<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER 0-22732
PACIFIC CREST CAPITAL, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4437818
------------------------------- -------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30343 CANWOOD STREET
AGOURA HILLS, CALIFORNIA 91301
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 865-3300
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
----------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
-------- --------
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS
OF MAY 13, 1998.
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
- ---------------------------- ----------------------------
COMMON STOCK, $.01 PAR VALUE 2,671,439
9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I
GUARANTEE OF PACIFIC CREST CAPITAL, INC. WITH RESPECT TO THE
9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I
<PAGE>
PACIFIC CREST CAPITAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - FINANCIAL INFORMATION.......................................................... 1
Item 1: Financial Statements.................................................. 1
Consolidated Balance Sheets........................................... 1
Consolidated Statements of Operations................................. 2
Consolidated Statements of Shareholders' Equity....................... 3
Consolidated Statements of Cash Flows................................. 4
Notes to Consolidated Financial Statements............................ 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 7
Part II - OTHER INFORMATION............................................................. 18
SIGNATURES.............................................................................. 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
Cash $ 1,765 $ 3,592
Securities purchased under resale agreements 3,113 22,048
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 4,878 25,640
- ------------------------------------------------------------------------------------------------------------
Investment securities (Note 4):
Available for sale, at market 236,685 321,261
Loans
Commercial mortgage 328,033 278,614
Residential mortgage 1,056 1,194
Commercial business/SBA/other 5,864 4,476
SBA loans held for sale 4,057 4,784
- -----------------------------------------------------------------------------------------------------------
Total loans 339,010 289,068
Deferred loan fees 422 582
Allowance for loan losses 5,692 5,024
- -----------------------------------------------------------------------------------------------------------
Net loans 332,896 283,462
Accrued interest receivable 6,293 8,241
Prepaid expenses and other assets 2,295 2,102
Deferred income taxes 3,697 2,911
Other real estate owned 510 806
Premises and equipment 919 881
- -----------------------------------------------------------------------------------------------------------
Total assets $ 588,173 $ 645,304
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Savings accounts $ 258,441 $ 276,011
Certificates of deposit 172,869 182,979
Money market checking 23,774 23,849
- -----------------------------------------------------------------------------------------------------------
Total deposits 455,084 482,839
Reverse repurchase agreements 6,500 30,779
Term borrowings 73,950 79,450
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures 17,250 17,250
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 552,784 610,318
Accrued interest and other liabilities 5,878 4,846
- -----------------------------------------------------------------------------------------------------------
Total liabilities 558,662 615,164
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 5 and 6):
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 March 31, 1999, and December 31, 1998 28,026 28,087
Retained earnings 6,753 5,559
Accumulated other comprehensive income (loss) (486) 1,199
Common stock in treasury, at cost, 300,988 shares
at March 31, 1999, 295,500 shares at December 31, 1998 (4,782) (4,705)
Total shareholders' equity 29,511 30,140
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 588,173 $ 645,304
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Book value per common share (Note 3) $ 10.99 $ 11.20
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest on loans, including fees $ 7,505 $ 6,219
Securities purchased under resale agreements 211 4
Investment securities
Held to maturity - 95
Available for sale 4,733 4,269
- ---------------------------------------------------------------------------------------------------
Total interest income 12,449 10,587
Interest expense:
Interest expense on interest-bearing deposits
Savings accounts 3,107 2,572
Certificates of deposit 2,430 1,948
Money market checking 257 216
- ---------------------------------------------------------------------------------------------------
Total interest expense on deposits 5,794 4,736
Reverse repurchase agreements 354 496
Term borrowings 1,094 785
Trust preferred securities 405 404
- ---------------------------------------------------------------------------------------------------
Total interest expense 7,647 6,421
- ---------------------------------------------------------------------------------------------------
Net interest income 4,802 4,166
Provision for loan losses 660 200
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,142 3,966
NONINTEREST INCOME:
Gain on sale of SBA Loans 96 -
Gain on sale of investment securities 515 -
Loan prepayment and late fees 99 98
Other noninterest income 261 103
- ---------------------------------------------------------------------------------------------------
Total noninterest income 971 201
- ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Valuation adjustments to other real estate owned 43 -
Other real estate owned expenses 18 44
Salaries and employee benefits 1,740 1,357
Net occupancy expenses 442 391
Communication and data processing 212 191
Advertising and promotion 192 64
FDIC insurance premiums 12 10
Credit and collection expenses 10 13
Other expenses 267 231
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 2,936 2,301
- ---------------------------------------------------------------------------------------------------
Income before income taxes 2,177 1,866
Income tax provision (Note 2) 849 765
- ---------------------------------------------------------------------------------------------------
Net income $ 1,328 $ 1,101
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Per share data (Note 3):
Basic earnings per common share $ 0.49 $ 0.38
- ---------------------------------------------------------------------------------------------------
Weighted average basic common shares outstanding (in thousands) 2,691 2,893
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.47 $ 0.36
- ---------------------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding (in thousands) 2,823 3,058
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON TREASURY OTHER TOTAL TOTAL
---------------- ---------------- RETAINED COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
(DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) INCOME (LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Unrealized gain on securities,
available for sale - - - - - 10 10 10
-------
Total Comprehensive income: $ 4,857
-------
Issuance of common stock:
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
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income: - - - - 1,328 - $ 1,328 1,328
Other comprehensive income (loss),
net of tax
Unrealized income (loss) on securities,
available for sale - - - - - (1,685) (1,685) (1,685)
-------
Total Comprehensive income (loss): $ (357)
-------
Issuance of treasury shares:
Under employee stock purchase plan - (12) 4 66 - - 54
Under non-employee directors' stock
purchase plan - - 1 10 - - 10
Under employee stock option plan - (49) 5 74 - - 25
Purchase of treasury shares - - (15) (227) - - (227)
Cash dividends paid - - - - (134) - (134)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 2,986 $28,026 (301) $(4,782) $6,753 $ (486) - $29,511
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,328 $ 1,101
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 660 200
Valuation adjustments to OREO 43 -
Depreciation and amortization 77 73
Amortization of deferred loan fees (128) (109)
Amortization/accretion of securities (19) (1)
Gain on sale of SBA Loans (96) -
Gain on sale of investment securities (515) -
Changes in operating assets and liabilities:
Accrued interest receivable 1,948 (1,412)
Prepaid expenses and other assets (193) 24
Deferred income taxes 435 (147)
Accrued interest and other liabilities 1,032 1,355
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,572 1,084
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities:
Available for sale (3,000) (30,000)
Proceeds from sales and calls of investment securities:
Available for sale 85,204 -
Net increase in loans (42,234) (4,684)
Proceeds from sale of SBA loans 1,381 -
Purchase of loans (9,017) -
Purchases of equipment and leasehold improvements, net (115) (70)
Proceeds from sale of other real estate owned 253 -
- ----------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities 32,472 (34,754)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in savings accounts (17,570) (1,384)
Net (decrease)/increase in certificate of deposits (10,110) 9,470
Net (decrease)/increase in money market checking (75) 1,588
Net (decrease)/increase in reverse repurchase agreements (24,279) 12,600
Net (decrease)/increase in term borrowings (5,500) 10,000
Proceeds from stock options exercised 89 -
Proceeds from the issuance of common stock - 92
Cash dividends paid (134) -
Purchase of treasury stock, at cost (227) -
- ----------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities (57,806) 32,366
- ----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (20,762) (1,304)
Cash and cash equivalents at beginning of period 25,640 2,392
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,878 $ 1,088
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,803 $ 6,593
Income taxes $ - $ 150
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
- -------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The interim financial statements included herein have been prepared by
Pacific Crest Capital, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Pacific Crest
Capital, Inc. together with its subsidiaries is referred to as the "Company".
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's latest Annual Report. In the opinion of
management, all adjustments, including normal recurring adjustments necessary to
present fairly the financial position of the Company with respect to the interim
financial statements, and the results of its operations for the interim period
ended March 31, 1999, have been included. Certain reclassifications have been
made to prior year amounts to conform to the 1999 presentation. The results of
operations for interim periods are not necessarily indicative of results for the
full year.
- -------------------------------------------------------------------------------
NOTE 2. INCOME TAXES
- -------------------------------------------------------------------------------
For the quarters ended March 31, 1999 and 1998, the Company estimated
its provision for income taxes at $849,000 or 39.0% and $765,000 or 41.0%,
respectively. The difference between the Company's statutory tax rate and its
effective tax rate, for the quarters ended March 31, 1999 and 1998, are due to
California tax deductions (credits) generated by the Company on loans made in
special tax zones within California. In addition, adjustments have been made to
tax valuation reserves for the quarter ending March 31, 1999 as a result of
settlements made with the IRS on prior year income tax returns.
- -------------------------------------------------------------------------------
NOTE 3. COMPUTATION OF BOOK VALUE AND EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------
Book value per common share was calculated by dividing total
shareholders' equity by the number of common shares issued, less common shares
repurchased by the Company "treasury shares", at March 31, 1999 and December 31,
1998. The number of common shares used in this calculation was 2,986,264 of
common shares issued less 300,988 of treasury shares resulting in 2,685,276 of
common shares issued and outstanding at March 31, 1999, and 2,986,264 of common
shares issued less 295,500 treasury shares resulting in 2,690,764 of common
shares issued and outstanding at December 31, 1998.
Basic and diluted earnings per common share for the quarter ended March
31, 1999 and 1998, were determined by dividing net income by the weighted
average common shares outstanding. For the diluted earnings per share
computation, the common shares outstanding were adjusted to reflect the number
of common stock equivalents outstanding based on the number of outstanding stock
options issued by the Company utilizing the treasury stock method. See table
below for the diluted earnings per share computations:
<TABLE>
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA) QUARTER ENDED 3/31/99 QUARTER ENDED 3/31/98
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common stockholders $1,328 2,691 $ 0.49 $1,101 2,893 $ 0.38
-----------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 132 (0.02) - 165 (0.02)
DILUTED EPS
-----------------------------------------------------------------------------
Income available to common stockholders $1,328 2,823 $ 0.47 $1,101 3,058 $ 0.36
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
Investment agency 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 March 31, 1999 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities
Available for sale $237,465 261 1,040 236,685
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company's security portfolio at March 31, 1999 consists of
investments in U.S. government sponsored agency securities. 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
5
<PAGE>
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 following table reflects the scheduled maturities in the Company's
investment securities portfolio at March 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED FAIR AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Due from one to five years $ 5,000 $ 5,031 6.44% 2.8 years
Due from five to ten years 190,855 190,298 6.66% 8.8 years
Due over ten years 41,610 41,356 6.62% 12.1 years
------------------------------------------------------------
Total Investment securities: $237,465 $236,685 6.64% 9.1 years
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $82.1
million were pledged to secure borrowings aggregating $80.4 million at March
31, 1999.
- -------------------------------------------------------------------------------
NOTE 5. CAPITAL
- -------------------------------------------------------------------------------
At March 31, 1999, 10,000,000 shares of $0.01 par value common stock
were authorized of which, 2,986,264 shares were issued and 2,685,276
outstanding.
Pacific Crest Bank is required to maintain certain minimum capital
levels and must maintain certain capital ratios to be considered "well
capitalized" under the prompt corrective action provisions of the FDIC
Improvement Act.
The following table sets forth Pacific Crest Bank's regulatory
capital ratios at March 31, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1998
REGULATORY CAPITAL RATIOS ------------------------------------------------------------------------------
PACIFIC CREST BANK Required Actual Excess Required Actual Excess
- ----------------------------------------------------- ----------- ------------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 6.83% 2.83% 4.00% 6.81% 2.81%
Tier I risk-based capital ratio 4.00% 10.46% 6.46% 4.00% 10.67% 6.67%
Total risk-based capital ratio 8.00% 11.71% 3.71% 8.00% 11.92% 3.92%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 6. 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
$5.8 million in cash and investments less current liabilities and short-term
debt at March 31, 1999. 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 for the first quarter of
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 March 31, 1999, Pacific Crest Bank had
retained earnings of $10.5 million of which $1.5 million was unrestricted and
available for dividend payments. The Bank declared and paid a $280,000 first
quarter cash dividend, to the Parent Company on March 18, 1999. The Bank
anticipates that it will continue to declare and pay quarterly dividends to the
Parent Company during 1999.
- -------------------------------------------------------------------------------
NOTE 7. OTHER COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------
The following table reflects the tax effect of other comprehensive
income:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Other comprehensive income (loss):
Unrealized gain (loss) on U.S. agency securities $(2,905) $ (280)
Tax expense (benefit) (1,220) (115)
- ------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of taxes $(1,685) $ (165)
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced the consolidated financial performance of the Company
for the quarter ended March 31, 1999. This analysis should be read in
conjunction with the Company's 1998 Annual Report on Form 10-K and with the
unaudited financial statements and notes as set forth on pages 1 through 6 of
this report.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company.
The following discussion should be read in conjunction with the information
in the Company's consolidated financial statements and notes thereto and
other financial data included elsewhere herein. Certain statements under this
caption constitute "forward-looking statements" within the meaning of the
Private Securities Reform Act of 1995, and as such, may involve risks and
uncertainties. The Company's actual results, performance and achievements may
differ materially from the results, performance and achievements expressed or
implied in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, economic conditions, competition
in the geographic and business areas in which the Company conducts its
operations, fluctuations in interest rates, credit quality and governmental
regulation.
The following table sets forth certain selected financial data
concerning the Company for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
SELECTED FINANCIAL DATA -------------------------------------------------------------
(DOLLARS IN THOUSANDS) 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCE
Average Loans $ 315,498 $ 264,167 $ 230,400 $ 230,476 $ 230,479
Average Investment Securities 285,243 320,632 311,378 263,990 250,763
Average Earning Assets 617,191 597,675 542,745 496,927 481,503
Average Assets 626,086 603,560 550,803 506,418 491,140
Average Deposits 467,770 456,129 391,301 366,195 351,178
Average Borrowings 121,255 112,765 125,361 106,710 106,140
Average Equity 30,013 32,076 30,262 29,833 29,405
PERFORMANCE RATIOS
Return on average assets (1) 0.85% 0.78% 0.92% 1.03% 0.90%
Return on average common equity (1) 18.20% 16.79% 17.63% 18.09% 15.73%
Net interest margin (2) 3.16% 2.81% 2.99% 3.41% 3.51%
CAPITAL AND LEVERAGE RATIOS (3)
Risk-based capital ratios:
Tier one 10.46% 10.67% 12.44% 12.85% 12.22%
Total 11.71% 11.92% 13.69% 14.10% 13.47%
Leverage capital ratio (4) 6.83% 6.81% 7.23% 7.60% 7.45%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.68% 1.74% 2.00% 2.01% 1.83%
Allowance for loan losses to nonaccrual loans 2.25% - - - 1889.04%
Total nonperforming assets to total assets (5) 0.52% 0.12% 0.17% 0.19% 0.45%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations based upon annualized net income, excluding accumulated
other comprehensive income.
(2) Net interest margin is calculated by dividing annualized net income by
average earning assets.
(3) Capital ratios of Pacific Crest Bank only.
(4) Calculation is based on quarter end asset balances of Pacific Crest
Bank.
(5) Non-performing assets include nonaccrual loans and other real estate
owned ("OREO") and exclude troubled debt restructurings.
7
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter ended March 31, 1999 and 1998,
present the distribution of average assets, liabilities and stockholders'
equity, the total dollar amount of interest income from average
interest-earning assets, the resultant yields and the interest expense on
average interest-bearing liabilities, expressed in both dollars and rates.
All average balances are daily average balances. Nonaccrual loans have been
included in the table as loans, having a zero yield.
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
(DOLLARS IN THOUSANDS) Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 315,498 $ 7,505 9.65% $230,479 $ 6,219 10.94%
Repurchase agreements 16,450 211 5.20% 261 4 6.22%
U.S. government agency securities
Available for sale 275,267 4,580 6.66% 245,765 4,269 6.95%
Held to maturity - - - 4,998 95 7.60%
Corporate debt securities
Available for sale 9,976 153 6.13% - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 285,243 4,733 6.64% 250,763 4,364 6.96%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) 617,191 12,449 8.18% 481,503 10,587 8.92%
- ---------------------------------------------------------------------------------------------------------------------------------
Other real estate owned 784 2,042
Other noninterest earning assets 13,425 11,808
Less allowance for loan losses (1) 5,314 4,213
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 626,086 491,140
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 264,228 3,107 4.77% 198,878 2,572 5.24%
Certificates of deposit 179,803 2,430 5.48% 134,664 1,948 5.87%
Money market checking 23,739 257 4.39% 17,636 216 4.97%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 467,770 5,794 5.02% 351,178 4,736 5.47%
- ---------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements 26,266 354 5.47% 34,557 496 5.82%
Term borrowings 77,739 1,094 5.71% 54,333 785 5.86%
Trust preferred securities 17,250 405 9.39% 17,250 404 9.37%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 589,025 7,647 5.27% 457,318 6,421 5.69%
Non interest-bearing liabilities 7,048 4,417
Shareholders' equity 30,013 29,405
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders
equity 626,086 491,140
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 4,802 $ 4,166
Net interest rate spread (2) 2.91% 3.23%
Net interest-earning assets $ 28,166 $ 24,185
Net interest margin (3) 3.16% 3.51%
Average interest-earning assets to
average interest-bearing liabilities 104.8% 105.3%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Net interest rate spread represents the average yield earned on
interest-earning assets, less the average rate paid on interest-bearing
liabilities.
(3) Net interest margin is computed by dividing net interest income by
total average earning assets.
8
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following table presents the dollar amount of changes in
interest income and interest expense of major components of interest-earning
assets and interest-bearing liabilities due to changes in outstanding
balances and changes in interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (i) changes on volume (i.e. changes in volume multiplied by
old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
--------------------------------------------
For the Quarter Ended
March 31, 1999
--------------------------------------------
1999 compared to 1998
Increase (decrease) due to
--------------------------------------------
Net
(DOLLARS IN THOUSANDS) Volume Rate Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans $ 2,088 $ (802) $ 1,286
Repurchase agreements 208 (1) 207
U.S. government agency securities:
Available for sale 490 (179) 311
Held to maturity (95) - (95)
Corporate Bonds:
Available for sale 153 - 153
- -----------------------------------------------------------------------------------------
Total change in interest income 2,844 (982) 1,862
- -----------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts 785 (250) 535
Certificates of deposit 617 (135) 482
Money market checking 68 (27) 41
Reverse repurchase agreements (113) (29) (142)
Term borrowings 330 (21) 309
Trust preferred securities - 1 1
- -----------------------------------------------------------------------------------------
Total change in interest expense 1,687 (461) 1,226
- -----------------------------------------------------------------------------------------
Changes in net interest income $ 1,157 $ (521) $ 636
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
DETAILED COMPARISONS OF FINANCIAL RESULTS
EARNINGS PERFORMANCE
Net income was $1.3 million (or $0.47 per common share on a diluted
basis) for the quarter ended March 31, 1999, compared to $1.1 million (or
$0.36 per common share on a diluted basis) for the corresponding period in
1998. The improvement in the first quarter of 1999 over the comparable period
in 1998 is primarily attributable to increases in the Company's net interest
income, and noninterest income, partially offset by increases in the
provision for loan losses and noninterest expense.
NET INTEREST INCOME
Net interest income increased by $636,000 or 15.3% to $4.8 million for
the quarter ended March 31, 1999 compared to the same period of 1998. The
increase in net interest income during the quarter ended March 31, 1999 was
primarily the result of an increase of $135.7 million in the Company's average
balance of interest earning assets between the 1999 and 1998 periods.
The Company's net interest rate spread and net interest margin, both
declined in 1999 when compared to the same period in 1998. The net interest rate
spread is defined as the yield on interest-earning assets less the rates paid on
interest-bearing liabilities. The net interest rate spread for the quarter ended
March 31, 1999 and 1998 was 2.91% and 3.23%, respectively. The decline in the
spread between the 1999 and 1998 periods is the result of a decrease of 74 basis
points in the yields paid on interest-earning assets between the two periods,
partially offset by a decline of 42 basis points on the interest-bearing
liabilities. The decline in the yield of the interest-earning asset yield is the
result of the selected following items. The decline of market interest rates and
the repricing of the Company's variable rate loan portfolio downward in response
to overall lower market interest rates. In addition the purchase of investment
securities that increased the securities portfolio, as well as the purchase of
securities to replace securities being called during the second, third, and
fourth quarters of 1998 were invested in U.S. Agency Securities yielding less
than the securities portfolio prior to March of 1998. The loan yields on the
Company's new loan originations made during 1998 and 1999 have generally been
lower than the yields on loans within the portfolio made prior to the first
quarter of 1998.
9
<PAGE>
The net interest margin is defined as the difference between interest
income and interest expense divided by the average interest-earning assets. The
net interest margin for the quarter ended March 31, 1999 and 1998, was 3.16% and
3.51%, respectively. The decline in the margin is the result of the reduced net
interest rate spread.
The following table sets forth the composition of average
interest-earning and average interest-bearing liabilities by category, and by
the percentage of each category to the total, for the three months ended March
31, 1999 and 1998, including the change in average balance and yield/rate
between these respective periods:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
March 31, 1999 March 31, 1998 Avg. Bal. Net Change
-------------------------------------------------------------------------------
% Avg. % Avg. Yield/
Average Compo- Yield/ Average Compo- Yield/ Rate
(DOLLARS IN THOUSANDS) Balance sition Rate Balance sition Rate $ % Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $ 315,498 51.1% 9.65% $ 230,479 47.9% 10.94% $ 85,019 3.3% -1.29%
Repurchase agreements 16,450 2.65% 5.20% 261 0% 6.22% 16,189 2.6% -1.02%
Investment securities 285,243 46.2% 6.64% 250,763 52.1% 6.96% 34,480 -5.9% -0.32%
- -------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 617,191 100.0% 8.18% 481,503 100.0% 8.92% 135,688 -0.74%
- -------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits 467,770 79.4% 5.02% 351,178 76.8% 5.47% 116,592 2.6% -0.45%
Borrowings 104,005 17.7% 5.65% 88,890 19.4% 5.84% 15,115 -1.7% -0.19%
Trust preferred securities 17,250 2.9% 9.39% 17,250 3.8% 9.37% - -0.9% 0.02%
- -------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 589,025 100.0% 5.27% $ 457,318 100.0% 5.69% $131,707 -0.42%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL INTEREST INCOME
Total interest income increased by $1.9 million or 17.6% to $12.5
million for the quarter ended March 31, 1999 compared to the same period of
1998. This increase was primarily due to an increase in the average balance
of interest earning assets of $135.7 million for the quarter ended March 31,
1999 over the comparable period in 1998. Average interest-earning assets
increased between the first quarter of 1999 and 1998 as a result of the
growth in the loan portfolio and the purchase of investment securities.
Partially offsetting these increases, the overall yields on the Company's
interest-earning assets decreased by 74 basis points for the quarter ended
March 31, 1999 from the comparable periods in 1998. 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 and investment
securities. The primary reason for the decline in the overall loan portfolio
yield is due to the continued replacement of higher yielding loans being paid
off, with newly originated lower yielding loans. This reflects the increased
competitive rate pressure within the lending marketplace.
The increase in the average balances of the Company's U.S.
government sponsored agency securities for the quarter ended March 31, 1999,
reflects the purchase of slightly lower yielding investment securities during
the second, third and fourth quarters of 1998.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter ended March 31, 1999
increased by $1.2 million or 19.1% to $7.6 million compared to the same
period of 1998. The increase in interest expense resulted entirely from an
increase in the average balance of interest-bearing liabilities of $131.7
million for the quarter ended March 31, 1999, as compared to the same period
of 1998. The average interest-bearing liabilities rose between these
respective periods primarily reflects the growth in the Company's savings and
time deposit accounts during the third and fourth quarters of 1998. The rates
paid on the Company's interest-bearing liabilities decreased from 5.69% to
5.27%, or 42 basis points, during the quarter ended March 31, 1999, compared
to the same period in 1998. The decrease in the rates paid on the Company's
interest-bearing liabilities reflects both the decline in market interest
rates between these periods and the rate reduction on the Company's savings
products at the beginning of the first quarter of 1999.
The increase to the interest bearing liabilities average balances
for the first quarter of 1999 as compared to 1998 reflects the aggressive
growth in the Company's savings products during the third and fourth quarters
of 1998. While the first quarter of 1999 reflected an overall runoff in
deposit liabilities, this decline did not exceed the cumulative growth in
these products during the second, third and fourth quarters of 1998.
Interest expense on savings accounts increased $535,000 or 20.8% to
$3.1 million for the quarter ending March 31, 1999 compared to the first
quarter of 1998. This increase was the result of a $65.3 million or a 32.9%
increase in the average balance of savings accounts. This increase was
partially offset by a decline of 47 basis points in the rates paid on the
Company's savings accounts.
Interest expense on certificates of deposits increased $482,000 or
24.7% to $2.4 million for the quarter ended 1999 as compared to 1998. This
increase reflects a $45.1 million or 33.5% increase in the average balances
of certificates of deposits. Partially offsetting this increase was a 39
basis point decrease in the rates paid on the Company's certificates of
deposits.
Interest expense on money market checking accounts increased $41,000
or 19.0% during the first quarter of 1999 as compared to 1998. This increase
reflects a $6.1 million or 34.6% increase in the average balances in the
Company's money market
10
<PAGE>
checking accounts. Partially offsetting this increase was a 58 basis point
decrease in the rates paid on the Company's money market checking.
Interest expense on term borrowing increased $309,000 or 39.4%
during the first quarter of 1999 as compared to 1998. This increase reflects
a $23.4 million or 43.1% increase in the average balance of term borrowings.
This was partially offset by a 15 basis point decline in the rates paid for
term borrowings.
Interest expense on reverse repurchase agreements decreased $142,000 or
28.6% during the first quarter of 1999 as compared to 1998. This decrease
reflects a $8.3 million or 24.0% decrease in the average balance of reverse
repurchase agreements.
PROVISION FOR LOAN LOSSES
During the quarter ended March 31, 1999, the Company's provision for
loan loss increased by $460,000 to $660,000, compared to the same period in
1998. The increase in the provision is the result of management's evaluation of
current portfolio loan loss exposure. The increase to the provision for the
first quarter of 1999, primarily reflects the growth in the Company's loan
portfolio. Although the Company maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations. The calculation of the
adequacy of the allowance for loan losses is based on several factors, including
underlying loan collateral values, delinquency trends and historical loan loss
experience. The ratio of nonaccrual loans to total loans, net of deferred loan
fees, was 0.75% at March 31, 1999 and 0.00% at December 31, 1998. The ratio of
the allowance for loan losses to nonaccrual loans was 2.25% at March 31, 1999
and 0.00% at December 31, 1998. The allowance for loan losses as a percentage of
loans stood at 1.68% at March 31, 1999, compared to 1.74% at December 31, 1998.
NONINTEREST INCOME
Noninterest income for the quarter ended March 31, 1999 increased by
$770,000 to $971,000. This increase was primarily the result of $515,000 gains
on the sale of investment securities, $96,000 gains on the sale of SBA loans,
and a higher loan origination income.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter ended March 31, 1999:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE ANALYSIS For the Quarter Ended March 31
- --------------------------------------------------------------------------------------------------------------------
AMOUNTS CHANGE
(DOLLARS IN THOUSANDS) 1999 1998 $ %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Valuation adjustments to other real estate owned $ 43 $ - $ 43 100.0%
Other real estate owned expense 18 44 (26) (144.4%)
Salaries and employee benefits 1,740 1,357 383 22.0%
Net occupancy expenses 442 391 51 11.5%
Advertising and promotion 192 64 128 66.7%
FDIC insurance premiums 12 10 2 16.7%
Credit and collections expenses 10 13 (3) (30.0%)
Communication and information systems 212 191 21 9.9%
Other expenses 267 231 36 13.5%
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,936 $2,301 635 21.6%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the quarter ended March 31, 1999 increased
$635,000, or 21.63%, over the same period in 1998. These changes are detailed on
the table above and significant changes in noninterest expense are described
below.
The valuation adjustment to OREO for the first quarter ended March 31,
1999 increased by $43,000 compared to the same period in 1998. The Company
recorded OREO valuation adjustment on two OREO properties in 1999, while no OREO
property writedowns were necessary during the first quarter of 1998.
Salaries and employee benefits for the quarter ended March 31, 1999,
increased by $383,000, or 22.0%, as compared to the same period in 1998. The
increase is partially the result of an increased to the Company's marketing and
administrative bonus accrual made during the first quarter in 1999 versus 1998.
In addition, the Company provided an approximate 4% salary increase to most
employee base salaries in January 1999. In addition, the Company has increased
its overall staffing levels between these respective periods.
Net occupancy expense increased by $51,000 or 11.5% compared to the
same period of last year. This increase reflects the opening of the Company's
loan production offices in Oregon, Washington, and Arizona.
Advertising and promotional cost increased for the quarter ended
March 31, 1999 by $128,000 or 66.7% compared to the same period in 1998. This
increase reflects the advertising program implemented by the Company
beginning in the third quarter of 1998. The Company has implemented a
commercial real estate loan advertising program that will be applied
consistently throughout the remainder of 1999.
11
<PAGE>
Communication and information systems cost increased $21,000 or 9.9%
as compared to the same period of last year. This increase also reflects the
opening of the Company's loan production offices, in addition to installing
and upgrading a portion of the Company's computer hardware and software
systems.
Other expenses increased by $36,000 or 13.5% for the quarter ended
March 31, 1999 as compared to 1998. This increase reflects the additional
cost associated with the higher volume in loan origination activity for the
quarter ending March 31, 1999.
INCOME TAX PROVISION
For the quarters ended March 31, 1999 and 1998, the Company
estimated its provision for income taxes at $849,000 or 39.0% and $765,000 or
41.0%, respectively. The difference between the Company's statutory tax rate
and its effective tax rate, for the quarters ended March 31, 1999 and 1998,
was due to California tax deductions (credits) generated by the Company on
loans made in special tax zones within California. In addition adjustments
have been made to tax valuation reserves for the quarter ended March 31,
1999, as a result of settlements made with the IRS on prior year tax returns.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN BALANCE SHEET
MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998
Total assets of the Company decreased to $588.2 million at March 31,
1999 from $645.3 million at December 31, 1998, a $57.1 million decrease. The
investment securities portfolio decreased by $84.6 million through active
liquidation of investment securities. Borrowings in reverse repurchase
agreements were reduced by $24.3 million to $6.5 million at March 31, 1999.
Additionally, the Company decreased its term borrowings by $5.5 million to $73.9
million at March 31, 1999.
The Company increased its holdings in investment securities during the
first three quarters of 1998 with the intention of liquidating a portion of
these securities to fund loans as anticipated loan demand improved during 1999.
In the first quarter of 1999, this began to occur as the Company was able to
sell selected investment securities and use the proceeds to fund higher rate
yielding loans. As of March 31, 1999, net loans, had increased by $49.4 million
while investment securities had declined by $84.6 million during this same
period. Investment securities liquidation, in addition to funding loan growth,
was used to cover the decline in deposit runoff experienced by the Bank in the
first quarter.
Loans, net of deferred fees and the allowance for loan losses,
increased by $49.4 million to $332.9 million at March 31, 1999, from $283.5
million at December 31, 1998. The Company originated and purchased $61.8 million
in new real estate and business loans during the first three months ended March
31, 1999. Off-setting these originations, the Company experienced $10.9 million
in loan payoffs and sold $1.3 million of SBA loans during the three months ended
March 31, 1999.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at March 31, 1999 increased by $668,000
from the level at December 31, 1998, and represents 1.68% of outstanding loans
at March 31, 1999. The increase in the general loan loss reserve from $5.02
million at December 31, 1998 to $5.69 million at March 31, 1999 reflects a
recovery of $8,000, in addition to the $660,000 in loan loss provision added to
the reserve for the first quarter of 1999. The increase in the provision for
loan losses directly increased the allowance for loan losses, and reflects the
growth in the Company's loan portfolio. Management and the Board of Directors
regularly review loan performance and the adequacy of the allowance for loan
losses.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and valuation adjustment to OREO as of the
dates or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
PERIOD ENDED MARCH 31,
ALLOWANCE FOR LOAN LOSSES ----------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 5,024 $ 4,100
Commercial real estate mortgages:
Chargeoffs - -
Recoveries 8 7
Provision for loan losses: 660 200
- ------------------------------------------------------------------------------------------
Balance at end of period: $ 5,692 $ 4,307
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.68% 1.83%
Net loan (recoveries)/charge-offs $ (8) $ (7)
Valuation adjustment to OREO 43 -
- ------------------------------------------------------------------------------------------
Total net loan (recoveries)/charge-offs & OREO valuation adjustment $ 35 $ (7)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
NON-PERFORMING AND RESTRUCTURED ASSETS
The following table sets forth loans accounted for on a nonaccrual
basis, OREO and loans that were impaired due to the loans being restructured at
the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $2,527 $ -
Other real estate owned 510 806
- --------------------------------------------------------------------------------
Total nonaccrual loans and OREO $3,037 $ 806
- --------------------------------------------------------------------------------
Total nonperforming assets to total assets 0.52% 0.12%
- --------------------------------------------------------------------------------
Other impaired loans (restructured loans) $ - $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NONACCRUAL LOANS
Nonaccrual loans are loans, not classified as "troubled debt
restructurings" or OREO, and that are 60 days or more delinquent and show
little or no current payment ability. These loans are supported, however, by
collateral or cash flow that support the collectibility of the Company's
remaining book balance, after consideration of the allowance for loan losses.
The Company had four nonaccrual loans at March 31, 1999, totaling $2.53
million. Nonaccrual loan balances are net of any prior write-offs, but any
specifically assigned portions of the general allowance for loan losses are
not deducted from the nonaccrual loan balances above.
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by
the Company. The Company had one property in this category at March 31, 1999,
totaling $510,000. The Company recorded a valuation write down of $13,000 on
the OREO that it sold during the first quarter of 1999, and $30,000 on the
one property remaining in this category at March 31, 1999. The Company makes
valuation adjustments to its OREO, based on the most recent collateral
appraisal data and other relevant information which effectively reduces the
book value of such assets to the estimated fair market value less selling
cost of the properties. The fair value of the real estate takes into account
the real estate values net of expenses such as brokerage commission, past due
property taxes, property repair expenses, and other items. The estimated sale
price does not necessarily reflect the appraisal values which management
believes, in some cases, may be higher than what could be realized in a sale
of the OREO.
REVERSE REPURCHASE AGREEMENTS
The Company decreased its short term borrowing at March 31, 1999 by
$24.3 million to $6.5 million, from $30.8 million at December 31, 1998. The
rates paid on this short term debt average 5.47% during the first quarter of
1999. The Company continued to utilize these borrowing lines to cover short
term financing needs for loan originations and fundings. The Company
maintains four short term borrowing lines with national brokers aggregating
$95.0 million in availability. At March 31, 1999 the Company had $88.5
million in unused short term borrowing availability against these four
borrowing facilities.
TERM BORROWINGS
The Company reduced its term borrowings by $5.5 million during the
first quarter of 1999. The Company has a total of $140.0 million of term
borrowing lines, of which $73.9 million had been borrowed against at March
31, 1999. This debt is secured by pledging specific amounts of specific
securities of the Company's U.S. government sponsored agency securities
portfolio. Several of these secured borrowing have an original five year
maturity with a two-year, one-time call option. The table reflects the
attributes of the Company's term borrowings.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) RATE CALL DATE MATURITY DATE AMOUNT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.82% five-year term borrowings 5.82% 09/99 09/02 $ 25,000
5.78% five-year term borrowings 5.78% 10/99 10/02 10,000
5.63% five-year term borrowings 5.63% 12/99 12/02 10,000
5.48% five-year term borrowings 5.48% 01/00 01/03 10,000
5.64% one-year term borrowings 5.64% - 04/99 18,950
- ----------------------------------------------------------------------------------------------------------------
Total term borrowings $ 73,950
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital
that will support consistent and sustained asset growth, anticipated credit
risks and to ensure that regulatory and industry capital guidelines and
standards are maintained. Pacific Crest Bank is subject to leverage and
risk-based capital adequacy standards applicable to FDIC insured
institutions. At March 31, 1999, Pacific Crest Bank was in compliance with
all such capital requirements.
13
<PAGE>
Shareholders' equity decreased by $629,000 to $29.5 million at March
31, 1999. This decrease reflects the following activity. Other comprehensive
income net of tax decreased by $1.69 million as the investment securities
portfolio was repriced downward due to an increase in market interest rates
at March 31, 1999. The Company purchased 15,000 shares of common stock under
its stock repurchase plan. These treasury shares cost the Company $227,000.
The Company declared and paid a cash dividend of $0.05 per common share
during the first quarter of 1999, totaling $134,000. Partially offsetting the
decrease to capital was the recording of $1.3 million of net income for the
first quarter of 1999, and the increase to capital of $89,000 for the
issuance of stock to employees and directors, under the Company's employee
stock purchase plan, non-employee directors' stock purchase plan and the
employee's stock option plan.
On May 11, 1999, the Company announced that the Board of Directors
had declared a $0.06 per common share cash dividend for the second quarter of
1999. The dividend will be paid to shareholders of record at the close of
business June 4, 1999 and is payable on June 18, 1999.
Pacific Crest Bank is required to maintain certain minimum capital
levels and must maintain certain capital ratios to be considered "well
capitalized" under the prompt corrective action provisions of the FDIC
Improvement Act.
The following table sets forth Pacific Crest Bank's regulatory capital
ratios at March 31, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1998
REGULATORY CAPITAL RATIOS --------------------------------------------------------------------------------
PACIFIC CREST BANK Required Actual Excess Required Actual Excess
- ----------------------------------------------------- ----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 6.83% 2.83% 4.00% 6.81% 2.81%
Tier 1 risk-based capital ratio 4.00% 10.46% 6.46% 4.00% 10.67% 6.67%
Total risk-based capital ratio 8.00% 11.71% 3.71% 8.00% 11.92% 3.92%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 reasonable
predictable source of funds, deposit flows and mortgage loan prepayments are
greatly influenced by the level of interest rates, economic conditions, and
competition.
The Company's holdings of cash and cash equivalents during the three
months ended March 31, 1999 decreased $20.7 million to $4.9 million at March
31, 1999 from $25.6 million at December 31, 1998. The decline in the
Company's cash equivalents during the first quarter of 1999 was utilized in
financing the Company's first quarter net loan growth, deposit liability
runoff and paying down a portion of the Company's term borrowings.
Loans, net of deferred fees and the allowance for loan losses,
increased by $49.4 million to $332.9 million at March 31, 1999, from $283.5
million at December 31, 1998. The Company originated $52.8 million and
purchased 9.0 million, for a total of $61.8 million in new real estate and
business loans during the quarter ended March 31, 1999. Off-setting these
originations, the Company experienced $10.9 million in loan payoffs and sold
$1.3 million in SBA loans during the quarter ended March 31, 1999.
The Company experienced a decline in its interest bearing deposits
of $27.8 million during the first quarter of 1999. This decline was primarily
the result of the Company lowering rates on its savings, money market
checking, and time deposits at the beginning of January 1999. The Company
lowered deposit rates by approximately 61 basis points on both its saving and
money market checking accounts at that time. The Company had anticipated
between a 4 and 6% runoff in deposit liability would be experienced after its
deposit rate decline, as the interest sensitivity accounts would be redeemed.
The Company experienced a $17.6 million deposit runoff in its saving
accounts, and $10.1 million deposit runoff in its certificates of deposits.
In order to reduce its overnight short term borrowings, the Company
paid down its reverse repurchase agreements by $24.3 million and paid down
its term borrowings by $5.5 million during 1999.
The growth of the Company's loans, the decline in the Company's
deposit liabilities and the payoff of the Company's short term and term
borrowings were financed in part through liquidating $85.2 million in the
Company's investment securities portfolio. The partial liquidation of the
securities portfolio to finance the Company's net loan growth, to cover the
deposit liability runoff and to pay down term borrowings were consistent with
the Company's 1999 strategic operating plan.
The liquidity of the parent company, Pacific Crest, is dependent on
several factors, including the payment of cash dividends by its subsidiary,
Pacific Crest Bank, or the ability to secure borrowings. Without dividends
from Pacific Crest Bank, Pacific Crest must rely solely on existing cash,
investments, or the ability to secure borrowings. On May 11, 1999, the
Company announced that the Board of Directors had declared a $0.06 per common
share cash dividend for the second quarter of 1999. The dividend will be paid
to shareholders of record at the close of business June 4, 1999 and is
payable on June 18, 1999. Cash plus investments less current liabilities and
short-term debt totaled $5.8 million at March 31, 1999. This amount is
necessary to pay future operating expenses, existing current liabilities, the
interest cost associated with the subordinated debt security and for the
possible infusion of capital into Pacific Crest Bank. The interest on the
Junior Subordinated Debentures will be paid by Pacific Crest to the Trust,
and represents the sole revenues of the Trust and the source of dividend
distributions by the Trust to the holders of the Capital Trust Securities.
Pacific Crest Bank's ability to pay dividends to Pacific Crest is
restricted by California state law, which requires that sufficient retained
earnings are available to pay the dividend. Pacific Crest Bank had retained
earnings of $10.5 million of which $1.5 million was unrestricted and
available for dividend payments at March 31, 1999. The Bank declared and paid
a $280,000 first quarter 1999 cash dividend to the Parent Company on March
18, 1999. On May 11, 1999, the Bank announced that the Board of Directors had
declared a $300,000 second quarter cash dividend payable to the parent
Company on June 18, 1999. The Bank anticipates that it will continue to
declare and pay quarterly dividends to the Parent Company during 1999.
14
<PAGE>
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 10q 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 second 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 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 10q 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 second, third and fourth quarters of
1999. 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.
15
<PAGE>
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%. 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.
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 March 31, 1999 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.
16
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
EXPECTED MATURITY DATES OR REPRICING DATE BY YEAR
------------------------------------------------------------------------------------------
FAIR
VALUE AT
(DOLLARS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 3/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS:
ASSETS:
Repurchase agreements (1) $ 3,113 $ - $ - $ - $ - $ - $ 3,113 $ 3,113
average yield (variable rate) 4.61% - - - - - 4.61%
U.S. Government sponsored agency securities
available for sale (2) 5,031 - - - - 231,654 236,685 236,685
average yield (fixed rate) 6.44% - - - - 6.68% 6.67%
Total loans gross (3) 183,085 18,309 34,247 16,696 25,616 61,057 339,010 342,400
average yield 10.02% 9.90% 9.20% 8.25% 9.10% 8.40% 9.60%
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings accounts (1) $ 258,441 - - - - - $258,441 $258,441
average rates (variable rate) 4.70% - - - - - 4.70%
Money market checking (1) 23,774 - - - - - 23,774 23,774
average rates (variable rate) 4.38% - - - - - 4.38%
Certificates of deposit (4) 169,570 1,982 512 805 - - 172,869 172,869
average rates (fixed rate) 5.43% 5.83% 5.98% 5.75% - - 5.43%
Reverse repurchase agreements (1) 6,500 - - - - - 6,500 6,500
average rates (variable rate) 5.65% - - - - - 5.65%
Term borrowings (5) 18,950 - 45,000 10,000 - - 73,950 75,042
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.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Not applicable.
(b) REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K during the quarter ended
March 31, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
Date: May 17, 1999 /s/ Gary Wehrle
--------------------------- --------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: May 17, 1999 /s/ Robert J. Dennen
--------------------------- --------------------------------------
Robert J. Dennen
Senior Vice President, Chief Financial
Officer, Corporate Secretary
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PACIFIC CREST CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912048
<NAME> PACIFIC CREST CAPITAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,878
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 236,685
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 338,588
<ALLOWANCE> 5,692
<TOTAL-ASSETS> 588,173
<DEPOSITS> 455,084
<SHORT-TERM> 6,500
<LIABILITIES-OTHER> 5,878
<LONG-TERM> 91,200
29,511
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 588,173
<INTEREST-LOAN> 7,505
<INTEREST-INVEST> 4,733
<INTEREST-OTHER> 211
<INTEREST-TOTAL> 12,449
<INTEREST-DEPOSIT> 5,794
<INTEREST-EXPENSE> 7,647
<INTEREST-INCOME-NET> 4,802
<LOAN-LOSSES> 660
<SECURITIES-GAINS> 515
<EXPENSE-OTHER> 2,936
<INCOME-PRETAX> 2,177
<INCOME-PRE-EXTRAORDINARY> 2,177
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,328
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.16
<LOANS-NON> 2,527
<LOANS-PAST> 2,527
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,000
<ALLOWANCE-OPEN> 5,024
<CHARGE-OFFS> 0
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 5,692
<ALLOWANCE-DOMESTIC> 5,692
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
