As Filed with the Securities & Exchange Commission on May 12, 2000
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 March 31, 2000.
[ ] 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
-----------------
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 __ No X
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 April 30, 2000: 4,535,006
--------------
PACIFIC CONTINENTAL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Income: 3
Three months ended March 31, 2000 and March 31, 1999
Consolidated Statements of Comprehensive Income: 4
Three months ended March 31, 2000 and March 31, 1999
Consolidated Balance Sheets: 5
March 31, 2000, December 31, 1999 and March 31, 1999
Consolidated Statements of Cash Flows: 6
Three months ended March 31, 2000 and March 31, 1999
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Market Risk and Balance Sheet Management 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings none
Item 2. Changes in Securities none
Item 3. Defaults Upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders none
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Page 2
CONSOLIDATED INCOME STATEMENT
Amounts in $1,000's
(Unaudited)
Quarter ended March 31,
2000 1999
-------------------------------------------
Interest income
Loans $5,613 $4,794
Securities 551 464
Dividends from Federal Home Loan Bank 35 38
Federal funds sold 10 9
-------------------------------------------
6,208 5,305
-------------------------------------------
Interest expense
Deposits 1,711 1,317
Federal Home Loan Bank borrowings 192 150
Federal funds purchased 129 118
-------------------------------------------
2,032 1,585
Net interest income 4,176 3,720
Provision for loan losses 150 300
-------------------------------------------
Net interest income after provision 4,026 3,420
-------------------------------------------
Noninterest income
Service charges on deposit accounts 245 239
Other fee income, principally bankcard processing 380 292
Loan servicing 44 147
Mortgage banking income and gains on sales of loans 96 257
Gain (loss) on sale of securities (7) 0
Other 73 61
-------------------------------------------
831 996
-------------------------------------------
Noninterest expense
Salaries and employee benefits 1,464 1,319
Premises and equipment 295 302
Bankcard processing 313 216
Business development 203 162
Other 453 442
-------------------------------------------
2,728 2,441
-------------------------------------------
Income before income taxes 2,170 1,975
Provision for income taxes 823 760
-------------------------------------------
Net income $1,306 $1,215
-------------------------------------------
Earnings per share
Basic $0.29 $0.25
-------------------------------------------
Diluted $0.28 $0.25
-------------------------------------------
Page 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended
March 31,
2000 1999
-------------------------------------------------
Net income $1,306 $1,215
-------------------------------------------------
Unrealized losses on Investment Securities
Unrealized losses arising during the period (114) (162)
Reclassification for losses included in
statement of income 7 -
-------------------------------------------------
(107) (162)
Income tax benefit 41 62
-------------------------------------------------
Net unrealized losses on securities
available for sale (66) (100)
Comprehensive Income $1,240 $1,115
-------------------------------------------------
Page 4
CONSOLIDATED BALANCE SHEET
Amounts in $1,000's
(Unaudited)
Mar. 31, Dec. 31, Mar. 31,
2000 1999 1999
---------------------------------------------
ASSETS
Cash and due from banks $ 13,293 $ 9,269 $ 10,884
Federal funds sold 1,912 683 2,670
---------------------------------------------
Total cash and cash equivalents 15,205 9,952 13,554
Securities available-for-sale 32,638 34,850 31,116
Loans held for sale 3,033 2,767 5,640
Loans, less allowance for loan losses 216,749 206,765 182,209
Interest receivable 1,644 1,553 1,381
Federal Home Loan Bank stock 2,190 2,156 2,042
Property, net of accumulated depreciation 11,900 11,764 10,630
Deferred income taxes 702 594 155
Other assets 717 687 1,053
---------------------------------------------
Total assets 284,778 271,088 247,780
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand 61,639 62,532 53,547
Savings and interest-bearing checking 109,882 108,757 93,170
Time $100,000 and over 35,017 27,568 34,168
Other time 28,092 25,318 17,749
---------------------------------------------
Total deposits 234,630 224,175 198,634
Federal funds purchased 8,300 5,800 7,800
Federal Home Loan Bank term borrowings 13,000 13,000 11,000
Accrued interest and other payables 1,298 1,002 1,963
---------------------------------------------
Total liabilities 257,228 243,977 219,397
---------------------------------------------
Stockholders' equity
Common stock 4,535 4,596 4,821
Surplus 14,018 14,135 14,697
Retained earnings 9,557 8,874 8,873
Accumulated other comprehensive loss (560) (494) (8)
---------------------------------------------
27,550 27,111 28,383
---------------------------------------------
Total liabilities and stockholders' equity $284,778 $271,088 $247,780
=============================================
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
For three months ended March 31,
-------------------------------------------
2000 1999
-------------------------------------------
Cash flows from operating activity:
Net income $ 1,306 $ 1,215
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 176 184
Provision for loan losses 150 300
Origination of loans held for sale (3,901) (10,105)
Proceeds from sale of loans held for sale 3,635 11,564
Gain on sales of loans - (103)
Change in interest receivable and other assets (229) (935)
Change in payables and other liabilities 297 1,074
Other adjustments (42) (25)
---------------------------------------
Net cash provided by operating activities 1,390 3,169
---------------------------------------
Cash flows from investing activities
Proceeds from sales and maturities of securities 2,201 4,786
Purchase of securities (46) (4,860)
Loans made net of principal collections (10,133) (7,804)
Proceeds from sales of loans - 3,748
Purchase of property (312) (98)
---------------------------------------
Net cash used in investing activities (8,290) (4,228)
---------------------------------------
Cash flows from financing activities
Net increase in deposits 10,454 4,305
Increase (decrease) in fed funds purchased 2,500 (800)
Proceeds from stock options exercised 112 118
Repurchase of shares (913) -
---------------------------------------
Net cash provided by financing activities 12,153 3,622
---------------------------------------
Net increase (decrease) in cash and cash equivalents 5,253 2,564
Cash and cash equivalents, beginning of period 9,952 10,990
---------------------------------------
Cash and cash equivalents, end of period $ 15,205 $ 13,554
---------------------------------------
Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion contains a review of Pacific Continental Corporation
(the "Company") and its wholly-owned subsidiary Pacific Continental Bank (the
"Bank") operating results and financial condition for the first quarter of 2000.
When warranted, comparisons are made to the same period in 1999 and to the
previous year ended December 31, 1999. 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, 1999, which contains additional statistics
and explanations. All numbers, except per share data, are expressed in
thousands of dollars.
This discussion may contain certain forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
stated. Readers are cautioned not to place undue reliance on these forward-
looking statements.
HIGHLIGHTS
Earnings in the first quarter of 2000 were $1,306, up $91, or 7%, over first
quarter 1999 earnings of $1,215. Basic earnings per share were $0.29 and $0.25
in the first quarters of 2000 and 1999, respectively, an increase of 16%.
Average shares outstanding for the first quarter 2000 and 1999 were 4,576 and
4,806, respectively. The number of shares issued and outstanding declined as a
result of the Company's share repurchase plan instituted in July 1999. Period
end assets at March 31, 2000, were $284,778, a 15% increase over one year ago.
Average assets for the first quarter of 2000 were $275,752, up 15% over average
assets in the same quarter one-year ago. Return on assets and return on equity
in the first quarter of 2000 were 1.90% and 19.03%. That compares to 2.04% and
17.57% reported in first quarter of 1999.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the primary source of the Company's revenue. Net
interest income prior to the provision for loan loss, in the first quarter of
2000 increased $456, or 12%, over same period in 1999. This increase is
primarily the result of growth of earning assets. Average earning assets
increased 14% when compared to the first quarter of 1999.
Net interest margin as a percentage of earning assets was 6.68% in the first
quarter of 2000 compared to 6.86% in the same time period in 1999. Overall, the
decline in net interest margin resulted from the use of higher rate funding
sources, which increased rates paid on liabilities faster than the yield on
loans. The rate volume analysis shows the yield on earning assets increased by
15 basis point (0.15%) in the first quarter of 2000 from the first quarter of
1999, while the rate on total liabilities increased by 27 basis points.
A detailed comparison of interest income and interest expense between first
quarter 2000 to first quarter 1999 shows that interest income grew by $903.
Increased volume of earning assets improved interest income by $723, while
higher yields on earning assets improved interest income by $179. The
improvement in earning asset yields is attributable to repricing of variable
rate loans tied to the prime rate, which rose by 75 basis points from the first
quarter 1999. Higher volumes of interest bearing deposits and borrowings
increased interest expense by $211, and higher rates on liabilities increased
interest expense by $235. In general, the rates paid on liabilities have risen
faster than the yield on loans.
Page 7
Provision for Loan Losses
Below is a summary of the Company's allowance for loan losses for the first
three months of 2000:
2000
-----------------
Balance, December 31, 1999 $2,448
Provision charged to income 150
Loans charged off 659
Recoveries credited to allowance 5
-----------------
Balance, March 31, 2000 $1,944
=================
First quarter 2000 provision for loan losses was $150, compared to $300 for the
same quarter last year. The allowance for loan losses at March 31, 2000 was
0.88% of period end loans. That compares to a ratio of 1.15% at December 31,
1999 and 1.23% at March 31, 1999. Net charge offs in first quarter 2000 were
$654, which was primarily attributable to a single loan that had been identified
and reserved for at December 31, 1999 as a problem loan with some risk of loss.
In addition, two other loans were similarly identified and reserved for at
December 31, 1999, which have been classified as impaired at March 31, 2000.
The investment in impaired loans at March 31, 2000 was $1,919 of which $1,254
was guaranteed by the government. The valuation allowance assigned to these two
loans totaled $380 and is included in the March 31, 2000 ending allowance for
loan losses.
Below is a summary of nonaccrual loans, loans past due 90 days or more and still
accruing interest, and other real estate owned for the periods covered in this
report:
Mar. 31, 2000 Dec. 31, 1999 Mar. 31, 1999
-------------- -------------- --------------
Nonaccrual loans $ 433 $1,422 $ 737
Impaired loans 1,919 0 0
90 days past due and accruing interest 217 464 149
Other real estate owned 525 125 0
------- ------ -----
Total nonperforming assets 3,094 2,011 886
Nonperforming loans guaranteed by government (1,461) (160) (215)
------- ------ -----
Total nonperforming assets, net of guaranteed $ 1,633 $1,851 $ 671
Noninterest Income
Noninterest income decreased $165 or 17% in the first quarter of 2000 when
compared to the same period in 1999. The decline in noninterest income in the
current quarter is attributable to two categories. Loan servicing fees of $44
in the current quarter are down $103 or 70% from the first quarter 1999 due to
an overall decline in the loan servicing portfolio. Part of this decline
resulted from a pay down of a serviced loan that required a $54 writedown of a
servicing asset booked in 1999. Mortgage banking income and gains on the sales
of loans dropped significantly from $257 in first quarter 1999 to $96 in the
current quarter, a decline of $161 or 63%. Mortgage banking income in the
current quarter was down $73, while gains on the sales of loans were down $88.
A general softening of the mortgage market, higher interest rates, and lower
levels of refinancing contributed to lower mortgage banking revenues. The
Company sold no loans in the current quarter. In the first quarter 1999, the
Company sold approximately $2,200 in government guaranteed loans. In the past,
the Company has routinely sold loans for purposes of liquidity. Due to the
strong growth in core deposits throughout 1999, the Company has sufficient
liquidity and access to funding to hold loans in its portfolio. These declines
in noninterest income were partially offset by increased revenues in Bankcard
processing, which was up $98 or 34% over 1999.
Page 8
Noninterest Expense
Noninterest expense in the current quarter increased $287 or 12% over the same
period in 1999. Salaries and employee benefits were up $145 or 11% over 1999
due to new offices and staff increases in existing offices, combined with a 23%
increase in medical benefits costs. Bankcard processing expense increased $97
or 45% and was a direct result of increased volumes. Business development
expense increased $41 or 25% due to production and promotional costs related to
the Company's new on-line banking product, which became available to customers
during the current quarter. The growth in these expense categories was offset
slightly by a small decline in premises and equipment costs, down $7 from last
year. Higher occupancy and equipment expense related to new office openings has
been offset by growth in rental income on the Company's three story Gateway
office building in Springfield, Oregon.
Year 2000
The Year 2000 or Y2K problem is a result of the inability of computer software
programs to recognize the year 2000, as most programs and systems were designed
to store calendar years in the 1900's by assuming the "19" and storing only the
last two digits of the year. As the Company has reported in the past, it spent
considerable effort in preparing for Y2K in the period leading up to January 1,
2000.
Through the first three months of 2000, the Company has not experienced any
significant Y2K problems and has not been informed of any material Y2K problems
by it customers or vendors. The Company will continue to monitor the Y2K
compliance of its own computer systems and equipment with embedded technology,
as well as any Y2K related problems that may be reported to it by third parties
with whom it does business.
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 quarter of each year typically resulting in funding
and liquidity pressures. During the current quarter, core deposits were
unchanged from December 31, 1999. As a percentage of total deposits, core
deposits were 86% at March 31, 2000 compared to 90% at December 31, 2000. Asset
growth of $13,690 in the first quarter was funded primarily with national time
deposits, public time deposits, and overnight unsecured borrowings. At March
31, 2000 the Bank had secured and unsecured overnight and term borrowing
capacity of approximately $63,800 of which $21,300 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 March 31, 2000, the Company's total capital to
risk weighted assets was 12.71%, compared to 14.55% at March 31, 1999. This
decline is due to stock repurchases.
Page 9
During 1999, the Company announced plans to purchase up to 390,000 shares of its
stock in the open market. Through March 31, 2000, the Company had purchased
314,000 of its own shares on the open market at an average price per share of
$15.07, leaving 76,000 shares still authorized to be repurchased. . Below is a
summary of share activity during the first quarter and shares outstanding at
March 31, 2000.
Outstanding shares January 1, 2000 4,595,622
New shares issued through stock options 11,962
Shares repurchased through (70,905)
---------
Outstanding shares March 31, 2000 4,536,679
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.
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
Page 10
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 there no material changes from the Company's position
at December 31, 1999.
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 March 31, 2000. The table shows estimates of
changes in net interest income. For illustrative purposes the base figure of
$16,796 used in the interest rate shock analysis is the annualized actual net
interest income for the first three months of 2000. 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 17,755 959 5.71%
+100 17,278 482 2.87%
Base 16,796 0 0.00%
-100 16,297 (499) -2.97%
-200 16,107 (689) -4.10%
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% 16,870 74 0.44%
Base 16,796 0 0.00%
Declining 2.40% 16,497 (299) -1.78%
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 11
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 May 12, 2000 /s/ J. Bruce Riddle
------------- -----------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated May 12, 2000 /s/ Michael A. Reynolds
------------- -----------------------------------------
Michael A. Reynolds
Vice President and Controller
Page 12