<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 August 2, 1999.
<TABLE>
<CAPTION>
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
<S> <C>
Common Stock, $.01 par value 2,655,774
</TABLE>
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.
JUNE 30, 1999 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . 1
Consolidated Statements of Operations . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity . . . . 3
Consolidated Statements of Cash Flows . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities. . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . .. . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 20
</TABLE>
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
Cash $ 7,909 $ 3,592
Securities purchased under resale agreements 557 22,048
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 8,466 25,640
- ------------------------------------------------------------------------------------------------------------------------
Investment securities (Note 4):
Available for sale, at market 209,063 321,261
Loans
Commercial mortgage 350,884 278,614
Residential mortgage 573 1,194
Commercial business/SBA/other 3,362 4,476
SBA loans held for sale 3,204 4,784
- ------------------------------------------------------------------------------------------------------------------------
Total loans 358,023 289,068
Deferred loan fees 485 582
Allowance for loan losses 6,099 5,024
- ------------------------------------------------------------------------------------------------------------------------
Net loans 351,439 283,462
Accrued interest receivable 5,489 8,241
Prepaid expenses and other assets 2,119 2,102
Deferred income taxes 6,185 2,911
Other real estate owned - 806
Premises and equipment 992 881
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 583,753 $ 645,304
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Savings accounts $ 248,433 $ 276,011
Certificates of deposit 203,704 182,979
Money market checking 21,895 23,849
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 474,032 482,839
Reverse repurchase agreements 5,500 30,779
Term borrowings 55,000 79,450
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures 17,250 17,250
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 551,782 610,318
Accrued interest and other liabilities 5,323 4,846
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 557,105 615,164
- ------------------------------------------------------------------------------------------------------------------------
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 June 30, 1999, and December 31, 1998 27,916 28,087
Retained earnings 7,800 5,559
Accumulated other comprehensive income (loss) (3,886) 1,199
Common stock in treasury, at cost, 330,490 shares
at June 30, 1999, 295,500 shares at December 31, 1998 (5,182) (4,705)
Total shareholders' equity 26,648 30,140
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 583,753 $ 645,304
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Book value per common share (Note 3) $ 10.03 $ 11.20
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
1
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE FOR THE
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans, including fees $ 8,209 $ 6,308 $ 15,714 $ 12,528
Securities purchased under resale agreements 128 34 339 37
Investment securities
Held to maturity - 95 - 190
Available for sale 3,472 4,474 8,205 8,742
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 11,809 10,911 24,258 21,497
Interest expense:
Interest expense on interest-bearing deposits
Savings accounts 3,001 2,562 6,108 5,134
Certificates of deposit 2,416 2,212 4,846 4,160
Money market checking 249 224 506 440
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense on deposits 5,666 4,998 11,460 9,734
Reverse repurchase agreements 120 253 474 749
Term borrowings 856 1,035 1,950 1,820
Trust preferred securities 404 404 809 808
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,046 6,690 14,693 13,111
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,763 4,221 9,565 8,386
Provision for loan losses 395 230 1,055 430
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,368 3,991 8,510 7,956
NONINTEREST INCOME:
Gain on sale of other real estate owned 25 83 25 83
Gain on sale of commercial real estate loans - 332 - 332
Gain on sale of SBA Loans 79 137 175 137
Gain on sale of investment securities 71 - 586 -
Loan prepayment and late fee income 269 407 368 508
Other noninterest income 215 114 476 214
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 659 1,073 1,630 1,274
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Valuation adjustments to other real estate owned - 50 43 50
Other real estate owned expenses 17 121 35 165
Salaries and employee benefits 1,734 1,581 3,474 2,938
Net occupancy expenses 430 419 872 810
Communication and data processing 223 188 435 379
Advertising and promotion 215 115 407 179
FDIC insurance premiums 14 11 26 21
Credit and collection expenses 26 75 36 88
Other expenses 362 299 629 530
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,021 2,859 5,957 5,160
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,006 2,205 4,183 4,070
Income tax provision (Note 2) 799 904 1,648 1,669
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,207 $ 1,301 $ 2,535 $ 2,401
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Per share data (Note 3):
Basic earnings per common share $ 0.45 $ 0.45 $ 0.94 $ 0.83
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average basic common shares outstanding (in thousands) 2,669 2,874 2,680 2,884
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.43 $ 0.43 $ 0.90 $ 0.79
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average diluted common shares outstanding (in thousands) 2,786 3,042 2,800 3,050
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
COMMON TREASURY
--------------------------------------- RETAINED
(DOLLARS AND SHARES IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT EARNINGS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,972 $ 27,944 (85) $ (1,174) $ 849
- ---------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income: - - - - 4,847
Other comprehensive income,
net of tax
Unrealized gain on securities,
available for sale - - - - -
Total Comprehensive income:
Issuance of common stock:
Under employee stock purchase
plan 6 63 - - -
Under non-employee directors' stock
purchase plan 2 44 - - -
Under employee stock option plan 6 36 - - -
Purchase of treasury shares - - (211) (3,531) -
Cash dividends paid - - - - (137)
- ---------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 2,986 $ 28,087 (296) $ (4,705) $ 5,559
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income: - - - - 2,535
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities,
available for sale - - - - -
Total Comprehensive income (loss):
Issuance of treasury shares:
Under employee stock purchase
plan - (12) 4 66 -
Under non-employee directors' stock
purchase plan - - 2 27 -
Under employee stock option plan - (159) 17 263 -
Purchase of treasury shares - - (57) (833) -
Cash dividends paid - - - - (294)
- ---------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 2,986 $ 27,916 (330) $ (5,182) $ 7,800
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
ACCUMULATED
OTHER TOTAL TOTAL
COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
(DOLLARS AND SHARES IN THOUSANDS) INCOME (LOSS) INCOME (LOSS) EQUITY
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1997 $ 1,189 - $ 28,808
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income: - $ 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 - 63
Under non-employee directors' stock
purchase plan - 44
Under employee stock option plan - 36
Purchase of treasury shares - (3,531)
Cash dividends paid - (137)
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 1,199 - $ 30,140
- --------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income: - $ 2,535 2,535
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities,
available for sale (5,085) (5,085) (5,085)
-------------
Total Comprehensive income (loss): $ (2,550)
-------------
Issuance of treasury shares:
Under employee stock purchase
plan - 54
Under non-employee directors' stock
purchase plan - 27
Under employee stock option plan - 104
Purchase of treasury shares - (833)
Cash dividends paid - (294)
- --------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 $ (3,886) - $ 26,648
- --------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
(DOLLARS IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,535 $ 2,401
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 1,055 430
Valuation adjustments to OREO 43 50
Depreciation and amortization 155 140
Amortization of deferred loan fees (137) (300)
Amortization/accretion of securities (26) (1)
Gain on sale of SBA Loans (175) (137)
Gain from sale of commercial real estate loans - (332)
Gain from sale of OREO (25) (83)
Gain on sale of investment securities (586) -
Changes in operating assets and liabilities:
Accrued interest receivable 2,752 (607)
Prepaid expenses and other assets 17 (1,034)
Deferred income taxes 434 5
Accrued interest and other liabilities 477 511
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,519 1,043
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities:
Available for sale (54,360) (110,600)
Proceeds from sales and calls of investment securities:
Available for sale 158,342 50,000
Net increase in loans (63,071) (2,310)
Proceeds from sale of commercial real estate loans - 7,831
Proceeds from sale of SBA loans 3,368 1,509
Purchase of loans (9,017) -
Purchases of equipment and leasehold improvements, net (266) (205)
Proceeds from sale of other real estate owned 789 1,264
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by/ (used in) investing activities 35,785 (52,511)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in savings accounts (27,578) (3,933)
Net increase in certificate of deposits 20,725 33,727
Net (decrease)/increase in money market checking (1,954) 1,883
Net (decrease) in reverse repurchase agreements (25,279) (6,500)
Net (decrease)/increase in term borrowings (24,450) 31,000
Proceeds from stock options exercised 104 -
Proceeds from employees and directors stock purchase plans 81 99
Cash dividends paid (294) -
Purchase of treasury stock, at cost (833) (1,129)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in)/ provided by investing activities (59,478) 55,147
- --------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (17,174) 3,679
Cash and cash equivalents at beginning of period 25,640 2,392
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,466 $ 6,071
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 15,048 $ 12,808
Income taxes $ 1,900 $ 2,015
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Transfers from loans to other real estate owned $ - $ 206
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 June 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.
- --------------------------------------------------------------------------------
NOTE 2. INCOME TAXES
- --------------------------------------------------------------------------------
For the quarters ended June 30, 1999 and 1998, the Company estimated its
provision for income taxes at $799,000 or 39.8% and $904,000 or 41.0%
respectively. For the six months ended June 30, 1999 and 1998, the Company's
provision for income taxes was $1.65 million or 39.4% and $1.67 million or
41.0%, respectively. The difference between the Company's statutory tax rate
and its effective tax rate, for the quarters and six months ended June 30, 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 quarters and six
months ending June 30, 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 June 30, 1999 and December 31, 1998. The
number of common shares used in this calculation was 2,986,264 of common shares
issued less 330,490 of treasury shares resulting in 2,655,774 of common shares
issued and outstanding at June 30, 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 and six
months ended June 30, 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 6/30/99 QUARTER ENDED 6/30/98
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE PER SHARE AVERAGE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 1,207 2,669 $ 0.45 $ 1,301 2,874 $ 0.45
------------------------------------- -------------------------------------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 117 (0.02) - 168 (0.02)
DILUTED EPS ------------------------------------- -------------------------------------
Income available to common stockholders $ 1,207 2,786 $ 0.43 $ 1,301 3,042 $ 0.43
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
<CAPTION>
SIX MONTHS ENDED 6/30/99 SIX MONTHS ENDED 6/30/98
------------------------------------- -------------------------------------
AVERAGE PER SHARE AVERAGE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 2,535 2,680 $ 0.94 $ 2,401 2,884 $ 0.83
------------------------------------- -------------------------------------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 120 (0.04) - 166 (0.04)
DILUTED EPS ------------------------------------- -------------------------------------
Income available to common stockholders $ 2,535 2,800 $ 0.90 $ 2,401 3,050 $ 0.79
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment agency securities have been classified in the consolidated
balance sheets according to management's intent and ability. The amortized
cost of securities and their approximate fair values at June 30, 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 $ 215,762 $ 19 $ 6,718 $ 209,063
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's security portfolio at June 30, 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
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 June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AMORTIZED FAIR AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) COST VALUE YIELD LIFE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Due from one to five years $ 61,343 $ 60,189 5.86% 3.0 Years
Due from five to ten years 132,813 128,276 6.60% 8.8 Years
Due over ten years 21,606 20,598 6.60% 12.4 Years
------------------------------------------------------------
Total Investment securities: $ 215,762 $ 209,063 6.39% 7.5 Years
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
U.S. government sponsored agency securities carried at $70.5 million
were pledged to secure borrowings aggregating $60.5 million at June 30, 1999.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL
- --------------------------------------------------------------------------------
At June 30, 1999, 10,000,000 shares of $0.01 par value common stock were
authorized of which, 2,986,264 shares were issued and 2,655,774 outstanding.
Pacific Crest Bank (the "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 ("FDICIA").
The following table sets forth Pacific Crest Bank's regulatory capital
ratios at June 30, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT JUNE 30, 1999 AT DECEMBER 31, 1998
----------------------------------------------------------------------------------
PACIFIC CREST BANK Required Actual Excess Required Actual Excess
- ------------------------------------------------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.36% 3.36% 4.00% 6.81% 2.81%
Tier I risk-based capital ratio 4.00% 10.35% 6.35% 4.00% 10.67% 6.67%
Total risk-based capital ratio 8.00% 11.60% 3.60% 8.00% 11.92% 3.92%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1999, the Bank was "well capitalized" under the prompt
corrective action provisions of 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%.
- --------------------------------------------------------------------------------
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 $5.3
million in cash and investments less current liabilities and short-term debt at
June 30, 1999. These funds are 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
$0.06 and a $0.05 cent per share common stock cash dividend for the second and
first quarters of 1999, respectively. On July 30, 1999, the Company announced
that the Board of Directors had declared a $0.06 per common share cash dividend
for the third quarter of 1999. The dividend will be paid to shareholders of
record at the close of business September 2, 1999 and is payable on September
17, 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 June 30, 1999, Pacific Crest Bank had
retained earnings of $11.7 million of which $1.7 million was unrestricted and
available for dividend payments. The Bank has declared and paid a $300,000
second quarter and a $280,000 first quarter cash dividend, to the parent
during 1999. The Bank anticipates that it will continue to declare
and pay quarterly dividends to the parent during 1999.
6
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. OTHER COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The following table reflects the tax effect of other comprehensive income:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other comprehensive income (loss):
Unrealized gain (loss) on U.S. agency securities $ (8,767) $ 618
Tax expense/(benefit) (3,682) 219
- -----------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of taxes $ (5,085) $ 399
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major factors
that influenced the consolidated financial performance of the Company for the
quarter and six months ended June 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 on pages 1 through 7 of
this report.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information in the
Company's consolidated financial statements and notes thereto and other
financial data included elsewhere herein. Certain statements under this caption
constitute "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, and as such, may involve risks and uncertainties.
The Company's actual results, performance and achievements may differ materially
from the results, performance and achievements expressed or implied in such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, economic conditions, competition in the geographic and
business areas in which the Company conducts its operations, fluctuations in
interest rates, credit quality and governmental regulation.
The following table sets forth certain selected financial data concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA AT OR FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
(DOLLARS IN THOUSANDS) 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE BALANCE
Average Loans $ 345,237 $ 315,498 $ 264,167 $ 230,400 $ 230,476
Average Investment Securities 211,991 285,243 320,632 311,378 263,990
Average Earning Assets 568,254 617,191 597,675 542,745 496,927
Average Assets 576,889 626,086 603,560 550,803 506,418
Average Deposits 456,156 467,770 456,129 391,301 366,195
Average Borrowings 86,041 121,255 112,765 125,361 106,710
Average Equity 28,730 30,013 32,076 30,262 29,833
PERFORMANCE RATIOS
Return on average assets (1) 0.84% 0.85% 0.78% 0.92% 1.03%
Return on average common equity (1) 16.12% 18.20% 16.79% 17.63% 18.09%
Net interest margin (2) 3.36% 3.16% 2.81% 2.99% 3.41%
CAPITAL AND LEVERAGE RATIOS (3)
Risk-based capital ratios:
Tier one 10.35% 10.46% 10.67% 12.44% 12.85%
Total 11.60% 11.71% 11.92% 13.69% 14.10%
Leverage capital ratio (4) 7.36% 6.83% 6.81% 7.23% 7.60%
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.71% 1.68% 1.74% 2.00% 2.01%
Allowance for loan losses to nonaccrual loans - 225.00% - - -
Total nonperforming assets to total assets (5) - 0.52% 0.12% 0.17% 0.19%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations are 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) Calculations are based on average quarterly asset balances of Pacific
Crest Bank.
(5) Non-performing assets include nonaccrual loans and other real estate
owned ("OREO") and exclude troubled debt restructurings.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following tables, for the quarter and six months ended June 30, 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 June 30,
--------------------------------------------------------------------------
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) $ 345,237 $ 8,209 9.54% $ 230,476 $ 6,308 10.98%
Repurchase agreements 11,026 128 4.66% 2,461 34 5.54%
Investment securities
Available for sale 211,991 3,472 6.57% 258,991 4,474 6.91%
Held to maturity - - - 4,999 95 7.60%
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities 211,991 3,472 6.57% 263,990 4,569 6.94%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) 568,254 11,809 8.34% 496,927 10,911 8.81%
- --------------------------------------------------------------------------------------------------------------------------
Other real estate owned 331 1,685
Other noninterest earning assets 14,228 12,215
Less allowance for loan losses 5,924 4,409
- --------------------------------------------------------------------------------------------------------------------------
Total assets 576,889 506,418
- --------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 251,830 3,001 4.78% 195,253 2,562 5.26%
Certificates of deposit 181,520 2,416 5.34% 152,876 2,212 5.80%
Money market checking 22,806 249 4.38% 18,066 224 4.97%
- --------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 456,156 5,666 4.98% 366,195 4,998 5.47%
- --------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements 10,043 120 4.79% 17,603 253 5.75%
Term borrowings 58,748 856 5.84% 71,857 1,035 5.78%
Trust preferred securities 17,250 404 9.37% 17,250 404 9.37%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 542,197 7,046 5.21% 472,905 6,690 5.67%
Non interest-bearing liabilities 5,962 3,680
Shareholders' equity 28,730 29,833
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders
equity 576,889 506,418
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 4,763 $ 4,221
Net interest rate spread (2) 3.13% 3.14%
Net interest-earning assets $ 26,057 $ 24,022
Net interest margin (3) 3.36% 3.41%
Average interest-earning assets to
average interest-bearing liabilities 104.8% 105.1%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</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.
9
<PAGE>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------------
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) $ 330,450 $ 15,714 9.59% $ 230,477 $ 12,528 10.96%
Repurchase agreements 13,723 339 4.98% 1,367 37 5.46%
U.S. government agency securities
Available for sale 243,454 8,052 6.61% 252,415 8,742 6.93%
Held to maturity - - - 4,999 190 7.60%
Corporate debt securities
Available for sale 4,961 153 6.17% - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 248,415 8,205 6.61% 257,414 8,932 6.94%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) 592,588 24,258 8.25% 489,258 21,497 8.86%
- --------------------------------------------------------------------------------------------------------------------------
Other real estate owned 556 1,863
Other noninterest earning assets 13,829 12,448
Less allowance for loan losses 5,621 4,312
- --------------------------------------------------------------------------------------------------------------------------
Total assets 601,352 499,257
- --------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 257,995 6,108 4.77% 197,055 5,134 5.25%
Certificates of deposit 180,666 4,846 5.41% 143,820 4,160 5.83%
Money market checking 23,270 506 4.39% 17,852 440 4.97%
- --------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 461,931 11,460 5.00% 358,727 9,734 5.47%
- --------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements 18,110 474 5.28% 26,033 749 5.80%
Term borrowings 68,191 1,950 5.77% 63,144 1,820 5.81%
Trust preferred securities 17,250 809 9.38% 17,250 808 9.37%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 565,482 14,693 5.24% 465,154 13,111 5.68%
Non interest-bearing liabilities 6,502 4,483
Shareholders' equity 29,368 29,620
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders
equity 601,352 499,257
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,565 $ 8,386
Net interest rate spread (2) 3.01% 3.18%
Net interest-earning assets $ 27,106 $ 24,104
Net interest margin (3) 3.25% 3.46%
Average interest-earning assets to
average interest-bearing liabilities 104.79% 105.18%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Net interest rate spread represents the average yield earned on
interest-earning assets, less the average rate paid on interest-bearing
liabilities.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND EXPENSE
The following table presents the dollar amount of changes in interest
income and interest expense of major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates. For each 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.
10
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
For the Quarter Ended For the Six Months Ended
June 30, 1999 June 30, 1999
----------------------------------------------------------------------------
1999 compared to 1998 1999 compared to 1998
Increase (decrease) due to Increase (decrease) due to
----------------------------------------------------------------------------
Net Net
(DOLLARS IN THOUSANDS) Volume Rate Change Volume Rate Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans $ 2,815 $ (914) $ 1,901 $ 4,906 $ (1,720) $ 3,186
Repurchase agreements 100 (6) 94 305 (3) 302
U.S. government agency securities:
Available for sale (778) (224) (1,002) (302) (388) (690)
Held to maturity (95) (95) (94) (96) (190)
Corporate Bonds:
Available for sale - - - 153 - 153
- ----------------------------------------------------------------------------------------------------------------------------
Total change in interest income 2,137 (1,239) 898 4,968 (2,207) 2,761
- ----------------------------------------------------------------------------------------------------------------------------
CHANGES IN INTEREST EXPENSE:
Savings accounts 691 (252) 439 1,475 (500) 974
Certificates of deposit 391 (187) 204 1,005 (319) 686
Money market checking 54 (29) 25 123 (57) 66
Reverse repurchase agreements (95) (38) (133) (212) (63) (275)
Term borrowings (191) 12 (179) 144 (14) 130
Trust preferred securities - - - - 1 1
- ----------------------------------------------------------------------------------------------------------------------------
Total change in interest expense 850 (494) 356 2,535 (952) 1,582
- ----------------------------------------------------------------------------------------------------------------------------
Changes in net interest income $ 1,287 $ (745) $ 542 $ 2,433 $ (1,255) $ 1,179
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
DETAILED COMPARISONS OF FINANCIAL RESULTS
NET INCOME
Net income was $1.2 million (or $0.43 per common share on a diluted basis)
for the quarter ended June 30, 1999, compared to $1.3 million (or $0.43 per
common share on a diluted basis) for the corresponding period in 1998. Pretax
income for the second quarter of 1998 included a gain on the sale of commercial
real estate loans of $332,000 or $196,000 on an after tax basis. There was no
corresponding commercial real estate loan sale income during the second quarter
of 1999.
Net income was $2.5 million (or $.90 per common share on a diluted basis)
for the six months ended June 30, 1999, compared to $2.4 million (or $0.79 per
common share on a diluted basis) for the corresponding period in 1998. The
improvement in the six months net income 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 $542,000 or 12.8% to $4.8 million for the
quarter ended June 30, 1999 compared to the same period of 1998. Net interest
income increased by $1.2 million or 14.1% to $9.6 million for the six months
ended June 30, 1999 compared to the same period of 1998. The increase in net
interest income during the quarter and six months ended June 30, 1999 was
primarily the result of an increase of $71.3 million and $103.3 million,
respectively, in the Company's average balance of interest-earning assets
between the 1999 and 1998 periods. Both the yield on interest-earning assets
and the rates paid on interest-bearing liabilities declined 47 and 46 basis
points, respectively, between the second quarter periods and declined 61 and 44
basis points, respectively, between the six month 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 June 30, 1999 and 1998 was 3.13% and 3.14%, respectively, while
the interest rate spread for the six months ending June 30, 1999 and 1998 was
3.01% and 3.18%, respectively. The slight change in the net interest rate
spread between the 1999 and 1998 periods is the result of a decrease of 47
basis points in the yields paid on interest-earning assets offset by a
decline of 46 basis points on the interest-bearing liabilities for the second
quarter and for the six months was the result of a decrease of 61 basis
points in the yields paid on interest-earning assets partially offset by a
decline of 44 basis points on the interest-bearing liabilities. The decline
in the yield of the interest-earning assets is primarily the result of the
following items: (1) 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, (2) the decline in the investment security yield
reflects 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 and (3)
11
<PAGE>
the loan yields on the Company's new loan originations made during the
second half of 1998 and the first half of 1999 have generally been lower than
the yields on loans within the portfolio made prior to 1998.
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 June 30, 1999 and 1998, was 3.36% and
3.41%, respectively. The net interest margin for the six months ended June 30,
1999 and 1998 was 3.25% and 3.46%, 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
assets and average interest-bearing liabilities by category, and by the
percentage of each category to the total, for the three months ended June 30,
1999 and 1998, including the change in average balance and yield/rate between
these respective periods:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
June 30, 1999 June 30, 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 $ 330,450 55.8% 9.59% $ 230,477 47.1% 10.96% $ 99,973 8.7% -1.37%
Repurchase agreements 13,723 2.3% 4.98% 1,367 0.3% 5.46% 12,356 2.0% -0.48%
Investment securities 248,415 41.9% 6.61% 257,414 52.6% 6.94% (8,999) -10.7% -0.33%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 592,588 100.0% 8.25% 489,258 100.0% 8.86% 103,330 -0.61%
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits 461,931 81.7% 5.00% 358,727 77.1% 5.47% 103,204 4.6% -0.47%
Borrowings
Other borrowings 18,110 3.2% 5.28% 26,033 5.6% 5.80% (7,923) -2.4% -0.52%
Term borrowings 68,191 12.1% 5.77% 63,144 13.6% 5.81% 5,047 -1.5% -0.04%
Trust preferred securities 17,250 3.0% 9.38% 17,250 3.7% 9.37% - -0.8% 0.01%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 565,482 100.0% 5.24% $ 465,154 100.0% 5.68% $100,328 -0.44%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL INTEREST INCOME
Total interest income increased by $898,000 or 8.2% to $11.8 million for
the quarter ended and increased by $2.8 million or 12.8% to $24.3 million for
the six months ended June 30, 1999 compared to the same periods of 1998. These
increases were primarily due to an increase in the average balance of interest-
earning assets of $71.3 million and $103.3 million for the quarter and six
months ended June 30, 1999, respectively. Average interest-earning assets
increased between the 1999 and 1998 periods as a result of the growth in the
loan portfolio. The overall yields on the Company's interest-earning assets
decreased by 47 and 61 basis points for the quarter and six months ended June
30, 1999 from the comparable periods in 1998. This decline is due to reduced
yields earned on commercial loans and investment securities. One reason for the
decline in the overall loan portfolio yield is 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. A second reason for the decline in
the loan yield is the payoff and maturity of older loans that generally have a
slightly higher yield compared to the average yield in the loan portfolio. A
third reason for the decline in the loan yield is the origination of new loans
that generally have a slightly lower yield compared to the average yield in the
loan portfolio. The changes in the loan yields reflect the increased
competitive rate pressure within the lending marketplace. The decline in the
investment security yield reflects 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.
TOTAL INTEREST EXPENSE
Total interest expense for the quarter ended June 30, 1999 increased by
$356,000 or 5.3% to $7.0 million compared to the same period of 1998. Total
interest expense for the six months ended June 30, 1998 increased by $1.6
million or 12.1%, to $14.7 million compared to the same period of 1998. The
increase in interest expense for both periods resulted entirely from an
increase in the average balance of interest-bearing liabilities of $69.3
million and $100.3 million, respectively, for the quarter and six months
ended June 30, 1999, as compared to the same period of 1998. The average
interest-bearing liability increase 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 5.67% to 5.21%, or 46
basis points, during the quarter and decreased from 5.68% to 5.24% or 44
basis points during the six months ended June 30, 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.
Interest expense on savings accounts increased $439,000 or 17.1% to $3.0
million, and increased $974,000 or 19.0% to $6.1 million for the quarter and six
months ending June 30, 1999, respectively, as compared to the comparable periods
of 1998. These increases were the result of a $56.6 million or 29.0% and a
$60.9 million or 30.9% increase in the average balances of
12
<PAGE>
savings accounts for the quarter and six months ending June 30, 1999 as compared
to 1998. These increases were partially offset by a decline of 48 basis points
on the rates paid on the Company's savings accounts for both the quarter and six
months ending June 30, 1999, as compared to 1998.
Interest expense on certificates of deposits increased $204,000 or 9.2% to
$2.4 million and increased $686,000 or 16.5% to $4.8 million for the quarter and
six months ending June 30, 1999, respectively, as compared to 1998. These
increases reflect a $28.6 million or 18.7% and a $36.8 million or 25.6% increase
in the average balances of certificates of deposits for the quarter and six
months ending June 30, 1999, respectively, as compared to the comparable 1998
periods. Partially offsetting these increases was a 46 basis point second
quarter and a 42 basis point six month decrease in the rates paid on the
Company's certificates of deposits.
Interest expense on money market checking accounts increased $25,000 or
11.2% and $66,000 or 15.0% for the quarter and six months ending June 30, 1999,
respectively, as compared to 1998. These increases reflect a $4.7 million or
26.2% and a $5.4 million or 30.3% increase in the average balances in the
Company's money market checking accounts for the quarter and six months ending
June 30, 1999. Partially offsetting these increases was a 59 and 58 basis point
decrease in the rates paid on the Company's money market checking accounts for
the quarter and six months ending June 30, 1999, respectively.
Interest expense on term borrowings decreased $179,000 or 17.3% during the
second quarter of 1999 but increased $130,000 or 7.1% during the six months
ending June 30, 1999, as compared to 1998. The second quarter 1999 decrease
reflects a $13.1 million or 18.2% decrease in the average balance of term
borrowings for the quarter, while the six months increase reflects a $5.0
million or 8.0% increase in the average balance for the six months ending June
30, 1999, as compared to 1998. The rates paid on term borrowings remained
relatively stable between the 1999 and 1998 periods.
Interest expense on reverse repurchase agreements declined $133,000 or
52.6% and declined $275,000 or 36.7% for the quarter and six months ending June
30, 1999, respectively, as compared to 1998. These decreases reflect a $7.7
million or 42.9% and a $7.9 million or 30.4% decrease in the average balances of
reverse repurchase agreements for the quarter and six months ending June 30,
1999, respectively, as compared to 1998. The rates paid on reverse repurchase
agreements declined significantly between the 1999 and 1998 periods, declining
96 basis points for the second quarter and declining 52 basis points for the six
months. The decline in the rates paid for reverse repurchase agreements
reflects the decline in market rates between these periods.
PROVISION FOR LOAN LOSSES
During the quarter ended June 30, 1999, the Company's provision for loan
losses increased by $165,000 to $395,000, and for the six months the provision
increased $625,000 to $1,055,000 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
quarter and six months ending June 30, 1999, primarily reflects the growth in
the Company's loan portfolio as well as judgments about economic conditions.
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 table on page 8 reflects the ratio of
nonaccrual loans to total loans, and the ratio of the allowance for loan losses
to nonaccrual loans at June 30, 1999 and June 30, 1998. The allowance for loan
losses as a percentage of loans stood at 1.71% at June 30, 1999, compared to
1.74% at December 31, 1998.
NONINTEREST INCOME
The following table sets forth certain information with respect to the
Company's noninterest income for the quarter and six months ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
NONINTEREST INCOME ANALYSIS For the Quarter Ended June 30 For the Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
(Dollars in thousands) 1999 1998 $ % 1999 1998 $ %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gain on sale of other real estate owned $ 25 $ 83 $ (58) (69.9%) $ 25 $ 83 $ (58) (69.9%)
Gain on sale of commercial real estate loans - 332 (332) (100.0%) - 332 (332) (100.0%)
Gain on sale of SBA loans 79 137 (58) (42.3%) 175 137 38 27.7%
Gain on sale of investment securities 71 - 71 100.0% 586 - 586 100.0%
Loan prepayment and late fee income 269 407 (138) (33.9%) 368 508 (140) (27.6%)
Other noninterest income 215 114 101 88.6% 476 214 262 122.4%
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 659 $ 1,073 (414) (38.6%) $ 1,630 $ 1,274 356 27.9%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest income for the quarter ended June 30, 1999, decreased by
$414,000 to $659,000, compared to 1998. This decrease was primarily the
result of a $332,000 gain on the sale of commercial real estate loans in the
second quarter of 1998. Also contributing to the second quarter decline was
the decrease of $138,000 in loan prepayment and late fee income, a $58,000
decline on the gain on sale of other real estate owned, and a $58,000 decline
on the sale of SBA loans. These declines were partially offset by a $71,000
gain on the sale of investment securities and an increase of $101,000 on loan
origination fees.
13
<PAGE>
Noninterest income increased $356,000 to $1.6 million for the six months
ending June 30, 1999 compared to 1998. This increase was primarily the
result of a $586,000 gain on the sale of investment securities and a $262,000
increase in loan origination fees and a $38,000 increase in gain on sale of
SBA loans. These increases were partially offset by a $332,000 gain recorded
on the sale of commercial real estate loans in 1998 and a decrease of
$140,000 in loan prepayments and late fee income during 1999.
NONINTEREST EXPENSE
The following table sets forth certain information with respect to the
Company's noninterest expenses for the quarter and six months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE ANALYSIS For the Quarter Ended June 30 For the Six Months Ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNTS CHANGE AMOUNTS CHANGE
(DOLLARS IN THOUSANDS) 1999 1998 $ % 1999 1998 $ %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Valuation adjustments to other real estate owned $ - $ 50 $ (50) (100.0%) $ 43 $ 50 $ (7) (14.0%)
Other real estate owned expense 17 121 (104) (86.0%) 35 165 (130) (78.8%)
Salaries and employee benefits 1,734 1,581 153 9.7% 3,474 2,938 536 18.2%
Net occupancy expenses 430 419 11 2.6% 872 810 62 7.7%
Communication and data processing 223 188 35 18.6% 435 379 56 14.8%
Advertising and promotion 215 115 100 87.0% 407 179 228 127.4%
FDIC insurance premiums 14 11 3 27.3% 26 21 5 23.8%
Credit and collections expenses 26 75 (49) (65.3%) 36 88 (52) (59.1%)
Other expenses 362 299 63 21.1% 629 530 99 18.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 3,021 $ 2,859 162 5.67% $ 5,957 $ 5,160 797 15.4%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense for the quarter and six months ended June 30, 1999
increased $162,000, or 5.67% and increased $797,000 or 15.4%, over the same
periods in 1998, respectively. These changes are detailed on the table above
and significant changes in noninterest expense are described below.
The valuation adjustment to OREO for the second quarter ended June 30, 1999
decreased by $50,000 compared to the same period in 1998. The Company sold its
last OREO property in the second quarter of 1999 at a gain. No OREO valuation
adjustments were recorded in the second quarter of 1999.
Other real estate owned expense for the quarter and six months ending June
30, 1999, declined $104,000 and $130,000, respectively, compared to 1998 as a
result of the final sale of the Company's OREO properties during 1999.
Salaries and employee benefits for the quarter and six months ended June
30, 1999, increased by $153,000, or 9.7%, and increased $536,000 or 18.2%,
respectively, as compared to the same period in 1998. The increase is partially
the result of an increase to the Company's marketing and administrative bonus
accrual made during the first and second quarters of 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 expenses increased by $11,000 or 2.6% for the quarter and
$62,000 or 7.7% for the six months compared to the same periods of last year.
This increase reflects 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 $35,000 or 18.6% for
the quarter and $56,000 or 14.8% for the six months as compared to the same
periods 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.
Advertising and promotion costs increased for the quarter and six months
ended June 30, 1999 by $100,000 or 87.0% and $228,000 or 127.4%, respectively,
compared to the same period in 1998. The Company has 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.
Credit and collection expenses decreased for the quarter and six months
ended June 30, 1999 by $49,000 or 65.3% and $52,000 or 59.1%, respectively,
compared to the same period of 1998. The number of problem and nonaccrual loans
declined during 1999, resulting in a reduction in credit and collection costs.
Other expenses increased by $63,000 or 21.1% and $99,000 or 18.7% for the
quarter and six months ended June 30, 1999 as compared to 1998. This increase
reflects the additional cost associated with the higher volume in loan
origination activity for the quarter and six months ending June 30, 1999.
INCOME TAX PROVISION
For the quarters ended June 30, 1999 and 1998, the Company estimated its
provision for income taxes at $799,000 or 39.8% and $904,000 or 41.0%,
respectively. For the six months ended June 30, 1999 and 1998, the Company's
provision for income taxes was $1.7 million or 39.4% and $1.7 million or
41.0%, respectively. The difference between the Company's statutory tax rate
and its effective tax rate, for the quarters ended June 30, 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
14
<PAGE>
valuation reserves for the quarters and six months ending June 30, 1999, as a
result of settlements made with the IRS on prior year tax returns.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN BALANCE SHEET
JUNE 30, 1999 COMPARED TO DECEMBER 31, 1998
Total assets of the Company decreased to $583.7 million at June 30, 1999
from $645.3 million at December 31, 1998, a $61.6 million decrease. The
investment securities portfolio decreased by $112.2 million through active
liquidation of investment securities. Borrowings in reverse repurchase
agreements were reduced by $25.3 million to $5.5 million at June 30, 1999.
Additionally, the Company decreased its term borrowings by $24.5 million to
$55.0 million at June 30, 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 fourth quarter of 1998, this began to occur as the Company was able to
sell selected investment securities and use the proceeds to fund new loan
originations. As of June 30, 1999, net loans had increased by $68.0 million
while investment securities had declined by $112.2 million during this same
period. Investment securities liquidation, in addition to funding loan growth,
was used to cover the decline in deposits, overnight borrowings and term
borrowings for the six month period ending June 30, 1999.
Loans, net of deferred fees and the allowance for loan losses, increased by
$68.0 million to $351.4 million at June 30, 1999, from $283.5 million at
December 31, 1998. The Company originated $88.9 million and purchased $9.0
million for a total of $97.9 million in new real estate and business loans
during the six months ended June 30, 1999. Offsetting these originations, the
Company experienced $25.7 million in loan payoffs and sold $3.4 million of SBA
loans during the six months ended June 30, 1999.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1999 increased by $1.1 million
from the level at December 31, 1998, and represents 1.71% of outstanding
loans at June 30, 1999. The increase in the allowance from $5.0 million at
December 31, 1998 to $6.1 million at June 30, 1999 primarily reflects $1.1
million in loan loss provision recorded for the first six 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.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and valuation adjustments to OREO for the
periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
ALLOWANCE FOR LOAN LOSSES PERIOD ENDED JUNE 30,
--------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 5,024 $ 4,100
Commercial real estate mortgages:
Charge-offs - (20)
Recoveries 20 15
Provision for loan losses: 1,055 430
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of period: $ 6,099 $ 4,525
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a % of loans 1.71% 2.01%
Net loan (recoveries)/charge-offs $ (20) $ (5)
Valuation adjustments to OREO 43 50
- ----------------------------------------------------------------------------------------------------------------------------
Total net loan (recoveries)/charge-offs and OREO valuation adjustments $ 23 $ 45
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING AND RESTRUCTURED ASSETS
The following table sets forth loans accounted for on a nonaccrual basis,
OREO and loans that were impaired due to the loans being restructured at the
dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans 0 0
Other real estate owned 0 806
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and OREO $ 0 $ 806
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 0% 0.12%
- ----------------------------------------------------------------------------------------------------------------------------
Other impaired loans (restructured loans) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
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. The Company had no nonaccrual loans at June 30,
1999.
OTHER REAL ESTATE OWNED
Assets classified as OREO include foreclosed real estate owned by the
Company. The Company had no properties in this category at June 30, 1999.
The Company records its OREO properties at the lower of cost or fair market
value which may require the Company to make valuation adjustments to its OREO
properties held, based on current collateral appraisal data and other
relevant information which effectively reduces the book value of such assets
to their 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 commissions, past due property taxes, property
repair expenses, and other items. The estimated sale price utilized by the
Company may 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 June 30, 1999 by $25.3
million to $5.5 million, from $30.8 million at December 31, 1998. The rates
paid on this short-term debt averaged 4.79% and 5.28% for the three months
and six months ended June 30, 1999, respectively. The Company utilized 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 June 30, 1999
the Company had $89.5 million in unused short-term borrowing availability
against these four borrowing facilities.
TERM BORROWINGS
The Company reduced its term borrowings by $24.5 million to $55.0
million during the six months ending June 30, 1999. The Company has a total
of $140.0 million of term borrowing lines, of which $55.0 million had been
borrowed against at June 30, 1999. This debt is secured by pledging specific
amounts of specific securities of the Company's U.S. government sponsored
agency securities portfolio. These secured borrowing have an original five
year maturity with a two-year, one-time call option. The table below reflects
the attributes of the Company's term borrowings.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT RATE CALL DATE MATURITY DATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.82% five-year term borrowings $ 25,000 5.82% 09/99 09/02
5.78% five-year term borrowings 10,000 5.78% 10/99 10/02
5.63% five-year term borrowings 10,000 5.63% 12/99 12/02
5.48% five-year term borrowings 10,000 5.48% 01/00 01/03
- ----------------------------------------------------------------------------------------------------------------------------
Total term borrowings $ 55,000 5.72%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 June 30, 1999,
Pacific Crest Bank was in compliance with all such capital requirements.
Shareholders' equity decreased by $3.5 million to $26.6 million at June 30,
1999. This decrease reflects the following activity. Other comprehensive income
net of tax decreased by $5.1 million as the investment securities portfolio was
repriced downward due to an increase in market interest rates at June 30, 1999.
The Company purchased 57,000 shares of common stock under its stock repurchase
plan. These treasury shares cost the Company $833,000. The Company declared
and paid two cash dividends, a $0.05 per share first quarter cash dividend of
$134,000 and a $0.06 per share second quarter cash dividend of $160,000.
Partially offsetting the decrease to capital was the recording of $2.5 million
of net income for the six months of 1999, and the increase to capital of
$185,000 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 stock option plan. On July 30, 1999, the Company
announced that the Board of Directors had declared a $0.06 per common share cash
dividend for the third quarter of 1999. The dividend will be paid to
shareholders of record at the close of business September 2, 1999 and is payable
on September 17, 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.
16
<PAGE>
The following table sets forth Pacific Crest Bank's regulatory capital
ratios at June 30, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS AT JUNE 30, 1999 AT DECEMBER 31, 1998
----------------------------------------------------------------------------------
PACIFIC CREST BANK Required Actual Excess Required Actual Excess
- ------------------------------------------------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital ratio 4.00% 7.36% 3.36% 4.00% 6.81% 2.81%
Tier 1 risk-based capital ratio 4.00% 10.35% 6.35% 4.00% 10.67% 6.67%
Total risk-based capital ratio 8.00% 11.60% 3.60% 8.00% 11.92% 3.92%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1999, the Bank was "well capitalized" under the prompt
corrective action provisions of 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%.
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings, the
payments of principal and interest on loans, the payment of interest on
investment securities and the sale of loans and securities.
The Company's holdings of cash and cash equivalents during the six months
ended June 30, 1999 decreased $17.2 million to $8.5 million at June 30, 1999
from $25.6 million at December 31, 1998. The decline in the Company's cash
equivalents during the six months ending June 30, 1999 was utilized in financing
the Company's net loan growth, deposit liability runoff and paying down a
portion of the Company's term and other borrowings.
Loans, net of deferred fees and the allowance for loan losses, increased by
$68.0 million to $351.4 million at June 30, 1999, from $283.5 million at
December 31, 1998. The Company originated $88.9 million and purchased 9.0
million, for a total of $97.9 million in new real estate and business loans
during the six months ended June 30, 1999. Offsetting these originations, the
Company experienced $25.7 million in loan payoffs and sold $3.4 million in SBA
loans during the six months ended June 30, 1999.
The Company experienced a decline in its interest-bearing deposits of $8.8
million during the first six months 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 experienced a $27.6
million deposit runoff in its saving accounts, a $1.9 million runoff in its
money market checking accounts, and $20.7 million increase in its certificates
of deposit.
In order to reduce its overnight and short-term borrowings, the Company
paid down its reverse repurchase agreements by $25.3 million and paid down its
term borrowings by $24.5 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 $112.2 million in the Company's investment
securities portfolio. The partial liquidation of the investment securities
portfolio to finance the Company's net loan growth, and to cover the deposit
liability runoff was 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. Cash plus investments less current liabilities
and short-term debt totaled $5.3 million at June 30, 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 $11.7 million of which $1.7 million was unrestricted and available
for dividend payments at June 30, 1999. The Bank has declared and paid a
$300,000 second quarter and a $280,000 first quarter cash dividend to the parent
during 1999. The Bank anticipates that it will continue to declare and
pay quarterly dividends to the parent during 1999.
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.
17
<PAGE>
As of the date of this Form 10-Q filing, the Company has successfully
completed the awareness and assessment phase, the testing phase and the
remediation phase (if required) of all critical systems identified within the
Company's year 2000 plan. The Company is currently in the final phases of
the validation phases of selected aspects 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 have all been
tested, remediated (if needed), and certified as compliant with the exception
of the Company's telephone voice response system, which is in the final
remediation and validation phase.
The Company has notified its customers by means of statement stuffers of
Year 2000 issues. In addition the Company is also in the process of contacting
all of 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
will be evaluated to ensure an adequate specific allocation to the allowance for
loan losses is established. While management believes the Year 2000 does
represent an area of potential risk for credit losses, it 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. 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 Form 10-Q 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 purchase new computer
software systems, or to have existing systems modified, is not expected to
exceed $75,000, in total, over the third and fourth quarters 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.
- --------------------------------------------------------------------------------
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 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 June 30, 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.
18
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
EXPECTED MATURITY DATES OR REPRICING DATE BY YEAR
-----------------------------------------------------------------------------------------
FAIR
VALUE AT
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 6/30/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS:
ASSETS:
Repurchase agreements (1) $ 557 $ - $ - $ - $ - $ - $ 557 $ 557
average yield (variable rate) 4.80% - - - - - 4.80%
U.S. Government sponsored agency
securities
available for sale (2) $ 5,006 - $ 50,169 - - $153,888 $ 209,063 $ 209,063
average yield (fixed rate) 6.44% - 5.66% - - 6.6% 6.39%
Total loans gross (3) $ 193,556 $ 15,893 $ 25,155 $ 34,629 $ 17,018 $ 71,773 $ 358,024 $ 359,731
average yield 9.95% 9.48% 9.21% 8.08% 8.08% 8.26% 9.20%
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings accounts (1) $ 248,433 - - - - - $ 248,433 $ 248,433
average rates (variable rate) 4.71% - - - - - 4.71%
Money market checking (1) $ 21,895 - - - - - $ 21,895 $ 21,895
average rates (variable rate) 4.33% - - - - - 4.33%
Certificates of deposit (4) $ 109,940 $ 83,496 $ 8,414 $ 703 $ 944 $ 207 $ 203,704 $ 202,187
average rates (fixed rate) 5.33% 5.16% 5.41% 5.77% 5.77% 5.25% 5.27%
Reverse repurchase agreements (1) $ 5,500 - - - - - $ 5,500 $ 5,500
average rates (variable rate) 4.91% - - - - - 4.91%
Term borrowings (5) - - - $ 45,000 $ 10,000 - $ 55,000 $ 55,000
average rates (fixed rate) - - - 5.77% 5.48% - 5.72%
Trust preferred securities (2) - - - - - $ 17,250 $ 17,250 $ 17,250
average rates (fixed rate) - - - - - 9.38% 9.38%
Interest rate cap (6) $ 100,000 - - - - - $ 100,000 $ 100,000
average rates (fixed rate) 6.7% - - - - - 6.7%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
(6) The interest rate cap reprices on a quarterly basis based on the 3
Month Libor interest rate index. This interest rate cap begins to pay
interest when the 3 Month Libor rate exceeds 6.70%.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 1999 the annual meeting of shareholders of the Company was
held for the purpose of the following:
To elect Richard S. Orfalea and Gary Wehrle to the Board of
Directors for a term of three years to serve until a successor is
elected and qualified. A total of 2,488,856 shares were represented
at the meeting. A total of 2,452,789 shares were cast "FOR" the
election of Mr. Orfalea and Mr. Wehrle and 36,067 shares were
"WITHHELD" from voting for the nominees. The Company's other Board
of Directors, Martin J. Frank, Steven J. Orlando and Rudolph I.
Estrada are serving for a term of three years. Mr. Frank and Mr.
Orlando's terms expire at the annual meeting of 2001. Mr.
Estrada's term expires at the annual meeting of 2000.
To approve an amendment to the Company's 1993 Equity Incentive Plan
which would increase the annual grant of stock options to
non-employee directors from 500 shares to 1000 shares and eliminate
the provision limiting the receipt of annual grants to five years. A
total of 2,225,431 shares were cast "FOR" the amendment to the Plan,
260,085 shares were cast "AGAINST" the Plan, and 3,340 shares
abstained.
To approve an amendment to the Company's 1994 Employee Stock Purchase
Plan which would increase the number of shares reserved for
issuance under this Plan from 33,330 to 75,000 shares. A total of
2,290,377 shares were cast "FOR" the amendment to the Plan, 194,440
shares were cast "AGAINST" the Plan, and 4,039 shares abstained.
ITEM 5. OTHER INFORMATION
Not applicable.
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 June 30, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
Date: August 5, 1999 /s/Gary Wehrle
----------------------- -----------------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: August 5, 1999 /s/Robert J. Dennen
----------------------- -----------------------------------------------
Robert J. Dennen
Senior Vice President, Chief Financial Officer
Corporate Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8466
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 209063
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 357538
<ALLOWANCE> 6099
<TOTAL-ASSETS> 583753
<DEPOSITS> 474032
<SHORT-TERM> 5500
<LIABILITIES-OTHER> 5323
<LONG-TERM> 72250
0
0
<COMMON> 26648
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 583753
<INTEREST-LOAN> 8209
<INTEREST-INVEST> 3472
<INTEREST-OTHER> 128
<INTEREST-TOTAL> 11809
<INTEREST-DEPOSIT> 5666
<INTEREST-EXPENSE> 7046
<INTEREST-INCOME-NET> 4763
<LOAN-LOSSES> 395
<SECURITIES-GAINS> 71
<EXPENSE-OTHER> 3021
<INCOME-PRETAX> 2006
<INCOME-PRE-EXTRAORDINARY> 2006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1207
<EPS-BASIC> .45
<EPS-DILUTED> .43
<YIELD-ACTUAL> 3.36
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3000
<ALLOWANCE-OPEN> 5692
<CHARGE-OFFS> 0
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 6099
<ALLOWANCE-DOMESTIC> 6099
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
