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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 0-22732
PACIFIC CREST CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4437818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30343 CANWOOD STREET 91301
AGOURA HILLS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 865-3300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
AT MARCH 15, 1999, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, AS REPORTED ON THE NASDAQ NATIONAL MARKET, WAS
$37,271,000.
- -----------
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF FORM 10-K INTO WHICH INCORPORATED
--------------------- -----------------------------------------
DEFINITIVE PROXY STATEMENT FOR THE PART III
1999 ANNUAL MEETING OF STOCKHOLDERS
AT MARCH 16, 1999, REGISTRANT HAD 2,685,276 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING.
<PAGE>
INDEX
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PART I
PAGE
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<S> <C> <C>
Item 1. Business....................................................................... 1-15
Item 2. Properties..................................................................... 15-16
Item 3. Legal Proceedings.............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................ 16
Item 4(a). Executive Officers of the Registrant........................................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 17
Item 6. Selected Financial Data........................................................ 18-19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 20-31
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk..................... 31-32
Item 8. Financial Statements and Supplementary Data.................................... 33-51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 53
Item 11. Executive Compensation......................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 53
Item 13. Certain Relationships and Related Transactions................................. 53
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K......................... 53-54
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PART I
ITEM 1. BUSINESS.
Pacific Crest Capital, Inc. ("Pacific Crest" or "Parent Company") is a
financial services company principally engaged in commercial and industrial real
estate and Small Business Administration ("SBA") lending through its wholly
owned subsidiary, Pacific Crest Bank ("Pacific Crest Bank"). Unless the context
otherwise indicates, the "Company" refers to Pacific Crest and its wholly owned
subsidiary, Pacific Crest Bank. Certain matters discussed in this Annual Report
on Form 10-K may constitute forward-looking statements under Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
statements may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in which
the Company operates in, projections of future performance, perceived
opportunities in the market and statements regarding the Company's mission and
vision. The Company's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements. For discussion of the factors that
might cause such a difference, see "Item 1. Business - Business Considerations
and Certain Factors that May Affect Future Results of Operations and Stock
Price."
PACIFIC CREST BANK
Pacific Crest Bank, is a California licensed industrial loan company that
is supervised and regulated by the California Department of Financial
Institutions (the "Department" or "DFI") and the Federal Deposit Insurance
Corporation ("FDIC"). The deposits of Pacific Crest Bank are insured by the FDIC
up to applicable limits.
Pacific Crest Bank concentrates on marketing to and serving the needs of
individuals and small and medium sized businesses in California, Arizona, Oregon
and Washington. Pacific Crest Bank conducts its deposit operations through three
branch offices, located in Beverly Hills, Encino and San Diego, California.
Pacific Crest Bank offers savings accounts, money market checking accounts and
certificates of deposit, but does not offer traditional banking services, such
as demand deposit checking accounts, travelers' checks or safe deposit boxes. In
addition, Pacific Crest Bank offers VISA and MasterCard credit cards on an
agency basis and is a member of Cirrus, Star and Explore ATM networks. Pacific
Crest Bank has focused its lending activities on real estate loans secured by
commercial real estate and small business loans under the federal Small Business
Administration program. Pacific Crest Bank conducts its lending operations
through its three deposit branches and its loan production offices, located in
Agoura Hills, Orange County, Oakland and Sacramento, California; Phoenix,
Arizona; Portland, Oregon and Seattle, Washington.
COMPETITION
Pacific Crest Bank faces significant competition in California for new
loans from industrial loan companies, commercial banks, savings and loan
associations, credit unions, credit companies, Wall Street lending conduits,
mortgage bankers, life insurance companies and pension funds. Some of the
largest savings and loans and banks in the United States operate in California,
and have extensive branch systems and advertising programs which Pacific Crest
Bank does not have. Large banks and savings and loans frequently also enjoy a
lower cost of funds than Pacific Crest Bank and can therefore charge less than
Pacific Crest Bank for loans. Pacific Crest Bank attempts to compensate for
competitive disadvantages that may exist by providing a higher level of personal
service to borrowers and "hands-on" involvement by senior officers to meet
borrower's needs. With intense competition within the lending area, the Company
has experienced a decline in the yield within its commercial real estate lending
portfolio over the last several years. The primary reason for the decline in the
yield in the loan portfolio is due to lower yielding loans being added to the
loan portfolio during 1996, 1997 and 1998, reflecting the increased competitive
rate pressure in the marketplace. In addition, higher yielding loans have been
paying off during 1997 and 1998, adding to the overall yield decline. See "MD&A"
- - Net Interest Income.
Pacific Crest Bank also faces competition for depositor's funds from
other industrial loan companies, banks, savings and loans, credit unions and
increasingly, from brokerage firms, mutual funds and life insurance annuity
products. Many of Pacific Crest Bank's competitors offer a greater array of
products to customers than Pacific Crest Bank. Pacific Crest Bank does not offer
demand deposit checking accounts, travelers' checks or safe deposit boxes and
thus has a competitive disadvantage to commercial banks and savings associations
in attracting depositors. Pacific Crest Bank attempts to compensate for the lack
of a full array of services in its branches by offering slightly higher interest
rates for deposits than most of its competitors.
LENDING
Pacific Crest Bank's primary focus in lending activities is the
origination of adjustable rate and fixed rate commercial real estate loans and
SBA loans in California, Arizona, Oregon and Washington. Loans are generally
made for terms of one to ten years. At December 31, 1998, 73.4% of Pacific Crest
Bank's loans were priced at a margin over either Bank of America's prime lending
rate, or the published WALL STREET JOURNAL prime lending rate, 6.8% were priced
at a margin over the Federal Home Loan Bank Board's 11th District Cost of Funds
Index, 4.2% were priced at a margin over either the 6-month or 1-year Treasury
bill rate, 2.4% were priced at a margin over either the 6 month or 1 month LIBOR
rate and 13.2% represented fixed rate loans. A significant number of Pacific
Crest Bank's adjustable rate loans adjust quarterly. In addition, a fair number
of prime rate and Treasury rate loans may not initially reprice for up to five
years and are fixed during the first several years. A significant number of
loans have interest rate floors and ceilings which limit the interest rate
repricing of the loans. As of December 31, 1998, 96% of the loan portfolio was
comprised of commercial real estate loans with an average loan balance of
$645,000.
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LOAN ORIGINATION AND UNDERWRITING
Pacific Crest Bank's loans have been primarily originated through
referrals from commercial loan brokers, banks, realtors, and other third parties
for which the borrower pays a referral fee ranging from 1/2% to 1% of the loan
amount. Pacific Crest Bank currently employs twelve commercial marketing
representatives, who maintain contacts with loan referral sources in California,
Arizona, Oregon and Washington, screen referred transactions and provide
customer service. The credit approval process includes an examination of the
cash flow and debt service coverage of the property serving as loan collateral,
as well as the financial condition and credit references of the borrower.
Following analysis of the borrower's credit, cash flows and collateral, loans
are submitted to Pacific Crest's Credit Committee for approval. Pacific Crest
Bank's senior management is actively involved in its commercial lending
activities and collateral valuation process. Pacific Crest Bank obtains
independent third party appraisals of all properties securing its loans. In
addition, Pacific Crest Bank employs individuals which serve as internal
property analysts to inspect properties and review the third party appraisals
for the benefit of the Credit Committee.
At December 31, 1998, the maximum amount that Pacific Crest Bank could
loan to one borrower was approximately $7.7 million. It is anticipated by
management that Pacific Crest Bank's Board of Directors will periodically adjust
and modify its underwriting criteria in response to economic conditions and
business opportunities.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like many financial institutions, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received on its
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company, such as inflation, recession and unemployment, and the
impact which future changes in domestic and foreign economic conditions might
have on the Company cannot be predicted.
Monetary and fiscal policies of the federal government and the policies
of regulatory agencies also influence the business of Pacific Crest Bank,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact on the Company of
any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory agencies.
See "Item 1. Business - Supervision and Regulation."
SUPERVISION AND REGULATION
Pacific Crest Bank is subject to regulation, supervision and examination
under both California and federal law. Pacific Crest Bank is subject to
supervision and regulation by the Commissioner of Financial Institutions of the
State of California (the "Commissioner") through the Department and, as a
nonmember bank, by the FDIC. Pacific Crest Bank is not regulated or supervised
by the Office of Thrift Supervision which regulates savings and loan
institutions.
Pacific Crest (Parent Company) is not directly regulated or supervised by
the Commissioner, the FDIC, the Federal Reserve Board or any other bank
regulatory authority, except with respect to the general regulatory and
enforcement authority of the Commissioner and the FDIC over transactions and
dealings between Pacific Crest and Pacific Crest Bank, and except with respect
to both the specific limitations regarding ownership of the capital stock of the
parent corporation of any industrial loan company, and the specific limitations
regarding the payment of dividends from Pacific Crest Bank.
Set forth below is a summary description of certain laws and regulations
which relate to the operations of Pacific Crest and Pacific Crest Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
CALIFORNIA LAW
The industrial loan business conducted by Pacific Crest Bank is currently
governed by the California Industrial Loan Law and the rules and regulations of
the Commissioner which, among other things, regulate collateral requirements and
maximum maturities of the various types of loans that are permitted to be made
by California-chartered industrial loan companies.
Subject to restrictions imposed by applicable California law, Pacific
Crest Bank is permitted to make secured and unsecured consumer and non-consumer
loans. The maximum term of repayment of loans made by industrial loan companies
ranges up to 40 years and 30 days depending upon collateral and priority of the
secured position, except that loans with repayment terms in excess of 30 years
and 30 days may not in the aggregate exceed 5% of the total outstanding loans
and obligations of the company. Secured loans may generally be repayable in
unequal periodic payments as long as their terms do not exceed 10 years.
However, consumer loans secured by real property with terms in excess of three
years must be repayable in substantially equal periodic payments unless such
loans are covered under the Garn-St. Germain Depository Institutions Act of 1982
(primarily single-family residential mortgage loans). Real property loans in
excess of $10,000 must be secured by (i) real property or (ii) real and personal
property combined having a fair market value at the time the loan is made of at
least 110% of the principal amount owing on the loan and on prior encumbrances,
except tax liens, secured by the same personal and/or real property. This
requirement does not
3
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apply to loans to facilitate the sale of other real estate owned ("OREO"),
renewals or modifications pursuant to workouts, or any loans saleable in the
secondary market. In addition, the term of a nonconsumer loan secured solely or
primarily by personal property may not exceed 15 years and 30 days from the date
the loan is made or acquired by the company. California law limits lending
activities outside of California by industrial loan companies to no more than
20% of total assets unless the Commissioner has authorized a higher level.
California law contains extensive requirements for the diversification of
the loan portfolios of industrial loan companies. An industrial loan company
with outstanding investment certificates may not, among other things, place more
than 25% of its loans or other obligations which are secured only partially, but
not primarily, by real property; may not make any one loan secured primarily by
improved real property which exceeds 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; may not lend an amount in excess
of 5% of its paid-up and unimpaired capital stock and surplus not available for
dividends upon the security of the stock of any one corporation; may not make
loans to, or hold the obligations of, any one person as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; and may have no more than 70% of
its total assets in loans which have remaining terms to maturity in excess of
seven years which are secured solely or primarily by real property. Based on
existing loans in Pacific Crest Bank's portfolio at December 31, 1998, the ratio
of loans secured solely or primarily by real property with terms in excess of
seven years to total assets was approximately 31.6%. At December 31, 1998,
Pacific Crest Bank satisfied all of the above requirements.
An industrial loan company generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the Commissioner. Nor may an industrial loan company make any loan
to, or hold an obligation of, any of its shareholders or any shareholder of its
holding company or affiliates, except that this prohibition does not apply to
persons who own less than 10% of the stock of a holding company or affiliate
which is listed on a national securities exchange. Any person who wishes to
acquire 10% or more of the capital stock of a California industrial loan company
or 10% or more of the voting capital stock or other securities giving control
over management of its parent company must obtain the prior written approval of
the Commissioner.
An industrial loan company is subject to certain leverage limitations
which are not generally applicable to commercial banks or savings and loan
associations. In particular, industrial loan companies which have been in
operation in excess of 60 months may, with written approval of the Commissioner,
have outstanding at any time investment certificates not to exceed 20 times
paid-up and unimpaired capital stock and surplus not available for dividends.
Increases in leverage under California law must also meet specified minimum
standards for liquidity reserves in cash, loan loss reserves, minimum capital
stock levels and minimum unimpaired paid-in surplus levels. In order for an
industrial loan company to increase its deposits to in excess of 15 times the
aggregate amount of its paid-up and unimpaired capital stock and unimpaired
surplus not available for dividends, the industrial loan company must, among
other things, maintain a liquidity reserve in cash or cash equivalent equal to
1 1/2 % of its total investment certificates outstanding and maintain a special
allowance for losses as required by the Commissioner. Pacific Crest Bank
satisfied all of these standards at December 31, 1998. As approved by the
Commissioner, Pacific Crest Bank can currently operate with an investment
certificate to unimpaired capital and unimpaired surplus ratio of 18.5 to 1. At
December 31, 1998, Pacific Crest Bank's investment certificate to capital ratio
was approximately 12.4 to 1. Limitations have also been imposed with respect to
a depository institution's authority to accept, renew or rollover brokered
deposits. Pacific Crest Bank had no brokered deposits as of December 31, 1998.
Industrial loan companies are not permitted to borrow, except from the
Federal Home Loan Bank, the FDIC or the FRB, and by the sale of investment or
thrift certificates, in an amount exceeding 300% of outstanding capital stock,
surplus and undivided profits, without the Commissioner's prior consent. All
sums borrowed in excess of 150% of outstanding capital stock, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the Commissioner, and be included as investment or thrift
certificates for purposes of computing the maximum amount of certificates an
industrial loan company may issue.
Under California law, industrial loan companies are generally permitted
to invest their funds in investments which are legal investments for California
commercial banks, including the Capital Stock, obligations and other securities
of corporations, subject to the commissioners' rules and regulations. In
general, California commercial banks are prohibited from investing an amount
exceeding 15% of shareholders' equity in the security of any one issuer, except
for specified obligations of the United States, California, and local
governments and agencies. An industrial loan company may acquire real property
only in satisfaction of debts previously contracted, pursuant to certain
foreclosure transactions or as may be necessary as premises for the transaction
of its business, in which case such investment is limited to one-third of an
industrial loan company's paid-up capital stock and surplus not available for
dividends.
California industrial loan law allows an industrial loan company to
increase its secondary capital by issuing interest-bearing capital notes in the
form of subordinated notes and debentures. Such notes are not deposits and are
not insured by the FDIC or any other governmental agency, and are generally
required to have an initial maturity of at least seven years and are
subordinated to deposit holders, general creditors and secured creditors of the
issuing thrift. Pacific Crest Bank had no subordinated debentures outstanding at
December 31, 1998.
Although investment authority and other activities that may be engaged in
by Pacific Crest Bank generally are prescribed under the California Industrial
Loan Law, certain provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991, (the "FDICIA"), may limit Pacific Crest Bank's ability
to engage in certain activities that otherwise are authorized under the
California Industrial Loan Law.
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FEDERAL LAW
Pacific Crest Bank's deposits are insured by the FDIC to the full extent
permissible by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions to which it provides deposit insurance. Among the
numerous applicable regulations are those issued under the Community
Reinvestment Act of 1977 ("CRA") to encourage members of insured state nonmember
banks to meet the credit needs of local communities, including low and moderate
income neighborhoods consistent with safety and soundness, and a rating system
to measure performance. Inadequacies of performance may result in regulatory
action by the FDIC.
Pacific Crest Bank is subject to the rules and regulations of the FDIC to
the same extent as other financial institutions which are insured by that
entity. The approval of the FDIC is required prior to any merger, consolidation
or change in control, or the establishment or relocation of any branch office of
Pacific Crest Bank. This supervision and regulation is intended primarily for
the protection of the deposit insurance funds. If, as a result of an examination
of Pacific Crest Bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of Pacific Crest Bank's operations are unsatisfactory or that
Pacific Crest Bank or its management is violating or has violated any law or
regulation, various remedies are available to the FDIC. Such remedies include
the power to enjoin "unsafe or unsound" practices, to require affirmative action
to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of Pacific Crest Bank, to assess civil monetary
penalties, to remove officers and directors and ultimately to terminate Pacific
Crest Bank's deposit insurance.
Pacific Crest's securities are registered with the Securities and
Exchange Commission (the "SEC") under the Exchange Act. As such, Pacific Crest
is subject to information, proxy solicitation, insider trading, and other
requirements and restrictions of the Exchange Act.
CAPITAL STANDARDS
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages which range from 0% for assets with low credit risk, such as certain
U.S. Treasury securities, to 100% for assets with relatively high credit risk,
such as commercial loans.
The FDIC requires a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines, the FDIC
requires banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the FDIC has the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios. See "Item 1. Business -
Economic Conditions, Government Policies, Legislation, and Regulation." Pacific
Crest, unlike Pacific Crest Bank, is not subject to any minimum capital
requirement. The following table sets forth Pacific Crest Bank's regulatory
capital ratios at December 31, 1998 and 1997:
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REGULATORY CAPITAL RATIOS AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
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PACIFIC CREST BANK REQUIRED ACTUAL EXCESS REQUIRED ACTUAL EXCESS
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Leverage capital ratio 4.00% 6.81% 2.81% 4.00% 7.53% 3.53%
Tier 1 risk-based capital ratio 4.00% 10.67% 6.67% 4.00% 12.02% 8.02%
Total risk-based capital ratio 8.00% 11.92% 3.92% 8.00% 13.27% 5.27%
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PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions that fall below
one or more prescribed minimum capital ratios. Each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on its capital ratios: (i)
well capitalized, (ii) adequately capitalized, (iii) undercapitalized, (iv)
significantly undercapitalized, and (v) critically undercapitalized. At December
31, 1998, Pacific Crest Bank exceeded the required ratios for classification as
"well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed two-percent of the bank's total assets.
Federal guidelines generally define "tangible equity" as a bank's tangible
assets less liabilities. Federal regulators may, among other alternatives,
require the appointment of a conservator or a receiver for a critically
undercapitalized bank. In California, the Commissioner may require the
appointment of a conservator or receiver for an industrial loan company if its
capital
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is impaired or reduced below the amount required by the Industrial Loan Law. In
the event Pacific Crest Bank is placed in conservatorship or receivership; the
Company's ability to perform its obligations would be adversely impacted.
In addition to measures taken under the prompt corrective action
provisions, banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation, or any
condition imposed in writing by the agency or any written agreement with the
agency.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist
them in identifying and addressing potential safety and soundness concerns
before capital becomes impaired. The guidelines set forth operational and
managerial standards relating to: (i) internal controls, information systems and
internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv)
asset growth, (v) earnings, and (vi) compensation, fees and benefits. In
addition, the federal banking agencies have also adopted safety and soundness
guidelines with respect to asset quality and earnings standards. These
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
standards, an insured depository institution should: (i) conduct periodic asset
quality reviews to identify problem assets, (ii) estimate the inherent losses in
problem assets and establish reserves that are sufficient to absorb estimated
losses, (iii) compare problem asset totals to capital, (iv) take appropriate
corrective action to resolve problem assets, (v) consider the size and potential
risks of material asset concentrations, and (vi) provide periodic asset quality
reports with adequate information for management and the board of directors to
assess the level of asset risk. These new guidelines also set forth standards
for evaluating and monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
Pacific Crest Bank's deposit accounts are insured by the Bank Insurance
Fund ("BIF"), as administered by the FDIC, up to the maximum permitted by law.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits which
as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1997 ("EGRPRA"), at January 1, 1997, Pacific Crest
Bank began paying, in addition to its normal deposit insurance premium as a
member of the BIF, an amount equal to approximately 1.3 basis points per $100 of
insured deposits toward the retirement of the Financing Corporation bonds ("Fico
Bonds") issued in the 1980s to assist in the recovery of the savings and loan
industry. Members of the Savings Association Insurance Fund ("SAIF"), by
contrast, pay, in addition to their normal deposit insurance premium,
approximately 6.4 basis points. Under EGRPRA, the FDIC is not permitted to
establish SAIF assessment rates that are lower than comparable BIF assessment
rates. Beginning no later than January 1, 2000, the rate paid to retire the Fico
Bonds will be equal for members of the BIF and the SAIF. EGRPRA also provides
for the merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
INTERSTATE BANKING AND BRANCHING
The Bank Holding Company Act of 1956, as amended (the "BHCA") currently
permits bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
certain nationwide- and state-imposed concentration limits. Pacific Crest Bank
has the ability, subject to certain restrictions, to acquire by acquisition or
merger branches outside its home state. The establishment of new interstate
branches is also possible in those states with laws that expressly permit it.
Interstate branches are subject to certain laws of the states in which they are
located. Competition may increase further as banks branch across state lines and
enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Crest Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and CRA
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods. A bank may be
subject to substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take compliance with
such laws and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted March 31, 1998 Pacific Crest
Bank was rated "satisfactory" in complying with its CRA obligations.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
6
<PAGE>
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
The Company has conducted and completed a comprehensive review of its
computer systems to identify all systems that could be affected by the year 2000
issue and has implemented a plan to resolve any issue. The year 2000 issue is
the result of computer programs being written using two, rather than four,
digits to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 instead
of the year 2000. This could result in major system failure or miscalculations.
The Company presently believes that, with modifications to some of the existing
software and possible conversions to new software, the year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. Even if such modifications and conversions are not
completed timely, the year 2000 problem is not expected to have a material
impact on the operations of the Company. The total cost estimated to correct the
new computer software systems, or to have existing systems modified, is not
expected to exceed $150,000 over the next year. See Item 7, Management's
Discussion and Analysis, "Year 2000 Compliance".
RESTRICTIONS ON TRANSFERS OF FUNDS TO PACIFIC CREST BY PACIFIC CREST BANK
Pacific Crest is a legal entity separate and distinct from Pacific Crest
Bank. Pacific Crest's ability to pay cash dividends is limited by Delaware state
law. At present, substantially all of Pacific Crest's revenues, including funds
available for the payment of dividends and other operating expenses will be
dependent in the future on dividends paid by Pacific Crest Bank.
Under California law, an industrial loan company is not permitted to
declare dividends on its capital stock unless it has at least $750,000 of
unimpaired capital plus additional capital of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed retained earnings; or, (ii) in the
alternative, after giving effect to the distribution, (y) the sum of assets (net
of goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes, income
and other credits), or (z) current assets would be not less than current
liabilities (except that if average earnings before taxes for the last two years
had been less than average interest expenses, current assets must be not less
than 125% of current liabilities).
In addition, an industrial loan company is prohibited from paying
dividends from that portion of capital which its board of directors has declared
restricted for dividend payment purposes. The amount of restricted capital
maintained by an industrial loan company provides the basis of establishing the
maximum permissible loan to one single borrower. The amount of unrestricted
capital available for dividend payment by Pacific Crest Bank was $174,058 at
December 31, 1998.
The FDIC also has authority to prohibit Pacific Crest Bank from engaging
in activities that, in the FDIC's opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the FDIC
could assert that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the FDIC has
established guidelines with respect to the maintenance of appropriate levels of
capital by banks under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which Pacific Crest Bank may pay. An insured depository institution is
prohibited from paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions if after such
transaction the institution would be undercapitalized. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms" and "Capital Standards" for a discussion of these additional
restrictions on capital distributions.
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. At December 31, 1998, Pacific Crest
Bank had positive retained earnings of $9.17 million, of which $174,058 was
unrestricted and available for dividend payment.
Pacific Crest Bank is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, Pacific Crest or other affiliates, the purchase of, or
investments in, stock or other securities thereof, the taking of such securities
as collateral for loans, and the purchase of assets of Pacific Crest or other
affiliates. Such restrictions prevent Pacific Crest and such other affiliates
from borrowing from Pacific Crest Bank unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by Pacific Crest Bank to or in Pacific Crest or to or in any other
affiliate are limited, individually, to 10.0% of Pacific Crest Bank's capital
and surplus (as defined by federal regulations), and such secured loans and
investments are limited, in the aggregate, to 20.0% of Pacific Crest Bank's
capital and surplus (as defined by federal regulations). California law also
imposes certain restrictions with respect to transactions involving Pacific
Crest and other controlling persons of Pacific Crest Bank. See "Item 1. Business
- - Supervision and Regulation - California Law." Additional restrictions on
transactions with affiliates may be imposed on Pacific Crest Bank under the
prompt corrective action provisions of federal law. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms."
ACCOUNTING CHANGES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
fair value, if practicable. It also requires that servicing rights and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Furthermore, SFAS No. 125 requires that debtors reclassify financial
7
<PAGE>
assets pledged as collateral, and that secured parties recognize those assets
and their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. Finally, SFAS No. 125 requires
that a liability be eliminated if either: (a) the debtor pays the creditor and
is relieved of its obligation for the liability, or (b) the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor. Accordingly, a liability is not considered extinguished by
an in-substance defeasance. SFAS No. 125 supersedes SFAS No. 122, "Accounting
for Mortgage Servicing Rights," which was adopted by the Company on January 1,
1997 and which management of the Company determined had no material impact on
the Company's results of operations or financial position. In December 1996, the
FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." SFAS No. 127 defers for one year the effective date
of SFAS No. 125 as it relates to transactions involving secured borrowings and
collateral and transfers and servicing of financial assets. This Statement also
provides additional guidance on these types of transactions. The Company adopted
this statement for the year ended December 31, 1997, and is reflected in the
Company's consolidated financial statements. The adoption of this statement has
not had a material impact on the Company's consolidated financial statements for
the years ended December 31, 1997 and 1998.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ended after December 15, 1997, including
interim periods. The Company adopted this statement for the year ended December
31, 1997, and is reflected in the Company's consolidated financial statements.
The adoption of this statement has not had a material impact on the Company's
consolidated financial statements for the years ended December 31, 1997 and
1998.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This statement establishes standards for
disclosing information about capital structure, including pertinent rights and
privileges of various securities outstanding. SFAS No. 129 is effective for
financial statements for periods ended after December 15, 1997. The Company
adopted this statement for the year ended December 31, 1997, and is reflected in
the Company's consolidated financial statements. The adoption of this statement
has not had a material impact on the Company's consolidated financial statements
for the years ended December 31, 1997 and 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1998. This
statement was adopted by the Company as of January 1, 1998. The adoption of this
statement did not have a material impact on the Company's consolidated financial
statements for the year ended December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. This statement was adopted by the
Company as of January 1, 1998. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements for the year
ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires the Bank to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 allows derivatives to be designated as
hedges only if certain criteria are met with the resulting gain or loss on the
derivative either charged to income or reported as a part of other comprehensive
income if criteria are met. SFAS 133 is effective for all fiscal quarters
beginning after June 15, 1999. The Company does not believe that when adopted,
SFAS 133 will have a material impact on its operations and financial position.
In October 1998, FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on the company's
intent to sell or hold the investment. SFAS No. 134 is effective for the first
fiscal quarter beginning after December 15, 1998. The Company does not believe
that when adopted, SFAS No. 134 will have a material impact on its operations
and financial position.
8
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company employed 70 persons. Management
believes that its relations with its employees are good. The Company is not a
party to any collective bargaining agreement.
SELECTED STATISTICAL DISCLOSURE REGARDING THE BUSINESS OF THE COMPANY
The following statistical data relating to the Company's operations
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and Consolidated Financial
Statements and Notes to Consolidated Financial Statements. Average balances are
determined on a daily basis.
LOAN PORTFOLIO
Pacific Crest Bank focuses its lending activities on commercial real
estate loans and SBA loans to investors and small and medium sized businesses.
The following table presents the categories of Pacific Crest Bank's loans at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
(DOLLARS IN THOUSANDS) BALANCE % BALANCE % BALANCE % BALANCE % BALANCE %
- -----------------------------------------------------------------------------------------------------------------------------
LOAN CATEGORIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial mortgage $ 278,614 96% $ 223,902 96% $ 206,172 97% $ 193,332 97% $ 183,173 98%
Residential mortgage 1,194 - 1,593 1% 1,596 1% 3,169 2% 1,336 1%
Commercial business/SBA/other 4,476 2% 6,401 3% 3,944 2% 2,242 1% 1,133 1%
Loans held for sale, SBA 4,784 2% - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Gross loans 289,068 100% 231,896 100% 211,712 100% 198,743 100% 185,642 100%
Less deferred loan fees 582 763 617 1,965 3,181
Less allowance for loan losses 5,024 4,100 3,400 4,500 8,075
- -----------------------------------------------------------------------------------------------------------------------------
Net loans $ 283,462 $ 227,033 $ 207,695 $ 192,278 $ 174,386
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Real estate mortgage loans include loans primarily to investors and small
and middle market businesses for industrial and commercial use. These loans are
secured by the property underlying the loan.
MATURITIES AND INTEREST SENSITIVITIES OF LOAN PORTFOLIO
The first table below sets forth the contractual maturities of Pacific
Crest Bank's loan portfolio at December 31, 1998. The second table below sets
forth the amounts of such loans that have fixed interest rates and floating or
adjustable interest rates. Loans which have adjustable or floating interest
rates, are shown as maturing in the period during which the contract is due. The
following tables do not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF LOANS BY CATEGORY:
<S> <C> <C> <C> <C> <C>
Commercial mortgage $ 22,012 $ 51,357 $145,053 $ 60,192 $ 278,614
Residential mortgage - 618 - 576 1,194
Commercial business/SBA/other - 4 600 3,872 4,476
Loans held for sale, SBA - 5 641 4,138 4,784
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, gross $ 22,012 $ 51,984 $146,294 $ 68,778 $ 289,068
- -----------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF LOANS BY INTEREST RATE TYPE:
Loans with Variable Interest Rates
Loans that reprice quarterly $ 14,842 $ 37,660 $ 62,841 $ 23,671 $ 139,014
Loans that reprice semi annually or annually 5,528 9,161 17,385 14,039 46,113
Loans that are initially fixed rate, that convert
to variable rate
Convert to variable rate in next 12 months - 2,111 6,908 1,403 10,422
Convert to variable rate in next 13-24 months - 452 8,433 1,211 10,096
Convert to variable rate in next 25-36 months - - 13,584 4,782 18,366
Convert to variable rate in next 37-48 months - - - 9,335 9,335
Convert to variable rate in next 49-60 months - - 10,427 4,688 15,115
Convert to variable rate after 60 months - 852 663 5,125 6,640
Loans with fixed interest rates $ 1,642 $ 1,748 $ 26,053 $ 4,524 $ 33,967
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, gross $ 22,012 $ 51,984 $146,294 $ 68,778 $ 289,068
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
CLASSIFIED ASSETS
In connection with examinations of insured institutions, the FDIC and the
DFI examiners have the authority to identify problem assets and, if necessary,
require them to be classified. There are three primary classifications for
problem assets: "substandard," "doubtful" and "loss." "Substandard" assets are
assets that are characterized by the distinct possibility that the institution
will sustain some loss if deficiencies are not corrected. "Doubtful" assets have
all of the weaknesses inherent in "substandard" loans, but also have the
characteristic that, on the basis of existing facts, conditions and values,
collection or liquidation in full is highly questionable and improbable. "Loss"
assets are assets that are considered uncollectible. Assets that are classified
"loss" require the institution either to establish a specific reserve in the
amount of 100% of the portion of the asset classified "loss" or to charge-off
the asset. In addition, the FDIC characterizes certain assets as "special
mention." These are assets which do not currently warrant classification but
possess weaknesses deserving management's close attention.
In addition, the Company utilizes an internally developed loan
classification and monitoring system in determining the appropriate level of the
allowance for loan losses. This system involves periodic reviews of the entire
loan portfolio and loan classifications based on that review.
NONPERFORMING ASSETS
The Company's general policy is to discontinue the accrual of interest on
a loan when any installment payment is 61 days or more past due or, when
management otherwise determines the collectibility of principal or interest is
unlikely prior to the loan becoming 61 days past due.
Interest income on nonaccrual loans is subsequently recognized when the
loan becomes contractually current. Accounts which are deemed uncollectible by
management or for which no payment has been received for five months are charged
off for the amount that exceeds the estimated net realizable value of the
underlying real estate collateral.
The Company's general policy is to initiate foreclosure proceedings when
loans are more than 30 days past due. Some loans that are more than 30 days past
due are never actually foreclosed, however, because the borrower brings the
account current either before a formal notice of default is filed or before the
property goes to foreclosure sale.
On loans that are more than 60 days past due, updated third party
appraisals are generally ordered to ascertain the current fair market value of
the loan collateral. Between the time the updated appraisals are ordered and the
time they are received, (normally about a 60 day period), management evaluates
the loan collateral position to ascertain the amount of general loan loss
reserves that should be allocated to the loan. Upon receipt of the third party
appraisal, further general loan loss reserves are allocated, if necessary based
on the estimated net realizable value of the collateral (which is calculated
based on the estimated sales price of the collateral less all selling costs).
The calculation of the adequacy of the allowance for loan losses is based
on a variety of factors, including loan classifications and underlying loan
collateral values, and not directly tied to the level of nonperforming loans
which are comprised entirely of nonaccrual loans. Therefore, changes in the
amount of nonaccrual loans will not necessarily result in an associated increase
or decrease in the allowance for loan losses. The ratio of nonaccrual loans to
total loans, net of deferred fees was 0.0% at December 31, 1998 and 0.10% at
December 31, 1997.
Total nonperforming assets declined in 1998 from $2.3 million or 0.49% of
total assets at December 31, 1997 to $0.8 million or 0.12% of total assets at
December 31, 1998. At December 31, 1998 the Company had no loans on nonaccrual,
and the Company had no loans that were more than 30 days delinquent.
NONPERFORMING AND RESTRUCTURED ASSETS
The following table sets forth (a) loans accounted for on a nonaccrual
basis, (b) OREO, (c) and loans that were "troubled debt restructurings" at the
dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING AND TROUBLED DEBT RESTRUCTURING ASSETS DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ - $ 228 $ 1,386 $ 4,985 $ 9,779
Other real estate owned 806 2,064 3,469 4,355 5,724
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 806 2,292 4,855 9,340 15,503
Troubled debt restructurings(1) - 899 719 8,757 5,039
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 0.12% 0.49% 1.60% 3.60% 6.24%
Allowance for loan losses to nonaccrual loans - 1798.20% 245.30% 90.30% 82.60%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All troubled debt restructurings were performing in accordance with their
revised terms at December 31, 1997.
For 1998, gross interest income which would have been recorded had the
nonaccrual loans been current in accordance with their original terms was $7,000
while no interest income on such loans was recorded during 1998. In comparison
with 1997, gross interest income which would have been recorded had the 1997
nonaccrual loans been current in accordance with their original terms would have
been $390,000 while the amount of 1997 interest income actually recorded on such
loans for 1997 was $141,000.
NONACCRUAL LOANS
Nonaccrual loans are loans, not classified as "troubled debt
restructurings" that show little or no current payment ability. These loans are
supported, however, by collateral or cash flow that support the collectibility
of the Company's remaining book balance. Nonaccrual loan balances are net of any
prior write-offs, but any specifically assigned general allowance for loan
losses is not deducted from the nonaccrual loan balances.
10
<PAGE>
The following table represents the major components of the changes in the
nonaccrual loans for the year ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NONACCRUAL LOAN ACTIVITY YEAR ENDING DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLAR IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans at beginning of period $ 228 $ 1,386 $ 4,985
Nonaccrual loan additions - 3,325 4,675
Loans returned to accrual status - (269) (630)
Loans transferred to OREO (208) (1,376) (2,836)
Loan chargeoffs (20) (468) (1,929)
Loan payments/payoffs/other - (2,370) (2,879)
- ----------------------------------------------------------------------------------------------------------------------------
Net change/activity (228) (1,158) (3,599)
- ----------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans at end of period $ - $ 228 $ 1,386
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had a total of two properties in this category at December
31, 1998, totaling $806,000.
Other real estate owned declined to $806,000 at December 31, 1998, from
$2.1 million at December 31, 1997, a decline of $1.3 million or 60.9%. This
reflects the sale of three properties with a net balance of $1.3 million during
1998 versus five properties with a net balance of $2.3 million during 1997.
The Company makes valuation adjustments to its OREO, based on the most
recent collateral appraisal data and other relevant information which
effectively reduce the book value of such assets to the estimated fair market
value less selling costs of the properties. The fair value of the real estate
takes into account the real estate values net of expenses such as brokerage
commission, past due property taxes, property repair expenses, and other items.
The estimated sale price does not necessarily reflect appraisal values which
management believes, in some cases, may be higher than what could be realized in
a sale of OREO. The $806,000 balance of OREO at December 31, 1998 reflects
reductions of $335,000 from the original principal balances of the related
loans, through both loan chargeoffs (prior to the properties becoming OREO) and
valuation adjustments (subsequent to the properties becoming OREO). The $335,000
of reductions is not included in the allowance for loan losses.
The following table represents the major components of the changes in the
OREO for the year ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
OTHER REAL ESTATE OWNED ACTIVITY YEAR ENDING DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLAR IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OREO at beginning of period $ 2,064 $ 3,469 $ 4,355
Transfers from loans 208 1,376 2,836
OREO write downs (50) (370) (155)
Payments/other (84) (136) (86)
Sales of OREO properties (1,332) (2,275) (3,481)
- ----------------------------------------------------------------------------------------------------------------------------
Net change/activity (1,258) (1,405) (886)
- ----------------------------------------------------------------------------------------------------------------------------
OREO balance at end of period $ 806 $ 2,064 $ 3,469
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
TROUBLED DEBT RESTRUCTURINGS (TDR)
A TDR is a loan in which the Company, for reasons related to the
borrower's financial difficulties, grants a permanent concession to the
borrower, such as a reduction in the loan's fully-indexed interest rate, a
reduction in the face amount of the debt, or an extension of the maturity date
of the loan, that the Company would not otherwise consider. At December 31,
1998, the Company had no loans categorized as a TDR. The TDR balance reflected
in the "Nonperforming and Troubled Debt Restructuring Asset" table is net of any
prior write-offs, but any specifically assigned general allowance for loan
losses is not deducted from the above TDR loan balances.
The following table represents the major components of the changes in the
TDRs for the year ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
TROUBLED DEBT RESTRUCTURING ACTIVITY YEAR ENDING DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLAR IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TDR balance beginning of period $ 899 $ 719 $ 8,757
Transfers to accruing loans (899) - (948)
Transfers to nonaccruing loans - - (156)
Loan sale/loan payments - - (5,538)
Net loan charge-offs/other - 180 (1,396)
- ----------------------------------------------------------------------------------------------------------------------------
Net change/activity (899) 180 (8,038)
- ----------------------------------------------------------------------------------------------------------------------------
TDR balance end of period $ - $ 899 $ 719
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
OTHER LOANS OF CONCERN (POTENTIAL PROBLEM LOANS)
In addition to nonaccrual loans and TDRs, as of December 31, 1998, the
Company had 4 loans with aggregate outstanding loan balances of $2.7 million
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the properties securing the loans have caused
management concern about the ability of the borrowers to comply with present
loan repayment terms and which may result in the future inclusion of such loans
in the nonperforming loan category. This compares with three loans with
aggregate outstanding loan balances of $3.2 million at December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in the loan
portfolio. Since the Company's loan portfolio consists primarily of term loans
secured by commercial real property, general loan loss reserves are typically
established by assigning all loans to specified risk categories and then
determining the appropriate levels of reserve for each risk category. A special
management "Reserve Committee" meets monthly to review the loan portfolio,
delinquency trends, collateral value trends, nonperforming asset data and other
material. The amount of the allowance is based upon management's evaluation of
numerous factors, including the adequacy of collateral securing the loans in the
Company's portfolio, delinquency trends, historical loan loss experience, and
current economic conditions.
Based on evaluations of the aforementioned considerations, the Company
establishes its allowance for loan losses. The allowance for loan losses
expressed, as a percentage of total net loans, was 1.74% at December 31, 1998,
1.77% at December 31, 1997, 1.61% at December 31, 1996, and 2.29% at December
31, 1995.
The Board of Directors reviews the adequacy of the allowance for loan
losses on a quarterly basis. Management utilizes its best judgment in providing
for possible loan losses and establishing the allowance for loan losses.
However, the allowance is an estimate which is inherently uncertain and depends
on the outcome of future events. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based upon their judgment of the information
available to them at the time of their examination.
Adverse economic conditions or a declining real estate market could
adversely affect certain Pacific Crest Bank borrowers' abilities to
contractually repay their loans. A decline in the economy could result in
deterioration in the quality of the loan portfolio and could result in high
levels of nonperforming assets and charge-offs which would adversely affect the
financial condition and results of operations of the Company.
The following tables set forth certain information with respect to the
Company's allowance for loan losses and valuation adjustments to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 4,100 $ 3,400 $ 4,500 $ 8,075 $ 3,910
Commercial mortgage
Chargeoffs 20 468 3,452 4,757 4,278
Recoveries 34 33 244 222 100
- -----------------------------------------------------------------------------------------------------------------------------
Net loan (recoveries)/charge-offs (14) 435 3,208 4,535 4,178
Purchased loan reserve - - 191 - -
Provision for loan losses 910 1,135 1,917 960 8,343
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 5,024 $ 4,100 $ 3,400 $ 4,500 $ 8,075
Net loan (recoveries)/charge-offs (14) 435 3,208 4,535 4,178
Valuation adjustments to OREO 50 370 155 344 1,719
- -----------------------------------------------------------------------------------------------------------------------------
Total net loan (recoveries)/charge-offs &
OREO valuation adjustments $ 36 $ 805 $ 3,363 $ 4,879 $ 5,897
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net loan (recoveries)/charge-offs to average loans (0.01%) 0.20% 1.68% 2.45% 2.14%
Net loan (recoveries)/charge-offs & OREO valuation
adjustments to average loans and OREO 0.01% 0.36% 1.73% 2.57% 2.92%
Allowance for loan losses to total loans,
net of deferred fees 1.74% 1.77% 1.61% 2.29% 4.43%
Allowance for loan losses
to nonaccrual loans - 1798% 245% 90% 83%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL
LOSSES ALLL LOSSES ALLL LOSSES ALLL LOSSES ALLL LOSSES ALLL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES:
Commercial mortgage $ 4,823 96% $ 3,936 96% $ 3,172 93% $ 4,365 97% $ 7,913 98%
Residential mortgage 20 - 41 1% 155 5% 90 2% 81 1%
Commercial business/SBA/other 181 4% 123 3% 73 2% 45 1% 81 1%
Loans held for sale, SBA - - - - - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 5,024 100% $ 4,100 100% $ 3,400 100% $ 4,500 100% $ 8,075 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ACTIVITIES
The Company's investment portfolio is used for both liquidity purposes
and for investment income. The following table sets forth certain information
regarding the Company's investment portfolio as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
% of % of % of
INVESTMENT SECURITIES: Balance Total Balance Total Balance Total
------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Sponsored
agency securities
Available for sale $ 309,525 96% $ 217,738 98% $ 52,534 63%
Held to maturity - - 4,998 2% 30,960 37%
Corporate debt securities
Available for sale $ 11,736 4% - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 321,261 100% $ 222,736 100% $ 83,494 100%
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INTEREST EARNING ASSETS:
Repurchase agreements $ 22,048 100% $ 426 100% $ 262 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the maturity distribution of the
investment portfolio at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Due from one to five years $ 10,854 $ 10,892 6.00% 3.4 years
Due from five to ten years 261,667 263,713 6.65% 8.9 years
Due after ten years 46,613 46,656 6.62% 12.2 years
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 319,134 $ 321,261 6.63% 9.0 years
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
For additional information on the investment portfolio, see Note 4 of
Notes to Consolidated Financial Statements.
REPURCHASE AGREEMENTS
The Company invests excess cash overnight and up to 3 months in
securities purchased under agreements to resell ("repurchase agreements"). The
maximum investment with one brokerage firm or bank may not exceed $25 million.
The Company has master repurchase agreements with several nationally recognized
banks and broker/dealers. Collateral securing repurchase agreements is limited
to U.S. Treasury bonds, notes and bills, and securities issued by either U.S.
government agencies or U.S. government sponsored agencies. Collateral securing
the repurchase agreements is restricted to non-derivative types of securities by
the aforementioned agencies. Collateral securing repurchase agreements is held
for safekeeping under third-party custodial agreements and is required to be
segregated and separately accounted for from all other securities held by the
custodian for its other customers or for its own account.
SOURCES OF FUNDS
DEPOSITS
The Company's primary source of funds is FDIC-insured deposits, raised
through its subsidiary Pacific Crest Bank which consists of limited draft money
market checking accounts, money market savings accounts, and term certificates
of deposit. At December 31, 1998, the Company had total deposits of $482.8
million with 11,624 accounts.
13
<PAGE>
The Company has deposit-gathering branches located in Beverly Hills,
Encino and San Diego, California. The Company's headquarters office in Agoura
Hills is an administrative office and does not take deposits. The Company's
deposit products are limited to limited draft money market checking accounts,
money market savings accounts and term certificates of deposit. The Company
offers term certificates of deposits with 30-day to five-year maturities. The
Company attracts depositors by offering rates that are generally higher than
rates offered by independent commercial banks and savings and loans and that
offer a broader array of services. The Company also conducts a wholesale deposit
operation through which deposits from other financial institutions located
throughout the United States are solicited. The Company does not purchase
brokered deposits. Management believes its deposits are a stable and reliable
funding source.
The following table sets forth information regarding the composition of
the Company's deposit mix for average balances and rates paid on deposits for
the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------
Average Average Average
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEPOSIT CATEGORIES:
Money market savings $ 211,851 5.30% $ 181,303 5.30% $ 176,742 5.19%
Certificates of deposit 160,720 5.75% 110,829 5.84% 62,747 5.51%
Money market checking 18,917 5.02% 18,054 4.94% 16,717 4.92%
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 391,488 5.47% $ 310,186 5.47% $ 256,206 5.25%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The remaining maturities of the certificates of deposit at December 31,
1998 are set forth in the following table:
<TABLE>
<CAPTION>
3 MONTHS OVER 3 TO OVER 6 TO OVER
(DOLLARS IN THOUSANDS) OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 38,744 $ 47,068 $ 51,483 $ 7,460 $ 144,755
Certificates of deposit of $100,000 or more 9,907 10,471 16,245 1,601 38,224
- ----------------------------------------------------------------------------------------------------------------------------
Total certificates of deposit $ 48,651 $ 57,539 $ 67,728 $ 9,061 $ 182,979
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
REVERSE REPURCHASE AGREEMENTS
A secondary source of funds for the Company consists of short-term
borrowings in the form of reverse repurchase agreements. The Company has set up
short-term borrowing lines with four brokers/dealers aggregating $95 million in
availability. The repayment terms on this short-term debt range from one day up
to three months. The interest rate paid can vary daily, but typically
approximates the federal funds rate plus 25 basis points. These borrowings are
secured by pledging specific amounts of specific securities of the Company's
U.S. government sponsored agency securities portfolio. The Company utilizes
these borrowing lines to cover short-term financing needs for loan fundings or
investment security purchases. The balance outstanding as of December 31, 1998
was $30.8 million. The Company had $21.5 million in reverse repurchase
agreements outstanding at December 31, 1997. At December 31, 1998, the Company
had $64.2 million in borrowing availability under these credit lines. During
1998 the highest outstanding reverse repurchase agreement was $41.8 million.
The Company also maintains a line of credit with the Federal Reserve Bank
with approximately $1.3 million available for borrowing at December 31, 1998. At
December 31, 1998 there were no borrowings under this line of credit. This
agreement is secured by approximately $2.7 million in commercial real estate
loans at December 31, 1998.
TERM BORROWINGS
The Company has a medium Term borrowing facility of $45.0 million through
one broker dealer. This facility allows the Company to borrow for periods of up
to one year. At December 31, 1998, the Company had borrowings of $24.5 million,
against this line, leaving $20.5 million in unused availability. This debt is
secured by pledging specific amounts of specific securities of the Company's
U.S. government sponsored agency securities portfolio. Borrowings on this
facility with an original maturity under 90 days are classified as Reverse
Repurchase Agreements, while borrowing with an original maturity in excess of 90
days are classified as Term borrowings.
The Company has a long term borrowing facility of $95 million over one
year through one broker dealer. At December 31, 1998 the Company had
borrowings of $55.0 million, leaving an unused credit availability borrowings
of $40.0 million in this line. This debt is secured by pledging specific
amounts of specific securities of the Company's U.S. government sponsored
agency securities portfolio. The $55.0 million borrowed against this line
have an original five year maturity with a two-year, one-time call option.
The table below describes the attributes of the Company's term borrowings.
During 1998 the highest outstanding term borrowing balance was $79.5 million.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) CALL DATE MATURITY DATE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.82% five-year term borrowings 9/25/1999 09/25/2002 $ 25,000
5.78% five-year term borrowings 10/08/1999 10/06/2002 10,000
5.63% five-year term borrowings 12/18/1999 12/18/2002 10,000
5.48% five-year term borrowings 01/07/2000 01/07/2003 10,000
5.64% one-year term borrowings - 04/01/1999 24,450
- ----------------------------------------------------------------------------------------------------------------------------
Total term borrowings $ 79,450
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY OF
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
On September 22, 1997, PCC Capital I, ("PCC Capital"), a wholly owned
subsidiary of Pacific Crest, issued $17.25 million of 9.375% Cumulative Trust
Preferred Securities, (the "Trust Preferred Securities"). PCC Capital invested
the gross proceeds of $17.25 million from the offering in the junior
subordinated debentures, issued by Pacific Crest. The junior subordinated
debentures were issued concurrent with the issuance of the Trust Preferred
Securities. The interest on the junior subordinated debentures will be paid by
Pacific Crest to PCC Capital and represents the sole revenues of PCC Capital and
the sole source of dividend distributions, to the holders of the Trust Preferred
Securities. The undertakings of Pacific Crest with regard to this public
offering constitute a full and unconditional guarantee by Pacific Crest, of PCC
Capital's obligations under the Trust Preferred Securities. Pacific Crest has
the right, assuming no default has occurred, to defer payments of interest on
the junior subordinated debentures at any time for a period not to exceed 20
consecutive quarters. The Trust Preferred Securities will mature on October 1,
2027, but can be called after October 1, 2002 by PCC Capital.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
Certain matters discussed in this Annual Report on Form 10-K may
constitute forward-looking statements under Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act. These statements may involve
risks and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates
in, projections of future performance, perceived opportunities in the market and
statements regarding the Company's mission and vision. The Company's actual
results, performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. The following is a summary of some of the important factors that
could affect the Company's future results of operations and/or stock price, and
should be considered carefully.
(1) ECONOMIC CONDITIONS. The Company's results are strongly influenced by
general economic conditions in its market areas. Accordingly, a deterioration
in these conditions could have a material adverse impact on the quality of the
Company's loan portfolio and the demand for its products and services. In
particular, changes in economic conditions in the real estate industry may
affect its performance. See "Item 1. Business - Economic Conditions,
Government Policies, Legislation, and Regulation."
(2) INTEREST RATES. The Company anticipates that interest rate levels will
remain generally constant in 1999, but if interest rates vary substantially from
present levels, the Company's results may differ materially from the results
currently anticipated. See "Item 1. Business - Economic Conditions, Government
Policies, Legislation, and Regulation", and "Item 7A. - Quantitative and
Qualitative Disclosure About Market Risk."
(3) GOVERNMENT REGULATION AND MONETARY POLICY. All forward-looking statements
presume a continuation of the existing regulatory environment and United States
government monetary policies. The banking industry is subject to extensive
federal and state regulations, and significant new laws or changes in, or
repeals of, existing laws may cause results to differ materially. See "Item 1.
Business - Economic Conditions, Government Policies, Legislation, and
Regulation," and "- Supervision and Regulation."
(4) COMPETITION. The Company competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries. Results of
the Company may differ if circumstances affecting the nature or level of
competition change, such as the merger of competing financial institutions or
the acquisition of California institutions by out-of-state companies. See
"Item 1. Business - Competition."
(5) CREDIT QUALITY. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, 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
its management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying credit
portfolios, but such policies and procedures may not prevent unexpected losses
that could materially adversely affect the Company's results. See "Item 1.
Business - Loan Origination and Underwriting."
(6) OTHER RISKS. From time to time, the Company details other risks with respect
to its businesses and/or its financial results in its filings with the SEC, the
FDIC and the DFI respectively.
The Company 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.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 30343 Canwood
Street, Agoura Hills, California 91301. Pacific Crest Bank conducts its deposit
operations through three branch offices located in Beverly Hills, Encino and San
Diego, California, and conducts its lending operations through the above three
branch offices in addition to its loan production offices, located in Agoura
Hills, Orange County, Oakland and Sacramento, California, Phoenix, Arizona,
Portland, Oregon and Seattle, Washington. The Company leases all of its offices.
Information with respect to the Company's principal executive and branch offices
is as follows:
15
<PAGE>
<TABLE>
<CAPTION>
FLOOR SPACE IN ANNUAL LEASE EXPIRATION
LOCATION SQUARE FEET RENT DATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PACIFIC CREST BANK:
Agoura Hills, California (1) 16,361 $ 270,254 2006
Beverly Hills, California 3,102 165,000 2001
Encino, California 3,310 75,600 2007
San Diego, California 4,505 105,417 2010
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Office also used by Pacific Crest.
The loan production offices currently leased by the Company are generally
between 200 and 1000 square feet and are leased either on a month-to-month basis
or for a lease commitment term not to exceed one year. The annual rent expense
for a loan production office generally does not exceed $20,000.
ITEM 3. LEGAL PROCEEDINGS.
There is one lawsuit and claim pending against the Company which
management considers incidental to normal operations. Management, after review,
including consultation with counsel, believes that any ultimate liability which
could arise from this lawsuit and claim, would not materially affect the
financial position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals are executive officers of the Company as of
December 31, 1998. Pertinent information relating to these individuals is set
forth below. There are no family relationships between any of the officers. All
of the Company's officers hold their respective offices at the pleasure of the
Board of Directors, subject to the rights, if any, of an officer under any
contract of employment.
GARY WEHRLE - CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF PACIFIC
CREST - AGE 56
Mr. Wehrle has served as Chairman of the Board of Pacific Crest since
October 20, 1993, and President and Chief Executive Officer of Pacific
Crest since September 10, 1993. Mr. Wehrle has served as President and
Chief Executive Officer of Pacific Crest Bank since 1984. Mr. Wehrle
served as Executive Vice President of the Foothill Group, Inc. from
1980 to 1993.
GONZALO FERNANDEZ - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 56
Mr. Fernandez has served as Executive Vice President of Pacific Crest
since June 20, 1994. Mr. Fernandez has served as Executive Vice President
of Pacific Crest Bank since June 20, 1994. From May 1988 to June 1994, he
served as Senior Vice President of City National Bank.
BARRY L. OTELSBERG - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 48
Mr. Otelsberg has served as Executive Vice President of Pacific Crest
since September 10, 1993. Mr. Otelsberg has served as Executive Vice
President of Pacific Crest Bank since 1985.
LYLE C. LODWICK - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 45
Mr. Lodwick has served as Executive Vice President of Pacific Crest since
September 10, 1993. Mr. Lodwick has served as Executive Vice President of
Pacific Crest Bank since 1992 and, prior to that, served as Senior Vice
President of Pacific Crest Bank from 1988 to 1992.
ROBERT J. DENNEN - SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
SECRETARY OF PACIFIC CREST - AGE 46
Mr. Dennen has served as Senior Vice President, Chief Financial Officer
and Secretary of Pacific Crest since January 1, 1999 and prior to that,
served as Vice President and Chief Financial Officer of Pacific Crest
from 1993 to 1998. Mr. Dennen has served as Senior Vice President and
Chief Financial Officer of Pacific Crest Bank since January 1, 1999 and
prior to that, served as Vice President and Chief Financial Officer of
Pacific Crest Bank from 1993 to 1998, and prior to that, served as Vice
President and Controller/Treasurer of Pacific Crest Bank from 1986 to
1993.
JOSEPH FINCI - SENIOR VICE PRESIDENT OF PACIFIC CREST - AGE 41
Mr. Finci has served as Senior Vice President of Pacific Crest since
November 1, 1995. Mr. Finci has served as Senior Vice President of Pacific
Crest Bank since November 1, 1995 and, prior to that, served as Vice
President of Pacific Crest Bank from 1990 to 1995.
CAROLYN REINHART - SENIOR VICE PRESIDENT OF PACIFIC CREST - AGE 39
Ms. Reinhart has served as Senior Vice President of Pacific Crest since
January 1, 1998 and, prior to that, served as Vice President of Pacific
Crest from 1993 to 1997. Ms. Reinhart has served as Senior Vice President
of Pacific Crest Bank since January 1, 1998 and, prior to that, served as
Vice President of Pacific Crest Bank from 1989 to 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value (the "Common Stock") is
traded on the Nasdaq National Market under the Nasdaq symbol "PCCI."
The following table presents the high and low sales prices for the Common
Stock during each quarter commencing January 1, 1997. There were approximately
1,500 beneficial owners of the Common Stock as of March 15, 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
QUARTER ENDED HIGH LOW
- -------------------------------------------------------------------------------------------
<S> <C> <C>
3/31/97 $13.75 $11.00
6/30/97 $13.50 $12.00
9/30/97 $17.75 $12.75
12/31/97 $18.75 $15.63
3/31/98 $19.00 $16.38
6/30/98 $21.50 $17.63
9/30/98 $20.00 $13.75
12/31/98 $15.25 $11.00
- -------------------------------------------------------------------------------------------
</TABLE>
The Company paid a cash dividend on its Common Stock during the fourth
quarter of 1998 and the Company currently plans to declare and pay quarterly
dividends during 1999. The Company's ability to pay dividends is subject to
restrictions set forth in the Delaware General Corporation Law. The Delaware
General Corporation Law provides that a Delaware corporation may pay dividends
either (i) out of the corporation's surplus (as defined by Delaware law), or
(ii) if there is no surplus, out of the corporation's net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Furthermore, if the Company were determined to be a quasi-California
corporation, the Company would have to comply with California law with respect
to, among other things, distributions to stockholders. Under California law, a
corporation is prohibited from paying dividends unless (i) the retained earnings
of the corporation immediately prior to the distribution exceeds the amount of
the distribution, (ii) the assets of the corporation exceed 1-1/4 times its
liabilities, or (iii) the current assets of the corporation exceed its current
liabilities, but if the average pre-tax net earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1-1/4 times it current liabilities.
Management believes that the Company is not a quasi-California
corporation by virtue of the Common Stock being listed on the Nasdaq National
Market and the Company having more than 800 holders of its equity securities.
However, no assurances can be given that this will continue to be the case in
the future. The Company's ability to pay cash dividends in the future will
depend in large part on the ability of Pacific Crest Bank to pay dividends on
its capital stock to the Company. The ability of Pacific Crest Bank to pay
dividends to the Company is subject to restrictions set forth in the California
Industrial Loan Law and the provisions of the California General Corporation Law
described above. See "Item 1. Business - Supervision and Regulation - California
Law."
Management is aware of eleven securities dealers who currently make a
market in the Common Stock: Sandler O'Neill & Partners; Friedman, Billings,
Ramsey & Co. Inc.; Herzog, Heine, Geduld, Inc.; Fahestock & Co., Inc.; Knight
Securities; Instinet Corporations; Hill, Thompson, Magid & Co.; Torrey Pines
Securities, Inc.; Capital Resources, Inc.; Sutro & Co., Inc and William R. Hough
& Co.
RECENT SALES OF UNREGISTERED SECURITIES
None.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following summary consolidated financial information of the Company
and its subsidiaries as of and for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 has been derived from the Company's audited consolidated
financial statements. The summary consolidated financial information should be
read in conjunction with the Company's consolidated financial statements and
related notes incorporated herein by reference.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 25,640 $ 2,392 $ 2,834 $ 56,167 $ 6,204
Investment securities 321,261 222,736 83,494 - 55,248
Total loans, net of deferred fees 288,486 231,133 211,095 196,778 182,461
Allowance for loan losses 5,024 4,100 3,400 4,500 8,075
Other real estate owned 806 2,064 3,469 4,355 5,724
Other assets 14,135 10,084 6,593 6,309 6,958
Total assets 645,304 464,309 304,085 259,109 248,520
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 482,839 348,171 266,695 234,510 226,350
Reverse repurchase agreements 30,779 21,500 10,000 - -
Term borrowings 79,450 45,000 - - -
Trust preferred securities 17,250 17,250 - - -
Shareholders' equity $ 30,140 $ 28,808 $ 24,468 $ 21,952 $ 19,628
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Total interest income $ 45,240 $ 35,346 $ 26,567 $ 23,799 $ 21,114
Total interest expense 28,538 19,611 13,500 12,084 9,358
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 16,702 15,735 13,067 11,715 11,756
Provision for loan losses 910 1,135 1,917 960 8,343
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,792 14,600 11,150 10,755 3,413
Noninterest income:
Gain (loss) on investment securities 252 - 413 851 (780)
Gain on sale of other real estate owned 120 216 - - -
Gain on sale of commercial real estate loans 467 - - - -
Gain on sale of SBA loans 254 - - - -
Other non interest income (1) 1,385 532 1,068 470 404
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,478 748 1,481 1,321 (376)
Noninterest expense:
Valuation adjustments to
other real estate owned 50 370 155 344 1,719
Other real estate owned expenses 211 114 150 203 850
Other general & administrative expenses 10,018 8,780 7,818 8,362 8,841
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,279 9,264 8,123 8,909 11,410
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,991 6,084 4,508 3,167 (8,373)
Income tax provision (benefit) 3,144 2,377 1,505 (77) (1,914)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,847 3,707 3,003 3,244 (6,459)
- ----------------------------------------------------------------------------------------------------------------------
Preferred dividends declared - - - (920) (1,104)
Net income (loss) applicable to common stock $ 4,847 $ 3,707 $ 3,003 $ 2,324 $ (7,563)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS: (2)
Return on average total assets (3) 0.90% 0.97% 1.06% 1.34% (2.56)%
Return on average shareholders' equity (4) 17.02% 14.06% 12.96% 16.02% (24.73)%
Net interest rate spread (5) 2.87% 3.89% 4.41% 4.60% 4.49%
Net interest margin (6) 3.15% 4.20% 4.76% 4.98% 4.82%
Ratio of other general & administrative
expenses to average total assets 1.86% 2.29% 2.77% 3.46% 3.50%
Dividend payout ratio (7) 2.8% - - - -
Nonperforming assets to total assets at
end of period (8) 0.12% 0.49% 1.60% 3.60% 6.24%
Net loan (recoveries)/charge-offs to average loans (0.01%) 0.20% 1.68% 2.45% 2.14%
Net loan (recoveries)/charge-offs & OREO valuation
adjustments to average loans and OREO 0.01% 0.36% 1.73% 2.57% 2.92%
Allowance for loan losses to total loans,
net of deferred fees 1.74% 1.77% 1.61% 2.29% 4.43%
Allowance for loan losses and OREO valuation
allowance to nonperforming assets 505.2% 165.70% 70.58% 52.68% 61.72%
Allowance for loans losses to nonaccrual loans - 1798.20% 245.30% 90.30% 82.60%
Total average shareholders' equity to total
average assets 5.64% 6.89% 8.20% 8.38% 10.34%
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (IN THOUSANDS):
Weighted average basic common shares outstanding 2,817 2,936 2,947 1,173 1,102
Weighted average diluted common shares outstanding (9) 2,971 3,070 3,004 2,954 2,660
- ----------------------------------------------------------------------------------------------------------------------------
Book value per common share $11.20 $9.97 $8.35 $7.43 $7.38
Diluted earnings (loss) per common share $1.64 $1.21 $1.00 $1.10 ($6.88)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1996 includes a $264,000 gain on the sale of $28.2 million in deposits.
(2) Pacific Crest's performance ratios are based on actual daily averages.
(3) Net income (loss) divided by average total assets.
(4) Net income (loss) divided by total average shareholders' equity, excluding
accumulated other comprehensive income.
(5) Average yield earned on interest-earning assets less the average rate paid
on interest-bearing liabilities.
(6) Net interest income divided by total average interest-earning assets.
(7) Dividends declared per common share divided by diluted earnings per common
share. The 1998 dividend payout ratio represents one quarter of declared
dividends. If the company had declared four quarters of dividends at the
fourth quarter pay out rate, the dividend payout ratio would have been 11.2%
(8) Nonperforming assets include total nonaccrual loans, and OREO.
(9) The conversion price of the preferred stock for these calculations is $9.00
per share. The preferred stock was converted into common stock of the
Company in December of 1995.
19
<PAGE>
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Pacific Crest Capital, Inc. (the "Company"), a Delaware corporation, is a
financial services holding company and holds 100% of the stock of Pacific Crest
Bank, and 100% of the common stock of PCC Capital I ("PCC Capital").
The consolidated financial statements and financial data as of December
31, 1998, 1997, 1996, 1995 and 1994 include the Company and its wholly owned
subsidiaries. For convenience, these financial statements are referred to as the
financial statements of the Company (Pacific Crest).
The following discussion should be read in conjunction with the
information under "Item 6. Selected Financial Data" and the Company's
consolidated financial statements and related notes contained elsewhere herein.
Certain statements under this caption constitute "forward-looking statements"
under Section 27A of the Securities Act and Section 21E of the Exchange Act
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in these forward-looking statements.
Factors that might cause such a difference, include but are not limited to,
credit quality, economic conditions, competition in the geographic and business
areas in which the Company conducts its operations, fluctuations in interest
rates and government regulation. For additional information concerning these
factors, see "Item 1. Business - Business Considerations and Certain Factors
that May Affect Future Results of Operations and Stock Price."
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
EARNINGS PERFORMANCE
The Company's pretax income for the year ended December 31, 1998 was $8.0
million, compared to $6.1 million for the same period in 1997. The increase of
$1.9 million, or 31.3%, was due to several factors. These factors include a $1.0
million increase in net interest income and a $225,000 decline in the provision
for loan losses. In addition total noninterest income increased by $1.7 million
during 1998 over the prior year. These factors were partially offset by an
increase in noninterest expense of $1.0 million.
NET INTEREST INCOME
Net interest income increased by $967,000, or 6.1%, to $16.7 million for
the year ended December 31, 1998 as compared to the same period in 1997. This
was primarily due to the increase in the Company's average interest earning
assets of $155.5 million during the period ended December 31, 1998.
Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. The Company attempts to
minimize the effect of interest rate fluctuations on net interest margin by
matching a portion of the Company's interest sensitive assets and interest
sensitive liabilities.
Net interest income can also be affected by a change in the composition
of assets and liabilities, for example, if higher yielding loan assets were to
replace a like amount of lower yielding short-term government securities.
Changes in volume and changes in rates also affect net interest income. Volume
changes are caused by differences in the level of earning assets and
interest-bearing liabilities. Rate changes result from differences in yields
earned on assets and rates paid on liabilities.
The following table presents the distribution of average assets,
liabilities and shareholders' equity, the total dollar amount of interest income
from average interest-earning assets, the resultant yields and the interest
expense on average interest-bearing liabilities, expressed in both dollars and
rates. All average balances are daily average balances. Nonaccrual loans have
been included in the table as loans, having a zero yield.
20
<PAGE>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 238,950 $ 25,653 10.74% $ 222,833 $ 24,475 10.98% $ 190,856 $ 21,384 11.20%
Repurchase agreements 4,167 221 5.30% 2,056 112 5.45% 42,833 2,270 5.30%
U.S. government agency securities
Available for sale 282,325 19,020 6.74% 114,635 8,045 7.02% 23,874 1,632 6.84%
Held to maturity 4,040 310 7.67% 35,032 2,714 7.75% 17,173 1,281 7.46%
Corporate debt securities
Available for sale 585 36 6.15% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 286,950 19,366 6.75% 149,667 10,759 7.19% 41,047 2,913 7.10%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) 530,067 45,240 8.53% 374,556 35,346 9.44% 274,736 26,567 9.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Other real-estate owned 1,373 2,355 3,938
Other non-interest earning assets 11,890 9,746 7,980
Less allowance for loan losses (1) 4,547 3,744 4,013
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 538,783 $ 382,913 $ 282,641
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 211,851 11,226 5.30% 181,303 9,603 5.30% 176,742 9,179 5.19%
Certificates of deposit 160,720 9,241 5.75% 110,829 6,467 5.84% 62,747 3,456 5.51%
Money market checking 18,917 949 5.02% 18,054 892 4.94% 16,717 822 4.92%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 391,488 21,416 5.47% 310,186 16,962 5.47% 256,206 13,457 5.25%
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements 24,893 1,418 5.70% 28,493 1,638 5.75% 671 43 6.41%
Term borrowings 70,653 4,087 5.78% 9,685 562 5.80% - - -
Trust preferred securities 17,250 1,617 9.37% 4,789 449 9.38% - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 504,284 28,538 5.66% 353,153 19,611 5.55% 256,877 13,500 5.26%
Non interest-bearing liabilities 4,098 3,393 2,597
Shareholders' equity 30,401 26,367 23,167
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 538,783 $ 382,913 $ 282,641
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 16,702 $ 15,735 $ 13,067
Net interest rate spread (2) 2.87% 3.89% 4.41%
Net interest-earning assets $ 25,783 $ 21,403 $ 17,859
Net interest margin (3) 3.15% 4.20% 4.76%
Average interest-earning assets to
average interest-bearing
liabilities 105.1% 106.1% 107.0%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees. The amount of interest foregone on
nonaccrual loans was $7,000, $249,000 and $547,000 for 1998, 1997 and 1996,
respectively.
(2) Net interest rate spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (i.e. changes in volume multiplied by old rate) and
(ii) changes in rate (i.e. changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume which
cannot be segregated, have been allocated proportionately to changes due to
volume and changes due to rate.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans (1) $ 1,740 $ (562) $ 1,178 $ 3,518 $ (427) $ 3,091
Repurchase agreements 112 (3) 109 (2,205) 62 (2,143)
Certificates of deposit - (8) (7) (15)
U.S. government agency securities
Available for sale 11,315 (340) 10,975 6,370 43 6,413
Held to maturity (2,377) (27) (2,404) 1,382 51 1,433
Corporate debt securities
Available for sale 36 - 36 - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total change in interest income 10,826 (932) 9,894 9,057 (278) 8,779
- ----------------------------------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts 1,619 4 1,623 240 184 424
Certificates of deposit 2,871 (97) 2,774 2,796 215 3,011
Money market checking 44 13 57 66 4 70
Reverse repurchase agreements (205) (15) (220) 1,600 (5) 1,595
Term borrowings 3,524 1 3,525 562 - 562
Trust preferred securities 1,168 - 1,168 449 - 449
- ------------------------------------------------------------------------------------- -------------------------------------
Total change in interest expense 9,021 (94) 8,927 5,713 398 6,111
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include interest income that would have been earned on nonaccrual
loans.
NET INTEREST INCOME (CONTINUED)
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 years ended December 31, 1998 and 1997 was 2.87% and 3.89%,
respectively. The decline in the spread between the 1998 and 1997 periods was
primarily the result of a decrease on the yields earned on interest-earning
assets.
The net interest margin is defined as the difference between interest
income and interest expense divided by the average interest-earning assets. The
net interest margin for the years ended December 31, 1998 and 1997, was 3.15%
and 4.20%, respectively. The decline in the margin was 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 investment 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.
The following table sets forth the composition of average
interest-earning assets and average interest-bearing liabilities by category and
by the percentage of each category to the total for the years ended December 31,
1998 and 1997, including the change in average balance and yield/rate between
these respective periods:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 Change
-------------------------------------------------------------------------------------------
% Avg. % Avg.
Average Compo- Yield/ Average Compo- Yield/ Yield/
(DOLLARS IN THOUSANDS) Balance sition Rate Balance sition Rate $ % Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 238,950 45.1% 10.74% $ 222,833 59.5% 10.98% $ 16,117 -14.4% -0.24%
Repurchase agreements 4,167 0.8% 5.30% 2,056 0.5% 5.45% 2,111 0.3% -0.15%
Investment securities 286,950 54.1% 6.75% 149,667 40.0% 7.19% 137,283 14.1% -0.44%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 530,067 100.0% 8.53% $ 374,556 100.0% 9.44% $ 155,511 0.0% -0.91%
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 391,488 77.6% 5.47% 310,186 87.8% 5.47% $ 81,302 -10.2% 0.00%
Borrowings 95,546 18.9% 5.76% 38,178 10.8% 5.76% 57,368 8.1% 0.00%
Trust preferred securities 17,250 3.5% 9.37% 4,789 1.4% 9.38% 12,461 2.1% -0.01%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 504,284 100.0% 5.66% $ 353,153 100.0% 5.55% $ 151,131 0.0% 0.11%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
TOTAL INTEREST INCOME
Total interest income increased by $9.9 million, or 28.0%, to $45.2
million for the year ended December 31, 1998, compared to the same period in
1997. This increase was primarily due to an increase in the average balance of
interest-earning assets of $155.5 million to $530.1 million, a 41.5% increase,
for the year ended December 31, 1998, over the comparable period in 1997. The
growth in interest-earning assets has been concentrated in investment securities
and commercial loans. Partially offsetting these increases, the overall yields
on the Company's interest-earning assets decreased by 91 basis points for the
year ended December 31, 1998 from the comparable period 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 lower
yielding loans being added to the loan portfolio during 1998, reflecting the
increased competitive rate pressure in the marketplace. In addition, higher
yielding loans have been paying off during 1998, adding to the overall yield
decline.
The substantial increase in the average balances of the Company's U.S.
government sponsored agency securities for the year ended December 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 increased by $8.9 million, or 45.5%, to $28.5
million for the year ended December 31, 1998, 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 $151.1 million to $504.3 million, a
42.8% increase, for the year ended December 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 in the average balances has been primarily
in certificates of deposit, savings accounts, term borrowings and the trust
preferred securities but also includes a small increase in money market
checking. The rates paid on the Company's interest-bearing liabilities increased
from 5.55% to 5.66%, or 11 basis points, during the year ended December 31,
1998, compared to the same period in 1997. The increases in the rates paid on
the Company's interest-bearing liabilities reflect the change in the composition
of interest-bearing liabilities as detailed above, and the change in market
interest rates between the 1998 and 1997 periods. The change in the composition
of the interest-bearing liabilities for the year ended December 31, 1998,
reflects the leveraging of the balance sheet with increased borrowings
subsequent to the issuance of $17.25 million of trust preferred securities in
September of 1997.
PROVISION FOR LOAN LOSSES
During 1998, the Company decreased its provision for loan losses to
$910,000 from $1.1 million for 1997. The decrease of $225,000 between 1998 and
1997 in the loan loss provision primarily reflects the decline of nonaccrual
loans, other loans of concern and troubled debt restructured loans during the
year ending December 31, 1998.
Although the Company maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts, thereby
adversely affecting future results of operations. The calculation of the
adequacy of the allowance for loan losses is based on a variety of factors,
including adequacy of collateral, which includes loan balance to collateral
value, loan debt service coverage ratio and secondary collateral, if applicable.
In addition management evaluates the following factors, current delinquency
trends, historical Company loan loss experience, regional real estate economic
conditions and overall economic trends impacting the Company's real estate
lending portfolio. Commercial real estate serves as collateral for virtually the
Company's entire loan portfolio. The ratio of nonaccrual loans to total loans,
net of deferred loan fees was 0.10% at December 31, 1997. The Company had no
nonaccrual loans, no impaired loans and no loans classified as troubled debt
restructured at December 31, 1998.
NONINTEREST INCOME
The following table reflects the major components of noninterest income
for the years ended December 31, 1998, 1997 and 1996 and the dollar and
percentage change between the periods of 1998/1997 and 1997/1996:
<TABLE>
<CAPTION>
NONINTEREST INCOME ANALYSIS FOR THE YEAR ENDED DECEMBER 31 $ CHANGE % CHANGE+/- $ CHANGE % CHANGE+/-
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1998/1997 1998/1997 1997/1996 1997/1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gain on sale of other real estate owned $ 120 $ 216 $ - $ (96) (44.4%) $ 216 100%
Gain on sale of commercial real estate loans 467 - - 467 100% - -
Gain on sale of SBA loans 254 - - 254 100% - -
Gain on sale of investment securities 252 - 413 252 100% (413) (100%)
Gain on sale of deposits - - 264 - - (264) (100%)
Loan prepayment and late fees 788 243 - 545 224.3% 243 100%
Other noninterest income 597 289 804 308 106.6% (515) (64%)
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 2,478 $ 748 $ 1,481 $ 1,730 231.3% $ (733) (49%)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest income for the year ended December 31, 1998 increased by $1.7
million, or 231%, compared to the same period in 1997. These changes are
detailed on the table above and significant changes in noninterest income are
described below.
23
<PAGE>
The gain on sale of other real estate owned (OREO) has declined during
the year ended December 31, 1998, as compared to 1997, due to the continued
decline in the balances held in OREO properties. Additionally, in May of 1997,
an OREO property was sold at a gain of $176,000, which substantially exceeded
all gains recorded in 1998.
During 1998, the Company instituted a commercial real estate loan program
designed to produce loan product for both the Company's portfolio and for
potential sale in the secondary market. The loans originated are fixed rate
loans with interest rates fixed for ten years based on a margin over the
ten-year U.S. Treasury Bond. The loans were sold at a premium ranging between
3.1% and 6.1%, depending upon the characteristics of each loan. Although this
program has been designed in part to produce recurring gain income for the
Company, there can be no assurance that future sales will occur to produce
future gain income. The Company generated $467,000 in gain income under this
program during 1998. See also "Notes to Consolidated Financial Statements,"
footnote 20.
During the last three quarters of 1998, the Company sold the SBA
guaranteed portion of three pools of loans at a premium ranging between 5.75%
and 10.0%. These loans were sold, with the servicing rights retained, at a total
premium of $254,000. The Company did not sell any SBA loans in 1997. See also
"Notes to Consolidated Financial Statements," footnote 21.
In the third and fourth quarters of 1998, the Company sold investment
securities held in its available for sale portfolio, generating $252,000 in gain
income. The Company did not sell any investments during 1997 which resulted in a
"gain on sale".
Loan prepayment income for the year ended December 31, 1998 rose by
$545,000, over the comparable period in 1997. This is due to the increased
volume of loans prepaying in 1998, as compared to 1997, due to the competitive
interest rate environment.
Other noninterest income increased by $308,000 primarily as a result of
an increase in loan origination fees in 1998. This is a direct result of the
increase in loan originations of 114.5% from $50.7 million in 1997 to $108.8
million for 1998.
NONINTEREST EXPENSE
The following table reflects the major components of noninterest expense
for the years ended December 31, 1998, 1997 and 1996 and the dollar and
percentage change between the periods of 1998/1997 and 1997/1996.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE ANALYSIS YEAR ENDED DECEMBER 31 $ CHANGE % CHANGE +/- $ CHANGE % CHANGE +/-
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1998/1997 1998/1997 1997/1996 1997/1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustments to other real estate owned $ 50 $ 370 $ 155 $ (320) -86.5% $ 215 138.7%
Other real estate owned expense 211 114 150 97 85.1% (36) -24.0%
Salaries and employee benefits 5,822 5,009 4,664 813 16.2% 345 7.4%
Net occupancy expense 1,616 1,568 1,448 48 3.1% 120 8.3%
Communication and data processing 778 659 551 119 18.1% 108 19.6%
Advertising and promotion 541 351 174 190 54.1% 177 101.7%
FDIC insurance premiums 43 73 72 (30) -41.1% 1 1.4%
Credit and collections expenses 127 127 94 - 0.0% 33 35.1%
Other expenses 1,091 993 815 98 9.9% 178 21.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $10,279 $ 9,264 $ 8,123 $ 1,015 11.0% $ 1,141 14.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the year ended December 31, 1998 increased by
$1.0 million or 11.0%, compared to 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 year ended December 31, 1998,
decreased by $320,000, compared to the same period in 1997. The Company recorded
OREO valuation adjustments on two OREO properties in 1997, while minimal write
downs were necessary during 1998.
Salaries and employee benefits for the year ended December 31, 1998
increased by $813,000 compared to the same period in 1997. This was primarily
the result of increased marketing and administrative bonus expense in 1998
versus 1997, due to higher loan volume and improved return on equity. The
Company also provided an approximate 4% salary increase to most employee base
salaries in January of 1998. Finally, the Company hired additional loan
marketing staff during 1998, increasing its marketing representative count from
eight employees at the beginning of 1998 to twelve at year end 1998.
Advertising and promotion expenses for the year ended December 31, 1998
increased by $190,000 over 1997. This increase is due to the Company's more
aggressive advertising campaign in 1998 which contributed to the loan and
deposit growth experienced in the current year.
Communication and data processing expense for the year ended December 31,
1998, increased by $119,000, compared to the same period in 1997. These
increases were primarily the result of the Company establishing loan production
offices in Portland, Oregon; Seattle, Washington; and Orange County, California,
in addition to the hiring of additional marketing staff during 1998.
Other expenses for the year ended December 31, 1998, increased by $98,000
compared to the same period in 1997, due to an increase in loan origination cost
during 1998. This is a direct result of the increase in loan originations of
114.5% from $50.7 million in 1997 to $108.8 million for 1998.
INCOME TAX PROVISION
The Company's income tax provision for the year ended December 31, 1998
was $3.1 million which represents an effective tax rate of 39.3%. The difference
between the Company's statutory tax rate of 41.1% and its effective tax rate for
the year
24
<PAGE>
ended December 31, 1998 was primarily due to California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
The Company's income tax provision for the year ended December 31, 1997
was $2.4 million which represents an effective tax rate of 39.1%. The difference
between the Company's statutory tax rate of 41.5% and its effective tax rate for
the year ended December 31, 1997 was due to both the reversal of a portion of
the Company's tax valuation reserve of approximately $386,000 against the
Company's tax provision, as well as California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31 $ CHANGE % CHANGE +/- $ CHANGE % CHANGE +/-
-------------------------------------------------------------------------------------------
1998 1997 1996 1998/1997 1998/1997 1997/1996 1997/1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 25,640 $ 2,392 2,834 $ 23,248 971.91% $ (442) (15.60%)
Investment securities 321,261 222,736 83,494 98,525 44.23% 139,242 166.77%
Net loans 283,462 227,033 207,695 56,429 24.85% 19,338 9.31%
Other assets 14,941 12,148 10,062 2,793 22.99% 2,086 20.73%
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 645,304 464,309 304,085 180,995 38.98% 160,224 52.69%
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Total deposits 482,839 348,171 266,695 134,668 38.68% 81,476 30.55%
Reverse repurchase
agreements/term borrowings 110,229 66,500 $ 10,000 43,729 65.76% 56,500 565.00%
Trust preferred securities 17,250 17,250 - - - 17,250 100.00%
Other liabilities 4,846 3,580 2,922 1,266 35.36% 658 22.52%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 615,164 435,501 279,617 179,663 41.25% 155,884 55.75%
SHAREHOLDERS' EQUITY 30,140 28,808 24,468 1,332 4.62% 4,340 17.74%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 645,304 $ 464,309 $ 304,085 $ 180,995 38.98% $ 160,224 52.69%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total assets increased by $181.0 million for the year ended December 31,
1998, compared to 1997. Changes in assets, liabilities, and shareholders' equity
are detailed above, and significant changes are described below.
The increase in cash and cash equivalents at December 31, 1998 of $23.2
million was the result of the Company maintaining higher levels of liquidity
during the fourth quarter of 1998, as a result of the strong loan origination
demand and the significant increase in the Company's interest-bearing deposits.
The increase in the balance of investment securities for the year ended
December 31, 1998 reflects the Company's effort to optimize earnings by more
effectively leveraging capital with the purchase of these securities. The
increase in net loans primarily reflects new loan originations and purchases of
$128.2 million, reduced by $64.3 million in loan payoffs, loan transfers to
OREO, and loan chargeoffs. The increase in other assets is primarily due to the
increase in accrued interest receivable for the year ended December 31, 1998,
over the comparable period in 1997. This increase is due to the larger portfolio
of investment securities, as well as an increase in net loans.
Total liabilities have increased in response to the need to fund the
growth in assets for the year ended December 31, 1998. The growth in deposits
included $75.8 million in savings deposits, $51.8 million in certificates of
deposit, $7.1 million in money market checking deposits, $9.3 million in reverse
repurchase agreements, and $34.4 million in term borrowings.
Shareholders' equity has risen for the year ended December 31, 1998,
primarily due to the current year net income of $4.8 million, partially offset
by the purchase of treasury shares of $3.5 million.
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
Total nonperforming assets declined $1.5 million or 64.8% during 1998, to
$806,000, or 0.12% of total assets at December 31, 1998, compared with $2.3
million, or 0.49% of total assets at December 31, 1997, due to decreases in the
level of both nonaccrual loans and OREO. Loans transferred to OREO were
$208,000, resulting in a zero balance of nonaccrual loans at December 31, 1998.
OREO at December 31, 1998 consisted of two properties with a combined carrying
value of $806,000. The Company had four loans with aggregate outstanding loan
balances of $2.7 million which management considered to be potential problem
loans due to possible credit problems of the borrowers or cash flows of the
properties securing the loans. The reduction in nonperforming assets was largely
due to continued emphasis by management on problem credits, as well as continued
favorable economic conditions in the Company's market areas.
- --------------------------------------------------------------------------------
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings and
payments of principal and interest on loans and investment securities. While
maturities and scheduled principal amortization on loans are a reasonably
predictable source of funds,
25
<PAGE>
deposit flows and mortgage loan prepayments are greatly influenced by the level
of interest rates, economic conditions, and competition.
The primary lending and investment activities of the Company have
generally been the origination of adjustable rate and fixed rate commercial real
estate loans, the purchase of U.S. government sponsored agency securities,
corporate debt securities and to a lesser extent, the purchase of short-term
repurchase agreements. The purchase of U.S. government sponsored agency
securities, corporate debt securities and short-term repurchase agreements
provide a source of long and short-term liquidity. The lending and investment
activities of the Company are funded primarily by principal and interest
payments on loans, interest-bearing deposit growth, borrowing of reverse
repurchase agreements, term borrowings and long term borrowings in the form of
trust preferred securities.
The Company's most liquid assets are cash, cash in banks and repurchase
agreements. The levels of these assets depend on the Company's operating,
financing, lending and investing activities during any given period.
Liquidity for the Company is monitored daily and evaluated monthly.
Excess funds are invested in short-term investment securities, generally
repurchase agreements. Additional sources of funds are available by borrowing
against the Company's U.S. government sponsored agency securities portfolio and
secondarily by borrowing from the Federal Reserve Bank's discount window.
The table below sets forth pertinent details related to the Company's
borrowing availability as of December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
BORROWING LINE OUTSTANDING REMAINING NUMBER OF BROKER
(DOLLARS IN THOUSANDS) LIMITS BALANCE AVAILABLE DEALERS TERM
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short term borrowings $ 95,000 $ 30,779 $ 64,221 4 90 days or less
Term borrowings $ 45,000 $ 24,450 $ 20,550 1 One year or less
Long term borrowings $ 95,000 $ 55,000 $ 40,000 1 5 year/2 year call
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
All borrowings are secured by pledging specific amounts of specific
securities of the Company's U.S. government sponsored agency securities
portfolio. The Company also had a borrowing line of $1.3 million with the
Federal Reserve Bank, of which there were no borrowings at December 31, 1998. At
December 31, 1998, the Company had outstanding legal commitments to fund real
estate term loans of $4.6 million.
There has been an increase in the Company's holdings of cash and cash
equivalents during the period ended December 31, 1998 compared to 1997. Cash and
cash equivalents increased by $23.2 million to $25.6 million at December 31,
1998 from $2.4 million at December 31, 1997. The Company raised $75.8 million in
savings accounts and $51.8 million in certificates of deposits during 1998 due,
in part, by maintaining the rate structure on these products, during a declining
rate environment. The Company experienced an increase in its money market
checking deposits of $7.1 million. The Company originated and purchased $128.2
million in new commercial real estate and business loans during 1998.
Off-setting these originations, the Company experienced $52.0 million in loan
payoffs, $12.0 million in loan sales, $208,000 in loan transfers to OREO, and
$20,000 in loan chargeoffs during 1998.
The Company on an unconsolidated basis, (the "Parent Company") has
approximately $5.6 million in cash and investments less current liabilities and
short-term debt at December 31, 1998. These funds are necessary to pay future
operating expenses of the Parent Company, service all outstanding debt, and
possibly for future capital infusions into Pacific Crest Bank. Without dividends
from Pacific Crest Bank, the Parent Company must rely solely on existing cash
investments and borrowing. The Company declared and paid a $0.05 cent per share
common stock cash dividend during the fourth quarter of 1998, which amounted to
$137,000. In addition, the Company has declared a $0.05 cent per share common
stock cash dividend for the first quarter of 1999 on February 11, 1999, payable
on March 18, 1999 to holders of record on March 4, 1999. The Company anticipates
that it will continue to declare and pay quarterly dividends during 1999.
Pacific Crest Bank's ability to pay dividends to the Parent Company is
restricted by California state law which requires that sufficient retained
earnings are available to pay the dividend. At December 31, 1998, Pacific Crest
Bank had retained earnings of $9.2 million, of which $174,000 was unrestricted
and available for dividend payments. The Bank has declared a $280,000 first
quarter cash dividend, payable to the Parent Company. This dividend was declared
on February 11, 1999, payable on March 18, 1999. The Bank anticipates that it
will continue to declare and pay quarterly dividends to the Parent Company
during 1999.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital that
will support sustained asset growth, anticipated credit risks and to ensure that
regulatory guidelines and industry standards are met.
Pacific Crest Bank is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. Risk-based capital
consists of a core capital component (Tier I), essentially common stockholders'
equity, less intangible assets and a supplemental component (Tier II) which
includes the allowance for loan losses up to 1.25% of risk-weighted assets, and
a system for assigning assets and off-balance sheet items to one of four
risk-weighted categories. These capital standards require a minimum Tier I
risk-based capital ratio of 4.00% and total risk-based capital ratio (Tier I
plus Tier II) of 8.00%.
In addition to the risked-based guidelines, the FDIC requires banking
organizations to maintain a minimum amount of Tier I Capital to total assets,
referred to as the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking organizations,
the minimum leverage ratio of Tier I Capital to total assets must be 3%. For all
banking
26
<PAGE>
organizations not rated in the highest category, the minimum leverage ratio must
be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%.
At December 31, 1998, Pacific Crest Bank was in compliance with all such
requirements. The following table sets forth Pacific Crest Bank's regulatory
capital ratios as of the dates indicated:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT DECEMBER 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% 6.81% 2.81% 4.00% 7.53% 3.53%
Tier I risk-based capital ratio 4.00% 10.67% 6.67% 4.00% 12.02% 8.02%
Total risk-based capital ratio 8.00% 11.92% 3.92% 8.00% 13.27% 5.27%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The purpose of asset liability management is to minimize the risk of loss
resulting from changes in interest rates. One method of assessing the potential
risk associated with changes in the interest rates is to examine the extent to
which assets and liabilities are "interest rate sensitive" by monitoring the
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature and reprice within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would generally tend to adversely affect net interest income while
a positive gap would generally tend to result in an increase in net interest
income. During a period of declining interest rates, a negative gap would
generally tend to result in increased net interest income while a positive gap
would generally tend to adversely affect net interest income. At December 31,
1998, total interest-bearing liabilities maturing or repricing within one year
exceeded total interest-earning assets repricing or maturing in the same period
by $200.4 million, representing a negative cumulative one-year gap of 31.1% 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 manage 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 generally provide for
quarterly repricing, the Company has written a significant amount of its loans
with interest rate floors. At December 31, 1998, 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. In addition to adjusting the pricing levels and characteristics of
interest rate sensitive assets and liabilities to manage interest rate risk, in
June of 1998, the Company purchased an interest rate cap. The interest rate cap
was purchased as a hedge instrument for the Company's deposit liabilities which
reprice in one year or less. This instrument is indexed to the 90-day London
Interbank Offered Rate (LIBOR) with a strike price of 6.70%. When LIBOR exceeds
this level, the interest rate cap earns income for the Company, thereby
mitigating some of the risk of rising interest rates. The interest rate cap does
not expose the Company to any additional risk beyond the initial investment of
$925,000.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at December 31, 1998, 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. For assets with call features, repricing is determined using the
estimated duration of the instrument. The Company has assumed, for purposes of
this table only, that its savings accounts, money market checking accounts, and
reverse repurchase agreements, which totaled $276.0 million, $23.8 million and
$30.8 million, respectively at December 31, 1998, reprice immediately. The
Company has assumed, for purposes of the static gap tables, that its investment
securities mature/reprice after the initial call date, but prior to its maturity
date, based upon a duration model that factors the probability of the securities
being called relative to changes in interest rates.
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 behind 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 by the Company using an interest rate shock analysis. This
analysis applies
27
<PAGE>
"change ratios" to assets and liabilities based upon various assumptions
regarding their repricing characteristics under various hypothetical market
interest rate fluctuations. 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 December 31, 1998, management's analysis indicates
that the Company's net interest income would decrease by no more than 10% if
rates rose 200 basis points over one year.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
IMMEDIATE OVER ONE
THROUGH YEAR THROUGH OVER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS SUBJECT TO INTEREST RATE ADJUSTMENT:
Repurchase agreements $ 22,048 $ - $ - $ 22,048
Investment securities - available for sale
U.S. Government sponsored agency securities - 76,171 233,354 309,525
Corporate debt securities 11,736 - - 11,736
Total loans, gross 194,811 57,237 37,020 289,068
- ----------------------------------------------------------------------------------------------------------------------------
Total $228,595 $ 133,408 $ 270,374 $ 632,377
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES SUBJECT TO INTEREST RATE ADJUSTMENT:
Certificates of deposit $ 173,918 $ 9,061 - $ 182,979
Savings accounts 276,011 - - 276,011
Money market checking 23,849 - - 23,849
Reverse repurchase agreements 30,779 - - 30,779
Term borrowings 24,450 55,000 - 79,450
Trust preferred security - - 17,250 17,250
- ----------------------------------------------------------------------------------------------------------------------------
Total $529,007 $ 64,061 $ 17,250 $ 610,318
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate cap $100,000 - - $ 100,000
Gap (1) $ (200,412) $ 69,347 $ 253,124 $ 122,059
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative Gap $ (200,412) $ (131,065) $ 122,059 $ 122,059
- ----------------------------------------------------------------------------------------------------------------------------
As a percent of total assets -31.06% -20.31% 18.91% 18.91%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Gap represents rate sensitive assets less rate sensitive liabilities,
net of the effect of the interest rate cap.
- --------------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
The financial institutions industry, as with other industries, is faced
with Year 2000 issues. These issues center around computer programs that do not
recognize a year which begins with "20" instead of "19", or uses only 2 digits
for the year. This could result in major systems failures or miscalculations.
This Year 2000 issue creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems, as well as from
computer systems of the Federal Reserve Bank, correspondent banks, customers,
vendors, and utility providers. Failures of these systems or untimely
corrections could have a material adverse impact on the Company's ability to
conduct its business and results of operations.
Certain statements in this section constitute forward-looking statements
under the Private Securities Litigation Reform Act of 1995 which involve risk
and uncertainties. The Company's actual results may differ significantly from
the results discussed in these forward-looking statements. Such factors include,
but are not limited to, the estimated costs of remediation, the preparedness of
third party vendors, timetables for implementation of future remediation and
testing, contingency plans, and estimated future costs due to business
disruption caused by affected third parties.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and services.
The Company has formed a Year 2000 committee comprised of certain officers to
evaluate and address the Year 2000 issue for both information technology and
non-information technology systems.
As of the date of this 10K filing, the Company has successfully completed
the awareness and assessment phases of the Year 2000 plan and is currently in
the remediation, testing and validation phases of the plan. None of the
Company's critical systems were programmed by internal staff; rather, they are
serviced or provided by outside system vendors. The systems that were identified
in the assessment phase as critical to the Company's operations are expected to
be remediated, tested, and certified as compliant by the end of the first
quarter of 1999.
The Company has notified its customers by means of statement stuffers of
Year 2000 issues. It is also in the process of contacting each of its major
borrowing customers to make them aware of the issues and to seek information
regarding its customers' preparedness for the Year 2000. Any borrowers unable to
confirm Year 2000 compliance in a timely manner will be evaluated to ensure an
adequate specific allocation to the allowance for loan losses. Year 2000
compliance will be a factor in all credit decisions and in the specific
allocations of a required allowance for loan losses. Management believes the
Year 2000 does represent an area of potential risk for credit losses, but also
believes the risk is manageable. However, credit losses could be realized by the
Company
28
<PAGE>
due to Year 2000 problems affecting the businesses of borrowers. The amount of
such losses would be a function of the value of the collateral associated with
the individual credits. Whether such potential losses would require an
additional provision for loan losses would be determined in conjunction with the
normal quarterly analysis of the adequacy of the allowance for loan losses.
Vendors and utilities have informed the Company that their Year 2000 projects
are on schedule and their progress is being monitored by Company personnel.
An expected reasonable "worst case" scenario is that, notwithstanding the
testing and certification of all the Company's critical systems beforehand, a
problem is discovered in the year 2000 that impacts the core accounting systems.
In this event, the Company would be required to perform many business functions
manually until such time as the responsible vendor corrected the problem. Such
manual processing of functions is provided for in the Company's contingency
plans.
As of the date of this 10k filing, the total cost of software & hardware
corrections and modifications related to the year 2000 issue, was approximately
$30,000. The total cost estimated to correct the new computer software systems,
or to have existing systems modified, is not expected to exceed $150,000, in
total, over the next year. Although the Company does not expect any material
adverse consequences to occur as a result of year 2000 issue, there can be no
assurance that the Company will be able to identify all year 2000 issues, or
that all contingency plans will assure uninterrupted business operations across
the millennium.
- --------------------------------------------------------------------------------
COMPARISONS OF FINANCIAL RESULTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
The Company's pretax income for the year ended December 31, 1997 was $6.1
million, compared to $4.5 million for the same period in 1996. The increase of
$1.6 million, or 35.0%, was due to several factors. These factors include a $2.7
million increase in net interest income and a $782,000 decline in the provision
for loan losses. These factors were partially offset by a decrease in
noninterest income of $733,000 and an increase in noninterest expense of $1.1
million.
NET INTEREST INCOME
Net interest income increased by $2.7 million, or 20.4%, to $15.7 million
for the year ended December 31, 1997 as compared to the same period in 1996.
This was primarily due to the increase in the Company's average interest earning
assets of $99.8 million during the period ended December 31, 1997.
The table on page 21 presents the distribution of average assets,
liabilities and shareholders' equity, the total dollar amount of interest income
from average interest-earning assets, the resultant yields and the interest
expense on average interest-bearing liabilities, expressed in both dollars and
rates for the years ended December 31, 1997 and 1996.
TOTAL INTEREST INCOME
Total interest income increased by $8.8 million, or 33.0%, to $35.3
million for the year ended December 31, 1997, compared to the same period in
1996. This increase was primarily due to an increase in the average balance of
interest-earning assets of $99.8 million to $374.6 million, a 36.3% increase,
for the year ended December 31, 1997, over the comparable period in 1996. The
growth in interest-earning assets has been concentrated in U.S. government
sponsored agency securities and commercial loans. Partially offsetting these
increases, the overall yields on the Company's interest-earning assets decreased
by 23 basis points for the year ended December 31, 1997 from the comparable
period in 1996. This decline is due to the change in the composition of
interest-earning assets which is detailed above, and the reduced yields earned
on commercial loans. The primary reason for the decline in the overall loan
portfolio yield is due to lower yielding loans being added to the loan portfolio
during 1997, reflecting the increased competitive rate pressure in the
marketplace. In addition, higher yielding loans have been paying off during
1997, adding to the overall yield decline.
The substantial increase in the average balances of the Company's U.S.
government sponsored agency securities for the year ended December 31, 1997,
reflects the Company's effort to optimize earnings by more effectively
leveraging capital with the purchase of these securities. The purchase of U.S.
government agency securities reflects a shift by the Company to maintain lower
balances within the lower yielding repurchase agreements portfolio, while
reinvesting in the higher yielding U.S. government agency securities portfolio.
TOTAL INTEREST EXPENSE
Total interest expense increased by $6.1 million, or 45.3%, to $19.6
million for the year ended December 31, 1997, compared to the same period of
1996. The increase in interest expense resulted from an increase in the average
balance of interest-bearing liabilities of $96.3 million to $353.2 million, a
37.5% increase, for the year ended December 31, 1997, as compared to the same
period of 1996. Average interest-bearing liabilities continue to rise to fund
the growth of the Company. The growth has been primarily in certificates of
deposit, and savings accounts, but also includes growth in reverse repurchase
agreements, term borrowings, and trust preferred securities. Contributing to
these increases, were increases in the rates paid on interest-bearing
liabilities during 1997. The rates paid on the Company's interest-bearing
liabilities increased from 5.26% to 5.55%, or 29 basis points, during the year
ended December 31, 1997, compared to the same period in 1996. The increases in
the rates paid on the Company's interest-bearing liabilities reflect the change
in the composition of interest bearing liabilities as detailed above, and the
change in market interest rates between the 1997 and 1996 periods. The change in
the composition of the interest-bearing liabilities for the year ended December
31, 1997, reflects a shift in the Company's strategy to fund a portion of the
growth in assets from sources other than deposit liabilities. This shift is
reflected in the growth in reverse repurchase agreements, term borrowings, and
the issuance of the trust preferred securities.
29
<PAGE>
PROVISION FOR LOAN LOSSES
During 1997, the Company decreased its provision for loan losses to $1.1
million from $1.9 million for 1996. The decrease of $782,000 between 1997 and
1996 in the loan loss provision primarily reflects the additional expense
provided in June of 1996 in connection with the sale of $9.5 million in
nonaccrual and TDR loans.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1997 decreased by
$733,000, or 49.5%, over the same period in 1996. This decrease is primarily due
to several nonrecurring income items that occurred in 1996. During 1996, the
Company recorded a $413,000 recovery on a corporate debt security that had been
written off in 1994. Additionally, 1996 noninterest income included a $264,000
gain recorded on the sale of $28.2 million of the Company's San Francisco branch
deposits. A further decrease occurred in 1997 as a result of other noninterest
income declining by $272,000, or 33.8%, due to decreased late fees, loan
prepayment fees, and rents received on OREO properties. These decreases were
partially offset by a $216,000 increase in the gain on sale of OREO properties
during 1997, compared to 1996.
NONINTEREST EXPENSE
The following noninterest expense analysis is based on the noninterest
expense table on page 24. This table provides a breakdown of the major
components of noninterest expense as well as the dollar and percentage change
for the years ended December 31, 1997 and 1996.
Noninterest expense for the year ended December 31, 1997 increased by
$1.1 million or 14.1%, compared to the same period in 1996.
The valuation adjustment to OREO for the year ended December 31, 1997,
increased by $215,000, compared to the same period in 1996. The increase was the
result of the Company recording partial write downs on two OREO properties
during 1997.
Salaries and employee benefits for the year ended December 31, 1997
increased by $345,000 compared to the same period in 1996. This increase was
primarily the result of marketing and administrative bonus accruals recorded
during 1997, which exceeded those of 1996. In addition, the Company established
a SBA lending department during the second and third quarters of 1996, which was
fully staffed for all of 1997. The Company also provided an approximate 4%
salary increase to most employee base salaries in January of 1997. The Company
hired additional loan marketing staff during 1997, increasing its marketing
representative count from five employees at the beginning of 1996 to eight at
year end 1997.
Net occupancy expense increased $120,000 during 1997, as a result of the
opening of loan production offices in Portland, Oregon and Orange County,
California.
Communication and data processing expense for the year ended December 31,
1997, increased by $108,000, compared to the same period in 1996. These
increases were primarily the result of the Company's establishment of the SBA
lending department during the second and third quarters of 1996, which increased
communication and telephone usage for 1997.
Other expenses for the year ended December 31, 1997, increased by
$178,000 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
The Company's income tax provision for the year ended December 31, 1997
was $2.4 million producing an effective tax rate of 39.1%. The difference
between the Company's statutory tax rate of 41.1% and its effective tax rate for
the year ended December 31, 1997 was due to both the reversal of a portion of
the Company's tax valuation reserve of approximately $386,000 against the
Company's tax provision, as well as California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
The Company's income tax provision for the year ended December 31, 1996
was $1.5 million producing an effective tax rate of 33.4%. The difference
between the Company's statutory tax rate of 41.5% and its effective tax rate for
the year ended December 31, 1996 was due to both the reversal of a portion of
the Company's tax valuation reserve of approximately $305,000 against the
Company's tax provision, as well as California tax deductions (credits)
generated by the Company on loans made in special tax zones within California.
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
Total assets increased by $160.2 million for the year ended December 31,
1997, compared to 1996. Changes in assets, liabilities, and shareholders' equity
are detailed on page 25, with significant changes described below.
The increase in the balance of U.S. government sponsored agency
securities for the year ended December 31, 1997 reflects the Company's effort to
optimize earnings by more effectively leveraging capital with the purchase of
these securities. The increase in net loans primarily reflects new loan
originations of $50.7 million, reduced by $28.6 million in loan payoffs, loan
transfers to OREO, and loan chargeoffs. The increase in other assets is
primarily due to the increase in accrued interest receivable for the year
30
<PAGE>
ended December 31, 1997, over the comparable period in 1996. This increase is
due to the larger portfolio of U.S. government sponsored agency securities and
net loans.
Total liabilities have increased in response to the need to fund the
growth in assets for the year ended December 31, 1997, compared to 1996. The
growth in deposits included $42.5 million in savings deposits, and $42.4 million
in certificates of deposit, partially offset by a $3.4 million decrease in money
market checking. Borrowings have also grown with a $45.0 million increase in
term borrowings and an $11.5 million increase in reverse repurchase agreements.
During the third quarter of 1997, the Company also raised $17.25 million in
trust preferred securities. The net proceeds were primarily used by the Company
for general corporate purposes and for a $5.0 million capital infusion into the
Company's wholly owned subsidiary, Pacific Crest Bank.
Shareholders' equity has risen for the year ended December 31, 1997,
primarily due to the current year net income of $3.7 million, and the current
year change in the unrealized gain on securities available for sale component of
equity of $1.4 million.
- -------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A derivative financial instrument includes futures, forwards, interest
rate swaps, option contracts, and other financial instruments with similar
characteristics. On June 8, 1998, the Company executed a five-year interest rate
cap agreement for a notional amount of $100 million. Under the cap agreement,
the Company earns income when the 90-day London Interbank Offered Rate (LIBOR)
exceeds 6.70%. LIBOR closed at 5.28% on December 31, 1998. The interest rate cap
was purchased as a hedge instrument for the Company's deposit liabilities which
reprice in one year or less. It was designed to hedge the risk that interest
rates may rise, which would produce an increase in the rates paid on these
deposit liabilities, resulting in an increase in interest expense and a
reduction in net interest margin. The interest rate cap mitigates this risk
somewhat since it earns income for the Company if interest rates rise beyond a
certain level. The interest rate cap does not expose the Company to any
additional risk beyond the initial investment of $925,000. With the exception of
the interest rate cap, the Company is not currently engaged in transactions
involving derivative financial instruments.
The Company's primary market risk is interest rate risk. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time to maximize income. Management realizes
certain risks are inherent and that the goal is to identify and minimize the
risks. Pacific Crest's exposure to market risk is reviewed on a regular basis by
the Asset/Liability committee. Tools used by management include the standard GAP
report. The Company has no market risk sensitive instruments held for trading
purposes. Management believes that the Company's market risk is reasonable at
this time.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management" and "Item 1. Business -
Investment Activities," and "- Source of Funds."
The table below provides information about the Company's balance sheet
non-derivative financial instruments that are sensitive to changes in interest
rates. For all outstanding financial instruments, the table presents the
principal outstanding balance at December 31, 1998 and the weighted average
interest yield/rate of the instruments by either the date the instrument can be
repriced for variable rate financial instruments or the expected maturity date
for fixed rate financial instruments.
31
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
EXPECTED MATURITY DATES OR REPRICING DATE BY YEAR
-----------------------------------------------------------------------------------------
FAIR
VALUE AT
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET FINANCIAL INSTRUMENTS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Repurchase agreements (1) $ 22,048 $ - $ - $ - $ - $ - $22,048 $22,048
average yield (variable rate) 5.32% - - - - - 5.32%
Corporate debt securities, available
for sale 11,736 - - - - 11,736 11,736
average yield (variable rate) 5.72% - - - - - 5.72%
U.S. Government sponsored agency
securities available
for sale (2) - - 5,025 23,090 48,056 233,354 309,525 309,525
average yield (fixed rate) - - 6.44% 6.87% 6.79% 6.62% 6.66%
Total loans gross (3) 194,811 11,064 20,648 10,075 15,450 37,020 289,068 295,131
average yield 10.25% 9.88% 9.24% 8.22% 9.19% 8.43% 9.80%
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings accounts (1) $ 276,011 - - - - - $276,011 $276,011
average rates (variable rate) 4.67% - - - - - 4.67%
Money market checking (1) 23,849 - - - - - 23,849 23,849
average rates (variable rate) 4.35% - - - - - 4.35%
Certificates of deposit (4) 173,918 5,762 1,982 512 805 - 182,979 182,064
average rates (fixed rate) 5.57% 5.63% 5.83% 5.98% 5.75% - 5.52%
Reverse repurchase agreements (1) 30,779 - - - - - 30,779 30,779
average rates (variable rate) 5.36% - - - - - 5.36%
Term borrowings (5) 24,450 - - 45,000 10,000 - 79,450 80,542
average rates (fixed rate) 5.64% - - 5.77% 5.48% - 5.69%
Trust preferred securities (2) - - - - - 17,250 17,250 17,250
average rates (fixed rate) - - - - - 9.38% 9.38%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value balances reflected in the table were derived as follows:
(1) For financial instruments that mature or reprice within 90
days, the carrying amounts and the fair value are
considered identical, due to the short term repricing of the
financial instruments.
(2) For investment securities, and the trust preferred
securities, fair value is based on the quoted market price
of these securities by broker dealers making a market for
these securities on a national exchange.
(3) Fair value of loans is based on the value the Company could
receive on the loans in a loan sale. The Company estimates
that it could sell a majority of its loans at a premium of
between 0.0% and 3.0%.
(4) Fair value of the Company's fixed maturity deposits are
estimated using rates currently offered for deposits of
similar remaining maturities.
(5) Fair value of term borrowings is estimated using discounted
cash flow analysis based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
32
<PAGE>
Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1998 and 1997......... 34
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996............................... 35
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................ 37
Notes to Consolidated Financial Statements........................ 38-51
Report of Deloitte & Touche LLP, Independent Auditors............. 52
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Pacific Crest Capital, Inc.
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 3,592 $ 1,966
Securities purchased under resale agreements 22,048 426
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 25,640 2,392
- -------------------------------------------------------------------------------------------------------------------------
Investment securities (Notes 4):
Held to maturity, at amortized cost - 4,998
Available for sale, at market 321,261 217,738
Loans (Note 5 and Note 20):
Commercial mortgage 278,614 223,902
Residential mortgage 1,194 1,593
Commercial business/SBA/other 4,476 6,401
SBA loans held for sale (Note 21): 4,784 -
- -------------------------------------------------------------------------------------------------------------------------
Total loans 289,068 231,896
Deferred loan fees 582 763
Allowance for loan losses 5,024 4,100
- -------------------------------------------------------------------------------------------------------------------------
Net loans 283,462 227,033
Accrued interest receivable 8,241 5,367
Prepaid expenses and other assets 2,102 1,478
Deferred income taxes, net (Note 12) 2,911 2,622
Other real estate owned (Note 6) 806 2,064
Premises and equipment, net (Note 7) 881 617
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 645,304 $ 464,309
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits (Note 8):
Savings accounts $ 276,011 $ 200,255
Certificates of deposit 182,979 131,213
Money market checking 23,849 16,703
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 482,839 348,171
Reverse repurchase agreements (Note 9) 30,779 21,500
Term borrowings (Note 10) 79,450 45,000
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures (Note 11) 17,250 17,250
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 610,318 431,921
Accrued interest and other liabilities 4,846 3,580
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 615,164 435,501
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 15) - -
Shareholders' equity (Notes 13, 14, 16 and 17):
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,
2,986,264 shares issued at December 31, 1998,
2,971,946 shares issued at December 31, 1997. 28,087 27,944
Retained earnings 5,559 849
Accumulated other comprehensive income (Note 22) 1,199 1,189
Common stock in treasury, at cost, 295,500 shares at December 31, 1998
85,000 shares at December 31, 1997 (4,705) (1,174)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 30,140 28,808
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 645,304 $ 464,309
- -------------------------------------------------------------------------------------------------------------------------
Book value per common share (Note 16) $ 11.20 $ 9.97
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Pacific Crest Capital, Inc.
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans, including fees (Note 5) $ 25,653 $ 24,475 $ 21,384
Securities purchased under resale agreements 221 112 2,270
Investment securities (Note 4)
Held to maturity 310 2,714 1,281
Available for sale 19,056 8,045 1,632
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 45,240 35,346 26,567
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest expense on interest-bearing deposits (Notes 8 and 19)
Savings accounts 11,226 9,603 9,179
Certificates of deposit 9,241 6,467 3,456
Money market checking 949 892 822
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense on deposits 21,416 16,962 13,457
Reverse repurchase agreements (Note 9) 1,418 1,638 43
Term borrowings (Note 10) 4,087 562 -
Trust preferred securities (Note 11) 1,617 449 -
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 28,538 19,611 13,500
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 16,702 15,735 13,067
Provision for loan losses (Note 5) 910 1,135 1,917
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,792 14,600 11,150
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Gain on sale of other real estate owned 120 216 -
Gain on sale of commercial/real estate loans (Note 20) 467 - -
Gain on sale of SBA Loans (note 21) 254 - -
Gain on sale of investment securities 252 - 413
Gain on sale of deposits - - 264
Loan prepayment and late fees 788 243 -
Other noninterest income 597 289 804
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,478 748 1,481
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Valuation adjustments to other real estate owned (Note 6) 50 370 155
Other real estate owned expenses 211 114 150
Salaries and employee benefits (Note 18) 5,822 5,009 4,664
Net occupancy expenses (Note 15) 1,616 1,568 1,448
Communication and data processing 778 659 551
Advertising and promotion 541 351 174
FDIC insurance premiums 43 73 72
Credit and collection expenses 127 127 94
Other expenses 1,091 993 815
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,279 9,264 8,123
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,991 6,084 4,508
Income tax provision (Note 12) 3,144 2,377 1,505
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,847 $ 3,707 $ 3,003
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (Note 16)
Basic earnings per common share $ 1.72 $ 1.26 $ 1.02
- ------------------------------------------------------------------------------------------------------------------------
Weighted average basic common shares outstanding (in thousands) 2,817 2,936 2,947
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.64 $ 1.21 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding (in thousands) 2,971 3,070 3,004
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
RETAINED ACCUMULATED
COMMON TREASURY EARNINGS OTHER TOTAL TOTAL
---------------- ----------------- (ACCUMULATED COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
(DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT DEFICIT) INCOME INCOME EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 2,954 $27,813 - $ - $ (5,861) $ - - $ 21,952
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - 3,003 - $ 3,003 3,003
Other comprehensive income,
net of tax: (Note 22)
Unrealized loss on securities, - - - - - (257) (257) (257)
available for sale
-----------
Total Comprehensive income: $ 2,746
-----------
Issuance of stock under employee
stock purchase plan (Note 13) 6 25 - - - - - 25
Purchase of treasury shares - - (30) (255) - - - (255)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 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: (Note 22)
Unrealized gain on securities, - - - - - 1,446 1,446 1,446
available for sale
-----------
Total Comprehensive income: $ 5,153
-----------
Issuance of common stock:
(Note 13)
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: - - - - 4,847 - $ 4,847 4,847
Other comprehensive income,
net of tax (Note 22)
Unrealized gain on securities, - - - - - 10 10 10
available for sale
-----------
Total Comprehensive income: $ 4,857
-----------
Issuance of common stock:
(Note 13)
Under employee stock
purchase plan 6 63 - - - - - 63
Under non-employee directors'
stock purchase plan 2 44 - - - - - 44
Under employee stock option plan 6 36 - - - - - 36
Purchase of treasury shares - - (211) (3,531) - - - (3,531)
Cash dividends paid - - - - (137) - - (137)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 2,986 $28,087 (296) $(4,705) $ 5,559 $ 1,199 - $ 30,140
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,847 $ 3,707 $ 3,003
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan loss 910 1,135 1,917
Valuation adjustment to OREO 50 370 155
Depreciation and amortization 275 251 233
Amortization of deferred loan fees (509) (379) (907)
Amortization/accretion of securities (23) (5) (37)
Gain on sale of other real estate owned (120) (216) -
Gain on sale of commercial/real estate loans (467) - -
Gain on sale of SBA Loans (254) - -
Gain on sale of investment securities (252) - (413)
Changes in operating assets and liabilities:
Accrued interest receivable (2,874) (3,401) (419)
Prepaid expenses and other assets (683) (706) (520)
Deferred income taxes (296) (366) 863
Accrued interest and other liabilities 1,266 658 275
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,870 1,048 4,150
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities:
Held to maturity - (15,000) (57,471)
Available for sale (282,251) (213,510) (106,859)
Proceeds from sales and calls of investment securities:
Held to maturity 5,000 40,965 26,911
Available for sale 179,077 50,800 53,900
Net increase in loans (49,618) (24,454) (8,096)
Proceeds from sale of commercial real estate loans 9,929 2,884 9,032
Proceeds from sale of SBA loans 2,836 - -
Purchase of loans (19,380) - (20,200)
Purchases of equipment and leasehold improvements, net (539) (315) (222)
Proceeds from sale of other real estate owned 1,452 2,727 3,567
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (153,494) (155,903) (99,438)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase/(decrease) in savings accounts 75,756 42,466 (15,936)
Net increase in certificate of deposits 51,766 42,387 28,041
Net increase/(decrease) in money market checking 7,146 (3,377) 20,080
Net increase in reverse repurchase agreements 9,279 11,500 10,000
Net increase in term borrowings 34,450 45,000 -
Proceeds from issuance of trust preferred securities - 17,250 -
Proceeds from issuance of common stock 143 106 25
Cash dividends paid (137) - -
Purchase of treasury stock, at cost (3,531) (919) (255)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 174,872 154,413 41,955
- --------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 23,248 (442) (53,333)
Cash and cash equivalents at beginning of period 2,392 2,834 56,167
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 25,640 $ 2,392 $ 2,834
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 28,007 $ 19,068 $ 13,428
Income taxes $ 4,000 $ 2,725 $ 745
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Transfers of net loans to other real estate owned $ 206 $ 1,376 $ 2,836
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 Pacific Crest Capital, Inc.
- --------------------------------------------------------------------------------
1. ORGANIZATION
Pacific Crest Capital, Inc. (the "Company"), a Delaware corporation, is
incorporated as a financial services holding company and holds 100% of the stock
of Pacific Crest Bank and 100% of the common stock of PCC Capital I ("PCC
Capital").
Pacific Crest Bank conducts an industrial loan business in the state of
California. Pacific Crest Bank is subject to regulation and supervision by the
Department of Financial Institutions of the State of California ("DFI") as
specified in the California Industrial Loan Law, and by the Federal Deposit
Insurance Corporation ("FDIC"). The FDIC insures deposits up to $100,000 for
each depositor.
PCC Capital is a statutory business trust, created under Delaware law,
for the exclusive purpose of issuing and selling $17.25 million of the 9.375%
Cumulative Trust Preferred Securities, (the "Trust Preferred Securities") and
using the proceeds to acquire the junior subordinated debentures issued by the
parent holding company.
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Pacific Crest Bank and PCC Capital. All
significant intercompany transactions have been eliminated.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheets and revenues and expenses for the year. Actual results in future
years could differ from those estimates by management in the current year.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
allowance for other real estate owned.
LOAN INCOME
Interest income includes interest on loans which is recognized as earned,
and amortization of loan fees. Loan fees, net of estimated indirect costs are
deferred and recognized by the interest method over the term of the loan.
CASH EQUIVALENTS
Cash and securities purchased under resale agreements are classified as
cash equivalents and are carried at cost. The Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS
The Company invests in securities purchased under resale agreements
("repurchase agreements") to optimize its returns on liquid assets. The Company
obtains collateral for these agreements which normally consist of U.S.
Government Agency securities, and U.S. government sponsored agency securities.
The duration of the agreement is typically from one to 90 days, with the average
transaction in repurchase agreements maturing under 30 days. Collateral for
repurchase agreements are generally held by a third-party trustee for the
Company.
INVESTMENT SECURITIES
The Company invests in U.S. government sponsored agency securities, and
to a lesser extent, investment grade corporate bonds. At the date of purchase,
the Company elects to segregate the security into either the held to maturity
portfolio or the available for sale portfolio, depending upon management's
ability and intent to hold such securities to maturity. Unrealized gains or
losses on securities available for sale are reflected in accumulated other
comprehensive income as a separate component of shareholders' equity, net of tax
effect. Income on investments is recognized using the level yield method.
Realized gains or losses on sales are recorded on a specific identification
basis.
ALLOWANCE FOR LOAN LOSSES
The Company charges current income in amounts necessary to maintain a
general allowance for loan losses deemed adequate to cover potential losses on
loans. The amount of the allowance is based on management's evaluation of
numerous factors including adequacy of collateral, which includes loan balance
to collateral value, loan debt service coverage ratio and secondary collateral
if applicable. Other factors include an evaluation of the strengths and
weaknesses of the borrower's financial position, and strengths and weaknesses of
the tenants in the properties. In addition, management evaluates current
delinquency trends, historical Company loan loss experience, regional real
estate economic conditions and overall economic trends impacting the Company's
real estate lending portfolio. The combination of these factors are utilized in
establishing the allowance for loan losses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the property. Office
furniture, fixtures and equipment are generally estimated to have useful lives
of between three and eight years. Leasehold improvements are amortized over
either the useful life or the life of the lease, whichever is shorter.
ACCOUNTING FOR PCC CAPITAL
For financial reporting purposes, PCC Capital is treated as a subsidiary
of the Company and, accordingly, the accounts are included in the consolidated
financial statements of the Company. The Trust Preferred Securities are
presented as a separate line item in the consolidated balance sheet under the
caption "Company Obligated Mandatorily Redeemable Preferred Securities of
38
<PAGE>
Subsidiary Trust Holding Solely Junior Subordinated Debentures." For financial
reporting purposes, the Company records the dividend distributions payable on
the Trust Preferred Securities as interest expense in the consolidated statement
of operations.
INCOME TAXES
Deferred tax assets and liabilities recognize the future tax consequences
of differences between the financial statement amounts of assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
BUSINESS SEGMENTS
The Company is organized and operated as a single reporting segment, a
financial services company, principally engaged in commercial and industrial
real estate and Small Business Administration lending. The Company's lending
activities concentrate on marketing to and serving the needs of individuals and
small to medium sized businesses located primarily in California, but also
including Arizona, Oregon and Washington. The Company conducts its deposit
operations through three branch offices, located in Southern California. The
consolidated financial statements, as they appear in this document, represent
the grouping of revenue and expense items as they are presented to executive
management of the Company, for use in strategically directing the operations of
the Company.
RECLASSIFICATIONS
Certain amounts in the prior years consolidated financial statements have
been reclassified to conform to the current year presentation.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for the fiscal years beginning after December
15, 1998. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement also requires that an entity display
an amount representing total comprehensive income for the period in that
financial statement. This statement also requires that an entity classify items
of other comprehensive income by their nature in a financial statement. For
example, other comprehensive income may include foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. Reclassification of financial
statements for earlier periods, provided for comparative purposes, is required.
This statement was adopted as of January 1, 1998 and is reflected in the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for financial statements
for periods beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement was adopted as of January
1, 1998 and is reflected in the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires the Bank to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement allows derivatives to be designated as hedges only if
certain criteria are met with the resulting gain or loss on the derivative
either charged to income or reported as a part of other comprehensive income.
This statement is effective for all fiscal quarters beginning after June 15,
1999. The Company does not believe that adoption of this statement will have a
material impact on its operations and financial position.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This statement is effective for
the first fiscal quarter beginning after December 15, 1998. This statement
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations that
are substantially similar. As the Company currently does not engage in
activities related to the securitization of mortgage loans or other activities
described by SFAS No 134, the Company does not believe that adoption of this
statement will have a material impact on its operations and financial position.
- --------------------------------------------------------------------------------
3. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of the fair value of financial instruments are required under
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." These
estimates may not represent values which would be received should these
financial instruments be sold, liquidated or otherwise terminated. The Company
utilizes a number of different methodologies in calculating and measuring the
fair value of financial instruments. Fair value information for financial
instruments reflected in the table within this footnote was calculated as
follows.
CASH AND CASH EQUIVALENTS:
The carrying amounts of cash and cash equivalents approximates their fair
value.
INVESTMENT SECURITIES:
39
<PAGE>
Fair value is based on the quoted market price of these securities by broker
dealers making a market for these securities on a national exchange.
LOANS:
The Company established the fair market value of the loan portfolio by
segregating the loan portfolio into categories by utilizing selected factors
(i.e., payment history, collateral values, risk classification, cash flows)
and then forecasting an estimated fair market value sale price for each of
the established loan categories. The estimated market value of the loan
portfolio includes categories of loans the Company believes would sell at a
premium between 0% and 3.0%, and categories of loans that would sell at a
discount between 0% and 25%. A significant number of the Company's variable
rate loans contain "floors" or minimum interest rates. The Company's variable
rate loans generally reprice on a quarterly basis. Many of these same loans
also contain covenants requiring penalties for early repayment. The Company
believes that loans with these characteristics, as well as being well
collateralized, with no history of delinquencies, would sell at a premium. On
the other hand, loans on a nonaccrual basis, or loans that have been
classified due to an identified weakness even though fully secured, could
normally only be sold for a discount depending on the anticipated level of
ultimate recovery upon liquidation of the collateral. Fair value then, is
based upon the estimated sales prices of these loans.
DEPOSITS:
Fair value of the Company's fixed maturity deposits are estimated using rates
currently offered for deposits of similar remaining maturities. In accordance
with SFAS No. 107, the fair value of deposits with no stated maturity such as
savings accounts and money market checking accounts are disclosed as the
amount payable on demand.
REVERSE REPURCHASE AGREEMENTS:
The carrying amounts of reverse repurchase agreements approximate their fair
value due to the short maturity of these borrowings.
TERM BORROWINGS:
The fair values of the Company's debt are estimated using discounted cash
flow analysis based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
TRUST PREFERRED SECURITY:
Fair value is based on the quoted market price of these securities by broker
dealers making a market for these securities on a national exchange.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
The fair value of the interest rate cap is estimated, using dealer quotes, as
the amount that the Company would pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering current
interest rates.
Because no conventional market exists for a significant portion of the Company's
financial instruments, and because of the inherent imprecision of estimating
fair values for financial instruments for which no conventional trading market
exists, management believes that the fair market value estimates utilized under
SFAS No. 107 should be viewed as only approximate values that the Company would
receive if the Company's assets and liabilities were sold. The carrying amounts
and estimated fair values for certain of the Company's financial instruments at
December 31, 1998 and 1997 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 25,640 $ 25,640 $ 2,392 $ 2,392
Investment securities 321,261 321,261 222,736 222,793
Loans, net 283,462 289,525 227,033 234,429
Accrued interest receivable 8,241 8,241 5,367 5,367
LIABILITIES:
Savings accounts 276,011 276,011 200,255 200,255
Money market checking 23,849 23,849 16,703 16,703
Certificates of deposit 182,979 182,064 131,213 128,589
Reverse repurchase agreements 30,779 30,779 21,500 21,500
Term borrowings 79,450 80,542 45,000 45,507
Trust preferred security 17,250 17,250 17,250 17,034
Accrued interest payable 1,349 1,349 818 818
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate cap - $100 million notional amount 761 761 - -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
4. INVESTMENT SECURITIES
The Company's investment securities have been classified in the
consolidated balance sheets according to management's intent and ability. The
carrying amount of securities and their approximate fair values at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED AMORTIZED GROSS UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Sponsored
Agency Securities
Available for sale $ 307,421 $ 2,113 $ (9) $309,525 $ 215,710 $ 2,050 $ (22) $ 217,738
Held to maturity - - - - 4,998 57 - 5,055
Corporate debt securities
Available for sale 11,713 31 (8) 11,736 - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 319,134 $ 2,144 $ (17) $321,261 $ 220,708 $ 2,107 $ (22) $ 222,793
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's security portfolio consists of investments in U.S. government
sponsored agency securities and investment grade corporate bonds. The U.S.
government sponsored agency securities consist of Federal Home Loan Bank (FHLB)
callable securities, Federal National Mortgage Association (FNMA) callable
securities, Federal Home Loan Mortgage Corporation (FHLMC) callable securities,
and Government National Mortgage Association (GNMA) mortgage backed securities.
These securities have call features that allow the issuing agency to retire
(call) an individual security prior to that security's stated maturity date.
This portfolio has call dates ranging between three months through four years.
The Company believes that the majority of these securities will be called by the
issuing agency prior to their final maturity date. The investment grade
corporate bonds are variable rate instruments whose index is based upon three
month LIBOR and whose rate reprices on a quarterly basis. The following table
reflects the scheduled maturities in the Company's investment securities
portfolio at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Due from one to five years $ 10,854 $ 10,892 6.00% 3.4 years
Due from five to ten years 261,667 263,713 6.65% 8.9 years
Due after ten years 46,613 46,656 6.62% 12.2 years
- -----------------------------------------------------------------------------------------------------------
Total investment securities $ 319,134 $ 321,261 6.63% 9.0 years
- -----------------------------------------------------------------------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $118.1 million were
pledged to secure borrowings aggregating $110.2 million at December 31, 1998.
- --------------------------------------------------------------------------------
5. LOANS
The Company is engaged primarily in commercial real estate term lending in
the state of California. Loans are principally secured by commercial real estate
and are generally contractually due over periods of up to ten years. The maximum
loan to one borrower secured by improved real property cannot exceed 20% of
Pacific Crest Bank's shareholder's equity at the time of funding which was $7.76
million at December 31, 1998. Pacific Crest Bank's largest loan at December 31,
1998 was $3.4 million which, at the time of funding, was in compliance with this
regulation.
Loans earned interest during the years ended December 31, 1998, 1997 and
1996 at rates ranging from 7.00% to 14.00%, 7.63% to 13.63% and 7.63% to 13.63%,
respectively. The activity in the allowance for loan losses is as indicated in
the table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 4,100 $ 3,400 $ 4,500
Provision for loan losses 910 1,135 1,917
Purchased loan reserve - - 191
Net loan recoveries/(charge-offs) 14 (435) (3,208)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 5,024 $ 4,100 $ 3,400
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Accounts which are deemed uncollectible by management or for which no
payment has been received for five consecutive months are charged-off for the
amount that is not collateralized by the estimated fair value less selling costs
of the underlying real estate collateral.
INCOME ON DELINQUENT LOANS
It is the Company's policy to suspend the recognition of income on any loan
which is 61 days or more contractually delinquent. Recognition of income is
generally resumed and suspended income is recognized when the loan becomes
contractually
41
<PAGE>
current. At December 31, 1998, the Company had no loans 61 days or more
contractually delinquent. At December 31, 1997 and 1996, income recognition was
suspended on loan balances of $228,000, and $1,386,000, respectively. The
amounts of contractual interest, interest recognized and interest foregone on
nonaccrual loans for the years ended December 31, 1998, 1997 and 1996 are as
indicated in the table.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans
Contractual interest $ 7 $ 390 $ 614
Interest recognized - 141 67
- ----------------------------------------------------------------------------------------------------------------------------
Interest foregone $ 7 $ 249 $ 547
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
IMPAIRED LOANS
The Company classifies certain loans as impaired. Impaired loans are
generally measured by the Company based on the present value of expected future
cash flows discounted at the loan's effective rate unless the loan is fully
collateralized.
The table below summarizes loan impairment data as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment in impaired loans $ - $ 1,634
Valuation reserve - impaired loans - (221)
Average recorded investment in impaired loans 57 3,458
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. OTHER REAL ESTATE OWNED
Other real estate owned is included in the consolidated financial
statements at the lower of cost or fair value less estimated selling costs and
the associated valuation allowance. The OREO and allowance for OREO tables
reflect the balance of the Company's OREO, as well as changes in the valuation
allowance for OREOs for the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other real estate owned $ 1,041 $ 2,524 $ 3,559
Less valuation allowance (235) (460) (90)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 806 $ 2,064 $ 3,469
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for OREO
Balance at beginning of period $ 460 $ 90 $ 888
Valuation adjustments 50 370 155
Net chargeoffs (275) - (953)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 235 $ 460 $ 90
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment of the Company is as indicated in the table.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture, fixtures and equipment $ 2,080 $ 1,838
Leasehold improvements 593 452
- -----------------------------------------------------------------------------------------------------
2,673 2,290
Less accumulated depreciation
and amortization (1,792) (1,673)
- -----------------------------------------------------------------------------------------------------
Premises and equipment, net $ 881 $ 617
- -----------------------------------------------------------------------------------------------------
</TABLE>
8. INTEREST-BEARING DEPOSITS
Savings accounts have no contractual maturity and for the years 1998,
1997 and 1996 earned interest at rates ranging from 2.52% to 5.35% per annum,
2.52% to 6.03% per annum and 2.48% to 5.08%, respectively. Certificates of
deposit have maturities ranging from 30 days to five years, and for the years
ended December 31, 1998, 1997 and 1996 earned interest at rates ranging from
2.96% to 6.95% per annum, 2.00% to 6.95% per annum and 2.96% to 6.06% per
annum, respectively. Certificates of deposit of $100,000 or more at December 31,
1998, 1997 and 1996 were approximately $38,224,000, $18,692,000, and $3,933,000,
respectively. The approximate contractual maturities of certificates of deposit
as of December 31, 1998 are as follows:
42
<PAGE>
<TABLE>
<CAPTION>
CERTIFICATES OF CERTIFICATES OF TOTAL
DEPOSIT LESS THAN DEPOSIT OF $100,000 CERTIFICATES OF
(DOLLARS IN THOUSANDS) $100,000 OR MORE DEPOSIT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 38,744 $ 9,907 $ 48,651
Over three months through twelve months 98,551 26,716 125,267
Over one year through five years 7,460 1,601 9,061
- ----------------------------------------------------------------------------------------------------------------------------
Total maturities $ 144,755 $ 38,224 $ 182,979
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. REVERSE REPURCHASE AGREEMENTS
The Company has short term borrowing lines with four brokers
aggregating $95.0 million in availability. The repayment terms on this
short-term debt range from one day to three months. The interest rate paid can
vary daily, but typically approximates the federal funds rate plus 25 basis
points. These borrowings are secured by pledging specific amounts of specific
securities of the Company's U.S. government sponsored agency securities
portfolio. The Company utilizes these borrowing lines to cover short-term
financing needs for loan fundings or investment security purchases. At December
31, 1998, the Company had $30.8 million outstanding in short-term reverse
repurchase agreements, which left $64.2 million in unused short-term borrowing
availability against its $95.0 million short-term borrowing facilities.
The Company also maintains a line of credit with the Federal Reserve
Bank with approximately $1.3 million available for borrowing at December 31,
1998. At December 31, 1998 there were no borrowings under this line of credit.
This agreement is secured by approximately $2.7 million in commercial real
estate loans at December 31, 1998.
- --------------------------------------------------------------------------------
10. TERM BORROWINGS
The Company has a medium Term borrowing facility of $45.0 million
through one broker dealer. This facility allows the Company to borrow for
periods of up to one year. At December 31, 1998, the Company had borrowings of
$24.5 million, against this line, leaving $20.5 million in unused availability.
This debt is secured by pledging specific amounts of specific securities of the
Company's U.S. government sponsored agency securities portfolio. Borrowings on
this facility with an original maturity under 90 days are classified as Reverse
Repurchase Agreements, while borrowings with an original maturity in excess of
90 days are classified as Term borrowings.
The Company has a long term borrowing facility of $95.0 million over
one year through one broker dealer. At December 31, 1998, the Company had
borrowings of $55.0 million, leaving an unused credit availability borrowings of
$40.0 million in this line. This debt is secured by pledging specific amounts of
specific securities of the Company's U.S. government sponsored agency securities
portfolio. The $55.0 million borrowed against this line has an original five
year maturity with a two-year, one-time call option. The table below describes
the attributes of the Company's term borrowings at December 31, 1998.
<TABLE>
<CAPTION>
CALL MATURITY
(DOLLARS IN THOUSANDS) DATE DATE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.82% five-year term borrowings 09/25/1999 09/25/2002 $ 25,000
5.78% five-year term borrowings 10/08/1999 10/06/2002 10,000
5.63% five-year term borrowings 12/18/1999 12/18/2002 10,000
5.48% five-year term borrowings 01/07/2000 01/07/2003 10,000
5.64% one- year term borrowings - 04/01/1999 24,450
- ----------------------------------------------------------------------------------------------------------------------------
Total term borrowings $ 79,450
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The contractual maturities of term borrowings at December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
YEAR (DOLLARS IN THOUSANDS) AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 24,450
2000 -
2001 -
2002 45,000
2003 10,000
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 79,450
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY OF
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
On September 22, 1997, PCC Capital, a wholly owned subsidiary of
Pacific Crest, issued $17.25 million of 9.375% Cumulative Trust Preferred
Securities. PCC Capital invested the gross proceeds of the $17.25 million from
the offering in the junior subordinated debentures issued by Pacific Crest. The
subordinated debentures were issued concurrent with the issuance of the Trust
Preferred Securities. The interest on the junior subordinated debentures will be
paid by Pacific Crest to PCC Capital and represents the sole revenues and the
sole source of dividend distributions by PCC Capital to the holders of the Trust
Preferred Securities. The
43
<PAGE>
undertakings of Pacific Crest with regard to this public offering constitute a
full and unconditional guarantee by Pacific Crest of PCC Capital's obligations
under the Trust Preferred Securities. Pacific Crest has the right, assuming no
default has occurred, to defer payments of interest on the junior subordinated
debentures at any time for a period not to exceed 20 consecutive quarters. The
Trust Preferred Securities will mature on October 1, 2027, but can be called
after October 1, 2002.
- --------------------------------------------------------------------------------
12. INCOME TAXES
The income tax provision is as indicated in the table:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,656 $ 2,013 $ 593
State 784 730 49
- ---------------------------------------------------------------------------------------------------------------------------
Current tax provision 3,440 2,743 642
- ---------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (209) (167) 573
State (87) (199) 290
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax (benefit) provision (296) (366) 863
- ---------------------------------------------------------------------------------------------------------------------------
Income tax provision $ 3,144 $ 2,377 $ 1,505
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as indicated in the table:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,361 $ 3,036
Other real estate owned 105 208
Reserve, accruals and state taxes 882 514
- ----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 4,348 3,758
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale (868) (861)
State taxes and other (569) (275)
- ----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,437) (1,136)
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,911 $ 2,622
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes for 1998, 1997 and
1996 at the federal tax rate of 35% to the effective tax rate is as indicated in
the table:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax based on statutory tax rate 35.00% 35.00% 35.00%
State franchise tax expense,
net of federal benefit 5.76% 5.76% 6.00%
Valuation allowance (0.63%) (6.34%) (2.80%)
Other, net (0.79%) 4.65% (4.8%)
- ----------------------------------------------------------------------------------------------------------------------------
Effective tax rate 39.34% 39.07% 33.40%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
13. STOCK PURCHASE AND OPTION PLANS
The 1993 Equity Incentive Plan (the "Plan") is designed to promote and
advance the interests of the Company and its shareholders by enabling the
Company to attract, retain and reward key employees. The Plan offers stock and
cash incentive awards, as well as stock options. The maximum number of shares of
common stock with respect to which awards may be granted under the Plan were
initially 150,000 shares as of December 1993. The number of shares under the
Plan are to be increased by two percent (2%) of the total issued and outstanding
shares of the Company's common stock as of the first day of each year, beginning
on January 1, 1995. The 2% per year increase of shares available under the Plan
continues through the term of the Plan, which expires on December 31, 2002.
The maximum number of shares of common stock to which awards may be
granted under the Plan at December 31, 1998 is 348,057, of which 346,290 stock
options have been issued as of December 31, 1998. The number of common shares
added under the Plan on January 1, 1999 was 53,815, increasing the cumulative
number of shares that may be awarded under the Plan to 401,872 after January 1,
1999. There were 6,525 common shares issued through the exercise of stock
options for the year ended December 31, 1998. The stock option table is a detail
summary of the activity of the stock options granted, cancelled and exercised
during the years ended December 31, 1996, 1997 and 1998.
44
<PAGE>
<TABLE>
<CAPTION>
STOCK OPTIONS PRICE WEIGHTED AVERAGE
OUTSTANDING AT SHARES RANGE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 159,963 3.50-7.00 $5.90
Options granted 64,500 7.50-8.25 7.58
Options cancelled (1,800) 6.00 6.00
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1996 222,663 3.50-8.25 6.37
- ----------------------------------------------------------------------------------------------------------------------------
Options granted 65,577 11.38-12.50 11.99
Options cancelled (400) 6.00 6.00
Options exercised (2,197) 6.00 6.00
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 285,643 $3.50-12.50 $7.66
- ----------------------------------------------------------------------------------------------------------------------------
Options granted 63,600 15.00-20.25 17.88
Options cancelled (2,150) 7.75-18.00 12.40
Options exercised (6,525) 6.00-7.56 6.20
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1998 340,568 $3.50-20.25 $9.57
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
ESTIMATED PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.50 - $5.50 26,470 6.3 years $4.61 17,922 $4.61
$6.00 - $7.00 123,397 5.2 years $6.13 123,397 $6.13
$7.50 - $8.25 62,674 7.1 years $7.58 20,649 $7.58
$11.00-$12.50 65,277 8.1 years $11.99 500 $11.66
$15.00 - $20.25 62,750 9.1 years $17.88 - -
- ----------------------------------------------------------------------------------------------------------------------------
340,568 $9.57 162,468 $6.16
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company maintains an Employee Stock Purchase Plan which allows
employees to purchase shares of the Company's common stock at the lower of fair
market value at the beginning of the Plan year, or 90% of fair market value at
the end of the Plan year. Employees' purchases may not exceed the lesser of
$25,000 or 15% of their annual base compensation. Shares of common stock
purchased under the Plan are not issuable until the end of the year. The maximum
number of shares of common stock which may be issued under this plan is 33,330
shares, of which 5,608 shares, for a value of $63,090, were issued in January of
1998. The Company issued 4,132 shares of common stock (treasury shares) for a
value of $65,781 on January 2, 1999 for employees participating in the Plan
during the year ended December 31, 1998. There are 7,761 shares available for
issuance under the plan for 1999.
The Company maintains a Non-Employee Directors' Stock Purchase plan.
This plan allows the directors to purchase the stock of the Company from
proceeds of their Directors' fees. The Directors purchased 2,185 and 2,830 of
common stock for a value of $ 39,572 and $39,613 during the years ended December
31, 1998, and 1997 respectively, under this plan.
The estimated fair value of options granted during 1998 and 1997 was
$6.41 and $4.17 per share, respectively. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized for
its stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share for the years ended December 31, 1998 , 1997 and
1996 would have been reduced to the pro forma amounts indicated in the table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
--------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income to common shareholders
As reported $ 4,847 $ 3,707 $ 3,003
Pro forma $ 4,681 $ 3,631 $ 2,957
Diluted earnings per common share
As reported $ 1.64 $ 1.21 $ 1.00
Pro forma $ 1.58 $ 1.18 $ 0.97
Weighted average diluted common shares outstanding (in thousands) 2,971 3,070 3,004
- ----------------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS:
Dividend yield 3.0% 0.0% 0.0%
Expected volatility 20% 20% 25%
Risk free interest rate 5.00% 5.60% 6.25%
Expected life 7 years 7 years 7 years
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
14. 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
$5.6 million in cash and investments less current liabilities and short-term
debt at December 31, 1998. However, these funds are also necessary to pay future
operating expenses of the parent company, interest expense on the $17.25 million
subordinated debentures, and possibly future capital infusions into Pacific
Crest Bank. Without dividends from Pacific Crest Bank, the parent must rely
solely on existing cash, investments and borrowings. The Company declared and
paid a $0.05 cent per share common stock cash dividend during the fourth quarter
of 1998. The dividend paid during 1998 was $137,000. The Company has declared a
$0.05 cent per share common stock cash dividend for the first quarter of 1999 on
February 11, 1999, payable on March 18, 1999 to holders of record on March 4,
1999. The Company anticipates that it will continue to declare and pay quarterly
dividends during 1999.
Pacific Crest Bank's ability to pay dividends to the parent is
restricted by California State law which requires that retained earnings be
available to pay the dividend. At December 31, 1998, Pacific Crest Bank had
retained earnings of $9.2 million of which $174,000 was unrestricted and
available for dividend payments. The Bank has declared a $280,000 first quarter
cash dividend, payable to the Parent Company based on unrestricted capital at
January 31, 1999. This dividend was declared on February 11, 1999, payable on
March 18, 1999. The Bank anticipates that it will continue to declare and pay
quarterly dividends to the Parent Company during 1999.
- --------------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its office facilities. Future minimum rental
payments required under operating leases that have initial and remaining
noncancelable terms in excess of one year are approximately as indicated in the
table as of December 31, 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 632
2000 641
2001 562
2002 508
2003 528
Thereafter 2,164
- ----------------------------------------------------------------------------------------------------------------------------
Total Lease Commitments $ 5,035
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain leases contain rental escalation clauses based on increases in
the Consumer Price Index and renewal options which may be exercised by the
Company. Rent expense for the years ended December 31, 1998, 1997 and 1996
totaled $780,000, $773,000 and $754,000, respectively.
UNFUNDED COMMITMENTS
Pacific Crest Bank makes unfunded commitments with its real estate term
lending activities for building improvements to property. As of December 31,
1998, Pacific Crest Bank had unfunded commitments in the real estate term loan
portfolio of $4.6 million.
LITIGATION
There is one lawsuit and claim pending against the Company which
management considers incidental to normal operation. Management, after review,
including consultation with counsel, believes that the ultimate liability, if
any which could arise from this lawsuit and claim would not materially affect
the financial position, results of operations or liquidity of the Company.
- --------------------------------------------------------------------------------
16. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE
Book value per common share was calculated by dividing total
shareholders' equity by the number of common shares less treasury shares
outstanding at December 31, 1998 and December 31, 1997. The number of common
shares outstanding was 2,986,264, less 295,500 of treasury shares at December
31, 1998, and 2,971,946, less 85,000 of treasury shares at December 31, 1997.
Basic and diluted earnings per common share for the years ended
December 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 basic and diluted earnings per share computations:
46
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA) YEAR ENDED 12/31/98 YEAR ENDED 12/31/97 YEAR ENDED 12/31/96
- ----------------------------------------------------------------------------------------------------------------------------
PER PER PER
NET SHARE NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $4,847 2,817 $ 1.72 $3,707 2,936 $ 1.26 $3,003 2,947 $ 1.02
EFFECT OF DILUTIVE SECURITIES
Stock Options - 154 (0.08) - 134 (0.05) - 57 (0.02)
DILUTED EPS
- ----------------------------------------------------------------------------------------------------------------------------
Income available to common
stockholders $4,847 2,971 $ 1.64 $3,707 3,070 $ 1.21 $3,003 3,004 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
17. REGULATORY MATTERS AND RESTRICTIONS ON SHAREHOLDERS' EQUITY
Pacific Crest Bank is subject to legal and regulatory requirements of
the California Industrial Loan Law and the FDIC. These legal and regulatory
requirements specify certain minimum capital ratios and place limits on the size
and type of loans Pacific Crest Bank may make.
The aggregate amount of thrift deposits outstanding is restricted under
the California Industrial Loan Law. Industrial loan companies may be authorized
to accept thrift deposits in amounts ranging from three to twenty times their
restricted equity. Pacific Crest Bank has been authorized by the Department of
Financial Institutions to accept thrift deposits of up to 18.5 times its
restricted shareholders' equity.
Pacific Crest Bank is subject to various regulatory capital
requirements administered by the FDIC. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the FDIC that, if undertaken, could have a direct
material effect on Pacific Crest Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Pacific Crest Bank must meet specific capital guidelines that involve
quantitative measures of Pacific Crest Bank's assets, liabilities and certain
off balance sheet items as calculated under regulatory accounting practices.
Pacific Crest Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Pacific Crest Bank to maintain minimum amounts and ratios as
set forth in the table below of total and Tier 1 capital to risk-weighted assets
of $365.2 million and $278.7 million at December 31, 1998 and 1997,
respectively, and of Tier 1 capital to average quarterly assets of $571.7
million and $443.6 million at December 31, 1998 and 1997, respectively.
Management believes that Pacific Crest Bank meets all capital adequacy
requirements to which it is subject as of December 31, 1998.
As of December 31, 1998 and 1997, the most recent notification from the
FDIC categorized Pacific Crest Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
Pacific Crest Bank must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the table below. There are no conditions
or events since that notification that management believes have changed the
institution's category.
Pacific Crest Bank's actual capital amounts and ratios are also
presented in the table. No amounts were deducted from capital for interest-rate
risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- --------------------------- ------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to risk weighted assets) $ 43,525 11.92% $ 29,213 > 8% $ 36,517 >10%
- -
Tier 1 Capital (to risk weighted assets) $ 38,955 10.67% $ 14,607 > 4% $ 21,910 > 6%
- -
Tier 1 Capital (to average quarterly assets) $ 38,955 6.81% $ 22,869 > 4% $ 28,586 > 5%
- -
- ----------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Total Capital (to risk weighted assets) $ 36,900 13.27% $ 22,296 > 8% $ 27,870 >10%
- -
Tier 1 Capital (to risk weighted assets) $ 33,416 12.02% $ 11,148 > 4% $ 16,722 > 6%
- -
Tier 1 Capital (to average quarterly assets) $ 33,416 7.53% $ 17,746 > 4% $ 22,183 > 5%
- -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
18. RETIREMENT SAVINGS AND SUPPLEMENTAL BENEFIT PLANS
Employees of Pacific Crest Bank participate in the Company's 401(k)
Plan (the "Retirement Plan"). The Retirement Plan covers substantially all
employees. Employees may contribute up to 15% of their salary up to a maximum of
$9,500 for 1996 and 1997, and $10,000 for 1998. Pacific Crest Bank matches
employee contribution amounts equal to 100% of the first 6% of
47
<PAGE>
compensation contributed by each participant. Amounts charged to expense under
the Retirement Plan for these matching contributions were $219,000, $191,000 and
$167,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The top four executive officers of Pacific Crest Bank participated in
The Company's Supplemental Executive Retirement Plan (the "Executive Retirement
Plan"). This plan provides for annual retirement benefits that would be payable
to the executives under the plan on their normal retirement date. The plan
provides for the offset for social security benefits and matching 401(k)
contributions made under the Pacific Crest Capital, Inc. Retirement Plan.
Offsets for social security and 401(k) matching contributions may be
substantial. Amounts charged to expense under the Executive Retirement Plan were
$113,000, $102,000 and $94,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
- --------------------------------------------------------------------------------
19. INTEREST RATE CAP
On June 8, 1998, the Company executed a five-year interest rate cap
agreement for a notional amount of $100 million. Under the cap agreement, the
Company earns income when the 90-day London Interbank Offered Rate (LIBOR)
exceeds 6.70%. LIBOR closed at 5.28% on December 31, 1998. The cost of the cap
was $925,000 which will be amortized over five years. The interest rate cap was
purchased as a hedge instrument for the Company's deposit liabilities which
reprice in one year or less. It was designed to hedge the risk that interest
rates may rise, which would produce an increase in the rates paid on these
deposit liabilities, resulting in an increase in interest expense and a
reduction in net interest margin. The interest rate cap mitigates this risk
somewhat, since it earns income for the Company if interest rates rise beyond a
certain level. The interest rate cap does not expose the Company to any
additional risk beyond the initial investment of $925,000. For the year ended
December 31, 1998, the amount of amortized premium was $105,000, and is included
in interest expense on interest-bearing deposits.
- --------------------------------------------------------------------------------
20. SECONDARY MARKET LOAN SALES
During 1998, the Company instituted a commercial real estate loan
program designed to produce loan product for both the Company's portfolio and
for potential sale in the secondary market. The loans originated are fixed rate
loans with interest rates fixed for ten years based on a margin over the
ten-year U.S. Treasury Bond. The loans were sold at a premium ranging between
3.1% and 6.1%, depending upon the characteristics of each loan. Although this
program has been designed in part to produce recurring gain income for the
Company, there can be no assurance that future sales will occur to produce
future gain income. Actual future sales of these types of loans will be based on
a variety of factors, including the total amount of net loan growth, secondary
market demand for such loans, and the level of interest rate risk in the
Company's financial structure. The table below contains specific information
related to the loan sales:
<TABLE>
<CAPTION>
PRINCIPAL NUMBER OF PREMIUM
(DOLLARS IN THOUSANDS) LOAN SALE DATE BALANCE SOLD LOANS SOLD ON SALE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1998 $ 7,485 7 $ 337
October 1998 1,976 1 130
-----------------------------------------------------------
$ 9,461 8 $ 467
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
21. SMALL BUSINESS ADMINISTRATION (SBA) LOAN PROGRAM
During 1997, the Company initiated a Small Business Administration
(SBA) loan program. The loans originated through this program are intended in
part for retention in the portfolio and in part to generate fee income through
SBA loan sales, and the related "gains on sale." These loans were sold, with the
servicing rights retained, at a premium range of 5.75% to 10%. The Company
calculated the servicing asset and interest only (I/O) strip related to the sale
transactions, in accordance with SFAS No. 125 and other authoritative
literature. The Company calculated these values using assumptions resulting in
values for the servicing asset and I/O strip that were not material to the
consolidated financial statements as a whole. Although this program has been
designed to produce recurring gain income for the Company on a quarterly basis,
there can be no assurance that future sales will occur to produce future gain
income. As of December 31, 1998, the Company had loans in this category with a
combined principal balance and SBA guaranteed balance of $4.8 million. The table
below contains specific information related to the loan sales:
<TABLE>
<CAPTION>
PRINCIPAL NUMBER OF PREMIUM
(DOLLARS IN THOUSANDS) LOAN SALE DATE BALANCE SOLD LOANS SOLD ON SALE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
May 1998 $ 1,372 3 $ 137
September 1998 513 4 50
December 1998 697 3 67
-----------------------------------------------------------
$ 2,582 10 $ 254
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
- --------------------------------------------------------------------------------
22. OTHER COMPREHENSIVE INCOME
The following table reflects the pre-tax, tax amounts and the after tax
balances of the components of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED
COMPREHENSIVE INCOME TAX EFFECT DECEMBER 31
--------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains/(losses) on securities $ 2,127 $ 2,028 $ (475)
Tax (Expense) or benefit (928) (839) 218
- ----------------------------------------------------------------------------------------------------------------------------
Net after tax comprehensive income $ 1,199 $ 1,189 $ (257)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the reclassification adjustments of the
net unrealized gains/(losses) on securities included in other comprehensive
income for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED
RECLASSIFICATIONS TO COMPREHENSIVE INCOME DECEMBER 31
--------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
Gain on sale of securities $ 252 $ - $ 413
Income tax expense 105 - 171
- ----------------------------------------------------------------------------------------------------------------------------
Net gain realized in net income $ 147 $ - $ 242
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
Holding gain/(loss) arising during period $ 238 $ 2,503 $ (441)
Reclassification of gains from other comprehensive income
to realized gains and losses (162) - -
Net tax effect (66) (1,057) 184
- ----------------------------------------------------------------------------------------------------------------------------
Total impact on other comprehensive income $ 10 $ 1,446 $ (257)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
23. PARENT COMPANY
The following represents the financial statements of Pacific Crest
Capital, Inc. (parent company only) as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS AT OR FOR THE YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 328 $ 458
Securities available for sale 30,180 30,037
Other assets 1,708 1,518
Investment in Pacific Crest Bank 38,955 33,416
Investment in PCC Capital I 534 534
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 71,705 $ 65,963
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short term borrowings $ 24,450 $ 20,000
Subordinated debentures 17,784 17,784
Accrued expenses and other liabilities 430 538
Common stock 28,087 27,944
Retained earnings 5,559 849
Common stock in treasury, at cost (4,705) (1,174)
Accumulated other comprehensive income 100 22
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 29,041 27,641
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 71,705 $ 65,963
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net interest expense $ (877) $ (194)
Income from subsidiaries 5,607 3,984
General and administrative expenses 451 356
- ---------------------------------------------------------------------------------------------------------------------------
Net income before taxes 4,279 3,434
Income tax benefit 568 273
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 4,847 $ 3,707
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,847 $ 3,707
Adjustments to reconcile income to net cash used by operating activities:
Net change to other assets and accrued expenses (432) (1,143)
Equity income from subsidiaries (5,607) (3,984)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (1,192) (1,420)
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of U.S. government sponsored agency securities - (30,037)
Capital infusion into Pacific Crest Bank - (5,000)
Capital infusion into PCC Capital I - (534)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (35,571)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from subordinated debentures - 17,784
Increase in short term borrowings 4,450 20,000
Proceeds from issuance of common stock 143 106
Purchase of treasury stock, at cost (3,531) (919)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,062 36,971
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (130) (20)
Cash and cash equivalents at beginning of period 458 478
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 328 $ 458
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Unaudited quarterly financial data for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Total interest income $ 10,587 $ 10,911 $ 11,480 $ 12,262
Total interest expense 6,421 6,690 7,394 8,033
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 4,166 4,221 4,086 4,229
Provision for loan losses 200 230 240 240
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,966 3,991 3,846 3,989
Noninterest income 201 1,073 566 638
Valuation adjustment to other real estate owned - 50 - -
Other real estate owned expense 44 121 38 8
General and administrative expenses 2,257 2,688 2,321 2,752
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,866 2,205 2,053 1,867
Income tax provision 765 904 792 683
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,101 $ 1,301 $ 1,261 $ 1,184
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.38 $ 0.45 $ 0.45 $ 0.44
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.36 $ 0.43 $ 0.43 $ 0.42
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Total interest income $ 7,677 $ 8,163 $ 8,847 $ 10,659
Total interest expense 3,954 4,389 4,896 6,372
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 3,723 3,774 3,951 4,287
Provision for loan losses 230 300 280 325
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,493 3,474 3,671 3,962
Noninterest income 101 349 167 131
Valuation adjustment to other real estate owned 130 210 30 -
Other real estate owned expense 14 4 31 65
General and administrative expenses 2,079 2,104 2,181 2,416
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,371 1,505 1,596 1,612
Income tax provision 547 599 637 594
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 824 $ 906 $ 959 $ 1,018
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.28 $ 0.31 $ 0.33 $ 0.34
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.27 $ 0.30 $ 0.31 $ 0.33
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC CREST CAPITAL, INC.
We have audited the accompanying consolidated balance sheets of Pacific Crest
Capital, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Crest Capital, Inc. and
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 11, 1999
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference is the information from the section
entitled "Election of Directors" from the Company's definitive Proxy Statement,
to be filed with the SEC within 120 days after December 31, 1998. Reference is
also made in connection with the list of Executive Officers which is provided
under Section 4(a), "Executive Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference is the information from the sections
entitled "Election of Directors - Compensation of Board of Directors,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" from the Company's definitive Proxy Statement, to be filed with
the SEC within 120 days after December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference is the information from the section
entitled "Beneficial Ownership of Principal Stockholders and Management" from
the Company's definitive Proxy Statement, to be filed with the SEC within 120
days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference is the information from the section
entitled "Certain Transactions" from the Company's definitive Proxy Statement,
to be filed with the SEC within 120 days after December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 AND 2. FINANCIAL STATEMENTS
The financial statements listed on the Index to Financial
Statements included under "Item 8. Financial Statements and
Supplemental Data." are filed as part of this Form 10-K. All
schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements and related
notes.
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3(i).1 Amended and restated Certificate of Incorporation (1)
3(ii).1 Amended and restated Bylaws of Pacific Crest Capital, Inc. (1)
4.1 Subordinated Indenture dated as of September 22, 1997, by and between
Pacific Crest Capital and Wilmington Trust Company, as indenture
trustee (11)
4.2 Officers' Certificate and Company Order dated September 22, 1997 (11)
4.3 Certificate of Trust of PCC Trust I dated August 18, 1997 (11)
4.4 Trust Agreement of PCC Trust I dated as of August 18, 1997 (11)
4.5 Certificate of Amendment to Certificate of Trust of PCC Trust I dated
August 20, 1997 (11)
4.6 Amended and Restated Trust Agreement of PCC Capital I, dated as of
September 22, 1997 (11)
4.7 Form of Trust Preferred Certificate of PCC Capital I (included as an
exhibit to exhibit 4.6) (11)
4.8 Form of Common Securities Certificate of PCC Capital I (included as an
exhibit to exhibit 4.6) (11)
4.9 Guarantee Agreement dated as of September 22, 1997 (11)
4.10 Agreement as to Expenses and Liabilities (11)
10.1 Form of Indemnification Agreement (3) *
10.2 Pacific Crest Capital, Inc. 1993 Equity Incentive Plan (4) (5) *
10.3 Pacific Crest Capital, Inc. Retirement Plan and Trust (3) *
10.4 1993 Employee Stock Purchase Plan (3) (6) *
10.5 Form of Split Dollar Agreement (3) *
10.6 Pacific Crest Capital, Inc. Supplemental Executive Retirement
Plan (3)*
10.7 Form of Distribution Agreement (1)
10.8 Form of Tax Sharing Agreement between Pacific Crest Capital, Inc. and
The Foothill Group, Inc. (3)
10.9 Office Lease by and between Wilshire Masterpiece, Inc. and Pacific
Crest Bank, dated October 31, 1990 (Beverly Hills Branch)(7)
53
<PAGE>
10.10 Office Lease between Fifth and Beech Associates and Pacific Crest Bank
(San Diego Branch) (7)
10.11 Shopping Center Lease dated April 18, 1978, between Frances Robert
Sarno, as Trustees, and Le Chateau Boutiques, Inc. (Encino Branch) (7)
10.11.1 Assignment, Assumption and Consent to Assignment of Lease dated October
16, 1980, between Pacific Crest Bank, Frances Sarno and Robert Sarno,
as Trustees, and Le Chateau Boutiques, Inc. (7)
10.11.2 Exercise of Option to Renew Lease dated January 23, 1990 (7)
10.12 Lease dated April 22, 1992, between The Klussman Family Trust and
Pacific Crest Bank (Agoura Hills office) (7)
10.14.1 Employment Agreement between the Company and Gary Wehrle (4) *
10.14.2 Employment Agreement between the Company and Barry Otelsberg (4) *
10.14.3 Employment Agreement between the Company and Lyle Lodwick (4) *
10.14.4 Employment Agreement between the Company and Robert J. Dennen (4) *
10.14.5 Employment Agreement between the Company and Gonzalo Fernandez (8) *
10.14.6 Employment Agreement between the Company and Joseph Finci (2) *
10.14.7 Employment Agreement between the Company and M. Carolyn Reinhart (2) *
10.15 1996 Non-Employee Directors' Stock Plan (9)*
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Independent Auditors (2)
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Subordinated Indenture (10)
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Amended and Restated Trust Agreement (10)
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Trust Preferred Securities Guarantee Agreements (10)
27.1 Financial Data Schedule - Fiscal Year end December 31, 1998 (2)
</TABLE>
- --------------
* Management contracts and compensatory plan or arrangements.
(1) Incorporated herein by reference from Registrant's Amendment No. 2 to
Form S-1 Registration Statement No. 33-68718, filed December 3, 1993.
(2) Filed herewith.
(3) Incorporated herein by reference from Registrant's Amendment No. 1 to
Form S-1 Registration Statement No. 33-68718, filed October 28, 1993.
(4) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1993, filed March 31, 1994.
(5) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 33-87990 filed December 27, 1994. Pacific
Crest Capital, Inc. 1993 Equity Incentive Plan.
(6) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 33-87988 filed December 27, 1994. Pacific
Crest Capital, Inc. 1995 Employee Stock Purchase Plan.
(7) Incorporated herein by reference from Registrant's Form S-1
Registration Statement No. 33-68717, filed September 13, 1993.
(8) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1994 filed March 30, 1995.
(9) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 333-23849, filed March 23, 1997. Pacific
Crest Capital, Inc. 1996 Non-Employee Directors' Stock Plan.
(10) Incorporated herein by reference from Registrant's Form S-2
Registration Statement No. 333-34257, filed August 22, 1997.
(11) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1997, filed March 27, 1998.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Item 14(a)(3).
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
BY: /s/ GARY WEHRLE
---------------------------------
GARY WEHRLE
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
DATE: MARCH 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ GARY WEHRLE Chairman of the Board, President March 23, 1999
- ----------------------------------- and Chief Executive Officer
Gary Wehrle (Principal Executive Officer)
/s/ ROBERT J. DENNEN Senior Vice President, Chief Financial March 23, 1999
- ----------------------------------- Officer and Secretary
Robert J. Dennen (Principal Financial and Accounting Officer)
/s/ RUDOLPH I. ESTRADA Director March 23, 1999
- -----------------------------------
Rudolph I. Estrada
/s/ MARTIN J. FRANK Director March 23, 1999
- -----------------------------------
Martin J. Frank
/s/ RICHARD S. ORFALEA Director March 23, 1999
- -----------------------------------
Richard S. Orfalea
/s/ STEVEN J. ORLANDO Director March 23, 1999
- -----------------------------------
Steven J. Orlando
</TABLE>
55
<PAGE>
EXHIBIT 21.1
PACIFIC CREST CAPITAL, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name State of Incorporation Type
- ---- ---------------------- ----
<S> <C> <C>
Pacific Crest Bank California Industrial Loan Company
PCC Capital I Delaware Statutory Business Trust
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-23849, 33-87988 and 33-87990 of Pacific Crest Capital, Inc. on Forms S-8
of our report dated February 11, 1999, appearing in this Annual Report on
Form 10-K of Pacific Crest Capital, Inc.for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
February 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,592
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,048
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 321,261
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 288,486
<ALLOWANCE> 5,024
<TOTAL-ASSETS> 645,304
<DEPOSITS> 482,839
<SHORT-TERM> 30,779
<LIABILITIES-OTHER> 4,846
<LONG-TERM> 96,700
0
0
<COMMON> 30,140
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 645,304
<INTEREST-LOAN> 25,653
<INTEREST-INVEST> 19,366
<INTEREST-OTHER> 221
<INTEREST-TOTAL> 45,240
<INTEREST-DEPOSIT> 21,416
<INTEREST-EXPENSE> 28,538
<INTEREST-INCOME-NET> 16,702
<LOAN-LOSSES> 910
<SECURITIES-GAINS> 252
<EXPENSE-OTHER> 10,279
<INCOME-PRETAX> 7,991
<INCOME-PRE-EXTRAORDINARY> 4,847
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,847
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 3.15
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,700
<ALLOWANCE-OPEN> 4,100
<CHARGE-OFFS> 20
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 5,024
<ALLOWANCE-DOMESTIC> 5,024
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
