As Filed with the Securities & Exchange Commission on August , 1999
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 June 30, 1999.
[ ] 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. [X] Yes [ ] 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 July 31, 1999: 4,831,140
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Page 1
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
Six months ended June 30, 1999, and June 30, 1998
Consolidated Statements of Comprehensive Income
Six months ended June 30, 1999 and June 30, 1998 4
Consolidated Balance sheets: 5
June 30, 1999, December 31, 1998 and June 30, 1998
Consolidated Statements of Cash Flows: 6
Six months ended June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 13
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
Page 2
PART I
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended June 30, Year to date June 30,
1999 1998 1999 1998
---------------------------- ---------------------------
Interest income
Interest and fees on loans $5,004 $4,439 $ 9,798 $8,505
Interest on investment securities 499 473 1,005 1,016
Interest on federal funds sold 9 23 15 36
---------------------------- ---------------------------
5,512 4,935 10,818 9,557
---------------------------- ---------------------------
Interest expense
Interest on deposits 1,337 1,256 2,655 2,512
Interest on borrowings 241 201 509 411
---------------------------- ---------------------------
1,578 1,457 3,164 2,923
---------------------------- ---------------------------
Net interest income 3,934 3,478 7,654 6,634
Provision for possible loan losses 200 210 500 410
---------------------------- ---------------------------
Net interest income after provision 3,734 3,268 7,154 6,224
---------------------------- ---------------------------
Noninterest income
Service charges on deposit accounts 217 197 455 373
Other fee income, principally bankcard 372 254 666 492
Loan servicing fees 150 66 296 150
Mortgage banking income and gains
on loan sales 310 519 567 822
Gain on sale of securities 16 0 16 6
Other noninterest income 56 66 118 104
---------------------------- ---------------------------
1,121 1,102 2,118 1,947
---------------------------- ---------------------------
Noninterest expense
Salaries and employee benefits 1,387 1,226 2,706 2,349
Premises and equipment 315 286 617 566
Bankcard processing 263 199 479 338
Business development 180 195 342 318
Other noninterest expense 486 452 929 864
---------------------------- ---------------------------
2,631 2,358 5,073 4,435
---------------------------- ---------------------------
Income before income taxes 2,224 2,012 4,199 3,736
Provision for income taxes 859 760 1,619 1,436
---------------------------- ---------------------------
Net income $1,365 $1,252 $ 2,580 $2,299
---------------------------- ---------------------------
Page 3
Earnings per share
Basic $0.28 $0.27 $0.54 $0.49
---------------------------- ---------------------------
Diluted 0.28 0.26 0.53 0.48
---------------------------- ---------------------------
Weighted average shares outstanding
Basic 4,829 4,720 4,818 4,683
Common stock equivalents
attributable to stock options 44 137 44 137
---------------------------- ---------------------------
Diluted 4,873 4,857 4,862 4,820
---------------------------- ---------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000's
(Unaudited)
Quarter ended Year to date
June 30, June 30,
1999 1998 1999 1998
----------------------- -------------------------
Net income $1,365 $1,252 $2,580 $2,299
----------------------- -------------------------
Unrealized gains (losses) on Investment Securities
Unrealized gains (losses) arising during the
period (304) (15) (466) 31
Reclassification for (gains) losses included in
statement of income (16) 0 (16) (6)
----------------------- -------------------------
(320) (15) (482) 25
Income tax (expense) benefit 123 6 185 (7)
----------------------- -------------------------
Net unrealized gains (losses) on securities
available for sale (197) (9) (297) 18
----------------------- -------------------------
Comprehensive Income $1,168 $1,243 $2,283 $2,310
----------------------- -------------------------
Page 4
CONSOLIDATED BALANCE SHEETS
Amounts in $1,000's
(Unaudited)
June 30, December, 31, June 30,
1999 1998 1998
----------------------------------------------------------
Assets
Cash and due from banks $ 11,692 $ 10,635 $ 10,700
Federal funds sold 618 355 487
----------------------------------------------------------
Total cash and cash equivalents 12,310 10,990 11,187
Investment securities 31,108 31,130 24,853
Loans, less allowance for loan losses 193,772 185,450 156,636
Federal home loan bank stock 2,079 2,004 1,929
Property, net of accumulated depreciation 11,040 10,716 8,942
Interest receivable 1,362 1,309 1,222
Other assets 1,067 345 992
----------------------------------------------------------
Total assets 252,738 241,944 205,761
----------------------------------------------------------
Liabilities and stockholders' equity
Deposits
Noninterest-bearing demand 59,241 56,556 47,197
Savings and interest-bearing checking 104,199 81,090 76,245
Time 46,990 56,683 45,036
----------------------------------------------------------
210,430 194,329 168,478
Federal funds purchased 1,800 8,600 2,000
Other borrowings 11,000 11,000 9,000
Accrued interest and other payables 535 849 1,514
Other liabilities 68 40 46
----------------------------------------------------------
Total liabilities 223,833 214,818 181,038
----------------------------------------------------------
Stockholders' equity
Common stock 19,601 19,376 18,917
Retained earnings 9,509 7,658 5,760
Accumulated other comprehensive income (205) 92 46
----------------------------------------------------------
Total stockholders' equity 28,905 27,126 24,723
----------------------------------------------------------
$252,738 $241,944 $205,761
----------------------------------------------------------
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $1,000's
(Unaudited)
For six months ended June 30,
1999 1998
------------------- -------------------
Cash flows from operating activity:
Net income $ 2,580 $ 2,299
Adjustments to reconcile net income to net cash provided
By operating activities
Depreciation 368 285
Amortization 77 91
Provision for loan losses 500 410
Deferred income taxes (158) 125
Origination of loans held for sale (20,158) (21,949)
Proceeds from sale of loans held for sale 19,743 24,142
Gain on sales of loans (224) (553)
Gain on sales of securities (16) (6)
Stock dividends from federal home loan bank (75) (72)
Change in interest receivable and other assets (775) (419)
Change in payables and other liabilities (287) 877
Other adjustments (204) (108)
------------------- -------------------
Net cash provided by operating activities 1,371 5,122
------------------- -------------------
Cash flows from investing activities
Change in investment securities (39) 5,440
Loans made net of principal collections (11,931) (22,089)
Proceeds from sales of loans 3,748 7,605
Purchase of loans - -
Purchase of property (693) (1,591)
------------------- -------------------
Net cash used in investing activities (8,915) (10,635)
------------------- -------------------
Cash flows from financing activities
Net increase in deposits 16,102 1,183
Increase (decrease) in fed funds purchased (6,800) (5,150)
Increase (decrease) in other borrowings - 6,000
Proceeds from stock options exercised 190 736
Dividends paid, net of reinvestment (628) (322)
------------------- -------------------
Net cash provided by financing activities 8,864 2,447
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 1,320 (3,066)
Cash and cash equivalents, beginning of period 10,990 14,253
------------------- -------------------
Cash and cash equivalents, end of period $ 12,310 $ 11,187
------------------- -------------------
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A complete set of Notes to Consolidated Financial Statements is a part of the
Annual Report to Shareholders for the period ended December 31, 1998, included
as exhibit 13 within the Bank's Form 10-K filed with the Federal Deposit
Insurance Corporation ("FDIC") on March 30, 1999. The notes below are included
for Pacific Continental Bank (the "Bank") because of material changes in the
financial statements or to provide the reader with additional information not
otherwise available.
Holding Company Reorganization. Effective June 7, 1999, the bank completed its
reorganization and formation of a bank holding company, Pacific Continental
Corporation (the "Company"). At that time, the Bank ceased reporting under the
Securities Exchange Act of 1934 with the FDIC, and the Company became the
successor registrant reporting with the SEC. The reorganization was accounted
for as a pooling of interests and required no restatement of previously reported
income.
Allowance for Loan Losses
1999
-----------------
Balance, December 31, 1998 $2,070
Provision charged to income 500
Loans charged off 103
Recoveries credited to allowance 11
-----------------
Balance, June 30, 1999 $2,478
-----------------
Net charge offs were $54 in the second quarter 1999 and $38 in the first quarter
of 1999. This compares to net charge offs of $18 in the second quarter of 1998
and $11 in the first quarter of 1998. Through June 30, 1999 net charge offs were
0.05% of average loans compared to 0.02% at June 30, 1998.
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:
June 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
Nonaccrual loans $824 $873 $475
90 days past due and accruing interest $149 $247 $ 92
Other real estate owned $129 $ 0 $ 0
Stock Option Plans
The Bank has an Employee Stock Option Plan and a Nonemployee Director Stock
Option Plan that have subsequently been adopted by the Company that reserves
shares of stock for issuance to executives, employees and directors. Information
with respect to options granted under the stock option plans, adjusted for stock
splits and dividends, is as follows:
1999
-------------------------------------------------
Options Average price
outstanding per share
-------------------------------------------------
Balance, December 31, 1998 201 $11.05
Grants - -
Exercised 28 7.79
-------------------------------------------------
Balance, June 30, 1999 173 $11.59
Page 7
Outstanding options at June 30, 1999 are as follows:
Shares Price per share Expiration
- --------------------------------------------------------------------------------------------
84 9.12 May, 2001
63 9.66 April, 2002
26 24.22 June, 2003
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operation
The following discussion contains a review of the Company's operating results
and financial condition for the second quarter and year to date for 1999. When
appropriate, comparisons are made to the same period in 1998 and to the previous
year ended December 31, 1998. 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 Bank's Form 10-K as filed with the FDIC
for the previous year ended December 31, 1998, which contains additional
statistics and explanations. All numbers, except per share data, are expressed
in thousands of dollars.
This discussion may contain certain forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
stated. Readers are cautioned not to place undue reliance on these forward-
looking statements.
Highlights
Net income in the second quarter 1999 was $1,365 an increase of 9% over second
quarter 1998 income of $1,252. Return on average assets and return on average
equity in the current quarter were 2.20% and 18.82% respectively as compared to
2.44% and 20.75% in the same quarter one year ago.
For the first six months of 1999 the Company earned $2,580 a 12% increase over
six month 1998 earnings of $2,299. Per share earnings on a diluted basis for the
first six months of 1999 and 1998 were $0.53 and $0.48, respectively. Comparing
the first six months of 1999 to the same period in 1998, return on average
assets was 2.12% and 2.27%, while return on average equity decreased to 18.20%
from 19.77%.
At June 30, 1999 total assets were $252,738 or 4% more than December 31, 1998
and 23% more than June 30, 1998.
On June 7, 1999, the Bank opened its ninth banking office in Tualatin, Oregon.
Effective also on this date, the bank completed its reorganization and formation
of a bank holding company. The Bank has also received regulatory approval to
open its tenth banking office later this year on West 11th Avenue in Eugene,
Oregon. The West 11th office will open in the fall of 1999.
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 earned on earning assets and interest
paid on paying liabilities. Net interest income as a percent of average earning
assets is referred to as the interest margin. The interest margin can be
examined more closely by considering the interest income and interest expense
components separately.
For the quarter ended June 30, 1999, net interest income, prior to the provision
for loan loss, totaled $3,934 a 13% increase from the same period in 1998.
Average earning assets increased 22%. Net interest income
Page 8
for the current quarter as a percent of earning assets was 6.94% down from 7.46%
for the same period in 1998. The yield on earning assets declined 0.87%
primarily due to lower loan fees and slightly lower loan yields while the Bank's
cost of funds fell only 0.35% as interest bearing deposits repriced more slowly
than loans. A significant portion of the Company's loan portfolio is variable
rate tied to the prime-lending rate. The 0.75% drop in prime in late 1998
reduced yields on these loans as compared to the same period last year. The
decline in loan fees is primarily due to competitive pressures in the Company's
major markets.
Net interest income for the first six months showed similar results. For the
first six months of 1999, net interest income, prior to the provision for loan
loss, totaled $7,654, an increase of 15% from the same period in 1998. Year-to-
date average earning assets increased 21% as compared to the same period in
1998. However, net interest income as a percent of earning assets declined from
7.21% in 1998 to 6.89% in 1999. This decline results from loan yields falling at
a faster rate than interest bearing liabilities. Net interest income for the
first six months of 1999 was $1,020 higher than the same period in 1998. A rate
volume analysis indicates that net interest income increased by $1,412 due to
higher volumes which was offset by a decline in net interest income of $392 due
to lower rates.
Noninterest Income
Year-to-date noninterest income of $2,118 was up 9% over 1998 noninterest income
for the same time period. Three categories of noninterest income showed
significant growth. Service charges on deposit accounts increased $82 or 22% due
to higher levels of accounts and price changes, which took effect in the fourth
quarter 1998. The Company also continued to be successful in expanding its
merchant banking activity. Revenues in this category increased by $174 or 35%
when compared to the first six months of 1998.
Loan servicing income of $296 through June 30, 1999 is nearly twice as high as
1998 levels resulting from loan sales and participations that occurred in the
second half of 1998. The growth in noninterest income in these three categories
was offset by a decline of $255 in gains on loan sales and mortgage-banking
income. The Company continued to be very successful in generating government
guaranteed loans. Through June 30, 1999 the Bank originated $7,423 of government
guaranteed Small Business Administration loans. This compares to $4,268
originated during the same period in 1998. However, due to the deposit growth
experienced in the first half of the year, the Company elected to hold more of
the government guaranteed loans in its loan portfolio rather than selling them.
Holding more guaranteed loans combined with slightly lower premiums on sales of
such loans has resulted in gains on loan sales dropping from $405 in 1998 to
$264 in 1999. Year-to-date 1999 mortgage-banking revenues have declined by $85
from $388 to $303. Higher interest rates in 1999 have slowed refinancing
activity reducing originations of mortgage loans during the first six months by
$3,973 thus reducing mortgage banking revenues.
Noninterest Expense
Year-to-date June 30, 1999 noninterest expense increased $638 or 14% from the
same period in 1998. Two expense categories accounted for $408 or 64% of the
total dollar increase in expenses. Salaries and employee benefits through the
first six months of 1999 increased $357 or 15% over the same period in 1998.
Premises and equipment expenses increased $51 or 9% over 1998. The increase in
both of these categories results from the opening of two new offices. The
Gateway Office in Springfield, Oregon opened in September 1998 and the Tualatin
Office in Tualatin, Oregon opened in June 1999. Staff increases and
corresponding salaries and benefits increases were the result of staffing these
two new offices. Merchant banking processing expenses were also up $141 or 42%
which corresponds directly with the revenue increase discussed above.
Liquidity
The Company derives liquidity through the growth of core deposits and the
maturity of investment securities and loans. Core deposits include demand,
interest checking, money market, savings and local
Page 9
time deposits. In addition, the Bank sells or participates loans to other
financial institutions. Additional liquidity is provided through access to
national CD markets, public deposits and both secured and unsecured borrowings.
In 1999 the Company has experienced strong growth in core deposits that
alleviated seasonal funding pressures typically experienced in the first half of
the year. Total deposits at June 30, 1999 are $16,102 or 8% higher than December
31, 1998 deposits and are $41,953 or 25% higher than June 30, 1998 deposits.
This has resulted in less reliance on funding from national CD markets and
public deposits. It has also reduced the level of loan sales and loan
participations in 1999 compared to 1998. Through the first six months of 1999,
the Company has sold or participated $3,748 in loans compared to $7,605 during
the same period in 1998. Core deposits at June 30, 1999 represent 89% of total
deposits compared to 86% of total deposits at June 30, 1998.
Capital Resources
Capital is the shareholder's investment in the Company. Capital grows through
the retention of earnings and the issuance of new stock. Capital formation
allows the Company to grow assets and provides flexibility in times of
adversity.
The Company's capital as a percent of total period end assets declined slightly
to 11.64% at June 30, 1999 from 11.92% in 1998. Fewer stock options exercised
and the suspension of the dividend reinvestment program in January 1999 resulted
in slower growth in capital relative to total assets. The Company is subject to
various regulatory capital requirements administered by Federal regulators. The
following schedlule shows that the Company is considered "well capitalized"
under regulatory guidelines.
Regulatory Guidelines
------------------------------------------------------
At 6/30/99 Adequate Well Capitalized
---------------------- ---------- ------------------
Total capital to risk based assets 14.75% 8.00% 10.00%
Tier 1 capital to risk based assets 13.59% 4.00% 6.00%
Expected earnings are considered sufficient to meet all anticipated capital
expenditures and any expenditures related to the year 2000 project. The Bank has
received regulatory approval to open a new office on West 11th Avenue in Eugene,
Oregon. Construction is expected to commence in October 1999.
Subsequent to the end of the second quarter, on July 6, 1999, the Company
announced the implementation of a stock repurchase plan. Pursuant to the plan,
the Company is authorized to purchase up to 240,000 shares of its issued and
outstanding common stock, adjusted for any stock splits or stock dividends,
through the Nasdaq OTC Bulletin Board, as determined by the officers of the
Company, at a per share price not to exceed $18.
Year 2000
The year 2000 presents a unique problem for all software and hardware users. The
"Y2K" problem results from the use of only 2 digits to represent the year in
many computer programs. Therefore these computer programs do not properly
recognize a year that begins with "20" instead of the familiar "19." If not
corrected, many computer applications could fail or create erroneous results.
The global extent of the Y2K problem is not yet known and it is prudent for all
companies to evaluate their exposure and to work towards mitigating any harmful
results.
The Company has identified several areas of potential concern, these being
computer operations, third party processors, client preparedness, and the need
for Y2K liquidity reserves.
The Company relies heavily on computers to process its daily work and to
maintain client records for loans and deposits. The Company has a wide area
network used for word processing, internal communications, loan document
preparation, and spreadsheet applications. The Company processes daily postings
of loan
Page 10
and deposit information using an "in-house" software and hardware solution. The
Company also utilizes a number of third party vendors for the processing of
various transactions such as automated teller, automated clearinghouse, and
bankcard transactions.
The Company is also exposed to the degree that its clients are prepared for Y2K.
The client's ability to continue servicing their debts can, in many cases, be
dependent on their ability to process work for themselves and from their third
party vendors.
At this point liquidity needs are not known. Besides the day-to-day liquidity
needed to operate the Company there is a concern that additional liquidity may
be required to fund cash withdrawals of worried depositors.
The Company has established a detailed plan to prepare for the year 2000. The
Federal Financial Institutions Examination Counsel (FFIEC) has made
recommendations to the financial community for preparing for Y2K. The Company
has incorporated their suggestions and timelines within its Y2K plan. The plan
has five distinct phases, these being: awareness, assessment, renovation,
validation, and implementation. The following table shows the Company's progress
in each of these phases.
Phase FFIEC mandated Bank's date of Comments
date completion
- ----------------------------------------------------------------------------------------------------------------
Awareness 06-30-1998 09-30-1997 Established Y2K Team
- ----------------------------------------------------------------------------------------------------------------
Assessment 09-01-1998 03-01-1998 The assessment phase was conducted with the help
of a consultant. The software vendor assessed
core-processing systems.
- ----------------------------------------------------------------------------------------------------------------
Renovation 12-31-1998 09-30-1998 Renovation is now complete. All hardware has been
upgraded or replaced. All required software has
been purchased and installed.
- ----------------------------------------------------------------------------------------------------------------
Validation 03-31-1999 01-31-1999 The Company's wide area network and software used
throughout the network has been validated. The
Company completed testing recently released
versions of its core banking software for loan and
deposit processing and its check processing
software.
- ----------------------------------------------------------------------------------------------------------------
Implementation 06-30-1999 03-31-1999 Completed testing all of the Company's "Mission
Critical" hardware and software. Developed a
viable contingency plan.
- ----------------------------------------------------------------------------------------------------------------
As the table above shows the Company has successfully completed the five phases
outlined by the FFIEC. Work commenced on the Year 2000 date change in 1997.
Testing all of our internal systems has been completed, and the Company feels
confident all systems will be fully functional in the year 2000. The Company is
working with our third party suppliers to encourage, aid, and monitor their
progress. Contingency plans are in place as parts of our strategy to ensure
minimal inconvenience to our clients come January 1, 2000. The Company spent
approximately $220 for the Y2K problem. This expense was allocated among
consultants, hardware upgrades, and software enhancements. In some cases
remediation of the problem resulted in an escalation of hardware and software
replacement.
The Company has held a number of Y2K seminars, which were well attended by
clients and the community. The Company has identified which clients represent
the most exposure to the Company and has a systematic calling program in place
to assess the client's degree of preparedness. The results of these calls will
help the Company determine the amount of exposure to the loan portfolio and to
the liquidity needs of the Company. To date the Company has not made any Y2K
specific loan loss reserve allocation.
Page 11
The Company has formulated plans to increase liquidity for the Y2K event. Such
plans include additional lines of credit with various lenders including the
Federal Reserve, the Federal Home Loan Bank and correspondent banks. The Company
presently has in excess of $80,000 in overnight or term credit available. In
addition the Company will consider asset sales and out of area liability
acquisition to supplement core deposit growth. It is hoped that local and
national education programs will calm any growing panic among consumers, which
will alleviate the need for exceptional liquidity measures.
The discussion above regarding the century date change for the year 2000
includes certain "forward looking statements" concerning the future operations
of the Company. The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 as they apply
to forward looking statements. This statement is for the express purpose of
availing the Company of the protection of such safe harbor with respect to all
"forward looking statements". Management's ability to predict results of the
effect of future plans is inherently uncertain, and is subject to factors that
may cause actual results to differ materially from those projected. Factors that
could effect the actual results include the Company's success in identifying
systems and programs that are not Year 2000 compliant; the possibility that
systems modifications will not operate as intended; unexpected costs associated
with remediation, including labor and consulting costs; the uncertainty
associated with the impact of the century change on the Company's clients,
vendors and third-party service providers; and the economy in general.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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. 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.
The Company's liability structure is composed primarily of noninterest bearing
corporate checking accounts and non-maturing saving and money market deposit
accounts. Other liabilities include time deposits with various maturities of
generally one year or less and borrowings.
The Company's assets are primarily composed of loans and investment securities.
Investment securities generally have fixed rates with maturities of less than
five years. The loan portfolio is made up of two distinct interest rate risk
profiles. Approximately half of the Company's loans are variable rate loans
subject to immediate change. In many cases these loans have interest rate floors
which insulate the Company from declining market rates. The other portion of the
loan portfolio is comprised of fixed rate installment loans and commercial real
estate loans with interest rates fixed for up to five years.
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
Page 12
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. Forecasts are prepared quarterly based upon data
provided by the bank to the Federal Home Loan Bank. Interest rate shock
scenarios are modeled in 100 basis point increments for shifts of plus or minus
4 percent in the federal funds rate. The more realistic forecast assumes a
gradual interest rate movement of plus or minus 2.40% change in the federal
funds rate over a one year period of time with rates moving up or down 0.60%
each quarter. The model used is based on the concept that all rates do not move
by the same amount. Although certain assets and liabilities may have similar
repricing characteristics, they may not react correspondingly to changes in
market interest rates. In the event of a change in interest rates, prepayment of
loans and early withdrawal of time deposits would likely deviate from those
previously assumed. Increases in market rates may also affect the ability of
certain borrowers to make scheduled principal payments.
The model attempts to account for such limitations by imposing weights on the
differences between repricing assets and repricing liabilities within each time
segment. These weights are based on the ratio between the amount of rate change
of each category of asset or liability, and the amount of change in the federal
funds rate. Certain non-maturing liabilities such as checking accounts and money
market deposit accounts are allocated among the various repricing time segments
to meet local competitive conditions and management's strategies.
The Company strives to manage the balance sheet so that net interest income is
not negatively impacted more than 15% given a change in interest rates of plus
or minus 200 basis points. 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 as of March 31, 1999. The table shows estimates of
changes in net interest income. For illustrative purposes the base figure of
$14,627 used is the annualized actual net interest income for the first quarter
of 1999. 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 15,935 1,305 8.92%
+100 15,276 649 4.44%
Base 14,627 0 0.00%
-100 14,038 (589) -4.03%
-200 13,258 (1,369) -9.36%
- ---------------------------------------------------------------------------------------
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% 14,737 110 0.75%
Base 14,627 0 0.00%
Declining 2.40% 14,545 (82) -0.56%
--------------------------------------------------------------------------
Page 13
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Bank's annual shareholder meeting was held on April 22, 1999 at its
headquarters in Eugene, Oregon.
(b) Not Applicable.
(c) A brief description of each matter voted upon at the Annual Shareholders'
Meeting and the number of votes cast for, against or withheld, including a
separate tabulation with respect to each nominee for office and each matter
is presented below:
(1) Approval of a Plan and Agreement of Reorganization and Share Exchange
dated December 9, 1998 (the "Agreement") between the Bank and Pacific
Continental Corporation, a newly-formed corporation (the "Company") which
provides that the Bank become a wholly owned subsidiary of the Company.
Effective June 7, 1999, each outstanding whole share of Bank common stock was
exchanged for one share of Company stock.
Votes cast for: 3,468,012
---------
Votes cast against: 18,743
---------
Votes abstaining: 24,863
---------
(2) Election of three directors with terms expiring in 2002 or until their
successors have been elected and qualified:
Michael S. Holcomb--
Votes cast for: 4,016,071
---------
Votes cast against: 15,939
---------
Votes withheld: 11,459
---------
Donald G. Montgomery--
Votes cast for: 4,016,071
---------
Votes cast against: 15,939
---------
Votes withheld: 11,459
---------
Kevin G. Murphy--
Votes cast for: 4,016,071
---------
Votes cast against: 15,939
---------
Votes withheld: 11,459
---------
(3) Adoption of an Employee Stock Option Plan, which allows for the grant
of stock options to purchase up to 500,000 shares of common stock.
Votes cast for: 3,221,456
---------
Votes cast against: 205,429
---------
Votes abstaining: 84,733
---------
(4) Adoption of a Director Stock Option Plan, which allows for the grant
of stock options to purchase up to 100,000 shares of common stock.
Page 14
Votes cast for: 3,209,137
---------
Votes cast against: 219,342
---------
Votes abstaining: 83,139
---------
(d) None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation
3.2 Bylaws
10.1 1992 Incentive Stock Option Plan
10.2 1995 Incentive Stock Option Plan
10.3 1999 Employee Stock Option Plan
10.4 1995 Directors' Stock Option Plan
10.5 1999 Directors' Stock Option Plan
10.6 Form of Executive Severance Agreements for Messrs. Riddle,
Brown, Gyde, Hagstrom and Hansen and Ms. Thompson.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K was filed by Pacific Continental Corporation on June
7, 1999 as the successor registrant under Section 12(g) pursuant to SEC Rule
12g-3 to Pacific Continental Bank, pursuant to the holding company
reorganization.
Page 15
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 August 6, 1999 /s/ J. Bruce Riddle
------------------ -------------------------------------
J. Bruce Riddle
President and Chief Executive Officer
Dated August 6, 1999 /s/ Hal Brown
------------------- -------------------------------------
Hal Brown
Senior Vice President
and Chief Financial Officer
Page 16