As Filed with the Securities & Exchange Commission on May 14, 2002
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, 2002.
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______
SEC File Number: 0-30106
PACIFIC CONTINENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
OREGON 93-1269184
----------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 West 7th Avenue
Eugene, Oregon 97401
(address of Principal Executive Offices) (Zip Code)
(541) 686-8685
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes 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 May 1 2002: 5,012,749
-----------------
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, 2002 and March 31, 2001
Consolidated Statements of Comprehensive Income 4
Three months ended March 31, 2002 and March 31, 2001
Consolidated Balance Sheets: 5
March 31, 2002, December 31, 2001 and March 31, 2001
Consolidated Statements of Cash Flows: 6
Three months ended March 31, 2002 and March 31, 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Market Risk and Balance Sheet Management 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings none
Item 2. Changes in Securities none
Item 3. Defaults Upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders none
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Page 2
CONSOLIDATED INCOME STATEMENT
Amounts in $1,000's
(Unaudited)
Quarter ended March 31,
2002 2001
-----------------------------------
Interest income
Loans $ 5,275 $ 5,788
Securities 301 633
Dividends from Federal Home Loan Bank 36 37
Federal funds sold 26 7
-----------------------------------
5,638 6,466
-----------------------------------
Interest expense
Deposits 760 1,785
Federal Home Loan Bank term borrowings 289 191
Federal funds purchased 10 113
-----------------------------------
1,059 2,089
Net interest income 4,579 4,377
Provision for loan losses 2,485 245
Net interest income after provision 2,094 4,132
Noninterest income
Service charges on deposit accounts 283 270
Other fee income, principally bankcard processing 606 514
Loan servicing 105 100
Mortgage banking income and gains on sales of loans 121 246
Gain (loss) on sale of securities 149 54
Other 82 72
-----------------------------------
1,346 1,256
-----------------------------------
Noninterest expense
Salaries and employee benefits 1,584 1,715
Premises and equipment 348 323
Bankcard processing 426 399
Business development 218 162
Other 686 500
-----------------------------------
3,262 3,099
-----------------------------------
Income before income taxes 178 2,289
Provision for income taxes 68 866
-----------------------------------
Net income $ 110 $ 1,423
===================================
Earnings per share
Basic $ 0.02 $ 0.28
===================================
Diluted $ 0.02 $ 0.28
===================================
Page 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended
March 31,
2002 2001
-------------------------
Net income
110 $ 1,423
-------------------------
Unrealized gains (losses) on Investment Securities
Unrealized gains (losses) arising during the period (112) 730
Reclassification for (gains) losses included in
statement of income (149) (54)
-------------------------
(261) 676
Income tax (expense) benefit 100 (260)
-------------------------
Net unrealized gains (losses) on securities
available for sale (161) 416
-------------------------
Comprehensive income (loss) $ (51) $ 1,839
=========================
Page 4
CONSOLIDATED BALANCE SHEET
Amounts in $1,000's
(Unaudited)
Mar. 31, Dec. 31, Mar. 31,
2002 2001 2001
------------------------------------
ASSETS
Cash and due from banks $ 16,168 $ 15,269 $ 13,517
Federal funds sold 270 16,521 519
------------------------------------
Total cash and cash equivalents 16,348 31,790 14,036
Securities available-for-sale 14,667 20,127 36,473
Loans held for sale 3,138 1,924 3,270
Loans, less allowance for loan losses 256,891 237,760 225,270
Interest receivable 1,397 1,408 1,642
Federal Home Loan Bank stock 2,497 2,461 2,336
Property, net of accumulated depreciation 13,196 13,306 12,915
Deferred income taxes 293 308 -
Other assets 1,479 464 349
------------------------------------
Total assets 309,906 309,548 296,291
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand 79,649 80,560 65,970
Savings and interest-bearing checking 128,557 126,243 117,066
Time $100,000 and over 23,725 19,608 36,383
Other time 19,570 21,918 23,680
------------------------------------
Total deposits 251,501 248,329 243,099
Federal funds purchased 900 - 6,000
Federal Home Loan Bank term borrowings 22,000 24,000 13,000
Accrued interest and other payables 596 1,615 1,977
------------------------------------
Total liabilities 274,997 273,944 264,076
------------------------------------
Stockholders' equity
Common stock 5,048 5,066 4,536
Surplus 20,650 20,706 14,061
Retained earnings 9,083 9,542 13,211
Accumulated other comprehensive loss 128 290 407
------------------------------------
34,909 35,604 32,215
------------------------------------
Total liabilities and stockholders' equity $ 309,906 $309,548 $ 296,291
====================================
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
For three months ended March 31,
--------------------------------
2002 2001
--------------------------------
Cash flows from operating activity:
Net income $ 110 $ 1,423
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 207 181
Provision for loan losses 2,485 245
Change in interest receivable and other assets (33) 537
Change in payables and other liabilities 361 726
Other adjustments (371) 275
--------------------------------
Net cash provided by operating activities 2,758 3,282
--------------------------------
Cash flows from investing activities
Proceeds from sales and maturities of securities 7,931 2,990
Purchase of securities (2,496) (1,367)
Loans made net of principal collections (24,967) (6,131)
Purchase of property (97) (98)
--------------------------------
Net cash used in investing activities (19,629) (4,607)
--------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 3,173 (7,005)
Increase in fed funds purchased 900 5,100
Increase (decrease) in Federal Home Loan Bank borrowings (2,000) 1,500
Proceeds from stock options exercised 46 6
Dividends paid (404) -
Repurchase of shares (285) -
--------------------------------
Net cash provided by financing activities 1,429 (399)
--------------------------------
Net decrease in cash and cash equivalents (15,442) (1,723)
Cash and cash equivalents, beginning of period 31,790 15,760
--------------------------------
Cash and cash equivalents, end of period $ 16,348 $ 14,036
================================
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A complete set of Notes to Consolidated Financial Statements is a part of the
Bank's Annual Report to Shareholders for the period ended December 31, 2001,
included as exhibit 13 to the Bank's Form 10-K filed March 20, 2002. The notes
below are included because of material changes in the financial statements or to
provide the reader with additional information not otherwise available. All
numbers in the following notes are expressed in dollar thousands.
1. Basis of Presentation
The accompanying interim condensed consolidated financial statements include the
accounts of Pacific Continental Corporation (the "Company"), a bank holding
company, and its wholly-owned subsidiary, Pacific Continental Bank (the "Bank")
and the Bank's wholly owned subsidiaries, PCB Services Corporation (which owns
and operates bank-related real estate) and PCB Loan Services Corporation (which
presently operates two hotel properties for the Bank). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and in conformity with generally accepted
accounting principles in the United States of America for interim financial
information. The financial statements include all adjustments and normal
accruals, which the Company considers necessary for a fair presentation of the
results of operations for such interim periods. In preparing the condensed
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, as of
the date of the balance sheets and income and expenses for the periods. Actual
results could differ from those estimates.
The balance sheet data as of December 31, 2001 was derived from audited
financial statements, but does not include all disclosures contained in the
Company's 2001 Annual Report to Shareholders.
The interim condensed consolidated financial statements should be read in
conjunction with the December 31, 2001 consolidated financial statements,
including the notes thereto, included in the Company's 2001 Annual Report to
Shareholders
2. Loans
Major classifications of loans at March 31, 2002, December 31, 2001, and March
31, 2001 are as follows:
March 31, 2002 December 31, 2001 March 31, 2001
------------------------------------------------------
Commercial loans $ 71,979 $ 63,058 $ 56,047
Real estate loans 180,251 169,776 162,047
Consumer loans 9,382 9,454 10,654
---------------------------------------------------
261,612 242,288 228,748
Deferred loan origination fees (1,199) (1,110) (1,083)
---------------------------------------------------
260,413 241,178 227,665
Allowance for loan losses (3,522) (3,418) (2,395)
---------------------------------------------------
$ 256,891 $ 237,760 $ 225,270
Page 7
Allowance for loan losses
2002 2001
-------------------------
Balance, January 1 $ 3,418 $ 2,149
Provision charged to income 2,485 245
Loans (charged) recovered against allowance (2,381) 1
-------------------------
Balance, March 31 3,522 $ 2,395
At March 31, 2002, the recorded investment in certain loans totaling $5,686,
including all nonaccrual loans, was considered impaired. A specific related
valuation allowance of $700 is provided for these loans and is included in the
March 31, 2002 allowance above. The average recorded investment in impaired
loans for the three months ended March 31, 2002 was approximately $5,600.
Interest income of approximately $70 was recognized on impaired loans for the
period January 1, 2002 through March 31, 2002. No loans were considered impaired
at March 31, 2001.
During the first quarter 2002, the Company foreclosed and assumed ownership of
two hotel properties on the Oregon coast, which secured loans to a single
borrower. This resulted in a loan loss of $2,364 during the current quarter.
A substantial portion of the loan portfolio is collateralized by real estate,
and is, therefore, susceptible to changes in local market conditions. Management
believes that the loan portfolio is diversified among industry groups. At March
31, 2002, approximately 10% 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. That compares to a concentration in the hotel
and motel industry of 11% and 12% at December 31, 2001 and March 31, 2001,
respectively. 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.
Item 2. Management's Discussion and Analysis
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 2002.
When warranted, comparisons are made to the same period in 2001 and to the
previous year ended December 31, 2001. The discussion should be read in
conjunction with the financial statements (unaudited) and related notes
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, 2001, 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 of provisions of the PSLRA. The forward-looking statements
contained in this report are subject to factors, risks, and uncertainties that
may cause actual results to differ materially from those projected. Important
factors that might cause such material differences include, but are not limited
to, those discussed in this section of the report. In addition, the following
items are among the factors that could cause actual results to differ materially
from the forward-looking statements in this report: general economic conditions,
including their impact on capital expenditures; business conditions in the
banking industry; recent world events and their impact on interest rates,
businesses, and customers; the regulatory environment; new legislation; vendor
quality and efficiency; employee retention factors; rapidly changing technology
and evolving banking industry standards; competitive standards; competitive
factors, including increased competition with community, regional, and national
financial institutions; fluctuating interest rate environments; and similar
matters. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of the statement. Pacific Continental Corporation undertakes no obligation
to publicly revise or update these forward-looking statements to reflect events
or circumstances that arise after the date of this report. Readers should
carefully
Page 8
review this quarterly report with other documents we file from time to time with
the Securities and Exchange Commission.
HIGHLIGHTS
Earnings in the first quarter of 2002 were $110, down from net income of $1,423
for the first quarter 2001. Results for the current quarter reflect a $2485
provision for loan losses compared to a loan loss provision of $245 for the same
period last year. The increased provision reflects losses associated with motel
properties. Operating revenue, which consists of net interest income plus
noninterest income was $5,925 for the current year, up 5% over $5,632 reported
for 2001. Diluted earnings per share were $0.02 and $0.28 in the first quarters
of 2002 and 2001, respectively. All per share data has been adjusted
retroactively to reflect a 10% stock dividend during 2001.
Period end assets at March 31, 2002, were $309,906, a 5% increase over one year
ago. Average assets for the first quarter of 2002 were $310,036, also up 5% over
average assets in the same quarter one-year ago. Strong loan growth was reported
for the first quarter 2002. Outstanding loans at March 31, 2002 grew by $19,235
over December 31, 2001, an 8% increase during the quarter, and an annualized
growth rate of 30%. Period end loans for the current quarter were up 14% over
the same period last year.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the primary source of the Company's revenue. Net interest
income is the difference between interest income derived from earnings assets,
principally loans, and the interest expense associated with interest bearing
liabilities, principally deposits. The volume and mix of earnings assets and
funding sources, market rates of interest, demand for loans, and the
availability of deposits affect net interest income.
Net interest income prior to the provision for loan loss, in the first quarter
of 2002 increased $202, or 5%, over same period in 2001. This increase is
primarily the result of growth of earning assets. Average earning assets in the
current quarter increased 5% when compared to the first quarter of 2001.
Net interest margin as a percentage of earning assets was 6.65% in the first
quarter of 2002 compared to 6.66% in the same time period in 2001. Earning asset
yields in the current quarter were 8.18% compared to 9.84% last year, a decline
of 1.65%. Cost of liabilities fell by 1.66% during the same time period from
3.24% to 1.57%. During the first quarter 2002, the loss of interest rate floors
on variable rate loans, lower interest rates on new loan production, and
interest reversed on nonaccrual loans have caused the yield on earning assets to
fall faster than the cost of funds. This resulted in compression of the net
interest margin when compared to margins during the last half of 2001. Interest
reversed on nonaccrual loans was approximately $37 or 0.16% of average earning
assets for the quarter. There was no interest reversed on nonaccrual loans
during the first quarter 2001.
Net interest margin for the last six months of 2001 averaged 6.87%, compared to
6.65% for the current quarter. Further compression of the margin is expected
during 2002 as earning asset yields are projected to decline in future quarters
considering the loss of interest rate floors on variable rate loans, the lower
interest rates on new loan production, and the level of nonperforming loans. In
addition, further opportunities to lower the cost of funds are limited, as
market interest rates appear to have stabilized.
A detailed comparison of interest income and interest expense between first
quarter 2002 and first quarter 2001 shows that interest income fell by $829.
Increased volume of earning assets improved interest income by $461, which was
offset by lower yields on earning assets reducing interest income by $1,290.
First quarter 2002 interest expense decreased $1,031 over the same quarter last
year. By restructuring the mix and maturities of liabilities, the Company
reduced interest expense by $208 even though total liabilities grew by $12,000
over last year. In addition, interest expense was $823 lower due to lower rates
paid on deposits and borrowings.
Page 9
Provision for Loan Losses
Below is a summary of the Company's allowance for loan losses for the first
three months of 2002:
2002
---------------
Balance, December 31, 2001 $ 3,418
Provision charged to income 2,485
Loans charged off (2,387)
Recoveries credited to allowance 6
---------------
Balance, March 31, 2002 $ 3,522
---------------
The first quarter 2002 provision for loan losses was $2,485, compared to $245
for the same quarter last year, reflecting the loss recorded during the current
quarter related to two hotel properties. The allowance for loan losses at March
31, 2002 was 1.34% of period end loans compared to 1.41% and 1.04% at December
31, 2001 and March 31, 2001, respectively. The allowance at March 31, 2002
includes $700 in specific allowance for impaired loans. At March 31, 2002, the
Company had $5,686 of impaired loans, net of government guarantees, which
include one hotel real estate loan of $4,949. At December 31, 2001, the Company
had $5,601 of impaired loans with a specific allowance assigned of $1,050. No
loans were classified as impaired at March 31, 2001.
During the first quarter 2002, the Company had net loan charge offs of $2,381.
The Company foreclosed and assumed ownership of two hotel properties on the
Oregon coast, which secured loans to a single borrower. The loss on the two
hotel properties accounted for $2,364 of the net loan charge offs recorded
during the quarter. The two properties were transferred to other real estate
during the quarter and account for the entire balance of foreclosed properties
of $864.
The Bank had assigned $650 of its allowance for loan losses to these loans at
December 31, 2001. The estimated loss at December 31, 2001 was based on
appraisals obtained during the fourth quarter 2001 and estimated repair costs.
During repairs on one of the facilities, a 50-unit motel, during 2002, it became
apparent that there were major construction deficiencies. Although the building
is less than four years old, a structural engineering inspection concluded that
repair costs could not be determined, as the full extent of the damage could not
be assessed without removing the building exterior. Because the inspection could
not quantify hidden damage, the Bank recognized a $1,855 loan loss on the loan
secured by this property and recorded an other real estate asset of $200,
representing the value of the land and recoverable improvements. Although the
bank is pursuing potential remedies and hopes to make partial recovery, this
conservative valuation makes any additional losses on this property very
unlikely.
The Bank recorded a loan loss on the other motel property, a 40-unit motel, of
$509 and recorded the asset in other real estate at a value of $664. This
facility was found to have significant unrepaired flood damage. Although the
damage is pervasive, it is apparent and repair costs are quantifiable.
The bank is preparing both properties for sale, and both properties are open and
being operated safely by a professional hotel/motel management firm. During the
first quarter 2002, the two properties had operating losses of $90, which was
recorded as other real estate expense.
Loans in the hotel/motel industry totaled approximately $27,000 or 10% of
outstanding loans at March 31, 2002, including the $4,949 loan presently on
nonaccrual status. Management has carefully evaluated this concentration and
believes it has recognized and reserved for all known and estimated losses.
Nonaccrual loans and foreclosed property in the hotel and motel industry totaled
$5,813 or 85% of total nonperforming assets at quarter end. The ultimate
collectability of loans and sale of properties is affected by the health of the
regional hotel/motel industry, which has suffered both a national and regional
decline over the past four months. In view of the uncertainties in the
hotel/motel industry, the Company is carefully monitoring loans made by the Bank
and related properties taken in foreclosure in this industry. Accordingly, it is
possible that additional loans may go on nonaccrual status or that further
losses, increased provisions for loan losses, and higher noninterest expense may
be experienced related to loans in the motel/hotel industry. Given the
Page 10
impact of the weak economy and its impact on the motel/hotel industry, it is the
Bank's present intention to limit and decrease its concentration in this
industry as the loan portfolio grows. The following table shows a summary of
nonaccrual loans, loans past due 90 days or more and still accruing interest,
and other real estate owned for the periods covered in this report:
Mar. 31, 2002 Dec. 31, 2001 Mar. 31, 2001
-------------- ------------- --------------
Nonaccrual loans and impaired loans $ 6,020 $ 6,049 $ 796
90 days past due and accruing interest 901 953 527
-------- -------- ---------
Total nonperforming loans 6,921 7,002 1,323
Nonperforming loans guaranteed by government (934) (1,020) (323)
-------- -------- ---------
Net nonperforming loans 5,987 5,982 1,000
Foreclosed properties 864 0 0
-------- -------- ---------
Total nonperforming assets, net of guaranteed $ 6,851 $ 5,982 $ 1,000
Noninterest Income
Noninterest income increased $90 or 7% in the first quarter of 2002 when
compared to the same period in 2001. All categories of noninterest income
improved during the current quarter when compared to last year, with the
exception of mortgage banking income and gains on sales of loans. The majority
of growth in noninterest income was attributable to three categories. Service
charges on deposit accounts grew by $13 or 5% over last year due to increased
number of clients and accounts. Other fees, which include bankcard processing
fees were up $92 or 18% due to increased clients and transaction volumes. Gains
on the sale of securities were $149 during first quarter 2002 compared to $54
for the same quarter last year. Increases in these categories were offset by a
$125 decline in mortgage banking revenues and gains on sales of loans. Gains on
the sales of loans were down $105 from last year. During the current quarter, no
loans were sold. During the first quarter 2001, the Company sold approximately
$2,900 of loans guaranteed by the government, which resulted in gains of $105.
Mortgage banking revenues decreased $20 or 15% from last year. First quarter
2001 represented record revenues for the Company for the residential mortgage
division. The pace of originations slowed during the first two months of 2002,
but picked up significantly during the month of March 2002.
Noninterest Expense
Noninterest expense in the current quarter increased $163 or 5% over the same
period in 2001. Salaries and employee benefits decreased by $131 or 8% from the
previous year due to a decline in incentive based compensation. Increased
expenses in the other four expense categories offset the decline in salaries and
employee benefits. Premises and equipment expense increased $25 or 8% reflecting
the Company's recent investment in new technology. Bankcard processing expense
increased $27 or 7% and was a direct result of increased transaction volumes.
Business development expenses were up $56 in the current quarter due to the
production costs associated with new advertising. The other expense category
showed the largest increase, up $186 or 37%. Three components accounted for the
majority of the increase in the other expense category. Professional services
were up $28 or 17% due to increased legal services related to problem loans.
Other data processing expense was up $55 or 71% primarily due to on line banking
processing costs related directly to a significant increase in the client base
and transaction volume. Finally, other real estate expense was $90 during the
current quarter compared to $0 last year for the same time period. The $90
expense results from operating losses at the two hotel properties the bank owns.
Other real estate expense related to the two motels is expected to decline
during the second quarter.
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. As a percentage of total deposits,
core deposits were 96% at March 31, 2002 compared to 94% at March 31, 2001.
Average core deposits in
Page 11
the current quarter increased nearly $21,000 or 9% over 2001 for the same
period. Core deposit growth combined with funds provided by securities sales
funded the $20,000 of loan growth during the first three months of 2002. At
March 31, 2002, the Company had overnight and term borrowing lines of $83,500
with various correspondent banks, the Federal Home Loan Bank of Seattle, and the
Federal Reserve Bank of San Francisco. At the end of the quarter, $60,600 of
overnight borrowings were available to the Company. In addition, $6,000 was
available from the State of Oregon certificate of deposit program. The Company's
loan portfolio also contains $14,475 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, 2002, the Company's total capital to
risk weighted assets was 12.80%, compared to 13.59% at March 31, 2001.
During the fourth quarter 2001, the Company announced a share repurchase plan,
which allows the Company to repurchase up to 200 thousand shares or about 4% of
outstanding shares through December 31, 2002. Through March 31, 2002, the
Company repurchased a total of 33 thousand shares, 12 thousand during the fourth
quarter 2001 and 21 thousand during the first quarter 2002.
During the first quarter 2002, the Company announced the decision to change its
practice of declaring semiannual cash dividends, and instead implemented a
practice of paying cash dividends on a quarterly basis. The Company's board of
directors will review its dividend considerations so that cash dividends, when
and if declared by the Company, would typically be paid in mid-March, June,
September, and December of each year. On February 15, 2002, the Company declared
its first quarterly dividend of $0.08 per share paid on March 15, 2002 to
shareholders of record on February 28, 2002.
The Company projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth, the new dividend practice, and the
share repurchase plan, while maintaining a well-capitalized designation from the
FDIC.
Item 3. Market Risk and Balance Sheet Management
The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have significant effects on
the Company's financial condition and results of operations. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Company's business activities. The
Company does not use derivatives such as forward and futures contracts, options,
or interest rate swaps to manage interest rate risk.
Interest rate risk generally arises when the maturity or repricing structure of
the Company's assets and liabilities differ significantly. Asset and liability
management, which among other things, addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income while maintaining sufficient liquidity. This process includes
monitoring contractual maturity and prepayment expectations together with
expected repricing of assets and liabilities under different interest rate
scenarios. Generally the Company seeks a structure that insulates net interest
income from large deviations attributable to changes in market rates by
balancing the repricing characteristics of assets and liabilities.
Interest rate risk is managed through the monitoring of the Company's balance
sheet by subjecting various asset and liability categories to interest rate
shocks and gradual interest rate movements over a one-year period of time.
Interest rate shocks use an instantaneous adjustment in market rates of large
magnitudes on a static balance sheet to determine the effect such a change in
interest rates would have on the Company's net interest income and capital for
the succeeding twelve-month period. Such an extreme change in interest rates and
the
Page 12
assumption that management would take no steps to restructure the balance sheet
does limit the usefulness of this type of analysis. This type of analysis tends
to provide a best case or worst-case scenario. A more reasonable approach
utilizes gradual interest rate movements over a one-year period of time to
determine the effect on the Company's net interest income.
The Company utilizes the services of The Federal Home Loan Bank's
asset/liability modeling software to determine the effect of a simultaneous
shift in interest rates. Interest rate shock scenarios are modeled in 1 percent
increments (plus or minus) in the federal funds rate. The more realistic
forecast assumes a gradual interest rate movement of plus or minus 2.40 percent
change in the federal funds rate over a one-year period of time with rates
moving up or down 0.60 percent each quarter. The model used is based on the
concept that all rates do not move by the same amount. Although certain assets
and liabilities may have similar repricing characteristics, they may not react
correspondingly to changes in market interest rates. In the event of a change in
interest rates, prepayment of loans and early withdrawal of time deposits would
likely deviate from those previously assumed. Increases in market rates may also
affect the ability of certain borrowers to make scheduled principal payments.
The model attempts to account for such limitations by imposing weights on the
differences between repricing assets and repricing liabilities within each time
segment. These weights are based on the ratio between the amount of rate change
of each category of asset or liability, and the amount of change in the federal
funds rate. Certain non-maturing liabilities such as checking accounts and money
market deposit accounts are allocated among the various repricing time segments
to meet local competitive conditions and management's strategies.
The Company strives to manage the balance sheet so that net interest income is
not negatively impacted more than 15 percent given a change in interest rates of
plus or minus 2 percent. Current evaluations show the Bank is within its
established guidelines.
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, 2002. The table shows estimates of
changes in net interest income. For illustrative purposes the base figure of
$18,570 used in the interest rate shock analysis is the annualized actual net
interest income for the first three months of 2002. Due to the various
assumptions used for this modeling, no assurance can be given that projections
will reflect actual results.
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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 19,829 1,259 6.78%
+100 19,231 661 3.56%
Base 18,570 0 0.00%
-100 17,900 (670) -3.61%
-200 16,784 (1,786) -9.62%
----------------------------------------------------------------------------
Gradual Interest Rate Movement Forecast
Net Interest Income and Market Value Performance
(dollars, in thousands)
----------------------- ---------------------------------------------------
Projected Net Interest Income
Interest Estimated $ Change % Change
Rate Change Value from Base from Base
----------------------- ---------------------------------------------------
Rising 2.40% 19,172 602 3.24%
Base 18,570 0 0.00%
Declining 2.40% 18,277 (293) -1.58%
-------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Holding Company Bylaws (as amended and restated).
99 Press Release dated May 10, 2002 announcing revised first
quarter 2002 results.
(b) Reports on Form 8-K
None
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CONTINENTAL CORPORATION
(Registrant)
Dated May 14, 2002 /s/ J. Bruce Riddle
------------------------ ---------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated May 14, 2002 /s/ Michael A. Reynolds
------------------------ ---------------------------------------
Michael A. Reynolds
Vice President and Chief Financial Officer
Page 15