<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-22732
PACIFIC CREST CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4437818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30343 Canwood Street
Agoura Hills, California 91301
(Address of principal executive offices) (Zip Code)
(818) 865-3300
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 |_|
The number of shares outstanding of issuer's $ .01 par value common stock as of
October 31, 2000, was 2,512,460.
9.375% Cumulative Trust Preferred Securities of PCC Capital I
Guarantee of Pacific Crest Capital, Inc. with respect to the
9.375% Cumulative Trust Preferred Securities of PCC Capital I
<PAGE>
PACIFIC CREST CAPITAL, INC.
SEPTEMBER 30, 2000 FORM 10-Q
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.............. 1
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2000
and 1999 ............................................. 2
Consolidated Statements of Shareholders' Equity
Nine Months Ended September 30, 2000 and 1999......... 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999......... 4
Notes to Consolidated Financial Statements.............. 5
Selected Quarterly Financial Data....................... 10
Selected Quarterly Income Statement and Balance
Sheet Data ........................................... 11
Selected Quarterly Average Balance Sheet and
Spread Data .......................................... 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 13
General ........................................ 13
Results of Operations .......................... 15
Financial Condition ............................ 28
Non-Performing Assets........................... 30
Liquidity ...................................... 30
Dividends....................................... 31
Capital Resources............................... 31
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .......................................... 32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 35
Item 2. Changes in Securities................................... 35
Item 3. Defaults Upon Senior Securities......................... 35
Item 4. Submission of Matters to a Vote of Security Holders..... 35
Item 5. Other Information....................................... 35
Item 6. Exhibits and Reports on Form 8-K........................ 35
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Cash $ 3,271 $ 1,282
Securities purchased under resale agreements -- 3,501
--------- ---------
Cash and cash equivalents 3,271 4,783
--------- ---------
Investment securities available for sale, at market 243,211 240,760
Loans:
Commercial real estate loans 384,502 357,312
SBA loans held for investment 5,431 3,690
SBA loans held for sale, at lower of cost or market 6,966 3,269
Other loans 816 2,062
--------- ---------
Gross loans 397,715 366,333
Less: deferred loan fees (408) (381)
Less: allowance for loan losses (7,214) (6,450)
--------- ---------
Net loans 390,093 359,502
--------- ---------
Deferred income taxes, net 8,729 8,600
Accrued interest receivable 6,889 6,604
Prepaid expenses and other assets 1,452 2,154
Premises and equipment 1,213 857
Other real estate owned -- --
--------- ---------
Total assets $ 654,858 $ 623,260
========= =========
Liabilities
Deposits:
Savings accounts $ 157,371 $ 196,368
Certificates of deposit 339,451 269,233
Money market checking accounts 14,360 18,783
--------- ---------
Total deposits 511,182 484,384
--------- ---------
Borrowings:
Securities sold under repurchase agreements 24,000 30,500
Borrowings from State of California 33,000 20,000
Term borrowings 30,000 40,000
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures
("Trust preferred securities") 17,250 17,250
--------- ---------
Total borrowings 104,250 107,750
--------- ---------
Total interest-bearing liabilities 615,432 592,134
Accrued interest payable and other liabilities 9,958 5,577
--------- ---------
Total liabilities 625,390 597,711
========= =========
Shareholders' Equity
Common stock, $.01 par value (10,000,000 shares authorized, 2,986,530
shares issued at September 30, 2000 and December 31, 1999) 30 30
Additional paid-in capital 27,809 27,885
Retained earnings 13,409 9,978
Accumulated other comprehensive loss (4,837) (6,355)
Common stock in treasury, at cost (474,070 shares at
September 30, 2000 and 384,806 shares at December 31, 1999) (6,943) (5,989)
--------- ---------
Total shareholders' equity 29,468 25,549
========= =========
Total liabilities and shareholders' equity $ 654,858 $ 623,260
========= =========
Book value per common share $ 11.73 $ 9.82
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 9,605 $ 8,533 $ 27,412 $ 24,247
Securities purchased under resale agreements 47 58 77 397
Investment securities available for sale 4,108 3,832 12,325 12,037
-------- -------- -------- --------
Total interest income 13,760 12,423 39,814 36,681
-------- -------- -------- --------
Interest expense:
Deposits:
Savings accounts 2,074 2,876 6,381 8,984
Certificates of deposit 5,371 3,151 13,793 7,997
Money market checking accounts 155 241 515 747
-------- -------- -------- --------
Total interest expense on deposits 7,600 6,268 20,689 17,728
-------- -------- -------- --------
Borrowings:
Securities sold under repurchase agreements 338 115 1,634 589
Borrowings from State of California 497 -- 1,288 --
Term borrowings 450 796 1,343 2,746
Trust preferred securities 405 404 1,213 1,213
-------- -------- -------- --------
Total interest expense on borrowings 1,690 1,315 5,478 4,548
-------- -------- -------- --------
Total interest expense 9,290 7,583 26,167 22,276
-------- -------- -------- --------
Net interest income 4,470 4,840 13,647 14,405
Provision for loan losses 125 400 500 1,455
-------- -------- -------- --------
Net interest income after provision for loan losses 4,345 4,440 13,147 12,950
-------- -------- -------- --------
Non-interest income:
Loan prepayment and late fee income 87 225 238 593
Gain on sale of investment securities -- -- -- 586
Gain on sale of SBA loans 114 -- 114 175
Gain on sale of other real estate owned -- -- 115 25
Other income 157 237 438 713
-------- -------- -------- --------
Total non-interest income 358 462 905 2,092
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits 1,611 1,665 4,523 5,139
Net occupancy expenses 332 412 1,078 1,284
Communication and data processing 202 254 644 689
Advertising and promotion 56 101 175 508
FDIC insurance premiums 26 13 78 39
Credit and collection expenses (136) -- (134) 36
Other real estate owned expenses (6) -- (10) 35
Valuation adjustments to other real estate owned -- -- -- 43
Other expenses 325 343 904 972
-------- -------- -------- --------
Total non-interest expense 2,410 2,788 7,258 8,745
-------- -------- -------- --------
Income before income taxes 2,293 2,114 6,794 6,297
Income tax provision 956 873 2,833 2,521
-------- -------- -------- --------
Net income $ 1,337 $ 1,241 $ 3,961 $ 3,776
======== ======== ======== ========
Earnings per common share:
Basic $ 0.53 $ 0.47 $ 1.57 $ 1.41
Diluted $ 0.51 $ 0.45 $ 1.51 $ 1.35
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated Total
Common Stock in Treasury Additional Other Share
------------------- -------------------- Paid-in Retained Comprehensive holders'
Shares Amount Shares Amount Capital Earnings Income (Loss) Equity
-------- -------- -------- -------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 2,986 $ 30 (296) $ (4,705) $ 28,057 $ 5,559 $ 1,199 $ 30,140
Comprehensive income (loss):
Net income -- -- -- -- -- 3,776 -- 3,776
Unrealized loss on investment
securities available for sale,
net of income taxes -- -- -- -- -- -- (5,380) (5,380)
--------
Total comprehensive loss (1,604)
Issuances of common stock in treasury:
Employee stock purchase plan -- -- 4 66 (12) -- -- 54
Non-employee directors'
stock purchase plan -- -- 2 39 -- -- -- 39
Employee stock option plan -- -- 17 264 (160) -- -- 104
Purchase of common stock in treasury -- -- (57) (833) -- -- -- (833)
Cash dividends paid ($0.17 per share) -- -- -- -- -- (453) -- (453)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1999 2,986 $ 30 (330) $ (5,169) $ 27,885 $ 8,882 $ (4,181) $ 27,447
======== ======== ======== ======== ======== ======== ======== ========
Balances at December 31, 1999 2,986 $ 30 (385) $ (5,989) $ 27,885 $ 9,978 $ (6,355) $ 25,549
Comprehensive income:
Net income -- -- -- -- -- 3,961 -- 3,961
Unrealized gain on investment
securities available for sale,
net of income taxes -- -- -- -- -- -- 1,518 1,518
--------
Total comprehensive income 5,479
Issuances of common stock in treasury:
Employee stock purchase plan -- -- 4 55 (14) -- -- 41
Non-employee directors'
stock purchase plan -- -- 3 47 (10) -- -- 37
Employee stock option plan -- -- 6 93 (52) -- -- 41
Purchase of common stock in treasury -- -- (102) (1,149) -- -- -- (1,149)
Cash dividends paid ($0.21 per share) -- -- -- -- -- (530) -- (530)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 2000 2,986 $ 30 (474) $ (6,943) $ 27,809 $ 13,409 $ (4,837) $ 29,468
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 3,961 $ 3,776
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 500 1,455
Gain on sale of investment securities -- (586)
Gain on sale of SBA loans (114) (175)
Gain on sale of other real estate owned (115) (25)
Valuation adjustments to other real estate owned -- 43
Depreciation and amortization of premises and equipment 244 243
Accretion of deferred loan fees (175) (273)
Accretion of discount on investment securities (18) (36)
Deferred income tax (benefit) expense (1,228) 350
Changes in operating assets and liabilities:
Accrued interest receivable (285) 1,725
Prepaid expenses and other assets 702 1
Accrued interest payable and other liabilities 4,381 2,181
--------- ---------
Net cash provided by operating activities 7,853 8,679
========= =========
Investing activities:
Purchases of investment securities
available for sale -- (90,474)
Proceeds from sales and calls of investment securities
available for sale -- 163,137
Principal payments on investment securities 184 11
Loan originations (65,560) (115,987)
Purchases of loans -- (9,017)
Proceeds from sales of SBA loans 2,766 3,115
Principal payments on loans 32,032 45,970
Proceeds from sales of other real estate owned 75 789
Purchases of premises and equipment, net (600) (268)
--------- ---------
Net cash used in investing activities (31,103) (2,724)
========= =========
Financing activities:
Net decrease in savings accounts (38,997) (49,012)
Net increase in certificates of deposit 70,218 64,770
Net decrease in money market checking accounts (4,423) (3,414)
Net decrease in securities sold under repurchase agreements (6,500) (10,279)
Net increase in borrowings from State of California 13,000 --
Net decrease in term borrowings (10,000) (29,450)
Purchase of common stock in treasury, at cost (1,149) (833)
Cash dividends paid (530) (453)
Proceeds from exercise of stock options 41 104
Proceeds from employees and directors stock purchase plans 78 93
--------- ---------
Net cash provided by (used in) financing activities 21,738 (28,474)
========= =========
Net decrease in cash and cash equivalents (1,512) (22,519)
Cash and cash equivalents at beginning of period 4,783 25,640
--------- ---------
Cash and cash equivalents at end of period $ 3,271 $ 3,121
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 1. Basis of Presentation
The interim consolidated financial statements included herein have been
prepared by Pacific Crest Capital, Inc., without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Pacific Crest
Capital, Inc., ("Pacific Crest" or the "Parent"), together with its wholly owned
subsidiaries, Pacific Crest Bank (the "Bank") and PCC Capital I ("PCC Capital"),
is referred to as the "Company." Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such SEC rules and regulations; nevertheless,
the Company believes that the disclosures are adequate to make the information
presented not misleading.
In the opinion of management, all adjustments have been included,
including normal recurring adjustments necessary to present fairly the financial
position of the Company and the results of its operations for the interim period
ended September 30, 2000. Certain reclassifications have been made to prior year
amounts to conform to the 2000 presentation. The results of operations for
interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto, which are
included in the Company's December 31, 1999 Annual Report on Form 10-K.
Note 2. Investment Securities
Investment securities have been classified in the Consolidated Balance
Sheets according to management's intent and ability. Securities classified as
available for sale are recorded at market value. Unrealized gains or losses on
securities available for sale are excluded from earnings and reported in
"Accumulated other comprehensive loss," net of tax effect, as a separate
component of Shareholders' Equity. The following tables present the amortized
cost and estimated fair values of investment securities available for sale as of
the dates indicated (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized Weighted
Amortized ------------------- Estimated Average
September 30, 2000 Cost Gains Losses Fair Value Yield
------------------ -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government sponsored agency securities:
Callable bonds $243,634 $ -- $ (7,998) $235,636 6.48%
Mortgage-backed securities 3,811 -- (80) 3,731 7.05%
Corporate debt securities 4,105 -- (261) 3,844 8.83%
-------- -------- -------- -------- ----
Total investment securities $251,550 $ -- $ (8,339) $243,211 6.53%
======== ======== ======== ======== ====
December 31, 1999
-----------------
Investment securities available for sale:
U.S. government sponsored agency securities:
Callable bonds $243,626 $ -- $(10,555) $233,071 6.50%
Mortgage-backed securities 3,996 -- (140) 3,856 7.09%
Corporate debt securities 4,094 2 (263) 3,833 7.69%
-------- -------- -------- -------- ----
Total investment securities $251,716 $ 2 $(10,958) $240,760 6.53%
======== ======== ======== ======== ====
</TABLE>
U.S. government sponsored agency securities with market values totaling
$93.4 million and $98.7 million were pledged to secure borrowings aggregating
$87.0 million and $90.5 million at September 30, 2000 and December 31, 1999,
respectively.
5
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
The Company's investment securities portfolio at September 30, 2000
consisted of fixed rate investments in U.S. government sponsored agency callable
bonds and mortgage-backed securities issued by Fannie Mae, Freddie Mac, the
Federal Home Loan Bank and the Government National Mortgage Association, as well
as variable rate investments in investment grade corporate debt securities. The
callable bonds have call features that allow the issuer to retire (call) an
individual security prior to that security's stated maturity date. As of
September 30, 2000, the Company's callable bond portfolio had call dates ranging
between one month and 10 months. The following table reflects the scheduled
maturities in Company's investment securities portfolio at September 30, 2000
(dollars in thousands):
Weighted
Amortized Estimated Average
Cost Fair Value Yield
-------- ---------- --------
Due in one to five years $ 81,360 $ 80,239 6.07%
Due in six to ten years 162,274 155,397 6.68%
Due over ten years 7,916 7,575 7.97%
-------- -------- ----
Total investment securities $251,550 $243,211 6.53%
======== ======== ====
Note 3. Borrowings from State of California
The Bank has a fixed rate borrowing facility with the State of California
Treasurer's Office under which the Bank can borrow an amount not to exceed its
unconsolidated total shareholder's equity. Borrowing maturity dates under this
program cannot exceed one year. The State of California requires collateral with
a market value equal to at least 110% of the outstanding borrowing amount. The
Bank has pledged specific amounts of certain U.S. government sponsored agency
securities to meet this collateral requirement. As of September 30, 2000, the
Bank's unconsolidated total shareholder's equity was $42.0 million, and the
Bank's outstanding borrowings from the State of California totaled $33.0
million.
The table below describes the attributes of the Bank's borrowings from the
State of California as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 2000
------------------------------------
Borrowing Date Amount Rate Maturity Date
--------------------------------------- ------- ---- -------------
<S> <C> <C> <C>
July 2000 $ 8,000 6.03% October 2000
July 2000 5,000 6.22% October 2000
October 1999 5,000 5.39% October 2000
November 1999 5,000 5.74% December 2000
December 1999 5,000 5.98% December 2000
August 2000 5,000 6.47% February 2001
------- ----
Total State of California borrowings $33,000 5.98%
======= ====
<CAPTION>
December 31, 1999
------------------------------------
Borrowing Date Amount Rate Maturity Date
--------------------------------------- ------- ---- -------------
<S> <C> <C> <C>
October 1999 $ 5,000 5.18% April 2000
October 1999 5,000 5.39% October 2000
November 1999 5,000 5.74% December 2000
December 1999 5,000 5.98% December 2000
------- ----
Total State of California borrowings $20,000 5.57%
======= ====
</TABLE>
6
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 4. Term Borrowings
The Company had fixed rate, long-term borrowings through one broker at
September 30, 2000 and December 31, 1999. These borrowings have call features
that allow the lender to call the debt prior to the stated maturity date. This
debt is secured by pledging specific amounts of certain U.S. government
sponsored agency securities.
The tables below reflect the attributes of the Company's term borrowings
as of the dates indicated (dollars in thousands):
September 30, 2000
----------------------------------------------------
Maturity
Borrowing Type Amount Rate Call Date Date
------------------------ ------- ----- -------------- --------------
Two-year borrowing $20,000 6.62% None September 2002
Three-year borrowing 10,000 5.95% October 2000 October 2002
------- ----
Total term borrowings $30,000 6.40%
======= ====
December 31, 1999
----------------------------------------------------
Maturity
Borrowing Type Amount Rate Call Date Date
------------------------ ------- ----- -------------- --------------
Five-year borrowing $10,000 5.48% January 2000 January 2003
Three-year borrowing 20,000 5.75% September 2000 September 2002
Three-year borrowing 10,000 5.95% October 2000 October 2002
------- ----
Total term borrowings $40,000 5.73%
======= ====
Note 5. Computation of Book Value Per Common Share
Book value per common share was calculated by dividing total shareholders'
equity by the number of common shares issued less common shares held in
treasury. The tables below present the computation of book value per common
share as of the dates indicated (dollars in thousands, except per share data):
September 30, December 31,
2000 1999
------------- ------------
Total shareholders' equity $ 29,468 $ 25,549
----------- -----------
Common shares issued 2,986,530 2,986,530
Less: common shares held
in treasury (474,070) (384,806)
----------- -----------
Common shares outstanding 2,512,460 2,601,724
=========== ===========
Book value per common share $ 11.73 $ 9.82
----------- -----------
7
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 6. Computation of Earnings Per Common Share
Basic and diluted earnings per common share were determined by dividing
net income by the applicable basic and diluted weighted average common shares
outstanding. For the diluted earnings per share computation, the weighted
average common shares outstanding were adjusted to reflect the number of common
stock equivalents outstanding based on the number of outstanding stock options
issued by the Company utilizing the treasury stock method.
The tables below present the basic and diluted earnings per common share
computations for the periods indicated (dollars and shares in thousands, except
per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $1,337 $1,241 $3,961 $3,776
====== ====== ====== ======
Basic weighted average common
shares outstanding 2,512 2,657 2,529 2,672
Dilutive effect of stock options 104 120 92 123
------ ------ ------ ------
Diluted weighted average common
shares outstanding 2,616 2,777 2,621 2,795
------ ------ ------ ------
Earnings per common share:
Basic $ 0.53 $ 0.47 $ 1.57 $ 1.41
Diluted $ 0.51 $ 0.45 $ 1.51 $ 1.35
====== ====== ====== ======
Note 7. Supplemental Disclosure of Cash Flow Information
For purposes of the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows, cash and cash equivalents include "Cash" and
"Securities purchased under resale agreements." Supplemental disclosure of cash
flow information is as follows for the periods indicated (in thousands):
Nine Months Ended
September 30,
------------------
2000 1999
------- -------
Cash paid during the period for:
Interest $25,713 $22,539
Income taxes $ 4,100 $ 2,825
Non-cash investing and financing activities:
Transfers from loans to other real estate owned $ 210 $ --
Loans to facilitate the sale of other real estate owned $ 250 $ 225
8
<PAGE>
PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 8. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", effective December 2000. Management does not believe that there
will be a material impact on the financial position or results of operations of
the Company from adoption of this bulletin.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas.
The amendment included expanding the normal purchase and sale exemption for
supply contracts, permitting the offsetting of certain intercompany foreign
currency derivatives and thus reducing the number of third party derivatives,
permitting hedge accounting for foreign-currency denominated assets and
liabilities and redefining interest rate risk to reduce sources of
ineffectiveness. Management does not believe that there will be a material
impact on the financial position or results of operations of the Company from
adoption of this statement.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for financial statements for periods beginning after December 15,
2000. This statement revises the standards for accounting for securitizations
and other transfers of financial assets and collateral, and requires certain
disclosures. Management is evaluating the impact of this statement on the
financial position and results of operations of the Company.
9
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain selected financial data concerning
the Company as of the dates or for the periods indicated (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
At or For the Three Months Ended
--------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
------------- -------- --------- --------------------------
<S> <C> <C> <C> <C> <C>
Loan Volume:
Loan originations $ 24,738 $ 17,005 $ 23,817 $ 15,666 $ 27,129
Loan sales - SBA 2,601 -- -- 1,838 --
Performance Ratios:
Return on average (realized) shareholders' equity (1) 16.02% 15.59% 17.22% 16.26% 16.11%
Return on average total assets (1) 0.82% 0.79% 0.88% 0.83% 0.82%
Net interest rate spread (2) 2.40% 2.51% 2.75% 2.80% 2.92%
Net interest margin (2) 2.73% 2.81% 3.05% 3.07% 3.19%
Operating expense to average total assets (3) 1.56% 1.47% 1.61% 1.77% 1.84%
Efficiency ratio (4) 52.86% 50.76% 50.21% 54.13% 52.58%
Average Balances:
Average shareholders' equity $ 28,222 $ 24,975 $ 24,725 $ 26,984 $ 29,057
Average realized shareholders' equity (5) 33,387 32,273 31,738 31,465 30,807
Average total assets 652,309 637,926 622,416 617,669 605,856
Per Share Data:
Dividends declared per common share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.06
Basic earnings per common share 0.53 0.50 0.53 0.49 0.47
Diluted earnings per common share 0.51 0.48 0.52 0.47 0.45
Book value per common share 11.73 10.70 10.17 9.82 10.33
Realized shareholders' equity per common share (5) 13.65 13.19 12.77 12.26 11.90
Asset Quality Ratios:
Total non-performing assets to total assets -- 0.18% -- 0.03% 0.04%
Allowance for loan losses to total loans 1.82% 1.84% 1.77% 1.76% 1.71%
Allowance for loan losses to non-accrual loans -- 597.64% -- 3071.43% 2660.43%
Capital Ratios - Pacific Crest Capital, Inc.:
Leverage ratio 6.96% 6.85% 6.86% 6.89% N/A
Tier 1 risk-based capital ratio 10.28% 10.17% 9.94% 10.18% N/A
Total risk-based capital ratio 12.84% 12.85% 12.72% 13.02% N/A
Capital Ratios - Pacific Crest Bank:
Leverage ratio 7.24% 7.21% 7.33% 7.19% 7.20%
Tier 1 risk-based capital ratio 10.59% 10.61% 10.51% 10.38% 10.31%
Total risk-based capital ratio 11.84% 11.87% 11.76% 11.64% 11.56%
</TABLE>
----------
(1) Calculation is based upon annualized net income.
(2) Defined under "Results of Operations - Net Interest Income."
(3) Operating expense is defined as total non-interest expense less valuation
adjustments to OREO, other OREO expenses and credit and collection
expenses. Calculation is based on annualized operating expense.
(4) Efficiency ratio is defined as operating expense divided by the sum of net
interest income, loan prepayment and late fee income, gain on sale of SBA
loans and other income.
(5) Calculation excludes accumulated other comprehensive loss from
shareholders' equity.
10
<PAGE>
SELECTED QUARTERLY INCOME STATEMENT AND BALANCE SHEET DATA
The following table sets forth certain selected income statement and
balance sheet data concerning the Company as of the dates or for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
At or For the Three Months Ended
---------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 4,470 $ 4,452 $ 4,725 $ 4,766 $ 4,840
Provision for loan losses (125) (125) (250) (222) (400)
Non-interest income 358 174 373 367 462
Operating expense (2,410) (2,348) (2,502) (2,738) (2,788)
OREO and collection expenses 142 6 (4) -- --
--------- --------- --------- --------- ---------
Income before income taxes 2,435 2,159 2,342 2,173 2,114
Income tax provision (956) (901) (976) (894) (873)
--------- --------- --------- --------- ---------
Net income $ 1,479 $ 1,258 $ 1,366 $ 1,279 $ 1,241
========= ========= ========= ========= =========
Balance Sheet Data:
Loans, net of deferred loan fees $ 397,307 $ 384,305 $ 378,564 $ 365,952 $ 364,626
Securities purchased under resale agreements -- 4,025 100 3,501 765
Investment securities - at amortized cost:
U.S. agency callable bonds 243,634 243,633 243,633 243,626 243,619
U.S. agency mortgage-backed securities 3,811 3,914 3,983 3,996 1,600
Corporate debt securities 4,105 4,102 4,098 4,094 1,863
--------- --------- --------- --------- ---------
Total investment securities 251,550 251,649 251,714 251,716 247,082
--------- --------- --------- --------- ---------
Total interest-earning assets $ 648,857 $ 639,979 $ 630,378 $ 621,169 $ 612,473
========= ========= ========= ========= =========
Deposits:
Savings accounts $ 157,371 $ 163,310 $ 176,478 $ 196,368 $ 226,999
Money market checking accounts 14,360 15,206 16,589 18,783 20,435
--------- --------- --------- --------- ---------
Total savings/money market checking 171,731 178,516 193,067 215,151 247,434
Certificates of deposit 339,451 329,096 280,572 269,233 247,749
--------- --------- --------- --------- ---------
Total deposits $ 511,182 $ 507,612 $ 473,639 $ 484,384 $ 495,183
========= ========= ========= ========= =========
Borrowings:
Securities sold under repurchase agreements 24,000 21,000 51,100 30,500 20,500
Borrowings from State of California 33,000 33,000 25,000 20,000 --
Term borrowings 30,000 30,000 30,000 40,000 50,000
Trust preferred securities 17,250 17,250 17,250 17,250 17,250
--------- --------- --------- --------- ---------
Total borrowings 104,250 101,250 123,350 107,750 87,750
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 615,432 $ 608,862 $ 596,989 $ 592,134 $ 582,933
========= ========= ========= ========= =========
Shareholders' equity:
Common stock $ 30 $ 30 $ 30 $ 30 $ 30
Additional paid-in capital 27,809 27,816 27,831 27,885 27,885
Beginning retained earnings 9,978 9,978 9,978 5,559 5,559
Year-to-date earnings 3,961 2,624 1,366 5,055 3,776
Year-to-date dividends (530) (354) (179) (636) (453)
Common stock in treasury, at cost (6,943) (6,968) (7,005) (5,989) (5,169)
--------- --------- --------- --------- ---------
Total realized shareholders' equity 34,305 33,126 32,021 31,904 31,628
Accumulated other comprehensive loss (4,837) (6,254) (6,517) (6,355) (4,181)
--------- --------- --------- --------- ---------
Total shareholders' equity $ 29,468 $ 26,872 $ 25,504 $ 25,549 $ 27,447
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
SELECTED QUARTERLY AVERAGE BALANCE SHEET AND SPREAD DATA
The following table sets forth certain selected average balance sheet and
spread data concerning the Company for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Average Interest-Earning Assets:
Loans, net of deferred loan fees $ 395,935 $ 383,876 $ 371,258 $ 364,959 $ 360,404
Securities purchased under resale agreements 2,879 1,711 228 1,280 4,662
Investment securities available for sale -
at amortized cost:
U.S. agency callable bonds 243,634 243,635 243,630 243,623 235,051
U.S. agency mortgage-backed securities . 3,841 3,955 3,990 2,790 1,603
Corporate debt securities 4,104 4,100 4,096 2,714 314
----------- ----------- ----------- ----------- -----------
Total investment securities 251,579 251,690 251,716 249,127 236,968
----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 650,393 $ 637,277 $ 623,202 $ 615,366 $ 602,034
=========== =========== =========== =========== ===========
Average Interest-Bearing Liabilities:
Savings accounts $ 160,336 $ 167,413 $ 182,593 $ 210,422 $ 238,541
Certificates of deposit 339,594 300,523 276,925 257,842 230,801
Money market checking accounts 14,528 15,839 18,130 19,700 21,624
----------- ----------- ----------- ----------- -----------
Total deposits 514,458 483,775 477,648 487,964 490,966
=========== =========== =========== =========== ===========
Securities sold under repurchase agreements 19,698 40,533 41,680 19,068 7,753
Borrowings from State of California 33,000 32,472 22,363 10,761 --
Term borrowings 30,000 30,000 30,659 48,696 54,511
Trust preferred securities 17,250 17,250 17,250 17,250 17,250
----------- ----------- ----------- ----------- -----------
Total borrowings 99,948 120,255 111,952 95,775 79,514
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 614,406 $ 604,030 $ 589,600 $ 583,739 $ 570,480
=========== =========== =========== =========== ===========
Yields on Average Interest-Earning Assets:
Loans, net of deferred loan fees 9.65% 9.50% 9.47% 9.36% 9.39%
Securities purchased under resale agreements 6.49% 6.35% 5.29% 4.96% 4.94%
Investment securities available for sale:
U.S. agency callable bonds 6.48% 6.48% 6.49% 6.49% 6.47%
U.S. agency mortgage-backed securities 6.98% 7.08% 7.02% 6.88% 6.49%
Corporate debt securities 9.06% 8.68% 8.40% 8.11% 7.64%
----------- ----------- ----------- ----------- -----------
Total investment securities 6.53% 6.53% 6.53% 6.51% 6.47%
----------- ----------- ----------- ----------- -----------
Total interest-earning assets 8.42% 8.33% 8.30% 8.18% 8.19%
=========== =========== =========== =========== ===========
Rates on Average Interest-Bearing Liabilities:
Savings accounts 5.15% 5.07% 4.83% 4.78% 4.78%
Certificates of deposit 6.29% 6.01% 5.71% 5.56% 5.42%
Money market checking accounts 4.24% 4.24% 4.39% 4.43% 4.42%
----------- ----------- ----------- ----------- -----------
Total deposits 5.88% 5.63% 5.32% 5.18% 5.07%
=========== =========== =========== =========== ===========
Securities sold under repurchase agreements 6.83% 6.50% 6.19% 5.87% 5.88%
Borrowings from State of California 5.89% 5.77% 5.61% 5.38% 0.00%
Term borrowings 5.87% 5.82% 5.83% 5.70% 5.71%
Trust preferred securities 9.39% 9.37% 9.37% 9.37% 9.37%
----------- ----------- ----------- ----------- -----------
Total borrowings 6.67% 6.54% 6.47% 6.36% 6.52%
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 6.02% 5.82% 5.55% 5.38% 5.27%
=========== =========== =========== =========== ===========
Net Interest Rate Spread 2.40% 2.51% 2.75% 2.80% 2.92%
Net Interest Margin 2.73% 2.81% 3.05% 3.07% 3.19%
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major factors
that influenced the consolidated results of operations and financial condition
of the Company for the period ended September 30, 2000. This analysis should be
read in conjunction with the Company's December 31, 1999 Annual Report on Form
10-K filed with the Securities and Exchange Commission and with the unaudited
financial statements and notes as set forth elsewhere in this report.
GENERAL
Forward-Looking Information
Certain matters discussed under this caption may constitute
forward-looking statements under Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. There can be no assurance that the results
described or implied in such forward-looking statements will, in fact, be
achieved and actual results, performance, and achievements could differ
materially because the business of the Company involves inherent risks and
uncertainties. Risks and uncertainties include possible future deteriorating
economic conditions in the Company's areas of operation; interest rate risk
associated with volatile interest rates and related asset/liability matching
risks; liquidity risks; risk of significant non-earning assets and net credit
losses that could occur, particularly in times of weak economic conditions or
times of rising interest rates; risk of available for sale securities declining
significantly in value as interest rates rise; and regulatory risks associated
with the variety of current and future regulations to which the Company is
subject. Risk factors are also discussed in detail in the Company's December 31,
1999 Annual Report on Form 10-K.
Earnings Performance
Net income was $1.3 million (or $0.51 per common share on a diluted basis)
for the three months ended September 30, 2000, compared to $1.2 million (or
$0.45 per common share on a diluted basis) for the corresponding period in 1999.
Pre-tax income was $2.3 million compared to $2.1 million for the three months
ended September 30, 2000 and 1999, respectively. The increase in pre-tax income
was primarily due to decreases of $378,000 and $275,000 in non-interest expense
and provision for loan losses, respectively, partially offset by decreases of
$104,000 and $370,000 in non-interest income and net interest income,
respectively.
Net income was $4.0 million (or $1.51 per common share on a diluted basis)
for the nine months ended September 30, 2000, compared to $3.8 million (or $1.35
per common share on a diluted basis) for the corresponding period in 1999.
Pre-tax income was $6.8 million compared to $6.3 million for the nine months
ended September 30, 2000 and 1999, respectively. The increase in pre-tax income
was primarily due to decreases of $1.5 million and $955,000 in non-interest
expense and provision for loan losses, respectively, partially offset by
decreases of $1.2 million and $758,000 in non-interest income and net interest
income, respectively.
Annualized return on average shareholders' equity was 16.02% and 16.27%
for the three and nine months ended September 30, 2000, respectively, compared
to 16.11% and 16.79% for the same periods in 1999. Annualized return on average
total assets was 0.82% and 0.83% for the three and nine months ended September
30, 2000, respectively, compared to 0.82% and 0.84% for the same periods in
1999.
Capital
As of September 30, 2000, Pacific Crest's leverage ratio, Tier 1
risk-based capital ratio and total risk-based capital ratio were 6.96%, 10.28%,
and 12.84%, respectively. The Bank's leverage ratio, tier 1 risk-based capital
ratio and total risk-based capital ratio were 7.24%, 10.59% and 11.84%,
respectively. These ratios placed Pacific Crest and the Bank in the
"well-capitalized" category as defined by federal regulations, which require
corresponding capital ratios of 5%, 6% and 10%, respectively, to qualify for
that designation.
Dividends
On October 19, 2000, the Company announced that the Board of Directors had
declared a $0.07 per common share cash dividend for the fourth quarter of 2000.
The dividend will be paid to shareholders of record at the close of business on
December 1, 2000 and is payable on December 15, 2000.
13
<PAGE>
On July 28, 2000, the Company announced that the Board of Directors had
declared a $0.07 per common share cash dividend for the third quarter of 2000.
The dividend was payable to shareholders of record at the close of business on
September 1, 2000 and was paid on September 15, 2000. The total amount of this
dividend was approximately $176,000.
The Company declared and paid a $0.07 per common share cash dividend
during each of the first and second quarters of 2000 for a total of $179,000 and
$175,000, respectively.
Stock Repurchase Plan
As of September 30, 2000, the Company had 39,000 remaining shares
authorized for repurchase under its common stock repurchase program. During the
nine months ended September 30, 2000, the Company repurchased 102,000 shares of
its common stock for a total cost of approximately $1,149,000, which resulted in
an average cost per share of $11.27. During the same period, the Company
utilized repurchased shares for all of its common stock issuances under the
Company's employee stock purchase plan, non-employee directors stock purchase
plan, and employee stock option plan, which totaled 12,736 shares.
Sale of Interest Rate Cap Agreement
On February 8, 2000, the Company sold its interest rate cap agreement
for $2.5 million and recognized a deferred gain of $1.8 million, which was
reported in the Consolidated Balance Sheets under the caption "Accrued
interest payable and other liabilities". The interest rate cap agreement had
originally been purchased on June 8, 1998, at a price of $925,000. The
deferred gain will be amortized as a credit to "Interest expense - deposits"
over the remaining life of the original interest rate cap agreement, which
had a maturity date of June 8, 2003. During the nine months ended September
30, 2000, the amount of deferred gain amortization totaled $356,000, which
resulted in a reduction in interest expense on deposits. Conversely, during
the nine months ended September 30, 1999, the amortization of the purchase
price of the interest rate cap totaled $138,000, which resulted in an
increase in interest expense on deposits. As of September 30, 2000, the
remaining deferred gain resulting from the sale of the interest rate cap
totaled $1.5 million and will be amortized as follows: $140,000 for the last
three months of 2000, $554,000 for 2001, $554,000 for 2002, and $242,000 for
2003.
SBA Lending
During the third quarter of 2000, the U.S. Small Business Administration
("SBA") awarded the Company "Preferred Lender" status for the Orange County,
California SBA district. Preferred Lender status is the highest designation
granted to lenders by the SBA. The Orange County SBA district includes Orange,
San Bernardino and Riverside counties.
In April of 2000, the SBA awarded the Company Preferred Lender status for
the Los Angeles SBA district, which covers Los Angeles, Ventura, and Santa
Barbara counties. In October of 1999, the SBA awarded the Company Preferred
Lender status for the San Diego SBA district, which covers San Diego and
Imperial counties.
In June of 2000, the Company hired one Senior Vice President and three
Vice Presidents in San Diego in order to significantly expand the Company's SBA
lending capabilities in Southern California. Each of the four officers has a
minimum of five years experience in the SBA industry and together they have a
combined 24 years of experience in the SBA industry.
Full Service Checking Accounts
During the third quarter of 2000, the Company introduced full service,
demand deposit checking accounts on a pilot basis. The Company intends to
offer this checking product to all of its customers during the fourth quarter
of 2000. Management anticipates that the growth of this checking product
could reduce the Company's average cost of funds and provide a stable source
of funding for loan growth.
14
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Three Months Ended September 30, 2000 vs. Three Months Ended September 30,
1999
The following table presents the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest yields/rates for the periods
presented. All average balances are daily average balances (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------------
2000 1999
------------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans (1) $395,935 $ 9,605 9.65% $360,404 $ 8,533 9.60%
Securities purchased under resale agreements 2,879 47 6.49% 4,662 58 4.94%
Investment securities available for sale (2):
U.S. government sponsored agency securities:
Callable bonds 243,634 3,948 6.48% 235,051 3,800 6.47%
Mortgage-backed securities 3,841 67 6.98% 1,603 26 6.49%
Corporate debt securities 4,104 93 9.06% 314 6 7.64%
-------- ------- ----------- -------- ------- -----------
Total investment securities 251,579 4,108 6.53% 236,968 3,832 6.47%
-------- ------- ----------- -------- ------- -----------
Total interest-earning assets 650,393 13,760 8.42% 602,034 12,423 8.19%
------- ----------- ------- -----------
Non-interest-earning assets 9,050 10,093
Less: allowance for loan losses (7,134) (6,271)
-------- --------
Total assets $652,309 $605,856
======== ========
Interest-Bearing Liabilities:
Savings accounts $160,336 2,074 5.15% $238,541 2,876 4.78%
Certificates of deposit 339,594 5,371 6.29% 230,801 3,151 5.42%
Money market checking accounts 14,528 155 4.24% 21,624 241 4.42%
-------- ------- ----------- -------- ------- -----------
Total deposits 514,458 7,600 5.88% 490,966 6,268 5.07%
-------- ------- ----------- -------- ------- -----------
Securities sold under repurchase agreements 19,698 338 6.83% 7,753 115 5.88%
Borrowings from State of California 33,000 497 5.89% 0 --
Term borrowings 30,000 450 5.87% 54,511 796 5.71%
Trust preferred securities 17,250 405 9.39% 17,250 404 9.37%
-------- ------- ----------- -------- ------- -----------
Total borrowings 99,948 1,690 6.67% 79,514 1,315 6.52%
-------- ------- ----------- -------- ------- -----------
Total interest-bearing liabilities 614,406 9,290 6.02% 570,480 7,583 5.27%
------- ----------- ------- -----------
Non-interest-bearing liabilities 9,681 6,319
Shareholders' equity 28,222 29,057
-------- --------
Total liabilities and shareholders' equity $652,309 $605,856
======== ========
Excess of interest-earning assets
over interest-bearing liabilities $ 35,987 $ 31,554
======== ========
Net interest income $ 4,470 $ 4,840
======= =======
Net interest rate spread (3) 2.40% 2.92%
==== ===========
Net interest margin (4) 2.73% 3.19%
==== ===========
Average interest-earning assets to
average interest-bearing liabilities 105.9% 105.5%
======== ========
</TABLE>
----------
(1) Average balances of loans are calculated net of deferred loan fees, but
include non-accrual loans which have a zero yield.
(2) Average balances of investment securities available for sale are presented
on a historical amortized cost basis, without the effects of fair value
adjustments.
(3) Net interest rate spread represents the yield earned on average total
interest-earning assets less the rate paid on average total
interest-bearing liabilities.
(4) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.
15
<PAGE>
The following table sets forth the composition of average interest-earning
assets and average interest-bearing liabilities by category and by the
percentage of each category to the total for the periods indicated, including
the change in average balance and yield/rate between these respective periods
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------------------------------
2000 1999 Net Change
---------------------------- ---------------------------- ------------------------------
% Average % Average % Average
Average of Yield/ Average of Yield/ Average of Yield/
Balance Total Rate Balance Total Rate Balance Total Rate
-------- ----- ------- -------- ----- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $395,935 60.9% 9.65% $360,404 59.8% 9.39% $ 35,531 1.1% 0.26%
Securities purchased under
resale agreements 2,879 0.4% 6.49% 4,662 0.8% 4.94% (1,783) -0.3% 1.55%
Investment securities available
for sale:
U.S. government sponsored
agency securities:
Callable bonds 243,634 37.5% 6.48% 235,051 39.0% 6.47% 8,583 -1.6% 0.01%
Mortgage-backed securities 3,841 0.6% 6.98% 1,603 0.3% 6.49% 2,238 0.3% 0.49%
Corporate debt securities 4,104 0.7% 9.06% 314 0.1% 7.64% 3,790 0.6% 1.42%
-------- ----- -------- ----- -------- ------
Total investment securities 251,579 38.7% 6.53% 236,968 39.4% 6.47% 14,611 -0.7% 0.06%
-------- ----- -------- ----- -------- ------
Total interest-earning assets $650,393 100.0% 8.42% $602,034 100.0% 8.19% $ 48,359 0.23%
======== ===== ======== ===== ========
Interest-Bearing Liabilities:
Savings accounts $160,336 26.1% 5.15% $238,541 41.8% 4.78% $(78,205) -15.7% 0.37%
Certificates of deposit 339,594 55.3% 6.29% 230,801 40.5% 5.42% 108,793 14.8% 0.87%
Money market
checking accounts 14,528 2.3% 4.24% 21,624 3.8% 4.42% (7,096) -1.5% -0.18%
-------- ----- -------- ----- -------- ------
Total deposits 514,458 83.7% 5.88% 490,966 86.1% 5.07% 23,492 -2.3% 0.81%
-------- ----- -------- ----- -------- ------
Securities sold under
repurchase agreements 19,698 3.2% 6.83% 7,753 1.4% 5.88% 11,945 1.8% 0.95%
Borrowings from State
of California 33,000 5.4% 5.89% -- -- -- 33,000 5.4% 5.89%
Term borrowings 30,000 4.9% 5.87% 54,511 9.5% 5.71% (24,511) -4.6% 0.16%
Trust preferred securities 17,250 2.8% 9.39% 17,250 3.0% 9.37% -- -0.2% 0.02%
-------- ----- -------- ----- -------- ------
Total borrowings 99,948 16.3% 6.67% 79,514 13.9% 6.52% 20,434 2.3% 0.15%
-------- ----- -------- ----- -------- ------
Total interest-bearing
liabilities $614,406 100.0% 6.02% $570,480 100.0% 5.27% $ 43,926 0.75%
======== ===== ======== ===== ========
Excess of interest-earning assets
over interest-bearing liabilities $ 35,987 $ 31,554 $ 4,433
Net interest rate spread 2.40% 2.92% -0.52%
Net interest margin 2.73% 3.19% -0.46%
</TABLE>
16
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense due to changes in average balances of
interest-earning assets and interest-bearing liabilities and changes in interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (i.e. changes in average balance multiplied by prior period rate) and
(ii) changes in rate (i.e. changes in rate multiplied by prior period average
balance). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately based on
the absolute dollar amounts of the changes due to volume and rate (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 vs. 1999
-------------------------------
Increase (Decrease) Due To
-------------------------------
Volume Rate Total
------- ------- -------
<S> <C> <C> <C>
Interest Income:
Loans $ 837 $ 235 $ 1,072
Securities purchased under resale
agreements (26) 15 (11)
Investment securities available for sale:
U.S. government sponsored agency securities:
Callable bonds 142 6 148
Mortgage-backed securities 39 2 41
Corporate debt securities 86 1 87
------- ------- -------
Total investment securities 267 9 276
------- ------- -------
Total interest income $ 1,078 $ 259 $ 1,337
======= ======= =======
Interest Expense:
Savings accounts $(1,008) $ 206 $ (802)
Certificates of deposit 1,656 564 2,220
Money market checking accounts (77) (9) (86)
------- ------- -------
Total deposits 571 761 1,332
------- ------- -------
Securities sold under repurchase
agreements 202 21 223
Borrowings from State of California 497 -- 497
Term borrowings (367) 21 (346)
Trust preferred securities -- 1 1
------- ------- -------
Total borrowings 332 43 375
------- ------- -------
Total interest expense $ 903 $ 804 $ 1,707
======= ======= =======
Net interest income $ 175 $ (545) $ (370)
======= ======= =======
</TABLE>
Net Interest Income
Net interest income decreased by $370,000, to $4.5 million, during the
three months ended September 30, 2000 compared to the same period in 1999.
This decrease was comprised of a $545,000 decrease attributable to changes in
interest rates, partially offset by a $175,000 increase attributable to
changes in volume. This was primarily due to the reduction in the net
interest rate spread of 52 basis points, to 2.40%, partially offset by the
$4.4 million increase, to $36.0 million, in the excess of interest-earning
assets over interest-bearing liabilities during the third quarter of 2000
compared to the same period in 1999.
The reduction in the net interest rate spread was principally due to an
increase of 75 basis points, to 6.02%, in the rate paid on average total
interest-bearing liabilities, partially offset by an increase of 23 basis
points, to 8.42%, in the yield on average total interest-earning assets. The
rate paid on average total interest-bearing liabilities increased primarily
due to the rise in interest rates, which started during the second half of
1999. The yield earned on average total interest-earning assets increased
principally due to an increase of 26 basis points, to 9.65%, in the yield
earned on average loans. The growth in the excess of interest-earning assets
over interest-bearing liabilities was primarily due to an increase of $48.3
million, to $650.4 million, in average total interest-earning assets,
partially offset by an increase of $43.9 million, to $614.4 million, in
average total interest-bearing liabilities.
17
<PAGE>
Total Interest Income
Total interest income increased by $1.3 million, to $13.8 million, during
the three months ended September 30, 2000 compared to the same period in 1999.
This was due to the growth in average total interest-earning assets and to the
increase in yield earned on these assets, which contributed $1.1 million and
$259,000, respectively, to interest income.
The growth in average total interest-earning assets of $48.4 million
during the third quarter of 2000 compared to the same period in 1999, was
principally due to an increase in average loans of $35.5 million, to $395.9
million, and an increase in average investment securities of $14.6 million, to
$251.6 million, partially offset by a decrease of $1.8 million, to $2.9 million,
in average securities purchased under resale agreements. The growth in loans and
investment securities was funded by deposits and borrowings, as well as through
liquidation of securities purchased under resale agreements.
The $14.6 million increase in average investment securities was primarily
due to the purchase in the third quarter of 1999 of $34.5 million of fixed rate,
U.S. government sponsored agency callable bonds with a weighted average coupon
of 7.10%. The purchase of these securities was funded by an increase in
deposits. Contributing to the $14.6 million increase in average investment
securities were the purchases in the fourth quarter of 1999 of $2.5 million of
fixed rate, Fannie Mae mortgage-backed securities with a weighted average coupon
of 7.50%, and $4.1 million of variable rate, corporate debt securities with a
weighted average coupon of 7.36%.
The yield on average total interest-earning assets increased by 23 basis
points, to 8.42%, during the three months ended September 30, 2000 compared to
the same period in 1999, primarily due to the above-mentioned increase of 26
basis points, to 9.65%, in the yield on average loans, as well as to increases
of 6 basis points and 155 basis points in the yields on average investment
securities and average securities purchased under resale agreements,
respectively.
Contributing to the increase in the yield on average loans was the
increase of 75 basis points, to 5.50%, in the federal funds rate by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), which took
place during the second half of 1999, the increase of 50 basis points, to 6.00%,
which took place during the first quarter of 2000, and the additional increase
of 50 basis points to 6.50%, which took place during the second quarter of 2000.
The impact of these increases in the federal funds rate caused upward repricing
on the Company's variable rate loans, especially those tied to the prime rate.
The federal funds rate is the rate at which banks lend to each other in the
overnight market. Increases in the federal funds rate generally result in
increases of the prime rates offered by major banks, including Bank of America.
The Company's prime rate loans are priced at a margin above either Bank of
America's prime lending rate or the published Wall Street Journal prime lending
rate.
The increase in the yield on average investment securities of 6 basis
points, to 6.53%, during the three months ended September 30, 2000 compared
to the same period last year, was primarily due to the above mentioned
purchases in the fourth quarter of 1999 of $4.1 million in higher yielding
corporate debt securities and $2.5 million in higher yielding mortgage-backed
securities.
Total Interest Expense
Total interest expense increased by $1.7 million, to $9.3 million, during
the three months ended September 30, 2000 compared to the same period in 1999.
This was due to the growth in average interest-bearing liabilities and to the
increase in the interest rate paid on these liabilities, which contributed
$903,000 and $804,000, respectively, to interest expense.
The growth in average total interest-bearing liabilities of $43.9 million
during the third quarter of 2000 compared to the same period in 1999, was
primarily due to an increase in average deposits of $23.5 million, to $514.5
million, and an increase in average borrowings of $20.4 million, to $99.9
million. The changes in average deposits and average borrowings resulted in a
shift in the mix of average total interest-bearing liabilities to higher rate
borrowings from lower rate deposits. The percentage of average borrowings to
average total interest-bearing liabilities increased to 16.3% during the third
quarter of 2000 from 13.9% during the same period in 1999.
The increase in average deposits of $23.5 million during the third quarter
of 2000 compared to the third quarter of 1999, was principally due to an
increase in average certificates of deposit of $108.8 million, partially offset
by decreases of $78.2 million and $7.1 million in average savings accounts and
average money market checking accounts, respectively.
18
<PAGE>
Deposits decreased $21.5 million over two quarters from $495.2 million at
September 30, 1999 to $473.6 million at March 31, 2000, then increased $34.0
million to $507.6 million at June 30, 2000, and finally increased $3.6 million
to $511.2 million at September 30, 2000. During this twelve month period,
certificate of deposit balances constantly increased, while savings/money market
checking account balances constantly decreased.
The increases in deposits of $34.0 million and $3.6 million during the
second and third quarters of 2000, respectively, were primarily attributable to
the Company's significant increases in certificate of deposit rates in April and
May 2000, and to the addition of $16.8 million in brokered deposits during the
second quarter of 2000. Thus, the growth in certificates of deposit outpaced the
runoff in savings/money market checking accounts during these two quarters and
was used to pay down securities sold under repurchase agreements and to fund
loans.
The changes in the average balances of the Company's deposit products
during the three months ended September 30, 2000 compared to the same period
in 1999, were primarily attributable to the Company's deposit strategy in
1999, which continued through the middle of July 2000. When short-term
interest rates started rising in the middle of 1999, the Company pursued a
strategy of limiting interest rate increases on its liquid savings and money
market checking accounts, while paying higher market interest rates on its
term certificates of deposit. This strategy was intended to better control
total interest costs during a rising interest rate environment as well as to
better match fixed rate liabilities with fixed rate assets. As a result, the
balances of higher rate certificates of deposit increased, while the balances
of lower rate savings accounts and money market accounts decreased, thus
changing the mix of deposits. The percentage of average certificates of
deposit to average total deposits increased to 66.0% during the third quarter
of 2000 from 47.0% during the third quarter of 1999. In February of 2000, and
later, in May of 2000, the Company raised the rates on its savings accounts
in response to the increase in market interest rates. The Company continued
to raise the rates on its certificates of deposit during 2000 until the
middle of July of 2000, when the Company reduced the rates on its one-year
and two-year certificates, and later, in the middle of August of 2000, the
Company reduced the rates on its one- to five-year certificates.
The increase in average borrowings of $20.4 million during the third
quarter of 2000 compared to the third quarter of 1999, was principally due to
increases of $33.0 million and $11.9 million in average borrowings from the
State of California and average securities sold under repurchase agreements,
respectively, partially offset by a reduction in average term borrowings of
$24.5 million.
Securities sold under repurchase agreements increased $30.6 million over
two quarters from $20.5 million at September 30, 1999 to $51.1 million at March
31, 2000, then declined $30.1 million to $21.0 million at June 30, 2000, and
finally increased $3.0 million to $24.0 million at September 30, 2000. The $30.6
million increase during the fourth quarter of 1999 and first quarter of 2000 was
used principally to cover the deposits runoff previously mentioned, and to fund
loans. The $30.1 million decrease during the second quarter of 2000 was paid
down with new deposits. The $3.0 million increase during the third quarter of
2000 was primarily used to fund loans.
Borrowings from the State of California, which started during the fourth
quarter of 1999, increased $5.0 million from $20.0 million at December 31, 1999
to $25.0 million at March 31, 2000, and then increased $8.0 million to $33.0
million at June 30, 2000. This $33.0 million balance remained unchanged through
the third quarter of 2000. The Company used the $25.0 million borrowed during
the fourth quarter of 1999 and first quarter of 2000 to pay off certain term
borrowings, which were called by the lender, and used the $8.0 million borrowed
during the second quarter of 2000 to pay down securities sold under repurchase
agreements.
Term borrowings decreased $20.0 million from $50.0 million at September
30, 1999 to $30.0 million at September 30, 2000, due to this debt being called
by the lender during the fourth quarter of 1999.
The increase in the rate on average total interest-bearing liabilities of
75 basis points, to 6.02%, during the three months ended September 30, 2000
compared to the same period in 1999, was principally due to the following
factors:
o The rate on average deposits increased 81 basis points, to 5.88%.
o The rate on average borrowings increased 15 basis points, to 6.67%.
o The mix of average deposits shifted to higher rate certificates of
deposit from lower rate savings/money market checking accounts.
19
<PAGE>
o The mix of average total interest-bearing liabilities shifted to
higher rate borrowings from lower rate deposits.
The increase in the rate on average deposits of 81 basis points during the
third quarter of 2000 compared to the same period last year, was primarily due
to the following factors:
o The Company started raising the interest rates on its one-to
five-year certificates of deposit beginning in the second quarter of
1999 and continued through the middle of July 2000.
o In February 2000, and later, in May 2000, the Company raised the
rates on its savings accounts, which had not been increased during
1999.
o The mix of average deposits shifted to higher rate certificates of
deposit from lower rate savings/money market accounts.
The increase in the rate on average borrowings of 15 basis points during
the three months ended September 30, 2000 compared to the same period in 1999,
was primarily due to the following factors:
o Interest rates started to rise in the second half of 1999 and
continued to rise through the second quarter of 2000 due to the
increases in the federal funds rate by the Federal Reserve, as
described above. This served to raise the rates on the Company's
available borrowing facilities, especially short-term borrowings.
The rate on average securities sold under agreements to repurchase
increased by 95 basis points, to 6.83%, during the three months
ended September 30, 2000 compared to the same period in 1999.
o During the first quarter of 2000, a $10.0 million callable term
borrowing, bearing interest at a lower rate of 5.48%, was called by
the lender and was partially replaced by a $5.0 million State of
California borrowing, bearing interest at a higher rate of 5.83% and
maturing in June 2000. Upon maturity, this $5.0 million State of
California borrowing was replaced by a $5.0 million State of
California borrowing bearing interest at 5.79% and maturing in
August 2000.
o During the second quarter of 2000, a $5.0 million State of
California borrowing matured, bearing interest at a lower rate of
5.18%. This was replaced by a $5.0 million State of California
borrowing, bearing interest at a higher rate of 5.87% and maturing
in July 2000.
o During the third quarter of 2000, a total of $18.0 million in State
of California borrowings matured, bearing interest at a lower
weighted average rate of 5.87%. These were replaced by $18.0 million
in State of California borrowings, bearing interest at a higher
weighted average rate of 6.21%.
o During the third quarter of 2000, a $20.0 million callable term
borrowing, bearing interest at a lower rate of 5.75%, was called by
the lender, and replaced by a term borrowing bearing interest at a
higher rate of 6.62%.
Partially offsetting the increase in the rate on average borrowings were the
following factors:
o During the fourth quarter of 1999, $20.0 million of higher rate
5.71% callable term borrowings were called by the lender and
replaced by the Company with $20.0 million of lower rate 5.57% State
of California borrowings.
o During the second quarter of 2000, $8.0 million of higher rate 6.85%
securities sold under repurchase agreements were replaced by a $8.0
million State of California borrowing, bearing interest at a lower
rate of 5.91% and maturing in July 2000.
20
<PAGE>
Net Interest Income
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30,
1999
The following table presents the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest yields/rates for the periods
presented. All average balances are daily average balances (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans (1) $383,734 $27,412 9.55% $340,544 $24,247 9.52%
Securities purchased under resale agreements 1,610 77 6.39% 10,670 397 4.97%
Investment securities available for sale (2):
U.S. government sponsored agency securities:
Callable bonds 243,633 11,850 6.48% 239,765 11,801 6.56%
Mortgage-backed securities 3,929 207 7.02% 1,607 77 6.39%
Corporate debt securities 4,100 268 8.71% 3,375 159 6.28%
-------- ------- ------ -------- ------- ------
Total investment securities 251,662 12,325 6.53% 244,747 12,037 6.56%
-------- ------- ------ -------- ------- ------
Total interest-earning assets 637,006 39,814 8.35% 595,961 36,681 8.23%
------- ------ ------- ------
Non-interest-earning assets 7,458 12,645
Less: allowance for loan losses (6,860) (5,840)
-------- --------
Total assets $637,604 $602,766
======== ========
Interest-Bearing Liabilities:
Savings accounts $170,078 6,381 5.01% $251,439 8,984 4.78%
Certificates of deposit 305,804 13,793 6.03% 197,562 7,997 5.41%
Money market checking accounts 16,160 515 4.26% 22,715 747 4.40%
-------- ------- ------ -------- ------- ------
Total deposits 492,042 20,689 5.62% 471,716 17,728 5.02%
-------- ------- ------ -------- ------- ------
Securities sold under repurchase agreements 33,918 1,634 6.44% 14,619 589 5.39%
Borrowings from State of California 29,292 1,288 5.78% 0 --
Term borrowings 30,219 1,343 5.84% 63,581 2,746 5.70%
Trust preferred securities 17,250 1,213 9.38% 17,250 1,213 9.38%
-------- ------- ------ -------- ------- ------
Total borrowings 110,679 5,478 6.56% 95,450 4,548 6.32%
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 602,721 26,167 5.80% 567,166 22,276 5.25%
------- ------ ------- ------
Non-interest-bearing liabilities 8,901 6,226
Shareholders' equity 25,982 29,374
-------- --------
Total liabilities and shareholders' equity $637,604 $602,766
-------- --------
Excess of interest-earning assets over
interest-bearing liabilities $ 34,285 $ 28,795
======== ========
Net interest income $13,647 $14,405
======= =======
Net interest rate spread 2.55% 2.98%
====== =======
Net interest margin 2.86% 3.23%
====== =======
Average interest-earning assets to
average interest-bearing liabilities 105.7% 105.1%
======== ========
</TABLE>
----------
(1) Average balances of loans are calculated net of deferred loan fees, but
include non-accrual loans which have a zero yield.
(2) Average balances of investment securities available for sale are presented
on a historical amortized cost basis, without the effects of fair value
adjustments.
21
<PAGE>
The following table sets forth the composition of average interest-earning
assets and average interest-bearing liabilities by category and by the
percentage of each category to the total for the periods indicated, including
the change in average balance and yield/rate between these respective periods
(dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------------------
2000 1999 Net Change
--------------------------- --------------------------- ---------------------------
% Average % Average % Average
Average of Yield/ Average of Yield/ Average of Yield/
Balance Total Rate Balance Total Rate Balance Total Rate
-------- ----- ------- -------- ----- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $383,734 60.2% 9.54% $340,544 57.1% 9.52% $ 43,190 3.1% 0.02%
Securities purchased under
resale agreements 1,610 0.2% 6.39% 10,670 1.8% 4.97% (9,060) -1.6% 1.42%
Investment securities available for sale:
U.S. government sponsored
agency securities:
Callable bonds 243,633 38.2% 6.49% 239,765 40.2% 6.56% 3,868 -2.0% -0.07%
Mortgage-backed securities 3,929 0.6% 7.02% 1,607 0.3% 6.39% 2,322 0.3% 0.63%
Corporate debt securities 4,100 0.6% 8.72% 3,375 0.6% 6.28% 725 0.0% 2.44%
-------- ----- -------- ----- -------- -----
Total investment securities 251,662 39.6% 6.53% 244,747 41.1% 6.56% 6,915 -1.5% -0.03%
-------- ----- -------- ----- -------- -----
Total interest-earning assets $637,006 100.0% 8.35% $595,961 100.0% 8.23% $ 41,045 0.12%
======== ===== ======== ===== ========
Interest-Bearing Liabilities:
Savings accounts $170,078 28.2% 5.01% $251,439 44.3% 4.78% $(81,361) -16.1% 0.23%
Certificates of deposit 305,804 50.7% 6.02% 197,562 34.9% 5.41% 108,242 15.8% 0.61%
Money market
checking accounts 16,160 2.6% 4.26% 22,715 4.0% 4.40% (6,555) -1.4% -0.14%
-------- ----- -------- ----- -------- -----
Total deposits 492,042 81.6% 5.62% 471,716 83.2% 5.02% 20,326 -1.6% 0.60%
-------- ----- -------- ----- -------- -----
Securities sold under
repurchase agreements 33,918 5.6% 6.44% 14,619 2.6% 5.39% 19,299 3.0% 1.05%
Borrowings from State
of California 29,292 4.9% 5.78% 29,292 4.9% 5.78%
Term borrowings 30,219 5.0% 5.84% 63,581 11.2% 5.70% (33,362) -6.2% 0.14%
Trust preferred securities 17,250 2.9% 9.38% 17,250 3.0% 9.38% -0.1% 0.00%
-------- ----- -------- ----- -------- -----
Total borrowings 110,679 18.4% 6.56% 95,450 16.8% 6.32% 15,229 1.6% 0.24%
-------- ----- -------- ----- -------- -----
Total interest-bearing
liabilities $602,721 100.0% 5.80% $567,166 100.0% 5.25% $ 35,555 0.55%
======== ===== ======== ===== ========
Excess of interest-earning assets
over interest-bearing liabilities $ 34,285 $ 28,795 $ 5,490
Net interest rate spread 2.55% 2.98% -0.43%
Net interest margin 2.86% 3.23% -0.37%
</TABLE>
22
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense due to changes in average balances of
interest-earning assets and interest-bearing liabilities and changes in interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (i.e. changes in average balance multiplied by prior period rate) and
(ii) changes in rate (i.e. changes in rate multiplied by prior period average
balance). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately based on
the absolute dollar amounts of the changes due to volume and rate (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 vs. 1999
-----------------------------
Increase (Decrease) Due To
-----------------------------
Volume Rate Total
------- ------- -------
<S> <C> <C> <C>
Interest Income:
Loans $ 3,113 $ 52 $ 3,165
Securities purchased under resale
agreements (409) 89 (320)
Investment securities available for sale:
U.S. government sponsored agency securities:
Callable bonds 181 (132) 49
Mortgage-backed securities 122 8 130
Corporate debt securities 39 70 109
------- ------- -------
Total investment securities 342 (54) 288
------- ------- -------
Total interest income $ 3,046 $ 87 $ 3,133
======= ======= =======
Interest Expense:
Savings accounts $(3,020) $ 417 $(2,603)
Certificates of deposit 4,807 989 5,796
Money market checking accounts (209) (23) (232)
------- ------- -------
Total deposits 1,578 1,383 2,961
------- ------- -------
Securities sold under repurchase
agreements 911 134 1,045
Borrowings from State of California 1,288 -- 1,288
Term borrowings (1,468) 65 (1,403)
Trust preferred securities -- -- --
------- ------- -------
Total borrowings 731 199 930
------- ------- -------
Total interest expense $ 2,309 $ 1,582 $ 3,891
------- ------- -------
Net interest income $ 737 $(1,495) $ (758)
======= ======= =======
</TABLE>
Net Interest Income
Net interest income decreased by $758,000, to $13.6 million, during the
nine months ended September 30, 2000 compared to the same period in 1999.
This decrease was comprised of a $1.5 million decrease attributable to
changes in interest rates, partially offset by a $737,000 increase
attributable to changes in volume. This was primarily due to the reduction in
the net interest rate spread of 43 basis points, to 2.55 %, partially offset
by the $5.5 million increase, to $34.3 million, in the excess of
interest-earning assets over interest-bearing liabilities during the nine
months ended September 30, 2000 compared to the same period in 1999.
The reduction in the net interest rate spread was principally due to an
increase of 55 basis points, to 5.80%, in the rate paid on average total
interest-bearing liabilities, partially offset by an increase of 12 basis
points, to 8.35%, in the yield on average total interest-earning assets. The
rate paid on average total interest-bearing liabilities increased primarily
due to the rise in interest rates, which started during the second half of
1999. The yield earned on average total interest-earning assets increased
principally due to a shift in the mix of average total interest-earning
assets to higher yielding loans from lower yielding securities. The growth in
the excess of interest-earning assets over interest-bearing liabilities was
primarily due to an increase of $41.0 million, to $637.0 million, in average
total interest-earning assets, partially offset by an increase of $35.6
million, to $602.7 million, in average total interest-bearing liabilities.
23
<PAGE>
Total Interest Income
Total interest income increased by $3.1 million, to $39.8 million, during
the nine months ended September 30, 2000 compared to the same period in 1999.
This was due to the growth in average total interest-earning assets and to the
increase in yield earned on these assets, which contributed $3.0 million and
$87,000, respectively, to interest income.
The growth in average total interest-earning assets of $41.0 million
during the nine months ended September 30, 2000 compared to the same period in
1999, was principally due to an increase in average loans of $43.2 million, to
$383.7 million, and an increase in average investment securities of $6.9
million, to $251.7 million, partially offset by a decrease of $9.1 million, to
$1.6 million, in average securities purchased under resale agreements. The
growth in loans was funded by deposits and borrowings as well as through
liquidation of securities purchased under resale agreements. The relatively
larger growth in average loans compared to that of average investment
securities, as well as the reduction in average securities purchased under
resale agreements, resulted in a shift in the mix of average total
interest-earning assets to higher yielding loans from lower yielding securities.
The percentage of average loans to average total interest-earning assets
increased to 60.2% in the first nine months of 2000 from 57.1% in the first nine
months of 1999.
The yield on average total interest-earning assets increased by 12 basis
points, to 8.35%, during the nine months ended September 30, 2000 compared to
the same period in 1999, primarily due to the above mentioned shift in the mix
of average total interest-earning assets to higher yielding loans from lower
yielding securities, as well as to increases of 2 basis points and 142 basis
points in the yields on average loans and average securities purchased under
resale agreements, respectively. Partially offsetting these factors was a
decrease of 3 basis points in the yield on average investment securities.
The decrease in the yield on average investment securities of 3 basis
points, to 6.53%, during the nine months ended September 30, 2000 compared to
the same period last year, was primarily due to the calls and sales in 1999 of
$148.0 million of higher yielding callable bonds with a weighted average coupon
rate of 6.71%, which were partially replaced by the purchases of $85.8 million
of lower yielding, shorter maturity, callable bonds with a weighted average
coupon rate of 6.23%. Partially offsetting this factor were the purchases in the
fourth quarter of 1999 of higher yielding corporate debt securities and
mortgage-backed securities.
Total Interest Expense
Total interest expense increased by $3.9 million, to $26.2 million, during
the nine months ended September 30, 2000 compared to the same period in 1999.
This was due to the growth in average interest-bearing liabilities and to the
increase in rate on these liabilities, which contributed $2.3 million and $1.6
million, respectively, to interest expense.
The growth in average total interest-bearing liabilities of $35.6 million
during the first nine months of 2000 compared to the same period in 1999, was
primarily due to an increase in average deposits of $20.3 million, to $492.0
million, and an increase in average borrowings of $15.2 million, to $110.7
million. The changes in average deposits and average borrowings resulted in a
shift in the mix of average total interest-bearing liabilities to higher rate
borrowings from lower rate deposits. The percentage of average borrowings to
average total interest-bearing liabilities increased to 18.4% during the first
nine months of 2000 from 16.8% during the same period last year.
The increase in average deposits of $20.3 million during the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999,
was principally due to an increase in average certificates of deposit of $108.2
million, partially offset by decreases of $81.4 million and $6.6 million in
average savings accounts and average money market checking accounts,
respectively.
The changes in the average balances of the Company's deposit products
during the nine months ended September 30, 2000 compared to the same period in
1999, were primarily attributable to the Company's deposit strategy in 1999 and
2000, which was described earlier. As a result, the balances of higher rate
certificates of deposit increased, while the balances of lower rate savings
accounts and money market accounts decreased, thus changing the mix of deposits.
The percentage of average certificates of deposit to average total deposits
increased to 62.2% during the first nine months of 2000 from 41.9% during the
first nine months of 1999.
24
<PAGE>
The increase in average borrowings of $15.2 million during the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999,
was principally due to increases of $29.3 million and $19.3 million in average
borrowings from the State of California and average securities sold under
repurchase agreements, respectively, partially offset by a reduction in average
term borrowings of $33.4 million.
The increase in the rate on average total interest-bearing liabilities of
55 basis points, to 5.80%, during the nine months ended September 30, 2000
compared to the same period in 1999, was principally due to the following
factors:
o The rate on average deposits increased 60 basis points, to 5.62%.
o The rate on average borrowings increased 24 basis points, to 6.56%.
o The mix of average deposits shifted to higher rate certificates of
deposit from lower rate savings/money market checking accounts.
o The mix of average total interest-bearing liabilities shifted to
higher rate borrowings from lower rate deposits.
The reasons for the increases in the rates paid on average deposits and
average borrowings were described earlier under "Results of Operations - Net
Interest Income - Three Months Ended September 30, 2000 vs. Three Months Ended
September 30, 1999 - Total Interest Expense."
Provision for Loan Losses
During the three and nine months ended September 30, 2000, the Company's
provision for loan losses decreased by $275,000 and $955,000, to $125,000 and
$500,000, respectively, compared to the same periods in 1999. The decrease in
the provision is the result of management's evaluation of the loan portfolio and
economic conditions. See "Financial Condition - Allowance for Loan Losses."
Non-interest Income
The following table sets forth certain information with respect to the
Company's non-interest income for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
Amounts Net Change Amounts Net Change
----------------- ---------------- ----------------- ----------------
2000 1999 $ % 2000 1999 $ %
------- ------- ------- ----- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan prepayment and late fee income $ 87 $ 225 $ (138) (61.3%) $ 238 $ 593 $ (355) (59.9%)
Gain on sale of investment securities -- -- -- -- -- 586 (586) (100.0%)
Gain on sale of SBA loans 114 -- 114 100.0% 114 175 (61) (34.9%)
Gain on sale of other real estate owned -- -- -- -- 115 25 90 360.0%
Other income 157 237 (80) (33.8%) 438 713 (275) (38.6%)
------- ------- ------- ----- ------- ------- ------- -----
Total non-interest income $ 358 $ 462 $ (104) (22.5%) $ 905 $ 2,092 $(1,187) (56.7%)
------- ------- ------- ----- ------- ------- ------- -----
</TABLE>
Non-interest income for the three months ended September 30, 2000
decreased by $104,000, to $358,000, compared to the same period in 1999. This
was primarily due to decreases of $138,000 and $80,000 in loan prepayment and
late fee income and other income, respectively, partially offset by a $114,000
gain on the sale of $2.6 million principal balance of SBA loans.
Non-interest income for the nine months ended September 30, 2000 decreased
by $1.2 million, to $905,000, compared to the same period in 1999. This was
primarily due to decreases of $586,000, $355,000, and $275,000 in gain on sale
of investment securities, loan prepayment and late fee income, and other income,
respectively.
25
<PAGE>
Non-interest Expense
The following table sets forth certain information with respect to the
Company's non-interest expense for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -------------------------------------
Amounts Net Change Amounts Net Change
------------------ ---------------- ------------------ ----------------
2000 1999 $ % 2000 1999 $ %
------- ------- ------- ----- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 1,611 $ 1,665 $ (54) (3.2%) $ 4,523 $ 5,139 $ (616) (12.0%)
Net occupancy expenses 332 412 (80) (19.4%) 1,078 1,284 (206) (16.0%)
Communication and data processing 202 254 (52) (20.5%) 644 689 (45) (6.5%)
Advertising and promotion 56 101 (45) (44.6%) 175 508 (333) (65.6%)
FDIC insurance premiums 26 13 13 100.0% 78 39 39 100.0%
Credit and collection expenses (136) -- (136) 100.0% (134) 36 (170) (472.2%)
Other real estate owned expenses (6) -- (6) 100.0% (10) 35 (45) (128.6%)
Valuation adjustments to
other real estate owned -- -- -- -- -- 43 (43) (100.0%)
Other expenses 325 343 (18) (5.2%) 904 972 (68) (7.0%)
------- ------- ------- ----- ------- ------- ------- -----
Total non-interest expense $ 2,410 $ 2,788 $ (378) (13.6%) $ 7,258 $ 8,745 $(1,487) (17.0%)
======= ======= ======= ===== ======= ======= ======= =====
</TABLE>
Non-interest expense for the three months ended September 30, 2000
decreased by $378,000, to $2.4 million, compared to the same period in 1999.
This was primarily due to decreases of $136,000, $80,000, and $54,000 in credit
and collection expenses, net occupancy expenses, and salaries and employee
benefits, respectively.
Non-interest expense for the nine months ended September 30, 2000
decreased by $1.5 million, to $7.3 million, compared to the same period in 1999.
This was primarily due to decreases of $616,000, $333,000, and $206,000 in
salaries and employee benefits, advertising and promotion, and net occupancy
expenses, respectively.
Salaries and employee benefits for the three and nine months ended
September 30, 2000 decreased by $54,000 and $616,000, to $1.6 million and $4.5
million, respectively, as compared to the same periods in 1999. The decreases
were primarily due to the following factors:
o During the fourth quarter of 1999, the Company eliminated its five
loan production offices located outside of Southern California.
These loan production offices had each been staffed with one loan
production officer.
o During the first quarter of 2000, the Company closed its office in
Orange County, California, which had been established to coordinate
and originate loans for its secondary market loan sales program.
This office was staffed with six employees.
Partially offsetting the decreases in salaries and employee benefits was
the approximate 4% increase to employee base salaries in January 2000, as well
as an increase due to the hiring in June 2000 of four officers in San Diego to
expand the Company's SBA lending capabilities in Southern California and the
hiring in June 2000 of a commercial real estate marketing representative in
Laguna Hills to handle lending in Orange County and the Inland Empire.
Net occupancy expenses decreased by $80,000 and $206,000, to $332,000 and
$1.1 million, respectively, for the three and nine months ended September 30,
2000, compared to the same periods last year. This decrease was primarily due to
the aforementioned closure of the five loan production offices located outside
of Southern California during the fourth quarter of 1999. The lease on the
secondary market loan sales office in Orange County, which was closed during the
first quarter of 2000, had an expiration date of March 2002. However, the
landlord released the Company from its obligation under the lease effective June
19, 2000. The Company paid no additional costs to the landlord in connection
with this lease other than normal rent through the June 19, 2000 release date.
Partially offsetting the decrease in net occupancy expenses was the
opening of an office in Laguna Hills during June for the recently hired
commercial marketing representative. The Company plans to open an office in San
Diego during the latter part of November 2000 for the recently hired SBA
officers. During the interim period, these SBA officers have worked in the
Company's San Diego branch.
26
<PAGE>
Credit and collection expenses decreased by $136,000 and $170,000 for the
three and nine months ended September 30, 2000, respectively, compared to the
same periods in 1999, primarily due to the current quarter $140,000 recovery of
property taxes, which had been paid on behalf of a borrower and expensed by the
Company in prior years.
Income Tax Provision
For the three months ended September 30, 2000 and 1999, the Company's
provision for income taxes was $956,000 and $873,000, respectively, which
resulted in effective tax rates of 41.7% and 41.3%, respectively. For the nine
months ended September 30, 2000 and 1999, the Company's provision for income
taxes was $2.8 million and $2.5 million, respectively, which resulted in
effective tax rates of 41.7% and 40.0%, respectively.
27
<PAGE>
FINANCIAL CONDITION
Balance Sheet Analysis
The following table presents condensed balance sheets as of the dates
indicated and the dollar and percentage changes between the periods (in
thousands):
<TABLE>
<CAPTION>
Net Change
September 30, December 31, ---------------------
2000 1999 $ %
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 3,271 $ 4,783 $ (1,512) (31.61%)
Investment securities available for
sale, at market 243,211 240,760 2,451 1.02%
Net loans 390,093 359,502 30,591 8.51%
Other assets 18,283 18,215 68 0.37%
--------- --------- --------- -----
Total assets $ 654,858 $ 623,260 $ 31,598 5.07%
========= ========= ========= =====
Liabilities
Savings accounts $ 157,371 $ 196,368 $ (38,997) (19.86%)
Certificates of deposit 339,451 269,233 70,218 26.08%
Money market checking accounts 14,360 18,783 (4,423) (23.55%)
--------- --------- --------- -----
Total deposits 511,182 484,384 26,798 5.53%
--------- --------- --------- -----
Securities sold under repurchase
agreements 24,000 30,500 (6,500) (21.31%)
Borrowings from State of California 33,000 20,000 13,000 65.00%
Term borrowings 30,000 40,000 (10,000) (25.00%)
Trust preferred securities 17,250 17,250 -- 0.00%
--------- --------- --------- -----
Total borrowings 104,250 107,750 (3,500) (3.25%)
--------- --------- --------- -----
Total interest-bearing liabilities 615,432 592,134 23,298 3.93%
Other liabilities 9,958 5,577 4,381 78.55%
--------- --------- --------- -----
Total liabilities 625,390 597,711 27,679 4.63%
--------- --------- --------- -----
Shareholders' Equity
Common stock 30 30 -- 0.00%
Additional paid-in capital 27,809 27,885 (76) (0.27%)
Retained earnings 13,409 9,978 3,431 34.39%
Accumulated other comprehensive loss (4,837) (6,355) 1,518 (23.89%)
Common stock in treasury, at cost (6,943) (5,989) (954) 15.93%
--------- --------- --------- -----
Total shareholders' equity 29,468 25,549 3,919 15.34%
--------- --------- --------- -----
Total liabilities and
shareholders' equity $ 654,858 $ 623,260 $ 31,598 5.07%
========= ========= ========= =====
</TABLE>
Total assets increased by $31.6 million, to $654.9 million, during the
nine months ended September 30, 2000, primarily due to a $30.6 million increase
in net loans and a $2.5 million increase in investment securities available for
sale. The increase in net loans was principally due to $65.6 million of
originations, partially offset by $32.0 million of principal payments. The
increase in investment securities available for sale was primarily attributable
to an increase in market value.
Total liabilities increased by $27.7 million, to $625.4 million, during
the nine months ended September 30, 2000, primarily due to an increase in
deposits of $26.8 million and an increase in other liabilities of $4.4 million,
partially offset by a decrease in borrowings of $3.5 million. This resulted in a
shift in the mix of total interest-bearing liabilities to lower rate deposits
from higher rate borrowings and served to decrease interest expense for the
first nine months of 2000. Deposits as a percentage of total interest-bearing
liabilities increased to 83.1% at September 30, 2000 from 81.8% at December 31,
1999.
28
<PAGE>
The $26.8 million increase in deposits during the first nine months of
2000 was comprised of an increase of $70.2 million in certificates of deposit,
partially offset by decreases of $39.0 million and $4.4 million in savings
accounts and money market checking accounts, respectively. The changes in the
balances of the Company's deposit products during the first nine months of 2000
resulted in a shift in the mix of deposits from lower yielding savings/money
market accounts to higher yielding certificates of deposit. The percentage of
certificates of deposit to total deposits increased to 66.4% at September 30,
2000 from 55.6% at December 31, 1999 and served to increase interest expense for
the first nine months of 2000.
The increase in deposits was attributable to the increase in interest
rates paid on all of the Company's certificate of deposit products during the
year until the middle of July and August 2000, when the Company reduced the
rates on its one- to five-year certificates. During the first seven and one half
months of 2000, for example, the Company raised the rates on the highest tiers
of its certificate products as follows: one month certificate - 47 basis points;
three month certificate - 95 basis points; six month certificate - 93 basis
points; one year certificate - 70 basis points; two year certificate - 107 basis
points; three year certificate - 64 basis points; and four and five year
certificates - 46 basis points. In July and August, for example, the Company
reduced the rates on the highest tiers of certain certificate products as
follows: one, four and five year certificates - 19 basis points; two year
certificate - 56 basis points; and three year certificate - 37 basis points.
During the first nine months of 2000, the Company increased the tiered rates on
its savings accounts, ranging from 10 basis points on the lowest tier up to 95
basis points on the highest tier, and kept unchanged the tiered rates on its
money market checking accounts.
The $3.5 million decrease in borrowings during the first nine months of
2000 was comprised of a decrease of $6.5 million in securities sold under
repurchase agreements and a principal payment of $10.0 million on a term
borrowing, which was called by the lender, partially offset by $13.0 million in
additional borrowings from the State of California. The combined $16.5 million
reduction in securities sold under repurchase agreements and term borrowings was
funded with $13.0 million of borrowings from the State of California and $3.5
million from an increase in certificates of deposit.
The $4.4 million increase in other liabilities during the first nine
months of 2000 was primarily due to increases in borrowers' impound accounts and
accrued interest payable, as well as the recording of the deferred gain on the
sale of the interest rate cap discussed earlier.
Shareholders' equity increased by $3.9 million, to $29.5 million, during
the nine months ended September 30, 2000. Changes to shareholders' equity were
due to the following factors:
o The Company recorded $4.0 million of net income for the first nine
months of 2000.
o The Company declared and paid cash dividends of $530,000 for the
first nine months of 2000.
o Accumulated other comprehensive loss decreased by $1.5 million
during the first nine months of 2000 due to an increase in market
value of the Company's investment securities available for sale.
o Common stock in treasury increased by $954,000 during the first nine
months of 2000, primarily due to the $1.1 million purchase of
102,000 shares of the Company's common stock under its stock
repurchase plan. Partially offsetting this increase and thereby
reducing the number of treasury shares was the issuance of 12,736
shares of common stock in treasury for $119,000 under the Company's
employee stock purchase plan, non-employee directors stock purchase
plan, and employee stock option plan.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2000 increased by
$764,000, to $7.2 million, from the level at December 31, 1999, primarily due
to $500,000 in provision for loan losses recorded during the first nine
months of 2000 and a recovery of $246,000 on a previously charged off
commercial real estate loan. The calculation of the adequacy of the allowance
for loan losses is based on a variety of factors, including growth in the
Company's loan portfolio, the adequacy of collateral securing the loans in
the loan portfolio, current delinquency trends, historical loan loss
experience, regional real estate economic conditions, and overall economic
trends impacting the Company's real estate lending portfolio. Commercial and
multi-family real estate serves as collateral for over 95% of the Company's
loan portfolio. The allowance for loan losses as a percentage of loans stood
at 1.82% at September 30, 2000, compared to 1.76% at December 31, 1999.
29
<PAGE>
Although the Company maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts, thereby
adversely affecting future results of operations.
The following table sets forth certain information with respect to the
Company's allowance for loan losses for the periods indicated (dollars in
thousands):
Nine Months Twelve Months
Ended Ended
September 30, December 31,
2000 1999
------------- -------------
Allowance for loan losses at beginning of period $ 6,450 $ 5,024
Provision for loan losses 500 1,677
Charge-offs: commercial real estate -- (280)
Charge-offs: commercial business -- (7)
Recoveries: commercial real estate 264 36
------- -------
Allowance for loan losses at end of period $ 7,214 $ 6,450
======= =======
Non-performing Assets
The following table sets forth non-accrual loans, OREO and restructured
loans as of the dates indicated (dollars in thousands):
September 30, December 31,
2000 1999
------------- -----------
Non-accrual loans $ -- $ 210
OREO -- --
----------- -----------
Total non-performing assets $ -- $ 210
----------- -----------
Total non-performing assets to total assets -- 0.03%
----------- -----------
Restructured loans $ -- $ --
----------- -----------
During the nine months ended September 30, 2000, the non-accrual loan of
$210,000 at December 31, 1999 was transferred to OREO and sold for a gain of
$115,000.
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings, and
payments of principal and interest on loans and investment securities. While
maturities and scheduled principal amortization on loans are a reasonably
predictable source of funds, deposit flows and mortgage loan prepayments are
greatly influenced by the level of interest rates, economic conditions, and
competition. As a measure of protection against these uncertainties, the Company
maintains borrowing relationships with several brokers, whereby the Company is
able to borrow funds that are secured by pledging specific amounts of certain
U.S. government sponsored agency securities. The Company is generally able to
borrow up to 98% of the market value of these securities. As of September 30,
2000, the aggregate market value of U.S. government sponsored agency securities
that were available for collateral purposes totaled $146.0 million.
The Bank also has a fixed rate borrowing facility with the State of
California Treasurer's Office under which the Bank can borrow an amount not to
exceed its unconsolidated total shareholder's equity. Borrowing maturity dates
under this program cannot exceed one year. As of September 30, 2000, the Bank's
unconsolidated total shareholder's equity was $42.0 million and the Bank's
outstanding borrowings from the State of California totaled $33.0 million.
30
<PAGE>
DIVIDENDS
As a Delaware corporation, Pacific Crest may pay common dividends out of
surplus or, if there is no surplus, from net profits for the current and
preceding fiscal year. The Parent, on an unconsolidated basis, had approximately
$3.5 million in cash and investments less current liabilities and short-term
debt at September 30, 2000. These funds are necessary to pay future operating
expenses of the Parent, service all outstanding debt, including the $17.25
million junior subordinated debentures payable to PCC Capital, and fund possible
future capital infusions into the Bank. Without dividends from the Bank, the
Parent must rely solely on existing cash, investments, and the ability to secure
borrowings.
The Bank's ability to pay dividends to the Parent is restricted by
California state law, which requires that sufficient retained earnings are
available to pay the dividend. The Bank declared and paid dividends to the
Parent in the amount of $1.6 million for the first nine months of 2000. At
September 30, 2000, the Bank had retained earnings of $17.0 million that may be
available for dividend payments. On October 18, 2000, the Bank declared a
$600,000 cash dividend for the fourth quarter of 2000, payable to the Parent on
December 15, 2000. The Bank anticipates that it will continue to declare and pay
quarterly dividends to the Parent.
Capital Resources
The Company's objective is to maintain a level of capital that will
support sustained asset growth and anticipated credit risks and will ensure that
regulatory guidelines and industry standards are met. Pacific Crest and the Bank
are subject to certain minimum capital adequacy and minimum well capitalized
category guidelines adopted by the Federal Reserve and the FDIC. These
guidelines relate primarily to the leverage ratio, the Tier 1 risk-based capital
ratio, and the total risk-based capital ratio. The minimum well capitalized
required ratios are 5.00% leverage, 6.00% Tier 1 risk-based capital, and 10.00%
total risk-based capital. The minimum capital adequacy required ratios are 4.00%
leverage, 4.00% Tier 1 risk-based capital, and 8.00% total risk-based capital.
At September 30, 2000, Pacific Crest and the Bank were in compliance with all
such capital requirements.
The following table sets forth the regulatory capital and ratios of
Pacific Crest and the Bank as of the dates indicated (dollars in thousands):
September 30, December 31,
2000 1999
- ------------- ------------
Pacific Crest Capital, Inc.
Leverage ratio 6.96% 6.89%
Tier 1 risk-based capital ratio 10.28% 10.18%
Total risk-based capital ratio 12.84% 13.02%
Tier 1 capital $ 45,740 $ 42,539
Total risk-based capital 57,137 54,392
Net risk-weighted assets 444,917 417,788
Average total assets 657,474 617,669
Pacific Crest Bank
Leverage ratio 7.24% 7.19%
Tier 1 risk-based capital ratio 10.59% 10.38%
Total risk-based capital ratio 11.84% 11.64%
Tier 1 capital $ 46,749 $ 43,586
Total risk-based capital 52,290 48,848
Net risk-weighted assets 441,598 419,747
Average total assets 646,115 606,604
31
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time to maximize income. Management realizes
certain risks are inherent and that the goal is to identify and minimize the
risks. The Company's exposure to market risk is reviewed on a regular basis by
the Asset/Liability committee. Tools used by management include an interest rate
shock analysis and, to a lesser extent, the standard GAP report, which measures
the estimated difference between the amount of interest-earning assets and
interest-bearing liabilities anticipated to mature or reprice during future
periods, based on certain assumptions. The Company has no market risk sensitive
instruments held for trading purposes and is not currently engaged in
transactions involving derivative financial instruments. Management believes
that the Company's market risk is reasonable at this time.
32
<PAGE>
The table below provides information about the Company's balance sheet
non-derivative financial instruments at September 30, 2000 that are sensitive to
changes in interest rates. For all financial instruments, the table presents the
outstanding principal balance and the weighted average interest yield/rate of
the instruments by either the date that the instrument can be repriced, for
variable rate financial instruments, or the expected maturity date, for fixed
rate financial instruments (dollars in thousands):
<TABLE>
<CAPTION>
Expected maturity date or repricing date
----------------------------------------------------------------------------
Within Over Over Over Over Estimated
6 6 to 12 12 to 18 18 to 24 24 Fair
At September 30, 2000 Months Months Months Months Months Total Value
--------------------- ------ ------- -------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Securities purchased under resale
agreements (1) $ -- $ -- $ -- $ -- $ -- $ -- $ --
average yield (variable rate) -- -- -- -- -- --
U.S. government sponsored
agency callable bonds
available for sale (2) -- -- -- 50,466 185,170 235,636 235,636
average yield (fixed rate) -- -- -- 5.65% 6.70% 6.48%
U.S. government sponsored
agency mortgage-backed
securities available for sale (2) -- -- -- -- 3,731 3,731 3,731
average yield (fixed rate) -- -- -- -- 7.05% 7.05%
Corporate debt securities
available for sale (2) 3,844 -- -- -- -- 3,844 3,844
average yield (variable rate) 8.83% -- -- -- -- 8.83%
Loans, gross (3) 163,709 22,039 30,765 28,437 152,765 397,715 402,488
average yield 10.95% 9.72% 8.32% 8.46% 8.56% 9.58%
-------- -------- ------- ------- -------- -------- --------
Total interest-sensitive assets $167,553 $ 22,039 $30,765 $78,903 $341,666 $640,926 $645,699
======== ======== ======= ======= ======== ======== ========
Interest-Sensitive Liabilities:
Savings accounts (1) $157,371 $ -- $ -- $ -- $ -- $157,371 $157,371
average rates (variable rate) 5.47% -- -- -- -- 5.47%
Certificates of deposit (4) $105,579 144,604 18,486 46,501 24,281 339,451 337,754
average rates (fixed rate) 6.04% 6.41% 6.83% 6.89% 6.19% 6.37%
Money market checking accounts (1) 14,360 -- -- -- -- 14,360 14,390
average rates (variable rate) 4.23% -- -- -- -- 4.23%
Securities sold under
repurchase agreements (1) 24,000 -- -- -- -- 24,000 24,000
average rates (variable rate) 6.69% -- -- -- -- 6.69%
Borrowings from State of
California (5) 33,000 -- -- -- -- 33,000 32,987
average rate (fixed rate) 5.97% -- -- -- -- 5.97%
Term borrowings (5) 10,000 -- -- 20,000 -- 30,000 29,999
average rates (fixed rate) 5.95% -- -- 6.62% -- 6.40%
Trust preferred securities (2) -- -- -- -- 17,250 17,250 15,309
average rates (fixed rate) -- -- -- -- 9.38% 9.38%
-------- -------- ------- ------- -------- -------- --------
Total interest-sensitive liabilities $344,310 $144,604 $18,486 $66,501 $ 41,531 $615,432 $611,780
======== ======== ======= ======= ======== ======== ========
</TABLE>
33
<PAGE>
The fair value balances reflected in the table were derived as follows:
(1) For financial instruments that mature or reprice within 90 days, the
carrying amounts and the fair values are considered identical due to
the short term repricing of the financial instruments.
(2) Fair value of investment securities and the trust preferred
securities is based on the quoted market price of these securities
by broker dealers making a market for these securities on a national
exchange.
(3) Fair value of loans is based on the value the Company could receive
on the loans in a loan sale. The Company estimates that it could
sell a majority of its loans at a premium of between 0.0% and 3.0%.
(4) Fair value of certificates of deposit, which have a fixed maturity,
is estimated using rates currently offered for deposits of similar
remaining maturities.
(5) Fair values of borrowings from the State of California and term
borrowings are estimated using discounted cash flow analysis based
on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
34
<PAGE>
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
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC CREST CAPITAL, INC.
Date: November 13, 2000 /s/ Gary Wehrle
----------------- ----------------------------------------------
Gary Wehrle
President and Chief Executive Officer
Date: November 13, 2000 /s/ Robert J. Dennen
----------------- ----------------------------------------------
Robert J. Dennen
Senior Vice President, Chief Financial Officer
Corporate Secretary
