As Filed with the Securities & Exchange Commission on August 3, 2001
SECURITIES & EXCHANGE COMMISSION
----------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2001.
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[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
________________
SEC File Number: 0-30106
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PACIFIC CONTINENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
OREGON 93-1269184
----------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 West 7th Avenue
Eugene, Oregon 97401
(address of Principal Executive Offices) (Zip Code)
(541) 686-8685
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $1.00 par value, outstanding as of August 3, 2001: 4,605,394
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PACIFIC CONTINENTAL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Income: 3
Six months ended June 30, 2001, and June 30, 2000
Consolidated Statements of Comprehensive Income
Six months ended June 30, 2001 and June 30, 2000 4
Consolidated Balance sheets: 5
June 30, 2001, December 31, 2000 and June 30, 2000
Consolidated Statements of Cash Flows: 6
Six months ended June 30, 2001 and June 30, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Market Risk and Balance Sheet Management 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings none
Item 2. Changes in Securities none
Item 3. Defaults Upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Page 2
PART I
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended June 30, Year to date June 30,
2001 2000 2001 2000
---------------------- -------------------------
Interest income
Loans $5,839 $5,919 $11,627 $11,532
Securities 608 517 1,241 1,068
Dividends on Federal Home Loan Bank stock 41 35 78 70
Federal funds sold 11 9 19 19
---------------------- -------------------------
6,499 6,480 12,965 12,689
---------------------- -------------------------
Interest expense
Deposits 1,478 1,944 3,263 3,655
Federal Home Loan Bank borrowings 259 199 450 391
Federal funds purchased 71 161 184 289
---------------------- -------------------------
1,808 2,303 3,897 4,335
---------------------- -------------------------
Net interest income 4,691 4,177 9,068 8,354
Provision for loan losses 225 550 470 700
---------------------- -------------------------
Net interest income after provision 4,446 3,639 8,598 7,666
---------------------- -------------------------
Noninterest income
Service charges on deposit accounts 300 256 570 501
Other fee income, principally bankcard 494 412 1,008 792
Loan servicing fees 125 76 225 120
Mortgage banking income and gains
on loan sales 134 84 380 180
Gain (loss) on sale of securities (27) (17) 27 (24)
Other noninterest income 54 68 126 141
---------------------- -------------------------
1,080 879 2,336 1,710
---------------------- -------------------------
Noninterest expense
Salaries and employee benefits 1,623 1,464 3,338 2,928
Premises and equipment 303 283 626 578
Bankcard processing 391 343 790 656
Business development 243 311 405 514
Other noninterest expense 604 773 1,104 1,226
---------------------- -------------------------
3,164 3,173 6,263 5,901
---------------------- -------------------------
Income before income taxes 2,382 1,334 4,671 3,463
Provision for income taxes 927 541 1,793 1,363
---------------------- -------------------------
Net income $1,455 $ 793 $ 2,878 $ 2,099
---------------------- -------------------------
Page 3
Earnings per share
Basic $ 0.32 $ 0.17 $ 0.63 $ 0.46
----------------- ----------------
Diluted $ 0.32 $ 0.17 $ 0.63 $ 0.46
----------------- ----------------
Weighted average shares outstanding
Basic 4,562 4,535 4,549 4,556
Common stock equivalents
attributable to stock options 30 14 28 22
----------------- ----------------
Diluted 4,592 4,549 4,577 4,578
----------------- ----------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended Year to date
June 30, June 30,
2001 2000 2001 2000
--------------------------- ---------------------------
Net income $ 1,455 $ 793 $ 2,878 $ 2,099
--------------------------- ---------------------------
Unrealized gains (losses) on Investment Securities
Unrealized gains (losses) arising during the period (59) (219) 671 (333)
Reclassification for (gains) losses included in
statement of income 27 17 (27) 24
--------------------------- ---------------------------
(32) (202) 644 (309)
Income tax (expense) benefit 12 78 248 119
--------------------------- ---------------------------
Net unrealized gains (losses) on securities
available for sale (20) (124) 396 (190)
--------------------------- ----------------------------
Comprehensive Income $ 1,435 $ 669 $ 3,274 $ 1,909
=========================== ===========================
Page 4
CONSOLIDATED BALANCE SHEETS
Amounts in $1,000's
(Unaudited)
June 30, December, 31, June 30,
2001 2000 2000
----------------------------------------------------
Assets
Cash and due from banks $ 15,585 $ 15,145 $ 15,533
Federal funds sold 1,190 615 826
----------------------------------------------------
Total cash and cash equivalents 16,775 15,760 16,359
Securities available-for-sale 32,819 38,115 29,172
Loans held for sale 1,230 814 2,770
Loans, less allowance for loan losses 236,574 221,631 230,152
Interest receivable 1,610 1,714 1,554
Federal home loan bank stock 2,376 2,299 2,191
Property, net of accumulated depreciation 13,386 12,978 12,346
Deferred income taxes - - 713
Other assets 491 813 753
----------------------------------------------------
Total assets 305,261 294,124 296,010
====================================================
Liabilities and stockholders' equity
Deposits
Noninterest-bearing demand 73,198 69,549 67,637
Savings and interest-bearing checking 120,122 126,770 111,610
Time $100,000 and over 25,186 27,476 38,832
Other time 22,590 26,308 31,077
----------------------------------------------------
241,096 250,103 249,156
----------------------------------------------------
Federal funds purchased 2,900 900 5,000
Federal Home Loan Bank term advances 26,000 11,500 13,000
Accrued interest and other liabilities 1,680 1,251 1,337
----------------------------------------------------
Total liabilities 271,676 263,754 268,493
----------------------------------------------------
Stockholders' equity
Common stock 4,605 4,536 4,536
Surplus 14,618 14,056 14,042
Retained earnings 13,975 11,787 9,623
Accumulated other comprehensive loss 387 (9) (684)
----------------------------------------------------
Total stockholders' equity 33,585 30,370 27,517
----------------------------------------------------
$305,261 $ 294,124 $296,010
====================================================
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
For six months ended June 30,
2001 2000
-------- --------
Cash flows from operating activity:
Net income $ 2,878 $ 2,099
Adjustments to reconcile net income to net cash provided
By operating activities
Depreciation 364 360
Amortization 76 77
Provision for loan losses 470 700
Deferred income taxes (66) (42)
Origination of loans held for sale (17,556) (8,724)
Proceeds from sale of loans held for sale 17,244 8,721
Gain on sales of loans (104) --
(Gain) loss on sales of securities (27) 24
Stock dividends from federal home loan bank (78) (70)
Change in interest receivable and other assets 427 (186)
Change in payables and other liabilities 430 335
Other adjustments 472 (145)
-------- --------
Net cash provided by operating activities 4,530 3,149
-------- --------
Cash flows from investing activities
Proceeds from sales and maturities of securities 11,682 6,204
Purchase of securities (6,464) (593)
Loans made net of principal collections (15,413) (24,086)
Purchase of property (752) (944)
-------- --------
Net cash used in investing activities (10,947) (19,419)
-------- --------
Cash flows from financing activities
Net increase (decrease) in deposits (9,008) 24,981
Increase (decrease) in fed funds purchased 2,000 (800)
Increase in Federal Home Loan Bank borrowings 14,500 --
Repurchase of shares -- (987)
Proceeds from stock options exercised 630 164
Dividends paid, net of reinvestment (691) (681)
-------- --------
Net cash provided by financing activities 7,432 22,677
-------- --------
Net increase in cash and cash equivalents 1,015 6,407
Cash and cash equivalents, beginning of period 15,760 9,952
-------- --------
Cash and cash equivalents, end of period $ 16,775 $ 16,359
-------- --------
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A complete set of Notes to Consolidated Financial Statements is a part of the
Bank's Annual Report to Shareholders for the period ended December 31, 2000,
included as exhibit 13 within the Bank's Form 10-K filed March 15, 2001. The
notes below are included because of material changes in the financial statements
or to provide the reader with additional information not otherwise available.
1. Basis of Presentation
The accompanying interim condensed consolidated financial statements include the
accounts of Pacific Continental Corporation (the "Company"), a bank holding
company, and its wholly-owned subsidiary, Pacific Continental Bank (the "Bank")
and the Bank's wholly owned subsidiaries, PCB Services Corporation (which owns
and operates bank-related real estate) and PCB Loan Services Corporation
(presently inactive). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and in conformity with generally accepted
accounting principles in the United States of America for interim financial
information. The financial statements include all adjustments and normal
accruals, which the Company considers necessary for a fair presentation of the
results of operations for such interim periods. In preparing the condensed
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 income and expenses for the periods. Actual
results could differ from those estimates.
The balance sheet data as of December 31, 2000 was derived from audited
financial statements, but does not include all disclosures contained in the
Company's 2000 Annual Report to Shareholders.
The interim condensed consolidated financial statements should be read in
conjunction with the December 31, 2000 consolidated financial statements,
including the notes thereto, included in the Company's 2000 Annual Report to
Shareholders.
2. Federal Home Loan Bank Term Advances
The Bank is a member of the Federal Home Loan Bank (FHLB), which provides a
secured line of credit of $45,000 that may be accessed for short or long-term
borrowings given sufficient qualifying collateral. At June 30, 2001 the Bank had
a total of $26,000 in borrowings outstanding from FHLB, consisting of 11
advances with maturities ranging from July 2001 through June 2005 bearing a
weighted average interest rate of 5.46%. At December 31, 2000, the Bank had a
total of $11,500 in borrowings outstanding from the FHLB bearing a weighted
average interest rate of 6.71%. At June 30, 1999, the Bank had a total of
$13,000 in borrowings outstanding from the FHLB bearing a weighted average
interest rate of 6.27%.
3. Adoption of New Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as a replacement for SFAS No. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, but it carries over most of the provisions of SFAS No. 125 without
change.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The statement is
effective for recognition and reclassification of collateral
Page 7
for fiscal years ending after December 15, 2000. Adoption of SFAS No. 140 did
not have a material effect on the Company's financial position or results of
operation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion contains a review of Pacific Continental Corporation
and its wholly owned subsidiary Pacific Continental Bank operating results and
financial condition for the second quarter of 2001. When warranted, comparisons
are made to the same period in 2000 and to the previous year ended December 31,
2000. The discussion should be read in conjunction with the financial statements
(unaudited) contained elsewhere in this report. The reader is assumed to have
access to the Company's Form 10-K and portions of the Annual Report to
Shareholders incorporated into the 10-K for the previous year ended December 31,
2000, which contains additional statistics and explanations. All numbers, except
per share data, are expressed in thousands of dollars.
In addition to historical information, this report contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Pacific Continental Corporation of the protections
of the safe harbor provisions of the PSLRA. The forward-looking statements
contained in this report are subject to factors, risks, and uncertainties that
may cause actual results to differ materially from those projected. Important
factors that might cause such material differences include, but are not limited
to, those discussed in this section of the report. In addition, the following
items are among the factors that could cause actual results to differ materially
from the forward-looking statements in this report: general economic conditions,
including their impact on capital expenditures; business conditions in the
banking industry; the regulatory environment; new legislation; vendor quality
and efficiency; employee retention factors; rapidly changing technology and
evolving banking industry standards; competitive standards; competitive factors,
including increased competition with community, regional, and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of the
statement. Pacific Continental Corporation undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers should carefully
review the risk factors described in this and other documents we file from time
to time with the Securities and Exchange Commission.
Six Month Highlights
. Operating revenue up 13% over last year.
. Second quarter net interest margin as a percentage of earning assets 6.99%.
. One of only ten businesses in the state of Oregon to be recognized by
Families in Good Company with the Quality Seal signifying dedication to
families in the workplace and the community.
. Named one of the Top 100 businesses to work for in the state of Oregon by
the Oregon Business Magazine.
. Pacific Continental Bank recognized as SBA Lender of the Year in Oregon for
the third consecutive year.
. Financial profile remains strong with return on assets and return on equity
of 1.96% and 17.96%, respectively, through six months of 2001.
Net income in the second quarter 2001 was $1,455 an increase of 83% from second
quarter 2000 income of $793. Return on average assets and return on average
equity in the current quarter were 1.96% and 17.61% respectively as compared to
1.11% and 11.40% in the same quarter one year ago. The improvement in quarterly
earnings resulted from a 14% increase in operating revenues (net interest income
Page 8
plus noninterest income), lower loan loss provision and successful expense
control when compared to last year.
For the first six months of 2001 the Company earned $2,878 a 37% increase from
six month 2000 earnings of $2,099. Per share earnings on a diluted basis for the
first six months of 2001 and 2000 were $0.63 and $0.46, respectively, also an
increase of 37%. Average shares outstanding for the first six months of 2000
were 4,561,607 compared to 4,548,833 for the same period one-year ago. The
increase in average shares outstanding resulted from stock options exercised
during the current quarter. Comparing the first six months of 2001 to the same
period in 2000, return on average assets was 1.96% and 1.50%, while return on
average equity improved to 17.96% from 15.19%.
At June 30, 2001 total assets were $305,261 or 4% more than December 31, 2000
and 3% more than June 30, 2000.
Results of Operations
Net Interest Income
Net interest income is the primary source of the Company's revenue. Net interest
income is the difference between interest income derived from earnings assets,
principally loans, and the interest expense associated with interest bearing
liabilities, principally deposits. The volume and mix of earnings assets and
funding sources, market rates of interest, demand for loans, and the
availability of deposits affect net interest income.
Net interest income prior to the provision for loan loss, in the second quarter
of 2001 increased $514, or 12%, over same period in 2000. This increase resulted
from growth of earning assets and improved net interest margin. Average earning
assets in the current quarter increased 6% when compared to the first quarter of
2000. Net interest margin as a percentage of earning assets improved by 0.55%
from 6.44% in second quarter 2000 to 6.99% in second quarter 2001.
On three occasions during the first quarter of 2001, the Federal Reserve lowered
market interest rates, which resulted in a 1.50% drop in the prime-lending rate.
The Federal Reserve followed with three more rate drops during the second
quarter resulting in another 1.25% decline in the prime lending rate. The rate
decline in the current quarter resulted in the continued decline in the cost of
liabilities. Total liability costs in the current quarter dropped 0.36% from
3.01% in the first three months of the year to 2.65% in the second quarter.
While liability costs fell during the second quarter, earning asset yields were
relatively stable in spite of the decline in the prime-lending rate. Earning
asset yields were 9.64% in the current quarter compared to 9.67% in the first
quarter of this year The decline in yield on earning assets was mitigated by the
activation of interest rate floors on variable rate loans, most of which went
into effect at the end of February 2001.
Net interest income for the first six months showed results similar to the
quarter-to-quarter comparison. For the first six months of 2001, net interest
income, prior to the provision for loan loss, totaled $9,068, an increase of 9%
over $8,354 for the same period in 2000. Year-to-date average earning assets
increased 5% as compared to the same period in 2000, while net interest income
as a percent of earning assets improved from 6.59% in 2000 to 6.82% in 2001. The
increase in margin resulted from rates on interest bearing liabilities falling
faster than loan yields. A detailed rate and volume analysis shows that the
interest income component grew by $276, a $581 improvement due to higher volumes
offset by $305 decline due to lower rates. The interest expense component fell
by $438 entirely due to lower rates.
Provision for Loan Losses
Below is a summary of the Company's allowance for loan losses for the first six
months of 2001.
Page 9
2001
--------------
Balance, December 31, 2000 $ 2,149
Provision charged to income 470
Loans charged off 115
Recoveries credited to allowance 47
--------------
Balance, June 30, 2001 $ 2,551
==============
The second quarter 2001 provision for loan losses was $225 compared to $550 for
the same quarter last year. Year-to-date June 30, 2001 loan loss provision was
$470 compared to $700 for the same period in 2000. The decrease in the provision
during 2001 was due to due to lower loan losses and improvement in general loan
quality. Through the first six months of the current year, net charge offs were
$68. That compares to net charge offs of $1,139 for the same time period in
2000. The allowance for loan losses at June 30, 2001 was 1.06% compared to 0.86%
at June 30, 2000.
The Company continued to experience significant improvement in the level of
nonperforming assets. Total nonperforming assets at June 30, 2001 are down
nearly $1,000 from June 30, 2000. During the first six months of the current
year, the Company has not experienced any material increase in the level of
nonperforming assets.
Below is a summary of nonperforming assets at June 30, 2001 compared to prior
periods. Nonperforming assets consist of nonaccrual loans, loans past due 90
days or more and still accruing interest, and other real estate owned.
Nonaccrual loans and loans 90 days past due and still accruing interest consist
of 19 individual loans, the largest of which represents exposure of $135.
June 30, 2001 December 31, 2000 June 30, 2000
------------- ----------------- -------------
Nonaccrual loans $ 898 $ 490 $ 1,609
90 days past due and accruing interest $ 238 $ 155 $ 79
Repossessed assets $ 0 $ 385 $ 445
------- ------- -------
Total nonperforming assets $ 1,136 $ 1,030 $ 2,133
Nonperforming loans guaranteed by government $ (479) $ (184) $(1,179)
------- ------- -------
Total nonperforming assets, net of guarantee $ 639 $ 846 $ 954
Noninterest Income
Year-to-date June 30, 2001 noninterest income of $2,336 was up $626 or 37% from
2000 noninterest income for the same time period. All categories of noninterest
income improved during the current year when compared to last year. The majority
of growth in noninterest income was attributable to four categories. Service
charges on deposit accounts were up $69 or 14% due to an increase in the number
of clients. Merchant bankcard fees grew by $216 or 27% due to increased volumes
of clients and transactions. Loan servicing fees of $225 were up $105 or 88%,
which resulted from an increase of $11,000 in the loan-servicing portfolio from
loan sales during the last half of 2000 and during the first three months of
2001. In addition, last year's loan servicing income was negatively impacted by
a $52 write down of a servicing asset due to a prepayment during the first six
months of the year. Finally, mortgage banking income and gains on the sales of
loans increased from $180 in 2000 to $380 in 2001, an improvement of $200 or
111%. Mortgage banking revenues were up $127 or 85% over last year due to higher
levels of refinancing and home sales resulting from a lower interest rate
environment. Gains on the sales of loans improved by $73 or 237%. During the
first quarter of the current year, the Company sold approximately $2,900 of
loans guaranteed by the government, which resulted in gains of $104. No loans
were sold during the first six months of 2000.
Page 10
Noninterest Expense
Year-to-date June 30, 2001 noninterest expense increased $362 or 6% from the
same period in 2000. Merchant bankcard processing expense accounted for $134 of
the increase and related directly to the revenue increase discussed above.
Excluding the merchant processing fees, total noninterest expense increased only
4% over last year. Total personnel expense during the first six months increased
$410, primarily due to increased benefits costs and commissions paid on mortgage
loan originations. Offsetting the increase in merchant processing and personnel
expense were declines in business development expense of $109 and in other
expense of $122. Business development expenses during the first six months of
2000 had significant one time costs to promote the Company's on line banking
product and the opening of its West 11th office. The decline in other expense
resulted from a reduction in repossession, collection, and other real estate
expense from last year of approximately $100.
Liquidity
Liquidity is the term used to define the Company's ability to meet its financial
commitments. The Company maintains sufficient liquidity to ensure funds are
available for both lending needs and the withdrawal of deposit funds. The
Company derives liquidity primarily through core deposit growth, the maturity of
investment securities, and loan payments. Core deposits include demand, interest
checking, money market, savings and local time deposits. Additional liquidity is
provided through sales of loans, access to national CD markets, public deposits
and both secured and unsecured borrowings. Because of seasonal construction and
economic activity and client payment of various tax obligations, the Company
traditionally experiences slower growth of core deposits during the first half
of each year typically resulting in funding and liquidity pressures. This was
evidenced by the fact that average core deposits for the month of June 2001 are
unchanged from December 2000. As a percentage of total deposits, core deposits
were 95% at June 30, 2001 compared to 93% at December 31, 2000. Asset growth of
approximately $10,000 in the first six months of the current was funded
primarily with long term borrowings from the Federal Home Loan Bank of Seattle
and unsecured borrowings. Over the course of the last twelve months, the Company
has intentionally allowed national time deposits and public funds to mature and
alternatively used short term borrowing lines in order to take advantage of
falling market interest rates. The decline of outstanding deposits from June 30,
2000 to June 30, 2001 of $8,000 was entirely attributable to the run off of
these deposits. At June 30, 2001, the Bank had secured and unsecured overnight
and term borrowing capacity of approximately $78,000 of which $28,900 was used.
Capital Resources
Capital is the shareholder's investment in the Company. Capital grows through
the retention of earnings and the issuance of new stock through the exercise of
incentive options and decreases through the payment of dividends and share
repurchase programs. Capital formation allows the Company to grow assets and
provides flexibility in times of adversity.
Banking regulations require the Company to maintain minimum levels of capital.
The Company manages its capital to maintain a "well capitalized" designation
(the FDIC's highest rating). At June 30, 2001, the Company's total capital to
risk weighted assets was 13.50%, compared to 12.13% at June 30, 2000.
Below is a summary of share activity during the first six months of 2001 and
shares outstanding at June 30, 2001.
Outstanding shares January 1, 2001 4,535,752
New shares issued through stock options 69,042
-----------
Outstanding shares June 30, 2001 4,604,794
Page 11
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth while maintaining a well-capitalized
designation from the FDIC.
Item 3. Market Risk and Balance Sheet Management
The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have significant effects on
the Company's financial condition and results of operations. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Company's business activities. The
Company does not use derivatives such as forward and futures contracts, options,
or interest rate swaps to manage interest rate risk.
Interest rate risk generally arises when the maturity or repricing structure of
the Company's assets and liabilities differ significantly. Asset and liability
management, which among other things, addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income while maintaining sufficient liquidity. This process includes
monitoring contractual maturity and prepayment expectations together with
expected repricing of assets and liabilities under different interest rate
scenarios. Generally the Company seeks a structure that insulates net interest
income from large deviations attributable to changes in market rates by
balancing the repricing characteristics of assets and liabilities.
Interest rate risk is managed through the monitoring of the Company's balance
sheet by subjecting various asset and liability categories to interest rate
shocks and gradual interest rate movements over a one-year period of time.
Interest rate shocks use an instantaneous adjustment in market rates of large
magnitudes on a static balance sheet to determine the effect such a change in
interest rates would have on the Company's net interest income and capital for
the succeeding twelve-month period. Such an extreme change in interest rates and
the assumption that management would take no steps to restructure the balance
sheet does limit the usefulness of this type of analysis. This type of analysis
tends to provide a best case or worst-case scenario. A more reasonable approach
utilizes gradual interest rate movements over a one-year period of time to
determine the effect on the Company's net interest income.
The Company utilizes the services of The Federal Home Loan Bank's
asset/liability modeling software to determine the effect of a simultaneous
shift in interest rates. Interest rate shock scenarios are modeled in 1 percent
increments (plus or minus) in the federal funds rate. The more realistic
forecast assumes a gradual interest rate movement of plus or minus 2.40 percent
change in the federal funds rate over a one-year period of time with rates
moving up or down 0.60 percent each quarter. The model used is based on the
concept that all rates do not move by the same amount. Although certain assets
and liabilities may have similar repricing characteristics, they may not react
correspondingly to changes in market interest rates. In the event of a change in
interest rates, prepayment of loans and early withdrawal of time deposits would
likely deviate from those previously assumed. Increases in market rates may also
affect the ability of certain borrowers to make scheduled principal payments.
The model attempts to account for such limitations by imposing weights on the
differences between repricing assets and repricing liabilities within each time
segment. These weights are based on the ratio between the amount of rate change
of each category of asset or liability, and the amount of change in the federal
funds rate. Certain non-maturing liabilities such as checking accounts and money
market deposit accounts are allocated among the various repricing time segments
to meet local competitive conditions and management's strategies
The Company strives to manage the balance sheet so that net interest income is
not negatively impacted more than 15 percent given a change in interest rates of
plus or minus 2 percent. Current evaluations show the Bank is within its
established guidelines, and interest rate risk profile at June 30, 2001. The
current quarter's analysis would suggest that the bank's net interest income is
negatively impacted by both rising and falling rates over a one-year period.
However, the impact in either scenario is not materially different from the base
case.
Page 12
The following table shows the estimated impact of the various interest rate
scenarios used in the software modeling based on data provided by the Company to
the Federal Home Loan Bank at June 30, 2001. The table shows estimates of
changes in net interest income. For illustrative purposes the base figure of
$18,286 used in the interest rate shock analysis is the annualized actual net
interest income for the first six months of 2001. Due to the various assumptions
used for this modeling, no assurance can be given that projections will reflect
actual results.
Page 13
Interest Rate Shock Analysis
Net Interest Income and Market Value Performance
(dollars in thousands)
----------------------- ------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
----------------------- ------------------------------------------------
+200 18,138 (148) (0.81)%
+100 18,255 (31) (0.17)%
Base 18,286 0 0.00%
-100 17,961 (325) (1.78)%
-200 17,619 (667) (3.65)%
----------------------- ------------------------------------------------
Gradual Interest Rate Movement Forecast
Net Interest Income and Market Value Performance
(dollars, in thousands)
----------------------- ------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
----------------------- ------------------------------------------------
Rising 2.40% 18,123 (163) (0.89)%
Base 18,286 0 0.00%
Declining 2.40% 18,173 (113) (0.62)%
----------------------- ------------------------------------------------
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PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
(a) Pacific Continental Corporation's Annual Shareholders' Meeting was
held on April 24, 2001
(b) Not Applicable
(c) A brief description of each matter voted upon at the Annual Meeting
and number of votes cast for, against or withheld, including a
separate tabulation with respect to each nominee to serve on the Board
is presented below:
(1) Election of (3) three Directors for terms expiring in 2004 or
until their successors have been elected and qualified.
Directors:
Larry G. Campbell -
Votes Cast For: 3,804,764
Votes Withheld: 46,622
James W. Putney -
Votes Cast For: 3,812,348
Votes Withheld: 39,038
J. Bruce Riddle -
Votes Cast For: 3,804,197
Votes Withheld: 47,189
(d) None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.6 Form of Executive Severance Agreements for Messrs. Riddle and Brown
(b) Reports on Form 8-K
None
Page 15
SIGNATURES
Pursuant to the requirements 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 CONTINENTAL CORPORATION
(Registrant)
Dated August 3 , 2001 /s/ J. Bruce Riddle
--------------------- -------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated August 3, 2001 /s/ Michael A. Reynolds
--------------------- -------------------------------------
Michael A. Reynolds
Vice President and Controller
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