\<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 SEPTEMBER 30, 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 or 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
--- ---
The number of shares outstanding of issuer's $ .01 par value common stock as of
November 5, 1999, was 2,636,864.
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.
SEPTEMBER 30, 1999 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998..................... 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998...... 2
Consolidated Statements of Shareholders' Equity
Nine Months Ended September 30, 1999 and 1998................ 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998................ 4
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 23
Item 2. Changes in Securities.......................................... 23
Item 3. Defaults Upon Senior Securities................................ 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
Item 5. Other Information.............................................. 23
Item 6. Exhibits and Reports on Form 8-K............................... 23
</TABLE>
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ---------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Cash $ 2,356 $ 3,592
Securities purchased under resale agreements 765 22,048
-------------- ---------------
Cash and cash equivalents 3,121 25,640
-------------- ---------------
Investment securities available for sale,
at market (Note 2) 239,873 321,261
Loans:
Commercial mortgage 354,526 278,614
Residential mortgage 572 1,194
Commercial business/SBA/other 5,097 4,476
SBA loans held for sale, at lower of cost or market 4,810 4,784
-------------- ---------------
Gross loans 365,005 289,068
Less: deferred loan fees 379 582
Less: allowance for loan losses 6,252 5,024
-------------- ---------------
Net loans 358,374 283,462
-------------- ---------------
Accrued interest receivable 6,516 8,241
Prepaid expenses and other assets 2,101 2,102
Deferred income taxes 6,515 2,911
Other real estate owned - 806
Premises and equipment 907 881
-------------- ---------------
Total assets $ 617,407 $ 645,304
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Savings accounts $ 226,999 $ 276,011
Certificates of deposit 247,749 182,979
Money market checking accounts 20,435 23,849
-------------- ---------------
Total deposits 495,183 482,839
Securities sold under repurchase agreements 20,500 30,779
Term borrowings 50,000 79,450
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures
("Trust preferred securities") 17,250 17,250
-------------- ---------------
Total interest-bearing liabilities 582,933 610,318
Accrued interest and other liabilities 7,027 4,846
-------------- ---------------
Total liabilities 589,960 615,164
-------------- ---------------
SHAREHOLDERS' EQUITY (Note 4):
Common stock, $.01 par value (10,000,000 shares authorized, 2,986,530
shares issued at September 30, 1999 and December 31, 1998) 30 30
Additional paid-in capital 27,885 28,057
Retained earnings 8,882 5,559
Accumulated other comprehensive income (loss) (4,181) 1,199
Common stock in treasury, at cost (329,666 shares at
September 30, 1999 and 295,500 shares at December 31, 1998) (5,169) (4,705)
-------------- ---------------
Total shareholders' equity 27,447 30,140
-------------- ---------------
Total liabilities and shareholders' equity $ 617,407 $ 645,304
-------------- ---------------
-------------- ---------------
Book value per common share (Note 3) $ 10.33 $ 11.20
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 8,533 $ 6,267 $ 24,247 $ 18,795
Securities purchased under resale agreements 58 15 397 52
Investment securities:
Available for sale 3,832 5,103 12,037 13,845
Held to maturity - 95 - 286
------------ ------------ ------------ ------------
Total interest income 12,423 11,480 36,681 32,978
INTEREST EXPENSE:
Deposits:
Savings accounts 2,876 2,708 8,984 7,840
Certificates of deposit 3,151 2,472 7,997 6,632
Money market checking accounts 241 241 747 683
------------ ------------ ------------ ------------
Total interest expense on deposits 6,268 5,421 17,728 15,155
Securities sold under repurchase agreements 115 450 589 1,199
Term borrowings 796 1,119 2,746 2,939
Trust preferred securities 404 404 1,213 1,213
------------ ------------ ------------ ------------
Total interest expense 7,583 7,394 22,276 20,506
------------ ------------ ------------ ------------
Net interest income 4,840 4,086 14,405 12,472
Provision for loan losses 400 240 1,455 670
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 4,440 3,846 12,950 11,802
NON-INTEREST INCOME:
Loan prepayment and late fee income 225 152 593 657
Gain on sale of investment securities - 209 586 209
Gain on sale of SBA loans - 50 175 187
Gain on sale of commercial real estate loans - - - 336
Gain on sale of other real estate owned - - 25 83
Other income 237 155 713 368
------------ ------------ ------------ ------------
Total non-interest income 462 566 2,092 1,840
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,665 1,376 5,139 4,314
Net occupancy expenses 412 375 1,284 1,185
Communication and data processing 254 193 689 572
Advertising and promotion 101 138 508 317
FDIC insurance premiums 13 11 39 32
Credit and collection expenses - 39 36 127
Other real estate owned expenses - 38 35 203
Valuation adjustments to other real estate owned - - 43 50
Other expenses 343 189 972 719
------------ ------------ ------------ ------------
Total non-interest expense 2,788 2,359 8,745 7,519
------------ ------------ ------------ ------------
Income before income taxes 2,114 2,053 6,297 6,123
Income tax provision 873 792 2,521 2,461
------------ ------------ ------------ ------------
Net income $ 1,241 $ 1,261 $ 3,776 $ 3,662
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS PER COMMON SHARE (NOTE 5):
Basic $ 0.47 $ 0.45 $ 1.41 $ 1.28
Diluted $ 0.45 $ 0.43 $ 1.35 $ 1.21
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(dollars and shares in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK ADDITIONAL IN TREASURY
------------------------ -------------------------
SHARES AMOUNT PAID-IN CAPITAL SHARES AMOUNT
------------ ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,972 $ 30 $ 27,914 (85) $ (1,174)
Comprehensive income:
Net income - - - - -
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $3,439 - - - - -
Total comprehensive income
Issuance of common stock:
Under employee stock purchase
plan 6 - 63 - -
Under employee stock option plan 7 - 36 - -
Purchase of common stock in treasury - - - (171) (2,957)
Cash dividends paid - - - - -
------------ ----------- ---------------- ------------ ------------
Balances at September 30, 1998 2,985 $ 30 $ 28,013 (256) $ (4,131)
------------ ----------- ---------------- ------------ ------------
------------ ----------- ---------------- ------------ ------------
Balances at December 31, 1998 2,986 $ 30 $ 28,057 (296) $ (4,705)
Comprehensive income:
Net income - - - - -
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $3,956 - - - - -
Total comprehensive income
Issuance of common stock in treasury:
Under employee stock purchase
plan - - (12) 4 66
Under non-employee directors'
stock purchase plan - - 2 39
Under employee stock option plan - - (160) 17 264
Purchase of common stock in treasury - - (57) (833)
Cash dividends paid - - - -
------------ ----------- ---------------- ------------ ------------
Balances at September 30, 1999 2,986 $ 30 $ 27,885 (330) $ (5,169)
------------ ----------- ---------------- ------------ ------------
------------ ----------- ---------------- ------------ ------------
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE SHAREHOLDERS'
EARNINGS INCOME (LOSS) EQUITY
------------ ---------------- ----------------
<S> <C> <C> <C>
Balances at December 31, 1997 $ 849 $ 1,189 $ 28,808
Comprehensive income:
Net income 3,662 - 3,662
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $3,439 - 4,482 4,482
----------------
Total comprehensive income 8,144
Issuance of common stock:
Under employee stock purchase
plan - - 63
Under employee stock option plan - - 36
Purchase of common stock in treasury - - (2,957)
Cash dividends paid - - -
------------ ---------------- ----------------
Balances at September 30, 1998 $ 4,511 $ 5,671 $ 34,094
------------ ---------------- ----------------
------------ ---------------- ----------------
Balances at December 31, 1998 $ 5,559 $ 1,199 $ 30,140
Comprehensive income:
Net income 3,776 - 3,776
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $3,956 - (5,380) (5,380)
----------------
Total comprehensive loss (1,604)
Issuance of common stock in
treasury:
Under employee stock purchase
plan - - 54
Under non-employee directors'
stock purchase plan - - 39
Under employee stock option plan - - 104
Purchase of common stock in treasury - - (833)
Cash dividends paid (453) - (453)
------------ ---------------- ----------------
Balances at September 30, 1999 $ 8,882 $ (4,181) $ 27,447
------------ ---------------- ----------------
------------ ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,776 $ 3,662
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 1,455 670
Gain on sale of investment securities (586) (209)
Gain on sale of SBA loans (175) (187)
Gain on sale of commercial real estate loans - (336)
Gain on sale of other real estate owned (25) (83)
Valuation adjustments to other real estate owned 43 50
Depreciation and amortization of premises and equipment 243 204
Accretion of deferred loan fees (273) (435)
Accretion of discount on investment securities (36) (6)
Changes in operating assets and liabilities:
Accrued interest receivable 1,725 (1,613)
Prepaid expenses and other assets 1 (162)
Deferred income taxes 350 (394)
Accrued interest and other liabilities 2,181 2,356
--------------- --------------
Net cash provided by operating activities 8,679 3,517
--------------- --------------
INVESTING ACTIVITIES:
Purchase of investment securities
available for sale (90,474) (265,611)
Proceeds from sale and call of investment securities
available for sale 163,148 173,825
Loan originations (115,987) (63,288)
Purchase of loans (9,017) -
Proceeds from sale of SBA loans 3,115 2,072
Proceeds from sale of commercial real estate loans - 7,831
Principal payments on loans 45,970 46,484
Proceeds from sale of other real estate owned 789 1,264
Purchase of premises and equipment, net (268) (362)
--------------- --------------
Net cash used in investing activities (2,724) (97,785)
--------------- --------------
FINANCING ACTIVITIES:
Net (decrease) increase in savings accounts (49,012) 9,517
Net increase in certificates of deposit 64,770 48,444
Net (decrease) increase in money market checking accounts (3,414) 2,101
Net (decrease) increase in securities sold under repurchase agreements (10,279) 5,000
Net (decrease) increase in term borrowings (29,450) 33,000
Purchase of common stock in treasury, at cost (833) (2,957)
Cash dividends paid (453) -
Proceeds from exercise of stock options 104 -
Proceeds from employees and directors stock purchase plans 93 99
--------------- --------------
Net cash (used in) provided by financing activities (28,474) 95,204
--------------- --------------
Net (decrease) increase in cash and cash equivalents (22,519) 936
Cash and cash equivalents at beginning of period 25,640 2,392
--------------- --------------
Cash and cash equivalents at end of period $ 3,121 $ 3,328
--------------- --------------
--------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The interim consolidated 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., ("Pacific Crest" or the "parent"), together with its
wholly owned subsidiaries, Pacific Crest Bank (the "Bank") and PCC Capital I
("PCC Capital"), 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.
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 consolidated financial statements,
and the results of its operations for the interim period ended September 30,
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.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included
in the Company's 1998 Annual Report on Form 10-K.
NOTE 2. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance
sheets according to management's intent and ability. Securities classified as
available for sale are recorded at fair value. Unrealized gains or losses on
securities available for sale are reflected in "Accumulated Other Comprehensive
Income," net of tax effect, as a separate component of "Shareholders' Equity."
The amortized cost of securities and their approximate fair values at September
30, 1999 and December 31, 1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
----------------------------
SEPTEMBER 30, 1999 COST GAINS LOSSES VALUE
- ---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government agency securities $ 245,219 $ - $ (7,228) $ 237,991
Corporate debt securities 1,863 19 1,882
------------ ------------ ------------ ------------
Total investment securities $ 247,082 $ 19 $ (7,228) $ 239,873
------------ ------------ ------------ ------------
DECEMBER 31, 1998
- ----------------------
Investment securities available for sale:
U.S. government agency securities $ 307,421 $ 2,113 $ (9) $ 309,525
Corporate debt securities 11,713 31 (8) 11,736
------------ ------------ ------------ ------------
Total investment securities $ 319,134 $ 2,144 $ (17) $ 321,2617
------------ ------------ ------------ ------------
</TABLE>
NOTE 3. COMPUTATION OF BOOK VALUE 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 held in
treasury. The tables below present the computation of book value per common
share at September 30, 1999 and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Total shareholders' equity $ 27,447 $ 30,140
---------------- -----------------
Common shares issued 2,986,530 2,986,530
Less: common shares held
in treasury (329,666) (295,500)
---------------- -----------------
Common shares outstanding 2,656,864 2,691,030
---------------- -----------------
---------------- -----------------
Book value per common share $ 10.33 $ 11.20
</TABLE>
5
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 4. PREFERRED STOCK
As of September 30, 1999 and December 31, 1998, there were 2,000,000 shares
of the Company's $.01 par value preferred stock authorized and no shares issued
or outstanding.
NOTE 5. COMPUTATION OF EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share for the three and nine months
ended September 30, 1999 and 1998, were determined by dividing net income by the
applicable basic and diluted weighted average common shares outstanding. For the
diluted earnings per share computation, the weighted average common shares
outstanding were adjusted to reflect the number of common stock equivalents
outstanding based on the number of outstanding stock options issued by the
Company utilizing the treasury stock method.
The tables below present the basic and diluted earnings per share
computations for the three and nine months ended September 30, 1999 and 1998
(dollars and shares in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,241 $ 1,261 $ 3,776 $ 3,662
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
Basic weighted average common
shares outstanding 2,657 2,803 2,672 2,857
Dilutive effect of stock options 120 150 123 161
----------- ------------- ------------ ------------
Diluted weighted average common
shares outstanding 2,777 2,953 2,795 3,018
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
Earnings per common share:
Basic $ 0.47 $ 0.45 $ 1.41 $ 1.28
Diluted $ 0.45 $ 0.43 $ 1.35 $ 1.21
</TABLE>
NOTE 6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include "Cash" and "Securities purchased under resale
agreements." Supplemental disclosure of cash flow information is as follows
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 22,539 $ 20,102
Income taxes $ 2,825 $ 2,865
Non-cash investing and financing activities:
Transfers from loans to other real estate owned $ - $ 206
</TABLE>
6
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 7. CURRENT ACCOUNTING PRONOUNCEMENTS
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 on the balance sheet 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 accumulated other comprehensive income if
criteria are met.
SFAS 133 was originally scheduled to be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. However, the FASB
subsequently issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133" which amended the effective
date of the application of SFAS 133 to be effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Initial application of SFAS
133 must be as of the beginning of an entity's fiscal quarter. SFAS 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not believe that when adopted, SFAS 133 will have a material
impact on its operations and financial position.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced the consolidated results of operations and financial
condition of the Company for the three and nine months ended September 30,
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 in this report.
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning
the Company for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
----------------------------------------------------------------
9/30/1999 6/30/1999 3/31/1999 12/31/1998 9/30/1998
------------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCES:
Average loans $ 360,404 $ 345,237 $ 315,498 $ 264,167 $ 230,400
Average investment securities 236,968 211,991 285,243 320,632 311,378
Average interest-earning assets 602,034 568,254 617,191 597,675 542,745
Average assets 605,856 576,889 626,086 603,560 550,803
Average deposits 490,966 456,156 467,770 456,129 391,301
Average borrowings 79,514 86,041 121,255 112,765 125,361
Average equity 29,057 28,730 30,013 32,076 30,262
PERFORMANCE RATIOS:
Return on average assets (1) 0.82% 0.84% 0.85% 0.78% 0.92%
Return on average common equity (1) 16.11% 16.12% 18.20% 16.79% 17.63%
Operating expense to average assets (2) 1.84% 2.06% 1.83% 1.82% 1.66%
Efficiency ratio (3) 52.60% 55.90% 54.50% 59.20% 51.40%
Net interest margin (4) 3.19% 3.36% 3.16% 2.81% 2.99%
CAPITAL RATIOS (5):
Leverage capital ratio (6) 7.20% 7.36% 6.83% 6.81% 7.23%
Tier 1 risk-based capital ratio 10.31% 10.35% 10.46% 10.67% 12.44%
Total risk-based capital ratio 11.56% 11.60% 11.71% 11.92% 13.69%
ASSET QUALITY RATIOS:
Allowance for loan losses to total gross loans 1.71% 1.71% 1.68% 1.74% 2.00%
Allowance for loan losses to non-accrual loans 2660.43% - 225.00% - -
Total non-performing assets to total assets (7) 0.04% - 0.52% 0.12% 0.17%
LOAN VOLUME:
Loan originations $ 27,129 $ 36,016 $ 52,842 $ 45,551 $ 29,944
Loan purchases - - 9,017 19,380 -
Loan sales - SBA - 1,655 1,285 697 513
Loan sales - commercial real estate - - - 1,976 -
- --------------------------------------------------
</TABLE>
(1) Calculations are based upon annualized net income. The calculation of
average common equity excludes accumulated other comprehensive income.
(2) Operating expense is defined as total non-interest expense less valuation
adjustments to OREO, other OREO expenses and credit and collection
expenses.
(3) Efficiency ratio is defined as operating expense divided by the sum of
net interest income plus loan prepayment and late fee income plus other
non-interest income.
(4) Net interest margin is calculated by dividing annualized net interest
income by total average interest-earning assets.
(5) Capital ratios of Pacific Crest Bank only. The required ratios for a
"well-capitalized" institution are 5% leverage capital, 6% tier 1
risk-based capital and 10% total risk-based capital.
(6) Calculations are based on average quarterly asset balances of Pacific
Crest Bank.
(7) Non-performing assets include non-accrual loans and other real estate
owned ("OREO") and exclude troubled debt restructurings.
8
<PAGE>
FORWARD-LOOKING INFORMATION
Certain matters discussed under this caption may constitute
forward-looking statements under Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act. There can be no assurance that
the results described or implied in such forward-looking statements will, in
fact, be achieved and actual results, performance, and achievements could
differ materially because the business of the Company involves inherent risks
and uncertainties. Risks and uncertainties include possible future
deteriorating economic conditions in the Company's areas of operation;
interest rate risk associated with volatile interest rates and related
asset/liability matching risks; liquidity risks; risk of significant
non-earning assets, and net credit losses that could occur, particularly in
times of weak economic conditions or times of rising interest rates; risks of
available for sale securities declining significantly in value as interest
rates rise; risks associated with the Year 2000 which could disrupt the
Company's operations; and regulatory risks associated with the variety of
current and future regulations to which the Company is subject. Such risks
include the possibility that appropriate regulatory approvals will not be
obtained for Pacific Crest Bank to convert to a state-chartered bank, or if
regulatory approvals are obtained, that Pacific Crest Bank would have
difficulty or lack of success in implementing on-line banking and checking
account products in the future (See "Bank Charter Conversion" below). Also,
there can be no assurance that preferred lender status in the San Diego
region of the SBA will result in more SBA loans being funded by the Company
in the future, and there can be no assurance that other SBA regions will
approve Pacific Crest Bank as a preferred lender in the future (See
"Preferred Lender Status" below). Risk factors are also discussed in detail
in the Company's 1998 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
EARNINGS PERFORMANCE
Net income was $1.2 million (or $0.45 per common share on a diluted basis)
for the three months ended September 30, 1999, compared to $1.3 million (or
$0.43 per common share on a diluted basis) for the corresponding period in 1998.
The quarterly change in net income reflects a $754,000 increase in net interest
income partially offset by increases of $429,000 and $160,000 in non-interest
expense and provision for loan losses, respectively, as well as a decrease of
$104,000 in non-interest income.
Net income was $3.8 million (or $1.35 per common share on a diluted basis)
for the nine months ended September 30, 1999, compared to $3.7 million (or $1.21
per common share on a diluted basis) for the corresponding period in 1998. The
year-to-date change in net income reflects increases of $1.9 million and
$252,000 in net interest income and non-interest income, respectively, partially
offset by increases of $1.2 million and $785,000 in non-interest expense and
provision for loan losses, respectively.
Annualized return on average common equity was 16.11% and 16.79% for the
three and nine months ended September 30, 1999, respectively, compared to
17.63% and 17.16% for the same periods in 1998. Annualized return on average
assets was 0.82% and 0.84% for the three and nine months ended September 30,
1999, respectively, compared to 0.92% and 0.95% for the same periods last
year.
CAPITAL
Pacific Crest Bank's leverage capital ratio, tier 1 risk-based capital
ratio and total risk-based capital ratio were 7.20%, 10.31% and 11.56%,
respectively, at September 30, 1999, placing the Bank in the
"well-capitalized" category as defined by federal regulations, which require
corresponding capital ratios of 5%, 6% and 10%, respectively, to qualify for
that designation.
The Company's book value per common share was $10.33 at September 30, 1999
compared to $11.20 at December 31, 1998.
DIVIDENDS
On October 29, 1999, the Company announced that the Board of Directors had
declared a $0.07 per common share cash dividend for the fourth quarter of 1999.
The dividend will be paid to shareholders of record at the close of business on
December 1, 1999 and is payable on December 15, 1999. During the first, second
and third quarters of 1999, the Company declared and paid cash dividends of
$134,000 or $0.05 per share, $160,000 or $0.06 per share and $159,000 or $0.06
per share, respectively, for a total of $453,000.
STOCK REPURCHASE PLAN
On October 29, 1999 the Company announced that the Board of Directors had
increased the allotted shares under the Company's common stock repurchase
program by 70,000 to 220,000 from the 150,000 shares previously authorized in
September 1998. During the nine months ended September 30, 1999, the Company
purchased 57,500 shares of its common stock. The total cost of the purchased
shares was approximately $833,000, which resulted in an average cost per share
of $14.48.
On November 4, 1999, the Company purchased 20,000 shares of its common
stock for approximately $293,000 at an average cost per share of $14.63. On a
cumulative basis from September, 1998 through November 4, 1999, the Company
purchased 143,000 shares under this program, leaving 77,000 remaining shares
authorized for repurchase. The total cost of these cumulative shares purchased
was approximately $2.1 million, which resulted in an average cost per share of
$14.51.
The Company utilized repurchased shares for all of its common stock
issuances during the nine months ended September 30, 1999, which totaled 23,334
shares.
CORRESPONDENT LENDING PROGRAM
On October 29, 1999, the Company announced that it has modified its loan
origination system for loans originated outside of Southern California. The
Company is recruiting correspondent loan agents (independent contractors that
are not employees) to represent it in Seattle, Portland, Phoenix, Oakland and
Sacramento and has closed, or is in the process of closing, Company loan
production offices in these cities. These offices had each been staffed with one
loan production officer. Implementing this new origination system should enable
the Company to convert a portion of its fixed loan marketing costs to variable
costs. The changes should be completed before the end of 1999. The Company
does not expect the cost of closing these offices to be material.
9
<PAGE>
BANK CHARTER CONVERSION
During September 1999, Pacific Crest Bank filed an application with the
California Department of Financial Institutions ("DFI") to convert its charter
from a California state chartered industrial bank to a California state
chartered commercial bank. The commercial bank charter will allow the Bank to
offer full-service checking accounts and enable the Bank to pursue full-service
on-line banking. Additionally, Pacific Crest Capital, Inc., the parent company
of Pacific Crest Bank, has filed an application with the Federal Reserve Board
("FRB") to become a bank holding company as required by the bank charter change.
Following the charter conversion, Pacific Crest Bank would continue to be
regulated by the DFI and Federal Deposit Insurance Corporation ("FDIC"), and
Pacific Crest Capital, Inc. would be regulated by the FRB.
The bank charter conversion is subject to regulatory approvals and is
expected to occur in the fourth quarter of 1999.
PREFERRED LENDER STATUS
During October 1999, Pacific Crest Bank was awarded "preferred lender"
status in the United States Small Business Administration's ("SBA") San Diego
region. Preferred lender status is the highest designation granted lenders by
the SBA and should facilitate the marketing and loan approval process for new
SBA loans in the San Diego region. It is the Company's intention to gain
preferred lender status in all of the West Coast SBA regions where Pacific
Crest Bank operates.
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.
The Company has successfully completed the awareness and assessment phase,
the testing and remediation phase, and the validation phase of all critical
systems identified within the Company's Year 2000 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 have all been tested,
remediated, and certified as compliant.
The Company has notified its deposit customers by means of statement
stuffers of Year 2000 issues. In addition, the Company has notified its
borrowing customers by a letter survey to make them aware of Year 2000 issues
and to seek information regarding their preparedness for the Year 2000. Any
borrowers unable to confirm Year 2000 compliance by October 30, 1999 were
evaluated to ensure an adequate specific allocation to the allowance for loan
losses was established. While management believes that the Year 2000 does
represent an area of potential risk for credit losses, it also believes that
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. 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.
The total cost of software and hardware corrections and modifications
related to the Year 2000 issue has been approximately $30,000. The total cost
estimated to purchase new computer software systems, or to have existing systems
modified, is not expected to exceed $50,000 in the fourth quarter of 1999.
Although the Company does not expect any material adverse consequences to occur
as a result of Year 2000 issues, 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.
10
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
NET INTEREST INCOME ANALYSES
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30,
1998
The following table present the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest yields/rates for the periods
presented. All average balances are daily average balances (dollars in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 360,404 $ 8,533 9.39% $ 230,400 $ 6,267 10.79%
Securities purchased under resale agreements 4,662 58 4.94% 967 15 5.95%
Investment securities:
U.S. government agency securities:
Available for sale 236,654 3,826 6.47% 306,379 5,103 6.66%
Held to maturity - - - 4,999 95 7.60%
Corporate debt securities
available for sale 314 6 7.64% - - -
------------ ------------ ----------- ------------ ------------ -----------
Total investment securities 236,968 3,832 6.47% 311,378 5,198 6.68%
------------ ------------ ----------- ------------ ------------ -----------
Total interest-earning assets 602,034 12,423 8.19% 542,745 11,480 8.39%
------------ ----------- ------------ -----------
Other non-interest-earning assets 10,093 12,709
Less: allowance for loan losses 6,271 4,651
------------ ------------
Total assets $ 605,856 $ 550,803
------------ ------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 238,541 $ 2,876 4.78% $201,389 $ 2,708 5.33%
Certificates of deposit 230,801 3,151 5.42% 170,867 2,472 5.74%
Money market checking accounts 21,624 241 4.42% 19,045 241 5.02%
------------ ------------ ----------- ------------ ------------ -----------
Total deposits 490,966 6,268 5.07% 391,301 5,421 5.50%
------------ ------------ ----------- ------------ ------------ -----------
Securities sold under repurchase agreements 7,753 115 5.88% 31,024 450 5.75%
Term borrowings 54,511 796 5.79% 77,087 1,119 5.76%
Trust preferred securities 17,250 404 9.37% 17,250 404 9.37%
------------ ------------ ----------- ------------ ------------ -----------
Total borrowings 79,514 1,315 6.56% 125,361 1,973 6.24%
------------ ------------ ----------- ------------ ------------ -----------
Total interest-bearing liabilities 570,480 7,583 5.27% 516,662 7,394 5.68%
------------ ----------- ------------ -----------
Non-interest-bearing liabilities 6,319 3,879
Shareholders' equity 29,057 30,262
------------ ------------
Total liabilities and shareholders' equity $ 605,856 $ 550,803
------------ ------------
Net interest-earning assets $ 31,554 $ 26,083
------------ ------------
------------ ------------
Net interest income $ 4,840 $ 4,086
------------ ------------
------------ ------------
Net interest rate spread (2) 2.92% 2.71%
----------- -----------
----------- -----------
Net interest margin (3) 3.19% 2.99%
----------- -----------
----------- -----------
Average interest-earning assets to
average interest-bearing liabilities 105.5% 105.0%
- ------------------------------------------------ ------------ ------------
------------ ------------
</TABLE>
(1) Average loans balance is calculated net of deferred loan fees. Includes
non-accrual loans which have a zero yield.
(2) Net interest rate spread represents the yield earned on total average
interest-earning assets less the rate paid on total average
interest-bearing liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
11
<PAGE>
NET INTEREST INCOME ANALYSES
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30,
1998
The following table set 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 periods presented, including
the change in average balance and yield/rate between these periods (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
1999 1998 NET CHANGE
--------------------------------- ------------------------------ ------------------------------
% AVERAGE % AVERAGE % AVERAGE
AVERAGE OF YIELD/ AVERAGE OF YIELD/ AVERAGE OF YIELD/
BALANCE TOTAL RATE BALANCE TOTAL RATE BALANCE TOTAL RATE
---------- --------- --------- ---------- -------- ---------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 360,404 59.9% 9.39% $ 230,400 42.4% 10.79% $130,004 17.5% -1.40%
Securities purchased under
resale agreements 4,662 0.8% 4.94% 967 0.2% 5.95% 3,695 0.6% -1.01%
Investment securities:
U.S. government agency
securities:
Available for sale 236,654 39.3% 6.47% 306,379 56.5% 6.66% (69,725) -17.2% -0.19%
Held to maturity - - - 4,999 0.9% 7.60% (4,999) -0.9% -7.60%
Corporate debt securities
available for sale 314 - 7.64% - - - 314 - 7.64%
---------- --------- ---------- -------- ----------- -------
Total investment securities 236,968 39.3% 6.47% 311,378 57.4% 6.68% (74,410) -18.1% -0.21%
---------- --------- ---------- -------- ----------- -------
Total interest-earning assets $ 602,034 100.0% 8.19% $ 542,745 100.0% 8.39% $ 59,289 -0.20%
---------- --------- ---------- -------- -----------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 238,541 41.8% 4.78% $ 201,389 39.0% 5.33% $ 37,152 2.8% -0.55%
Certificates of deposit 230,801 40.5% 5.42% 170,867 33.0% 5.74% 59,934 7.5% -0.32%
Money market
checking accounts 21,624 3.8% 4.42% 19,045 3.7% 5.02% 2,579 0.1% -0.60%
---------- --------- ---------- -------- ----------- -------
Total deposits 490,966 86.1% 5.07% 391,301 75.7% 5.50% 99,665 10.4% -0.43%
---------- --------- ---------- -------- ----------- -------
Securities sold under
repurchase agreements 7,753 1.4% 5.88% 31,024 6.0% 5.75% (23,271) -4.6% 0.13%
Term borrowings 54,511 9.5% 5.79% 77,087 14.9% 5.76% (22,576) -5.5% 0.03%
Trust preferred securities 17,250 3.0% 9.37% 17,250 3.4% 9.37% - -0.4% 0.00%
---------- --------- ---------- -------- ----------- -------
Total borrowings 79,514 13.9% 6.56% 125,361 24.3% 6.24% (45,847) -10.4% 0.32%
---------- --------- ---------- -------- ----------- -------
Total interest-bearing
liabilities $ 570,480 100% 5.27% $ 516,662 100% 5.68% $ 53,818 -0.41%
---------- --------- ---------- -------- -----------
---------- --------- ---------- -------- -----------
</TABLE>
12
<PAGE>
NET INTEREST INCOME ANALYSES
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30,
1998
The following table present the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest yields/rates for the periods
presented. All average balances are daily average balances (dollars in
thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 340,544 $ 24,247 9.52% $ 230,451 $ 18,795 10.90%
Securities purchased under resale agreements 10,670 397 4.97% 1,232 52 5.64%
Investment securities:
U.S. government agency securities:
Available for sale 241,372 11,878 6.56% 270,601 13,845 6.82%
Held to maturity - - - 4,999 286 7.63%
Corporate debt securities
available for sale 3,375 159 6.28% - - -
------------ ------------ ------------ ----------- ------------ ------------
Total investment securities 244,747 12,037 6.56% 275,600 14,131 6.84%
------------ ------------ ------------ ----------- ------------ ------------
Total interest-earning assets 595,961 36,681 8.23% 507,283 32,978 8.69%
------------ ------------ ------------ ------------
Other non-interest-earning assets 12,645 13,482
Less: allowance for loan losses 5,840 4,426
------------ -----------
Total assets $ 602,766 $ 516,339
------------ -----------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 251,439 $ 8,984 4.78% $ 198,516 $ 7,840 5.28%
Certificates of deposit 197,562 7,997 5.41% 152,935 6,632 5.80%
Money market checking accounts 22,715 747 4.40% 18,254 683 5.00%
------------ ------------ ------------ ----------- ------------ ------------
Total deposits 471,716 17,728 5.02% 369,705 15,155 5.48%
------------ ------------ ------------ ----------- ------------ ------------
Securities sold under repurchase agreements 14,619 589 5.39% 27,715 1,199 5.78%
Term borrowings 63,581 2,746 5.77% 67,842 2,939 5.79%
Trust preferred securities 17,250 1,213 9.38% 17,250 1,213 9.38%
------------ ------------ ------------ ----------- ------------ ------------
Total borrowings 95,450 4,548 6.37% 112,807 5,351 6.34%
------------ ------------ ------------ ----------- ------------ ------------
Total interest-bearing liabilities 567,166 22,276 5.25% 482,512 20,506 5.68%
------------ ------------ ------------ ------------
Non-interest-bearing liabilities 6,226 3,990
Shareholders' equity 29,374 29,837
------------ -----------
Total liabilities and shareholders' equity $ 602,766 $ 516,339
------------ -----------
Net interest-earning assets $ 28,795 $ 24,771
------------ -----------
------------ -----------
Net interest income $ 14,405 $ 12,472
------------ ------------
------------ ------------
Net interest rate spread (2) 2.98% 3.01%
------------ ------------
------------ ------------
Net interest margin (3) 3.23% 3.29%
------------ ------------
------------ ------------
Average interest-earning assets to
average interest-bearing liabilities 105.08% 105.13%
- ----------------------------------------------- ------------ -----------
------------ -----------
</TABLE>
(1) Average loans balance is calculated net of deferred loan fees. Includes
non-accrual loans which have a zero yield.
(2) Net interest rate spread represents the yield earned on total average
interest-earning assets less the rate paid on total average
interest-bearing liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
13
<PAGE>
NET INTEREST INCOME ANALYSES
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30,
1998
The following table set 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 periods presented, including
the change in average balance and yield/rate between these periods (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1999 1998 NET CHANGE
---------------------- ----------------------------------------- ----------------------------
% AVERAGE % AVERAGE % AVERAGE
AVERAGE OF YIELD/ AVERAGE OF YIELD/ AVERAGE OF YIELD/
BALANCE TOTAL RATE BALANCE TOTAL RATE BALANCE TOTAL RATE
-------------- ------- --------- ----------- -------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 340,544 57.1% 9.52% $ 230,451 45.4% 10.90% $110,093 11.7% -1.38%
Securities purchased under
resale agreements 10,670 1.8% 4.97% 1,232 0.3% 5.64% 9,438 1.4% -0.67%
Investment securities:
U.S. government agency
securities
Available for sale 241,372 40.5% 6.56% 270,601 53.3% 6.82% (29,229) -12.8% -0.26%
Held to maturity - - - 4,999 1.0% 7.63% (4,999) -1.0% -7.63%
Corporate debt securities
available for sale 3,375 0.6% 6.28% - - - 3,375 0.6% 6.28%
-------------- ------- ----------- -------- ----------- --------
Total investment securities 244,747 41.1% 6.56% 275,600 54.3% 6.84% (30,853) -13.3% -0.28%
-------------- ------- ----------- -------- ----------- --------
Total interest-earning assets $ 595,961 100.0% 8.23% $ 507,283 100.1% 8.69% $ 88,678 -0.46%
-------------- ------- ----------- -------- -----------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 251,439 44.3% 4.78% $ 198,516 41.1% 5.28% $ 52,923 3.2% -0.50%
Certificates of deposit 197,562 34.9% 5.41% 152,935 31.7% 5.80% 44,627 3.2% -0.39%
Money market
checking accounts 22,715 4.0% 4.40% 18,254 3.8% 5.00% 4,461 0.2% -0.60%
-------------- ------- ----------- -------- ----------- --------
Total deposits 471,716 83.2% 5.02% 369,705 76.6% 5.48% 102,011 6.6% -0.46%
-------------- ------- ----------- -------- ----------- --------
Securities sold under
repurchase agreements 14,619 2.6% 5.39% 27,715 5.7% 5.78% (13,096) -3.1% -0.39%
Term borrowings 63,581 11.2% 5.77% 67,842 14.1% 5.79% (4,261) -2.9% -0.02%
Trust preferred securities 17,250 3.0% 9.38% 17,250 3.6% 9.38% - -0.6% 0.00%
-------------- ------- ----------- -------- ----------- --------
Total borrowings 95,450 16.8% 6.37% 112,807 23.4% 6.34% (17,357) -6.6% 0.03%
-------------- ------- ----------- -------- ----------- --------
Total interest-bearing
liabilities $ 567,166 100.0% 5.25% $ 482,512 100.0% 5.68% $ 84,654 -0.43%
-------------- ------- ----------- -------- -----------
-------------- ------- ----------- -------- -----------
</TABLE>
14
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense due to changes in average balances of
interest-earning assets and interest-bearing liabilities 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 average balance multiplied by prior period rate) and
(ii) changes in rate (i.e. changes in rate multiplied by prior period average
balance). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately based on
the absolute dollar amounts of the changes due to volume and rate (dollars in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 VS. 1998 1999 VS. 1998
-------------------------------------- --------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------------- --------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------- ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 3,163 $ (897) $ 2,266 $ 8,077 $ (2,625) $ 5,452
Securities purchased under resale
agreements 47 (4) 43 352 (7) 345
Investment securities:
U.S. government agency securities:
Available for sale (1,141) (136) (1,277) (1,450) (517) (1,967)
Held to maturity (95) - (95) (286) - (286)
Corporate debt securities
available for sale 6 - 6 159 - 159
------------- ----------- ------------ ------------- ----------- ------------
Total investment securities (1,230) (136) (1,366) (1,577) (517) (2,094)
------------- ----------- ------------ ------------- ----------- ------------
Total interest income $ 1,980 $ (1,037) $ 943 $ 6,852 $ (3,149) $ 3,703
------------- ----------- ------------ ------------- ----------- ------------
INTEREST EXPENSE:
Savings accounts $ 466 $ (298) $ 168 $ 1,944 $ (800) $ 1,144
Certificates of deposit 825 (146) 679 1,830 (465) 1,365
Money market checking accounts 31 (31) - 154 (90) 64
------------- ----------- ------------ ------------- ----------- ------------
Total deposits 1,322 (475) 847 3,928 (1,355) 2,573
------------- ----------- ------------ ------------- ----------- ------------
Securities sold under repurchase
agreements (344) 9 (335) (533) (77) (610)
Term borrowings (330) 7 (323) (184) (9) (193)
Trust preferred securities - - - - - -
------------- ----------- ------------ ------------- ----------- ------------
Total borrowings (674) 16 (658) (717) (86) (803)
------------- ----------- ------------ ------------- ----------- ------------
Total interest expense $ 648 $ (459) $ 189 $ 3,211 $ (1,441) $ 1,770
------------- ----------- ------------ ------------- ----------- ------------
Net interest income $ 1,332 $ (578) $ 754 $ 3,641 $ (1,708) $ 1,933
------------- ----------- ------------ ------------- ----------- ------------
------------- ----------- ------------ ------------- ----------- ------------
</TABLE>
NET INTEREST INCOME
Net interest income increased by $754,000 or 18.5% to $4.8 million for the
three months ended September 30, 1999 compared to the same period of 1998. Net
interest income increased by $1.9 million or 15.5% to $12.5 million for the nine
months ended September 30, 1999 compared to the same period of 1998. The
increase in net interest income during the three and nine months ended September
30, 1999 compared to the same periods last year was primarily the result of an
increase in the Company's average interest-earning assets of $59.3 million or
10.9% and $88.7 million or 17.5%, respectively.
The net interest rate spread is defined as the yield earned on total
average interest-earning assets less the rate paid on total average
interest-bearing liabilities. The Company's net interest rate spread improved
by 21 basis points to 2.92% during the three months ended September 30, 1999
compared to the same period in 1998. This resulted primarily from a decrease
of 41 basis points, to 5.27%, in the rate paid on total average
interest-bearing liabilities, partially offset by a decrease of 20 basis
points, to 8.19%, in the yield earned on total average interest-earning
assets. The Company's net interest rate spread declined by 3 basis points to
2.98% during the nine months ended September 30, 1999 compared to a year ago.
This resulted primarily from a decrease of 46 basis points, to 8.23%, in the
yield earned on total average interest-earning assets, partially offset by a
reduction of 43 basis points, to 5.25%, in the rate paid on total average
interest-bearing liabilities.
The net interest margin is defined as annualized net interest income
divided by total average interest-earning assets. The net interest margin
increased by 20 basis points to 3.19% during the quarter ended September 30,
1999 compared to the same quarter last year. The net interest margin
decreased by six basis points to 3.23% during the nine months ended September
30, 1999 compared to the same period a year ago.
15
<PAGE>
TOTAL INTEREST INCOME
Total interest income increased by $943,000 or 8.2% to $12.4 million for
the quarter ended September 30, 1999 and increased by $3.7 million or 11.2% to
$36.7 million for the nine months ended September 30, 1999 compared to the same
periods in 1998. These increases were primarily due to an increase in average
interest-earning assets of $59.3 million and $88.7 million for the three and
nine months ended September 30, 1999, respectively. Average interest-earning
assets increased between the 1999 and 1998 periods primarily as a result of the
growth in the loan portfolio. The yields earned on the Company's
interest-earning assets decreased by 20 and 46 basis points for the three and
nine months ended September 30, 1999 from the comparable periods in 1998. This
decline was due to reduced yields earned on commercial loans and investment
securities. One reason for the decline in the overall loan portfolio yield was
due to the repricing of the Company's variable rate loan portfolio downward as a
result of the decline in market interest rates between these periods. However,
effective August 24, 1999, the Federal Reserve increased the federal funds
interest rate from 5.00% to 5.25%, the impact of which started the upward
repricing of the Company's variable rate loans, especially those tied to the
prime rate. A second reason for the decline in the loan yield was the payoff and
maturity of older loans that generally had a slightly higher yield compared to
the average yield in the loan portfolio. A third reason for the decline in the
loan yield was the lower yields on the Company's loan originations made during
the second half of 1998 and the first nine months of 1999 compared to the yields
on loans within the portfolio made prior to 1998. The changes in the loan yields
reflected the increased competitive rate pressure within the lending
marketplace. The decline in the investment securities yield reflected the
purchase of lower yielding securities to replace securities being called and
sold during the third and fourth quarters of 1998 and the first and second
quarters of 1999. However, in order to increase the yield on its investments,
during the third quarter of 1999 the Company purchased at a discount $2.0
million of corporate debt securities which yielded 7.64% during the quarter.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter ended September 30, 1999 increased
by $189,000 or 2.6% to $7.6 million compared to the same period of 1998. Total
interest expense for the nine months ended September 30, 1999 increased by $1.8
million or 8.6%, to $22.3 million compared to the same period of 1998. The
increase in interest expense for both periods resulted primarily from an
increase in average interest-bearing liabilities of $53.8 million and $84.7
million, respectively, for the three and nine months ended September 30, 1999,
as compared to the same periods in 1998. The increase in average
interest-bearing liabilities between these respective periods primarily
reflected the growth in the Company's deposits during the third and fourth
quarters of 1998. The rates paid on the Company's interest-bearing liabilities
decreased by 41 and 43 basis points for the three and nine months ended
September 30, 1999 compared to the same periods in 1998. The decrease in the
rates paid on the Company's interest-bearing liabilities reflected both the
decline in market interest rates between these periods and the rate reduction on
the Company's deposit products at the beginning of the first quarter of 1999.
PROVISION FOR LOAN LOSSES
During the three and nine months ended September 30, 1999, the Company's
provision for loan losses increased by $160,000 and $785,000 to $400,000 and
$1.5 million, respectively, compared to the same periods in 1998. The increase
in the provision is the result of management's evaluation of the loan portfolio
and economic conditions. The increase to the provision for the three and nine
months ended September 30, 1999, primarily reflects the growth in the Company's
loan portfolio as well as judgments about economic conditions.
NON-INTEREST INCOME
The following table sets forth certain information with respect to the
Company's non-interest income for the three and nine months ended September 30,
1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
--------------------- ------------------ --------------------- ------------------
1999 1998 $ % 1999 1998 $ %
---------- ---------- -------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan prepayment and late fee income $ 225 $ 152 $ 73 48.0% $ 593 $ 657 $ (64) (9.7%)
Gain on sale of investment securities - 209 (209) (100.0%) 586 209 377 180.4%
Gain on sale of SBA loans - 50 (50) (100.0%) 175 187 (12) (6.4%)
Gain on sale of commercial real estate loans - - - - - 336 (336) (100.0%)
Gain on sale of other real estate owned - - - - 25 83 (58) (69.9%)
Other income 237 155 82 52.9% 713 368 345 93.8%
---------- ---------- -------- --------- ---------- ---------- --------- --------
Total non-interest income $ 462 $ 566 $ (104) (18.4%) $2,092 $1,840 $ 252 13.7%
---------- ---------- -------- --------- ---------- ---------- --------- --------
---------- ---------- -------- --------- ---------- ---------- --------- --------
</TABLE>
16
<PAGE>
Non-interest income for the quarter ended September 30, 1999, decreased by
$104,000 to $462,000 compared to 1998. This was primarily the result of a
$209,000 gain on the sale of investment securities and a $50,000 gain on the
sale of SBA loans in the third quarter of 1998. These factors were partially
offset by current quarter increases of $73,000 and $82,000 in loan prepayment
and late fee income and other income, respectively.
Non-interest income increased by $252,000 to $2.1 million for the nine
months ended September 30, 1999 compared to 1998. This was primarily the
result of an additional $377,000 in gain on the sale of investment securities
and a $345,000 increase in other income. These increases were partially
offset by a $336,000 gain recorded on the sale of commercial real estate
loans in 1998 and current year-to-date decreases of $64,000, $58,000 and
$12,000 in loan prepayment and late fee income, gain on sale of OREO and gain
on sale of SBA loans, respectively.
NON-INTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's non-interest expense for the three and nine months ended September 30,
1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
--------------------- ------------------ --------------------- ------------------
1999 1998 $ % 1999 1998 $ %
---------- ---------- -------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 1,665 $ 1,376 $ 289 21.0% $ 5,139 $ 4,314 $ 825 19.1%
Net occupancy expenses 412 375 37 9.9% 1,284 1,185 99 8.4%
Communication and data processing 254 193 61 31.6% 689 572 117 20.5%
Advertising and promotion 101 138 (37) (26.8%) 508 317 191 60.3%
FDIC insurance premiums 13 11 2 18.2% 39 32 7 21.9%
Credit and collection expenses - 39 (39) (100.0%) 36 127 (91) (71.7%)
Other real estate owned expense - 38 (38) (100.0%) 35 203 (168) (82.8%)
Valuation adjustments to
other real estate owned - - - - 43 50 (7) (14.0%)
Other expenses 343 189 154 81.5% 972 719 253 35.2%
---------- ---------- -------- --------- ---------- ---------- --------- --------
Total non-interest expense $2,788 $2,359 $ 429 18.2% $8,745 $7,519 $ 1,226 16.3%
---------- ---------- -------- --------- ---------- ---------- --------- --------
---------- ---------- -------- --------- ---------- ---------- --------- --------
</TABLE>
Non-interest expense for the three and nine months ended September 30, 1999
increased by $429,000 or 18.2% and $1.2 million or 16.3%, over the same periods
in 1998, respectively. These changes are detailed on the table above and
significant changes in non-interest expense are described below.
Salaries and employee benefits for the three and nine months ended
September 30, 1999 increased by $289,000, or 21.0%, and $825,000 or 19.1%,
respectively, as compared to the same periods in 1998. The increase was due to:
(1) an increase to the Company's marketing and administrative bonus accrual made
during the first and second quarters of 1999 versus 1998, (2) the Company
provided an approximate 4% salary increase to most employee base salaries in
January 1999 and (3) the Company has increased its overall staffing levels
between these respective periods.
Net occupancy expenses increased by $37,000 or 9.9% for the current
quarter and $99,000 or 8.4% for the current nine months compared to the same
periods last year. This increase reflected the opening of the Company's loan
production offices in Arizona during the fourth quarter of 1998, and the Orange
County, California loan production office in the first quarter of 1999.
Communication and data processing costs increased by $61,000 or 31.6% for
the current quarter and $117,000 or 20.5% for the current nine months compared
to the same periods last year. This increase reflected the opening of the
Company's loan production offices described above, in addition to the
installation and upgrading a portion of the Company's computer hardware and
software systems.
Advertising and promotion costs decreased by $37,000 or 26.8% and
increased by $191,000 or 60.3% for the three and nine months ended September
30, 1999, respectively, compared to the same periods in 1998. The Company
conducted a more extensive commercial real estate and SBA loan advertising
program during both the first and second quarters of 1999 as compared to 1998
but reduced the level of advertising in the third quarter of 1999.
Credit and collection expenses for the three and nine months ended
September 30, 1999 decreased by $39,000 or 100.0%, and $91,000 or 71.7%,
respectively, compared to the same periods in 1998, primarily due to the decline
in the number of problem and non-accrual loans during 1999.
Other real estate owned expense for the three and nine months ended
September 30, 1999, declined by $38,000 or 100%, and $168,000 or 82.8%
respectively, compared to the same periods last year as a result of the final
sale of the Company's OREO properties during 1999.
Other expenses increased by $154,000 or 81.5%, and $253,000 or 35.2% for
the three and nine months ended September 30, 1999, respectively, as compared
to 1998. This increase reflects the additional cost associated with the
higher volume in loan origination activity for the nine months ended
September 30, 1999.
17
<PAGE>
INCOME TAX PROVISION
For the three months ended September 30, 1999 and 1998, the Company's
provision for income taxes was $873,000 and $792,000, respectively, which
resulted in effective tax rates of 41.3% and 38.6%, respectively. For the nine
months ended September 30, 1999 and 1998, the Company's provision for income
taxes was $2.52 million and $2.46 million, respectively, which resulted in
effective tax rates of 40.0% and 40.2%, respectively. The difference between the
effective tax rates for the three months ended September 30, 1999 and 1998, is
the result of adjustments made to the tax valuation reserves for the quarter
ended September 30, 1998, as a result of settlements made with the IRS on prior
year tax returns.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998
Total assets of the Company decreased by $27.9 million to $617.4 million at
September 30, 1999 from $645.3 million at December 31, 1998. This was primarily
due to a $81.4 million decrease in the investment securities portfolio and a
$21.3 million decrease in securities purchased under resale agreements,
partially offset by an increase of $75.9 million in gross loans.
Total liabilities of the Company decreased by $25.2 million to $590.0
million at September 30, 1999 from $615.2 million at December 31, 1998. This was
primarily due to reductions of $29.5 million and $10.3 million in term
borrowings and securities sold under repurchase agreements, respectively,
partially offset by an increase of $12.3 million in deposits.
INVESTMENT SECURITIES
Investment securities decreased by $81.4 million to $239.9 million
during the nine months ended September 30, 1999. This was primarily due to
sales of $162.6 million and a decline in fair value of $9.3 million,
partially offest by purchases of $90.5 million. The proceeds from liquidating
the securities were used to fund loan growth and pay down borrowings, which
was consistent with the Company's 1999 strategic operating plan.
The Company's investment securities portfolio at September 30, 1999
consisted of fixed rate investments in U.S. government agency securities and
variable rate investments in corporate debt securities. The U.S. government
agency securities consisted 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. The
U.S. agency securities have call dates ranging between one month and two years,
while the corporate debt securities have $1.0 million callable in August, 2003
and $1.0 million callable in February, 2007. The following table reflects the
Company's investment securities portfolio by stated maturity date at September
30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
------------ ------------ ------------
<S> <C> <C> <C>
Due in one to five years $ 76,348 $ 75,408 6.08%
Due in six to ten years 147,271 142,058 6.69%
Due over ten years 23,463 22,407 6.67%
------------ ------------
Total investment securities $247,082 $239,873 6.50%
------------ ------------
------------ ------------
</TABLE>
As of September 30, 1999, $80.6 million of U.S. government agency
securities were pledged to secure borrowings totaling $70.5 million.
LOANS
Loans, gross of deferred fees and the allowance for loan losses, increased
by $75.9 million to $365.0 million at September 30, 1999, from $289.1 million at
December 31, 1998. This was primarily due to $116.0 million of originations and
$9.0 million of purchases for a total of $125.0 million in new real estate and
business loans during the nine months ended September 30, 1999. Partially
offsetting these additions to the loan portfolio were $46.0 million in loan
payoffs, $2.9 million of SBA loan sales and $255,000 in loan charge-offs.
18
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1999 increased by $1.2
million from the level at December 31, 1998, primarily due to $1.5 million in
provision for loan losses recorded during the first nine months of 1999. The
increase in the allowance reflects the growth in the Company's loan portfolio,
the Company's evaluation of its loan portfolio and economic trends. Management
and the Board of Directors regularly review loan performance and the adequacy of
the allowance for loan losses.
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, historical loan loss
experience and economic conditions. The allowance for loan losses as a
percentage of loans stood at 1.71% at September 30, 1999, compared to 1.74% at
December 31, 1998.
The following table sets forth certain information with respect to the
Company's allowance for loan losses for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
--------------------------------
SEPTEMBER 30, DECEMBER 31,
-------------- --------------
1999 1998
-------------- --------------
<S> <C> <C>
Balance at beginning of period $ 5,024 $ 4,100
Commercial real estate mortgages:
Provision for loan losses 1,455 910
Charge-offs (255) (20)
Recoveries 28 34
-------------- --------------
Balance at end of period $ 6,252 $ 5,024
-------------- --------------
-------------- --------------
</TABLE>
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
The following table sets forth non-accrual loans, OREO and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Non-accrual loans $ 235 $ -
OREO - 806
-------------- --------------
Total non-accrual loans and OREO $ 235 $ 806
-------------- --------------
Total non-performing assets to total assets 0.04% 0.12%
-------------- --------------
Restructured loans $ - $ -
-------------- --------------
-------------- --------------
</TABLE>
DEPOSITS
The Company experienced an increase in deposits of $12.3 million during the
first nine months of 1999 which was primarily due to a $64.8 million increase in
certificates of deposit, partially offset by deposit runoff of $49.0 million and
$3.4 million in savings accounts and money market checking accounts,
respectively. The increase in certificates of deposit was primarily the result
of the Company raising rates at the beginning of January 1999 and later during
the third quarter of 1999.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company decreased its balance of securities sold under repurchase
agreements at September 30, 1999 by $10.3 million to $20.5 million, from $30.8
million at December 31, 1998. The rates paid on this variable rate short-term
debt averaged 5.88% and 5.39% for the three and nine months ended September 30,
1999, respectively. The Company utilized these borrowing lines to cover
short-term financing needs for loan originations. The Company maintains
short-term borrowing lines with national brokers aggregating $140.0 million. At
September 30, 1999 the Company had $119.5 million available against these
borrowing facilities. This debt is secured by pledging specific amounts of
specific U.S. agency securities. At September 30, 1999, $20.9 million of U.S.
agency securities were pledged to secure securities sold under repurchase
agreements.
TERM BORROWINGS
The Company reduced its term borrowings by $29.5 million to $50.0
million during the nine months ended September 30, 1999. These secured
borrowings are fixed rate and have call features which allow the lender to
call the debt prior to the stated maturity date. The Company has a total of
$95.0 million of term borrowing lines. At September 30, 1999, $45.0 million
was available against these borrowing lines. This debt is secured by pledging
specific amounts of specific U.S. agency securities. At September 30, 1999,
$59.7 million of U.S. agency securities were pledged to secure term
borrowings.
19
<PAGE>
During September 1999, the Company paid off $25.0 million of term
borrowings bearing interest at 5.82% that was called by the issuing lender and
partially replaced it with $20.0 million at 5.75% with an original three year
maturity and a one-year, one-time call option.
The table below reflects the attributes of the Company's term borrowings
which were outstanding at September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
MATURITY
BORROWING DATE BORROWING TYPE AMOUNT RATE CALL DATE DATE
- --------------------- --------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
October, 1997 Five-year borrowing $ 10,000 5.78% 10/99 10/02
December, 1997 Five-year borrowing 10,000 5.63% 12/99 12/02
January, 1998 Five-year borrowing 10,000 5.48% 01/00 01/03
September, 1999 Three-year borrowing 20,000 5.75% 09/00 09/02
------------
Total term borrowings $ 50,000 5.68%
------------
------------
</TABLE>
SHAREHOLDERS' EQUITY
Shareholders' equity decreased by $2.7 million to $27.4 million during the
nine months ended September 30, 1999. This decrease was primarily due to the
following: (1) accumulated other comprehensive income decreased by $5.4 million
as the investment securities portfolio was repriced downward due to an increase
in market interest rates at September 30, 1999, (2) the Company paid $833,000
for the purchase of common stock under its stock repurchase plan and (3) the
Company declared and paid three quarterly cash dividends totaling $453,000.
Partially offsetting these decreases to shareholders' equity were the recording
of $3.8 million of net income for the first nine months of 1999 and the issuance
of $197,000 of stock to employees and directors under the Company's employee
stock purchase plan, non-employee directors' stock purchase plan and the
employee stock option plan.
CAPITAL RESOURCES
The Company's objective is to maintain a level of capital that will
consistently support sustained asset growth and anticipated credit risks and
will 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 September 30,
1999, Pacific Crest Bank was in compliance with all such capital requirements.
REGULATORY CAPITAL
Pacific Crest Bank is required by the FDIC to maintain certain minimum
capital ratios and must maintain higher capital ratios to be considered "well
capitalized" under the prompt corrective action provisions of the FDIC
Improvement Act of 1991 ("FDICIA"). To be categorized as "well capitalized" the
Bank must maintain a leverage capital ratio of 5%, a tier 1 risk-based capital
ratio of 6% and a total risk-based capital ratio of 10%. The following table
sets forth Pacific Crest Bank's regulatory capital ratios at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------------------------- ---------------------------------------
Minimum Minimum
Required Actual Excess Required Actual Excess
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.20% 3.20% 4.00% 6.81% 2.81%
Tier 1 risk-based capital ratio 4.00% 10.31% 6.31% 4.00% 10.67% 6.67%
Total risk-based capital ratio 8.00% 11.56% 3.56% 8.00% 11.92% 3.92%
</TABLE>
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings, principal
and interest payments received on loans, interest payments received on
investment securities and proceeds from sales of loans and investment
securities. Additionally, the Company maintains borrowing lines with brokers
aggregating $235 million of which $70.5 million was outstanding at September 30,
1999, leaving $164.5 million available.
The Company's holdings of cash and cash equivalents during the nine
months ended September 30, 1999 decreased $22.5 million to $3.1 million at
September 30, 1999 from $25.6 million at December 31, 1998. The decline in
the Company's cash and cash equivalents during the nine months ended
September 30, 1999 was utilized in financing the Company's net loan growth,
deposit liability runoff and paying down borrowings.
20
<PAGE>
DIVIDENDS
As a Delaware corporation, Pacific Crest Capital, Inc., may pay common
dividends out of surplus or, if there is no surplus, from net profits for the
current and preceding fiscal year. Pacific Crest had approximately $5.2 million
in cash and investments less current liabilities and short-term debt at
September 30, 1999. These funds are necessary to pay future operating expenses,
existing current liabilities, interest expense on the $17.3 million junior
subordinated debentures payable to PCC Capital, and possible future capital
infusions into Pacific Crest Bank. Without dividends from the Bank, the parent
must rely solely on existing cash and investments and the ability to secure
borrowings.
Pacific Crest Bank's ability to pay dividends to the parent is restricted
by California state law which requires that sufficient retained earnings be
available to pay the dividend. At September 30, 1999, the Bank had retained
earnings of $12.8 million of which $1.8 million was unrestricted and available
for dividend payments. The Bank has declared and paid dividends to the parent in
the amounts of $280,000, $300,000 and $320,000 for the first, second and third
quarters of 1999, respectively. Pacific Crest Bank anticipates that it will
continue to declare and pay quarterly dividends to the parent.
ITEM 3. 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 interest income when the Three Month London Interbank Offered
Rate (LIBOR) exceeds 6.70%. LIBOR closed at 6.08% on September 30, 1999. 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 income. 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, which is being
amortized over five years. The amortization is included in "Interest Expense -
Deposits - Savings Accounts" on the consolidated statements of operations. 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. The
Company'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, which measures the estimated difference between the amount of
interest-earning assets and interest bearing liabilities repricing during future
periods. 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 at September 30, 1999 that are sensitive to
changes in interest rates. For all financial instruments, the table presents the
principal outstanding balance and the weighted average interest yield/rate of
the instruments by either the date that the instrument can be repriced for
variable rate financial instruments or the expected maturity date for fixed rate
financial instruments (dollars in thousands).
21
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY OR REPRICING
- --------------------------------------------------------------------------------------------------------------------
OVER OVER OVER
WITHIN 3 TO 12 1 TO 3 3 TO 5 OVER FAIR
AT SEPTEMBER 30, 1999 3 MONTHS MONTHS YEARS YEARS 5 YEARS TOTAL VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities purchased under resale
agreements (1) $ 765 -- -- -- -- $ 765 $ 765
average yield (variable rate) 5.20% -- -- -- -- 5.20%
Investment securities
available for sale (2) -- -- $ 50,169 -- $189,704 $239,873 $239,873
average yield (fixed rate) -- -- 5.66% -- 7.01% 6.73%
Total gross loans (3) $174,449 $ 9,424 $ 14,360 $ 7,871 $158,901 $365,005 $368,272
average yield 10.26% 9.96% 8.60% 8.60% 8.60% 9.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $175,214 $ 9,424 $ 64,529 $ 7,871 $348,605 $605,643 $608,910
==================================================================================================================================
INTEREST-SENSITIVE LIABILITIES:
Savings accounts (1) $226,999 -- -- -- -- $226,999 $226,999
average rates (variable rate) 4.70% -- -- -- -- 4.70%
Certificates of deposit (4) $ 44,767 $121,039 $ 65,849 $ 16,094 -- $247,749 $245,891
average rates (fixed rate) 4.60% 5.43% 5.80% 5.90% -- 5.52%
Money market checking accounts (1) $ 20,435 -- -- -- -- $ 20,435 $ 20,435
average rates (variable rate) 4.30% -- -- -- -- 4.30%
Securities sold under
repurchase agreements (1) $ 20,500 -- -- -- -- $ 20,500 $ 20,500
average rates (variable rate) 5.46% -- -- -- -- 5.46%
Term borrowings (5) -- -- $ 40,000 $ 10,000 -- $ 50,000 $ 50,000
average rates (fixed rate) -- -- 5.77% 5.48% -- 5.71%
Trust preferred securities (2) -- -- -- -- $ 17,250 $ 17,250 $ 18,113
average rates (fixed rate) -- -- -- -- 9.38% 9.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $312,701 $121,039 $105,849 $ 26,094 $ 17,250 $582,933 $581,938
==================================================================================================================================
</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 values are considered identical due to
the short term repricing of the financial instruments.
(2) Fair value of investment securities and the trust preferred securities
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 certificates of deposit, which have a fixed maturity, is
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.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1999.
23
<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: November 15, 1999 /s/Gary Wehrle
------------------- -------------------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: November 15, 1999 /s/Robert J. Dennen
------------------- -------------------------------------------------
Robert J. Dennen
Senior Vice President, Chief Financial Officer
Corporate Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
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