EXHIBIT 13.1
Pacific Continental Corporation
Selected Financial Data
(Dollars in thousands, except per share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
For the year
Net interest income $ 18,520 $ 17,262 $ 16,054 $ 13,953 $ 12,304
Provision for loan losses $ 1,455 $ 1,340 $ 735 $ 810 $ 730
Noninterest income $ 4,894 $ 3,909 $ 4,119 $ 3,984 $ 2,595
Noninterest expense $ 12,654 $ 11,970 $ 10,700 $ 9,369 $ 7,521
Income taxes $ 3,582 $ 3,053 $ 3,364 $ 2,985 $ 2,431
Net income $ 5,722 $ 4,808 $ 5,374 $ 4,773 $ 4,217
Cash dividends $ 1,401 $ 1,225 $ 1,323 $ 1,149 $ 976
Per common share data (1)
Net income
Basic $ 1.14 $ 0.96 $ 1.03 $ 0.92 $ 0.86
Diluted $ 1.12 $ 0.96 $ 1.02 $ 0.90 $ 0.84
Cash dividends $ 0.28 $ 0.25 $ 0.25 $ 0.22 $ 0.19
Market value, end of year $ 12.70 $ 8.07 $ 11.82 $ 16.25 $ 13.94
At year end
Assets $309,548 $294,124 $271,088 $241,944 $200,120
Loans, less allowance for loan loss $239,683 $222,445 $209,533 $185,292 $144,112
Deposits $248,328 $250,104 $224,175 $194,329 $167,295
Shareholders' equity $ 35,604 $ 30,370 $ 27,111 $ 27,126 $ 21,991
Average for the year
Assets $299,721 $288,589 $255,271 $214,247 $183,821
Earning assets $270,702 $260,419 $230,303 $193,163 $165,994
Loans, less allowance for loan loss $234,441 $224,119 $195,355 $162,780 $141,050
Deposits $238,856 $239,197 $207,224 $172,081 $153,050
Interest paying liabilities $195,529 $195,214 $169,054 $140,869 $123,735
Shareholders' equity $ 33,882 $ 28,626 $ 28,173 $ 24,787 $ 19,279
Financial ratios
Return on average:
Assets 1.91% 1.67% 2.11% 2.23% 2.29%
Shareholders' equity 16.89% 16.79% 19.08% 19.26% 21.87%
Average shareholders' equity/average assets 11.30% 9.92% 11.04% 11.57% 10.49%
Dividend payout ratio 24.48% 25.47% 24.62% 24.07% 22.54%
Risk based capital:
Tier I capital 12.71% 12.30% 12.07% 12.99% 13.81%
Tier II capital 13.98% 13.17% 13.15% 13.98% 14.75%
(1) Per common share data is retroactively adjusted to reflect the stock splits
and stock dividends of 2001, 1998, and 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Consolidated Financial Statements alone. The discussion should
be read in conjunction with the audited financial statements and the notes
thereto included later in this annual report. 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; recent world events and their impact on interest rates,
businesses and customers; 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.
HIGHLIGHTS
Year 2001
. Increased operating revenue 11% over prior year.
. Improved net interest margin by 0.21% over prior year to 6.84%.
. Paid cash dividends of $1.4 million or $0.28 per share.
. Recognized as SBA Lender of the Year for 2000, the third consecutive
year.
. Selected as one of the Top 100 Best Companies to work for by the
Oregon Business Magazine.
. Awarded the Quality Seal from Families in Good Company.
. Instituted a stock buy back program.
. Maintained a consistent strong financial performance: Return on assets
and return on equity of 1.91% and 16.89%, respectively.
Pacific Continental Corporation earned $5,722 or $1.12 per diluted share in
2001, compared to $4,808 or $0.96 per diluted share and $5,374 or $1.02 per
diluted share in 2000 and 1999,
respectively. Return on average assets was 1.91% in the current year, compared
to 1.67% in 2000. Return on average equity for 2001 was 16.89% compared to
16.79% for the previous year.
At December 31, 2001, total assets were $309,548, an increase of 5% over 2000
year-end total assets of $294,124. Total deposits at year-end were $248,329
compared to $250,104 for the previous year.
RESULTS OF OPERATIONS
Net Interest Income
The largest component of the Company's earnings is net interest income. Net
interest income is the difference between interest income derived from earning
assets, principally loans, and the interest expense associated with interest
bearing liabilities, principally deposits. The volume and mix of earning assets
and funding sources, market rates of interest, demand for loans, and the
availability of deposits affect net interest income.
Two tables follow which analyze the change in net interest income for 2001,
2000, and 1999. Table I, Average Balance, Analysis of Net Interest Earnings,
provides information with regard to average balances of assets and liabilities,
as well as associated dollar amounts of interest income and interest expense,
relevant average yields or rates, and net interest income as a percent of
average earning assets. Table II, Analysis of Changes in Interest Income and
Interest Expense, shows the increase (decrease) in the dollar amount of interest
income and interest expense and the differences attributable to changes in
either volume or rates. Changes not solely due to volume or rate are allocated
to rate.
2001 Compared to 2000
Net interest income for 2001 was $18,520, an increase of $1,258 or 7% over 2000
net interest income of $17,262. For the year 2001, net interest margin as a
percentage of earning assets increased by 0.21% from 6.63% in 2000 to 6.84% in
2001.
During the year 2001, the Federal Reserve aggressively lowered market interest
rates in response to economic conditions, which resulted in a 4.75% decline in
the prime-lending rate. The Company's net interest margin improved despite the
significant decline in market interest rates. The Company was able to lower its
costs of interest-bearing liabilities during 2001 due to lower rates paid on
deposit accounts and the Company's effectiveness in shortening the maturity
structure of its interest-bearing liabilities in order to take advantage of
falling market rates. Conversely, the Company was able to maintain a high yield
on its earning assets, which dropped only 0.81% from 2000 to 2001, due to the
activation of interest rate floors on existing loans.
Interest and fees on earning assets declined by $1,160 or 4% to $25,279.
Referring to Table II, total interest income improved by $1,191 due to increased
earning asset volumes, which was offset by a $2,264 drop in interest income due
to lower yields on earning assets. Average earning assets grew by $10,282 or 4%.
Loan growth accounted for all of the growth in earning assets. Referring to
Table 1, loan yields declined by 0.81% due primarily to the decrease in the
prime-lending rate, which affected yields on variable rate loans and new loan
production. In addition, interest reversed and forgone on nonaccrual loans
negatively impacted earning asset yields. Interest reversed and forgone on
nonaccrual loans for the year totaled approximately $371 or 0.14% of earning
assets. The activation of interest rate floors during the first half of 2001 on
variable rate loans mitigated the decline in earning asset yields. At December
31, 2001,
the Company had approximately $94,000 variable rate loans of which approximately
$74,000 had active interest rate floors.
Interest expense on interest-bearing liabilities decreased by $2,417 or 26%.
Referring to Table II, interest expense decreased $117 due to the change in mix
of interest-bearing liabilities. Growth in money market and NOW account volumes
combined with the use of term borrowings from the Federal Home Loan Bank of
Seattle allowed the Company to reduce the volumes of high cost national time
deposits and public time deposits. Again, referring to Table II, interest
expense declined by $2,300 due to lower rates on interest-bearing liabilities,
which was directly related to the decrease in market interest rates and the
ability of the Company to restructure liability maturities. The decline of 1.42%
on money market and NOW accounts combined with a 0.85% decline in time deposit
rates accounted for $1,948 of the total decline in interest expense.
Finally, the Company's margin was positively impacted by the growth in
noninterest bearing deposits. Current year average noninterest bearing deposits
grew by $5,715 or 9% over last year. Noninterest bearing deposits account for
23% of the Company's total average assets.
2000 Compared to 1999
Net interest income for 2000 was $17,262, an increase of 8% over 1999 net
interest income of $16,054. For 2000, net interest income as a percentage of
average earning assets fell from 6.97% in 1999 to 6.63% in 2000.
During the first half of 2000, rising market interest rates and reliance on
higher rate funding sources required to fund seasonal loan growth resulted in
the rate on interest bearing liabilities rising faster than the yield on loans,
thus causing the margin to fall. During the second half of 2000, a combination
of increased core deposit growth, which reduced the use of higher rate funding
sources and falling market rates on liabilities, reduced the interest expense
component of the margin leading to higher margins in the third and fourth
quarters of the year.
Interest and fees on earning assets increased 16%, or $3,742, to $26,438.
Referring to Table II, total interest income improved by $3,098 due to increased
earning asset volumes and $644 due to improved rates or yields on earning
assets. Average earning assets grew by $30,116 or 13%. Loan growth (net of
allowance) accounted for $28,764 of the increased volume of earning assets. Loan
yield improvement was directly related to the increase in the prime rate during
2000 and the volume of variable rate loans held in the Company's loan portfolio.
The overall yield on earning assets was negatively impacted by a 16% decline in
recognized loan fees from $954 in 1999 to $803 in 2000. In addition, higher
nonperforming loans during the year 2000 negatively impacted earning asset and
loan yields. Interest lost and reversed on nonperforming loans was approximately
$215,000 during 2000 or 0.08% of earning assets. This compares to approximately
$40,000 of interest lost and reversed during 1999.
Interest expense on interest bearing liabilities for the year 2000 increased
38%, or $2,533, to $9,176. Total interest expense increased by $1,113 due to
higher volumes and $1,420 due to higher rates (See Table II). Growth in money
market and time deposit volumes and corresponding increased rates accounted for
$2,274 of the total increase in interest expense for the year. Rates on money
market accounts increased 0.63% to 3.78% in 2000 from 1999. Rates on time
deposits increased by 0.94% to 6.05% in 2000, up from 5.11% in 1999. The
increase in rates and the use of higher rate funding sources during the first
six months of 2000 caused the rate on interest bearing liabilities to increase
0.77% for the current year as compared to a 0.30% increase in the yield on
earning assets.
The Company continued to benefit from funding with noninterest bearing sources.
Average demand deposits in 2000 increased 12% over 1999. Noninterest bearing
deposits represent 24% of total assets at December 31, 2000 compared to 23% at
December 31, 1999.
Provision for Possible Loan Losses
Management provides for possible loan losses by maintaining an allowance. The
level of the allowance is determined based upon judgments regarding the size and
nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of nonperforming loans, and anticipated
general economic conditions. Additions to the allowance are charged to expense.
Loans are charged against the allowance when management believes the collection
of principal is unlikely.
The provision for loan losses totaled $1,455 in 2001, $1,340 in 2000, and $735
in 1999. Net loan charge offs were $186 in 2001 compared to $1,639 in 2000, and
$357 in 1999. The larger provisions in 2001 and 2000 reflect specifically
identified risks in the Company's loan portfolio and a general decline in
economic conditions during 2001.
The allowance for loan losses at December 31, 2001 was $3,418 (1.41% of loans)
compared to $2,418 (0.98% of loans) and $2,448 (1.17% of loans) at years end
2000 and 1999, respectively. The 2001 amount includes $1,050 in specific
allowance for impaired loans. At December 31, 2001, the Company had $5,608 of
impaired loans (net of government guarantees). At years ended 2000 and 1999, the
Company classified no loans as impaired. Three loans secured by hotel properties
in Oregon account for $4,900 of the year 2001 impaired loans.
Subsequent to December 31, 2001, the Company foreclosed and took possession of
two of the above hotel properties. The Company hired a professional hotel
management firm to operate these properties while they are made ready for sale.
The Company expects to report these properties as other real estate owned at the
end of the first quarter 2002. Also subsequent to year-end, the hotel property
securing the third loan was sold to another party, and the loan of $1,900 was
restructured without additional loss.
At December 31, 2000 and 1999, the Company had nonaccrual loans of $490 and
$1,422, respectively that were not considered impaired. In addition, the Company
had loans 90 days past due and still accruing interest of $953, $155, and $464
at December 31, 2001, 2000, and 1999, respectively.
Management believes that the allowance for loan losses is adequate for estimated
loan losses, based on management's assessment of various factors, including
present past due and impaired loans, past history of loss experience, and
present economic conditions. In response to the increase in impaired loans and a
slow down in the economy, management increased the allowance for loan losses.
Past due and impaired loans are actively managed to minimize the potential loss
of principal.
Noninterest Income
Noninterest income is income derived from sources other than fees and interest
on earning assets. The Company's primary sources of noninterest income are
service charge fees on deposit accounts, merchant bankcard activity, income
derived from mortgage banking services, and gains on the sale of loans.
2001 Compared to 2000
Year-to-date noninterest income was $4,894, up $985 or 25% over 2000. For the
year 2001, noninterest income accounted for 21% of total operating revenue (net
interest income plus noninterest income), compared to 18% and 20% for 2000 and
1999, respectively. Growth in noninterest income during 2001 was attributable to
five categories. Revenues on deposit accounts grew by $89 or 9%. Other fee
income, principally merchant bankcard processing fees were up $326 or 17% due to
increased volumes and the addition of new clients. Mortgage banking income and
gain on sales of loans increased by $38 or 7%. Residential mortgage revenues
increased $173 or 77% due to the high level of home sales and refinancing
activities in the low interest rate environment, while gain on sales of loans
decreased $135. During 2001, the Company sold approximately $2,800 of government
guaranteed loans, compared to $5,800 during 2000. Loan servicing fees improved
by $235 or 93% due to an increase in the loan servicing portfolio, which
resulted from approximately $9,600 in loan sales during the fourth quarter 2000
and first quarter 2001. Finally, gains on the sales of securities were $251 for
the year 2001 compared to a loss of $24 recorded in 2000.
2000 Compared to 1999
In 2000, noninterest income was $3,909, down 5% from 1999 noninterest income of
$4,119. For 2000, noninterest income accounted for 18% of total operating
revenue, compared to 20% for 1999. The decline in noninterest income was
attributable to two categories. Loan servicing fees of $254 were down $206 or
45% due to an overall decline in the loan-servicing portfolio and a related
principal reduction on a serviced loan that required a $62 write off of a
servicing asset booked in 1999. Mortgage banking income and gains on sales of
loans dropped significantly from $953 in 1999 to $578 in 2000. Mortgage banking
income was down $143 or 30%, and gain on sales of loans was down $233 or 43%. A
general softening of the residential market, higher interest rates, and lower
levels of refinancing contributed to lower mortgage revenues in 2000. During
2000, the Company sold approximately $5,800 of government guaranteed loans,
which resulted in gain on sales of loans of $235. That compares to sales of
approximately $4,300 of government guaranteed loans and $3,700 of commercial
real estate loans that resulted in gains of $476 in 1999. These declines in
noninterest income were partially offset by increased account service charges,
up $86 or 9% and increased fee income, principally bankcard processing fees, up
$379 or 25%.
Noninterest Expense
Noninterest expense represents all expenses other than interest costs associated
with deposits and other interest bearing liabilities. It incorporates personnel,
premises and equipment, data processing and other operating expenses.
2001 Compared to 2000
Year-to-date noninterest expense of $12,654 was up $684 or 6% over last year.
Bankcard processing fees increased $233 or 16% (directly related to the revenue
increase and increased volumes) and accounted for 34% of the total expense
increase. Excluding bankcard processing fees, all other noninterest expense grew
by $451 or 4%. Salaries and employee benefits rose $589 or 10% due to salary
increases of existing staff, increased commissions to mortgage loan originators,
and higher benefit costs. Expense increases in bankcard processing and salaries
were offset by a $57 decline in business development expense and a $167 decline
in other
expense. The decline in the other expense category resulted from an $86
drop in repossession expense and a decrease of $60 in NASDAQ listing fees.
2000 Compared to 1999
For 2000, noninterest expense increased $1,270 or 12% over 1999. Total personnel
expense, which accounted for 52% of total noninterest expense in the current
year, was up $537 or 10%. The full year effect of the Tualatin office, which
opened in June 1999 and the opening of the West 11/th/ office in Eugene in June
2000 added to staff and salaries. Premises and equipment expense dropped by $84
or 6% from $1,353 in 1999 to $1,267 in 2000. The decline in premises and
equipment expenses was attributable to an increase of approximately $135 in rent
income from the Company's three story Gateway office building located in
Springfield, Oregon. Growth in the merchant bankcard processing operation
increased processing expenses by $383 or 34% and was related to an increase in
the number of clients and corresponding volumes. The $23 increase in business
development expense was primarily due to promotional expenses related to the
Bank's new online banking product. Current year other expense increased by $412
or 22%. Approximately $131 of the increase in the other expense category was
related to expenses on foreclosed assets.
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, maturity of
investment securities and loan payments. Core deposits include demand, interest
checking, money market, savings, and local time deposits. Additional liquidity
and funding sources are provided through the sale of loans, access to national
CD markets, and both secured and unsecured borrowings.
Core deposits at December 31, 2001 were 97% of total deposits, compared to 93%
at December 31, 2000. During the last six months of 2001, the company
experienced a $22,000 increase in its core deposit base. During the first half
of 2001, asset growth was primarily funded with long-term borrowings from the
Federal Home Loan Bank of Seattle. Over the course of the last fifteen months,
the Company intentionally allowed national time deposits and public funds to
mature and alternatively use core deposit growth and short term borrowing lines
for funding in order take advantage of falling market interest rates. The
decline in outstanding deposits of $1,225 was entirely attributable to the
planned reduction of these deposit types.
Overnight-unsecured borrowing lines have been established at various
correspondent banks, the Federal Home Loan Bank of Seattle and with the Federal
Reserve Bank of San Francisco. At year-end December 31, 2001, the Bank had
overnight borrowing lines totaling approximately $81,500. At December 31, 2001,
the Company had approximately $57,500 of overnight funding available. In
addition, $11,000 of funding was available from the State of Oregon time deposit
program with community banks. The Company's loan portfolio also contains
approximately $13,200 in guaranteed government loans, which can be sold on the
secondary market.
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. 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 December 31, 2001, the Company's total capital
to risk weighted assets was 13.98%, compared to 13.17% at December 31, 2000.
On October 19, 2001, the Company paid a 10% stock dividend to shareholders of
record at October 5, 2001. The Company also announced a stock repurchase plan in
November 2001, which expires on December 31, 2002. The plan allows the Company
to purchase up to 200 thousand shares or approximately 4% of outstanding shares
over the next twelve months. During the month of December 2001, the Company
repurchased 12.1 thousand shares on the open market.
The Company pays semi-annual cash dividends, in June and December, with payments
representing approximately 25% of the previous six-month's earnings. During
2001, the Company paid cash dividends of $1,401, an increase of 14% over 2000
cash dividends of $1,225.
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth and the stock repurchase plan, while
maintaining a well-capitalized designation from the FDIC.
INFLATION
Substantially all of the assets and liabilities of the Company are monetary.
Therefore, inflation has a less significant impact on the Company than does
fluctuation in market interest rates. Inflation can lead to accelerated growth
in noninterest expenses, which impacts net earnings. During the last two years,
inflation, as measured by the Consumer Price Index, has not changed
significantly. The effects of this inflation have not had a material impact on
the Company.
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 a significant effect on
the Company's financial condition and results of operations. The Company does
not use derivatives such as forward and futures contracts, options, or interest
rate swaps to manage interest rate risk. 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.
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.
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 changes in interest
rates have on net interest income. Interest rate shock scenarios are modeled in
1% 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% change
in the federal funds rate over a one-year period of time with rates moving up or
down 0.60% 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% given a change in interest rates of plus
or minus 200 basis points. Evaluations of the forecasting model at December 31,
2001 indicate the Company is within its established guidelines. During the last
two quarters of 2001, the model has shown the Company is becoming more asset
sensitive. During the first half of 2002, the Company expects net interest
margin to decline as loans with active interest rate floors renew at current
market rates, which will cause earning asset yields to fall faster than the cost
of interest-bearing deposits.
The following tables show the estimated impact of interest rate changes on net
interest income. Tables show results of Company supplied data for both the rate
shock and gradual interest rate scenarios. The base figure of $18,520 used in
both analyses represents actual net interest income for the year 2001. Due to
the various assumptions used for this modeling, no assurance can be given that
projections will reflect actual results.
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 $ 20,539 $ 2,019 10.90%
+100 19,755 1,235 6.67%
Base 18,520 0 0.00%
-100 17,694 (826) -4.46%
-200 16,648 (1,872) -10.11%
--------------------------------------------------------------
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% $ 19,061 $ 541 2.92%
Base 18,520 0 0.00%
Declining 2.40% 18,181 (339) - 1.83%
--------------------------------------------------------------
FORM 10-K
A copy of the Company's annual report of Form 10-K which is filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
available to shareholders, at no charge, upon written request to: Pacific
Continental Bank, P.O. Box 10727, Eugene, OR 97440-2727.
Table I
Average Balance Analysis of Net Interest Earnings
$ Thousands
2001 2000
---- ----
Average Interest Average Average Interest Average
Balance Income/(Expense Yield/(Cost) Balance Income/(Expense Yield/(Cost)
------- --------------- ------------ ------- --------------- ------------
Interest Earning Assets
Federal funds sold and interest
bearing deposits in banks $ 1,656 $ 51 3.08% $ 1,321 $ 92 6.94%
Securities available for sale:
Taxable (1) $ 34,604 $ 2,294 6.63% $ 34,979 $ 2,324 6.64%
Loans, net of allowance for loan losses(2)(3)(4) $234,441 $ 22,933 9.78% $224,119 $24,022 10.72%
-------- -------- --------- --------
Total interest earning assets $270,701 $ 25,279 9.34% $260,419 $26,438 10.15%
Non Interest Assets
Cash and due from banks $ 13,941 $ 12,896
Premises and equipment $ 13,198 $ 12,237
Interest receivable and other $ 1,881 $ 3,037
-------- --------
Total non interest assets $ 29,020 $ 28,170
Total assets $299,721 $288,589
Interest Bearing Liabilities
Money market and NOW accounts $106,851 ($2,522) -2.36% $101,157 ($3,825) -3.78%
Savings deposits $ 12,886 ($218) -1.69% $ 12,384 ($361) -2.92%
Time deposits $ 50,549 ($2,630) -5.20% $ 62,799 ($3,801) -6.05%
Federal funds purchased $ 4,577 ($229) -5.01% $ 5,762 ($371) -6.44%
Term borrowings $ 20,666 ($1,159) -5.61% $ 13,112 ($818) -6.24%
-------- -------- -------- -------
Total interest bearing liabilities $195,529 ($6,759) -3.46% $195,214 ($9,176) -4.70%
Non Interest Bearing Liabilities
Demand deposits $ 68,572 $ 62,857
Interest payable and other $ 1,738 $ 1,892
-------- --------
Total non interest liabilities $ 70,310 $ 64,749
-------- --------
Total liabilities $265,839 $259,963
Stockholders' equity $ 33,882 $ 28,626
-------- --------
Total liabilities and stockholders equity $299,721 $288,589
Net Interest Income $18,520 $17,262
Net Interest Income as a Percent of Earning Assets 6.84% 6.63%
1999
----
Average Interest Average
Balance Income/(Expense Yeild/(Cost)
------- --------------- ------------
Interest Earning Assets
Federal funds sold and interest
bearing deposits in banks $ 604 $ 37 6.15%
Securities available for sale:
Taxable (1) $ 34,344 $ 2,195 6.39%
Loans, net of allowance for loan losses(2)(3)(4) $195,355 $ 20,465 10.48%
-------- --------
Total interest earning assets $230,303 $ 22,697 9.86%
Non Interest Assets
Cash and due from banks $ 11,524
Premises and equipment $ 11,087
Interest receivable and other $ 2,357
--------
Total non interest assets $ 24,968
Total assets $255,271
Interest Bearing Liabilities
Money market and NOW accounts $ 90,655 ($2,852) -3.15%
Savings deposits $ 11,324 ($303) -2.68%
Time deposits $ 48,944 ($2,501) -5.11%
Federal funds purchased $ 7,786 ($412) -5.29%
Term borrowings $ 10,345 ($575) -5.56%
-------- --------
Total interest bearing liabilities $169,054 ($6,643) -3.93%
Non Interest Bearing Liabilities
Demand deposits $ 56,301
Interest payable and other $ 1,743
--------
Total non interest liabilities $ 58,044
--------
Total liabilities $227,098
Stockholders' equity $ 28,173
--------
Total liabilities and stockholders equity $255,271
Net Interest Income $ 16,054
Net Interest Income as a Percent of Earning Assets 6.97%
NOTES TO TABLE 1
1. Federal Home Loan Bank stock is included in securities available for sale.
2. Nonaccrual loans are included in average balance totals.
3. Interest income includes recognized loan origination fees of $811, $803,
and $954 for the years-ended 2001, 2000, and 1999 respectively.
4. Total includes loans held for sale.
Table II
Analysis of Changes in Interest Income and Interest Expense
$ Thousands
2001 compared to 2000 2000 compared to 1999
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Federal funds sold and interest
bearing deposits in banks $ 23 ($63) ($40) $ 44 $ 11 $ 55
Securities avialable for sale:
Taxable ($25) ($5) ($30) $ 41 $ 89 $ 130
Tax-exempt $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Loans, net of allowance for loan losses $1,106 ($2,195) ($1,089) $ 3,013 $ 544 $ 3,557
------ -------- -------- -------- -------- --------
Total interest income $1,105 ($2,264) ($1,160) $ 3,098 $ 644 $ 3,742
Interest paid on:
Money market and NOW accounts ($215) $ 1,518 $ 1,303 ($330) ($643) ($973)
Savings deposits ($15) $ 158 $ 143 ($28) ($30) ($58)
Time deposits $ 742 $ 430 $ 1,172 ($708) ($593) ($1,301)
Federal funds purchased $ 76 $ 65 $ 141 $ 107 ($66) $ 41
Term borrowings ($471) $ 129 ($342) ($154) ($89) ($243)
------ -------- -------- -------- -------- --------
Total interest expense $ 117 $ 2,300 $ 2,417 ($1,113) ($1,421) ($2,534)
------ -------- -------- -------- -------- --------
Net interest income $1,221 $ 37 $ 1,258 $ 1,985 ($777) $ 1,208
Pacific Continental Corporation and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
ZIRKLE, LONG & TRIGUEIRO, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
Eugene, Oregon 97401
Pacific Continental Corporation and Subsidiaries
C O N T E N T S
- --------------------------------------------------------------------------------
Page
----
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ZIRKLE, LONG & TRIGUEIRO, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
Eugene, Oregon 97401
Independent Auditors' Report
The Board of Directors and Stockholders
Pacific Continental Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Continental Corporation and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Continental Corporation
and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
Eugene, Oregon
January 25, 2002
Pacific Continental Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
---------------------------
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 15,268,742 $ 15,145,489
Federal funds sold 16,521,304 615,009
------------ ------------
Total cash and cash equivalents 31,790,046 15,760,498
Securities available-for-sale 20,126,762 38,114,974
Loans held for sale 1,923,758 813,551
Loans, less allowance for loan losses 237,759,644 221,631,188
Interest receivable 1,409,822 1,714,524
Federal Home Loan Bank stock 2,460,800 2,298,800
Property, net of accumulated depreciation 13,305,735 12,977,821
Deferred income taxes 307,822 -
Other assets 463,850 812,939
------------ ------------
Total assets $309,548,239 $294,124,295
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 80,559,463 $ 69,548,873
Savings and interest-bearing demand 126,243,389 126,770,317
Time, $100,000 and over 19,608,040 27,476,161
Other time 21,917,788 26,308,204
------------ ------------
248,328,680 250,103,555
Federal funds purchased - 900,000
Federal Home Loan Bank term borrowings 24,000,000 11,500,000
Accrued interest and other liabilities 1,615,177 1,250,708
------------ ------------
Total liabilities 273,943,857 263,754,263
------------ ------------
Commitments and contingencies (Notes 6 and 16)
Stockholders' equity:
Common stock, $1 par value; 10,000,000 shares
authorized; 5,066,290 and 4,535,752 shares
outstanding in 2001 and 2000, respectively 5,066,290 4,535,752
Additional paid-in capital 20,706,519 14,056,333
Retained earnings 9,541,959 11,787,069
Accumulated other comprehensive income (loss) 289,614 (9,122)
------------ ------------
Total stockholders' equity 35,604,382 30,370,032
------------ ------------
Total liabilities and stockholders' equity $309,548,239 $294,124,295
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended December 31
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
Interest income:
Loans $ 22,933,342 $ 24,024,226 $ 20,466,227
Securities 2,132,074 2,180,717 2,041,920
Dividends on Federal Home Loan Bank stock 162,198 143,554 151,881
Federal funds sold 50,970 89,126 37,170
------------ ------------ ------------
25,278,584 26,437,623 22,697,198
------------ ------------ ------------
Interest expense:
Deposits 5,370,134 7,987,275 5,655,472
Federal Home Loan Bank borrowings 1,159,342 817,640 575,209
Federal funds purchased 229,523 370,791 412,257
------------ ------------ ------------
6,758,999 9,175,706 6,642,938
------------ ------------ ------------
Net interest income 18,519,585 17,261,917 16,054,260
Provision for loan losses 1,455,000 1,340,000 735,000
------------ ------------ ------------
Net interrest income after provision for
loan losses 17,064,585 15,921,917 15,319,260
------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 1,105,636 1,016,896 977,151
Other fee income, principally bankcard processing 2,210,823 1,885,066 1,505,863
Loan servicing 489,356 253,961 952,907
Mortgage banking income and gains on sales
of loans 616,254 578,319 952,907
Gains (losses) on sales of securities 251,003 (24,322) 30,490
Other 220,548 199,294 193,017
------------ ------------ ------------
4,893,620 3,909,214 4,119,034
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 6,764,328 6,174,747 5,638,406
Premises and equipment 1,353,566 1,268,630 1,353,447
Bankcard processing 1,735,977 1,503,279 1,119,924
Business development 748,580 805,201 773,445
Other 2,051,483 2,218,226 1,815,205
------------ ------------ ------------
12,653,934 11,970,083 10,700,427
------------ ------------ ------------
Income before income taxes 9,304,271 7,861,048 8,737,867
Provision for income taxes 3,582,000 3,053,000 3,364,000
------------ ------------ ------------
Net income $ 5,722,271 $ 4,808,048 $ 5,373,867
============ ============ ============
Earnings per share:
Basic $ 1.14 $ .96 $ 1.02
Diluted $ 1.12 $ .96 $ 1.02
The accompanying notes are an integral part of these consolidated financial
statements.
3
Stockholders' Equity
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other
Number Common Paid-in Retained Comprehensive
of Shares Stock Capital Earnings Income (Loss) Total
------------ ---------- ------------ ------------ -------------- -------------
Balance, January 1, 1999 4,803,053 $4,803,053 $14,572,528 $ 7,657,712 $ 92,357 $ 27,125,650
----------- -------------
Net income 5,373,867 5,373,867
Other comprehensive loss:
Unrealized losses on securities (920,074)
Reclassification of gains realized (30,490)
Deferred income taxes 364,604
-----------
Other comprehensive income (585,960) (585,960)
----------- -------------
Comprehensive income 4,787,907
Stock options exercised and related tax benefit 35,902 35,902 305,847 341,749
Cash dividends (1,323,255) (1,323,255)
Shares repurchased and retired (243,333) (243,333) (743,382) (2,834,017) (3,820,732)
----------- ----------- ------------ ------------- -------------
Balance, December 31, 1999 4,595,622 4,595,622 14,134,993 8,874,307 (493,603) 27,111,319
----------- -------------
Net income 4,808,048 4,808,048
Other comprehensive income:
Unrealized gains on securities 761,611
Reclassification of losses realized 24,322
Deferred income taxes (301,452)
-----------
Other comprehensive loss 484,481 484,481
----------- -------------
Comprehensive income 5,292,529
Stock options exercised and related tax benefit 17,638 17,638 160,183 177,821
Cash dividends (1,224,713) (1,224,713)
Shares repurchased and retired (77,508) (77,508) (238,843) (670,573) (986,924)
----------- ----------- ------------ ------------- -------------
Balance, December 31, 2000 4,535,752 4,535,752 14,056,333 11,787,069 (9,122) 30,370,032
----------- -------------
Net income 5,722,271 5,722,271
Other comprehensive income:
Unrealized gains on securities 735,649
Reclassification of net gains realized (251,003)
Deferred income taxes (185,910)
-----------
Other comprehensive income 298,736 298,736
----------- -------------
Comprehensive income 6,021,007
Stock options exercised and related tax benefit 81,920 81,920 687,186 769,106
10% stock dividend 460,719 460,719 6,012,383 (6,473,102)
Cash dividends (1,400,993) (1,400,993)
Shares repurchased and retired (12,101) (12,101) (49,383) (93,286) (154,770)
----------- ----------- ------------ ------------- -------------
Balance, December 31, 2001 5,066,290 $5,066,290 $20,706,519 $ 9,541,959 $ 289,614 $ 35,604,382
----------- ----------- ------------ ------------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 5,722,271 $ 4,808,048 $ 5,373,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 854,997 778,813 780,647
Amortization (accretion) (92,463) 55,378 112,560
Provision for loan losses 1,455,000 1,340,000 735,000
Losses of foreclosed assets - 82,679 -
Deferred income taxes (522,000) 334,000 (137,000)
(Gains) losses on sales of securities (251,003) 24,322 (30,490)
Stock dividends from Federal Home Loan Bank (162,000) (143,300) (151,600)
Change in:
Interest receivable 304,702 (161,630) (244,136)
Deferred loan fees 29,229 (43,309) 30,471
Capitalized loan servicing rights 69,799 130,870 (126,573)
Loans held for sale (806,170) 623,785 3,612,098
Accrued interest and other liabilities 239,527 203,310 232,248
Income taxes payable 177,210 17,327 (76,731)
Other assets (105,710) 3,101 (149,985)
------------ ------------ ------------
Net cash provided by operating activities 6,913,389 8,053,394 9,960,376
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of securities 27,382,531 9,852,549 16,266,537
Purchase of securities (8,566,206) (12,411,330) (21,019,078)
Loans made net of principal collections received (11,710,097) (17,787,588) (32,366,284)
Proceeds from sales of loans 1,500,000 3,200,000 3,748,144
Purchase of loans (7,706,625) (1,030,000) -
Purchase of property (1,182,911) (1,992,864) (1,827,997)
Proceeds on sale of foreclosed assets 385,000 442,321 -
------------ ------------ ------------
Net cash provided by (used in) investing activities 101,692 (19,726,912) (35,198,678)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,774,876) 25,928,787 29,845,945
Change in federal funds purchased (900,000) (4,900,000) (2,800,000)
Change in Federal Home Loan Bank term borrowings 12,500,000 (1,500,000) 2,000,000
Proceeds from stock options exercised 745,106 164,820 298,749
Dividends paid (1,400,993) (1,224,713) (1,323,255)
Repurchase of Company shares (154,770) (986,924) (3,820,732)
------------ ------------ ------------
Net cash provided by financing activities 9,014,467 17,481,970 24,200,707
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 16,029,548 5,808,452 (1,037,595)
Cash and cash equivalents, beginning of year 15,760,498 9,952,046 10,989,641
------------ ------------ ------------
Cash and cash equivalents, end of year $ 31,790,046 $ 15,760,498 $ 9,952,046
============ ============ ============
Supplemental information:
Noncash investing and financing activities:
Transfers of loans to foreclosed assets $ - $ 785,000 $ 125,000
Transfers of loans held for sale 304,037 1,329,938 617,122
Change in unrealized gain on securities, net of
deferred income taxes 298,736 484,481 585,960
Cash paid during the year for:
Income taxes 3,926,790 2,688,672 3,577,732
Interest 6,929,933 9,091,100 6,644,367
The accompanying notes are an integral part of these consolidated financial
statements.
5
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Principles of Consolidation - The 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 Service
Corporation (which owns and operates bank-related real estate) and PCB Loan
Services Corporation (which owns and operates certain repossessed or
foreclosed collateral). The Bank provides commercial banking, financing,
mortgage lending and other services in Western Oregon. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from or deposited with
banks, interest-bearing balances due from banks, and federal funds sold.
Generally, federal funds are sold for one-day periods.
The Bank is required to maintain certain reserves as defined by regulation.
Such reserves were maintained in cash at December 31, 2001.
Securities Available-for-Sale - Securities available-for-sale are held for
indefinite periods of time and may be sold in response to movements in
market interest rates, changes in the maturity mix of bank assets and
liabilities or demand on liquidity. The Bank classified all securities as
available-for-sale throughout 2001 and 2000. Securities classified as
available-for-sale are reported at estimated fair value, net of deferred
taxes. The difference between estimated fair value and amortized cost is a
separate component of stockholders' equity (accumulated other comprehensive
income). Management determines the appropriate classification of securities
at the time of purchase.
Interest income on debt securities is included in income using the level
yield method. Gains and losses on sales of securities are recognized on the
specific identification basis.
Loans Held for Sale and Mortgage Banking Activities - The Bank originates
residential real estate loans for resale in the secondary market. The Bank
also originates government guaranteed loans, a portion of which are held
for sale. Sales are without recourse. Loans held for sale are carried at
the lower of cost or market.
6
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Loans and Income Recognition - Loans are stated at the amount of unpaid
principal, reduced by deferred loan origination fees, discounts associated
with retained portions of loans sold, and an allowance for loan losses.
Interest on loans is calculated using the simple-interest method on daily
balances of the principal amount outstanding. Accrual of interest is
discontinued on a loan when management believes, after considering economic
and business conditions and collection efforts, that the borrower's
financial condition is such that collection of the interest is doubtful.
Loan origination fees are amortized over the lives of the loans as
adjustments to yield.
Allowance for Loan Losses - The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount
that management considers adequate to absorb possible losses on existing
loans that may become uncollectible based on evaluations of the
collectibility of loans and prior loss experience. The evaluations take
into consideration such factors as changes in the nature of the loan
portfolio, overall portfolio quality, review of specific problem loans,
estimated value of underlying collateral, and current economic conditions
that may affect the borrower's ability to pay. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when management believes that it is probable
that all amounts will not be collected according to the contractual terms.
An impaired loan is valued using the present value of expected cash flows
discounted at the loan's effective interest rate, the observable market
price of the loan or the estimated fair value of the loan's collateral or
related guaranty. Loans deemed impaired are specifically allocated for in
the allowance for loan losses.
Servicing - Servicing assets are recognized as separate assets when rights
are acquired through sales of loans. Capitalized servicing rights are
reported in other assets and are amortized into noninterest income in
proportion to, and over the period of, the estimated future net servicing
income of the underlying loans. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Fair value is determined based upon discounted cash flows using
market-based assumptions.
Federal Home Loan Bank Stock - The investment in Federal Home Loan Bank
("FHLB") stock is carried at par value, which approximates its fair value.
As a member of the FHLB system, the Bank is required to maintain a minimum
level of investment in FHLB stock based on specific percentages of its
outstanding mortgages, total assets or FHLB advances. For 2001, the minimum
required investment was approximately $850,000. The Bank may request
redemption at par value of any stock in excess of the amount the Bank is
required to hold. Stock redemptions are at the discretion of the FHLB.
7
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Property - Property is stated at cost, net of accumulated depreciation.
Additions, betterments and replacements of major units are capitalized.
Expenditures for normal maintenance, repairs and replacements of minor
units are charged to expense as incurred. Gains or losses realized from
sales or retirements are reflected in operations currently.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are 30 to 40 years for
buildings, 3 to 10 years for furniture and equipment, and up to the lease
term for leasehold improvements.
Advertising - Advertising costs are generally charged to expense during the
year in which they are incurred.
Income Taxes - Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
calculated using tax rates in effect for the year in which the differences
are expected to reverse.
Stockholders' Equity and Earnings Per Share - Basic earnings per share are
computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted earnings per share include the
effect of common stock equivalents that would arise from the exercise of
stock options discussed in Note 12. Weighted shares outstanding are
adjusted retroactively for the effect of stock dividends.
Weighted average shares outstanding at December 31 are as follows:
2001 2000 1999
----------- ----------- -----------
Basic 5,036,428 5,000,147 5,223,755
Common stock equivalents
attributable to stock options 50,487 16,273 49,561
----------- ----------- -----------
Diluted 5,086,915 5,016,420 5,273,316
=========== =========== ===========
The Company repurchased and retired 12,101 shares of common stock costing
$154,770 in 2001; 77,508 shares costing $986,924 in 2000; and 243,333
shares costing $3,820,732 in 1999.
The Company has approved repurchase of 200,000 shares of Company stock, of
which 12,101 were repurchased in 2001.
8
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Financial Accounting Standards Board ("FASB") - In September 2000, FASB
issued SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinquishments of Liabilities. This Statement replaces SFAS No.
125 and revises standards for accounting and securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but carries over most of SFAS No. 125's provisions without
reconsideration. It is generally effective after March 31, 2001. Adoption
of SFAS No. 140 did not have a material effect on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. These Statements make
significant changes to the accounting for business combinations and
goodwill. SFAS No. 141 eliminates the pooling-of-interests method of
accounting and requires that the purchase method of accounting be used for
business combinations initiated after June 30, 2001. SFAS No. 142
discontinues the practice of amortizing goodwill and requires that goodwill
be continually evaluated for impairment and be written-down when
appropriate. Other intangible assets with a determinable useful life will
continue to be amortized over future periods. Adoption of SFAS Nos. 141 and
142 had no effect on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. The Statement is effective for fiscal
years beginning after June 15, 2002. The Company does not expect that
adoption of SFAS No. 143 will have a material effect on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, and provides guidance on classification and accounting for such assets
when held for sale or abandonment. The Statement is effective for fiscal
years beginning after June 15, 2002. The Company does not expect that
adoption of SFAS No. 144 will have a material effect on the Company's
financial position or results of operations.
Reclassifications - The 2000 and 1999 figures have been reclassified where
appropriate to conform with the financial statement presentation used in
2001. These reclassifications had no effect on previously reported net
income.
9
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Securities Available-for-Sale:
The amortized cost and estimated market values of securities
available-for-sale at December 31 are as follows:
2001
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------------- -------------- --------------- --------------
Obligations of U.S. Government agencies $ 3,697,772 $ 231,736 $ - $ 3,929,508
Obligations of states and political
subdivisions (taxable) 1,506,800 6,090 1,512,890
Mortgage-backed securities 14,452,343 232,021 14,684,364
-------------- ------------- --------------- -------------
$ 19,656,915 $ 469,847 $ - $ 20,126,762
============== ============= =============== =============
2000
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------------- -------------- --------------- --------------
Obligations of U.S. Government agencies $ 11,088,070 $ 214,967 $ - $ 11,303,037
Obligations of states and political
subdivisions (taxable) 1,397,600 18,966 - 1,416,566
Corporate notes 2,006,019 9,329 - 2,015,348
Mortgage-backed securities 23,638,083 62,604 320,664 23,380,023
-------------- -------------- -------------- ------------
$ 38,129,772 $ 305,866 $ 320,664 $ 38,114,974
============== ============== ============== ============
The amortized cost and estimated market value of securities at December
31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to
call or prepay obligations.
2001 2000
------------------------------- -------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------- -------------- -------------- --------------
Due in one year or less $ - $ - $ 2,006,019 $ 2,015,348
Due after one year through 5 years 3,697,772 3,929,508 11,088,070 11,303,037
Due after 5 years through 15 years 1,506,800 1,512,879 1,397,600 1,416,566
Mortgage-backed securities 14,552,343 14,684,375 23,638,083 23,380,023
-------------- ------------- -------------- -------------
$ 19,756,915 $ 20,126,762 $ 38,129,772 $ 38,114,974
============== ============= ============== =============
10
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Securities Available-for-Sale, Continued:
Gross realized gains and losses were $300,643 and $49,640, respectively,
in 2001. Gross realized losses on sales of securities were $24,322 in
2000. Gross realized gains on sales of securities were $30,490 in 1999.
At December 31, 2001, mortgage-backed securities with amortized costs of
$6,598,773 (estimated market values of $6,778,000) were pledged to secure
certain Treasury and public deposits as required by law.
3. Loans:
Major classifications of loans at December 31 are as follows:
2001 2000
------------- ----------------
Commercial loans $ 63,058,587 $ 54,797,800
Real estate loans 169,775,925 159,481,077
Consumer loans 9,453,854 10,582,451
------------- ----------------
242,288,366 224,861,328
Deferred loan origination fees (1,110,693) (1,081,464)
------------- ----------------
241,177,673 223,779,864
Allowance for loan losses (3,418,029) (2,148,676)
------------- ----------------
$ 237,759,644 $ 221,631,188
============= ================
Scheduled maturities or repricing, if earlier, of loans at December 31,
2001 are as follows:
Three months or less $ 94,289,650
Three months to one year 9,764,860
One year to three years 63,498,644
Three years to five years 59,850,071
Thereafter 14,885,141
----------------
$ 242,288,366
================
11
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. Loans, Continued:
Allowance for Loan Losses:
2001 2000 1999
---------------- ------------------ ---------------
Balance, beginning of year $ 2,148,676 $ 2,447,900 $ 2,069,614
Provision charged to income 1,455,000 1,340,000 735,000
Loans charged against the allowance (273,232) (1,729,518) (376,706)
Recoveries credited to allowance 87,585 90,294 19,992
-------------- ---------------- --------------
Balance, end of year $ 3,418,029 $ 2,148,676 $ 2,447,900
============== ================ ==============
At December 31, 2001, the recorded investment in certain loans totaling
$5,601,238, including all nonaccrual loans, were considered impaired. A
specific related valuation of $1,050,000 is provided for these loans and
is included in the allowance above. The average recorded investment in
impaired loans for the year ended December 31, 2001 was approximately
$2,000,000. Interest income recognized on impaired loans for the year
ended December 31, 2001 was not significant. No loans were considered as
impaired at December 31, 2000 or 1999. Loans on nonaccrual status were
$489,957 and $1,422,344 at December 31, 2000 and 1999, respectively.
Interest income which would have been realized on nonaccrual loans if they
had remained current was approximately $371,000, $31,000 and $102,000 in
2001, 2000 and 1999, respectively. Loans contractually past due 90 days or
more on which interest was still accruing totaled $953,384 ($334,055 net
of guarantees) and $155,097 at December 31, 2001 and 2000, respectively.
A substantial portion of the loan portfolio is collateralized by real
estate and is, therefore, susceptible to changes in local market
conditions. Management believes that the loan portfolio is diversified
among industry groups. At December 31, 2001, approximately 11% of the
Bank's loan portfolio was concentrated in loans to the hotel and motel
industry, with no other single industry group exceeding 10% of the
portfolio. It is management's opinion that the allowance for loan losses
is adequate to absorb known and inherent risks in the loan portfolio.
However, actual results may differ from estimates.
4. Servicing:
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of serviced
loans at December 31, 2001 and 2000 were $32,944,670 and $39,635,162,
respectively.
The balance of capitalized loan servicing rights, net of valuation
allowances, included in other assets was $83,675 and $153,473 at December
31, 2001 and 2000, respectively.
12
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
5. Foreclosed Assets:
There were no foreclosed assets at December 31, 2001. Foreclosed assets of
$385,000 at December 31, 2000 is included in other assets and recorded at
fair value less estimated selling costs.
6. Property:
Property at December 31 consists of the following:
2001 2000
-------------- ------------
Land $ 2,053,664 $ 1,662,107
Buildings and improvements 11,098,606 10,695,558
Furniture and equipment 4,515,037 4,770,083
------------- ------------
17,667,307 17,127,748
Less accumulated depreciation 4,361,572 4,149,927
------------- ------------
$ 13,305,735 $ 12,977,821
------------- ------------
Lease Commitments - The Bank leases certain facilities for office
locations under noncancelable operating lease agreements expiring through
2020. Rent expense related to these leases totaled $253,918, $212,011 and
$186,149 in 2001, 2000 and 1999, respectively.
Property Leased to Others - The Bank leases approximately 82% of its
Springfield Gateway building to others under noncancelable operating lease
agreements extending through 2011.
Future minimum payments required under these leases are:
Property
Lease Leased
Commitments to Others
----------------- ------------
2002 $ 236,319 $ 407,491
2003 244,852 414,749
2004 244,003 390,043
2005 181,843 338,202
2006 162,541 234,955
Thereafter 1,247,690 467,770
------------- ------------
$ 2,317,248 $ 2,253,210
------------- ------------
13
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
7. Deposits:
Scheduled maturities or repricing of time deposits at December 31 are as
follows:
2001 2000
------------- -------------
Less than three months $ 12,974,165 $ 17,905,220
Three months to one year 19,922,198 30,860,570
One to three years 7,840,750 4,326,928
Thereafter 788,715 691,647
8. Federal Funds Purchased:
The Bank maintains uncollateralized federal funds borrowing lines with
correspondent banks totaling $34,000,000. There were no borrowings against
these lines at December 31, 2001. At December 31, 2000, $900,000 of
federal funds were purchased from correspondent banks.
9. Federal Home Loan Bank Term Borrowings:
Federal Home Loan Bank term borrowings at December 31 are as follows:
2001 2000
------------- -------------
Due January 2002, 5.36% $ 2,000,000 $ -
Due January 2003, 5.76% 6,000,000 6,000,000
Due May 2003, 4.90% 1,000,000 -
Due April 2004, 5.07% 3,000,000 -
Due May 2004, 5.35% 2,000,000 -
Due June 2004, 4.98% 5,000,000 -
Due July 2004, 5.16% 3,000,000 -
Due May 2005, 5.67% 1,000,000 -
Due June 2005, 5.26% 1,000,000 -
Paid 2001 - 5,500,000
------------ -------------
$ 24,000,000 $ 11,500,000
------------ -------------
The Bank has a borrowing limit with the FHLB totaling $45,000,000
($21,000,000 available at December 31, 2001). FHLB stock, funds on deposit
with FHLB, securities and loans are pledged as collateral for borrowings
from FHLB.
14
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
10. Income Taxes:
The provision for income taxes for the years ended December 31 consist of
the following:
2001 2000 1999
----------- ------------ -----------
Currently payable:
Federal $ 3,397,000 $ 2,251,000 $ 2,899,000
State 707,000 468,000 602,000
----------- ------------ -----------
4,104,000 2,719,000 3,501,000
----------- ------------ -----------
Deferred:
Federal (431,000) 276,000 (114,000)
State (91,000) 58,000 (23,000)
----------- ------------ -----------
(522,000) 334,000 (137,000)
----------- ------------ -----------
Total provision for income taxes $ 3,582,000 $ 3,053,000 $ 3,364,000
----------- ------------ -----------
The provision for deferred income taxes results from timing differences in
the recognition of revenue and expenses for financial statement and tax
purposes. The nature and tax effect of these differences for the years
ended December 31 are as follows:
2001 2000 1999
----------- ------------ -----------
Loan fees and other loan basis adjustment
differences between financial
statement and tax purposes $ (81,770) $ 37,259 $ (34,792)
Loan loss deduction for tax purposes
more (less) than provision for financial
reporting purposes (402,135) 191,532 (103,666)
Depreciation deduction differences
between financial statement and
tax purposes - (5,957) (20,044)
Federal Home Loan Bank stock dividends 50,419 45,264 47,503
State income tax and other (88,514) 65,902 (26,001)
----------- ------------ -----------
$ (522,000) $ 334,000 $ (137,000)
----------- ------------ -----------
15
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
10. Income Taxes, Continued:
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31 was as follows:
2001 2000 1999
---------- ---------- ----------
Expected federal income tax provision
at 34% $3,163,000 $2,673,000 $2,971,000
State income tax, net of federal income
tax effect 407,000 347,000 382,000
Other nondeductible expenses 12,000 33,000 11,000
---------- ---------- ----------
Provision for income taxes $3,582,000 $3,053,000 $3,364,000
========== ========== ==========
The tax benefit associated with stock option plans reduced taxes payable
by $24,000, $13,000 and $43,000 at December 31, 2001, 2000 and 1999,
respectively. Such benefit is credited to additional paid-in capital.
The components of deferred tax assets and liabilities at December 31 are
as follows:
2001 2000 1999
---------- --------- -----------
Assets:
Allowance for loan losses $1,088,302 $ 592,663 $ 826,373
Basis adjustments on loans 144,507 60,252 65,966
Other 15,105 - -
Net unrealized losses on securities - 5,676 307,129
---------- --------- -----------
Total deferred tax assets 1,247,914 658,591 1,199,468
---------- --------- -----------
Liabilities:
Federal Home Loan Bank stock dividends 433,730 371,593 316,629
Excess tax over book depreciation 195,671 192,072 198,617
Net unrealized gains on securities 180,233 - -
Other, principally loan origination costs 130,458 123,194 90,039
---------- --------- -----------
Total deferred tax liabilities 940,092 686,859 605,285
---------- --------- -----------
Net deferred tax assets (liabilities) $ 307,822 $ (28,268) $ 594,183
========== ========= ===========
Management believes that net deferred taxes will be recognized in the
normal course of operations and, accordingly, management has not reduced
net deferred tax assets by a valuation allowance.
16
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
11. Retirement Plan:
The Bank has a 401(k) profit sharing plan covering substantially all
employees. The plan provides for employee and employer contributions. The
total plan expenses, including employer contributions, were $388,917,
$328,355 and $349,455 in 2001, 2000 and 1999, respectively.
12. Stock Option Plans:
The Company has Employee and Nonemployee Director Stock Option Plans that
reserve shares of stock for issuance to executives, employees and
directors. Under the plans, the exercise price of each option must equal
the greater of market price or net book value of the Company's stock on
the date of the grant, and the option's maximum term is ten years. Options
granted before 2000 vested at grant. For employee options granted in 2001
and 2000, vesting occurs over a four-year period. Information with respect
to options granted under the stock option plans, adjusted for stock splits
and dividends, is as follows:
2001 2000 1999
------------------------- -------------------------- --------------------------
Average Average Average
Options Price Options Price Options Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
------------ ---------- ------------- ----------- ------------- -----------
Balance, beginning of
year 360,048 $ 9.30 179,053 $ 10.45 220,864 $ 10.05
Grants:
Employees 182,050 12.76 179,300 8.41 -
Directors 23,100 12.76 26,400 8.41 -
Exercised (89,187) 8.35 (19,257) 8.54 (39,492) 7.56
Expired (15,025) (5,448) (2,319)
------------ ------------- -------------
Balance, end of year 460,986 $ 10.94 360,048 $ 9.30 179,053 $ 10.45
============ ============= =============
Options exercisable
at end of year 216,424 218,588 179,053
Options available for
grant at end of
year 261,470 460,075 660,000
17
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plans, Continued:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for
the plans been determined based on the fair value at the grant date for
awards in 2001 and 2000 (no options granted in 1999) consistent with the
provisions of SFAS No. 123, net income and earnings per share would have
been the pro forma amounts indicated below:
2001 2000 1999
---------- ---------- ----------
Net income - as reported $5,722,271 $4,808,048 $5,373,867
Net income - pro forma 5,517,275 4,718,147 5,373,867
Basic earnings per share - as reported 1.14 0.96 1.02
Basic earnings per share - pro forma 1.10 0.94 1.02
The fair value of each option grant ($3.13 and $2.21 in 2001 and 2000,
respectively) is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000
--------- ---------
Dividend yield 3.33% 3.89%
Risk-free interest rate 5.43% 6.50%
Expected life 4 years 4 years
Expected volatility 31.60% 30.24%
Outstanding options at December 31, 2001 are as follows:
Shares Price
--------------------------
Exercisable Total Per Share Expiration
----------- --------- --------- --------------
47,846 47,846 $ 8.78 June 2002
21,670 21,670 20.40 June 2003
88,498 186,595 8.41 September 2005
58,410 204,875 12.76 August 2006
-------- --------
216,424 460,986
======== ========
18
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
13. Transactions with Related Parties:
The Bank has granted loans to officers and directors and to companies with
which they are associated. Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated parties. The aggregate
dollar amount of these loans outstanding was $1,541,519, $1,353,322 and
$442,879 at December 31, 2001, 2000 and 1999, respectively. Activity with
respect to these loans during the year ended December 31, 2001 was as
follows:
Balance, January 1, 2001 $1,353,322
Additions or renewals 681,313
Amounts collected or renewed (493,116)
----------
Balance, December 31, 2001 $1,541,519
----------
In addition, there were $253,471 in commitments to extend credit to
directors and officers at December 31, 2001, which are included as part of
commitments in Note 14.
Real estate management fees of $82,714 were paid to a director during
2001.
19
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
14. Financial Instruments with Off-Balance-Sheet Credit Risk:
In order to meet the financing needs of its customers, the Bank commits to
extensions of credit and issues letters of credit. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for other products. In the event of nonperformance by the customer,
the Bank's exposure to credit loss is represented by the contractual
amount of the instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Off-balance-sheet instruments at December 31 consist of the following:
2001 2000
------------- -------------
Commitments to extend credit $51,726,566 $38,964,350
Letters of credit and financial guarantees written 4,398,845 3,416,225
20
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
15. Fair Value Disclosures of Financial Instruments:
The following disclosures are made in accordance with provisions of SFAS
No. 107, Disclosures About Fair Value of Financial Instruments. The use of
different assumptions and estimation methods could have a significant
effect on fair value amounts. Accordingly, the estimates of fair value
herein are not necessarily indicative of the amounts that might be
realized in a current market exchange.
The estimated fair values of the financial instruments at December 31 are
as follows:
2001 2000
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 31,790,046 $ 31,790,046 $ 15,760,498 $ 15,760,498
Securities 20,126,762 20,126,762 38,114,974 38,114,974
Loans held for sale 1,923,758 1,978,854 813,551 831,954
Loans, net of allowance
for loan losses 237,759,644 242,899,991 221,631,188 222,375,535
Interest receivable 1,409,822 1,409,822 1,714,524 1,714,524
Federal Home Loan
Bank stock 2,460,800 2,460,800 2,298,800 2,298,800
Financial liabilities:
Deposits 248,328,680 249,178,680 250,103,555 250,218,555
Federal funds purchased - - 900,000 900,000
Federal Home Loan
Bank borrowings 24,000,000 24,835,000 11,500,000 11,493,000
Accrued interest payable 172,212 172,212 343,146 343,146
Cash and Cash Equivalents - The fair value approximates carrying amount.
Securities - Fair value is based on quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices from similar securities.
Loans Held for Sale - Fair value represents the anticipated proceeds from
sale of the loans.
21
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
15. Fair Value Disclosures of Financial Instruments, Continued:
Loans - Fair value of fixed-rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. Variable rate loans have carrying amounts that are a reasonable
estimate of fair value.
Deposits - Fair value of demand, interest-bearing demand and savings
deposits is the amount payable on demand at the reporting date. Fair value
of time deposits is estimated using the interest rates currently offered
for the deposits of similar remaining maturities. In accordance with
provisions of SFAS No. 107, the estimated fair values of deposits do not
take into account the benefit that results from low-cost funding such
deposits provide.
Federal Funds Purchased - The carrying amount is a reasonable estimate of
fair value because of the short-term nature of these borrowings.
Federal Home Loan Bank Borrowings - Fair value of Federal Home Loan Bank
borrowings is estimated by discounting future cash flows at rates currently
available for debt with similar terms and remaining maturities.
Off-Balance-Sheet Financial Instruments - The carrying amount and fair
value are based on fees charged for similar commitments and are not
material.
16. Commitments and Legal Contingencies:
During 2001, the Company entered into employment agreements with two key
executives. The employment agreements provide for minimum aggregate annual
base salaries of $353,750 in 2001, performance adjustments, life insurance
coverage, incentive compensation, and other perquisites commonly found in
such agreements. The employment agreements expire in April 2004. Aggregate
bonus expense to these executives of $292,000 was recorded in 2001.
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect
on the Company's consolidated financial statements.
22
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
17. Regulatory Matters:
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation ("FDIC"). Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's 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 the Bank to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets, and of Tier I capital to leverage assets.
Management believes, as of December 31, 2001, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the FDIC
categorized the Bank as well capitalized. To be categorized as well
capitalized, the Bank must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- --------- -------------- ------- -------------- -------
As of December 31, 2001:
Total capital (to risk
weighted assets) $ 37,578,463 13.98% $ 21,502,000 8% $ 26,877,500 10%
Tier I capital (to risk
weighted assets) 34,160,434 12.71% 10,751,000 4% 16,126,500 6%
Tier I capital (to leverage
assets) 34,160,434 11.14% 12,269,760 4% 15,337,200 5%
As of December 31, 2000:
Total capital (to risk
weighted assets) $ 32,439,587 13.17% $ 19,702,720 8% $ 24,628,400 10%
Tier I capital (to risk
weighted assets) 30,290,911 12.30% 9,851,360 4% 14,777,040 6%
Tier I capital (to leverage
assets) 30,290,911 10.28% 11,786,560 4% 14,733,200 5%
23
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
18. Parent Company Financial Information:
Financial information for Pacific Continental Corporation (Parent Company
only) is presented below:
BALANCE SHEETS
December 31
2001 2000
---------------- -----------------
Assets:
Cash ($185,042 and $32,781 deposited with the Bank) $ 1,035,837 $ 39,743
Prepaid expenses 2,500 7,500
Deferred income taxes 116,000 41,000
Investment in the Bank, at cost plus equity
in earnings 34,450,045 30,281,789
---------------- -----------------
$ 35,604,382 $ 30,370,032
================ =================
Liabilities and stockholders' equity:
Liabilities $ - $ -
Stockholders' equity 35,604,382 30,370,032
---------------- -----------------
$ 35,604,382 $ 30,370,032
================ =================
STATEMENTS OF INCOME
For the Periods Ended December 31
2001 2000 1999
---------------- ---------------- -----------------
Income:
Cash dividends from the Bank $ 1,995,000 $ 2,180,000 $ 4,514,000
Interest income 2,082 2,519 411
---------------- ---------------- -----------------
1,997,082 2,182,519 4,514,411
---------------- ---------------- -----------------
Expenses:
Investor relations 102,238 - -
Legal and registration expense 46,198 126,149 45,132
Personnel costs paid to Bank 46,895 - -
---------------- ---------------- -----------------
195,331 126,149 45,132
---------------- ---------------- -----------------
Income before income tax benefit
and equity in undistributed
earnings of the Bank 1,801,751 2,056,370 4,469,279
Income tax benefit 75,000 28,000 13,000
Equity in undistributed earnings of the Bank 3,845,520 2,723,678 (1,267,015)
---------------- ---------------- -----------------
Net income $ 5,722,271 $ 4,808,048 $ 3,215,264
================ ================ =================
24
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
18. Parent Company Financial Information, Continued:
STATEMENTS OF CASH FLOWS
For the Periods Ended December 31
2001 2000 1999
---------------- ---------------- -----------------
Cash flows from operating activities:
Net income $ 5,722,271 $ 4,808,048 $ 3,215,264
Adjustments to reconcile net income
to net capital provided by
operating activities:
Equity in undistributed earnings of (3,845,520) (2,723,678) 1,267,015
the Bank
Prepaid expenses 5,000 (7,500) -
Deferred income taxes (75,000) (28,000) (13,000)
---------------- ---------------- -----------------
Net cash provided by operating
activities 1,806,751 2,048,870 4,469,279
---------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from stock options exercised 745,106 164,820 84,208
Dividends paid (1,400,993) (1,224,713) (695,394)
Shares repurchased and retired (154,770) (986,924) (3,820,403)
---------------- ---------------- -----------------
Net cash used in financing
activities (810,657) (2,046,817) (4,431,589)
---------------- ---------------- -----------------
Net increase in cash 996,094 2,053 37,690
Cash, beginning of period 39,743 37,690 -
---------------- ---------------- -----------------
Cash, end of period $ 1,035,837 $ 39,743 $ 37,690
================ ================ =================
25