EXHIBIT 13.1
Pacific Continental Corporation and Subsidiaries
Selected Financial Data Page 1
Management Discussion and Analysis
of Financial Condition and Results
of Operations Page 2
Annual Report Page 14
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Pacific Continental Corporation
Selected Financial Data
(Dollars in thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
For the year
Net interest income $ 17,262 $ 16,054 $ 13,953 $ 12,304 $ 9,974
Provision for loan losses $ 1,340 $ 735 $ 810 $ 730 $ 290
Noninterest income $ 3,909 $ 4,119 $ 3,984 $ 2,595 $ 2,192
Noninterest expense $ 11,970 $ 10,700 $ 9,369 $ 7,521 $ 6,459
Income taxes $ 3,053 $ 3,364 $ 2,985 $ 2,431 $ 2,074
Net income $ 4,808 $ 5,374 $ 4,773 $ 4,217 $ 3,343
Cash dividends $ 1,225 $ 1,323 $ 1,149 $ 976 $ 863
Per common share data (1)
Net income
Basic $ 1.06 $ 1.13 $ 1.01 $ 0.95 $ 0.77
Diluted $ 1.05 $ 1.12 $ 0.99 $ 0.92 $ 0.75
Cash dividends $ 0.27 $ 0.28 $ 0.24 $ 0.21 $ 0.20
Market value, end of year $ 8.88 $ 13.00 $ 17.88 $ 15.33 $ 10.00
At year end
Assets $294,124 $271,088 $241,944 $200,120 $160,685
Loans, less allowance for loan loss $222,445 $209,533 $185,292 $144,112 $121,994
Deposits $250,104 $224,175 $194,329 $167,295 $135,419
Shareholders' equity $ 30,370 $ 27,111 $ 27,126 $ 21,991 $ 17,230
Average for the year
Assets $288,589 $255,271 $214,247 $183,821 $144,959
Earning assets $260,419 $230,303 $193,163 $165,994 $130,573
Loans, less allowance for loan loss $224,119 $195,355 $162,780 $141,050 $110,229
Deposits $258,071 $207,224 $172,081 $153,050 $119,791
Interest paying liabilities $195,214 $169,054 $140,869 $123,735 $ 96,942
Shareholders' equity $ 28,626 $ 28,173 $ 24,787 $ 19,279 $ 15,968
Financial ratios
Return on average:
Assets 1.67% 2.11% 2.23% 2.29% 2.31%
Shareholders' equity 16.79% 19.08% 19.26% 21.87% 20.94%
Average shareholders' equity/average assets 9.92% 11.04% 11.57% 10.49% 11.02%
Dividend payout ratio 25.47% 24.62% 24.07% 22.54% 26.09%
Risk based capital:
Tier I capital 12.30% 12.07% 12.99% 13.81% 12.93%
Tier II capital 13.17% 13.15% 13.98% 14.75% 13.64%
(1) Per common share data is retroactively adjusted to reflect the stock splits
and stock dividends of 1998,1997 and 1996.
1
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; 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
Pacific Continental Corporation earned $4,808 or $1.05 per share in 2000
compared with $5,374 or $1.12 per share and $4,773 or $0.99 per share in 1999
and 1998, respectively. Diluted earnings per share in 2000 declined 6% from
1999. Return on average assets was 1.67% in the current year, compared to 2.12%
in 1999. Return on average equity for 2000 was 16.79% compared to 19.08% for the
previous year.
At December 31, 2000, total assets were $294,124, an increase of 8% over 1999
year-end total assets of $271,088. Total deposits were $250,104, an increase of
12% over the 1999 total of $224,175.
During 2000, the Company opened its tenth banking office located on West 11th
Avenue in Eugene, Oregon.
RESULTS OF OPERATIONS
Net Interest Income
2
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 2000,
1999, and 1998. 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 volume.
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. In addition, during the first week of January 2001, the
Federal Reserve Bank lowered market interest rates by 0.50%, which should allow
this trend to continue.
Interest and fees on earning assets increased 16%, or $3,741, to $26,438.
Referring to Table II, total interest income improved by $3,087 due to increased
earning asset volumes and $646 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 13% decline in
recognized loan fees from $1,076 in 1999 to $940 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.
Current year interest expense on interest bearing liabilities 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.
3
The Company continues 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. This percentage is well above peer group banks' ratio of 15%.
1999 Compared to 1998
Net interest income for 1999 was $16,054, an increase of 15% over 1998 net
interest income of $13,952. For 1999 net interest income, expressed as a percent
of average earning assets, was 6.97%, a decline from 7.22% for the year 1998.
Interest and fees on earning assets increased 14%, or $2,784, to $22,697. This
increase is primarily due to growth in earning assets. Average earning assets
grew $37,140 or 19%. The growth in earning assets was primarily in loans. A
decrease in average yield on earning assets from 10.31% in 1998 to 9.86% in 1999
and a decline in loan fees of $183 partially offset the gains attributable to
increased volume. The decline in yields, excluding loan fees, reflects the
national decline in interest rates experienced in the first eight months of
1999. The decline in loan fees resulted from competitive pressures in local
markets.
Interest expense on interest bearing liabilities increased 11%, or $682, to
$6,643. The increase in interest expense is primarily attributable to increased
volume of interest bearing liabilities. Money market and NOW accounts, up
$24,306 or 37% accounted for over 80% of the increase in interest expense
related to volume. The growth of these core deposits allowed the Company to
reduce more expensive time deposits and rely less on purchased funds and term
borrowings to fund asset growth. The general decline in interest rates during
the first eight months of 1999 resulted in lower rates paid on interest bearing
liabilities helped offset a portion of the increased expense due to volume. In
particular, the rate paid on savings deposits, time deposits, and federal funds
purchased all showed decreases ranging from 0.34% to 0.40%, reflecting the
general decline in national rates through most of 1999.
The Company benefited from funding with noninterest bearing sources. Average
demand deposits increased 21% over 1998. Noninterest bearing deposits represent
23% of total assets at December 31, 1999, a percentage well above peer group
banks' ratio of 15%.
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 non performing 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 $1,340 in 2000, $735 in 1999, and $810 in
1998. The increased loan loss provision in 2000 resulted from losses recognized
during the year totaling $1,639, compared to $357 and $244 in 1999 and 1998,
respectively. In addition, management
4
has increased the provision for losses in view of a general decline in economic
conditions at year-end 2000.
The allowance for loan losses at year-end 2000 was $2,149, compared to $2,448
and $2,070 at year-end 1999 and 1998, respectively. Although the allowance for
loan losses in 2000 has declined to 0.98% of outstanding loans at the end of
2000, compared to 1.17% and 1.15% in 1999 and 1998, it represents a higher
multiple of nonperforming assets at yearn end. Nonperforming loans include
nonaccrual loans, 90 days past due and still accruing interest, and foreclosed
assets. The allowance for loan losses at year-end 2000 was 209% of year-end 2000
nonperforming assets of $1,030. At year-end 1999 and 1998, the allowance
represented 122% and 185% of year-end nonperforming assets. In addition,
foreclosed assets valued at $357 at year-end 2000 were sold during January 2001
for a gain of approximately $5.
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.
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 (net interest income plus noninterest income), compared to 20% and 22%
for 1999 and 1998, respectively. 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 $5,700 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%.
1999 Compared to 1998
In 1999, noninterest income was $4,119, up 3% over 1998 income of $3,985.
Several categories showed significant growth during the year, which was offset
by declines in mortgage banking revenue and gains on the sales of loans. Service
charges on deposit accounts grew by $158 or 19% due to growth in the number of
accounts and increased fees. Merchant bankcard activities generated $1,369 in
revenues, up $217 or 26%. As a result of the sale and participation of loans in
late 1998, loan servicing fees grew by $105, from $355 in 1998 to $460 in 1999.
The growth in these categories was significantly offset by a decline of $192 or
36% in mortgage banking income and a decline of $307 or 30% in the gains on
sales of loans. The mortgage banking operation was slowed in 1999 by higher
interest rates, a drop in the level of refinancing, and a downsizing of the
operation. In previous years, the Company routinely sold, at significant gains,
5
guaranteed government Small Business Administration ("SBA") loans. In 1999, the
deposit growth was sufficient to fund asset growth; thus the Company elected to
retain loan assets thereby reducing gains on the sales of loans.
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.
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 11th office in Eugene in June
2000 added to staff and salaries. Management projections indicate that new
offices will not be profitable for a period of 18 to 36 months. 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.
1999 Compared to 1998
For 1999, noninterest expense increased $1,331 or 14% over 1998. Total personnel
expense, which accounts for 53% of total noninterest expense, was up $636 or
13%. Premises and equipment expense was up $148 or 12% over the previous year.
The full year effect of the new Springfield, Oregon office, which opened in
September 1998, and the opening of the Tualatin, Oregon office in June 1999
created additions to staff and occupancy costs. In addition, the Company
commenced lease payments on its new West 11th Avenue location in Eugene, Oregon
in September 1999. Growth in the merchant bankcard processing operation
increased processing expenses by $311 or 38%. An increase in the number of
merchants and corresponding volumes, combined with increased fees from the
Company's outside processor, were responsible for the increased expense.
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
6
or alternative funding sources are provided through the sale of loans, access to
national CD markets, and both secured and unsecured borrowings.
As described in the net interest income section above, the Company relied
heavily on alternative funding sources during the first six months of the
current year to fund asset growth. However, because of strong growth in core
deposits, approximately $8,900 of loan sales, and reduced loan demand, the
reliance on alternative funding sources declined significantly during the last
half of the year. Core deposits at December 31, 2000 represent 93% of total
deposits as compared to 90% at year-end 1999. Year-end 2000 core deposits are up
15% or $30,519 over last year.
Overnight-unsecured borrowing lines have been established at various
correspondent banks. At year-end December 31, 2000, the Bank had overnight
borrowing capacity of $29,000. At year end, the Bank had $900 in borrowings
outstanding from correspondent banks leaving $28,100 available. In addition, the
Bank is a member of the Federal Home Loan Bank of Seattle (FHLB). The FHLB
provides secured borrowings using a blanket pledge of various Bank assets. The
Bank uses the FHLB borrowing line for both term advances and overnight
borrowings. The Bank's FHLB borrowing limit, subject to sufficient collateral
and stock investment, was approximately $44,000 at December 31, 2000. At
December 31, 2000, the Bank had $11,500 in term advances outstanding, leaving
$32,500 available for additional term advances or overnight borrowing. In total,
at year-end December 31, 2000, the Bank had $73,000 in overnight borrowing lines
with $60,600 in unused borrowing capacity.
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, 2000, the Company's total capital
to risk weighted assets was 13.17%, compared to 13.15% at December 31, 1999.
The Company implemented a stock repurchase plan in June 1999. During 1999 and
2000, the Company purchased 320,841 of its own shares (243,333 shares purchased
during 1999 and 77,508 shares purchased during 2000) on the open market at an
average price per share of $14.98. The stock repurchase plan terminated December
31, 2000.
The Company pays semi-annual cash dividends, in June and December, with payments
representing approximately 25% of the previous six month's earnings. During
2000, the Company paid cash dividends of $1,225, a decrease of 7% from 1999 cash
dividends of $1,323, reflecting lower earnings in 2000 compared to 1999 and
fewer shares outstanding due to the stock repurchases.
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth, while maintaining a
well-capitalized designation from the FDIC.
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.
7
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.
8
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,
2000 indicate the Company is well within the established guidelines. Throughout
the year 2000, the forecasting model has shown no material change in the
Company's interest rate risk profile.
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 $17,262 used in
both analyses represents actual net interest income for the year 2000. Due to
the various assumptions used for this modeling, no assurance can be given that
projections will reflect actual results.
9
Interest Rate Shock Analysis
Net Interest Income and Market Value Performance
$ thousands
--------------- ---------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value From Base from Base
--------------- ---------------------------------------------------
+200 $ 18,279 $ 1,017 5.89%
+100 17,797 535 3.10%
Base 17,262 0 0.00%
-100 16,791 (471) -2.73%
-200 16,345 (917) -5.31%
--------------- ---------------------------------------------------
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% $ 17,557 $ 295 1.71%
Base 17,262 0 0.00%
Declining 2.40% 16,984 (278) - 1.61%
----------------- -------------------------------------------------
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.
10
Table I
Average Balance Analysis of Net Interest Earnings
$ Thousands
2000 1999 1998
---- ---- ----
Interest Average Interest Average Interest Average
Average Income/ Yield Average Income Yield Average Income/ Yield/
Balance Expense /(Cost) Balance /(Expense /(Cost) Balance (Expense (Cost)
------- ------- ------- ------- --------- ------- ------- -------- ------
Interest Earning Assets
Federal funds sold and interest
bearing deposits in banks $ 1,321 $ 92 6.94% $ 604 $ 37 6.15% $ 1,072 $ 55 5.13%
Securities avialable for sale:
Taxable (1) $ 34,979 $ 2,324 6.64% $ 34,344 $ 2,195 6.39% $ 29,221 $ 1,818 6.22%
Tax-exempt (2) $ 0 $ 0 0.00% $ 0 $ 0 0.00% $ 90 4 4.13%
Loans, net of allowance for loan
losses(3)(4)(5) $224,119 $24,022 10.72% $195,355 $20,465 10.48% $162,780 $18,037 11.08%
-------- ------- -------- ------- -------- --------
$19,914 10.31%
Total interest earning assets $260,419 $26,438 10.15% $230,303 $22,697 9.86% $193,163
Non Interest Assets
Cash and due from banks $ 12,896 $ 11,524 $ 10,004
Premises and equipment $ 12,237 $ 11,087 $ 9,092
Interest receivable and other $ 3,037 $ 2,357 $ 1,988
-------- -------- --------
Total non interest assets $ 28,170 $ 24,968 $ 21,084
Total assets $288,589 $255,271 $214,247
Interest Bearing Liabilities
Money market and NOW accounts $101,157 ($3,825) -3.78% $ 90,655 ($2,852) -3.15% $ 66,349 ($2,084) -3.14%
Savings deposits $ 12,384 ($361) -2.92% $ 11,324 ($303) -2.68% $ 8,633 ($261) -3.02%
Time deposits $ 62,799 ($3,801) -6.05% $ 48,944 ($2,501) -5.11% $ 50,388 ($2,742) -5.44%
Federal funds purchased $ 5,762 ($371) -6.44% $ 7,786 ($412) -5.29% $ 6,274 ($357) -5.69%
Term borrowings $ 13,112 ($818) -6.24% $ 10,345 ($575) -5.56% $ 9,225 ($517) -5.60%
-------- ------- -------- ------- -------- --------
Total interest bearing liabilities $195,214 ($9,176) -4.70% $169,054 ($6,643) -3.93% $140,869 ($5,961) -4.23%
Non Interest Bearing Liabilities
Demand deposits $ 62,857 $ 56,301 $ 46,711
Interest payable and other $ 1,892 $ 1,743 $ 1,880
-------- -------- --------
Total non interest liabilities $ 64,749 $ 58,044 $ 48,591
-------- -------- --------
Total liabilities $259,963 $227,098 $189,460
Stockholders' equity $ 28,626 $ 28,173 $ 24,787
-------- -------- --------
Total liabilities and stockholders equity $288,589 $255,271 $214,247 $ 13,953
Net Interest Income $17,262 $16,054
Net Interest Income as a Percent of 7.22%
Earning Assets 6.63% 6.97%
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NOTES TO TABLE 1
1. Federal Home Loan Bank stock is included in securities available for sale.
2. Interest income does not include a taxable equivalent adjustment.
3. Nonaccrual loans are included in average balance totals.
4. Interest income includes recognized loan origination fees of $940, $1,076,
and $1,137 for the years-ended 2000, 1999, and 1998 respectively.
5. Total includes loans held for sale.
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Table II
Analysis of Changes in Interest Income and Interest Expense
$ Thousands
2000 compared to 1999 1999 compared to 1998
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 $ 44 $ 11 $ 55 ($24) $ 6 ($18)
Securities available for sale:
Taxable $ 41 $ 89 $ 129 $ 319 $ 58 $377
Tax-exempt $ 0 $ 0 $ 0 ($4) $ 0 ($4)
Loans, net of allowance for loan losses $3,013 $ 544 $3,557 $3,595 ($1,168) $2,427
------ ------ ------ ------ ------- ------
Total interest income $3,098 $ 644 $3,741 $3,886 ($1,104) $2,783
Interest paid on:
Money market and NOW accounts ($330) ($643) ($973) ($763) ($4) ($768)
Savings deposits ($28) ($30) ($58) ($81) $ 39 ($42)
Time deposits ($708) ($593) ($1,301) $79 $ 163 $241
Federal funds purchased $107 ($66) $41 ($86) $ 31 ($55)
Term borrowings ($154) ($89) ($242) ($63) $ 5 ($58)
------ ------ ------ ------ ------- ------
Total interest expense ($1,113) ($1,420) ($2,533) ($915) $ 233 ($682)
------ ------ ------ ------ ------- ------
Net interest income $1,985 ($776) $1,208 $2,971 ($870) $2,101
13
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, 2000 and 1999, 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,
2000. 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 generally accepted auditing
standards. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
Eugene, Oregon
January 31, 2001
14
Pacific Continental Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
--------------------------------------
2000 1999
------------ ------------
ASSETS
Cash and due from banks $ 15,145,489 $ 9,269,481
Federal funds sold 615,009 682,565
------------ ------------
Total cash and cash equivalents 15,760,498 9,952,046
Securities available-for-sale 38,114,974 34,849,960
Loans held for sale 813,551 2,767,274
Loans, less allowance for loan losses 221,631,188 206,765,352
Interest receivable 1,714,524 1,552,894
Federal Home Loan Bank stock 2,298,800 2,155,500
Property, net of accumulated depreciation 12,977,821 11,763,770
Deferred income taxes - 594,183
Other assets 812,939 686,910
------------ ------------
Total assets $294,124,295 $271,087,889
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 69,548,873 $ 62,531,496
Savings and interest-bearing demand 126,770,317 108,757,023
Time, $100,000 and over 27,476,161 27,568,215
Other time 26,308,204 25,318,034
------------ ------------
250,103,555 224,174,768
Federal funds purchased 900,000 5,800,000
Federal Home Loan Bank term borrowings 11,500,000 13,000,000
Accrued interest and other liabilities 1,250,708 1,001,802
------------ ------------
Total liabilities 263,754,263 243,976,570
------------ ------------
Commitments and contingencies (Notes 6 and 16)
Stockholders' equity:
Common stock, $1 par value; 10,000,000 shares
authorized; 4,535,752 and 4,595,622 shares
outstanding in 2000 and 1999, respectively 4,535,752 4,595,622
Surplus 14,056,333 14,134,993
Retained earnings 11,787,069 8,874,307
Accumulated other comprehensive loss (9,122) (493,603)
------------ ------------
Total stockholders' equity 30,370,032 27,111,319
------------ ------------
Total liabilities and stockholders' equity $294,124,295 $271,087,889
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
15
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended December 31
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest income:
Loans $ 24,024,226 $ 20,466,227 $ 18,022,873
Securities 2,180,717 2,041,920 1,674,387
Dividends on Federal Home Loan Bank stock 143,554 151,881 146,929
Federal funds sold 89,126 37,170 69,088
------------ ------------ ------------
26,437,623 22,697,198 19,913,277
============ ============ ============
Interest expense:
Deposits 7,987,275 5,655,472 5,148,415
Federal Home Loan Bank borrowings 817,640 575,209 517,157
Federal funds purchased 370,791 412,257 295,049
------------ ------------ ------------
9,175,706 6,642,938 5,960,621
============ ============ ============
Net interest income 17,261,917 16,054,260 13,952,656
Provision for loan losses 1,340,000 735,000 810,000
------------ ------------ ------------
Net interest income after provision for
loan losses 15,921,917 15,319,260 13,142,656
============ ============ ============
Noninterest income:
Service charges on deposit accounts 1,016,896 977,151 818,932
Other fee income, principally bankcard processing 1,885,066 1,505,863 1,160,458
Loan servicing 253,961 459,606 355,185
Mortgage banking income and gains on sales
of loans 578,319 952,907 1,453,999
Gains (losses) on sales of securities (24,322) 30,490 6,146
Other 199,294 193,017 189,965
------------ ------------ ------------
3,909,214 4,119,034 3,984,685
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 6,174,747 5,638,406 5,002,377
Premises and equipment 1,268,630 1,353,447 1,205,330
Bankcard processing 1,503,279 1,119,924 808,766
Business development 778,922 755,928 688,024
Other 2,244,505 1,832,722 1,664,980
------------ ------------ ------------
11,970,083 10,700,427 9,369,477
------------ ------------ ------------
Income before income taxes 7,861,048 8,737,867 7,757,864
Provision for income taxes 3,053,000 3,364,000 2,985,000
------------ ------------ ------------
Net income $ 4,808,048 $ 5,373,867 $ 4,772,864
============ ============ ============
Earnings per share:
Basic $ 1.06 $ 1.13 $ 1.01
Diluted $ 1.05 $ 1.12 $ .99
The accompanying notes are an integral part of these consolidated financial
statements.
16
Pacific Continental Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other
Number Common Retained Comprehensive
of Shares Stock Surplus Earnings Income (Loss) Total
--------- ------------ ------------ ------------ ------------- --------------
Balance, January 1, 1998 3,093,260 $ 3,093,260 $ 14,837,548 $ 4,033,359 $ 27,267 $ 21,991,434
----------- --------------
Net income 4,772,864 4,772,864
Other comprehensive income:
Unrealized gains on securities 111,742
Reclassification of gains realized (6,146)
Deferred income taxes (40,506)
-----------
Other comprehensive income 65,090 65,090
----------- --------------
Comprehensive income 4,837,954
Stock options exercised and related
tax benefit 148,779 148,779 1,053,986 1,202,765
Stock split (3 shares for 2) 1,549,894 1,549,894 (1,549,894) -
Cash dividends - $.24 per share (1,148,511) (1,148,511)
Dividends reinvested 11,556 11,556 238,516 250,072
Fractional shares repurchased and retired (436) (436) (7,628) (8,064)
--------- ------------ ------------ ------------ --------------
Balance, December 31, 1998 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 loss (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 - $.28 per share (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 income 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 - $.27 per share (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
========= ============ ============ ============ =========== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
17
Pacific Continental Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 4,808,048 $ 5,373,867 $ 4,772,864
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 778,813 780,647 621,111
Amortization 55,378 112,560 259,796
Provision for loan losses 1,340,000 735,000 810,000
Losses of foreclosed assets 82,679 - -
Deferred income taxes 334,000 (137,000) (122,000)
Origination of loans for sale (18,761,125) (23,140,515) (39,857,910)
Proceeds from sales of loans 19,735,907 27,387,185 39,304,528
Gains on sales of loans (350,997) (634,572) (946,855)
(Gains) losses on sales of securities 24,322 (30,490) (6,146)
Stock dividends from Federal Home Loan Bank (143,300) (151,600) (146,600)
Change in:
Interest receivable (161,630) (244,136) (126,439)
Deferred loan fees (43,309) 30,471 (37,976)
Capitalized loan servicing rights 130,870 (126,573) (67,739)
Accrued interest and other liabilities 203,310 232,248 38,271
Income taxes payable 17,327 (76,731) 678,158
Other assets 3,101 (149,985) 184,591
------------ ------------ ------------
Net cash provided by operating activities 8,053,394 9,960,376 5,357,654
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of securities 9,852,549 16,266,537 18,625,628
Purchase of securities (12,411,330) (21,019,078) (19,526,404)
Loans made net of principal collections received (17,787,588) (32,366,284) (45,916,505)
Proceeds from sales of loans 3,200,000 3,748,144 10,141,574
Purchase of loans (1,030,000) - (4,676,657)
Purchase of property (1,992,864) (1,827,997) (3,701,532)
Proceeds on sale of foreclosed assets 442,321 - -
------------ ------------ ------------
Net cash used in investing activities (19,726,912) (35,198,678) (45,053,896)
============ ============ ============
Cash flows from financing activities:
Net increase in deposits 25,928,787 29,845,945 27,033,705
Change in federal funds purchased (4,900,000) (2,800,000) 1,450,000
Change in Federal Home Loan Bank term borrowings (1,500,000) 2,000,000 8,000,000
Proceeds from stock options exercised 164,820 298,749 855,774
Dividends paid, net of reinvested in 1998 (1,224,713) (1,323,255) (898,439)
Repurchase of shares (986,924) (3,820,732) (8,064)
------------ ------------ ------------
Net cash provided by financing activities 17,481,970 24,200,707 36,432,976
=========== =========== ===========
Net increase (decrease) in cash and cash equivalents 5,808,452 (1,037,595) (3,263,266)
Cash and cash equivalents, beginning of year 9,952,046 10,989,641 14,252,907
------------ ------------ ------------
Cash and cash equivalents, end of year $15,760,498 $ 9,952,046 $10,989,641
=========== =========== ===========
Supplemental information:
Noncash investing and financing activities:
Transfers of loans to foreclosed assets $ 785,000 $ 125,000 $ -
Dividends reinvested - - 250,072
Change in unrealized gain on securities, net of
deferred income taxes 484,481 585,960 65,090
Cash paid during the year for:
Income taxes 2,688,672 3,577,732 2,428,840
Interest 9,091,100 6,644,367 5,987,928
The accompanying notes are an integral part of these consolidated financial
statements.
18
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 ("Company"), a
bank holding company formed in 1999, 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 - inactive in
2000 and 1999). 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, 2000.
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 2000 and 1999. 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.
19
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
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.
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,
and current economic conditions that may affect the borrower's ability to
pay.
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 Bank's 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 2000, the
Bank's minimum required investment was approximately $750,000. 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.
20
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.
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 on the basis of the weighted average number of shares
outstanding. 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 splits and stock dividends.
Weighted average shares outstanding at December 31 are as follows:
2000 1999 1998
---------------- ---------------- ----------------
Basic 4,545,588 4,748,868 4,739,919
Common stock equivalents
attributable to stock options 14,794 45,056 80,095
---------------- ---------------- ----------------
Diluted 4,560,382 4,793,924 4,820,014
---------------- ---------------- ----------------
Under a repurchase plan expiring December 31, 2000, the Company
repurchased and retired 77,508 shares of common stock costing $986,924 in
2000 and 243,333 shares costing $3,820,732 in 1999.
Financial Accounting Standards Board ("FASB") - In June 2000, FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of SFAS No. 133, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 138
addresses a limited number of implementation issues related to SFAS No.
133 (effective 2001). The Bank has no derivative instruments at December
31, 2000.
21
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
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 is not expected to have a material
effect on the Bank's financial position or results of operations.
Reclassifications - The 1999 and 1998 figures have been reclassified where
appropriate to conform with the financial statement presentation used in
2000. These reclassifications had no effect on previously reported net
income.
2. Securities Available-for-Sale:
The amortized cost and estimated market values of securities
available-for-sale at December 31 are as follows:
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
----------- ------------ ----------- -------------
1999
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
----------- ------------ ----------- -------------
Obligations of U.S. Government agencies $ 3,920,245 $ - $ 63,583 $ 3,856,662
Obligations of states and political
subdivisions (taxable) 906,400 537 - 906,937
Corporate notes 2,014,694 - 4,294 2,010,400
Mortgage-backed securities 28,809,353 - 733,392 28,075,961
----------- ------------ ----------- -------------
$35,650,692 $ 537 $ 801,269 $ 34,849,960
----------- ------------ ----------- -------------
22
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Securities Available-for-Sale, Continued:
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 with or without call or prepayment penalties.
2000 1999
---------------------------- ----------------------------
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 11,088,070 11,303,037 4,965,135 4,911,599
Due after 5 years through 15 years 1,397,600 1,416,566 1,876,204 1,862,400
Mortgage-backed securities 23,638,083 23,380,023 28,809,353 28,075,961
----------- ----------- ----------- ----------
$38,129,772 $38,114,974 $35,650,692 $34,849,960
----------- ----------- ----------- ----------
Gross realized losses on sales of securities were $24,322 in 2000. Gross
realized gains on sales of securities were $30,490 in 1999. Gross realized
gains and losses were $7,716 and $1,570, respectively, in 1998.
At December 31, 2000, mortgage-backed securities with amortized costs of
$8,457,980 (estimated market values of $8,409,035) were pledged to secure
certain Treasury and public deposits as required by law.
23
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. Loans:
Major classifications of loans at December 31 are as follows:
2000 1999
--------------- ---------------
Commercial loans $ 54,797,800 $ 56,485,265
Real estate loans 159,481,077 144,868,751
Consumer loans 10,582,451 8,984,009
--------------- ---------------
224,861,328 210,338,025
Deferred loan origination fees (1,081,464) (1,124,773)
--------------- ---------------
223,779,864 209,213,252
Allowance for loan losses (2,148,676) (2,447,900)
--------------- ---------------
$ 221,631,188 $ 206,765,352
--------------- ---------------
Scheduled maturities or repricing of loans at December 31, 2000 are as
follows:
Three months or less $ 89,846,348
Three months to one year 10,398,003
One year to three years 53,742,251
Three years to five years 63,023,704
Thereafter 7,851,022
---------------
$ 224,861,328
---------------
Allowance for Loan Losses:
2000 1999
--------------- ---------------
Balance, beginning of year $ 2,447,900 $ 2,069,614
Provision charged to income 1,340,000 735,000
Loans charged against the allowance (1,729,518) (376,706)
Recoveries credited to allowance 90,294 19,992
--------------- ---------------
Balance, end of year $ 2,148,676 $ 2,447,900
--------------- ---------------
24
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. Loans, Continued:
There were no loans outstanding at December 31, 2000 or 1999 that were
impaired or modified as to the original agreement to more favorable terms.
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 $31,000 and $102,000 during 2000 and 1999, respectively.
Loans contractually past due 90 days or more on which interest was still
accruing totaled $155,097 and $464,003 at December 31, 2000 and 1999,
respectively.
A substantial portion of the Bank's 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, 2000, approximately 12% 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, 2000 and 1999 were $39,635,162 and $39,071,356,
respectively.
The balance of capitalized loan servicing rights, net of valuation
allowances, included in other assets was $153,473 and $284,344 at December
31, 2000 and 1999, respectively.
5. Foreclosed Assets:
Foreclosed assets of $385,000 and $125,000 at December 31, 2000 and 1999,
respectively, is included in other assets and recorded at fair value less
estimated selling costs.
25
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. Property:
Property at December 31 consists of the following:
2000 1999
------------------- ------------------
Land $ 1,662,107 $ 1,662,107
Buildings and improvements 10,695,558 9,723,385
Furniture and equipment 4,770,083 3,772,375
------------------- ------------------
17,127,748 15,157,867
Less accumulated depreciation 4,149,927 3,394,097
------------------- ------------------
$ 12,977,821 $ 11,763,770
------------------- ------------------
Lease Commitments - The Bank leases certain facilities for office
locations under noncancelable operating lease agreements expiring through
2020. Rent expense totaled $212,011, $186,149 and $111,388 in 2000, 1999
and 1998, respectively, related to these leases.
Property Leased to Others - The Bank leases approximately 82% of its
Springfield Gateway building to others under noncancelable operating lease
agreements extending through 2005.
Future minimum payments required under these leases are:
Property
Lease Leased
Commitments to Others
----------------- -----------------
2001 $ 215,896 $ 284,766
2002 217,756 286,874
2003 223,756 291,802
2004 220,193 198,629
2005 155,168 148,123
Thereafter 1,302,889 111,092
----------------- -----------------
$ 2,335,658 $ 1,321,286
----------------- -----------------
26
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:
2000 1999
------------- ------------
Less than three months $ 17,905,220 $ 21,005,239
Three months to one year 30,860,570 26,657,362
One to three years 4,326,928 4,306,405
Thereafter 691,647 917,243
8. Federal Funds Purchased:
Federal funds purchased consists of the following at December 31:
2000 1999
------------- ------------
FHLB overnight borrowings $ - $ 4,000,000
Federal funds purchased from
correspondent banks 900,000 1,800,000
------------- ------------
$ 900,000 $ 5,800,000
------------- ------------
The Bank maintains uncollateralized federal funds borrowing lines with
correspondent banks totaling $29,000,000 ($28,100,000 available at
December 31, 2000).
The Bank has a borrowing limit with the FHLB totaling $44,000,000
($32,500,000 available at December 31, 2000). FHLB stock, funds on deposit
with FHLB, securities and loans are pledged as collateral for borrowings
from FHLB.
9. Federal Home Loan Bank Term Borrowings:
Federal Home Loan Bank term borrowings at December 31 are as follows:
2000 1999
--------------- ------------
Due January 2001, 6.84% interest
payable monthly $ 3,500,000 $ -
Due July 2001, 6.93% interest
payable monthly 2,000,000 -
Due January 2003, 5.76% interest
payable monthly 6,000,000 6,000,000
Paid 2000 - 7,000,000
--------------- ------------
$ 11,500,000 $ 13,000,000
--------------- ------------
FHLB borrowing limit and collateralization are discussed in Note 8.
27
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:
2000 1999 1998
-------------- ------------ ------------
Currently payable:
Federal $ 2,251,000 $ 2,899,000 $ 2,574,000
State 468,000 602,000 533,000
-------------- ------------ ------------
2,719,000 3,501,000 3,107,000
-------------- ------------ ------------
Deferred:
Federal 276,000 (114,000) (103,000)
State 58,000 (23,000) (19,000)
-------------- ------------ ------------
334,000 (137,000) (122,000)
-------------- ------------ ------------
Total provision for income taxes $ 3,053,000 $ 3,364,000 $ 2,985,000
============== ============ ============
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:
2000 1999 1998
-------------- ------------- --------------
Loan fees and other loan basis adjustment
differences between financial
statement and tax purposes $ 37,259 $ (34,792) $ 24,472
Loan loss deduction for tax purposes
more (less) than provision for financial
reporting purposes 191,532 (103,666) (164,102)
Depreciation deduction differences
between financial statement and
tax purposes (5,957) (20,044) (9,407)
Federal Home Loan Bank stock dividends 45,264 47,503 46,037
State income tax and other 65,902 (26,001) (19,000)
-------------- ------------- --------------
$ 334,000 $ (137,000) $ (122,000)
============== ============= ==============
28
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:
2000 1999 1998
------------ ------------ ------------
Expected federal income tax provision
at 34% $ 2,673,000 $ 2,971,000 $ 2,638,000
State income tax, net of federal income
tax effect 347,000 382,000 339,000
Other nondeductible expenses 33,000 11,000 8,000
------------ ------------ ------------
Provision for income taxes $ 3,053,000 $ 3,364,000 $ 2,985,000
============ ============ ============
The tax benefit associated with the Bank's stock option plans reduced taxes
payable by $13,000, $43,000 and $347,000 at December 31, 2000, 1999 and
1998, respectively. Such benefit is credited to surplus.
The components of deferred tax assets and liabilities at December 31 are as
follows:
2000 1999 1998
----------- ------------ ----------
Assets:
Allowance for loan losses $ 592,663 $ 826,373 $ 699,475
Basis adjustments on loans 60,252 65,966 29,626
Net unrealized losses on securities 5,676 307,129 -
----------- ------------ ----------
Total deferred tax assets 658,591 1,199,468 729,101
----------- ------------ ----------
Liabilities:
Federal Home Loan Bank stock dividends 371,593 316,629 258,481
Excess tax over book depreciation 192,072 198,617 218,120
Net unrealized gains on securities - - 57,470
Other, principally loan origination costs 123,194 90,039 102,451
----------- ------------ ----------
Total deferred tax liabilities 686,859 605,285 636,522
----------- ------------ ----------
Net deferred tax assets (liabilities) $ (28,268) $ 594,183 $ 92,579
=========== ============ ==========
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 $328,355,
$349,455 and $324,261 in 2000, 1999 and 1998, respectively.
29
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plans:
The Bank 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 equals the
market price of the Company's stock on the date of the grant, and the
option's maximum term is five years. Options granted before 2000 vested at
grant. For employee options granted in 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:
2000 1999 1998
------------------------- --------------------------- --------------------------
Average Average Average
Options Price Options Price Options Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
------------- ----------- ------------- ----------- ------------- -----------
Balance, beginning of
year 162,775 $ 11.49 200,785 $ 11.05 328,222 $ 7.51
Grants:
Employees 163,000 9.25 - 26,700 24.22
Directors 24,000 9.25 - -
Exercised (17,506) 9.39 (35,902) 8.32 (152,059) 5.63
Expired (4,953) (2,108) (2,078)
------------- ------------- -------------
Balance, end of year 327,316 $ 10.23 162,775 $ 11.49 200,785 $ 11.05
============= ============= =============
Options exercisable
at end of year 198,716 162,775 200,785
Options available for
grant at end of
year 415,250 600,000 13,834
The Bank 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 2000 and 1998 (no options granted in 1999) consistent with the
provisions of SFAS No. 123, the Bank's net income and earnings per share
would have been the pro forma amounts indicated below:
2000 1999 1998
----------- ----------- -----------
Net income - as reported $ 4,808,048 $ 5,373,867 $ 4,772,864
Net income - pro forma 4,718,147 5,373,867 4,625,458
Basic earnings per share - as reported 1.06 1.13 1.01
Basic earnings per share - pro forma 1.04 1.13 0.98
30
Pacific Continental Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plans , Continued:
The fair value of each option grant ($2.21 and $6.64 in 2000 and 1998,
respectively) is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
2000 1998
--------- --------
Dividend yield 3.89% 1.49%
Risk-free interest rate 6.50% 5.00%
Expected life 4 years 4 years
Expected volatility 30.24% 30.01%
Outstanding options at December 31, 2000 are as follows:
Price
Shares Per Share Expiration
-------- ----------- -------------
71,504 $ 9.12 May 2001
50,362 9.66 April 2002
20,700 24.22 June 2003
184,750 9.25 August 2005
13. Transactions with Related Parties:
The Bank has granted loans to officers and directors of the Bank 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
$1,353,322, $442,879 and $500,655 at December 31, 2000, 1999 and 1998,
respectively. Activity with respect to these loans during the year ended
December 31, 2000 was as follows:
Balance, January 1, 2000 $ 442,879
Additions or renewals 1,143,363
Amounts collected or renewed (232,920)
-----------
Balance, December 31, 2000 $ 1,353,322
===========
In addition, there were $310,238 in commitments to extend credit to
directors and officers at December 31, 2000, which are included as part of
commitments in Note 14.
31
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:
2000 1999
------------ ------------
Commitments to extend credit $ 38,964,350 $ 37,907,524
Letters of credit and financial guarantees written 3,416,225 1,075,725
32
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 Bank's financial instruments at December
31 are as follows:
2000 1999
------------------------------------- ------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------- ------------------------------------
Financial assets:
Cash and cash equivalents $ 15,760,498 $ 15,760,498 $ 9,952,046 $ 9,952,046
Securities 38,114,974 38,114,974 34,849,960 34,849,960
Loans held for sale 813,551 831,954 2,767,274 2,848,312
Loans, net of allowance
for loan losses 221,631,188 222,375,535 206,765,352 205,911,521
Interest receivable 1,714,524 1,714,524 1,552,894 1,552,894
Federal Home Loan
Bank stock 2,298,800 2,298,800 2,155,500 2,155,500
Financial liabilities:
Deposits 250,103,555 250,218,555 224,174,768 223,964,768
Federal funds purchased 900,000 900,000 1,800,000 1,800,000
Federal Home Loan
Bank borrowings 11,500,000 11,493,000 17,000,000 16,809,000
Accrued interest payable 343,146 343,146 258,540 258,540
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.
33
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. Legal Contingencies:
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.
34
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, 2000, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2000, 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, 2000:
Total capital (to risk
weighted assets) $32,439,587 13.17% $19,702,720 8% $24,628,400 10%
Tier 1 capital (to risk
weighted assets) 30,290,911 12.30% 9,851,360 4% 14,777,040 6%
Tier 1 capital (to leverage
assets) 30,290,911 10.28% 11,786,560 4% 14,777,040 5%
As of December 31, 1999:
Total capital (to risk
weighted assets) $29,980,906 13.15% $18,242,320 8% $20,802,900 10%
Tier 1 capital (to risk
weighted assets) 27,533,006 12.07% 9,121,160 4% 14,777,040 6%
Tier 1 capital (to leverage
assets) 27,533,006 10.15% 10,853,560 4% 13,560,950 5%
35
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
2000 1999
------------ ------------
Assets:
Cash ($32,781 and $37,409 deposited with the Bank) $ 39,743 $ 37,690
Prepaid expenses 7,500 -
Deferred income taxes 41,000 13,000
Investment in the Bank, at cost plus equity
in earnings 30,281,789 27,060,629
------------ ------------
$ 30,370,032 $ 27,111,319
============ ============
Liabilities and stockholders' equity:
Liabilities $ - -
Stockholders' equity 30,370,032 $ 27,111,319
------------ ------------
$ 30,370,032 $ 27,111,319
============ ============
STATEMENTS OF INCOME
For the Periods Ended December 31
2000 1999
------------ ------------
Cash dividends from the Bank $ 2,180,000 $ 4,514,000
Interest income 2,519 411
Legal and registration expense (126,149) (45,132)
------------ ------------
Income before income tax benefit and
equity in undistributed earnings
of the Bank 2,056,370 4,469,279
Income tax benefit 28,000 13,000
Equity in undistributed earnings of the Bank
(distributions in excess of earnings) 2,723,678 (1,267,015)
------------ ------------
Net income $ 4,808,048 $ 3,215,264
============ ============
36
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
2000 1999
------------ ------------
Cash flows from operating activities:
Net income $ 4,808,048 $ 3,215,264
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of the Bank
(distributions in excess of earnings) (2,723,678) 1,267,015
Prepaid expenses (7,500) -
Deferred income taxes (28,000) (13,000)
------------ ------------
Net cash provided by operating activities 2,048,870 4,469,279
------------ ------------
Cash flows from financing activities:
Proceeds from stock options exercised 164,820 84,208
Dividends paid (1,224,713) (695,394)
Shares repurchased and retired (986,924) (3,820,403)
------------ ------------
Net cash used in financing activities (2,046,817) (4,431,589)
------------ ------------
Net increase in cash 2,053 37,690
Cash, beginning of period 37,690 -
------------ ------------
Cash, end of period $ 39,743 $ 37,690
============ ============
37