of specific securities
of the Company's U.S. government sponsored agency securities portfolio. These
secured borrowing have an original five year maturity with a two-year, one-time
call option. The table reflects the attributes of the Company's term
borrowings.
13
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) CALL DATE MATURITY DATE AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.82% five-year term borrowings 09/99 09/02 $25,000
5.78% five-year term borrowings 10/99 10/02 10,000
5.63% five-year term borrowings 12/99 12/02 10,000
5.48% five-year term borrowings 01/00 01/03 10,000
- ----------------------------------------------------------------------------------------
Total term borrowings $55,000
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital that will
support consistent and sustained asset growth, anticipated 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 March 31, 1998,
Pacific Crest Bank was in compliance with all such capital requirements.
Shareholders' equity increased by $1.0 to $29.8 million at March 31, 1998.
This increase reflects the increase to shareholders' equity by the first
quarter net income of $1.1 million and a $92,000 increase resulting from the
purchase of stock under the employee and directors' stock purchase plans. This
increase was partially offset by a $165,000 decrease in accumulated other
comprehensive income.
Pacific Crest Bank is required to maintain certain minimum capital levels
and must maintain certain capital ratios to be considered "well capitalized"
under the prompt corrective action provisions of the FDIC Improvement Act.
The following table sets forth Pacific Crest Bank's regulatory capital
ratios at March 31, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT MARCH 31, 1998 AT DECEMBER 31, 1997
---------------------------------------- -------------------------------------
PACIFIC CREST BANK Required Actual Excess Required Actual Excess
- ---------------------------------------------------- ------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.45% 3.45% 4.00% 7.53% 3.53%
Tier 1 risk-based capital ratio 4.00% 12.22% 8.22% 4.00% 12.02% 8.02%
Total risk-based capital ratio 8.00% 13.47% 5.47% 8.00% 13.27% 5.27%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 three
months ended March 31, 1998 remained relatively level, decreasing $1.3 million
to $1.1 million at March 31, 1998 from $2.4 million at December 31, 1997. The
Company purchased $30.0 million of U.S. government sponsored agency securities,
net of maturities, calls and sales during the first quarter of 1998.
Loans, net of deferred fees and the allowance for loan losses, increased
by $4.6 million to $231.7 million at March 31, 1998, from $227.0 million at
December 31, 1997. The Company originated $17.7 million in new real estate and
business loans during the first three months ended March 31, 1998. Off-setting
these originations, the Company experienced $11.3 million in loan payoffs
during the three months ended March 31, 1998.
The Company partially funded its asset growth for the quarter ended March
31, 1998 by raising $9.5 million in certificates of deposits and $1.6 million
in money market checking accounts. These deposit increases were slightly offset
by a decrease of $1.4 million in its savings account balances. The Company has
continued with its shift in its funding strategy, from funding a portion of its
asset growth from sources other than deposit liabilities. This shift reflects
the growth of $12.6 million in reverse repurchase agreement borrowings and
$10.0 million in term borrowings, during the first quarter of 1998.
The liquidity of the parent company, Pacific Crest, is dependent on
several factors, including the payment of cash dividends by its subsidiary,
Pacific Crest Bank, or the ability to secure borrowings. Without dividends from
Pacific Crest Bank, Pacific Crest must rely solely on existing cash and
investments, or the ability to secure borrowings. Cash plus investments less
current liabilities and short-term debt totaled $9.5 million at March 31, 1998.
This amount is necessary to pay future operating expenses, existing current
liabilities, the interest cost associated with the subordinated debt security
issued in September of 1997, and for the possible infusion of capital into
Pacific Crest Bank. The interest on the Junior Subordinated Debentures will be
paid by Pacific Crest to the Trust, and represents the sole revenues of the
Trust and the source of dividend distributions by the Trust to the holders of
the Capital Trust Securities.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that sufficient retained
earnings are available to pay the dividend. Pacific Crest Bank had retained
earnings of $4.9 million at March 31, 1998. The total amount of retained
earnings is unrestricted and available for dividend payments.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
(b) REPORTS ON FORM 8-K:
Not applicable.
15
<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: May 8, 1998 /s/ Gary Wehrle
----------------- ---------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: May 8, 1998 /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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,088
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 247,394
<INVESTMENTS-CARRYING> 4,999
<INVESTMENTS-MARKET> 5,036
<LOANS> 235,974
<ALLOWANCE> 4,307
<TOTAL-ASSETS> 498,966
<DEPOSITS> 357,845
<SHORT-TERM> 34,100
<LIABILITIES-OTHER> 4,935
<LONG-TERM> 72,250
0
0
<COMMON> 29,836
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 498,966
<INTEREST-LOAN> 6,219
<INTEREST-INVEST> 4,364
<INTEREST-OTHER> 4
<INTEREST-TOTAL> 10,587
<INTEREST-DEPOSIT> 4,736
<INTEREST-EXPENSE> 6,421
<INTEREST-INCOME-NET> 4,166
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,301
<INCOME-PRETAX> 1,866
<INCOME-PRE-EXTRAORDINARY> 1,866
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,101
<EPS-PRIMARY> .38
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.51
<LOANS-NON> 228
<LOANS-PAST> 228
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,217
<ALLOWANCE-OPEN> 4,100
<CHARGE-OFFS> 0
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 4,307
<ALLOWANCE-DOMESTIC> 4,307
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,179
</TABLE>
