As Filed with the Securities & Exchange Commission on April 26, 2001
SECURITIES & EXCHANGE COMMISSION
------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001.
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[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
________________
SEC File Number: 0-30106
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PACIFIC CONTINENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
OREGON 93-1269184
----------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 West 7th Avenue
Eugene, Oregon 97401
(address of Principal Executive Offices) (Zip Code)
(541) 686-8685
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $1.00 par value, outstanding as of April 26, 2001: 4,536,369
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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, 2001 and March 31, 2000
Consolidated Statements of Comprehensive Income 4
Three months ended March 31, 2001 and March 31, 2000
Consolidated Balance Sheets: 5
March 31, 2001, December 31, 2000 and March 31, 2000
Consolidated Statements of Cash Flows: 6
Three months ended March 31, 2001 and March 31, 2000
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,
2001 2000
----------------------------------
Interest income
Loans $ 5,788 $5,613
Securities 633 551
Dividends from Federal Home Loan Bank 37 35
Federal funds sold 7 10
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6,466 6,208
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Interest expense
Deposits 1,785 1,711
Federal Home Loan Bank borrowings 191 192
Federal funds purchased 113 129
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2,089 2,032
Net interest income 4,377 4,176
Provision for loan losses 245 150
Net interest income after provision 4,132 4,026
Noninterest income
Service charges on deposit accounts 270 245
Other fee income, principally bankcard processing 514 380
Loan servicing 100 44
Mortgage banking income and gains on sales of loans 246 96
Gain (loss) on sale of securities 54 (7)
Other 72 73
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1,256 831
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Noninterest expense
Salaries and employee benefits 1,715 1,464
Premises and equipment 323 295
Bankcard processing 399 313
Business development 162 203
Other 500 453
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3,099 2,728
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Income before income taxes 2,289 2,170
Provision for income taxes 866 823
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Net income $ 1,423 $1,306
==================================
Earnings per share
Basic $ 0.31 $0.29
==================================
Diluted $ 0.31 $0.28
==================================
Page 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended
March 31,
2001 2000
--------------------------
Net income $ 1,423 $ 1,306
--------------------------
Unrealized gains (losses) on Investment Securities
Unrealized gains (losses) arising during the period 730 (114)
Reclassification for (gains) losses included in
statement of income (54) 7
--------------------------
676 (107)
Income tax (expense) benefit (260) 41
--------------------------
Net unrealized gains (losses) on securities
available for sale 416 (66)
--------------------------
Comprehensive Income $ 1,839 $ 1,240
==========================
Page 4
CONSOLIDATED BALANCE SHEET
Amounts in $1,000's
(Unaudited)
Mar. 31, Dec. 31, Mar. 31,
2001 2000 2000
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ASSETS
Cash and due from banks $ 13,517 $ 15,145 $ 13,293
Federal funds sold 519 615 1,912
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Total cash and cash equivalents 14,036 15,760 15,205
Securities available-for-sale 36,473 38,115 32,638
Loans held for sale 3,270 814 3,033
Loans, less allowance for loan losses 225,270 221,631 216,749
Interest receivable 1,642 1,715 1,644
Federal Home Loan Bank stock 2,336 2,299 2,190
Property, net of accumulated depreciation 12,915 12,978 11,900
Deferred income taxes - - 702
Other assets 349 813 717
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Total assets 296,291 294,125 284,778
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand 65,970 69,549 61,639
Savings and interest-bearing checking 117,066 126,771 109,882
Time $100,000 and over 36,383 27,476 35,017
Other time 23,680 26,308 28,092
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Total deposits 243,099 250,104 234,630
Federal funds purchased 6,000 900 8,300
Federal Home Loan Bank term borrowings 13,000 11,500 13,000
Accrued interest and other payables 1,977 1,251 1,298
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Total liabilities 264,076 263,755 257,228
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Stockholders' equity
Common stock 4,536 4,536 4,535
Surplus 14,061 14,056 14,018
Retained earnings 13,211 11,787 9,557
Accumulated other comprehensive loss 407 (9) (560)
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32,215 30,370 27,550
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Total liabilities and stockholders' equity $296,291 $294,125 $284,778
==================================
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
For three months ended March 31,
----------------------------------
2001 2000
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Cash flows from operating activity:
Net income $ 1,423 $ 1,306
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 181 176
Provision for loan losses 245 150
Origination of loans held for sale (12,361) (3,901)
Proceeds from sale of loans held for sale 10,112 3,635
Gain on sales of loans (104) -
Change in interest receivable and other assets 537 (229)
Change in payables and other liabilities 726 297
Other adjustments 275 (42)
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Net cash provided by operating activities 1,034 1,390
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Cash flows from investing activities
Proceeds from sales and maturities of securities 2,990 2,201
Purchase of securities (1,367) (46)
Loans made net of principal collections (3,883) (10,133)
Purchase of property (98) (312)
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Net cash used in investing activities (2,358) (8,290)
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Cash flows from financing activities
Net increase (decrease) in deposits (7,005) 10,454
Increase in fed funds purchased 5,100 2,500
Increase in Federal Home Loan Bank borrowings 1,500 -
Proceeds from stock options exercised 6 112
Repurchase of shares - (913)
Net cash provided by financing activities (399) 12,153
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Net increase (decrease) in cash and cash equivalents (1,723) 5,253
Cash and cash equivalents, beginning of period 15,760 9,952
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Cash and cash equivalents, end of period $ 14,036 $ 15,205
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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 2001.
When warranted, comparisons are made to the same period in 2000 and to the
previous year ended December 31, 2000. The discussion should be read in
conjunction with the financial statements (unaudited) contained elsewhere in
this report. The reader is assumed to have access to the Company's Form 10-K
and portions of the Annual Report to Shareholders incorporated into the 10-K for
the previous year ended December 31, 2000, which contains additional statistics
and explanations. All numbers, except per share data, are expressed in
thousands of dollars.
In addition to historical information, this report contains certain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose
of availing Pacific Continental Corporation of the protections of the safe
harbor provisions of the PSLRA. The forward-looking statements contained in this
report are subject to factors, risks, and uncertainties that may cause actual
results to differ materially from those projected. Important factors that might
cause such material differences include, but are not limited to, those discussed
in this section of the report. In addition, the following items are among the
factors that could cause actual results to differ materially from the forward-
looking statements in this report: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry; the
regulatory environment; new legislation; vendor quality and efficiency; employee
retention factors; rapidly changing technology and evolving banking industry
standards; competitive standards; competitive factors, including increased
competition with community, regional, and national financial institutions;
fluctuating interest rate environments; and similar matters. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date of the statement. Pacific
Continental Corporation undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date of this report. Readers should carefully review the risk factors
described in this and other documents we file from time to time with the
Securities and Exchange Commission.
HIGHLIGHTS
. Operating revenue up 12% over prior year.
. Pacific Continental Bank recognized as SBA Lender of the Year in Oregon for
the third consecutive year.
. Funded the first education loan under a unique new Federal loan program.
. Named one of the Top 100 businesses to work for in Oregon by the Oregon
Business Magazine.
. Susan Otcenas, Assistant Vice President & Loan Officer awarded the SBA
Financial Services Advocate of the year award.
. Financial profile remains strong with return on assets and return on equity
of 1.96% and 18.33% respectively.
Earnings in the first quarter of 2001 were $1,423, up $117, or 9%, over first
quarter 2000 earnings of $1,306. The increase in earnings was primarily due to
strong revenue growth, in particular, noninterest income, which was up $426 or
51% over last year. Diluted earnings per share were $0.31 and $0.28 in the
first quarters of 2001 and 2000, respectively, an increase of 11%. Return on
assets and return on equity in the first quarter of 2001 were 1.96% and 18.33%.
That compares to 1.90% and 19.03% reported in first quarter of 2000. Period end
assets at March 31, 2001, were $296,291, a 4% increase over one year ago.
Average assets for the first quarter of 2001 were $294,528, up 7% over average
assets in the same quarter one-year ago.
RESULTS OF OPERATIONS
Net Interest Income
Page 7
Net interest income is the primary source of the Company's revenue. Net
interest income is the difference between interest income derived from earnings
assets, principally loans, and the interest expense associated with interest
bearing liabilities, principally deposits. The volume and mix of earnings
assets and funding sources, market rates of interest, demand for loans, and the
availability of deposits affect net interest income.
Net interest income prior to the provision for loan loss, in the first quarter
of 2001 increased $200, or 5%, over same period in 2000. This increase is
primarily the result of growth of earning assets. Average earning assets in the
current quarter increased 7% when compared to the first quarter of 2000.
Net interest margin as a percentage of earning assets was 6.66% in the first
quarter of 2001 compared to 6.75% in the same time period in 2000. On three
occasions during the first quarter of 2001, the Federal Reserve lowered market
interest rates, which resulted in a 1.50% drop in the prime lending rate. This
resulted in an immediate decline in the yield on the Company's variable rate
loan portfolio. Approximately 40% of the Company's loan portfolio consists of
variable rate loans. The decline in yield on variable rate loans was mitigated
at the end of February 2001 (the last prime rate drop) by the activation of
interest rate floors on variable rate loans. The cost of interest-bearing
liabilities did not fall as quickly as asset yields during the first two months
of the quarter, resulting in interest margin compression. Net interest margin
for March 2000 improved significantly over January and February. March 2001 net
interest margin was 6.87% compared to 6.62% in February and 6.48% in January.
This improving trend is expected to continue, as earning asset yields should
stabilize while cost of funds continues to decline.
A detailed comparison of interest income and interest expense between first
quarter 2001 and first quarter 2000 shows that interest income grew by $257.
Increased volume of earning assets improved interest income by $365, which was
offset by lower yields on earning assets reducing interest income by $108. First
quarter 2001interest expense increased $57 over the same quarter last year.
Higher volumes of interest bearing deposits and borrowings increased interest
expense by $107, which was offset by a $50 decline in interest expense due to
lower rates on interest bearing liabilities.
Provision for Loan Losses
Below is a summary of the Company's allowance for loan losses for the first
three months of 2001:
2000
-------------------
Balance, December 31, 2000 $2,149
Provision charged to income 245
Loans charged off 27
Recoveries credited to allowance 28
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Balance, March 31, 2001 $2,395
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First quarter 2001 provision for loan losses was $245, compared to $150 for the
same quarter last year, reflecting the increase in nonperforming assets from
December 31, 2000 shown in the table below. The allowance for loan losses at
March 31, 2001 was 1.04% of period end loans compared to 0.88% at March 31,
2000. During the first quarter 2001, the Company had net loan recoveries of $1.
Net charge offs in the first quarter last year were $654, which was primarily
attributable to a single loan. In January 2001, the Company disposed of $385
of repossessed assets, which were on the books at December 31, 2000. This
resulted in a $5 gain upon disposal.
The Company experienced significant improvement in the level of nonperforming
assets, showing a decline of $1,771 from March 31, 2000 to March 31, 2001. The
increase in nonperforming assets from December 31, 2000 to March 31, 2001 did
not materially impact first quarter earnings.
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:
Page 8
Mar. 31, 2001 Dec. 31, 2000 Mar. 31, 2000
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Nonaccrual loans and impaired loans $ 796 $ 490 $ 2,352
90 days past due and accruing interest 527 155 217
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Total nonperforming loans 1,323 645 2,569
Repossessed assets 0 385 525
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Total nonperforming assets 1,323 1,030 3,094
Nonperforming loans guaranteed by government (323) (160) (1,461)
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Total nonperforming assets, net of guaranteed $ 1,000 $ 870 $ 1,633
Noninterest Income
Noninterest income increased $426 or 51% in the first quarter of 2001 when
compared to the same period in 2000. All categories of noninterest income
improved during the current quarter when compared to last year. The majority of
growth in noninterest income was attributable to four categories. Merchant
bankcard processing fees were up $134 or 35% due to increased volumes of clients
and transactions. The merchant bankcard processing fees have shown 30% to 40%
growth in each of the last four years. Loan servicing fees increased by $56 or
127% over last year. This improvement resulted from a $9,000 increase in the
loan-servicing portfolio. In addition, last year's loan servicing fees were
negatively impacted by a $52 write down of a servicing asset. Excluding last
year's write down, loan-servicing fees were up only $4. Mortgage banking income
and gains on sales of loans were up $150 or156%. Mortgage banking revenues
increased $64 or 82% over last year due to a higher level of home sales and
refinancing of existing mortgages, reflecting a more favorable interest rate
environment. Gains on sales of loans increased $86 or 481%. During the first
quarter 2001, the Company sold approximately $2,900 of loans guaranteed by the
government, which resulted in gains of $104. No loans were sold during the first
quarter of last year. Finally, gains on sales of securities increased by $61.
Gains of $54 were recognized in the current quarter on the sale of a single
security, which compares to a loss last year of $7.
Noninterest Expense
Noninterest expense in the current quarter increased $271 or 14% over the same
period in 2000. Two categories accounted for the majority of the increase in
noninterest expense. Salaries and employee benefits were up $251 or 17% over
2000. Salaries increased by 14% due to new offices and staff increases in
existing offices. Increased group insurance premiums accounted for $30 of the
increase, while increased commissions on mortgage originations accounted for an
additional $27. Bankcard processing expense increased $86 or 27% and was a
direct result of increased volumes. Increases in these two categories were
offset by a $41 decline in business development expense. During the first
quarter of last year, the Company had approximately $35 in one time expenditures
related to the promotion of a new online banking product.
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. During the current quarter, core deposits declined by
approximately $5,000 from December 31, 2000. As a percentage of total deposits,
core deposits were 94% at March 31, 2001 compared to 86% at March 31, 2000. Loan
sales of approximately $2,900 reduced some of the seasonal funding pressure
during the first quarter. At March 31, 2001, the Company had $52,500 available
funding from overnight borrowing agreements with correspondent banks and the
Federal Home Loan Bank of Seattle. In addition, $7,500
Page 9
was available from the State of Oregon certificate of deposit program. The
Company's loan portfolio also contains $11,255 in marketable government
guaranteed loans.
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, 2001, the Company's total capital to
risk weighted assets was 13.59%, compared to 12.71% at March 31, 2000. Quarter
end capital grew by $4,665 when compared to last year. Of the total increase in
capital, 21% or $967 was attributable to an increase in the net unrealized value
of the Company's securities portfolio.
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth, while maintaining a well-
capitalized designation from the FDIC.
Item 3. Market Risk and Balance Sheet Management
The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have significant effects on
the Company's financial condition and results of operations. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Company's business activities. The
Company does not use derivatives such as forward and futures contracts, options,
or interest rate swaps to manage interest rate risk.
Interest rate risk generally arises when the maturity or repricing structure of
the Company's assets and liabilities differ significantly. Asset and liability
management, which among other things, addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income while maintaining sufficient liquidity. This process includes
monitoring contractual maturity and prepayment expectations together with
expected repricing of assets and liabilities under different interest rate
scenarios. Generally the Company seeks a structure that insulates net interest
income from large deviations attributable to changes in market rates by
balancing the repricing characteristics of assets and liabilities.
Interest rate risk is managed through the monitoring of the Company's balance
sheet by subjecting various asset and liability categories to interest rate
shocks and gradual interest rate movements over a one year period of time.
Interest rate shocks use an instantaneous adjustment in market rates of large
magnitudes on a static balance sheet to determine the effect such a change in
interest rates would have on the Company's net interest income and capital for
the succeeding twelve-month period. Such an extreme change in interest rates and
the assumption that management would take no steps to restructure the balance
sheet does limit the usefulness of this type of analysis. This type of analysis
tends to provide a best case or worst case scenario. A more reasonable approach
utilizes gradual interest rate movements over a one-year period of time to
determine the effect on the Company's net interest income.
The Company utilizes the services of The Federal Home Loan Bank's
asset/liability modeling software to determine the effect of a simultaneous
shift in interest rates. Interest rate shock scenarios are modeled in 1 percent
increments (plus or minus) in the federal funds rate. The more realistic
forecast assumes a gradual interest rate movement of plus or minus 2.40 percent
change in the federal funds rate over a one-year period of time with rates
moving up or down 0.60 percent each quarter. The model used is based on the
concept that all rates do not move by the same amount. Although certain assets
and liabilities may have similar repricing characteristics, they may not react
correspondingly to changes in market interest rates. In the event of a change in
interest rates, prepayment of loans and early withdrawal of time deposits would
likely deviate from those previously assumed. Increases in market rates may also
affect the ability of certain borrowers to make scheduled principal payments.
Page 10
The model attempts to account for such limitations by imposing weights on the
differences between repricing assets and repricing liabilities within each time
segment. These weights are based on the ratio between the amount of rate change
of each category of asset or liability, and the amount of change in the federal
funds rate. Certain non-maturing liabilities such as checking accounts and money
market deposit accounts are allocated among the various repricing time segments
to meet local competitive conditions and management's strategies
The Company strives to manage the balance sheet so that net interest income is
not negatively impacted more than 15 percent given a change in interest rates of
plus or minus 2 percent. Current evaluations show the Bank is within its
established guidelines and there no material changes from the Company's position
at December 31, 2000. The current quarter's analysis shows the Company has
become more liability sensitive over the past six months, reflecting
management's strategy to shorten the maturity structure of its liabilities in
anticipation of falling market interest rates. This strategy was implemented to
protect the Company's net interest margin in light of the large portion of
variable rate loans in its portfolio.
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, 2001. The table shows estimates of
changes in net interest income. For illustrative purposes the base figure of
$17,751 used in the interest rate shock analysis is the annualized actual net
interest income for the first three months of 2001. Due to the various
assumptions used for this modeling, no assurance can be given that projections
will reflect actual results.
Interest Rate Shock Analysis
Net Interest Income and Market Value Performance
(dollars in thousands)
------------------- --------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
------------------- --------------------------------------------------
+200 18,721 970 5.47%
+100 18,213 462 2.68%
Base 17,751 0 0.00%
-100 17,407 (344) -1.94%
-200 17,124 (627) -3.53%
------------------- --------------------------------------------------
Gradual Interest Rate Movement Forecast
Net Interest Income and Market Value Performance
(dollars, in thousands)
------------------- --------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
------------------- --------------------------------------------------
Rising 2.40% 18,264 513 2.89%
Base 17,751 0 0.00%
Declining 2.40% 17,254 (227) -1.28%
------------------- --------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(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 April 26 , 2001 /s/ J. Bruce Riddle
--------------------- --------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated April 26 , 2001 /s/ Michael A. Reynolds
--------------------- --------------------------------------
Michael A. Reynolds
Vice President and Controller
Page 12