<PAGE>
As filed with the Securities and Exchange Commission on March 30, 2000
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 0-22732
PACIFIC CREST CAPITAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4437818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30343 CANWOOD STREET 91301
AGOURA HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 865-3300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I
GUARANTEE OF PACIFIC CREST CAPITAL, INC. WITH RESPECT TO THE
9.375% CUMULATIVE TRUST PREFERRED SECURITIES OF PCC CAPITAL I
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
At March 24, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant, as reported on the Nasdaq National
Market, was $24,017,602.
At March 24, 2000, the number of shares outstanding of the registrant's
$ .01 par value common stock was 2,507,144.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the May 12, 2000 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PACIFIC CREST CAPITAL, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. BUSINESS....................................................................... 1
General................................................................... 1
Loans..................................................................... 2
Non-performing Assets..................................................... 4
Allowance for Loan Losses................................................. 6
Investments............................................................... 8
Deposits.................................................................. 9
Borrowings................................................................ 9
Employees................................................................. 10
Regulation................................................................ 10
Risk Factors.............................................................. 15
ITEM 2. PROPERTIES..................................................................... 18
ITEM 3. LEGAL PROCEEDINGS.............................................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 18
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......... 19
ITEM 6. SELECTED FINANCIAL DATA........................................................ 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................... 22
General................................................................... 22
Results of Operations..................................................... 22
Financial Condition....................................................... 32
Non-performing Assets..................................................... 33
Liquidity................................................................. 34
Dividends................................................................. 34
Capital Resources......................................................... 35
Asset/Liability Management................................................ 35
Year 2000 Compliance...................................................... 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................... 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................................. 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................. 65
ITEM 11. EXECUTIVE COMPENSATION......................................................... 65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................. 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................. 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K......................... 65
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Crest Capital, Inc. ("Pacific Crest" or the "Parent") is a bank
holding company principally engaged in commercial real estate and Small Business
Administration ("SBA") lending through its wholly owned subsidiary, Pacific
Crest Bank (the "Bank"). During the fourth quarter of 1999, Pacific Crest became
a bank holding company regulated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve") as part of the conversion of the Bank's
charter to that of a state commercial bank. See "Pacific Crest Bank" below.
Unless the context otherwise indicates, the "Company" refers to Pacific Crest
and its wholly owned subsidiaries, Pacific Crest Bank and PCC Capital I.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Annual Report on Form 10-K may
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision.
Forward-looking statements include, but are not limited to, statements preceded
by, followed by or that include the word "will," "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions. The
Company's actual results, performance or achievements may differ significantly
from the results, performance or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see Item 1. "Business - Risk Factors - Business Considerations and
Certain Factors that May Affect Future Results of Operations and Stock Price."
Management of the Company believes that these forward-looking statements are
reasonable; however, undue reliance should not be placed on such statements,
which are based on current expectations.
PACIFIC CREST BANK
Pacific Crest Bank is a California commercial bank that is supervised
and regulated by the California Department of Financial Institutions (the
"Department" or "DFI") and the Federal Deposit Insurance Corporation ("FDIC").
In September 1999, the Bank filed an application with the DFI to convert from a
California industrial loan company to a California commercial bank. In December
1999, the Bank received all of the necessary regulatory approvals, and on
December 15, 1999 completed its conversion from an industrial loan company to a
commercial bank. The Bank converted to a commercial bank primarily in order to
offer full-service checking accounts and pursue full-service online banking. The
Bank anticipates that it will begin to offer full-service checking accounts
during 2000, and to offer full-service online banking during 2001. The Bank's
deposits are insured by the FDIC up to applicable limits.
Pacific Crest Bank concentrates on marketing to and serving the needs
of individuals and small and medium sized businesses in California, Arizona,
Oregon and Washington. The Bank conducts its deposit operations through three
branch offices, located in Beverly Hills, Encino and San Diego, California. The
Bank currently offers savings accounts, money market checking accounts and
certificates of deposit and plans to offer demand deposit checking accounts in
the second half of 2000. However, the Bank does not offer other traditional
banking services such as travelers' checks and safe deposit boxes. The Bank has
focused its lending activities on loans secured by commercial real estate and
small business loans under the federal SBA program. Pacific Crest Bank conducts
its lending operations through its lending and marketing representatives located
in Southern California and through its correspondent loan brokers located in
California, Arizona, Washington, and Oregon.
PCC CAPITAL I
PCC Capital I ("PCC Capital") is a statutory business trust created
under Delaware law for the exclusive purpose of issuing and selling 9.375%
Cumulative Trust Preferred Securities (the "Trust Preferred Securities").
On September 22, 1997, PCC Capital completed a $17.25 million public
offering of Trust Preferred Securities and invested the gross proceeds of $17.25
million from the offering in 9.375% junior subordinated debentures issued by
Pacific Crest. The junior subordinated debentures were issued concurrent with
the issuance of the Trust Preferred Securities. The interest on the junior
subordinated debentures paid by Pacific Crest to PCC Capital represents the sole
revenues of PCC Capital and the sole source of dividend distributions to the
holders of the Trust Preferred Securities. Pacific Crest has fully and
unconditionally guaranteed all of PCC Capital's obligations under the Trust
Preferred Securities.
1
<PAGE>
Pacific Crest has the right, assuming no default has occurred, to defer
payments of interest on the junior subordinated debentures at any time for a
period not to exceed 20 consecutive quarters. The Trust Preferred Securities
will mature on October 1, 2027, but can be called after October 1, 2002 by PCC
Capital.
The Trust Preferred Securities are presented on a separate line on the
Consolidated Balance Sheets under the caption "Company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely junior
subordinated debentures." For financial reporting purposes, the Company records
the dividend distributions on the Trust Preferred Securities as "Interest
expense - trust preferred securities" on the Consolidated Statements of Income.
LOANS
LENDING
The Bank's primary focus in lending activities is the origination of
adjustable rate and fixed rate commercial real estate loans and SBA loans in
California, Arizona, Oregon and Washington. Loans are generally made for terms
of one to ten years. At December 31, 1999, the Company's loan composition by
interest rate repricing index was as follows:
- 55.8% of the loan portfolio priced at a margin over either
Bank of America's prime lending rate or the published WALL
STREET JOURNAL prime lending rate;
- 21.8% of the loan portfolio priced at a margin over either the
six-month or one-year Treasury Bill rate;
- 3.7% of the loan portfolio priced at a margin over the Federal
Home Loan Bank Board's 11th District Cost of Funds Index;
- 1.5% of the loan portfolio priced at a margin over either the
six-month or one-month London Interbank Offered Rate
("LIBOR"); and
- 17.2% of the loan portfolio was fixed rate and did not
reprice.
Of the 82.8% of the Company's loans that reprice, approximately
40.1% will reprice on a quarterly basis. The remaining 42.7% of the
repriceable loans will reprice within the next 12 months to 60 months. These
loans are generally prime rate and Treasury rate loans that may not initially
reprice for up to five years and are fixed rate during the first several
years. A significant number of loans have interest rate floors and ceilings
that limit the interest rate repricing of the loans. As of December 31, 1999,
the loan portfolio consisted of 570 commercial real estate and SBA loans with
an average loan balance of $643,000.
COMMERCIAL REAL ESTATE LENDING
The Bank's loans have been primarily originated through referrals
from commercial loan brokers, banks, realtors, and other third parties for
which the borrower pays a referral fee ranging from 1/2% to 1% of the loan
amount. The Bank employs commercial marketing representatives, who maintain
contacts with loan referral sources in California, Arizona, Oregon and
Washington, screen referred transactions and provide customer service. The
credit approval process includes an examination of the cash flow and debt
service coverage of the property serving as loan collateral, as well as the
financial condition and credit references of the borrower. Following analysis
of the borrower's credit, cash flows and collateral, loans are submitted to
the Bank's Credit Committee for approval. The Bank's senior management is
actively involved in its commercial lending activities and collateral
valuation process. The Bank obtains independent third party appraisals of all
properties securing its loans. In addition, the Bank employs individuals who
serve as internal property analysts to inspect properties and review the
third party appraisals for the benefit of the Credit Committee.
During the fourth quarter of 1999, the Company modified its loan
origination system for loans originated outside of Southern California. The
Company has recruited and is currently in the process of recruiting
correspondent loan agents (independent contractors who are not employees) to
represent it in Seattle, Portland, Phoenix, Oakland and Sacramento and has
closed Company loan production offices within these cities. These loan
production offices previously had each been staffed with one loan production
officer.
The Bank currently originates loans that generally fall within a
range of $100,000 to $3.5 million in size. It is anticipated by management
that the Bank's Board of Directors will periodically adjust and modify its
underwriting criteria in response to economic conditions and business
opportunities.
2
<PAGE>
SBA LENDING
During 1997, the Company initiated an SBA loan program. Loans made
by the Company under programs offered by the SBA are generally made to small
businesses for the purchase of businesses, purchase or construction of
facilities, purchase of equipment or working capital. The loans generally
carry guarantees from the SBA that range from 75% - 90% of the balance
loaned. Borrowers are required to provide adequate collateral for these
loans, similar to other commercial business loans. Under its SBA program, the
Company sells the guaranteed portion of selected SBA loans that it
originates. The Company retains the unguaranteed portion of the loans, as
well as the servicing on the loans, for which it is paid a fee. SBA loans are
all variable rate based upon the WALL STREET JOURNAL prime lending rate. The
loan servicing spread is generally a minimum of 1.00% on all loans.
During October 1999, the Bank was awarded "preferred lender" status
in the SBA San Diego region. Preferred lender status is the highest
designation granted lenders by the SBA and should facilitate the marketing
and loan approval process for new SBA loans in the San Diego region. It is
the Company's intention to gain preferred lender status in all of the West
Coast SBA regions where the Bank operates.
SECONDARY MARKET LOAN SALES PROGRAM
During 1998, the Company initiated a commercial fixed rate real
estate loan program designed to originate loans for both the Company's
portfolio and for potential sale in the secondary market. During the first
quarter of 1999, the Company established an office in Orange County,
California to coordinate and originate loans under this program. The office
was staffed with six employees. During January 2000, the Company closed this
office and moved the operations to its headquarters in Agoura Hills,
California.
LOAN PORTFOLIO
The Bank focuses its lending activities on commercial real estate
loans and SBA loans to investors and small and medium sized businesses. The
following table presents the categories of the Bank's loans at the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial real estate $357,312 $278,614 $223,902 $206,172 $193,332
Single-family residential 571 1,194 1,593 1,596 3,169
Commercial business/SBA/other 5,181 4,476 6,401 3,944 2,242
SBA loans held for sale 3,269 4,784 - - -
- ------------------------------------------------------------------------------------------------------------
Gross loans 366,333 289,068 231,896 211,712 198,743
Less: deferred loan fees (381) (582) (763) (617) (1,965)
Less: allowance for loan losses (6,450) (5,024) (4,100) (3,400) (4,500)
- ------------------------------------------------------------------------------------------------------------
Net loans $359,502 $283,462 $227,033 $207,695 $192,278
- ------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITIES OF LOAN PORTFOLIO
The table below sets forth the contractual maturities of the Bank's
outstanding gross loans at December 31, 1999. Loans that have adjustable or
floating interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses (dollars in thousands):
<TABLE>
<CAPTION>
MATURITY NUMBER LOAN
DATE OF LOANS BALANCE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans maturing within one year 2000 32 $ 23,554
Loans maturing after one year
but within two years 2001 18 8,488
Loans maturing after two years
but within three years 2002 13 8,445
Loans maturing after three years
but within five years 2003 - 2004 18 8,385
Loans maturing after five years
but within ten years 2005 - 2009 322 240,593
Loans maturing after ten years After 2009 167 76,868
- ------------------------------------------------------------------------------------------------------
Total 570 $ 366,333
- ------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans and other real
estate owned. Total non-performing assets declined in 1999 from $0.8 million or
0.12% of total assets at December 31, 1998 to $0.2 million or 0.03% of total
assets at December 31, 1999. At December 31, 1999, the Company had one loan of
$210,000 on non-accrual status, and the Company had one loan of $295,000 that
was 31 to 60 days delinquent.
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
The following table sets forth (a) loans accounted for on a non-accrual
basis, (b) other real estate owned, (c) and loans that were "troubled debt
restructurings" at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 210 $ - $ 228 $ 1,386 $ 4,985
Other real estate owned - 806 2,064 3,469 4,355
- ----------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 210 $ 806 $ 2,292 $ 4,855 $ 9,340
- ----------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings $ - $ - $ 899 $ 719 $ 8,757
- ----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans to gross loans 0.06% - 0.10% 0.65% 2.51%
Total non-performing assets to total assets 0.03% 0.12% 0.49% 1.60% 3.60%
Allowance for loan losses to non-accrual loans 3071.43% - 1798.20% 245.30% 90.30%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-ACCRUAL LOANS
Non-accrual loans are loans, not classified as "troubled debt
restructurings" that show little or no current payment ability. These loans are
supported, however, by collateral or cash flow that support the collectibility
of the Company's remaining book balance. Non-accrual loan balances are net of
any prior write-offs, but any specifically assigned general allowance for loan
losses is not deducted from the non-accrual loan balances.
The Company's general policy is to discontinue the accrual of interest
on a loan when any installment payment is 61 days or more past due, or when
management otherwise determines the collectibility of principal or interest is
unlikely prior to the loan becoming 61 days past due.
Interest income on non-accrual loans is subsequently recognized when
the loan becomes contractually current. Accounts that are deemed uncollectible
by management or for which no payment has been received for five months are
charged off for the amount that exceeds management's estimated net realizable
value of the underlying real estate collateral.
The Company's general policy is to initiate foreclosure proceedings
when loans become more than 30 days past due. Some loans that are more than 30
days past due are never actually foreclosed, however, because the borrower
brings the account current either before a formal notice of default is filed or
before the property goes to foreclosure sale.
On loans that are more than 60 days past due, updated third party
appraisals generally are ordered to ascertain the current fair market value of
the loan collateral. Between the time the updated appraisals are ordered and the
time they are received, (normally about a 60 day period), management evaluates
the loan collateral position to ascertain the amount of general loan loss
reserves that should be allocated to the loan. Upon receipt of the third party
appraisal, further general loan loss reserves are allocated, if necessary, based
on the estimated net realizable value of the collateral (which is calculated
based on the estimated sales price of the collateral less all selling costs).
The calculation of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and is not tied directly to the level of non-accrual
loans. Therefore, changes in the amount of non-accrual loans will not
necessarily result in an associated increase or decrease in the allowance for
loan losses.
The amount of interest income that would have been recorded in 1999,
1998 and 1997 had the Company's non-accrual loans been current in accordance
with their original terms was $48,000, $7,000 and $390,000, respectively. The
amount of interest income actually recorded on these loans and included in net
earnings for 1999, 1998 and 1997 was $24,000, $0 and $141,000, respectively.
4
<PAGE>
The following table represents the major components of the changes in
the non-accrual loans for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans at beginning of period $ - $ 228 $ 1,386
Additions 3,053 - 3,325
Reinstatements to accrual status (2,527) - (269)
Transfers to OREO - (208) (1,376)
Charge-offs (287) (20) (468)
Payments/payoffs/other (29) - (2,370)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) 210 (228) (1,158)
- --------------------------------------------------------------------------------------------------
Non-accrual loans at end of period $ 210 $ - $ 228
- --------------------------------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE OWNED
Assets classified as other real estate owned ("OREO") include
foreclosed real estate owned by the Company. The Company had no properties in
this category at December 31, 1999. The Company records its OREO properties at
the lower of cost or fair value. This may require the Company to make valuation
adjustments to its OREO based on current collateral appraisal data and other
relevant information, which effectively reduces the book value of such assets to
their estimated fair value less selling cost. 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 value which management believes, in some cases, to be higher than what
could be realized in a sale of the OREO.
The following table represents the major components of the changes in
the OREO for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OREO balance at beginning of period $ 806 $ 2,064 $ 3,469
Transfers from non-accrual loans - 208 1,376
Write-downs (43) (50) (370)
Payments/other (51) (84) (136)
Sales (712) (1,332) (2,275)
- --------------------------------------------------------------------------------------------
Net decrease (806) (1,258) (1,405)
- --------------------------------------------------------------------------------------------
OREO balance at end of period $ - $ 806 $ 2,064
- --------------------------------------------------------------------------------------------
</TABLE>
TROUBLED DEBT RESTRUCTURINGS
A troubled debt restructuring ("TDR") is a loan in which the Company,
for reasons related to the borrower's financial difficulties, grants a permanent
concession to the borrower, such as a reduction in the loan's fully-indexed
interest rate, a reduction in the face amount of the debt, or an extension of
the maturity date of the loan, that the Company would not otherwise consider. At
December 31, 1999, the Company had no loans categorized as a TDR. The TDR
balances are reflected net of any prior write-offs, but any specifically
assigned general allowance for loan losses is not deducted from the TDR
balances.
The following table represents the major components of the changes in
the TDRs for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TDR balance at beginning of period $ - $ 899 $ 719
Transfers to accruing loans - (899) -
Charge-offs/other - - 180
- ------------------------------------------------------------------------------------------
Net (decrease) increase - (899) 180
- ------------------------------------------------------------------------------------------
TDR balance at end of period $ - $ - $ 899
- ------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
OTHER LOANS OF CONCERN (POTENTIAL PROBLEM LOANS)
In addition to non-accrual loans and TDRs, as of December 31, 1999,
the Company had three loans with aggregate outstanding loan balances of $3.2
million with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the properties securing the
loans have caused management concern about the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such loans in the non-performing loan category. This compares
with four loans with aggregate outstanding loan balances of $2.7 million at
December 31, 1998.
ALLOWANCE FOR LOAN LOSSES
CLASSIFIED ASSETS
In connection with examinations of insured institutions, the FDIC
and the DFI examiners have the authority to identify problem assets and, if
necessary, require them to be classified. There are three primary
classifications for problem assets: "substandard," "doubtful" and "loss."
"Substandard" assets are assets that are characterized by the distinct
possibility that the institution will sustain some loss if deficiencies are
not corrected. "Doubtful" assets have all of the weaknesses inherent in
"substandard" loans, but also have the characteristic that, on the basis of
existing facts, conditions and values, collection or liquidation in full is
highly questionable and improbable. "Loss" assets are assets that are
considered uncollectible. Assets that are classified "loss" require the
institution either to establish a specific reserve in the amount of 100% of
the portion of the asset classified "loss" or to charge-off the asset. In
addition, the FDIC characterizes certain assets as "special mention." These
are assets that do not currently warrant classification but possess
weaknesses deserving management's close attention.
In addition, the Company utilizes an internally developed loan
classification and monitoring system in determining the appropriate level of
the allowance for loan losses. This system involves periodic reviews of the
entire loan portfolio and loan classifications based on that review.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is established through a
provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio. Since the Company's loan portfolio consists
primarily of term loans secured by commercial real property, general loan
loss reserves are typically established by assigning all loans to specified
risk categories and then determining the appropriate levels of reserve for
each risk category. A special management "Reserve Committee" meets monthly to
review the loan portfolio, delinquency trends, collateral value trends,
non-performing asset data and other material information. The amount of the
allowance is based upon management's evaluation of numerous factors,
including the adequacy of collateral securing the loans in the Company's
portfolio, delinquency trends, historical loan loss experience, and existing
economic conditions.
Based on evaluations of the aforementioned considerations, the
Company establishes its allowance for loan losses. The allowance for loan
losses expressed, as a percentage of total net loans, was 1.76% at December
31, 1999, 1.74% at December 31, 1998 and 1.77% at December 31, 1997.
The full Board of Directors reviews the adequacy of the allowance
for loan losses on a quarterly basis. Management utilizes its best judgment
in providing for possible loan losses and establishing the allowance for loan
losses. However, the allowance is an estimate, which is inherently uncertain
and depends on the outcome of future events. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based upon their judgment of
the information available to them at the time of their examination.
Adverse economic conditions or a declining real estate market could
adversely affect certain Bank borrowers' abilities to contractually repay
their loans. A decline in the economy could result in deterioration in the
quality of the loan portfolio and could result in high levels of
non-performing assets and charge-offs, which would adversely affect the
financial condition, and results of operations of the Company.
6
<PAGE>
The following table sets forth certain information with respect to
the Company's allowance for loan losses and valuation adjustments to OREO as
of the dates or for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES ACTIVITY:
Allowance for loan losses at beginning of period $ 5,024 $ 4,100 $ 3,400 $ 4,500 $ 8,075
Provision for loan losses 1,677 910 1,135 1,917 960
Addition due to purchase - - - 191 -
Net loan charge-offs (recoveries):
Charge-offs: commercial real estate 280 20 468 3,452 4,757
Charge-offs: commercial business 7 - - - -
Recoveries: commercial real estate (36) (34) (33) (244) (222)
- ----------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs (recoveries) 251 (14) 435 3,208 4,535
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 6,450 $ 5,024 $ 4,100 $ 3,400 $ 4,500
- ----------------------------------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS AND OREO VALUATION ADJUSTMENTS
Net loan charge-offs (recoveries) $ 251 $ (14) $ 435 $ 3,208 $ 4,535
OREO valuation adjustments 43 50 370 155 344
- ----------------------------------------------------------------------------------------------------------------------------
Total net loan charge-offs (recoveries) and
OREO valuation adjustments $ 294 $ 36 $ 805 $ 3,363 $ 4,879
- ----------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:
Net loan charge-offs (recoveries) to average loans 0.07% (0.01%) 0.20% 1.68% 2.45%
Net loan charge-offs (recoveries) and OREO valuation
adjustments to average loans and OREO 0.08% 0.01% 0.36% 1.73% 2.57%
Allowance for loan losses to total loans,
net of deferred fees 1.76% 1.74% 1.77% 1.61% 2.29%
Allowance for loan losses
to non-accrual loans 3071% - 1798% 245% 90%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the allocation of the Company's
allowance for loan losses among the Company's loan categories as of the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------
ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE %
FOR LOAN OF FOR LOAN OF FOR LOAN OF FOR LOAN OF FOR LOAN OF
LOSSES TOTAL LOSSES TOTAL LOSSES TOTAL LOSSES TOTAL LOSSES TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate $ 6,291 98% $ 4,823 96% $ 3,936 96% $ 3,172 93% $ 4,365 97%
Single-family residential 10 - 20 - 41 1% 155 5% 90 2%
Commercial business/SBA/other 149 2% 181 4% 123 3% 73 2% 45 1%
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 6,450 100% $ 5,024 100% $ 4,100 100% $ 3,400 100% $ 4,500 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
INVESTMENTS
The Company's investment portfolio is used for both liquidity purposes
and for investment income. The following table sets forth certain information
regarding the Company's investment portfolio as of the dates indicated (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government sponsored agency securities:
Available for sale $236,927 $309,525 $217,738 $ 52,534 $ -
Held to maturity - - 4,998 30,960 -
Corporate debt securities
available for sale 3,833 11,736 - - -
- --------------------------------------------------------------------------------------------------------------------
Total investment securities $240,760 $321,261 $222,736 $ 83,494 $ -
- --------------------------------------------------------------------------------------------------------------------
Securities purchased under
resale agreements $ 3,501 $ 22,048 $ 426 $ 262 $ 53,749
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES
The Company's investment securities portfolio at December 31, 1999
consisted of fixed rate investments in callable bonds and mortgage-backed
securities of U.S. government sponsored agencies (i.e. Fannie Mae, Freddie
Mac, Federal Home Loan Bank and Government National Mortgage Association) as
well as variable rate investments in investment grade corporate debt
securities. These securities have call features that allow the issuer to
retire (call) an individual security prior to that security's stated maturity
date. As of December 31, 1999, the securities had various call dates ranging
from one month to 19 months.
The following table sets forth the composition of the Company's
investment securities portfolio at December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE COUPON
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fannie Mae (FNMA) callable bonds $121,351 $116,639 6.19%
Freddie Mac (FHLMC) callable bonds 88,980 84,286 6.62%
Federal Home Loan Bank (FHLB) callable bonds 33,295 32,146 7.14%
Fannie Mae (FNMA) mortgage-backed securities 2,526 2,483 7.50%
Government National Mortgage Association (GNMA)
mortgage-backed securities 1,470 1,373 6.50%
- -------------------------------------------------------------------------------------------------------
Total U.S. government sponsored agency securities 247,622 236,927 6.49%
Corporate debt securities 4,094 3,833 7.36%
- -------------------------------------------------------------------------------------------------------
Total investment securities $251,716 $240,760 6.51%
- -------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES PURCHASED UNDER RESALE AGREEMENTS
The Company invests excess cash overnight and up to 3 months in
securities purchased under resale agreements ("repurchase agreements"). The
Company has master repurchase agreements with several nationally recognized
banks and broker-dealers. The maximum investment with one brokerage firm or
bank may not exceed $25 million. Collateral securing the repurchase
agreements is limited to U.S. Treasury bonds, notes and bills, and securities
issued by either U.S. government agencies or U.S. government sponsored
agencies. Collateral securing the repurchase agreements is restricted to
non-derivative types of securities by the aforementioned agencies. Collateral
securing the repurchase agreements is held for safekeeping under third-party
custodial agreements and is required to be segregated and separately
accounted for from all other securities held by the custodian for its other
customers or for its own account.
8
<PAGE>
DEPOSITS
The following table sets forth information regarding the composition of
the Company's deposits as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Savings accounts $196,368 $276,011 $200,255 $157,789 $173,725
Certificates of deposit 269,233 182,979 131,213 88,826 60,785
Money market checking accounts 18,783 23,849 16,703 20,080 -
- --------------------------------------------------------------------------------------------------------------------
Total deposits $484,384 $482,839 $348,171 $266,695 $234,510
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's primary source of funds is FDIC-insured deposits raised
through the Bank. The Company has deposit-gathering branches located in Beverly
Hills, Encino and San Diego, California. The Company's headquarters office in
Agoura Hills is an administrative office and does not take deposits. The
Company's current deposit products include savings accounts, limited draft money
market checking accounts and term certificates of deposit with 30-day to
five-year maturities. The Company plans to offer demand deposit checking
accounts in the second half of 2000. The Company attracts depositors by offering
rates that are generally higher than rates offered by independent commercial
banks and savings and loans that offer a broader array of services. The Company
also conducts a wholesale deposit operation through which deposits from other
financial institutions located throughout the United States are solicited. The
Company does not purchase brokered deposits. Management believes its deposits
are a stable and reliable funding source. At December 31, 1999, the Company had
total deposits of $484.4 million with 12,004 accounts.
BORROWINGS
The following table sets forth information regarding the composition of
the Company's borrowings as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities sold under repurchase agreements $ 30,500 $ 30,779 $ 21,500 $ 10,000 -
Borrowings from State of California 20,000 - - - -
Term borrowings 40,000 79,450 45,000 - -
Trust preferred securities (1) 17,250 17,250 17,250 - -
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings $107,750 $127,479 $ 83,750 $ 10,000 $ -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For a description of the trust preferred securities see Item I. "Business -
General - PCC Capital I"
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
A secondary source of funds for the Company consists of short-term
borrowings in the form of securities sold under repurchase agreements ("reverse
repurchase agreements"). The Company has set up short-term borrowing lines with
four brokers aggregating $95.0 million. The repayment terms on this short-term
debt range from one day up to three months. The interest rate paid can vary
daily, but typically approximates the federal funds rate plus 25 basis points.
These borrowings are secured by pledging specific amounts of certain U.S.
government sponsored agency securities. The Company utilizes these borrowing
lines to cover short-term financing needs. The balance outstanding as of
December 31, 1999 totaled $30.5 million, which was comprised of $25.0 million,
drawn against the $95.0 million short-term borrowing lines described above, and
$5.5 million, drawn against the Company's $45.0 million medium-term borrowing
facility described below under "Term Borrowings." The remaining borrowing
availability under the Company's short-term borrowing lines at December 31, 1999
was $70.0 million.
9
<PAGE>
BORROWINGS FROM STATE OF CALIFORNIA
The State of California Treasurer's Office has a fixed rate lending
program whereby an eligible bank may borrow an amount not to exceed its total
shareholders' equity. Borrowing maturity dates under this program cannot exceed
one year. As of December 31, 1999, the Bank's total shareholder's equity was
$37.4 million, against which the Bank had borrowed $20.0 million, leaving an
available amount of $17.4 million. The State of California requires collateral
with a value of at least 110% of the outstanding borrowing amount. The Bank has
pledged specific amounts of certain U.S. government sponsored agency securities
to meet this collateral requirement.
TERM BORROWINGS
The Company has a fixed rate, medium-term borrowing facility of
$45.0 million through one broker. This facility allows the Company to borrow
for periods of up to one year. This debt is secured by pledging specific
amounts of certain U.S. government sponsored agency securities. Borrowings on
this facility with an original maturity up to 90 days are classified on the
Consolidated Balance Sheets as "Securities sold under repurchase agreements,"
while borrowing with an original maturity in excess of 90 days are classified
as "Term borrowings." At December 31, 1999, the Company had borrowings
outstanding of $5.5 million, leaving an unused credit availability of $39.5
million. The $5.5 million outstanding at December 31, 1999 had an original
maturity of 90 days and was thus classified as "Securities sold under
repurchase agreements."
The Company has a fixed rate, long-term borrowing facility of $95.0
million over one year through one broker dealer. This debt is secured by
pledging specific amounts of certain U.S. government sponsored agency
securities. Additionally, these borrowings are fixed rate and have call
features that allow the lender to call the debt prior to the stated maturity
date. At December 31, 1999, the Company had borrowings outstanding of $40.0
million, leaving an unused credit availability of $55.0 million. The $40.0
million outstanding at December 31, 1999 is callable at various times during
2000.
EMPLOYEES
As of December 31, 1999, the Company employed 70 persons. Management
believes that its relations with its employees are good. The Company is not a
party to any collective bargaining agreement.
REGULATION
GENERAL
Bank holding companies and banks are extensively regulated under
both federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of stockholders of the Company. Set forth below is a summary
description of the material laws and regulations that relate to the
operations of Pacific Crest and the Bank. The description is qualified in its
entirety by reference to the applicable laws and regulations.
PACIFIC CREST CAPITAL, INC.
Pacific Crest, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). Pacific Crest is required to file with the Federal Reserve
quarterly, semi-annual, and annual reports and such additional information as
the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may
conduct examinations of Pacific Crest and its subsidiaries.
The Federal Reserve may require that Pacific Crest terminate an
activity or terminate control of or liquidate or divest certain subsidiaries
or affiliates when the Federal Reserve believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve also has the authority to regulate provisions of certain
bank holding company debt, including authority to impose interest ceilings
and reserve requirements on such debt. Under certain circumstances, Pacific
Crest must file written notice and obtain approval from the Federal Reserve
prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve, a
bank holding company and its non-banking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property, or furnishing of services. Further,
Pacific Crest is required by the Federal Reserve to maintain certain levels
of capital. See "--Capital Standards."
Pacific Crest is required to obtain the prior approval of the
Federal Reserve for the acquisition of more than 5% of the outstanding shares
of any class of voting securities or substantially all of the assets of any
bank or bank holding company. Prior approval of the Federal Reserve is also
required for the merger or consolidation of Pacific Crest and another bank
holding company.
Pacific Crest is prohibited by the BHCA, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% of the outstanding voting shares of any company
that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or furnishing services to its subsidiaries. However, Pacific Crest,
subject to the prior approval of the Federal Reserve, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
10
<PAGE>
Under Federal Reserve regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve's policy that in serving as a
source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to
its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve's regulations or both.
Pacific Crest is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, Pacific Crest and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California Department of Financial Institutions.
Pacific Crest's securities are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As such, Pacific Crest is subject to the information,
proxy solicitation, insider trading, and other requirements and restrictions
of the Exchange Act.
PACIFIC CREST BANK
Effective December 15, 1999, the Bank converted its charter from
that of a California industrial loan company to that of a California
commercial bank. As a California commercial bank, the Bank is subject to
primary supervision, periodic examination, and regulation by the Commissioner
and the FDIC. To a lesser extent, the Bank also is subject to certain
regulations promulgated by the Federal Reserve. If, as a result of an
examination of the Bank, the FDIC should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or
that the Bank or its management is violating or has violated any law or
regulation, various remedies are available to the FDIC. Such remedies include
the power to enjoin "unsafe or unsound" practices, to require affirmative
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of the Bank, to assess civil
monetary penalties, to remove officers and directors, and ultimately to
terminate the Bank's deposit insurance, which for a California commercial
bank would result in a revocation of the Bank's charter. The Commissioner has
many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit
accounts, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "- Capital Standards."
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act").
The Financial Services Modernization Act repeals the two affiliation
provisions of the Glass-Steagall Act: Section 20, which restricted the
affiliation of Federal Reserve Member Banks with firms "engaged principally"
in specified securities activities; and Section 32, which restricts officer,
director, or employee interlocks between a member bank and any company or
person "primarily engaged" in specified securities activities. In addition,
the Financial Services Modernization Act also contains provisions that
expressly preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect of the law
is to establish a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the BHCA framework to permit a
holding company system to engage in a full range of financial activities
through a new entity known as a Financial Holding Company. "Financial
activities" is broadly defined to include not only banking, insurance, and
securities activities, but also merchant banking and additional activities
that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the financial
system generally.
11
<PAGE>
Generally, the Financial Services Modernization Act:
- Repeals historical restrictions on, and eliminates
many federal and state law barriers to, affiliations
among banks, securities firms, insurance companies,
and other financial service providers;
- Provides a uniform framework for the functional
regulation of the activities of banks, savings
institutions, and their holding companies;
- Broadens the activities that may be conducted by
national banks, banking subsidiaries of bank holding
companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the
privacy of consumer information;
- Adopts a number of provisions related to the
capitalization, membership, corporate governance, and
other measures designed to modernize the Federal Home
Loan Bank system;
- Modifies the laws governing the implementation of the
Community Reinvestment Act ("CRA"), and
- Addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and
long-term activities of financial institutions.
In order for Pacific Crest to take advantage of the ability to
affiliate with other financial services providers, Pacific Crest must become
a "Financial Holding Company" as permitted under an amendment to the BHCA. To
become a Financial Holding Company, Pacific Crest would file a declaration
with the Federal Reserve, electing to engage in activities permissible for
Financial Holding Companies and certifying that it is eligible to do so
because all of its insured depository institution subsidiaries are
well-capitalized and well-managed. See "Capital Standards." In addition, the
Federal Reserve must also determine that each insured depository institution
subsidiary of Pacific Crest has at least a "satisfactory" CRA rating. See "-
Community Reinvestment Act and Fair Lending Developments." Pacific Crest
currently meets the requirements to make an election to become a Financial
Holding Company. Management of Pacific Crest has not determined at this time
whether it will seek an election to become a Financial Holding Company.
The Financial Services Modernization Act also permits national banks
to engage in expanded activities through the formation of financial
subsidiaries. A national bank may have a subsidiary engaged in any activity
authorized for national banks directly or any financial activity, except for
insurance underwriting, insurance investments, real estate investment or
development, or merchant banking, which may only be conducted through a
subsidiary of a Financial Holding Company. Financial activities include all
activities permitted under new sections of the BHCA or permitted by
regulation.
A national bank seeking to have a financial subsidiary, and each of
its depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank
must exclude from its assets and equity all equity investments, including
retained earnings, in a financial subsidiary. The assets of the subsidiary
may not be consolidated with the bank's assets. The bank must also have
policies and procedures to assess financial subsidiary risk and protect the
bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section
of the Federal Deposit Insurance Act governing subsidiaries of state banks
that engage in "activities as principal that would only be permissible" for a
national bank to conduct in a financial subsidiary. It expressly preserves
the ability of a state bank to retain all existing subsidiaries. Because,
California permits commercial banks chartered by the state to engage in any
activity permissible for national banks, the Bank will be permitted to form
subsidiaries to engage in the activities authorized by the Financial Services
Modernization Act, to the same extent as a national bank. In order to form a
financial subsidiary, the Bank must be well-capitalized, and the Bank would
be subject to the same capital deduction, risk management and affiliate
transaction rules as are applicable to national banks.
Pacific Crest Capital, Inc. and Pacific Crest Bank do not believe
that the Financial Services Modernization Act will have a material adverse
effect on our operations in the near-term. However, to the extent that it
permits banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. The
Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated
on an ad hoc basis. Nevertheless, this act may have the result of increasing
the amount of competition that Pacific Crest Capital, Inc. and the Bank face
from larger institutions and other types of companies offering financial
products, many of which may have substantially more financial resources than
Pacific Crest Capital, Inc. and the Bank.
12
<PAGE>
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
Dividends from the Bank constitute the principal source of income to
Pacific Crest, which is a legal entity separate and distinct from the Bank.
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends to Pacific Crest. In addition, the California
Department of Financial Institutions and the Federal Reserve have the
authority to prohibit the Bank from paying dividends, depending upon its
financial condition, if such payment is deemed to constitute an unsafe or
unsound practice.
The FDIC and the Commissioner also have authority to prohibit the
Bank from engaging in activities that, in the FDIC's and the Commissioner's
opinion, constitute unsafe or unsound practices in conducting its business.
It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC and the Commissioner could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the FDIC and
the Federal Reserve have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth
in such guidelines and the restrictions that are or may be imposed under the
prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or Pacific Crest may pay. An insured depository
institution is prohibited from paying management fees to any controlling
persons or, with certain limited exceptions, making capital distributions if
after such transaction the institution would be undercapitalized. See "-
Prompt Corrective Action and Other Enforcement Mechanisms" and "- Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
CAPITAL STANDARDS
The Federal Reserve and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such
as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by
one of several risk weighted percentages, which range from 0% for assets with
low credit risk, such as certain U.S. Treasury securities, to 100% for assets
with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of 8% for
qualifying total capital to risk-weighted assets (the "Total risk-based
capital ratio") and a minimum ratio of 4% for Tier 1 capital to risk-weighted
assets (the "Tier 1 risk-based capital ratio"). In addition to the risk-based
guidelines, federal banking regulators require banking organizations to
maintain a minimum ratio of Tier 1 capital to average quarterly total assets
(the "leverage ratio"). For a banking organization rated in the highest of
the five categories used by regulators to rate banking organizations, the
minimum leverage ratio must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions that fall below
one or more prescribed minimum capital ratios. Each federal banking agency
has promulgated regulations defining the following five categories in which
an insured depository institution will be placed, based on its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December
31, 1999, the Bank exceeded the required ratios for classification as "well
capitalized."
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized, or undercapitalized may be treated
as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal banking
agencies, however, may not treat a significantly undercapitalized institution
as critically undercapitalized unless its capital ratio actually warrants
such treatment.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule,
regulation, or any condition imposed in writing by the agency or any written
agreement with the agency.
12
<PAGE>
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to
assist the federal banking agencies in identifying and addressing potential
safety and soundness concerns before capital becomes impaired. The guidelines
set forth operational and managerial standards relating to: (i) internal
controls, information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings,
and (vi) compensation, fees and benefits. In addition, the federal banking
agencies have also adopted safety and soundness guidelines with respect to
asset quality and earnings standards. These guidelines provide six standards
for establishing and maintaining a system to identify problem assets and
prevent those assets from deteriorating. Under these standards, an insured
depository institution should: (i) conduct periodic asset quality reviews to
identify problem assets, (ii) estimate the inherent losses in problem assets
and establish reserves that are sufficient to absorb estimated losses, (iii)
compare problem asset totals to capital, (iv) take appropriate corrective
action to resolve problem assets, (v) consider the size and potential risks
of material asset concentrations, and (vi) provide periodic asset quality
reports with adequate information for management and the board of directors
to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that
earnings are sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
Pacific Crest Bank's deposit accounts are insured by the Bank
Insurance Fund ("BIF"), as administered by the FDIC, up to the maximum
permitted by law. Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC or
the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits,
which as of December 31, 1999, ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment. Pursuant to the Economic
Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"),
at January 1, 2000, Pacific Crest Bank began paying, in addition to its
normal deposit insurance premium as a member of the BIF, an amount equal to
approximately 2.12 basis points per $100 of insured deposits toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the
1980s to assist in the recovery of the savings and loan industry. Members of
the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in
addition to their normal deposit insurance premium, approximately 6.4 basis
points. Under the Paperwork Reduction Act, the FDIC is not permitted to
establish SAIF assessment rates that are lower than comparable BIF assessment
rates. The Paperwork Reduction Act also provided for the merging of the BIF
and the SAIF by January 1, 1999 provided there were no financial institutions
still chartered as savings associations at that time. Although legislation to
eliminate the savings association charter has been proposed, as of January 1,
1999, there were still financial institutions chartered as savings
associations.
INTERSTATE BANKING AND BRANCHING
The BHCA permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to
certain conditions, including certain nationwide- and state-imposed
concentration limits. Pacific Crest Bank has the ability, subject to certain
restrictions, to acquire by acquisition or merger branches outside its home
state. The establishment of new interstate branches is also possible in those
states with laws that expressly permit it. Interstate branches are subject to
certain laws of the states in which they are located. Competition may
increase further as banks branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Crest Bank is subject to certain fair lending requirements
and reporting obligations involving home mortgage lending operations and
Community Reinvestment Act activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system, which bases CRA ratings on an
institution's lending service and investment performance. When a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted in January, 2000, Pacific
Crest Bank was rated "Satisfactory" in complying with its CRA obligations.
14
<PAGE>
RISK FACTORS
COMPETITION
The banking and financial services industry in California,
generally, and in the Bank's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily
of changes in regulation, changes in technology and product delivery systems,
and the accelerating pace of consolidation among financial service providers.
The Bank competes for loans, deposits, and customers with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market
funds, credit unions, and other non-bank financial service providers. Many of
these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader range of financial
services than the Bank. In addition, recent federal legislation may have the
effect of further increasing the pace of consolidation within the financial
services industry. See Item 1. "Business - Regulation - Financial Services
Modernization Legislation."
In order to compete with the other financial services providers, the
Bank principally relies upon local promotional activities, personal
relationships established by officers, directors, and employees with its
customers, and specialized services tailored to meet needs of the communities
served. In those instances where the Bank is unable to accommodate a
customer's needs, it may arrange for those services to be provided by its
correspondents. In addition, the Bank attempts to compensate for competitive
disadvantages that may exist by providing a higher level of personal service
to borrowers and "hands-on" involvement by senior officers to meet borrower's
needs. The Bank currently does not offer traditional banking services such as
travelers' checks or safe deposit boxes and thus has a competitive
disadvantage in attracting depositors. The Bank attempts to compensate for
the lack of a full array of services in its branches by offering slightly
higher interest rates for deposits than most of its competitors.
The Bank conducts its operations through its three deposit branches
and loan production offices located in Southern California. The Bank
originates loans outside of Southern California through correspondents and
brokers.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most financial institutions, is
primarily dependent on interest rate differentials. In general, the
difference between the interest rates paid on interest-bearing liabilities,
such as deposits and other borrowings, and the interest rates received on
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond
the control of the Company, such as inflation, recession and unemployment,
and the impact which future changes in domestic and foreign economic
conditions might have on the Company cannot be predicted.
Monetary and fiscal policies of the federal government and the
policies of regulatory agencies, particularly the Federal Reserve, also
influence the business of the Company. The Federal Reserve implements
national monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in U.S. government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements, and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve in these areas influence the
growth of bank loans, investments, and deposits and also affect interest
rates earned on interest-earning assets and paid on interest-bearing
liabilities. The nature and impact on the Company of any future changes in
monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have the effect of increasing the cost of doing business,
limiting or expanding permissible activities, or affecting the competitive
balance between banks and other financial services providers. Proposals to
change the laws and regulations governing the operations and taxation of
banks, bank holding companies, and other financial institutions and financial
services providers are frequently made in the U.S. Congress, in the state
legislatures, and before various regulatory agencies. See Item 1. "Business -
Regulation."
15
<PAGE>
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND STOCK PRICE
Certain matters discussed in this Annual Report on Form 10-K may
constitute forward-looking statements under Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act. These statements may involve
risks and uncertainties. These forward-looking statements relate to, among
other things, expectations of the business environment in which the Company
operates in, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements. The following is a summary of
some of the important factors that could affect the Company's future results
of operations and/or stock price, and should be considered carefully.
(1) ECONOMIC CONDITIONS. The Company's results are strongly influenced by
general economic conditions in its market areas. Accordingly, a deterioration
in these conditions could have a material adverse impact on the quality of
the Company's loan portfolio and the demand for its products and services. In
particular, changes in economic conditions in the real estate industry may
affect its performance. See Item 1. "Business - Risk Factors - Economic
Conditions, Government Policies, Legislation, and Regulation."
(2) INTEREST RATES. The Company is subject to possible interest rate spread
compression, which would adversely impact net interest income, if interest
rates rise. The amount of such interest rate spread compression would depend
upon the frequency, magnitude and duration of such interest rate increases.
See Item 1. "Business - Risk Factors - Economic Conditions, Government
Policies, Legislation, and Regulation", and Item 7A. -"Quantitative and
Qualitative Disclosures About Market Risk."
(3) GOVERNMENT REGULATION AND MONETARY POLICY. All forward-looking statements
presume a continuation of the existing regulatory environment and United
States government monetary policies. The banking industry is subject to
extensive federal and state regulations, and significant new laws or changes
in, or repeals of, existing laws may cause results to differ materially. See
Item 1. "Business - Risk Factors - Economic Conditions, Government Policies,
Legislation, and Regulation," and "- Regulation."
(4) COMPETITION. The Company competes with numerous other domestic and
foreign financial institutions and non-depository financial intermediaries.
Results of the Company may differ if circumstances affecting the nature or
level of competition change, such as the merger of competing financial
institutions or the acquisition of California institutions by out-of-state
companies. See Item 1. "Business - Risk Factors - Competition."
(5) CREDIT QUALITY. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that its management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying credit portfolios, but such policies and procedures may not
prevent unexpected losses that could materially adversely affect the
Company's results. See Item 1. "Business - Allowance for Loan Losses."
(6) DEPENDENCE ON KEY EMPLOYEES. If the Company were to lose key employees
temporarily or permanently, particularly if they went to work for
competitors, it could hurt the Company's business. The Company's future
success depends on the continued contributions of existing senior management
personnel.
(7) ENVIRONMENTAL CONCERNS. The cost of cleaning up or paying damages and
penalties associated with environmental problems could increase operating
expenses. When a borrower defaults on a loan secured by real property, the
Bank often purchases the property in foreclosure or accepts a deed to the
property surrendered by the borrower. The Bank may also take over the
management of commercial properties whose owners have defaulted on loans. The
Bank also owns and leases premises where our branches and other facilities
are located. Although the Bank has lending, foreclosure and facilities
guidelines intended to exclude properties with an unreasonable risk of
contamination, hazardous substances may exist on some of the properties that
the Bank owns, manages or occupies. The Bank may face the risk that
environmental laws could force it to clean up the properties at its expense.
It may cost much more to clean a property than the property is worth. The
Bank could also be liable for pollution generated by a borrower's operations
if the Bank takes a role in managing those operations after a default. The
Bank also may find it difficult or impossible to sell contaminated properties.
16
<PAGE>
(8) NATURAL DISASTERS. The Bank's most significant operations are
concentrated in Southern California. A major earthquake could result in
material loss to the Bank. A significant percentage of the Bank's loans are
and will be secured by real estate. California is an earthquake-prone region.
The Bank has a disaster-recovery plan with off-site data processing resources
located in Costa Mesa, California. However, the Bank's properties and most of
the real and personal property securing the loans in the Bank's portfolio are
in Southern California. Many of the Bank's borrowers could suffer uninsured
property damage, experience interruption of their business or lose their jobs
after an earthquake. Those borrowers might not be able to repay their loans,
and the collateral for loans could decline significantly in value. Unlike a
bank with operations that are more geographically diversified, the Bank is
vulnerable to greater losses if an earthquake, fire, flood or other natural
catastrophe occurs in Southern California.
(9) OTHER RISKS. From time to time, the Company details other risks with
respect to its businesses and/or its financial results in its filings with
the SEC, the FDIC and the DFI, respectively.
The Company believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance
that the results described in such forward-looking statements will, in fact,
be achieved.
17
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 30343 Canwood
Street, Agoura Hills, California 91301. Pacific Crest Bank conducts its deposit
and lending operations through three branch offices located in Beverly Hills,
Encino and San Diego, California. The Company leases all of its offices.
Information with respect to the Company's principal executive and branch offices
is as follows:
<TABLE>
<CAPTION>
FLOOR SPACE IN ANNUAL LEASE EXPIRATION
LOCATION SQUARE FEET RENT DATE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Agoura Hills, California 16,361 $290,370 2006
Beverly Hills, California 3,102 169,404 2001
Encino, California 3,310 64,800 2007
San Diego, California 4,505 117,120 2010
- -------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
There is one lawsuit and claim pending against the Company which
management considers incidental to normal operations. Management, after review,
including consultation with counsel, believes that any ultimate liability that
could arise from this lawsuit and claim, would not materially affect the
financial position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals are executive officers of the Company as of
December 31, 1999. Pertinent information relating to these individuals is set
forth below. There are no family relationships between any of the officers. All
of the Company's officers hold their respective offices at the pleasure of the
Board of Directors, subject to the rights, if any, of an officer under any
contract of employment.
GARY WEHRLE - CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF PACIFIC
CREST - AGE 57
Mr. Wehrle has served as Chairman of the Board of Pacific Crest since
October 20, 1993, and President and Chief Executive Officer of Pacific
Crest since September 10, 1993. Mr. Wehrle has served as President and
Chief Executive Officer of the Bank since 1984. Mr. Wehrle served as
Executive Vice President of the Foothill Group, Inc. from 1980 to 1993.
GONZALO FERNANDEZ - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 57
Mr. Fernandez has served as Executive Vice President of Pacific Crest
since June 20, 1994. Mr. Fernandez has served as Executive Vice
President of the Bank since June 20, 1994. From May 1988 to June 1994,
he served as Senior Vice President of City National Bank.
LYLE C. LODWICK - EXECUTIVE VICE PRESIDENT OF PACIFIC CREST - AGE 46
Mr. Lodwick has served as Executive Vice President of Pacific Crest
since September 10, 1993. Mr. Lodwick has served as Executive Vice
President of the Bank since 1992 and, prior to that, served as Senior
Vice President of the Bank from 1988 to 1992.
ROBERT J. DENNEN - SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
SECRETARY OF PACIFIC CREST - AGE 47
Mr. Dennen has served as Senior Vice President, Chief Financial Officer
and Secretary of Pacific Crest since January 1, 1999 and prior to that,
served as Vice President and Chief Financial Officer of Pacific Crest
from 1993 to 1999. Mr. Dennen has served as Senior Vice President and
Chief Financial Officer of the Bank since January 1, 1999 and prior to
that, served as Vice President and Chief Financial Officer of the Bank
from 1993 to 1999, and prior to that, served as Vice President and
Controller/Treasurer of the Bank from 1986 to 1993.
CAROLYN REINHART - SENIOR VICE PRESIDENT OF PACIFIC CREST - AGE 40
Ms. Reinhart has served as Senior Vice President of Pacific Crest since
January 1, 1998 and, prior to that, served as Vice President of Pacific
Crest from 1993 to 1997. Ms. Reinhart has served as Senior Vice President
of the Bank since January 1, 1999 and, prior to that, served as Vice
President of the Bank from 1989 to 1997.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $0.01 par value (the "Common Stock") is
traded on the Nasdaq National Market under the Nasdaq symbol "PCCI."
There were approximately 1,500 beneficial owners of the Common Stock as
of March 24, 2000.
The following tables present the high and low Common Stock prices as
well as the dividends declared and paid during each quarter for the last two
years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
HIGH LOW DIVIDENDS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fourth quarter $ 15.13 $ 11.88 $ 0.07
Third quarter 15.63 12.25 0.06
Second quarter 16.13 13.00 0.06
First quarter 15.63 13.75 0.05
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
HIGH LOW DIVIDENDS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fourth quarter $ 15.25 $ 11.00 $ 0.05
Third quarter 20.00 13.75 -
Second quarter 21.50 17.63 -
First quarter 19.00 16.38 -
- ------------------------------------------------------------------------------------
</TABLE>
The Company currently plans to declare and pay quarterly dividends
during 2000. The Company's ability to pay dividends is subject to restrictions
set forth in the Delaware General Corporation Law. The Delaware General
Corporation Law provides that a Delaware corporation may pay dividends either
(i) out of the corporation's surplus (as defined by Delaware law), or (ii) if
there is no surplus, out of the corporation's net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. Furthermore, if
the Company were determined to be a quasi-California corporation, the Company
would have to comply with California law with respect to, among other things,
distributions to shareholders. Under California law, a corporation is prohibited
from paying dividends unless (i) the retained earnings of the corporation
immediately prior to the distribution exceed the amount of the distribution,
(ii) the assets of the corporation exceed 1-1/4 times its liabilities, or (iii)
the current assets of the corporation exceed its current liabilities, but if the
average pre-tax net earnings of the corporation before interest expense for the
two years preceding the distribution was less than the average interest expense
of the corporation for those years, the current assets of the corporation must
exceed 1-1/4 times its current liabilities.
Management believes that the Company is not a quasi-California
corporation by virtue of the Common Stock being listed on the Nasdaq National
Market and the Company having more than 800 holders of its equity securities.
However, no assurances can be given that this will continue to be the case in
the future. The Company's ability to pay cash dividends in the future will
depend in large part on the ability of the Bank to pay dividends on its capital
stock to the Parent. The ability of the Bank to pay dividends to the Parent is
subject to restrictions set forth in the California Financial Code and the
provisions of the California General Corporation Law described above. See Item
1. "Business - Regulation - Dividends and Other Transfers of Funds."
Management is aware of twelve securities dealers who currently make a
market in the Company's Common Stock: Sandler O'Neill & Partners; Friedman,
Billings, Ramsey & Co. Inc.; Herzog, Heine, Geduld, Inc.; Fahestock & Co., Inc.;
Knight Securities; Instinet Corporations; Hill, Thompson, Magid & Co.; Torrey
Pines Securities, Inc.; Capital Resources, Inc.; Sutro & Co., Inc.; Hoefer &
Arnett and William R. Hough & Co.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company and
its subsidiaries has been derived from and should be read in conjunction with
the Company's audited consolidated financial statements and related notes which
are included in this Annual Report on Form 10-K (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,783 $ 25,640 $ 2,392 $ 2,834 $ 56,167
Investment securities 240,760 321,261 222,736 83,494 -
Loans, net of deferred loan fees 365,952 288,486 231,133 211,095 196,778
Allowance for loan losses (6,450) (5,024) (4,100) (3,400) (4,500)
OREO - 806 2,064 3,469 4,355
Other assets 18,215 14,135 10,084 6,593 6,309
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $623,260 $645,304 $464,309 $304,085 $259,109
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $484,384 $482,839 $348,171 $266,695 $234,510
Securities sold under repurchase agreements 30,500 30,779 21,500 10,000 -
Borrowings from State of California 20,000 - - - -
Term borrowings 40,000 79,450 45,000 - -
Trust preferred securities 17,250 17,250 17,250 - -
Other liabilities 5,577 4,846 3,580 2,922 2,647
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 597,711 615,164 435,501 279,617 237,157
- -----------------------------------------------------------------------------------------------------------------------------
Common stock 27,915 28,087 27,944 27,838 27,813
Retained earnings (deficit) 9,978 5,559 849 (2,858) (5,861)
Accumulated other comprehensive income (loss) (6,355) 1,199 1,189 (257) -
Common stock in treasury (5,989) (4,705) (1,174) (255) -
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 25,549 30,140 28,808 24,468 21,952
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $623,260 $645,304 $464,309 $304,085 $259,109
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Total interest income $ 49,361 $ 45,240 $ 35,346 $ 26,567 $ 23,799
Total interest expense 30,190 28,538 19,611 13,500 12,084
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 19,171 16,702 15,735 13,067 11,715
Provision for loan losses 1,677 910 1,135 1,917 960
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,494 15,792 14,600 11,150 10,755
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Gain on sale of investment securities 661 252 - 413 851
Gain on sale of SBA loans 250 254 - - -
Gain on sale of commercial real estate loans - 467 - - -
Gain on sale of OREO 25 120 216 - -
Other income (1) 1,523 1,385 532 1,068 470
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,459 2,478 748 1,481 1,321
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Operating expenses 11,369 9,891 8,653 7,724 7,877
Valuation adjustments to OREO 43 50 370 155 344
OREO expenses 28 211 114 150 203
Credit and collection expenses 43 127 127 94 485
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 11,483 10,279 9,264 8,123 8,909
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,470 7,991 6,084 4,508 3,167
Income tax expense (benefit) 3,415 3,144 2,377 1,505 (77)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,055 $ 4,847 $ 3,707 $ 3,003 $ 3,244
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Preferred dividends declared - - - - (920)
Net income applicable to common stock $ 5,055 $ 4,847 $ 3,707 $ 3,003 $ 2,324
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS (2):
Return on average total assets (3) 0.83% 0.90% 0.97% 1.06% 1.34%
Return on average shareholders' equity (4) 16.65% 17.02% 14.06% 12.96% 16.02%
Net interest rate spread (5) 2.94% 2.93% 3.89% 4.41% 4.60%
Net interest margin (6) 3.19% 3.17% 4.20% 4.76% 4.98%
Ratio of operating expenses to
average total assets 1.87% 1.84% 2.26% 2.73% 3.26%
Dividend payout ratio (7) 13.19% 2.80% - - -
Average total shareholders' equity to
average total assets 4.62% 5.64% 6.89% 8.20% 8.38%
ASSET QUALITY RATIOS:
Non-performing assets to total assets (8) 0.03% 0.12% 0.49% 1.60% 3.60%
Allowance for loan losses to total loans,
net of deferred loan fees 1.76% 1.74% 1.77% 1.61% 2.29%
Allowance for loan losses to non-accrual loans 3071.43% - 1798.20% 245.30% 90.30%
Allowance for loan losses and OREO valuation
allowance to non-performing assets 3071.43% 505.2% 165.70% 70.58% 52.68%
Net loan charge-offs (recoveries) to average loans 0.07% (0.01%) 0.20% 1.68% 2.45%
Net loan charge-offs (recoveries) and OREO valuation
adjustments to average loans and OREO 0.08% 0.01% 0.36% 1.73% 2.57%
REGULATORY CAPITAL RATIOS (9):
Leverage ratio 7.19% 6.81% 7.53% 8.60% 8.22%
Tier 1 risk-based capital ratio 10.38% 10.67% 12.02% 10.31% 9.48%
Total risk-based capital ratio 11.64% 11.92% 13.27% 11.56% 10.74%
PER SHARE DATA:
Basic earnings per common share $ 1.90 $ 1.72 $ 1.26 $ 1.02 $ 1.98
Diluted earnings per common share 1.82 1.64 1.21 1.00 1.10
Dividends declared per common share 0.24 0.05 - - -
Book value per common share 9.82 11.20 9.97 8.35 7.43
Realized shareholders' equity per common share (10) 12.26 10.76 9.57 8.44 7.43
SHARE INFORMATION (IN THOUSANDS):
Weighted average basic common shares outstanding 2,662 2,817 2,936 2,947 1,173
Weighted average diluted common shares outstanding (11) 2,778 2,971 3,070 3,004 2,954
Common shares outstanding, net of treasury shares 2,602 2,691 2,887 2,930 2,954
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1996 includes a $264 thousand gain on the sale of $28.2 million in
deposits.
(2) Pacific Crest's performance ratios are based on actual daily averages.
(3) Net income divided by average total assets.
(4) Net income divided by average total shareholders' equity, excluding
average accumulated other comprehensive income (loss).
(5) Yield earned on average total interest-earning assets less the rate
paid on average total interest-bearing liabilities.
(6) Net interest income divided by average total interest-earning assets.
(7) Dividends declared per common share divided by diluted earnings per
common share. The 1998 dividend payout ratio represents one quarter of
declared dividends, which were paid out in the fourth quarter of 1998.
If the Company had declared four quarters of dividends at the fourth
quarter pay-out rate, the dividend payout ratio for 1998 would have
been 11.2%.
(8) Non-performing assets consist of non-accrual loans and OREO.
(9) Capital ratios of the Bank only. The minimum required ratios for a well
capitalized institution are 5% leverage, 6% Tier 1 risk-based capital
and 10% total risk-based capital.
(10) Calculation excludes accumulated other comprehensive income (loss) from
shareholders' equity.
(11) The conversion price of the preferred stock for these calculations is
$9.00 per share. The preferred stock was converted into Common Stock of
the Company in December of 1995.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Pacific Crest Capital, Inc. ("Pacific Crest or the "Parent"), a
Delaware corporation, is a bank holding company and owns 100% of the stock of
Pacific Crest Bank (the "Bank"), and 100% of the common stock of PCC Capital I
("PCC Capital"). The consolidated financial statements and financial data
include the accounts of Pacific Crest and its wholly owned subsidiaries and are
referred to as the consolidated financial statements of the "Company."
The following discussion should be read in conjunction with the
information under Item 6. "Selected Financial Data" and the Company's
consolidated financial statements and related notes contained elsewhere herein.
Certain statements under this caption constitute "forward-looking statements"
under Section 27A of the Securities Act and Section 21E of the Exchange Act,
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in these forward-looking statements.
Factors that might cause such a difference, include but are not limited to,
credit quality, economic conditions, competition in the geographic and business
areas in which the Company conducts its operations, fluctuations in interest
rates and government regulation. For additional information concerning these
factors, see Item 1. "Business - Risk Factors."
CAPITAL
As of December 31, 1999, Pacific Crest's leverage ratio, Tier 1
risk-based capital ratio and total risk-based ratio were 6.89%, 10.18% and
13.02%, respectively. The Bank's leverage ratio, Tier 1 risk-based capital ratio
and total risk-based capital ratio were 7.19%, 10.38% and 11.64%, respectively.
These ratios placed Pacific Crest and the Bank in the "well-capitalized"
category as defined by federal regulations, which require corresponding capital
ratios of 5%, 6% and 10%, respectively, to qualify for that designation.
DIVIDENDS
On February 2, 2000, the Company announced that the Board of Directors
had declared a $0.07 per common share cash dividend for the first quarter of
2000. The dividend was payable to shareholders of record at the close of
business on March 1, 2000 and was paid on March 15, 2000. During the year ended
December 31, 1999, the Company declared and paid total cash dividends of $0.24
per share for a total of $636,000. During the year ended December 31, 1998, the
Company declared and paid cash dividends of $0.05 per share for a total of
$137,000.
STOCK REPURCHASE PLAN
On February 2, 2000, the Company announced that the Board of Directors
had increased by 100,000 shares the allotted shares under the Company's common
stock repurchase program. This additional 100,000 shares, together with the
remaining common shares available for repurchase under the prior authorized
share repurchase plan, resulted in a total of 126,000 shares authorized for
repurchase as of February 1, 2000. During the period from July 1996 through the
end of February 2000, the Company had repurchased a total of 464,000 shares of
its common stock.
During the year ended December 31, 1999, the Company repurchased
113,500 shares of its common stock. The total cost of the shares purchased in
1999 was approximately $1.7 million, which resulted in an average cost per share
of $14.67. During 1999, the Company utilized repurchased shares for all of its
common stock issuances under the Company's employee stock purchase plan,
non-employee directors stock purchase plan and employee stock option plan, which
totaled 24,194 shares.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
EARNINGS PERFORMANCE
Net income was $5.1 million (or $1.82 per common share on a diluted
basis) for the year ended December 31, 1999, compared to $4.8 million (or $1.64
per common share on a diluted basis) for the year ended December 31, 1998.
Pre-tax income was $8.5 million compared to $8.0 million for the years ended
December 31, 1999 and 1998, respectively. The increase in pre-tax income of
$479,000, or 6.0% was primarily due to an increase of $2.5 million in net
interest income, partially offset by increases of $1.2 million and $0.8 million
in non-interest expense and provision for loan losses, respectively.
Return on average shareholders' equity was 16.65% and 17.02% for the
years ended December 31, 1999 and 1998, respectively, while return on average
total assets was 0.83% and 0.90% for the same periods, respectively.
22
<PAGE>
The following table presents the distribution of average assets,
liabilities and shareholders' equity, the dollar amount of interest income from
average interest-earning assets and interest expense on average interest-bearing
liabilities, and the related yields and rates thereon for the periods indicated.
All average balances are daily average balances (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 346,698 $ 32,857 9.48% $ 238,950 $ 25,653 10.74% $ 222,833 $ 24,475 10.98%
Securities purchased under
resale agreements 8,303 413 4.97% 4,167 221 5.30% 2,056 112 5.45%
Investment securities:
U.S. government sponsored
agency securities:
Available for sale 242,643 15,877 6.54% 278,735 19,020 6.82% 114,635 8,045 7.02%
Held to maturity - - - 4,040 310 7.67% 35,032 2,714 7.75%
Corporate debt securities
available for sale 3,208 214 6.67% 585 36 6.15% - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 245,851 16,091 6.55% 283,360 19,366 6.84% 149,667 10,759 7.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 600,852 49,361 8.22% 526,477 45,240 8.59% 374,556 35,346 9.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 11,525 16,853 12,101
Less: allowance for loan losses (5,981) (4,547) (3,744)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 606,396 $ 538,783 $ 382,913
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 241,101 $ 11,519 4.78% $ 211,851 $ 11,226 5.30% $ 181,303 $ 9,603 5.30%
Certificates of deposit 212,755 11,613 5.46% 160,720 9,241 5.75% 110,829 6,467 5.84%
Money market checking accounts 21,955 967 4.40% 18,917 949 5.02% 18,054 892 4.94%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 475,811 24,099 5.06% 391,488 21,416 5.47% 310,186 16,962 5.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase
agreements 15,741 871 5.53% 24,893 1,418 5.70% 28,493 1,638 5.75%
Borrowings from State of California 2,712 148 5.46% - - - - - -
Term borrowings 59,829 3,455 5.77% 70,653 4,087 5.78% 9,685 562 5.80%
Trust preferred securities 17,250 1,617 9.37% 17,250 1,617 9.37% 4,789 449 9.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings 95,532 6,091 6.38% 112,796 7,122 6.31% 42,967 2,649 6.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 571,343 30,190 5.28% 504,284 28,538 5.66% 353,153 19,611 5.55%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 7,043 4,098 3,393
Shareholders' equity 28,010 30,401 26,367
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 606,396 $ 538,783 $ 382,913
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets $ 29,509 $ 22,193 $ 21,403
Net interest income $ 19,171 $ 16,702 $ 15,735
Net interest rate spread (2) 2.94% 2.93% 3.89%
Net interest margin (3) 3.19% 3.17% 4.20%
Average interest-earning assets to
average interest-bearing liabilities 105.16% 104.40% 106.1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees. Includes non-accrual loans that
have a zero yield.
(2) Net interest rate spread represents the yield earned on average total
interest-earning assets less the rate paid on average total
interest-bearing liabilities.
(3) Net interest margin is computed by dividing net interest income by
average total interest-earning assets.
23
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in outstanding balances and changes
in interest rates for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (i.e. changes in
volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume which cannot be segregated, have been allocated
proportionately based on the absolute dollar amounts of the changes due to
volume and rate (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 10,495 $ (3,291) $ 7,204 $ 1,740 $ (562) $ 1,178
Securities purchased under resale
agreements 207 (15) 192 112 (3) 109
Investment securities:
U.S. government sponsored
agency securities:
Available for sale (2,370) (773) (3,143) 11,198 (223) 10,975
Held to maturity (310) - (310) (2,377) (27) (2,404)
Corporate debt securities
available for sale 175 3 178 36 - 36
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities (2,505) (770) (3,275) 8,857 (250) 8,607
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 8,197 (4,076) 4,121 10,709 (815) 9,894
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings accounts 1,459 (1,166) 293 1,619 4 1,623
Certificates of deposit 2,859 (487) 2,372 2,871 (97) 2,774
Money market checking accounts 143 (125) 18 44 13 57
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 4,461 (1,778) 2,683 4,534 (80) 4,454
- ----------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase
agreements (506) (41) (547) (205) (15) (220)
Borrowings from State of California 148 - 148 - - -
Term borrowings (625) (7) (632) 3,524 1 3,525
Trust preferred securities - - - 1,168 - 1,168
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings (983) (48) (1,031) 4,487 (14) 4,473
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,478 (1,826) 1,652 9,021 (94) 8,927
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 4,719 $ (2,250) $ 2,469 $ 1,688 $ (721) $ 967
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include interest income that would have been earned on
non-accrual loans.
24
<PAGE>
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 periods indicated,
including the change in average balance and yield/rate between these respective
periods (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 NET CHANGE
------------------------------------------------------------------------------------------
% AVERAGE % AVERAGE % AVERAGE
AVERAGE OF YIELD/ AVERAGE OF YIELD/ AVERAGE OF YIELD/
BALANCE TOTAL RATE BALANCE TOTAL RATE BALANCE TOTAL RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 346,698 57.7% 9.48% $ 238,950 45.4% 10.74% $ 107,748 12.3% (1.26)%
Securities purchased under
resale agreements 8,303 1.4% 4.97% 4,167 0.8% 5.30% 4,136 0.6% (0.33)%
Investment securities:
U.S. government sponsored
agency securities
Available for sale 242,643 40.4% 6.54% 278,735 52.9% 6.82% (36,092) (12.5)% (0.28)%
Held to maturity - - - 4,040 0.8% 7.67% (4,040) (0.8)% (7.67)%
Corporate debt securities
available for sale 3,208 0.5% 6.67% 585 0.1% 6.15% 2,623 0.4% 0.52%
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 245,851 40.9% 6.55% 283,360 53.8% 6.84% (37,509) (12.9)% (0.29)%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 600,852 100.0% 8.22% $ 526,477 100.0% 8.59% $ 74,375 (0.37)%
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 241,101 42.2% 4.78% $ 211,851 42.0% 5.30% $ 29,250 0.2% (0.52)%
Certificates of deposit 212,755 37.2% 5.46% 160,720 31.9% 5.75% 52,035 5.3% (0.29)%
Money market
checking accounts 21,955 3.9% 4.40% 18,917 3.7% 5.02% 3,038 0.2% (0.62)%
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 475,811 83.3% 5.06% 391,488 77.6% 5.47% 84,323 5.7% (0.41)%
- ----------------------------------------------------------------------------------------------------------------------------
Securities sold under
repurchase agreements 15,741 2.7% 5.53% 24,893 5.0% 5.70% (9,152) (2.3)% (0.17)%
Borrowings from State of
California 2,712 0.5% 5.46% - - - 2,712 0.5% 5.46%
Term borrowings 59,829 10.5% 5.77% 70,653 14.0% 5.78% (10,824) (3.5)% (0.01)%
Trust preferred securities 17,250 3.0% 9.37% 17,250 3.4% 9.37% - (0.4)% 0.00%
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 95,532 16.7% 6.38% 112,796 22.4% 6.31% (17,264) (5.7)% 0.07%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 571,343 100.0% 5.28% $ 504,284 100.0% 5.66% $ 67,059 (0.38)%
- ----------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.94% 2.93% 0.01%
Net interest margin 3.19% 3.17% 0.02%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. The Company attempts
to minimize the effect of interest rate fluctuations on net interest margin
by matching a portion of the Company's interest sensitive assets and interest
sensitive liabilities.
Net interest income can also be affected by a change in the
composition of assets and liabilities, for example, if higher yielding loans
were to replace a like amount of lower yielding investment securities.
Changes in volume and changes in rates also affect net interest income.
Volume changes are caused by differences in the level of interest-earning
assets and interest-bearing liabilities. Rate changes result from differences
in yields earned on assets and rates paid on liabilities.
Net interest income increased by $2.5 million, or 14.8%, to $19.2
million for the year ended December 31, 1999 as compared to the same period
in 1998. This was primarily due to the increase in the Company's average
total interest-earning assets of $74.4 million, or 14.1%, during the year
ended December 31, 1999 compared to last year. Average total interest-bearing
liabilities increased by $67.1 million, or 13.3%, during 1999 compared to
1998.
25
<PAGE>
The net interest rate spread is defined as the yield earned on average
total interest-earning assets less the rate paid on average total
interest-bearing liabilities. The Company's net interest rate spread increased
by 1 basis point, to 2.94%, during the year ended December 31, 1999 compared to
last year. This resulted primarily from a decrease of 38 basis points, to 5.28%,
in the rate paid on average total interest-bearing liabilities, partially offset
by a decrease of 37 basis points, to 8.22%, in the yield earned on average total
interest-earning assets.
The net interest margin is defined as net interest income divided by
average total interest-earning assets. The net interest margin for the years
ended December 31, 1999 and 1998, was 3.19% and 3.17%, respectively.
TOTAL INTEREST INCOME
Total interest income increased by $4.1 million, to $49.4 million,
during the year ended December 31, 1999 compared to the year ended December 31,
1998. This was primarily due to the growth in average total interest-earning
assets, partially offset by the reduction in yield on these assets. Average
total interest-earning assets increased by $74.4 million, to $600.9 million,
which contributed $8.2 million to the increase in total interest income. The
yield on the Company's average total interest-earning assets decreased by 37
basis points, to 8.22%, which reduced total interest income by $4.1 million.
The growth in average total interest-earning assets in 1999 compared to
1998 was primarily due to an increase in average loans of $107.7 million, to
$346.7 million, partially offset by a decrease in average investment securities
of $37.5 million, to $245.9 million. This resulted in a shift in the mix of
average total interest-earning assets from lower yielding investment securities
to higher yielding loans. The percentage of average loans to average total
interest-earning assets increased to 57.7% in 1999 from 45.4% in 1998.
The decline in the yield on average total interest-earning assets in
1999 compared to 1998 was primarily due to a decrease in the yield on average
loans of 126 basis points, to 9.48%, and to a decrease in the yield on average
investment securities of 29 basis points, to 6.55%. The decline in the yield on
average loans in 1999 compared to 1998 was primarily due to the following:
- The loans that the Company originated during 1999 had lower overall
yields than those loans originated prior to 1998 as a result of
increased competition within the lending market; and
- The loans that paid off during 1999 were generally variable rate loans
that had higher yields than the yields on the loans that the Company
originated during 1999.
The decline in the yield on average investment securities in 1999
compared to 1998 was primarily due to the replacement of higher yielding U.S.
government sponsored agency securities that were called and sold in 1999 with
lower yielding securities that were purchased. Partially offsetting this factor
was the purchase in 1999 of higher yielding corporate debt securities.
Partially offsetting the decline in the yield on average total
interest-earning assets were the following factors, which served to increase the
yield on these assets:
- The aforementioned shift in the mix of average total interest-earning
assets from lower yielding investment securities to higher yielding
loans; and
- The three increases in 1999 by the Federal Reserve in the federal funds
rate of 25 basis points, to 5.00 %, on June 30, 1999; 25 basis points,
to 5.25%, on August 24, 1999; and 25 basis points, to 5.50%, on
November 16, 1999, the impact of which started the upward repricing of
the Company's variable rate loans, especially those tied to the prime
rate. The federal funds rate is the rate at which banks lend to each
other in the overnight market. Increases in the federal funds rate
generally result in increases of the prime rates offered by major
banks, including Bank of America.
TOTAL INTEREST EXPENSE
Total interest expense increased by $1.7 million, to $30.2 million,
during the year ended December 31, 1999 compared to the year ended December 31,
1998. This was primarily due to the growth in average total interest-bearing
liabilities, partially offset by the reduction in rate on these liabilities.
Average total interest-bearing liabilities increased by $67.1 million, to $571.3
million, which contributed $3.5 million to the increase in total interest
expense. The rate on the Company's average total interest-bearing liabilities
decreased by 38 basis points, to 5.28%, which reduced total interest expense by
$1.8 million.
The growth in average total interest-bearing liabilities in 1999
compared to 1998 was primarily due to an increase in average deposits of $84.3
million, to $475.8 million, partially offset by a decrease in average borrowings
of $17.3 million, to $95.5 million. This resulted in a shift in the mix of
average total interest-bearing liabilities from higher rate borrowings to lower
rate deposits. The percentage of average deposits to average total
interest-bearing liabilities increased to 83.3% in 1999 from 77.6% in 1998.
26
<PAGE>
The decline in the rate on average total interest-bearing liabilities
in 1999 compared to 1998 was primarily due to a decrease in the rate on average
deposits of 41 basis points, to 5.06%, and the aforementioned shift in the mix
of average total interest-bearing liabilities from higher rate borrowings to
lower rate deposits, partially offset by an increase in the rate on average
borrowings of 7 basis points, to 6.38%. The decrease in the rate on average
deposits in 1999 compared to 1998 was principally due to the rate reduction on
the Company's deposit products in the first quarter of 1999. Partially
offsetting these reasons were the following factors, which served to increase
the rate on average deposits:
- The Company increased the rates on its certificates of
deposits starting in the second quarter of 1999; and
- The mix of average deposits shifted in 1999 from lower rate
savings/money market accounts to higher rate certificates of
deposit. The percentage of average certificates of deposit to
average total deposits increased to 44.7% in 1999 from 41.1%
in 1998. On a point in time basis, the percentage of
certificates of deposit to total deposits increased to 55.6%
at December 31, 1999 from 37.9% at December 31, 1998.
The increase in the rate on average borrowings in 1999 compared to 1998
was primarily due to the impact that the higher rate, 9.37%, trust preferred
securities had on the lower balance of average borrowings in 1999 compared to
1998. The percentage of average trust preferred securities to average borrowings
increased to 18.1% in 1999 from 15.3% in 1998. Additionally, the aforementioned
changes by the Federal Reserve in the federal funds rate served to raise the
rates on the Company's available borrowing facilities. Partially offsetting
these reasons for the increase in the rate on average borrowings was the overall
decline in market interest rates between 1999 and 1998 and the Company obtaining
funding at favorable rates under the State of California's fixed rate lending
program during the fourth quarter of 1999. The Company intends to pursue
additional borrowings under this program in 2000.
PROVISION FOR LOAN LOSSES
During 1999, the Company increased its provision for loan losses by
$767,000, or 84.3%, to $1.7 million compared to 1998. The increase in the
provision reflects the growth in the Company's gross loan portfolio of $77.3
million, or 26.7%, to $366.3 million at December 31, 1999, as well as
management's evaluation of the loan portfolio and 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 a variety of factors,
including adequacy of collateral, which includes loan balance to collateral
value, loan debt service coverage ratio and secondary collateral, if applicable.
In addition management evaluates the following factors, current delinquency
trends, historical Company loan loss experience, regional real estate economic
conditions and overall economic trends impacting the Company's real estate
lending portfolio. Commercial real estate serves as collateral for virtually all
of the Company's loan portfolio.
NON-INTEREST INCOME
The following table reflects the major components of non-interest
income for the periods indicated and the dollar and percentage changes between
the periods (dollars in thousands):
<TABLE>
<CAPTION>
NET CHANGE NET CHANGE
YEARS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
------------------------------------------------------------------------
1999 1998 1997 $ % $ %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loan prepayment and late fee income $ 662 $ 788 $ 243 $(126) (16.0%) $ 545 224.3%
Gain on sale of investment securities 661 252 - 409 162.3% 252 100.0%
Gain on sale of SBA loans 250 254 - (4) (1.6%) 254 100.0%
Gain on sale of commercial real estate loans - 467 - (467) (100.0%) 467 100.0%
Gain on sale of other real estate owned 25 120 216 (95) (79.2%) (96) (44.4%)
Other income 861 597 289 264 44.2% 308 106.6%
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 2,459 $ 2,478 $ 748 $ (19) (0.8%) $ 1,730 231.3%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest income for the year ended December 31, 1999 decreased by
$19,000, or 0.8%, compared to the same period in 1998. This was primarily due to
a decrease of $467,000 in gain on sale of commercial real estate loans,
partially offset by an increase of $409,000 in gain on sale of investment
securities.
The 1998 $467,000 gain on sale of commercial real estate loans was
produced under the Company's secondary market loan sales program, which was
initiated in 1998 with the intent to generate fixed rate loans for the Company's
portfolio and for potential sale in the secondary market. During 1999, there
were no loan sales under this program. Although the program was
27
<PAGE>
designed in part to produce recurring gain income for the Company, there can
be no assurance that future sales will occur to generate such income.
NON-INTEREST EXPENSE
The following table reflects the major components of non-interest
expense for the periods indicated and the dollar and percentage changes between
the periods (dollars in thousands):
<TABLE>
<CAPTION>
NET CHANGE NET CHANGE
YEARS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
----------------------------------------------------------------------
1999 1998 1997 $ % $ %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 6,652 $ 5,822 $ 5,009 $ 830 14.3% $ 813 16.2%
Net occupancy expense 1,687 1,616 1,568 71 4.4% 48 3.1%
Communication and data processing 933 778 659 155 19.9% 119 18.1%
Advertising and promotion 598 541 351 57 10.5% 190 54.1%
FDIC insurance premiums 54 43 73 11 25.6% (30) (41.1%)
Credit and collections expenses 43 127 127 (84) (66.1%) - 0.0%
OREO expense 28 211 114 (183) (86.7%) 97 85.1%
Valuation adjustments to OREO 43 50 370 (7) (14.0%) (320) (86.5%)
Other expenses 1,445 1,091 993 354 32.4% 98 9.9%
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense $11,483 $10,279 $ 9,264 $ 1,204 11.7% $ 1,015 11.0%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expense for the year ended December 31, 1999 increased by
$1.2 million, or 11.7%, compared to the same period in 1998. This was primarily
due to increases of $830,000, $354,000 and $155,000 in salaries and employee
benefits, other expenses and communication and data processing, respectively,
partially offset by a decrease of $183,000 in OREO expense.
Salaries and employee benefits for the year ended December 31, 1999
increased by $830,000, or 14.3%, compared to the same period in 1998. This was
primarily due to an approximate 4% salary increase to the Company's employee
base salaries in January of 1999 and to an increase in overall staffing levels
between 1999 and 1998. During the first quarter of 1999, the Company established
an office in Orange County, California to coordinate and originate loans for its
secondary market loan sales program. This office was staffed with six employees.
Communication and data processing expense for the year ended December
31, 1999, increased by $155,000, or 19.9%, compared to the same period in 1998.
This increase reflected the opening of the Company's loan production office in
Arizona during the fourth quarter of 1998 and the Company's secondary market
loan sales office in Orange County during the first quarter of 1999, in addition
to the installation and upgrading of a portion of the Company's computer
hardware and software systems.
OREO expense for the year ended December 31, 1999, decreased by
$183,000, or 86.7%, compared to the same period in 1998 due to the decline in
related OREO properties.
Other expenses for the year ended December 31, 1999, increased by
$354,000, or 32.4%, compared to the same period in 1998. This increase was
primarily due to increases in loan origination costs and consulting fees during
1999 versus 1998. The increase in loan origination costs was the direct result
of the increase in loan originations of 21.0% from $108.8 million in 1998 to
$131.7 million in 1999. Consulting costs increased due to the implementation of
internal control reporting provisions of the FDIC Improvement Act of 1991, costs
for training and consulting on SBA lending and costs for auditing the Company's
information systems function. Miscellaneous other costs increased as a result of
the establishment of the Arizona loan production office and the Orange County
secondary market loan sales office.
INCOME TAX PROVISION
The Company's income tax provision for the year ended December 31, 1999
was $3.4 million compared to $3.1 million for 1998. The Company's effective tax
rates were 40.3% and 39.3% for December 31, 1999 and 1998 respectively. The
difference between the Company's statutory tax rates and its effective tax rates
for the years ended December 31, 1999 and 1998 was primarily due to California
tax deductions (credits) generated by the Company on loans made in special tax
zones within California.
28
<PAGE>
1998 COMPARED WITH 1997
EARNINGS PERFORMANCE
Net income was $4.8 million (or $1.64 per common share on a diluted
basis) for the year ended December 31, 1998, compared to $3.7 million (or $1.21
per common share on a diluted basis) for the year ended December 31, 1997.
Pre-tax income was $8.0 million and $6.1 million for the years ended December
31, 1998 and 1997, respectively. The increase in pre-tax income of $1.9 million,
or 31.3%, was primarily due to an increase in non-interest income of $1.7
million, an increase of $1.0 million in net interest income and a decrease of
$225,000 in the provision for loan losses, partially offset by an increase in
non-interest expense of $1.0 million.
Return on average shareholders' equity was 17.02% and 14.06% for the
years ended December 31, 1998 and 1997, respectively, while return on average
total assets was 0.90% and 0.97% for the same periods, respectively.
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 periods indicated,
including the change in average balance and yield/rate between these respective
periods (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1998 1997 NET CHANGE
-------------------------------------------------------------------------------------------
% AVERAGE % AVERAGE % AVERAGE
AVERAGE OF YIELD/ AVERAGE OF YIELD/ AVERAGE OF YIELD/
BALANCE TOTAL RATE BALANCE TOTAL RATE BALANCE TOTAL RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $238,950 45.4% 10.74% $ 222,833 59.5% 10.98% $ 16,117 (14.1)% (0.24)%
Securities purchased under
resale agreements 4,167 0.8% 5.30% 2,056 0.5% 5.45% 2,111 0.3% (0.15)%
Investment securities:
U.S. government sponsored
agency securities:
Available for sale 278,735 52.9% 6.82% 114,635 30.6% 7.02% 164,100 22.3% (0.20)%
Held to maturity 4,040 0.8% 7.67% 35,032 9.4% 7.75% (30,992) (8.6)% (0.08)%
Corporate debt securities
available for sale 585 0.1% 6.15% - - - 585 0.1% 6.15%
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 283,360 53.8% 6.84% 149,667 40.0% 7.19% 133,693 13.8% (0.35)%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $526,477 100.0% 8.59% $ 374,556 100.0% 9.44% $151,921 (0.85)%
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $211,851 42.0% 5.30% $ 181,303 51.3% 5.30% $ 30,548 (9.3)% 0.00%
Certificates of deposit 160,720 31.9% 5.75% 110,829 31.4% 5.84% 49,891 0.5% (0.09)%
Money market
checking accounts 18,917 3.7% 5.02% 18,054 5.1% 4.94% 863 (1.4)% 0.08%
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 391,488 77.6% 5.47% 310,186 87.8% 5.47% 81,302 (10.2)% 0.00%
- ----------------------------------------------------------------------------------------------------------------------------
Securities sold under
repurchase agreements 24,893 5.0% 5.70% 28,493 8.1% 5.75% (3,600) (3.1)% (0.05)%
Term borrowings 70,653 14.0% 5.78% 9,685 2.7% 5.80% 60,968 11.3% (0.02%)
Trust preferred securities 17,250 3.4% 9.37% 4,789 1.4% 9.38% 12,461 2.0% (0.01)%
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 112,796 22.4% 6.31% 42,967 12.2% 6.17% 69,829 10.2% 0.14%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $504,284 100.0% 5.66% $ 353,153 100.0% 5.55% $151,131 0.11%
- ----------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.93% 3.89% (0.96)%
Net interest margin 3.17% 4.20% (1.03)%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
NET INTEREST INCOME
Net interest income increased by $1.0 million, or 6.1%, to $16.7
million for the year ended December 31, 1998 compared to the same period in
1997. This was primarily due to the increase in the Company's average total
interest-earning assets of $151.9 million, or 40.6%, during the year ended
December 31, 1998 compared to the year ended December 31, 1997. Average total
interest-bearing liabilities increase by $151.1 million, or 42.8% during 1998
compared to 1997.
The Company's net interest rate spread decreased by 96 basis points,
to 2.93%, during the year ended December 31, 1998 compared to the year ended
December 31, 1997. This resulted primarily from a decrease of 85 basis
points, to 8.59%, in the yield earned on average total interest-earning
assets as well as an increase of 11 basis points, to 5.66%, in the rate paid
on average total interest-bearing liabilities.
The net interest margin for the years ended December 31, 1998 and
1997 was 3.17% and 4.20%, respectively. The decline in the margin was the
result of the reduced net interest rate spread, and the change in the
composition of the balance sheet. Loans, the highest yielding asset,
decreased as a percentage of average interest-earning assets while the
Company's holdings in the lower yielding investment securities increased as a
percentage of average interest-earning assets. Additionally, the Company
financed a portion of these security purchases with borrowings, including the
issuance of the trust preferred securities, which on average, cost the
Company more than deposits.
TOTAL INTEREST INCOME
Total interest income increased by $9.9 million, or 28.0%, to $45.2
million for the year ended December 31, 1998, compared to the same period in
1997. This increase was primarily due to an increase in the average balance
of interest-earning assets of $151.9 million to $526.5 million, a 40.6%
increase, for the year ended December 31, 1998, over the comparable period in
1997. The growth in interest-earning assets was concentrated in investment
securities and commercial loans. Partially offsetting these increases, the
overall yields on the Company's interest-earning assets decreased by 85 basis
points for the year ended December 31, 1998 from the comparable period in
1997. This decline was due to the change in the composition of
interest-earning assets and the reduced yields earned on commercial loans.
The primary reason for the decline in the overall loan portfolio yield was
due to lower yielding loans being added to the loan portfolio during 1998,
reflecting the increased competitive rate pressure in the marketplace. In
addition, higher yielding loans paid off during 1998, adding to the overall
yield decline.
The substantial increase in the average balances of the Company's
U.S. government sponsored agency securities for the year ended December 31,
1998, reflected the Company's effort to optimize earnings by more effectively
leveraging capital with the purchase of these securities.
TOTAL INTEREST EXPENSE
Total interest expense increased by $8.9 million, or 45.5%, to $28.5
million for the year ended December 31, 1998, compared to the same period of
1997. The increase in interest expense resulted from an increase in the
average balance of interest-bearing liabilities of $151.1 million to $504.3
million, a 42.8% increase, for the year ended December 31, 1998, as compared
to the same period of 1997. The increase in average interest-bearing
liabilities funded the growth of the Company. The growth in the average
balances was primarily in certificates of deposit, savings accounts, term
borrowings and the trust preferred securities but also included a small
increase in money market checking. The rates paid on the Company's
interest-bearing liabilities increased from 5.55% to 5.66%, or 11 basis
points, during the year ended December 31, 1998, compared to the same period
in 1997. The increases in the rates paid on the Company's interest-bearing
liabilities reflected the change in the composition of interest-bearing
liabilities and the change in market interest rates between the 1998 and 1997
periods. The change in the composition of the interest-bearing liabilities
for the year ended December 31, 1998, reflected the leveraging of the balance
sheet with increased borrowings subsequent to the issuance of $17.25 million
of trust preferred securities in September of 1997.
PROVISION FOR LOAN LOSSES
During 1998, the Company decreased its provision for loan losses to
$910,000 from $1.1 million for 1997. The decrease of $225,000 between 1998
and 1997 in the loan loss provision primarily reflected the decline of
non-accrual loans, other loans of concern and troubled debt restructured
loans during the year ending December 31, 1998.
30
<PAGE>
NON-INTEREST INCOME
Non-interest income for the year ended December 31, 1998 increased
by $1.7 million, or 231.3%, compared to the same period in 1997, primarily
due to the following:
Loan prepayment income for the year ended December 31, 1998 rose by
$545,000, over the comparable period in 1997. This was due to the increased
volume of loans prepaying in 1998, as compared to 1997, due to the
competitive interest rate environment.
In the third and fourth quarters of 1998, the Company sold
investment securities held in its available for sale portfolio, generating
$252,000 in gain income. The Company did not sell any investments during 1997
that resulted in a "gain on sale."
During the last three quarters of 1998, the Company sold the SBA
guaranteed portion of three pools of loans at a premium ranging between 5.75%
and 10.0%. These loans were sold, with the servicing rights retained, at a
total premium of $254,000. The Company did not sell any SBA loans in 1997.
During 1998, the Company instituted a commercial real estate loan
program designed to produce fixed rate loan product for both the Company's
portfolio and for potential sale in the secondary market. The Company
generated $467,000 in gain income under this program during 1998 by selling
loans at a premium ranging between 3.1% and 6.1%.
Other non-interest income increased by $308,000 primarily as a
result of an increase in loan origination fees in 1998. This was a direct
result of the increase in loan originations of 118.5% from $49.8 million in
1997 to $108.8 million for 1998.
NON-INTEREST EXPENSE
Non-interest expense for the year ended December 31, 1998 increased
by $1.0 million or 11.0%, compared to the same period in 1997, primarily due
to the following:
Salaries and employee benefits for the year ended December 31, 1998
increased by $813,000 compared to the same period in 1997. This was primarily
the result of increased marketing and administrative bonus expense in 1998
versus 1997, due to higher loan volume and improved return on equity. The
Company also provided an approximate 4% salary increase to most employee base
salaries in January of 1998. Finally, the Company hired additional loan
marketing staff during 1998, increasing its marketing representative count
from eight employees at the beginning of 1998 to twelve at year end 1998.
Communication and data processing expense for the year ended
December 31, 1998, increased by $119,000, compared to the same period in
1997. These increases were primarily the result of the Company establishing
loan production offices in Portland, Oregon; Seattle, Washington; and Orange
County, California, in addition to the hiring of additional marketing staff
during 1998.
Advertising and promotion expenses for the year ended December 31,
1998 increased by $190,000 over 1997. This increase is due to the Company's
more aggressive advertising campaign in 1998 which contributed to the loan
and deposit growth experienced in the current year.
The valuation adjustment to OREO for the year ended December 31,
1998, decreased by $320,000, compared to the same period in 1997. The Company
recorded OREO valuation adjustments on two OREO properties in 1997, while
minimal write downs were necessary during 1998.
INCOME TAX PROVISION
The Company's income tax provision for the year ended December 31,
1998 was $3.1 million, which represented an effective tax rate of 39.3%. The
difference between the Company's statutory tax rate of 41.1% and its
effective tax rate for the year ended December 31, 1998 was primarily due to
California tax deductions (credits) generated by the Company on loans made in
special tax zones within California.
The Company's income tax provision for the year ended December 31,
1997 was $2.4 million, which represented an effective tax rate of 39.1%. The
difference between the Company's statutory tax rate of 41.5% and its
effective tax rate for the year ended December 31, 1997 was due to both the
reversal of a portion of the Company's tax valuation reserve of approximately
$386,000 against the Company's tax provision, as well as California tax
deductions (credits) generated by the Company on loans made in special tax
zones within California.
31
<PAGE>
FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
The following table presents condensed balance sheets as of the dates
indicated and the dollar and percentage changes between the periods (dollars in
thousands):
<TABLE>
<CAPTION>
NET CHANGE NET CHANGE
DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
---------------------------------------------------------------------------------------
1999 1998 1997 $ % $ %
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,783 $ 25,640 $ 2,392 $ (20,857) (81.35%) $ 23,248 971.91%
Investment securities 240,760 321,261 222,736 (80,501) (25.06%) 98,525 44.23%
Net loans 359,502 283,462 227,033 76,040 26.83% 56,429 24.85%
Other assets 18,215 14,941 12,148 3,274 21.91% 2,793 22.99%
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 623,260 $ 645,304 $ 464,309 $ (22,044) (3.42%) $ 180,995 38.98%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Savings accounts $ 196,368 $ 276,011 $ 200,255 $ (79,643) (28.86%) $ 75,756 37.83%
Certificates of deposit 269,233 182,979 131,213 86,254 47.14% 51,766 39.45%
Money market checking accounts 18,783 23,849 16,703 (5,066) (21.24%) 7,146 42.78%
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 484,384 482,839 348,171 1,545 0.32% 134,668 38.68%
- ------------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase
agreements 30,500 30,779 21,500 (279) (0.91%) 9,279 43.16%
Borrowings from State of California 20,000 - - 20,000 100.0% - -
Term borrowings 40,000 79,450 45,000 (39,450) (49.65%) 34,450 76.56%
Trust preferred securities 17,250 17,250 17,250 - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total borrowings 107,750 127,479 83,750 (19,729) (15.48%) 43,729 52.21%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 592,134 610,318 431,921 (18,184) (2.98%) 178,397 41.30%
Other liabilities 5,577 4,846 3,580 731 15.08% 1,266 35.36%
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 597,711 615,164 435,501 (17,453) (2.84%) 179,663 41.25%
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 27,915 28,087 27,944 (172) (0.61%) 143 0.51%
Retained earnings 9,978 5,559 849 4,419 79.49% 4,710 554.77%
Accumulated other comprehensive
income (loss) (6,355) 1,199 1,189 (7,554) (630.03%) 10 0.84%
Common stock in treasury, at cost (5,989) (4,705) (1,174) (1,284) 27.29% (3,531) 300.77%
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 25,549 30,140 28,808 (4,591) (15.23%) 1,332 4.62%
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 623,260 $ 645,304 $ 464,309 $ (22,044) (3.42%) $ 180,995 38.98%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DECEMBER 31, 1999 VS. DECEMBER 31, 1998
Total assets decreased by $22.0 million, to $623.3 million, during
the year ended December 31, 1999, primarily due to decreases in investment
securities and cash and cash equivalents of $80.5 million and $20.9 million,
respectively, partially offset by an increase in net loans of $76.0 million.
The decreases in investment securities and cash and cash equivalents were
used to funds loans and pay down borrowings. The resulting change in asset
composition from lower yielding investments to higher yielding loans
contributed to the increase in net interest income for 1999 compared to 1998.
The decrease in investment securities was primarily due to sales of $165.3
million and a decline in fair value of $13.1 million, partially offset by
purchases of $98.0 million. The increase in net loans was primarily due to
$131.7 million of originations and $9.0 million of purchases, partially
offset by $58.8 million in payoffs and $4.7 million in SBA loan sales.
Total liabilities decreased by $17.5 million, to $597.7 million,
during the year ended December 31, 1999, primarily due to a decrease in
borrowings of $19.7 million, partially offset by an increase in deposits of
$1.5 million. This resulted in a shift in the mix of total interest-bearing
liabilities from higher rate borrowings to lower rate deposits and
contributed to the increase in net interest income for 1999 compared to 1998.
Deposits as a percentage of total interest-bearing liabilities increased to
81.8% at December 31, 1999 from 79.1% at December 31, 1998.
32
<PAGE>
The $19.7 million decrease in borrowings during 1999 was primarily
due to a $39.4 million decrease in term borrowings, partially offset by a
$20.0 increase in borrowings from the State of California. The Company
utilized the borrowings from the State of California, which generally had a
lower cost of funds than term borrowings, to replace a portion of the term
borrowings that were called (matured) during the fourth quarter of 1999. The
$20.0 million borrowed under the State of California's fixed rate lending
program during the fourth quarter of 1999 had a weighted average rate of
5.57%.
The $1.5 million increase in deposits during 1999 was primarily due
to an increase in certificates of deposit of $86.3 million partially offset
by a decrease in savings accounts and money market checking accounts of $79.6
million and $5.1 million, respectively. Management reduced the rates on all
of the Company's deposit products in the beginning of the first quarter of
1999, and later started raising the rates on its one to five year
certificates of deposit beginning in the second quarter of 1999. This
strategy served to lock in long-term deposits with fixed rates while
maintaining rates constant on short-term and liquid deposits. This strategy
resulted in a shift of funds from the Company's savings/money market checking
accounts into certificates of deposit. The percentage of certificates of
deposit to total deposits increased to 55.6% at December 31, 1999 from 37.9%
at December 31, 1998. In February 2000, the Company raised the rates on its
savings accounts in response to the overall increase in market interest rates.
Shareholders' equity decreased by $4.6 million, to $25.5 million,
during the year ended December 31, 1999. Changes to shareholders' equity were
due to the following:
- The Company recorded $5.1 million in net income during 1999;
- The Company declared and paid quarterly cash dividends during
1999 which totaled $636,000;
- Accumulated other comprehensive income decreased during 1999
by $7.6 million as the fixed rate investment securities
portfolio repriced downward due to an increase in market
interest rates at December 31, 1999; and
- Common stock in treasury increased during 1999 by $1.3
million, to $6.0 million, primarily resulting from the $1.7
million purchase in 1999 of 113,500 shares of the Company's
common stock under its stock repurchase plan.
DECEMBER 31, 1998 VS. DECEMBER 31, 1997
Total assets increased by $181.0 million during the year ended
December 31, 1998, compared to 1997, primarily due to increases of $23.2
million, $98.5 million and $56.4 million in cash and cash equivalents,
investment securities and net loans, respectively. The increase in cash and
cash equivalents during 1998 was the result of the Company maintaining higher
levels of liquidity during the fourth quarter of 1998, as a result of the
strong loan origination demand and the significant increase in the Company's
interest-bearing deposits. The increase in the balance of investment
securities for the year ended December 31, 1998 reflected the Company's
effort to optimize earnings by more effectively leveraging capital with the
purchase of these securities. The increase in net loans primarily reflected
new loan originations and purchases of $128.2 million, reduced by $64.3
million in loan payoffs, loan transfers to OREO, and loan chargeoffs.
Total liabilities increased during 1998 in response to the need to
fund the growth in assets. The growth in deposits included $75.8 million in
savings deposits, $51.8 million in certificates of deposit, $7.1 million in
money market checking deposits, $9.3 million in securities sold under
repurchase agreements, and $34.4 million in term borrowings.
Shareholders' equity increased during the year ended December 31,
1998, primarily due to 1998 net income of $4.8 million, partially offset by
the purchase of treasury shares of $3.5 million.
NON-PERFORMING ASSETS
Total non-performing assets declined by $596,000 during 1999, to
$210,000, or 0.03% of total assets at December 31, 1999, compared with
$806,000, or 0.12% of total assets at December 31, 1998. The decrease was due
to the sales of the Company's two remaining OREO properties held at December
31, 1998 with a carrying value of $806,000, partially offset by the addition
to non-accrual loans of one loan with a carrying value of $210,000. The
Company had three loans with aggregate outstanding loan balances of $3.2
million which management considered to be potential problem loans due to
possible credit problems of the borrowers or cash flows of the properties
securing the loans. The reduction in non-performing assets was largely due to
continued emphasis by management on problem credits, as well as continued
favorable economic conditions in the Company's market areas.
33
<PAGE>
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings of
securities sold under repurchase agreements, borrowings from the State of
California, term borrowings and payments of principal and interest on loans
and investment securities. While maturities and scheduled principal
amortization on loans are a reasonably predictable source of funds, deposit
flows and mortgage loan prepayments are greatly influenced by the level of
interest rates, economic conditions, and competition.
The Company's primary lending and investment activities have
generally been the origination of adjustable rate and fixed rate commercial
real estate loans, the purchase of U.S. government sponsored agency
securities, corporate debt securities and to a lesser extent, the purchase of
short-term securities purchased under resale agreements. The purchase of U.S.
government sponsored agency securities, corporate debt securities and
short-term securities purchased under resale agreements provides a source of
long and short-term liquidity.
The Company's most liquid assets are cash and securities purchased
under resale agreements. The levels of these assets depend on the Company's
operating, investing and financing activities during any given period.
Liquidity for the Company is monitored daily and evaluated monthly. Excess
funds are invested in short-term securities purchased under resale
agreements. Additional sources of funds are available by borrowing against
the Company's U.S. government sponsored agency securities portfolio and
secondarily by borrowing from the Federal Reserve Bank's discount window.
The table below sets forth pertinent details related to the
Company's borrowing facilities with brokers as of December 31, 1999 (dollars
in thousands):
<TABLE>
<CAPTION>
BORROWING BORROWING BORROWING NUMBER OF
LIMIT OUTSTANDING AVAILABILITY BROKERS TERM
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term borrowings $ 95,000 $ 25,000 $ 70,000 4 90 days or less
Medium-term borrowings 45,000 5,500 39,500 1 One year or less
Long-term borrowings 95,000 40,000 55,000 1 3 year / 1 year / call
- ------------------------------------------------------------------------------------------------------------------
Total $ 235,000 $ 70,500 $ 164,500 6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank also has a medium-term borrowing facility with the State of
California Treasurer's Office under which the Bank can borrow an amount not
to exceed its total shareholder's equity. Borrowing maturity dates under this
program cannot exceed one year. At December 31, 1999, the Bank's total
shareholder's equity was $37.4 million, against which the Bank had borrowed
$20.0 million. All borrowings are secured by pledging specific amounts of
certain U.S. government sponsored agency securities.
During the year ended December 31, 1999, the Company's cash and cash
equivalents decreased by $20.9 million to $4.8 million. This decrease was
primarily the result of paying down $19.7 million of the Company's total
borrowings. The Company's term borrowings were reduced by a total of $39.4
million during 1999. This reduction was the result of paying down $20.0
million with the proceeds from borrowing $20.0 million at more favorable
rates from the State of California and paying down the remaining $19.4
million with the Company's cash and cash equivalents. The Company's deposits
provided a total of $1.5 million in funding for the Company during 1999. This
resulted from the growth of $86.3 million in certificates of deposit,
partially offset by the runoff of $84.7 million in savings accounts and money
market checking accounts.
The Company financed its net loan growth of $76.0 million through
the net liquidation of $80.5 million within its investment securities
portfolio.
The Company originated $131.7 million in new loan volume, and $9.0
million in loan purchases during 1999. Offsetting these originations, the
Company experienced $58.8 million in loan payoffs and $4.7 million in SBA
loan sales.
34
<PAGE>
DIVIDENDS
As a Delaware corporation, the Company 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, on an unconsolidated basis, had
approximately $4.3 million in cash and investments less current liabilities
and short-term debt at December 31, 1999. These funds are necessary to pay
future operating expenses of the Parent, service all outstanding debt, and
fund possible future capital infusions into the Bank. Without dividends from
the Bank, the Parent must rely solely on existing cash investments and
borrowing. The Company declared and paid total cash dividends of $0.24 per
common share during 1999, which amounted to $636,000. On February 2, 2000,
the Company declared a $0.07 cent per common share cash dividend for the
first quarter of 2000 payable on March 15, 2000 to holders of record as of
March 1, 2000. The Company anticipates that it will continue to declare and
pay quarterly dividends during 2000.
The Bank's ability to pay dividends to the Parent is restricted by
California state law, which requires that sufficient retained earnings, are
available to pay the dividend. The Bank made cash dividend payments of $1.24
million to the Parent during 1999. At December 31, 1999, the Bank had
retained earnings of $13.8 million that may be available for dividend
payments. On February 1, 2000, the Bank declared a $400,000 cash dividend for
the first quarter of 2000 payable to the Parent on March 15, 2000. The Bank
anticipates that it will continue to declare and pay quarterly dividends to
the Parent during 2000.
CAPITAL RESOURCES
The Company's objective is to maintain a strong level of capital
that will support sustained asset growth, anticipated credit risks and to
ensure that regulatory guidelines and industry standards are met.
Pacific Crest and the Bank are subject to certain leverage and
risk-based capital adequacy standards adopted by the Federal Reserve and the
FDIC. Risk-based capital consists of a core capital component (Tier 1),
essentially total shareholders' equity excluding accumulated other
comprehensive income (loss), and a supplemental component (Tier 2), which
includes the allowance for loan losses up to 1.25% of risk-weighted assets,
and a system for assigning assets and off-balance sheet items to one of four
risk-weighted categories. These capital standards require a minimum Tier 1
risk-based capital ratio of 4.00% and total risk-based capital ratio (Tier 1
plus Tier 2) of 8.00%.
In addition to the risked-based guidelines, federal banking agencies
require banking organizations to maintain a minimum amount of Tier 1 capital
to average quarterly total assets, referred to as the leverage ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier
1 capital to total assets must be 3%. For all banking organizations not rated
in the highest category, the minimum leverage ratio must be at least 100 to
200 basis points above the 3% minimum, or 4% to 5%.
At December 31, 1999, Pacific Crest and the Bank were classified as
"well capitalized" and were in compliance with all such requirements. The
following tables sets forth the regulatory capital ratios for Pacific Crest
and the Bank as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------------------------
MINIMUM MINIMUM
PACIFIC CREST CAPITAL, INC. ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio 6.89% 4.00% 2.89% N/A 4.00% N/A
Tier 1 risk-based capital ratio 10.18% 4.00% 6.18% N/A 4.00% N/A
Total risk-based capital ratio 13.02% 8.00% 5.02% N/A 8.00% N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------------------------
MINIMUM MINIMUM
PACIFIC CREST BANK ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio 7.19% 4.00% 3.19% 6.81% 4.00% 2.81%
Tier 1 risk-based capital ratio 10.38% 4.00% 6.38% 10.67% 4.00% 6.67%
Total risk-based capital ratio 11.64% 8.00% 3.64% 11.92% 8.00% 3.92%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The purpose of asset liability management is to minimize the risk of
loss resulting from changes in interest rates. To the extent consistent with
its interest rate spread objectives, the Company attempts to manage its
interest rate risk and has taken actions to minimize the potential negative
impact of changing interest rates. In addition to focusing on making
commercial real estate loans which generally provide for quarterly repricing,
the Company has written a significant amount of its loans with interest rate
floors. Interest rate floors protect the Company in a declining interest rate
environment as affected loans do not reprice downward to their fully indexed
rate when interest rates fall. At December 31, 1999, the fully indexed rate
on these loans was generally equal to or in excess of the interest rate
floors. In addition to adjusting the pricing levels and characteristics of
interest rate sensitive assets and liabilities to manage interest rate risk,
in June of 1998, the Company purchased an interest rate cap. The interest
rate cap was purchased as a hedge instrument for the Company's deposit
liabilities that reprice in one year or less. This instrument is indexed to
the Three Month London Interbank Offered Rate (LIBOR) with a strike price of
6.70%. When the Three Month LIBOR exceeds this level, the interest rate cap
earns income for the Company, thereby mitigating some of the risk of rising
interest rates. The interest rate cap does not expose the Company to any
additional risk beyond the initial investment of $925,000. See Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk" for information
regarding the sale of the interest rate cap in February 2000.
35
<PAGE>
The Company primarily uses an interest rate shock analysis to
evaluate and manage interest rate risk and measure the impact of fluctuations
in interest rates on the Company's net interest income. This analysis applies
"change ratios" to assets and liabilities based upon various assumptions
regarding their repricing characteristics under various hypothetical market
interest rate fluctuations. As of December 31, 1999, management's analysis
indicates that the Company's net interest income would decrease by no more
than 15% if rates rose 200 basis points over one year.
Another method of assessing the potential risk associated with
changes in interest rates used to a lesser extent by the Company is to
examine the extent to which assets and liabilities are "interest rate
sensitive" by monitoring the institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The
interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets anticipated, based upon certain assumptions, to
mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated, based upon certain assumptions, to
mature and reprice within that same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative
gap would generally tend to adversely affect net interest income while a
positive gap would generally tend to result in an increase in net interest
income. During a period of declining interest rates, a negative gap would
generally tend to result in increased net interest income while a positive
gap would generally tend to adversely affect net interest income.
At December 31, 1999, based on the following gap analysis table,
total interest-bearing liabilities maturing or repricing within one year
exceeded total interest-earning assets repricing or maturing in the same
period by $188.7 million, representing a negative one-year gap of 30.3% of
total assets.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------
IMMEDIATE OVER ONE
THROUGH YEAR THROUGH OVER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Securities purchased under resale agreements $ 3,501 $ - $ - $ 3,501
Investment securities available for sale:
U.S. government sponsored agency securities - 74,923 162,004 236,927
Corporate debt securities 3,833 - - 3,833
Loans, gross 154,845 146,926 64,562 366,333
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $162,179 $ 221,849 $226,566 $ 610,594
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Savings accounts $196,368 $ - $ - $ 196,368
Certificates of deposit 185,212 84,021 - 269,233
Money market checking accounts 18,783 - - 18,783
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 400,363 84,021 - 484,384
- ----------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements 30,500 - - 30,500
Borrowings from State of California 20,000 - - 20,000
Term borrowings - 40,000 - 40,000
Trust preferred securities - - 17,250 17,250
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 50,500 40,000 17,250 107,750
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $450,863 $ 124,021 $ 17,250 $ 592,134
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate cap 100,000 - - 100,000
Gap (1) $ (188,684) $ 97,828 $209,316 $ 118,460
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ (188,684) $ (90,856) $118,460 $ 118,460
- ----------------------------------------------------------------------------------------------------------------------------
As a percent of total assets (30.27%) (14.58%) 19.01% 19.01%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Gap represents interest sensitive assets less interest sensitive
liabilities, net of the effect of the interest rate cap.
The gap analysis table is based on certain assumptions. Except as
stated below, the amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of the repricing timing or maturity date of the asset or liability.
For assets with call features, repricing is determined using the estimated
duration of the instrument. The Company has assumed, for purposes of this
table only, that its savings accounts, money market checking accounts and
securities sold under repurchase agreements, which totaled $196.4 million,
$18.8 million and $30.5 million, respectively, at December 31, 1999, reprice
immediately. The Company has assumed, for purposes of the gap analysis table,
that its investment securities mature/reprice after the initial call date,
but prior to the maturity date, based upon a duration model that factors the
probability of the securities being called relative to changes in interest
rates.
36
<PAGE>
Certain shortcomings are inherent in the method of using gap
analysis to evaluate interest rate risk as presented in the following table.
For example, gap analysis assumes that when interest rates change, all rates
change by the same amount and at the same time. Although certain assets and
liabilities may be available for repricing at the same time, assets and
liabilities often react independently to market interest rate changes,
resulting in variable degrees of change dependent on the type of asset or
liability. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, some adjustable rate loans have features, which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Loan prepayments and early withdrawal of certificates of deposit could
also cause the interest sensitivities to vary from those reflected in the
table. Due to these factors, the gap analysis may not provide a complete or
accurate assessment of the Company's exposure to changes in interest rates.
YEAR 2000 COMPLIANCE
The year 2000 issue was the result of computer programs being
written using two, rather than four, digits to define the applicable year.
Programs that have time-sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. This could have resulted in major
system failure or miscalculations. The Company has experienced no computer
system problems as a result of the year 2000. The Company is not aware of any
of its borrowers, major vendors or deposit customers that have experienced
any year 2000 problems. If a problem were to be discovered in the year 2000
that impacts the core accounting systems, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 an interest rate shock analysis and to a lesser extent,
the standard GAP report. The Company has no market risk sensitive instruments
held for trading purposes. Management believes that the Company's market risk
is reasonable at this time. See also Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
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 Three Month London Interbank
Offered Rate (LIBOR) exceeds 6.70%. Three Month LIBOR closed at 6.00% on
December 31, 1999. The interest rate cap was purchased as a hedge instrument
for the Company's deposit liabilities which reprice in one year or less. It
was designed to hedge the risk that interest rates may rise, which would
produce an increase in the rates paid on these deposit liabilities, resulting
in an increase in interest expense and a reduction in net interest margin.
The interest rate cap mitigates this risk somewhat since it earns income for
the Company if interest rates rise beyond a certain level. The interest rate
cap does not expose the Company to any additional risk beyond the initial
investment of $925,000. For the years ended December 31, 1999 and 1998, the
amounts of amortized premium were $185,000 and $105,000, respectively, and
were included in "Interest expense - deposits" on the Consolidated Statements
of Income. With the exception of the interest rate cap, the Company is not
currently engaged in transactions involving derivative financial instruments.
On February 8, 2000, the Company sold its interest rate cap
agreement for $2.5 million and recognized a deferred gain of $1.8 million.
The deferred gain will be amortized as a credit to "Interest expense -
deposits" over the remaining life of the original interest rate cap
agreement, which had a maturity date of June 8, 2003. Annual amortization is
projected to be $494,000, $554,000, $554,000 and $242,000 for the years ended
December 31, 2000, 2001, 2002 and 2003, respectively. Management believed
that the current realized benefits of selling the interest rate cap
outweighed the future potential benefits of holding the interest rate cap
until maturity. Additionally, the Company has certain fixed rate loans in its
portfolio which will convert to adjustable rate in the next two to three
years and will thus mitigate any increased interest expense on its adjustable
rate liabilities due to rising interest rates.
37
<PAGE>
The tables below provide information about the Company's balance
sheet non-derivative financial instruments at December 31, 1999 and 1998 that
are sensitive to changes in interest rates. For all outstanding financial
instruments, the table presents the outstanding principal balance 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 (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
EXPECTED MATURITY DATE OR REPRICING DATE BY YEAR
------------------------------------------------------------------------------------------
ESTIMATED
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Securities purchased under
resale agreements (1) $ 3,501 $ - $ - $ - $ - $ - $ 3,501 $ 3,501
average yield (variable rate) 4.45% - - - - - 4.45%
Corporate debt securities
available for sale (2) 3,833 - - - - 3,833 3,833
average yield (variable rate) 7.69% - - - - - 7.69%
U.S. government sponsored
agency securities
available for sale (2) - - 50,263 14,817 9,842 162,005 236,927 236,927
average yield (fixed rate) - - 5.69% 6.82% 6.93% 6.70% 6.50%
Loans, gross (3) 154,845 26,333 51,206 18,484 50,903 64,562 366,333 370,726
average yield 10.23% 9.20% 8.22% 9.12% 8.31% 8.39% 9.23%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $ 162,179 $26,333 $101,469 $33,301 $60,745 $226,567 $610,594 $ 614,987
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Savings accounts (1) $ 196,368 $ - $ - $ - $ - $ - $196,368 $ 196,368
average rates (variable rate) 4.68% - - - - - 4.68%
Certificates of deposit (4) 185,212 55,393 10,743 970 16,915 - 269,233 267,887
average rates (fixed rate) 5.51% 5.78% 6.02% 5.94% 6.08% - 5.63%
Money market checking accounts (1) 18,783 - - - - - 18,783 18,783
average rates (variable rate) 4.28% - - - - - 4.28%
Securities sold under repurchase
agreements (1) 30,500 - - - - - 30,500 30,500
average rates (variable rate) 6.02% - - - - - 6.02%
Borrowings from State of California (5)20,000 - - - - - 20,000 19,977
average rates (fixed rate) 5.57% - - - - - 5.57%
Term borrowings (5) 40,000 - - - - - 40,000 39,917
average rates (fixed rate) 5.73% - - - - - 5.73%
Trust preferred securities (2) - - - - - 17,250 17,250 13,380
average rates (fixed rate) - - - - - 9.38% 9.38%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $ 490,863 $55,393 $10,743 $ 970 $16,915 $17,250 $592,134 $ 586,812
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
EXPECTED MATURITY DATE OR REPRICING DATE BY YEAR
------------------------------------------------------------------------------------------
ESTIMATED
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Securities purchased under
resale agreements (1) $ 22,048 $ - $ - $ - $ - $ - $ 22,048 $ 22,048
average yield (variable rate) 5.32% - - - - - 5.32%
Corporate debt securities
available for sale (2) 11,736 - - - - - 11,736 11,736
average yield (variable rate) 5.72% - - - - - 5.72%
U.S. government sponsored
agency securities
available for sale (2) - - 5,025 23,090 48,056 233,354 309,525 309,525
average yield (fixed rate) - - 6.44% 6.87% 6.79% 6.62% 6.66%
Loans, gross (3) 194,811 11,064 20,648 10,075 15,450 37,020 289,068 295,131
average yield 10.25% 9.88% 9.24% 8.22% 9.19% 8.43% 9.80%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $ 228,595 $11,064 $25,673 $33,165 $63,506 $270,374 $632,377 $ 638,440
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Savings accounts (1) $ 276,011 $ - $ - $ - $ - $ - $276,011 $ 276,011
average rates (variable rate) 4.67% - - - - - 4.67%
Certificates of deposit (4) 173,918 5,762 1,982 512 805 - 182,979 182,064
average rates (fixed rate) 5.57% 5.63% 5.83% 5.98% 5.75% - 5.52%
Money market checking accounts (1) 23,849 - - - - - 23,849 23,849
average rates (variable rate) 4.35% - - - - - 4.35%
Securities sold under repurchase
agreements (1) 30,779 - - - - - 30,779 30,779
average rates (variable rate) 5.36% - - - - - 5.36%
Term borrowings (5) 24,450 - - 45,000 10,000 - 79,450 80,542
average rates (fixed rate) 5.64% - - 5.77% 5.48% - 5.69%
Trust preferred securities (2) - - - - - 17,250 17,250 17,250
average rates (fixed rate) - - - - - 9.38% 9.38%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $ 529,007 $ 5,762 $ 1,982 $45,512 $10,805 $17,250 $610,318 $ 610,495
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value balances reflected in the table were derived as follows:
(1) For financial instruments that mature or reprice within 90
days, the carrying amounts and the fair values are considered
identical, due to the short term repricing of the financial
instruments.
(2) For the 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 is
estimated using rates currently offered for deposits of
similar remaining maturities.
(5) Fair value of borrowings from the State of California and term
borrowings is estimated using discounted cash flow analysis
based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Consolidated Balance Sheets at December 31, 1999 and 1998................. 41
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997...................................... 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997....................................... 43
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................................... 44
Notes to Consolidated Financial Statements................................ 45
Report of Deloitte & Touche LLP, Independent Auditors.....................
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash $ 1,282 $ 3,592
Securities purchased under resale agreements 3,501 22,048
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 4,783 25,640
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale, at market 240,760 321,261
Loans:
Commercial real estate 357,312 278,614
Single-family residential 571 1,194
Commercial business/SBA/other 5,181 4,476
SBA loans held for sale, at lower of cost or market 3,269 4,784
- ---------------------------------------------------------------------------------------------------------------------------
Gross loans 366,333 289,068
Less: deferred loan fees (381) (582)
Less: allowance for loan losses (6,450) (5,024)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 359,502 283,462
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 6,604 8,241
Prepaid expenses and other assets 2,154 2,102
Deferred income taxes, net 8,600 2,911
Other real estate owned - 806
Premises and equipment 857 881
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 623,260 $ 645,304
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Savings accounts $ 196,368 $ 276,011
Certificates of deposit 269,233 182,979
Money market checking accounts 18,783 23,849
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 484,384 482,839
- ---------------------------------------------------------------------------------------------------------------------------
Borrowings:
Securities sold under repurchase agreements 30,500 30,779
Borrowings from State of California 20,000 -
Term borrowings 40,000 79,450
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures
("Trust preferred securities") 17,250 17,250
- ---------------------------------------------------------------------------------------------------------------------------
Total borrowings 107,750 127,479
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 592,134 610,318
Accrued interest payable and other liabilities 5,577 4,846
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 597,711 615,164
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value (10,000,000 shares authorized, 2,986,530
shares issued at December 31, 1999 and 1998) 30 30
Additional paid-in capital 27,885 28,057
Retained earnings 9,978 5,559
Accumulated other comprehensive income (loss) (6,355) 1,199
Common stock in treasury, at cost (384,806 shares at
December 31, 1999 and 295,500 shares at December 31, 1998) (5,989) (4,705)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 25,549 30,140
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 623,260 $ 645,304
- ---------------------------------------------------------------------------------------------------------------------------
Book value per common share $ 9.82 $ 11.20
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 32,857 $ 25,653 $ 24,475
Securities purchased under resale agreements 413 221 112
Investment securities:
Available for sale 16,091 19,056 8,045
Held to maturity - 310 2,714
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income on investment securities 16,091 19,366 10,759
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 49,361 45,240 35,346
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings accounts 11,519 11,226 9,603
Certificates of deposit 11,613 9,241 6,467
Money market checking accounts 967 949 892
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense on deposits 24,099 21,416 16,962
- ----------------------------------------------------------------------------------------------------------------------------
Borrowings:
Securities sold under repurchase agreements 871 1,418 1,638
Borrowings from State of California 148 - -
Term borrowings 3,455 4,087 562
Trust preferred securities 1,617 1,617 449
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense on borrowings 6,091 7,122 2,649
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 30,190 28,538 19,611
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 19,171 16,702 15,735
Provision for loan losses 1,677 910 1,135
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,494 15,792 14,600
NON-INTEREST INCOME:
Loan prepayment and late fee income 662 788 243
Gain on sale of investment securities, net 661 252 -
Gain on sale of SBA loans 250 254 -
Gain on sale of commercial real estate loans - 467 -
Gain on sale of other real estate owned 25 120 216
Other income 861 597 289
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,459 2,478 748
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 6,652 5,822 5,009
Net occupancy expenses 1,687 1,616 1,568
Communication and data processing 933 778 659
Advertising and promotion 598 541 351
FDIC insurance premiums 54 43 73
Credit and collection expenses 43 127 127
Other real estate owned expenses 28 211 114
Valuation adjustments to other real estate owned 43 50 370
Other expenses 1,445 1,091 993
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 11,483 10,279 9,264
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,470 7,991 6,084
Income tax provision 3,415 3,144 2,377
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,055 $ 4,847 $ 3,707
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $ 1.90 $ 1.72 $ 1.26
Diluted $ 1.82 $ 1.64 $ 1.21
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
42
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
ADDITIONAL COMMON STOCK RETAINED OTHER TOTAL
COMMON STOCK PAID-IN IN TREASURY EARNINGS COMPREHENSIVE SHAREHOLDERS'
------------------- ------------------
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) INCOME (LOSS) EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,960 $ 30 $ 27,808 (30) $ (255) $ (2,858) $ (257) $ 24,468
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - - 3,707 - 3,707
Other comprehensive income,
net of income taxes:
Unrealized gain on investment
securities available for sale - - - - - - 1,446 1,446
--------
Total comprehensive income 5,153
Issuances of common stock:
Employee stock purchase plan 7 - 52 - - - - 52
Non-employee directors' stock
purchase plan 3 - 39 - - - - 39
Employee stock option plan 2 - 15 - - - - 15
Purchase of common stock in treasury - - - (55) (919) - - (919)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,972 $ 30 $ 27,914 (85)$(1,174) $ 849 $ 1,189 $ 28,808
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - - 4,847 - 4,847
Other comprehensive income,
net of income taxes:
Unrealized gain on investment
securities available for sale - - - - - - 10 10
--------
Total comprehensive income 4,857
Issuances of common stock:
Employee stock purchase plan 6 - 63 - - - - 63
Non-employee directors' stock
purchase plan 2 - 44 - - - - 44
Employee stock option plan 6 - 36 - - - - 36
Purchase of common stock in treasury - - - (211) (3,531) - (3,531)
Cash dividends paid ($0.05 per share) - - - - - (137) - (137)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,986 $ 30 $ 28,057 (296) $ (4,705) $ 5,559 $ 1,199 $ 30,140
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income - - - - - 5,055 - 5,055
Other comprehensive income (loss),
net of income taxes:
Unrealized loss on investment
securities available for sale - - - - - - (7,554) (7,554)
--------
Total comprehensive loss (2,499)
Issuances of common stock
in treasury:
Employee stock purchase plan - - (12) 4 66 - - 54
Non-employee directors' stock
purchase plan - - - 3 51 - - 51
Employee stock option plan - - (160) 17 264 - - 104
Purchase of common stock in treasury - - - (113) (1,665) - - (1,665)
Cash dividends paid ($0.24 per share) - - - - - (636) - (636)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,986 $ 30 $ 27,885 (385) $ (5,989) $ 9,978 $ (6,355) $ 25,549
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
43
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,055 $ 4,847 $ 3,707
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 1,677 910 1,135
Gain on sale of investment securities (661) (252) -
Gain on sale of SBA loans (250) (254) -
Gain on sale of commercial real estate loans - (467) -
Gain on sale of other real estate owned (25) (120) (216)
Valuation adjustments to other real estate owned 43 50 370
Depreciation and amortization of premises and equipment 329 275 251
Accretion of deferred loan fees (336) (509) (379)
Accretion of discount on investment securities (50) (23) (5)
Deferred income tax benefit (219) (296) (366)
Changes in operating assets and liabilities:
Accrued interest receivable 1,637 (2,874) (3,401)
Prepaid expenses and other assets 7 (683) (706)
Accrued interest payable and other liabilities 731 1,266 658
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,938 1,870 1,048
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of investment securities:
Available for sale (98,019) (282,251) (213,510)
Held to maturity - - (15,000)
Proceeds from sales and calls of investment securities:
Available for sale 166,006 179,077 50,800
Held to maturity - 5,000 40,965
Principal payments on investment securities 142 - -
Loan originations (131,653) (108,839) (49,810)
Purchases of loans (9,017) (19,380) -
Proceeds from sales of SBA loans 4,998 2,836 -
Proceeds from sales of commercial real estate loans - 9,929 2,884
Principal payments on loans 58,766 59,221 25,356
Proceeds from sales of other real estate owned 563 1,452 2,727
Purchases of premises and equipment, net (305) (539) (315)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,519) (153,494) (155,903)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) increase in savings accounts (79,643) 75,756 42,466
Net increase in certificates of deposit 86,254 51,766 42,387
Net (decrease) increase in money market checking accounts (5,066) 7,146 (3,377)
Net (decrease) increase in securities sold under repurchase agreements (279) 9,279 11,500
Net increase in borrowings from State of California 20,000 - -
Net (decrease) increase in term borrowings (39,450) 34,450 45,000
Proceeds from issuance of trust preferred securities - - 17,250
Purchases of common stock in treasury, at cost (1,665) (3,531) (919)
Cash dividends paid (636) (137) -
Proceeds from exercise of stock options 104 36 15
Proceeds from employees and directors stock purchase plans 105 107 91
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (20,276) 174,872 154,413
- -------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (20,857) 23,248 (442)
Cash and cash equivalents at beginning of period 25,640 2,392 2,834
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,783 $ 25,640 $ 2,392
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
44
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION
Pacific Crest Capital, Inc. ("Pacific Crest" or the "Parent") is a
bank holding company principally engaged in commercial real estate and Small
Business Administration ("SBA") lending through its wholly owned subsidiary,
Pacific Crest Bank (the "Bank"). During the fourth quarter of 1999, Pacific
Crest became a bank holding company regulated by the Board of Governors of
the Federal Reserve System (the "Federal Reserve") as part of the conversion
of the Bank's charter to that of a state commercial bank. Unless the context
otherwise indicates, the "Company" refers to Pacific Crest and its wholly
owned subsidiaries, Pacific Crest Bank and PCC Capital I.
Pacific Crest Bank is a California commercial bank that is
supervised and regulated by the California Department of Financial
Institutions (the "Department" or "DFI") and the Federal Deposit Insurance
Corporation ("FDIC"). In September 1999, the Bank filed an application with
the DFI to convert from a California industrial loan company to a California
commercial bank. In December 1999, the Bank received all of the necessary
regulatory approvals, and on December 15, 1999 completed its conversion from
an industrial loan company to a commercial bank. The Bank converted to a
commercial bank primarily in order to offer full-service checking accounts
and pursue full-service online banking. The Bank's deposits are insured by
the FDIC up to applicable limits.
Pacific Crest Bank concentrates on marketing to and serving the
needs of individuals and small and medium sized businesses in California,
Arizona, Oregon and Washington. The Bank conducts its deposit operations
through three branch offices, located in Beverly Hills, Encino and San Diego,
California. The Bank currently offers savings accounts, money market checking
accounts and certificates of deposit. However, the Bank does not offer other
traditional banking services such as travelers' checks and safe deposit
boxes. The Bank has focused its lending activities on loans secured by
commercial real estate and small business loans under the federal SBA
program. Pacific Crest Bank conducts its lending operations through its
lending and marketing representatives located in Southern California and
through its correspondent loan brokers located in California, Arizona,
Washington, and Oregon.
PCC Capital I ("PCC Capital") is a statutory business trust created
under Delaware law for the exclusive purpose of issuing and selling $17.25
million of 9.375% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities"). The Trust Preferred Securities are presented as a separate line
item in the Consolidated Balance Sheets under the caption "Company obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely junior subordinated debentures." For financial reporting purposes, the
Company records the dividend distributions on the Trust Preferred Securities
as "Interest expense - trust preferred securities" in the Consolidated
Statements of Income.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Pacific Crest and its wholly owned subsidiaries, Pacific Crest Bank and PCC
Capital. All significant intercompany transactions have been eliminated.
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheets and revenues
and expenses for the year. Actual results in future years could differ from
those estimates by management in the current year. Material estimates that
are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the valuation allowance
for other real estate owned.
45
<PAGE>
BUSINESS SEGMENTS
The Company is organized and operated as a single reporting segment
principally engaged in commercial real estate and SBA lending. The Company's
lending activities concentrate on marketing to and serving the needs of
individuals and small to medium-sized businesses located primarily in
California, but also including Arizona, Oregon and Washington. The Company
conducts its deposit operations through three branch offices, located in
Southern California. The consolidated financial statements, as they appear in
this document, represent the grouping of revenue and expense items as they
are presented to executive management of the Company, for use in
strategically directing the operations of the Company.
CASH AND CASH EQUIVALENTS
For purpose of the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows, cash and cash equivalents include cash and
securities purchased under resale agreements which have original maturities
of three months or less and are carried at cost.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS
The Company invests excess cash overnight and up to three months in
securities purchased under resale agreements ("repurchase agreements").
Collateral securing the repurchase agreements is limited to U.S. Treasury
bonds, notes and bills, and securities issued by either U.S. government
agencies or U.S. government sponsored agencies. Collateral securing the
repurchase agreements is held for safekeeping under third-party custodial
agreements and is required to be segregated and separately accounted for from
all other securities held by the custodian for its other customers or for its
own account.
INVESTMENT SECURITIES
The Company invests in U.S. government sponsored agency securities,
and to a lesser extent, investment grade corporate debt securities. At the
date of purchase, the Company elects to segregate the security into either
the held to maturity portfolio or the available for sale portfolio, depending
upon management's ability and intent to hold such securities to maturity.
Debt securities classified as held to maturity are recorded at amortized cost
while securities classified as available for sale are recorded at market.
Unrealized gains or losses on securities available for sale are excluded from
earnings and reported in "Accumulated other comprehensive income (loss)" as a
separate component of Shareholders' Equity, net of tax effect. Realized gains
or losses are recorded using the specific identification method. Purchase
premiums and discounts are recognized in interest income using the level
yield method.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at
their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain estimated indirect origination costs, are
deferred and recognized as an adjustment of the related loan yield using the
interest method over the term of the loan.
SBA LOANS HELD FOR SALE
SBA loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses, if any, are recognized through a valuation allowance
by charges to income.
ALLOWANCE FOR LOAN LOSSES
The Company charges current income in amounts necessary to maintain
a general allowance for loan losses deemed adequate to cover potential losses
on loans. The amount of the allowance is based on management's evaluation of
numerous factors including adequacy of collateral, which includes loan
balance to collateral value, loan debt service coverage ratio and secondary
collateral, if applicable. Other factors include an evaluation of the
strengths and weaknesses of the borrower's financial position, and strengths
and weaknesses of the tenants in the properties. In addition, management
evaluates current delinquency trends, historical Company loan loss
experience, regional real estate economic conditions and overall economic
trends impacting the Company's real estate lending portfolio. The combination
of these factors are utilized in establishing the allowance for loan losses.
OTHER REAL ESTATE OWNED
Assets classified as other real estate owned ("OREO") include
foreclosed real estate owned by the Company. 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.
46
<PAGE>
DEFERRED INCOME TAXES
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the financial statement amounts of assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the property. Office
furniture, fixtures and equipment are generally estimated to have useful
lives of between three and eight years. Leasehold improvements are amortized
over either the useful life or the life of the lease, whichever is shorter.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair values. As amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133", SFAS 133 will be effective
beginning in 2001. Management believes that the adoption of SFAS 133 will not
have a material impact on the Company's results of operations or financial
position.
NOTE 3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 30,275 $ 28,007 $ 19,068
Income taxes $ 3,775 $ 4,000 $ 2,725
Non-cash investing and financing activities:
Transfers from loans to other real estate owned $ - $ 208 $ 1,376
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market prices.
However, in many instances, there are no quoted market prices for the
Company's various financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," excludes certain financial instruments and
all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.
Because no conventional market exists for a significant portion of
the Company's financial instruments, and because of the inherent imprecision
of estimating fair values for financial instruments for which no conventional
trading market exists, management believes that the fair market value
estimates should be viewed as only approximate values that the Company would
receive if the Company's assets and liabilities were sold.
47
<PAGE>
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their
fair values.
INVESTMENT 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.
LOANS
The Company established the fair market value of the loan portfolio
by segregating the loan portfolio into categories by utilizing selected
factors (i.e., payment history, collateral values, risk classification, cash
flows) and then forecasting an estimated fair market value sale price for
each of the established loan categories. The estimated market value of the
loan portfolio includes categories of loans the Company believes would sell
at a premium between 0% and 3.0%, and categories of loans that would sell at
a discount between 0% and 25%. A significant number of the Company's variable
rate loans contain "floors" or minimum interest rates. The Company's variable
rate loans generally reprice on a quarterly basis. Many of these same loans
also contain covenants requiring penalties for early repayment. The Company
believes that loans with these characteristics, as well as being well
collateralized, with no history of delinquencies, would sell at a premium. On
the other hand, loans on a non-accrual basis, or loans that have been
classified due to an identified weakness, even though fully secured, could
normally only be sold for a discount depending on the anticipated level of
ultimate recovery upon liquidation of the collateral. Fair value then, is
based upon the estimated sales prices less cost of sales of these loans.
DEPOSITS
Fair value of the Company's fixed maturity deposits are estimated
using rates currently offered for deposits of similar remaining maturities.
The fair value of deposits with no stated maturity such as savings accounts
and money market checking accounts are disclosed as the amount payable on
demand.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The carrying amounts of securities sold under repurchase agreements
approximate their fair value due to the short maturity of these borrowings.
BORROWINGS FROM STATE OF CALIFORNIA AND TERM BORROWINGS
The fair values of the Company's debt are estimated using discounted
cash flow analysis based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
TRUST PREFERRED 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.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts of accrued interest receivable and payable
approximate their fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the interest rate cap is estimated, using dealer
quotes, as the amount that the Company would pay to execute a new agreement
with terms identical to those remaining on the current agreement, considering
current interest rates.
48
<PAGE>
The carrying amounts and estimated fair values for certain of the
Company's financial instruments as of the dates indicated are summarized in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,783 $ 4,783 $ 25,640 $ 25,640
Investment securities 240,760 240,760 321,261 321,261
Loans, net 359,502 370,726 283,462 295,131
Accrued interest receivable 6,604 6,604 8,241 8,241
LIABILITIES
Savings accounts 196,368 196,368 276,011 276,011
Certificates of deposit 269,233 267,887 182,979 182,064
Money market checking accounts 18,783 18,783 23,849 23,849
Securities sold under repurchase agreements 30,500 30,500 30,779 30,779
Borrowings from State of California 20,000 19,977 - -
Term borrowings 40,000 39,917 79,450 80,542
Trust preferred securities 17,250 13,380 17,250 17,250
Accrued interest payable 1,264 1,264 1,349 1,349
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate cap - $100 million notional amount 635 1,900 761 761
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. INVESTMENT SECURITIES
The Company's investment securities have been classified in the
Consolidated Balance Sheets according to management's intent and ability. The
following table presents the amortized cost and fair values of the Company's
investment securities available for sale as of the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED ESTIMATED AMORTIZED GROSS UNREALIZED ESTIMATED
----------------------- -----------------------
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
U.S. government sponsored
agency securities $ 247,622 $ - $ (10,695) $ 236,927 $ 307,421 $ 2,113 $ (9) $ 309,525
Corporate debt securities 4,094 2 (263) 3,833 11,713 31 (8) 11,736
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 251,716 $ 2 $ (10,958) $ 240,760 $ 319,134 $ 2,144 $ (17) $ 321,261
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's investment securities portfolio at December 31, 1999,
consisted of fixed rate investments in U.S. government sponsored agency callable
bonds and mortgage-backed securities issued by Fannie Mae, Freddie Mac, the
Federal Home Loan Bank and the Government National Mortgage Corporation, in
addition to variable rate investments in investment grade corporate debt
securities. The callable agency securities have call features that allow the
issuer to retire (call) an individual security prior to that security's stated
maturity date. As of December 31, 1999, the Company's callable agency portfolio
had call dates ranging between one month and 19 months. The corporate debt
securities are variable rate instruments whose index is based upon the Three
Month London Interbank Offered Rate ("LIBOR") and whose rate reprices on a
quarterly basis.
U.S. government sponsored agency securities totaling $102.6 million and
$118.1 million were pledged to secure borrowings aggregating $90.5 million
and $110.2 million at December 31, 1999 and 1998, respectively.
49
<PAGE>
The following table reflects the scheduled maturities in the Company's
investment securities portfolio at December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due from one to five years $ 76,353 $ 74,923 6.06%
Due from six to ten years 147,273 139,642 6.68%
Due after ten years 28,090 26,195 7.07%
- --------------------------------------------------------------------------------------
Total investment securities $251,716 $240,760 6.53%
- --------------------------------------------------------------------------------------
</TABLE>
During 1999, the Company realized gross gains of $848,000 and gross
losses of $187,000 on the sales of its investment securities. During 1998,
the Company realized gross gains of $252,000 and no losses on the sales of
its investment securities. During 1997, no gains or losses were realized.
Proceeds from the sales and calls of investment securities during 1999, 1998
and 1997 were $166.0 million, $184.0 million and $91.8 million, respectively.
NOTE 6. LOANS
The Company is engaged primarily in commercial real estate term
lending in the state of California. Loans are principally secured by
commercial real estate and are generally contractually due over periods of up
to ten years.
The activities in the allowance for loan losses for the periods
indicated are presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at beginning of period $ 5,024 $ 4,100 $ 3,400
Provision for loan losses 1,677 910 1,135
Net loan (charge-offs) recoveries (251) 14 (435)
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 6,450 $ 5,024 $ 4,100
- --------------------------------------------------------------------------------------------------------
</TABLE>
Accounts which are deemed uncollectible by management or for which
no payment has been received for five consecutive months are charged-off for
the amount that is not collateralized by the estimated fair value less
selling costs of the underlying real estate collateral.
INCOME ON DELINQUENT LOANS
It is the Company's policy to suspend the recognition of income on
any loan when any installment payment is 61 days or more contractually
delinquent or when management otherwise determines that collectibility of
principal on interest is unlikely prior to the loan becoming 61 days past
due. Recognition of income is generally resumed and suspended income is
recognized when the loan becomes contractually current. At December 31, 1999,
1998 and 1997, the Company had loans totaling $210,000, $0 and $228,000,
respectively, which were 61 days or more contractually delinquent. The
amounts of contractual interest, interest recognized and interest foregone on
non-accrual loans for periods indicated are presented in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans:
Contractual interest $ 48 $ 7 $ 390
Less: interest recognized (24) - (141)
- --------------------------------------------------------------------------------------
Interest foregone $ 24 $ 7 $ 249
- --------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
IMPAIRED LOANS
The Company classifies certain loans as impaired. A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest
owed. Impaired loans are generally measured by the Company based on the
present value of expected future cash flows discounted at the loan's
effective rate unless the loan is fully collateralized. The table below
summarizes loan impairment data as of the dates or for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment in impaired loans $ 210 $ - $ 1,634
Valuation reserve - impaired loans $ (29) $ - $ (221)
Average recorded investment in impaired loans $ 70 $ 57 $ 3,458
- --------------------------------------------------------------------------------------------------
</TABLE>
SECONDARY MARKET LOAN SALES
During 1998, the Company initiated a commercial real estate loan
program designed to produce fixed rate loan product for both the Company's
portfolio and for potential sale in the secondary market. During the first
quarter of 1999, the Company established an office in Orange County,
California to coordinate and originate loans under this program. During
January 2000, the Company closed this office and moved the operations to its
headquarters in Agoura Hills, California. There were no loan sales under this
program in 1999, compared to sales of eight loans with a principal balance of
$9.5 million for a total gain of $467,000 in 1998.
SBA LOAN SALES
During 1997, the Company initiated an SBA loan program. Under this
program, the Company sells the guaranteed portion of selected SBA loans that it
originates. The Company retains the unguaranteed portion of the loans, as well
as the servicing on the loans, for which it is paid a fee. SBA loans are all
variable rate based upon the WALL STREET JOURNAL prime lending rate. The loan
servicing spread is generally a minimum of 1.00% on all loans. The table below
presents information related to the 1999 and 1998 SBA loan sales (there were no
sales in 1997) (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Number of loans sold 22 10
Principal balance sold $ 4,748 $ 2,582
Gain on sale $ 250 $ 254
- -------------------------------------------------------------------------------
</TABLE>
The Company calculated the servicing asset and retained loan contra
related to the 1999 and 1998 sales transactions in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," and other authoritative literature. The Company calculated
these values using assumptions resulting in values for the servicing asset and
retained loan contra that were not material to the consolidated financial
statements as a whole.
As of December 31, 1999, the Company had SBA loans in its loan
portfolio with an SBA guaranteed balance of $3.3 million that were designated as
held for sale.
The guaranteed portion of SBA loans that the Company had sold and was
servicing for others at December 31, 1999 and 1998 was $7.5 million and $2.8
million, respectively. These balances were not included in the Consolidated
Balance Sheets.
51
<PAGE>
NOTE 7. OTHER REAL ESTATE OWNED
Other real estate owned is included in the consolidated financial
statements at the lower of cost or fair value less estimated selling costs and
the associated valuation allowance. The following tables reflect the balance of
the Company's OREO, as well as changes in the valuation allowance for OREO as of
the dates or for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other real estate owned, gross $ - $ 1,041 $ 2,524
Less: valuation allowance - (235) (460)
- ---------------------------------------------------------------------------------------------------
Other real estate owned, net $ - $ 806 $ 2,064
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OREO valuation allowance at beginning of period $ 235 $ 460 $ 90
Valuation adjustments 43 50 370
Net charge-offs (278) (275) -
- ---------------------------------------------------------------------------------------------------
OREO valuation allowance at end of period $ - $ 235 $ 460
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment of the Company is presented in the table below
as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture, fixtures and equipment $ 2,341 $ 2,080
Leasehold improvements 595 593
- --------------------------------------------------------------------------------------
2,936 2,673
Less: accumulated depreciation
and amortization (2,079) (1,792)
- --------------------------------------------------------------------------------------
Premises and equipment, net $ 857 $ 881
- --------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and
1997 amounted to $329,000, $275,000 and $251,000, respectively.
NOTE 9. DEPOSITS
Savings accounts and money market checking accounts have no contractual
maturity. Certificates of deposit have maturities ranging from 30 days to five
years. Certificates of deposit of $100,000 or more at December 31, 1999 and 1998
were approximately $63,525,000 and $38,224,000, respectively. The approximate
remaining maturities of certificates of deposit as of December 31, 1999 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT
------------------------------------------
LESS THAN $100,000
$100,000 OR MORE TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 27,258 $ 7,091 $ 34,349
Over three months through twelve months 112,878 37,985 150,863
Over one year through three years 52,085 14,051 66,136
Over three years through five years 13,487 4,398 17,885
- ---------------------------------------------------------------------------------------------
Total $205,708 $ 63,525 $269,233
- ---------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
NOTE 10. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as
follows as of the dates or for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at year-end $ 30,500 $ 30,779 $ 21,500
Average amount outstanding during the year 15,741 24,893 28,493
Maximum amount outstanding at any month-end 32,500 41,800 50,400
Weighted average interest rate during the year 5.53% 5.70% 5.75%
Weighted average interest rate on year-end balances 6.02% 5.36% 5.92%
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company has short-term borrowing lines with four brokers
aggregating $95.0 million. The repayment terms on this short-term debt range
from one day to three months. The interest rate paid can vary daily, but
typically approximates the federal funds rate plus 25 basis points. These
borrowings are secured by pledging specific amounts of certain U.S. government
sponsored agency securities. The Company utilizes these borrowing lines to cover
short-term financing needs. At December 31, 1999, the Company had $30.5 million
outstanding in securities sold under repurchase agreements, which was comprised
of $25.0 million drawn against the $95.0 million short-term borrowing lines
described above, and $5.5 million drawn against the Company's $45.0 million
medium-term borrowing facility described below in Note 12. "Term Borrowings."
The remaining borrowing availability under the Company's short-term borrowing
lines at December 31, 1999 was $70.0 million.
NOTE 11. BORROWINGS FROM STATE OF CALIFORNIA
The State of California Treasurer's Office has a fixed rate lending
program whereby an eligible bank may borrow an amount not to exceed its total
shareholders' equity. Borrowing maturity dates under this program cannot exceed
one year. As of December 31, 1999, the Bank's total shareholder's equity was
$37.4 million, against which the Bank had borrowed $20.0 million, leaving
approximately $17.4 million in availability under this borrowing program. The
State of California requires collateral with a value of at least 110% of the
outstanding borrowing amount. The Bank has pledged specific amounts of certain
U.S. government sponsored agency securities to meet this collateral requirement.
The table below describes the attributes of the Bank's borrowings from
the State of California at December 31, 1999 (there were no borrowings at
December 31, 1998) (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
BORROWING DATE AMOUNT RATE MATURITY DATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
October 1999 $ 5,000 5.18% April 2000
October 1999 5,000 5.39% October 2000
November 1999 5,000 5.74% December 2000
December 1999 5,000 5.98% December 2000
- ------------------------------------------------------------------------------------------------
Total State of California borrowings $ 20,000 5.57%
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12. TERM BORROWINGS
The Company has a fixed rate, medium-term borrowing facility of $45.0
million through one broker. This facility allows the Company to borrow for
periods of up to one year. This debt is secured by pledging specific amounts of
certain U.S. government sponsored agency securities. Borrowings on this facility
with an original maturity up to 90 days are classified as "Securities sold under
repurchase agreements" on the Consolidated Balance Sheets, while borrowings with
an original maturity in excess of 90 days are classified as "Term borrowings."
At December 31, 1999, the Company had borrowings outstanding of $5.5 million,
leaving an unused credit availability of $39.5 million. At December 31, 1998,
the Company had $24.5 million outstanding in borrowings under this facility. The
$5.5 million outstanding at December 31, 1999 had an original maturity of 90
days and was thus classified as "Securities sold under repurchase agreements."
The $24.5 million outstanding at December 31, 1998 had an original maturity in
excess of 90 days and was thus classified as "Term borrowings."
The Company has a fixed rate, long-term borrowing facility of $95.0
million over one year through one broker. This debt is secured by pledging
specific amounts of certain U.S. government sponsored agency securities. At
December 31, 1999, the Company had borrowings outstanding of $40.0 million,
leaving an unused credit availability of $55.0 million. At December 31, 1998,
the Company had $55.0 million outstanding in borrowings under this facility.
53
<PAGE>
The tables below describe the attributes of the Company's term
borrowings as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------
BORROWING TYPE AMOUNT RATE CALL DATE MATURITY DATE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Five-year borrowing $ 10,000 5.48% January 2000 January 2003
Three-year borrowing 20,000 5.75% September 2000 September 2002
Three-year borrowing 10,000 5.95% October 2000 October 2002
- ---------------------------------------------------------------------------------------------------
Total term borrowings $ 40,000 5.73%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------
BORROWING TYPE AMOUNT RATE CALL DATE MATURITY DATE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-year borrowing $ 24,450 5.64% - April 1999
Five-year borrowing 25,000 5.82% September 1999 September 2002
Five-year borrowing 10,000 5.78% October 1999 October 2002
Five-year borrowing 10,000 5.63% December 1999 December 2002
Five-year borrowing 10,000 5.48% January 2000 January 2003
- ---------------------------------------------------------------------------------------------------
Total term borrowings $ 79,450 5.69%
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITY OF
SUBSIDIARY OF TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
On September 22, 1997, PCC Capital completed a $17.25 million public
offering of 9.375% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") and invested the gross proceeds of $17.25 million from the offering
in 9.375% junior subordinated debentures issued by Pacific Crest. The junior
subordinated debentures were issued concurrent with the issuance of the Trust
Preferred Securities. The interest on the junior subordinated debentures paid by
Pacific Crest to PCC Capital represents the sole revenues of PCC Capital and the
sole source of dividend distributions to the holders of the Trust Preferred
Securities. Pacific Crest has fully and unconditionally guaranteed all of PCC
Capital's obligations under the Trust Preferred Securities. Pacific Crest has
the right, assuming no default has occurred, to defer payments of interest on
the junior subordinated debentures at any time for a period not to exceed 20
consecutive quarters. The Trust Preferred Securities will mature on October 1,
2027, but can be called after October 1, 2002 by PCC Capital.
NOTE 14. INCOME TAXES
The income tax provision for the periods indicated is presented in the
table below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,250 $ 2,656 $ 2,013
State 384 784 730
- ---------------------------------------------------------------------------------
Current income tax provision 3,634 3,440 2,743
- ---------------------------------------------------------------------------------
Deferred:
Federal (756) (209) (167)
State 537 (87) (199)
- ---------------------------------------------------------------------------------
Deferred income tax benefit (219) (296) (366)
- ---------------------------------------------------------------------------------
Income tax provision $ 3,415 $ 3,144 $ 2,377
- ---------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
The income tax effects of temporary differences that give rise to
significant portions of the deferred income tax assets and liabilities as of the
dates indicated are presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Unrealized loss on investment securities available for sale $ 4,602 $ -
Allowance for loan losses 3,240 3,361
Other real estate owned - 105
Reserve, accruals and state taxes 958 882
- ---------------------------------------------------------------------------------------------------
Total deferred income tax assets 8,800 4,348
- ---------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on investment securities available for sale - (868)
State taxes and other (200) (569)
- ---------------------------------------------------------------------------------------------------
Total deferred income tax liablities (200) (1,437)
- ---------------------------------------------------------------------------------------------------
Net deferred income tax asset $ 8,600 $ 2,911
- ---------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes at the federal
income tax rate of 35% to the effective income tax for the periods indicated is
presented in the table below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax based on statutory tax rate 35.00% 35.00% 35.00%
State franchise tax expense,
net of federal benefit 7.07% 5.76% 5.76%
Valuation allowance - (0.63%) (6.34%)
Other, net (1.75%) (0.79%) 4.65%
- ---------------------------------------------------------------------------------------------
Effective income tax rate 40.32% 39.34% 39.07%
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE 15. STOCK PURCHASE PLANS AND STOCK OPTION PLAN
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan ("ESPP") which
allows employees to purchase shares of the Company's common stock at the lower
of fair market value at the beginning of the plan year, or 90% of fair market
value at the end of the plan year. Employees' purchases may not exceed the
lesser of $25,000 or 15% of their annual base compensation. Shares of common
stock purchased under the ESPP are not issuable until the end of the year. The
Company increased the number of shares authorized to be issued under the ESPP
from 33,330 shares, to 75,000 shares, an increase of 41,670 shares. This
increase was approved by the Company's shareholders at the May 11, 1999 Annual
Shareholders Meeting. The maximum number of shares of common stock that may be
issued under the ESPP is 75,000 shares, of which 4,132 treasury shares, for a
value of $54,418, were issued in January of 1999. The Company issued 3,520
shares of common stock (treasury shares) for a value of $40,797 on January 7,
2000 for employees participating in the ESPP during the year ended December 31,
1999. There are 45,911 shares available for issuance under the ESPP for 2000.
NON-EMPLOYEE DIRECTORS' STOCK PURCHASE PLAN
The Company maintains a Non-Employee Directors' Stock Purchase
Plan (the "Directors' Plan"). The Directors' Plan allows the directors to
purchase the stock of the Company from proceeds of their directors' fees. The
directors purchased 3,392 and 2,185 shares of common stock for a value of
$49,896 and $39,572 during the years ended December 31, 1999 and 1998,
respectively, under this plan.
55
<PAGE>
EMPLOYEE STOCK OPTION PLAN
The 1993 Equity Incentive Plan (the "Plan") is designed to promote and
advance the interests of the Company and its shareholders by enabling the
Company to attract, retain and reward key employees. The Plan offers stock and
cash incentive awards, as well as stock options. The maximum number of shares of
common stock with respect to which awards may be granted under the Plan were
initially 150,000 shares as of December 1993. The number of shares under the
Plan are to be increased by two percent (2%) of the total issued and outstanding
shares of the Company's common stock as of the first day of each year, beginning
on January 1, 1995. The 2% per year increase of shares available under the Plan
continues through the term of the Plan, which expires on December 31, 2002.
The maximum number of shares of common stock to which awards may be
granted under the Plan at December 31, 1999 was 401,872, of which 354,193 stock
options have been issued as of December 31, 1999. The number of common shares
added under the Plan on January 1, 2000 was 52,040, increasing the cumulative
number of shares that may be awarded under the Plan to 453,912 after January 1,
2000. There were 16,670 common shares issued through the exercise of stock
options for the year ended December 31, 1999.
The table below summarizes the activity of the Plan for the periods
indicated:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
OPTION EXERCISE EXERCISE
SHARES PRICES PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 222,663 $3.50-$8.25 $6.37
- ------------------------------------------------------------------------------------------------------
Options granted 65,577 11.38-12.50 11.99
Options cancelled (400) 6.00 6.00
Options exercised (2,197) 6.00 6.00
- ------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 285,643 $3.50-$12.50 $7.66
- ------------------------------------------------------------------------------------------------------
Options granted 63,600 15.00-20.25 17.88
Options cancelled (2,150) 7.75-18.00 12.40
Options exercised (6,525) 6.00-7.56 6.20
- ------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 340,568 $3.50-$20.25 $9.57
- ------------------------------------------------------------------------------------------------------
Options granted 56,050 13.75-15.00 14.86
Options cancelled (25,755) 7.50-18.00 14.72
Options exercised (16,670) 3.50-12.00 6.31
- ------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 354,193 $3.50-$20.25 $10.20
- ------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.50 - $5.50 21,770 5.4 years $4.83 21,770 $4.83
6.00 - 7.00 115,997 4.1 years 6.15 115,997 6.15
7.50 - 8.25 57,449 6.0 years 7.57 37,911 7.57
11.00 - 12.50 59,027 6.9 years 11.99 19,984 11.99
12.51 - 14.99 7,000 2.7 years 13.91 - 0.00
15.00 - 20.25 92,950 8.4 years 16.72 500 18.75
- ----------------------------------------------------------------------------------------------------------------------------
354,193 6.1 years $10.20 196,162 $6.90
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
The estimated fair value of stock options granted during 1999 and 1998
was $5.73 and $6.14 per share, respectively. The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by SFAS No. 123, "Accounting for Stock-based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below for the periods presented
(dollars and shares in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 5,055 $ 4,847 $ 3,707
Pro forma $ 4,904 $ 4,681 $ 3,631
Diluted earnings per common share:
As reported $ 1.82 $ 1.64 $ 1.21
Pro forma $ 1.77 $ 1.58 $ 1.18
Weighted average diluted common shares
outstanding 2,778 2,971 3,070
- --------------------------------------------------------------------------------------------
Assumptions:
Dividend yield 1.63% 0.28% 0%
Expected volatility 30% 20% 20%
Risk free interest rate 6.00% 5.00% 5.60%
Expected life 7.5 years 7 years 7 years
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 16. DIVIDENDS
As a Delaware corporation, 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 had approximately $4.3 million in cash and
investments less current liabilities and short-term debt at December 31, 1999.
However, these funds are also necessary to pay future operating expenses of the
Parent, interest expense on the $17.25 million subordinated debentures, and
possible future capital infusions into the Bank. Without dividends from the
Bank, the Parent must rely solely on existing cash, investments and borrowings.
During 1999, the Company declared and paid cash dividends of $0.24 cents per
common share for a total of $636,000. During 1998, the Company paid cash
dividends of $0.05 per common share for a total of $137,000. On February 2,
2000, the Company declared a $0.07 cent per common share cash dividend for the
first quarter of 2000, payable on March 15, 2000 to holders of record as of
March 1, 2000.
The Bank's ability to pay dividends to the Parent is restricted by
California State law, which requires that sufficient retained earnings are
available to pay the dividend. During 1999, the Bank paid $1.24 million cash
dividends to the Parent. At December 31, 1999, the Bank had retained earnings of
$13.8 million available for dividend payments. On February 1, 2000, the Bank
declared a $400,000 cash dividend for the first quarter of 2000, payable to the
Parent on March 15, 2000.
NOTE 17. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its office facilities. Future minimum rental
payments required under operating leases that have initial and remaining
non-cancelable terms in excess of one year are approximately as indicated in the
table below as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
<S> <C>
2000 $ 720
2001 642
2002 513
2003 513
2004 527
Thereafter 1,744
- ------------------------------------------------------------------------
Total $ 4,659
- ------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Certain leases contain rental escalation clauses based on increases in
the Consumer Price Index and renewal options, which may be exercised by the
Company. Rent expense for the years ended December 31, 1999, 1998 and 1997
totaled $829,000, $780,000 and $773,000, respectively.
UNFUNDED COMMITMENTS
The Bank makes unfunded commitments with its commercial real estate
term lending activities for building improvements to property. At December 31,
1999 and 1998, the Bank had unfunded commitments to fund loans secured by
commercial real estate of $2.3 million and $4.6 million, respectively. The
Bank's unfunded commercial real estate loan commitments may involve to varying
degrees, elements of credit and interest rate risk that is not recognized in the
Consolidated Balance Sheets. The Company's exposure to credit loss is
represented by the contractual amount of these commitments. These risks are
generally mitigated by the real estate collateral securing the commercial real
estate loan commitments and the SBA guarantee on SBA loan commitments.
LITIGATION
There is one lawsuit and claim pending against the Company which
management considers incidental to normal operation. Management, after review,
including consultation with counsel, believes that the ultimate liability, if
any which could arise from this lawsuit and claim would not materially affect
the financial position, results of operations or liquidity of the Company.
NOTE 18. COMPUTATION OF BOOK VALUE PER COMMON SHARE
Book value per common share was calculated by dividing total
shareholders' equity by the number of common shares issued less common shares
held in treasury. The table below presents the computation of book value per
common share as of the dates indicated (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Total shareholders' equity $ 25,549 $ 30,140
- ---------------------------------------------------------------------------------------
Common shares issued 2,986,530 2,986,530
Less: common shares held
in treasury (384,806) (295,500)
- ---------------------------------------------------------------------------------------
Common shares outstanding 2,601,724 2,691,030
- ---------------------------------------------------------------------------------------
Book value per common share $ 9.82 $ 11.20
- ---------------------------------------------------------------------------------------
</TABLE>
NOTE 19. COMPUTATION OF EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share were determined by dividing
net income by the applicable basic and diluted weighted average common shares
outstanding. For the diluted earnings per share computation, the common shares
outstanding were adjusted to reflect the number of common stock equivalents
outstanding based on the number of outstanding stock options issued by the
Company utilizing the treasury stock method.
The table below presents the basic and diluted earnings per share
computations for the periods indicated (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 5,055 $ 4,847 $ 3,707
- ---------------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 2,662 2,817 2,936
Dilutive effect of stock options 116 154 134
- ---------------------------------------------------------------------------------------
Diluted weighted average common
shares outstanding 2,778 2,971 3,070
- ---------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 1.90 $ 1.72 $ 1.26
Diluted $ 1.82 $ 1.64 $ 1.21
- ---------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
20. REGULATORY MATTERS AND RESTRICTIONS ON SHAREHOLDERS' EQUITY
Pacific Crest Capital, Inc. is subject to legal and regulatory
requirements of the Federal Reserve, while Pacific Crest Bank is subject to
legal and regulatory requirements of the California Financial Code, California
General Corporation Law and the FDIC. These legal and regulatory requirements
specify certain minimum capital ratios and place limits on the size and type of
loans that may be made.
The Bank may establish and maintain capital, surplus and undivided
profits accounts and may from time to time allocate its shareholder's equity
among such accounts so long as no part of its contributed capital is allocated
to the undivided profits account and the undivided profits account never exceeds
the Bank's retained earnings.
Both the Company and the Bank are subject to various regulatory capital
requirements administered by the Federal Reserve and the FDIC. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, both the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require both the Company and the Bank to maintain minimum amounts and
ratios as set forth in the table below of total and Tier 1 capital to
risk-weighted assets and Tier 1 capital to average quarterly assets. Management
believes that both the Company and the Bank met all capital adequacy
requirements to which they were subject as of December 31, 1999.
As of December 31, 1999, both Pacific Crest Capital, Inc. and the Bank
maintained capital ratios that categorized them as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a company must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions known to management that would have changed either institution's
category.
The following tables present the amounts of regulatory capital and
capital ratios for Pacific Crest Capital, Inc. and Pacific Crest Bank compared
to their minimum capital adequacy requirements and the minimum well capitalized
requirements as of the dates indicated. Pacific Crest Capital, Inc. was not
required to maintain regulatory capital ratios prior to its conversion to a bank
holding company in December 1999 (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM MINIMUM
CAPITAL ADEQUACY WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
-----------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets):
Pacific Crest Capital, Inc. $ 54,391 13.02% $ 33,423 8.00% $ 41,779 10.00%
Pacific Crest Bank $ 48,848 11.64% $ 33,580 8.00% $ 41,975 10.00%
Tier 1 capital (to risk weighted assets):
Pacific Crest Capital, Inc. $ 42,539 10.18% $ 16,711 4.00% $ 25,067 6.00%
Pacific Crest Bank $ 43,586 10.38% $ 16,790 4.00% $ 25,185 6.00%
Tier 1 capital (to average quarterly assets):
Pacific Crest Capital, Inc. $ 42,539 6.89% $ 24,707 4.00% $ 30,883 5.00%
Pacific Crest Bank $ 43,586 7.19% $ 24,264 4.00% $ 30,330 5.00%
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
(Pacific Crest Bank Only)
Total capital (to risk weighted assets) $ 43,525 11.92% $ 29,213 8.00% $ 36,517 10.00%
Tier 1 capital (to risk weighted assets) $ 38,955 10.67% $ 14,607 4.00% $ 21,910 6.00%
Tier 1 capital (to average quarterly assets) $ 38,955 6.81% $ 22,869 4.00% $ 28,586 5.00%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
NOTE 21. RETIREMENT SAVINGS AND SUPPLEMENTAL BENEFIT PLANS
Company employees participate in the Company's 401(k) Plan (the
"Retirement Plan"). The Retirement Plan covers substantially all employees.
Employees may contribute up to 15% of their salary up to a maximum of $10,000
for 1999, $10,000 for 1998 and $9,500 for 1997. The Company matches employee
contribution amounts equal to 100% of the first 6% of compensation contributed
by each participant. Amounts charged to expense under the Retirement Plan for
these matching contributions were $243,000, $219,000 and $191,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, four executive officers of the Company
participated in the Company's Supplemental Executive Retirement Plan (the
"Executive Retirement Plan"). This plan provides for annual retirement benefits
that would be payable to the executives under the plan on their normal
retirement date. The plan provides for the offset for social security benefits
and matching 401(k) contributions made under the Pacific Crest Capital, Inc.
Retirement Plan. Offsets for social security and 401(k) matching contributions
may be substantial. Amounts charged to expense under the Executive Retirement
Plan were $128,000, $113,000 and $102,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 22. INTEREST RATE CAP
On June 8, 1998, the Company executed a five-year interest rate cap
agreement for a notional amount of $100 million. Under the cap agreement, the
Company earns income when the Three-Month London Interbank Offered Rate (LIBOR)
exceeds 6.70%. Three-Month LIBOR closed at 6.00% on December 31, 1999. The cost
of the cap was $925,000 and is being amortized over five years. The interest
rate cap was purchased as a hedge instrument for the Company's deposit
liabilities, which reprices in one year or less. It was designed to hedge the
risk that interest rates may rise, which would produce an increase in the rates
paid on these deposit liabilities, resulting in an increase in interest expense
and a reduction in net interest income. The interest rate cap mitigates this
risk somewhat, since it earns income for the Company if interest rates rise
beyond a certain level. The interest rate cap does not expose the Company to any
additional risk beyond the initial investment of $925,000. For the years ended
December 31, 1999 and 1998, the amounts of amortized premium were $185,000 and
$105,000, respectively, and were included in "Interest expense - deposits" on
the Consolidated Statements of Income. See Note 25 for information regarding the
sale of the interest rate cap in February 2000.
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents accumulated other comprehensive income and
the components of other comprehensive income for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated other comprehensive income (loss)
at beginning of period $ 1,199 $ 1,189 $ (257)
Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses) on investment
securities available for sale:
Unrealized holding gains (losses) arising during the period (12,524) 238 2,503
Less: reclassification of realized net gains included in net income (559) (162) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss),
before income taxes (13,083) 76 2,503
- ----------------------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit on unrealized holding gains (losses) 5,294 (130) (1,057)
Income tax expense (benefit) on realized net gains included in net income 235 64 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss),
net of income taxes (7,554) 10 1,446
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
at end of period $ (6,355) $ 1,199 $ 1,189
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
NOTE 24. PARENT COMPANY FINANCIAL INFORMATION
The following table represents the condensed balance sheets of Pacific
Crest Capital, Inc. (Parent company only) as of the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
CONDENSED BALANCE SHEETS 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 184 $ 328
Investment securities available for sale, at market 9,788 30,180
Other assets 1,267 1,708
Investment in Pacific Crest Bank 37,353 38,955
Investment in PCC Capital I 534 534
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 49,126 $ 71,705
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Securities sold under repurchase agreements $ 5,500 $ -
Term borrowings - 24,450
Subordinated debentures 17,784 17,784
Other liabilities 293 430
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 23,577 42,664
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, at par 30 30
Additional paid-in capital 27,885 28,057
Retained earnings 9,978 5,559
Accumulated other comprehensive income (loss) (6,355) 100
Common stock in treasury, at cost (5,989) (4,705)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 25,549 29,041
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 49,126 $ 71,705
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the condensed statements of operations of
Pacific Crest Capital, Inc. (Parent company only) for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
CONDENSED STATEMENTS OF INCOME 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest expense $ (1,294) $ (877) $ (194)
Equity income - Pacific Crest Bank 5,871 5,539 3,993
Dividend income - PCC Capital I 50 50 12
Loss on sale of investment securities (132) - -
Other income 4 18 (21)
Non-interest expense (359) (451) (356)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,140 4,279 3,434
Income tax benefit 915 568 273
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,055 $ 4,847 $ 3,707
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
The following table presents the condensed statements of cash flows of
Pacific Crest Capital, Inc. (Parent company only) for the periods indicated
(dollars in thousands
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,055 $ 4,847 $ 3,707
Adjustments to reconcile net income to net cash used in operating activities:
Loss on sale of investment securities 132 - -
Equity income - Pacific Crest Bank (5,871) (5,539) (3,993)
Net change to other assets and other liabilities 462 (363) (1,134)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (222) (1,055) (1,420)
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities (9,995) - (30,037)
Proceeds from sales of investment securities 29,875 - -
Dividends received from Pacific Crest Bank 1,240 - -
Capital infusion into Pacific Crest Bank - - (5,000)
Capital infusion into PCC Capital I - - (534)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 21,120 - (35,571)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in securities sold under repurchase agreements 5,500 (20,000) 20,000
Increase (decrease) in term borrowings (24,450) 24,450 -
Proceeds from issuance of common stock 209 143 106
Purchase of common stock in treasury, at cost (1,665) (3,531) (919)
Cash dividends paid (636) (137) -
Proceeds from issuance of subordinated debentures - - 17,784
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,042) 925 36,971
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (144) (130) (20)
Cash and cash equivalents at beginning of period 328 458 478
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 184 $ 328 $ 458
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 25. SUBSEQUENT EVENT
On February 8, 2000, the Company sold its interest rate cap agreement
for $2.5 million and recognized a deferred gain of $1.8 million. The deferred
gain will be amortized as a credit to "Interest expense - deposits" over the
remaining life of the original interest rate cap agreement, which had a maturity
date of June 8, 2003. Annual amortization is projected to be $494,000, $554,000,
$554,000 and $242,000 for the years ended December 31, 2000, 2001, 2002 and
2003, respectively.
62
<PAGE>
NOTE 26. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
periods indicated (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 12,449 $ 11,809 $ 12,423 $ 12,680
Total interest expense 7,647 7,046 7,583 7,914
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 4,802 4,763 4,840 4,766
Provision for loan losses 660 395 400 222
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,142 4,368 4,440 4,544
Total non-interest income 971 659 462 367
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Operating expenses 2,865 2,978 2,788 2,738
OREO expense 18 17 - (7)
Valuation adjustments to OREO 43 - - -
Credit and collection expenses 10 26 - 7
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2,936 3,021 2,788 2,738
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,177 2,006 2,114 2,173
Income tax provision 849 799 873 894
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,328 $ 1,207 $ 1,241 $ 1,279
- --------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 0.49 $ 0.45 $ 0.47 $ 0.49
Diluted $ 0.47 $ 0.43 $ 0.45 $ 0.47
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 10,587 $ 10,911 $ 11,480 $ 12,262
Total interest expense 6,421 6,690 7,394 8,033
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 4,166 4,221 4,086 4,229
Provision for loan losses 200 230 240 240
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,966 3,991 3,846 3,989
Total non-interest income 201 1,073 566 638
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Operating expenses 2,244 2,613 2,282 2,752
OREO expense 44 121 38 8
Valuation adjustments to OREO - 50 - -
Credit and collection expenses 13 75 39 -
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2,301 2,859 2,359 2,760
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,866 2,205 2,053 1,867
Income tax provision 765 904 792 683
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,101 $ 1,301 $ 1,261 $ 1,184
- --------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 0.38 $ 0.45 $ 0.45 $ 0.44
Diluted $ 0.36 $ 0.43 $ 0.43 $ 0.42
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC CREST CAPITAL, INC.
We have audited the accompanying consolidated balance sheets of Pacific Crest
Capital, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Crest Capital, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 11, 2000
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference is the information from the section
entitled "Election of Directors" from the Company's definitive Proxy Statement,
to be filed with the SEC within 120 days after December 31, 1999. Reference is
also made in connection with the list of Executive Officers which is provided
under Item 4(a), "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference is the information from the sections
entitled "Election of Directors Compensation of Board of Directors," "Executive
Compensation" and "Compensation Committee Interlocks and Insider Participation"
from the Company's definitive Proxy Statement, to be filed with the SEC within
120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference is the information from the section
entitled "Beneficial Ownership of Principal Stockholders and Management" from
the Company's definitive Proxy Statement, to be filed with the SEC within 120
days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference is the information from the section
entitled "Certain Transactions" from the Company's definitive Proxy Statement,
to be filed with the SEC within 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 AND 2. FINANCIAL STATEMENTS
The financial statements listed on the Index to Financial
Statements included under Item 8. "Financial Statements and
Supplemental Data." are filed as part of this Form 10-K. All
schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements and related
notes.
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3(i).1 Amended and restated Certificate of Incorporation (1)
3(ii).1 Amended and restated Bylaws of Pacific Crest Capital, Inc. (1)
4.1 Subordinated Indenture dated as of September 22, 1997, by and between
Pacific Crest Capital and Wilmington Trust Company, as indenture
trustee (11)
4.2 Officers' Certificate and Company Order dated September 22, 1997 (11)
4.3 Certificate of Trust of PCC Trust I dated August 18, 1997 (11)
4.4 Trust Agreement of PCC Trust I dated as of August 18, 1997 (11)
4.5 Certificate of Amendment to Certificate of Trust of PCC Trust I dated
August 20, 1997 (11)
4.6 Amended and Restated Trust Agreement of PCC Capital I, dated as of
September 22, 1997 (11)
4.7 Form of Trust Preferred Certificate of PCC Capital I (included as an
exhibit to exhibit 4.6) (11)
4.8 Form of Common Securities Certificate of PCC Capital I (included as an
exhibit to exhibit 4.6) (11)
4.9 Guarantee Agreement dated as of September 22, 1997 (11)
4.10 Agreement as to Expenses and Liabilities (11)
10.1 Form of Indemnification Agreement (3) *
10.2 Pacific Crest Capital, Inc. 1993 Equity Incentive Plan (4) (5) *
<PAGE>
<S> <C>
10.3 Pacific Crest Capital, Inc. Retirement Plan and Trust (3) *
10.4 1993 Employee Stock Purchase Plan (3) (6) *
10.5 Form of Split Dollar Agreement (3) *
10.6 Pacific Crest Capital, Inc. Supplemental Executive Retirement Plan (3)*
10.7 Form of Distribution Agreement (1)
10.8 Form of Tax Sharing Agreement between Pacific Crest Capital, Inc. and
The Foothill Group, Inc. (3)
10.9 Office Lease by and between Wilshire Masterpiece, Inc. and Pacific
Crest Bank, dated October 31, 1990 (Beverly Hills Branch)(7)
10.10 Office Lease between Fifth and Beech Associates and Pacific Crest Bank
(San Diego Branch) (7)
10.11 Shopping Center Lease dated April 18, 1978, between Frances Robert
Sarno, as Trustees, and Le Chateau Boutiques, Inc. (Encino Branch) (7)
10.11.1 Assignment, Assumption and Consent to Assignment of Lease dated October
16, 1980, between Pacific Crest Bank, Frances Sarno and Robert Sarno,
as Trustees, and Le Chateau Boutiques, Inc. (7)
10.11.2 Exercise of Option to Renew Lease dated January 23, 1990 (7)
10.12 Lease dated April 22, 1992, between The Klussman Family Trust and
Pacific Crest Bank (Agoura Hills office) (7)
10.14.1 Employment Agreement between the Company and Gary Wehrle (4) *
10.14.2 Employment Agreement between the Company and Barry Otelsberg (4) *
10.14.3 Employment Agreement between the Company and Lyle Lodwick (4) *
10.14.4 Employment Agreement between the Company and Robert J. Dennen (4) *
10.14.5 Employment Agreement between the Company and Gonzalo Fernandez (8) *
10.14.6 Employment Agreement between the Company and Joseph Finci (12) *
10.14.7 Employment Agreement between the Company and M. Carolyn Reinhart (12) *
10.15 1996 Non-Employee Directors' Stock Plan (9)*
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Independent Auditors (2)
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Subordinated Indenture (10)
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Amended and Restated Trust Agreement (10)
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
Trustee under the Trust Preferred Securities Guarantee Agreements (10)
27.1 Financial Data Schedule - Fiscal Year end December 31, 1999 (2)
- --------------
* Management contracts and compensatory plan or arrangements.
(1) Incorporated herein by reference from Registrant's Amendment No. 2 to
Form S-1 Registration Statement No. 33-68718, filed December 3, 1993.
(2) Filed herewith.
(3) Incorporated herein by reference from Registrant's Amendment No. 1 to
Form S-1 Registration Statement No. 33-68718, filed October 28, 1993.
(4) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1993, filed March 31, 1994.
(5) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 33-87990 filed December 27, 1994. Pacific
Crest Capital, Inc. 1993 Equity Incentive Plan.
(6) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 33-87988 filed December 27, 1994. Pacific
Crest Capital, Inc. 1995 Employee Stock Purchase Plan.
(7) Incorporated herein by reference from Registrant's Form S-1
Registration Statement No. 33-68717, filed September 13, 1993.
(8) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1994 filed March 30, 1995.
(9) Incorporated herein by reference from Registrant's Form S-8
Registration Statement No. 333-23849, filed March 23, 1997. Pacific
Crest Capital, Inc. 1996 Non-Employee Directors' Stock Plan.
(10) Incorporated herein by reference from Registrant's Form S-2
Registration Statement No. 333-34257, filed August 22, 1997.
(11) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1997, filed March 27, 1998.
(12) Incorporated herein by reference from Registrant's Annual Report on
Form 10-K dated December 31, 1998, filed March 23, 1999.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 18,
1999 relating to a press release issued by the Company
announcing that the Bank had filed its conversion application
with the California Department of Financial Institutions.
(c) EXHIBITS
See Item 14(a)(3).
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
BY: /s/ Gary Wehrle
----------------------------------
GARY WEHRLE
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
DATE: MARCH 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Gary Wehrle Chairman of the Board, President March 30, 2000
- ------------------- and Chief Executive Officer
Gary Wehrle (Principal Executive Officer)
/s/ Robert J. Dennen Senior Vice President, Chief Financial March 30, 2000
- ------------------- Officer and Secretary
Robert J. Dennen (Principal Financial and Accounting
Officer)
/s/ Rudolph I. Estrada Director March 30, 2000
- ----------------------
Rudolph I. Estrada
/s/ Martin J. Frank Director March 30, 2000
- ----------------------
Martin J. Frank
/s/ Richard S. Orfalea Director March 30, 2000
- ----------------------
Richard S. Orfalea
/s/ Steven J. Orlando Director March 30, 2000
- -----------------------
Steven J. Orlando
</TABLE>
<PAGE>
EXHIBIT 21.1
PACIFIC CREST CAPITAL, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name State of Incorporation Type
---- ---------------------- ----
<S> <C> <C>
Pacific Crest Bank California California State Commercial Bank
PCC Capital I Delaware Statutory Business Trust
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-23849, 33-87988 and 33-87990 of Pacific Crest Capital, Inc. on Forms S-8
of our report dated February 11, 2000, appearing in this Annual Report on
Form 10-K of Pacific Crest Capital, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,282
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,501
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 240,760
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 365,952
<ALLOWANCE> 6,450
<TOTAL-ASSETS> 623,260
<DEPOSITS> 484,384
<SHORT-TERM> 30,500
<LIABILITIES-OTHER> 5,577
<LONG-TERM> 77,250
0
0
<COMMON> 30
<OTHER-SE> 27,885
<TOTAL-LIABILITIES-AND-EQUITY> 623,260
<INTEREST-LOAN> 32,857
<INTEREST-INVEST> 16,091
<INTEREST-OTHER> 221
<INTEREST-TOTAL> 49,361
<INTEREST-DEPOSIT> 24,099
<INTEREST-EXPENSE> 30,190
<INTEREST-INCOME-NET> 19,171
<LOAN-LOSSES> 1,677
<SECURITIES-GAINS> 661
<EXPENSE-OTHER> 11,483
<INCOME-PRETAX> 8,470
<INCOME-PRE-EXTRAORDINARY> 8,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,055
<EPS-BASIC> 1.90
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 3.19
<LOANS-NON> 210
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,200
<ALLOWANCE-OPEN> 5,024
<CHARGE-OFFS> 287
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 6,450
<ALLOWANCE-DOMESTIC> 6,450
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
