10-Q 1 a10-q.txt FORM 10-Q 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 JUNE 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 August 3, 2000, was 2,511,780. 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 PACIFIC CREST CAPITAL, INC. JUNE 30, 2000 FORM 10-Q TABLE OF CONTENTS
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets June 30, 2000 and December 31, 1999.................................. 1 Consolidated Statements of Income Three and Six Months Ended June 30, 2000 and 1999.................... 2 Consolidated Statements of Shareholders' Equity Six Months Ended June 30, 2000 and 1999.............................. 3 Consolidated Statements of Cash Flows Six Months Ended June 30, 2000 and 1999.............................. 4 Notes to Consolidated Financial Statements............................ 5 Selected Quarterly Financial Data..................................... 9 Selected Quarterly Balance Sheet Data................................. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 11 General........................................................ 11 Results of Operations.......................................... 13 Financial Condition............................................ 26 Non-Performing Assets.......................................... 28 Liquidity...................................................... 28 Dividends...................................................... 29 Capital Resources.............................................. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................... 33 Item 2. Changes in Securities.................................................. 33 Item 3. Defaults Upon Senior Securities........................................ 33 Item 4. Submission of Matters to a Vote of Security Holders.................... 33 Item 5. Other Information...................................................... 33 Item 6. Exhibits and Reports on Form 8-K....................................... 33
PACIFIC CREST CAPITAL, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 -------------- ---------------- ASSETS (Unaudited) (Audited) Cash $ 2,527 $ 1,282 Securities purchased under resale agreements 4,025 3,501 -------------- ---------------- Cash and cash equivalents 6,552 4,783 -------------- ---------------- Investment securities available for sale, at market 240,866 240,760 Loans: Commercial real estate loans 371,033 357,312 SBA loans held for investment 4,585 3,690 SBA loans held for sale, at lower of cost or market 6,386 3,269 Other loans 2,732 2,062 -------------- ---------------- Gross loans 384,736 366,333 Less: deferred loan fees (431) (381) Less: allowance for loan losses (7,082) (6,450) -------------- ---------------- Net loans 377,223 359,502 -------------- ---------------- Accrued interest receivable 6,735 6,604 Prepaid expenses and other assets 1,596 2,154 Deferred income taxes, net 9,735 8,600 Other real estate owned - - Premises and equipment 1,036 857 -------------- ---------------- Total assets $ 643,743 $ 623,260 ============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Savings accounts $ 163,310 $ 196,368 Certificates of deposit 329,096 269,233 Money market checking accounts 15,206 18,783 -------------- ---------------- Total deposits 507,612 484,384 -------------- ---------------- Borrowings: Securities sold under repurchase agreements 21,000 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 101,250 107,750 -------------- ---------------- Total interest-bearing liabilities 608,862 592,134 Accrued interest payable and other liabilities 8,009 5,577 -------------- ---------------- Total liabilities 616,871 597,711 ============== ================ SHAREHOLDERS' EQUITY Common stock, $.01 par value (10,000,000 shares authorized, 2,986,530 shares issued at June 30, 2000 and December 31, 1999) 30 30 Additional paid-in capital 27,816 27,885 Retained earnings 12,248 9,978 Accumulated other comprehensive loss (6,254) (6,355) Common stock in treasury, at cost (475,762 shares at June 30, 2000 and 384,806 shares at December 31, 1999) ( 6,968) (5,989) -------------- ---------------- Total shareholders' equity 26,872 25,549 ============== ================ Total liabilities and shareholders' equity $ 643,743 $ 623,260 ============== ================ Book value per common share $ 10.70 $ 9.82
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1
PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ----------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ---------- INTEREST INCOME: Loans $ 9,063 $ 8,209 $ 17,807 $ 15,714 Securities purchased under resale agreements 27 128 30 339 Investment securities available for sale 4,107 3,472 8,217 8,205 ----------- ----------- ----------- ---------- Total interest income 13,197 11,809 26,054 24,258 ----------- ----------- ----------- ---------- INTEREST EXPENSE: Deposits: Savings accounts 2,111 3,001 4,307 6,108 Certificates of deposit 4,493 2,416 8,422 4,846 Money market checking accounts 167 249 360 506 ----------- ----------- ----------- ---------- Total interest expense on deposits 6,771 5,666 13,089 11,460 ----------- ----------- ----------- ---------- Borrowings: Securities sold under repurchase agreements 655 120 1,296 474 Borrowings from State of California 474 - 791 - Term borrowings 441 856 893 1,950 Trust preferred securities 404 404 808 809 ----------- ----------- ----------- ---------- Total interest expense on borrowings 1,974 1,380 3,788 3,233 ----------- ----------- ----------- ---------- Total interest expense 8,745 7,046 16,877 14,693 ----------- ----------- ----------- ---------- Net interest income 4,452 4,763 9,177 9,565 Provision for loan losses 125 395 375 1,055 ----------- ----------- ----------- ---------- Net interest income after provision for loan losses 4,327 4,368 8,802 8,510 ----------- ----------- ----------- ---------- NON-INTEREST INCOME: Loan prepayment and late fee income 49 269 151 368 Gain on sale of investment securities - 71 - 586 Gain on sale of SBA loans - 79 - 175 Gain on sale of other real estate owned - 25 115 25 Other income 125 215 281 476 ----------- ----------- ----------- ---------- Total non-interest income 174 659 547 1,630 ----------- ----------- ----------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,414 1,734 2,912 3,474 Net occupancy expenses 360 430 746 872 Communication and data processing 222 223 442 435 Advertising and promotion 51 215 119 407 FDIC insurance premiums 26 14 52 26 Credit and collection expenses - 26 2 36 Other real estate owned expenses (6) 17 (4) 35 Valuation adjustments to other real estate owned - - - 43 Other expenses 275 362 579 629 ----------- ----------- ----------- ---------- Total non-interest expense 2,342 3,021 4,848 5,957 ----------- ----------- ----------- ---------- Income before income taxes 2,159 2,006 4,501 4,183 Income tax provision 901 799 1,877 1,648 ----------- ----------- ----------- ---------- Net income $ 1,258 $ 1,207 $ 2,624 $ 2,535 =========== =========== =========== ========== EARNINGS PER COMMON SHARE: Basic $ 0.50 $ 0.45 $ 1.03 $ 0.94 Diluted $ 0.48 $ 0.43 $ 1.00 $ 0.90
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS)
COMMON STOCK COMMON STOCK IN TREASURY ADDITIONAL ----------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL ---------- ---------- ----------- ---------- ---------------- Balances at December 31, 1998 ......... 2,986 $ 30 (296) $ (4,705) $ 28,057 Comprehensive income (loss): Net income ........................ -- -- -- -- -- Unrealized loss on investment securities available for sale, net of tax .................... -- -- -- -- -- Total comprehensive loss . Issuances of common stock in treasury: Employee stock purchase plan ... -- -- 4 66 (12) Non-employee directors' stock purchase plan ...... -- -- 2 27 -- Employee stock option plan ..... -- -- 17 263 (159) Purchase of common stock in treasury .. -- -- (57) (833) -- Cash dividends paid ($0.11 per share) . -- -- -- -- -- ---------- ---------- ----------- ---------- ---------------- Balances at June 30, 1999 ............. 2,986 $ 30 (330) $ (5,182) $ 27,886 ========== ========== =========== ========== ================ Balances at December 31, 1999 ......... 2,986 $ 30 (385) $ (5,989) $ 27,885 Comprehensive income: Net income ........................ -- -- -- -- -- Unrealized gain on investment securities available for sale, net of tax .................... -- -- -- -- -- Total comprehensive income Issuances of common stock in treasury: Employee stock purchase plan ... -- -- 4 55 (14) Non-employee directors' stock purchase plan ...... -- -- 2 32 (7) Employee stock option plan ..... -- -- 5 83 (48) Purchase of common stock in treasury .. -- -- (102) (1,149) -- Cash dividends paid ($0.14 per share).. -- -- -- -- -- ---------- ---------- ----------- ---------- ---------------- Balances at June 30, 2000 ............. 2,986 $ 30 (476) $ (6,968) $ 27,816 ========== ========== =========== ========== ================ ACCUMULATED OTHER TOTAL RETAINED COMPREHENSIVE SHAREHOLDERS' EARNINGS INCOME (LOSS) EQUITY --------------- ---------------- -------------- Balances at December 31, 1998 ......... $ 5,559 $ 1,199 $ 30,140 Comprehensive income (loss): Net income ........................ 2,535 -- 2,535 Unrealized loss on investment securities available for sale, net of tax .................... -- (5,085) (5,085) -------------- Total comprehensive loss . (2,550) Issuances of common stock in treasury: Employee stock purchase plan ... -- -- 54 Non-employee directors' stock purchase plan ...... -- -- 27 Employee stock option plan ..... -- -- 104 Purchase of common stock in treasury .. -- -- (833) Cash dividends paid ($0.11 per share) . (294) -- (294) --------------- ---------------- -------------- Balances at June 30, 1999 ............. $ 7,800 $ (3,886) $ 26,648 Balances at December 31, 1999 ......... $ 9,978 $ (6,355) $ 25,549 Comprehensive income: Net income ........................ 2,624 -- 2,624 Unrealized gain on investment securities available for sale, net of tax .................... -- 101 101 -------------- Total comprehensive income 2,725 Issuances of common stock in treasury: Employee stock purchase plan ... -- -- 41 Non-employee directors' stock purchase plan ...... -- -- 25 Employee stock option plan ..... -- -- 35 Purchase of common stock in treasury .. -- -- (1,149) Cash dividends paid ($0.14 per share).. (354) -- (354) --------------- ---------------- -------------- Balances at June 30, 2000 ............. $ 12,248 $ (6,254) $ 26,872 =============== ================ ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 2000 1999 ----------- ----------- OPERATING ACTIVITIES: Net income $ 2,624 $ 2,535 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 375 1,055 Gain on sale of investment securities -- (586) Gain on sale of SBA loans -- (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 165 155 Accretion of deferred loan fees (152) (137) Accretion of discount on investment securities (14) (26) Deferred income tax (benefit) expense (1,208) 434 Changes in operating assets and liabilities: Accrued interest receivable (131) 2,752 Prepaid expenses and other assets 558 17 Accrued interest payable and other liabilities 2,432 477 ----------- ----------- Net cash provided by operating activities 4,534 6,519 =========== =========== INVESTING ACTIVITIES: Purchases of investment securities available for sale -- (54,360) Proceeds from sales and calls of investment securities available for sale -- 158,335 Principal payments on investment securities 82 7 Loan originations (40,822) (88,858) Purchases of loans -- (9,017) Proceeds from sales of SBA loans -- 3,368 Principal payments on loans 22,918 26,013 Proceeds from sales of other real estate owned 75 563 Purchases of premises and equipment, net (344) (266) ----------- ----------- Net cash (used in) provided by investing activities (18,091) 35,785 =========== =========== FINANCING ACTIVITIES: Net decrease in savings accounts (33,058) (27,578) Net increase in certificates of deposit 59,863 20,725 Net decrease in money market checking accounts (3,577) (1,954) Net decrease in securities sold under repurchase agreements (9,500) (25,279) Net increase in borrowings from State of California 13,000 -- Net decrease in term borrowings (10,000) (24,450) Purchase of common stock in treasury, at cost (1,149) (833) Cash dividends paid (354) (294) Proceeds from exercise of stock options 35 104 Proceeds from employees and directors stock purchase plans 66 81 ----------- ----------- Net cash provided by (used in) financing activities 15,326 (59,478) =========== =========== Net increase (decrease) in cash and cash equivalents 1,769 (17,174) Cash and cash equivalents at beginning of period 4,783 25,640 ----------- ----------- Cash and cash equivalents at end of period $ 6,552 $ 8,466 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 June 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):
GROSS UNREALIZED WEIGHTED AMORTIZED --------------------------- ESTIMATED AVERAGE JUNE 30, 2000 COST GAINS LOSSES FAIR VALUE YIELD ---------------------- ------------ ------------ ------------ ------------ ------------ Investment securities available for sale: U.S. government sponsored agency securities: Callable bonds $ 243,633 $ -- $ (10,399) $ 233,234 6.46% Mortgage-backed securities 3,914 -- (136) 3,778 7.09% Corporate debt securities 4,102 -- (248) 3,854 8.46% ------------ ------------ ------------ ------------ ------------ Total investment securities $ 251,649 $ -- $ (10,783) $ 240,866 6.51% ------------ ------------ ------------ ------------ ------------ 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% ------------ ------------ ------------ ------------ ------------
U.S. government sponsored agency securities with market values totaling $103.7 million and $98.7 million were pledged to secure borrowings aggregating $84.0 million and $90.5 million at June 30, 2000 and December 31, 1999, respectively. 5 PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) The Company's investment securities portfolio at June 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 June 30 2000, the Company's callable bond portfolio had call dates ranging between one month and 13 months. The following table reflects the scheduled maturities in Company's investment securities portfolio at June 30, 2000 (dollars in thousands):
WEIGHTED AMORTIZED ESTIMATED AVERAGE COST FAIR VALUE YIELD ------------ ------------ ------------ Due in one to five years $ 81,360 $ 79,740 6.07% Due in six to ten years 142,273 134,869 6.66% Due over ten years 28,016 26,257 6.95% ------------ ------------ ------------ Total investment securities $ 251,649 $ 240,866 6.51% ------------ ------------ ------------
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 June 30, 2000, the Bank's unconsolidated total shareholder's equity was $39.6 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):
JUNE 30, 2000 --------------------------------------------- BORROWING DATE AMOUNT RATE MATURITY DATE --------------------------------------- ------------ --------- ------------- October 1999 $ 5,000 5.39% October 2000 November 1999 5,000 5.74% December 2000 December 1999 5,000 5.98% December 2000 April 2000 5,000 5.87% July 2000 April 2000 8,000 5.91% July 2000 June 2000 5,000 5.79% August 2000 ------------ --------- Total State of California borrowings $ 33,000 5.79% ============ =========
DECEMBER 31, 1999 --------------------------------------------- BORROWING DATE AMOUNT RATE MATURITY DATE --------------------------------------- ------------ --------- ------------- 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% ============ =========
6 PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) NOTE 4. TERM BORROWINGS The Company had fixed rate, long-term borrowings through one broker at June 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):
JUNE 30, 2000 ------------------------------------------------------------------ MATURITY BORROWING TYPE AMOUNT RATE CALL DATE DATE ----------------------------- ---------- --------- ---------------- ---------------- 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 $ 30,000 5.82% ========== =========
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):
JUNE 30, DECEMBER 31, 2000 1999 ----------- ----------- Total shareholders' equity $ 26,872 $ 25,549 ----------- ----------- Common shares issued 2,986,530 2,986,530 Less: common shares held in treasury (475,762) (384,806) ----------- ----------- Common shares outstanding 2,510,768 2,601,724 =========== =========== Book value per common share $ 10.70 $ 9.82 ----------- -----------
7 PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net income $ 1,258 $ 1,207 $ 2,624 $ 2,535 ========= ========= ========= ========= Basic weighted average common shares outstanding 2,510 2,669 2,538 2,680 Dilutive effect of stock options 95 117 87 120 --------- --------- --------- --------- Diluted weighted average common shares outstanding 2,605 2,786 2,625 2,800 ========= ========= ========= ========= Earnings per common share: Basic $ 0.50 $ 0.45 $ 1.03 $ 0.94 Diluted $ 0.48 $ 0.43 $ 1.00 $ 0.90 --------- --------- --------- ---------
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):
SIX MONTHS ENDED JUNE 30, ------------------------------- 2000 1999 -------------- -------------- Cash paid during the period for: Interest $ 16,958 $ 15,048 Income taxes $ 2,900 $ 1,900 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 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):
AT OR FOR THE THREE MONTHS ENDED ---------------------------------------------------------------------- SEPTEMBER JUNE 30, MARCH 31, DECEMBER 31, 30, JUNE 30, 2000 2000 1999 1999 1999 ------------------------------------------ ------------- ------------- AVERAGE BALANCES: Average loans $ 383,876 $ 371,258 $ 364,959 $ 360,404 $ 345,237 Average investment securities(1) 251,690 251,716 249,127 236,968 214,029 Average interest-earning assets 637,277 623,202 615,366 602,034 570,292 Average total assets 637,926 622,416 617,669 605,856 576,889 Average deposits 483,775 477,648 487,964 490,966 456,156 Average borrowings 120,255 111,952 95,775 79,514 86,041 Average shareholders' equity 24,975 24,725 26,984 29,057 28,730 Average realized shareholders' equity (2) 32,273 31,738 31,465 30,807 29,947 LOAN VOLUME: Loan originations $ 17,005 $ 23,817 $ 15,666 $ 27,129 $ 36,016 Loan sales - SBA - - 1,838 - 1,655 PERFORMANCE RATIOS: Return on average (realized) shareholders' equity (3) 15.59% 17.22% 16.26% 16.11% 16.12% Return on average total assets (3) 0.79% 0.88% 0.83% 0.82% 0.84% Net interest rate spread (4) 2.51% 2.75% 2.80% 2.92% 3.10% Net interest margin (4) 2.81% 3.05% 3.07% 3.19% 3.35% Operating expense to average total assets (5) 1.47% 1.61% 1.77% 1.84% 2.06% Efficiency ratio (6) 50.76% 50.21% 54.13% 52.58% 55.91% ASSET QUALITY RATIOS: Total non-performing assets to total assets 0.18% - 0.03% 0.04% - Allowance for loan losses to total loans 1.84% 1.77% 1.76% 1.71% 1.71% Allowance for loan losses to non-accrual loans 597.64% - 3071.43% 2660.43% - CAPITAL RATIOS - PACIFIC CREST CAPITAL, INC.: Leverage ratio 6.85% 6.86% 6.89% N/A N/A Tier 1 risk-based capital ratio 10.17% 9.94% 10.18% N/A N/A Total risk-based capital ratio 12.85% 12.72% 13.02% N/A N/A CAPITAL RATIOS - PACIFIC CREST BANK: Leverage ratio 7.21% 7.33% 7.19% 7.20% 7.36% Tier 1 risk-based capital ratio 10.61% 10.51% 10.38% 10.31% 10.35% Total risk-based capital ratio 11.87% 11.76% 11.64% 11.56% 11.60% PER SHARE DATA: Dividends declared per common share $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.06 Basic earnings per common share 0.50 0.53 0.49 0.47 0.45 Diluted earnings per common share 0.48 0.52 0.47 0.45 0.43 Book value per common share 10.70 10.17 9.82 10.33 10.03 Realized shareholders' equity per common share (2) 13.19 12.77 12.26 11.90 11.50 ------------------------------------------------------
(1) Average balances of investment securities are presented on a historical amortized cost basis, not at market value. (2) Calculation excludes accumulated other comprehensive loss from shareholders' equity. (3) Calculation is based upon annualized net income. (4) Defined under "Results of Operations - Net Interest Income." (5) 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. (6) 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. 9 SELECTED QUARTERLY BALANCE SHEET DATA The following table sets forth certain selected balance sheet data concerning the Company as of the dates indicated (dollars in thousands):
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 2000 2000 1999 1999 1999 -------------- ------------- -------------- -------------- -------------- INTEREST-EARNING ASSETS: Loans, net of deferred loan fees $ 384,305 $ 378,564 $ 365,952 $ 364,626 $ 357,538 Securities purchased under resale agreements 4,025 100 3,501 765 557 Investment securities - at amortized cost: U.S. agency callable bonds 243,633 243,633 243,626 243,619 214,157 U.S. agency mortgage-backed securities 3,914 3,983 3,996 1,600 1,605 Corporate debt securities 4,102 4,098 4,094 1,863 - -------------- ------------- -------------- -------------- -------------- Total investment securities 251,649 251,714 251,716 247,082 215,762 -------------- ------------- -------------- -------------- -------------- Total interest-earning assets $ 639,979 $ 630,378 $ 621,169 $ 612,473 $ 573,857 ============== ============= ============== ============== ============== INTEREST-BEARING LIABILITIES: Deposits: Savings accounts $ 163,310 $ 176,478 $ 196,368 $ 226,999 $ 248,433 Money market checking accounts 15,206 16,589 18,783 20,435 21,895 -------------- ------------- -------------- -------------- -------------- Total savings/money market checking 178,516 193,067 215,151 247,434 270,328 Certificates of deposit 329,096 280,572 269,233 247,749 203,704 -------------- ------------- -------------- -------------- -------------- Total deposits 507,612 473,639 484,384 495,183 474,032 -------------- ------------- -------------- -------------- -------------- Borrowings: Securities sold under repurchase agreements 21,000 51,100 30,500 20,500 5,500 Borrowings from State of California 33,000 25,000 20,000 - - Term borrowings 30,000 30,000 40,000 50,000 55,000 Trust preferred securities 17,250 17,250 17,250 17,250 17,250 -------------- ------------- -------------- -------------- -------------- Total borrowings 101,250 123,350 107,750 87,750 77,750 -------------- ------------- -------------- -------------- -------------- Total interest-bearing liabilities $ 608,862 $ 596,989 $ 592,134 $ 582,933 $ 551,782 ============== ============= ============== ============== ============== SHAREHOLDERS' EQUITY: Common stock and additional paid-in capital $ 27,846 $ 27,861 $ 27,915 $ 27,915 $ 27,916 Beginning retained earnings 9,978 9,978 5,559 5,559 5,559 Current year earnings 2,624 1,366 5,055 3,776 2,535 Current year dividends (354) (179) (636) (453) (294) Common stock in treasury, at cost (6,968) (7,005) (5,989) (5,169) (5,182) -------------- ------------- -------------- -------------- -------------- Total realized shareholders' equity 33,126 32,021 31,904 31,628 30,534 Accumulated other comprehensive loss (6,254) (6,517) (6,355) (4,181) (3,886) -------------- ------------- -------------- -------------- -------------- Total shareholders' equity $ 26,872 $ 25,504 $ 25,549 $ 27,447 $ 26,648 ============== ============= ============== ============== ==============
10 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 June 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 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 $0.48 per common share on a diluted basis) for the three months ended June 30, 2000, compared to $1.2 million (or $0.43 per common share on a diluted basis) for the corresponding period in 1999. Pre-tax income was $2.2 million compared to $2.0 million for the three months ended June 30, 2000 and 1999, respectively. The increase in pre-tax income was primarily due to decreases of $679,000 and $270,000 in non-interest expense and provision for loan losses, respectively, partially offset by decreases of $485,000 and $311,000 in non-interest income and net interest income, respectively. Net income was $2.6 million (or $1.00 per common share on a diluted basis) for the six months ended June 30, 2000, compared to $2.5 million (or $0.90 per common share on a diluted basis) for the corresponding period in 1999. Pre-tax income was $4.5 million compared to $4.2 million for the six months ended June 30, 2000 and 1999, respectively. The increase in pre-tax income was primarily due to decreases of $1.1 million and $680,000 in non-interest expense and provision for loan losses, respectively, partially offset by decreases of $1.1 million and $388,000 in non-interest income and net interest income, respectively. Annualized return on average shareholders' equity was 15.59% and 16.40% for the three and six months ended June 30, 2000, respectively, compared to 16.12% and 17.15% for the same periods in 1999. Annualized return on average total assets was 0.79% and 0.83% for the three and six months ended June 30, 2000, respectively, compared to 0.84% for the same periods in 1999. CAPITAL As of June 30, 2000, Pacific Crest's leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 6.85%, 10.17%, and 12.85%, respectively. The Bank's leverage ratio, tier 1 risk-based capital ratio and total risk-based capital ratio were 7.21%, 10.61% and 11.87%, 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 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 dividends will be paid to shareholders of record at the close of business on September 1, 2000 and is payable on September 15, 2000. 11 On May 15, 2000, the Company announced that the Board of Directors had declared a $0.07 per common share cash dividend for the second quarter of 2000. The dividend was payable to shareholders of record at the close of business on June 1, 2000 and was paid on June 15, 2000. The total amount of these dividends was approximately $175,000. During the first quarter of 2000, the Company declared and paid $0.07 per common share cash dividends, which totaled $179,000. STOCK REPURCHASE PLAN As of June 30, 2000, the Company had 39,000 remaining shares authorized for repurchase under its common stock repurchase program. During the six months ended June 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 11,044 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. The interest rate cap agreement had originally been purchased on June 8, 1998, for a premium 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 six months ended June 30, 2000, the amount of deferred gain amortization totaled $216,000, which resulted in a reduction in interest expense on deposits. Conversely, during the six months ended June 30, 1999, the amount of premium amortization totaled $92,000, which resulted in an increase in interest expense on deposits. As of June 30, 2000, the remaining deferred gain resulting from the sale of the interest rate cap totaled $1.6 million and will be amortized as follows: $276,000 for the second six months of 2000, $554,000 for 2001, $554,000 for 2002, and $242,000 for 2003. SBA LENDING In April 2000, the Federal Small Business Administration ("SBA") awarded the Company "Preferred Lender Status" for the Los Angeles SBA district, which covers Los Angeles, Ventura, and Santa Barbara counties. Preferred Lender status is the highest designation granted lenders by the SBA. In October 1999, the SBA awarded the Company Preferred Lender status for the San Diego SBA district, which covers San Diego and Imperial counties. In June 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. All four officers have a minimum of five years experience in the SBA industry and together have a combined 24 years of experience in the industry. 12 RESULTS OF OPERATIONS NET INTEREST INCOME THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 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):
THREE MONTHS ENDED JUNE 30, --------------------------------------------------------------------------- 2000 1999 ------------------------------------- ------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------------ ----------- ----------- ------------ ------------ ----------- INTEREST-EARNING ASSETS: Loans (1) $383,876 $ 9,063 9.50% $345,237 $ 8,209 9.54% Securities purchased under resale agreements 1,711 27 6.35% 11,026 128 4.66% Investment securities available for sale (2): U.S. government sponsored agency securities: Callable bonds 243,635 3,948 6.48% 212,422 3,447 6.49% Mortgage-backed securities 3,955 70 7.08% 1,607 25 6.22% Corporate debt securities 4,100 89 8.68% - - - ------------ ----------- ----------- ------------ ------------ ----------- Total investment securities 251,690 4,107 6.53% 214,029 3,472 6.49% ------------ ----------- ----------- ------------ ------------ ----------- Total interest-earning assets 637,277 13,197 8.33% 570,292 11,809 8.31% ------------ ---------- ------------ ----------- Non-interest-earning assets 7,485 12,521 Less: allowance for loan losses (6,836) (5,924) ------------ ------------ Total assets $637,926 $576,889 ============ ============ INTEREST-BEARING LIABILITIES: Savings accounts $167,413 $ 2,111 5.07% $251,830 $ 3,001 4.78% Certificates of deposit 300,523 4,493 6.01% 181,520 2,416 5.34% Money market checking accounts 15,839 167 4.24% 22,806 249 4.38% ------------ ----------- ----------- ------------ ------------ ----------- Total deposits 483,775 6,771 5.63% 456,156 5,666 4.98% ------------ ------------------------ ------------ ------------------------ Securities sold under repurchase agreements 40,533 655 6.50% 10,043 120 4.79% Borrowings from State of California 32,472 474 5.77% - - - Term borrowings 30,000 441 5.82% 58,748 856 5.76% Trust preferred securities 17,250 404 9.37% 17,250 404 9.37% ------------ ----------- ----------- ------------ ------------ ----------- Total borrowings 120,255 1,974 6.54% 86,041 1,380 6.37% ------------ ----------- ----------- ------------ ------------ ----------- Total interest-bearing liabilities 604,030 8,745 5.82% 542,197 7,046 5.21% ----------- ----------- ------------ ----------- Non-interest-bearing liabilities 8,921 5,962 Shareholders' equity 24,975 28,730 ------------ ------------ Total liabilities and shareholders' equity $637,926 $576,889 ============ ============ Net interest-earning assets $ 33,247 $ 28,095 ============ ============ Net interest income $ 4,452 $ 4,763 =========== ============ Net interest rate spread (3) 2.51% 3.10% =========== =========== Net interest margin (4) 2.81% 3.35% =========== =========== Average interest-earning assets to average interest-bearing liabilities 105.5% 105.2% ------------------------------------------------ ============ ============
(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. 13 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):
THREE MONTHS ENDED JUNE 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 ----------- -------- --------- ----------- -------- --------- ----------- -------- -------- INTEREST-EARNING ASSETS: Loans $383,876 60.2% 9.50% $345,237 60.6% 9.54% $ 38,639 -0.4% -0.04% Securities purchased under resale agreements 1,711 0.3% 6.35% 11,026 1.9% 4.66% (9,315) -1.6% 1.69% Investment securities available for sale: U.S. government sponsored agency securities: Callable bonds 243,635 38.2% 6.48% 212,422 37.2% 6.49% 31,213 1.0% -0.01% Mortgage-backed securities 3,955 0.6% 7.08% 1,607 0.3% 6.22% 2,348 0.3% 0.86% Corporate debt securities 4,100 0.7% 8.68% - 0.0% - 4,100 0.7% 8.68% ----------- -------- ----------- -------- ----------- -------- Total investment securities 251,690 39.5% 6.53% 214,029 37.5% 6.49% 37,661 2.0% 0.04% ----------- -------- ----------- -------- ----------- -------- Total interest-earning assets $637,277 100.0% 8.33% $570,292 100.0% 8.31% $ 66,985 0.02% =========== ======== =========== ======== =========== INTEREST-BEARING LIABILITIES: Savings accounts $167,413 27.7% 5.07% $251,830 46.4% 4.78% $(84,417) -18.7% 0.29% Certificates of deposit 300,523 49.8% 6.01% 181,520 33.5% 5.34% 119,003 16.3% 0.67% Money market checking accounts 15,839 2.6% 4.24% 22,806 4.2% 4.38% (6,967) -1.6% -0.14% ----------- -------- ----------- -------- ----------- -------- Total deposits 483,775 80.1% 5.63% 456,156 84.1% 4.98% 27,619 -4.0% 0.65% ----------- -------- ----------- -------- ----------- -------- Securities sold under repurchase agreements 40,533 6.7% 6.50% 10,043 1.9% 4.79% 30,490 4.8% 1.71% Borrowings from State of California 32,472 5.4% 5.77% - - - 32,472 5.4% 5.77% Term borrowings 30,000 5.0% 5.82% 58,748 10.8% 5.76% (28,748) -5.8% 0.06% Trust preferred securities 17,250 2.8% 9.37% 17,250 3.2% 9.37% - -0.3% 0.00% ----------- -------- ----------- -------- ----------- -------- Total borrowings 120,255 19.9% 6.54% 86,041 15.9% 6.37% 34,214 4.0% 0.17% ----------- -------- ----------- -------- ----------- -------- Total interest-bearing liabilities $604,030 100.0% 5.82% $542,197 100.0% 5.21% $ 61,833 0.61% =========== ======== =========== ======== =========== ======== Net interest-earning assets $ 33,247 $ 28,095 $ 5,152 Net interest rate spread 2.51% 3.10% -0.59% Net interest margin 2.81% 3.35% -0.54%
14 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):
THREE MONTHS ENDED JUNE 30, 2000 VS. 1999 -------------------------------------------- INCREASE (DECREASE) DUE TO -------------------------------------------- VOLUME RATE TOTAL ------------ ------------ ------------ INTEREST INCOME: Loans $ 889 $ (35) $ 854 Securities purchased under resale agreements (135) 34 (101) Investment securities available for sale: U.S. government sponsored agency securities: Callable bonds 506 (5) 501 Mortgage-backed securities 41 4 45 Corporate debt securities 89 -- 89 ------------ ------------ ------------ Total investment securities 636 (1) 635 ------------ ------------ ------------ Total interest income $ 1,390 $ (2) $ 1,388 ------------ ------------ ------------ INTEREST EXPENSE: Savings accounts $ (1,061) $ 171 $ (890) Certificates of deposit 1,743 334 2,077 Money market checking accounts (74) (8) (82) ------------ ------------ ------------ Total deposits 608 497 1,105 ------------ ------------ ------------ Securities sold under repurchase agreements 479 56 535 Borrowings from State of California 474 -- 474 Term borrowings (424) 9 (415) Trust preferred securities -- -- -- ------------ ------------ ------------ Total borrowings 529 65 594 ------------ ------------ ------------ Total interest expense $ 1,137 $ 562 $ 1,699 ------------ ------------ ------------ Net interest income $ 253 $ (564) $ (311) ============ ============ ============
NET INTEREST INCOME Net interest income decreased by $311,000, to $4.5 million, during the three months ended June 30, 2000 compared to the same period in 1999. This decrease was comprised of a $564,000 decrease attributable to changes in interest rates, partially offset by a $253,000 increase attributable to changes in volume. This was primarily due to the reduction in the net interest rate spread of 59 basis points, to 2.51%, partially offset by the increase in the Company's net interest-earning assets of $5.2 million, to $33.2 million, during the second 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 61 basis points, to 5.82%, in the rate paid on average total interest-bearing liabilities, partially offset by an increase of 2 basis points, to 8.33%, 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 4 basis points, to 6.53%, in the yield earned on investment securities. The growth in net interest-earning assets was primarily due to an increase of $67.0 million, to $637.3 million, in average total interest-earning assets, partially offset by an increase of $61.8 million, to $604.0 million, in average total interest-bearing liabilities. 15 TOTAL INTEREST INCOME Total interest income increased by $1.4 million, to $13.2 million, during the three months ended June 30, 2000 compared to the same period in 1999. This was primarily due to the growth in average total interest-earning assets, which contributed $1.4 million to interest income, partially offset by the reduction in yield earned on these assets during 2000 compared to 1999, which reduced interest income by $2,000. The growth in average total interest-earning assets of $67.0 million during the second quarter of 2000 compared to the same period in 1999, was principally due to an increase in average loans of $38.6 million, to $383.9 million, and an increase in average investment securities of $37.7 million, to $251.7 million, partially offset by a decrease of $9.3 million, to $1.7 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 $37.7 million increase in average investment securities was primarily due to the purchase in the beginning of 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 $37.7 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 2 basis points, to 8.33%, during the three months ended June 30, 2000 compared to the same period in 1999, primarily due to the above-mentioned increase of 4 basis points, to 6.53%, in the yield on investment securities. The yield on average loans, however, declined by 4 basis points, to 9.50%, primarily because the loans that the Company originated during the 12 months ended June 30, 2000 had lower overall yields than the loans that paid off during that period. Partially offsetting the above factors for the decline 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 increase in the yield on average investment securities of 4 basis points during the three months ended June 30, 2000 compared to the same period last year, was primarily due to the above mentioned 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 $1.7 million, to $8.7 million, during the three months ended June 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 $1.1 million and $562,000, respectively, to interest expense. The growth in average total interest-bearing liabilities of $61.8 million during the second quarter of 2000 compared to the same period in 1999, was primarily due to an increase in average deposits of $27.6 million, to $483.8 million, and an increase in average borrowings of $34.2 million, to $120.3 million. The growth in average deposits and even greater increase in 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 19.9% during the second quarter of 2000 from 15.9% during the same period last year. The increase in average deposits of $27.6 million during the second quarter of 2000 compared to the second quarter of 1999, was principally due to an increase in average certificates of deposit of $119.0 million, partially offset by decreases of $84.4 million and $7.0 million in average savings accounts and average money market checking accounts, respectively. Deposits increased $21.2 million from $474.0 million at June 30, 1999 to $495.2 million at September 30, 1999, then declined steadily for two quarters back down to $473.6 million at March 31, 2000, and finally increased $34.0 million to 16 $507.6 million at June 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 during the quarters ended September 30, 1999 and June 30, 2000 were primarily attributable to the Company's significant increases in certificate of deposit rates in the middle of June 1999 and later in 2000 at the end of April and beginning of May, 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. The $21.2 million increase in deposits during the third quarter of 1999, which took place at the beginning of the quarter, was used to fund the purchase of investment securities, as previously discussed. The $34.0 million increase in deposits during the second quarter of 2000 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 June 30, 2000 compared to the same period in 1999, were primarily attributable to the Company's deposit strategy in 1999, which, for the most part, continued through June 30, 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 62.1% during the second quarter of 2000 from 39.8% during the second quarter of 1999. In February 2000, and later, in May 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 the first six months of 2000, although much more significantly in the second quarter than the first quarter. The increase in average borrowings of $34.2 million during the second quarter of 2000 compared to the second quarter of 1999, was principally due to increases of $32.4 million and $30.5 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 $28.7 million. Securities sold under repurchase agreements increased $15.0 million from $5.0 million at June 30, 1999 to $20.5 million at September 30, 1999, then grew $30.6 million during the next two quarters to $51.1 million at March 31, 2000, and finally declined $30.0 million to $21.0 million at June 30, 2000. The $15.0 million increase during the third quarter of 1999, which took place at the end of the quarter, was used to fund loans and pay down term borrowings. 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 discussed, and to fund loans. The $30.0 million decrease during the second quarter of 2000 was paid down with new deposits. 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. 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 steadily from $55.0 million at June 30, 1999 to $30.0 million at June 30, 2000 due to this debt being called by the lender. 17 The increase in the rate on average total interest-bearing liabilities of 61 basis points during the three months ended June 30, 2000 compared to the same period in 1999, was principally due to the following factors: - The rate on average deposits increased 65 basis points, to 5.63%. - The rate on average borrowings increased 17 basis points, to 6.54%. - The mix of average deposits shifted to higher rate certificates of deposit from lower rate savings/money market checking accounts. - 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 65 basis points during the second quarter of 2000 compared to the same period last year, was primarily due to the following factors: - The Company started raising the interest rates on its two-to five-year certificates of deposit beginning in the second quarter of 1999, as mentioned above, and continued through the second quarter of 2000. - In February 2000, and later, in May 2000, the Company raised the rates on its savings accounts, which had not been increased during 1999. - 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 17 basis points during the three months ended June 30, 2000 compared to the same period in 1999, was primarily due to the following factors: - 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 171 basis points, to 6.50%, during the three months ended June 30, 2000 compared to the same period in 1999. - In April 1999, a $24.5 million term borrowing matured, bearing interest at a lower rate of 5.64%. The Company paid this debt with proceeds from the liquidation of its securities. - 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. - During the second quarter of 2000, a $5.0 million State of California borrowing, bearing interest at a lower rate of 5.18%, matured and 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. Partially offsetting the increase in the rate on average borrowings were the following factors: - In 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. - 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. 18 NET INTEREST INCOME SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 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):
SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------------- 2000 1999 ------------------------------------- ------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------------ ------------ ----------- ------------ ----------- ------------ INTEREST-EARNING ASSETS: Loans (1) $ 377,567 $ 17,807 9.48% $ 330,450 $ 15,714 9.59% Securities purchased under resale agreements 969 30 6.23% 13,723 339 4.98% Investment securities available for sale (2): U.S. government sponsored agency securities: Callable bonds 243,632 7,902 6.49% 242,162 8,001 6.61% Mortgage-backed securities 3,973 140 7.05% 1,609 51 6.34% Corporate debt securities 4,098 175 8.54% 4,931 153 6.21% ------------ ------------ ----------- ------------ ----------- ------------ Total investment securities 251,703 8,217 6.53% 248,702 8,205 6.60% ------------ ------------ ----------- ------------ ----------- ------------ Total interest-earning assets 630,239 26,054 8.31% 592,875 24,258 8.25% ------------ ----------- ----------- ------------ Non-interest-earning assets 6,654 14,098 Less: allowance for loan losses (6,722) (5,621) ------------ ------------ Total assets $ 630,171 $ 601,352 ============ ============ INTEREST-BEARING LIABILITIES: Savings accounts $ 175,003 $ 4,307 4.95% $ 257,995 $ 6,108 4.77% Certificates of deposit 288,724 8,422 5.87% 180,666 4,846 5.41% Money market checking accounts 16,985 360 4.26% 23,270 506 4.38% ------------ ------------ ----------- ------------ ----------- ------------ Total deposits 480,712 13,089 5.48% 461,931 11,460 5.00% ------------ ------------ ----------- ------------ ----------- ------------ Securities sold under repurchase agreements 41,107 1,296 6.34% 18,110 474 5.28% Borrowings from State of California 27,417 791 5.71% - - - Term borrowings 30,330 893 5.82% 68,191 1,950 5.69% Trust preferred securities 17,250 808 9.37% 17,250 809 9.38% ------------ ------------ ----------- ------------ ----------- ------------ Total borrowings 116,104 3,788 6.51% 103,551 3,233 6.23% ------------ ------------ ----------- ------------ ----------- ------------ Total interest-bearing liabilities 596,816 16,877 5.69% 565,482 14,693 5.24% ------------ ----------- ----------- ------------ Non-interest-bearing liabilities 8,505 6,502 Shareholders' equity 24,850 29,368 ------------ ------------ Total liabilities and shareholders' equity $ 630,171 $ 601,352 ============ ============ Net interest-earning assets $ 33,423 $ 27,393 ============ ============= Net interest income $ 9,177 $ 9,565 ============ =========== Net interest rate spread 2.62% 3.01% ============ ============ Net interest margin 2.93% 3.25% ============ ============ Average interest-earning assets to average interest-bearing liabilities 105.6% 104.8% ============ =============
----------------------------------------- (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. 19 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):
SIX MONTHS ENDED JUNE 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 ----------- -------- --------- ---------- -------- ---------- ----------- -------- -------- INTEREST-EARNING ASSETS: Loans $ 377,567 59.9% 9.48% $ 330,450 55.7% 9.59% $ 47,117 4.2% -0.11% Securities purchased under resale agreements 969 0.1% 6.23% 13,723 2.3% 4.98% (12,754) -2.3% 1.25% Investment securities available for sale: U.S. government sponsored agency securities: Callable bonds 243,632 38.7% 6.49% 242,162 40.9% 6.61% 1,470 -2.2% -0.12% Mortgage-backed securities 3,973 0.6% 7.05% 1,609 0.3% 6.34% 2,364 0.3% 0.71% Corporate debt securities 4,098 0.7% 8.54% 4,931 0.8% 6.21% (833) -0.1% 2.33% ----------- -------- ---------- --------- ----------- -------- Total investment securities 251,703 40.0% 6.53% 248,702 42.0% 6.60% 3,001 -2.0% -0.07% ----------- -------- ---------- --------- ----------- -------- Total interest-earning assets $ 630,239 100.0% 8.31% $ 592,875 100.0% 8.25% $ 37,364 0.06% =========== ======== ========== ========= =========== INTEREST-BEARING LIABILITIES: Savings accounts $ 175,003 29.3% 4.95% $ 257,995 45.6% 4.77% $ (82,992) -16.3% 0.18% Certificates of deposit 288,724 48.4% 5.87% 180,666 32.0% 5.41% 108,058 16.4% 0.46% Money market checking accounts 16,985 2.8% 4.26% 23,270 4.1% 4.38% (6,285) -1.3% -0.12% ----------- -------- ---------- --------- ----------- -------- Total deposits 480,712 80.5% 5.48% 461,931 81.7% 5.00% 18,781 -1.2% 0.48% ----------- -------- ---------- --------- ----------- -------- Securities sold under repurchase agreements 41,107 6.9% 6.34% 18,110 3.2% 5.28% 22,997 3.7% 1.06% Borrowings from State of California 27,417 4.6% 5.71% - - - 27,417 4.6% 5.71% Term borrowings 30,330 5.1% 5.82% 68,191 12.1% 5.69% (37,861) -7.0% 0.13% Trust preferred securities 17,250 2.9% 9.37% 17,250 3.0% 9.38% - -0.1% -0.01% ----------- -------- ---------- --------- ----------- -------- Total borrowings 116,104 19.5% 6.51% 103,551 18.3% 6.23% 12,553 1.2% 0.28% ----------- -------- ---------- --------- ----------- -------- Total interest-bearing liabilities $ 596,816 100.0% 5.69% $ 565,482 100.0% 5.24% $ 31,334 0.45% =========== ======== ========== ========= =========== Net interest-earning assets $ 33,423 $ 27,393 $ 6,030 Net interest rate spread 2.62% 3.01% -0.39% Net interest margin 2.93% 3.25% -0.32%
20 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):
SIX MONTHS ENDED JUNE 30, 2000 VS. 1999 -------------------------------------- INCREASE (DECREASE) DUE TO -------------------------------------- VOLUME RATE TOTAL ------------ ------------ ------------ INTEREST INCOME: Loans $ 2,272 $ (179) $ 2,093 Securities purchased under resale agreements (378) 69 (309) Investment securities available for sale: U.S. government sponsored agency securities: Callable bonds 48 (147) (99) Mortgage-backed securities 83 6 89 Corporate debt securities (29) 51 22 ------------ ------------ ------------ Total investment securities 102 (90) 12 ------------ ------------ ------------ Total interest income $ 1,996 $ (200) $ 1,796 ------------ ------------ ------------ INTEREST EXPENSE: Savings accounts $ (2,025) $ 224 $ (1,801) Certificates of deposit 3,131 445 3,576 Money market checking accounts (133) (13) (146) ------------ ------------ ------------ Total deposits 973 656 1,629 ------------ ------------ ------------ Securities sold under repurchase agreements 710 112 822 Borrowings from State of California 791 - 791 Term borrowings (1,100) 43 (1,057) Trust preferred securities - (1) (1) ------------ ------------ ------------ Total borrowings 401 154 555 ------------ ------------ ------------ Total interest expense $ 1,374 $ 810 $ 2,184 ------------ ------------ ------------ Net interest income $ 622 $ (1,010) $ (388) ============ ============ ============
NET INTEREST INCOME Net interest income decreased by $388,000, to $9.2 million, during the six months ended June 30, 2000 compared to the same period in 1999. This decrease was comprised of a $1.0 million decrease attributable to changes in interest rates, partially offset by a $622,000 increase attributable to changes in volume. This was primarily due to the reduction in the net interest rate spread of 39 basis points, to 2.62%, partially offset by the increase in the Company's net interest-earning assets of $6.0 million, to $33.4 million, during the six months ended June 30, 2000 compared to the same period in 1999. The reduction in the net interest rate spread was principally due to an increase of 45 basis points, to 5.69%, in the rate paid on average total interest-bearing liabilities, partially offset by an increase of 6 basis points, to 8.31%, 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, despite lower yields earned on loans and investment securities in 2000 compared to 1999, 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 net interest-earning assets was primarily due to an increase of $37.4 million, to $630.2 million, in average total interest-earning assets, partially offset by an increase of $31.3 million, to $596.8 million, in average total interest-bearing liabilities. 21 TOTAL INTEREST INCOME Total interest income increased by $1.8 million, to $26.1 million, during the six months ended June 30, 2000 compared to the same period in 1999. This was primarily due to the growth in average total interest-earning assets, which contributed $2.0 million to interest income, partially offset by the reduction in yields earned on loans and investment securities during 2000 compared to 1999, which reduced interest income by $200,000. The growth in average total interest-earning assets of $37.4 million during the six months ended June 30, 2000 compared to the same period in 1999, was principally due to an increase in average loans of $47.1 million, to $377.6 million, and an increase in average investment securities of $3.0 million, to $251.7 million, partially offset by a decrease of $12.8 million, to $969,000, 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 59.9% in the first six months of 2000 from 55.7% in the first six months of 1999. The yield on average total interest-earning assets increased by 6 basis points, to 8.31%, during the six months ended June 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. However, the yield on average loans declined by 11 basis points, to 9.48%, and the yield on average investment securities decreased by 7 basis points, to 6.53%. The reasons for the decline in the yield earned on average loans were described earlier under "Results of Operations - Net Interest Income - Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999 - Total Interest Income." The decrease in the yield on average investment securities of 7 basis points during the six months ended June 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 $2.2 million, to $16.9 million, during the six months ended June 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 $1.4 million and $810,000, respectively, to interest expense. The growth in average total interest-bearing liabilities of $31.3 million during the first six months of 2000 compared to the same period in 1999, was primarily due to an increase in average deposits of $18.8 million, to $480.7 million, and an increase in average borrowings of $12.6 million, to $116.1 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 19.5% during the first six months of 2000 from 18.3% during the same period last year. The increase in average deposits of $18.8 million during the six months ended June 30, 2000 compared to the six months ended June 30, 1999, was principally due to an increase in average certificates of deposit of $108.1 million, partially offset by decreases of $83.0 million and $6.3 million in average savings accounts and average money market checking accounts, respectively. 22 The changes in the average balances of the Company's deposit products during the six months ended June 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 60.1% during the first six months of 2000 from 39.1% during the first six months of 1999. In February 2000, and later, in May 2000, the Company raised the rates on its savings accounts in response to deposit runoff and the increase in market interest rates. The Company continued to raise the rates on its certificates of deposit during the first six months of 2000, although much more significantly in the second quarter than the first quarter. The increase in average borrowings of $12.6 million during the six months ended June 30, 2000 compared to the six months ended June 30, 1999, was principally due to increases of $27.4 million and $23.0 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 $37.9 million. The increase in the rate on average total interest-bearing liabilities of 45 basis points during the six months ended June 30, 2000 compared to the same period in 1999, was principally due to the following factors: - The rate on average deposits increased 48 basis points, to 5.48%. - The rate on average borrowings increased 28 basis points, to 6.51%. - The mix of average deposits shifted to higher rate certificates of deposit from lower rate savings/money market checking accounts. - 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 June 30, 2000 vs. Three Months Ended June 30, 1999 - Total Interest Expense." PROVISION FOR LOAN LOSSES During the three and six months ended June 30, 2000, the Company's provision for loan losses decreased by $270,000 and $680,000, to $125,000 and $375,000, 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):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------------- ----------------------------------------- AMOUNTS NET CHANGE AMOUNTS NET CHANGE ------------------------------------------ --------------------- -------------------- 2000 1999 $ % 2000 1999 $ % ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- Loan prepayment and late fee income $ 49 $ 269 $ (220) (81.8%) $ 151 $ 368 $ (217) (59.0%) Gain on sale of investment securities - 71 (71) (100.0%) - 586 (586) (100.0%) Gain on sale of SBA loans - 79 (79) (100.0%) - 175 (175) (100.0%) Gain on sale of other real estate owned - 25 (25) (100.0%) 115 25 90 360.0% Other income 125 215 (90) (41.9%) 281 476 (195) (41.0%) ---------- -------------------- ---------- ---------- ---------- -------------------- Total non-interest income $ 174 $ 659 $ (485) (73.6%) $ 547 $1,630 $(1,083) (66.4%) ---------- -------------------- ---------- ---------- ---------- --------------------
23 Non-interest income for the three months ended June 30, 2000 decreased by $485,000, to $174,000, compared to the same period in 1999. This was primarily due to decreases of $220,000, $150,000 and $90,000 in loan prepayment and late fee income, gains on sale of securities and loans, and other income, respectively. Non-interest income for the six months ended June 30, 2000 decreased by $1.1 million, to $547,000, compared to the same period in 1999. This was primarily due to decreases of $761,000, $217,000, and $195,000 in gains on sale of securities and loans, loan prepayment and late fee income, and other income, respectively. 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):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------------- ------------------------------------------ AMOUNTS NET CHANGE AMOUNTS NET CHANGE ---------------------- --------------------- ------------------------------------------- 2000 1999 $ % 2000 1999 $ % ----------- ---------- ---------- ---------- ----------- ---------- ---------- -------- Salaries and employee benefits $1,414 $1,734 $ (320) (18.5%) $2,912 $3,474 $ (562) (16.2%) Net occupancy expenses 360 430 (70) (16.3%) 746 872 (126) (14.4%) Communication and data processing 222 223 (1) (0.4%) 442 435 7 1.6% Advertising and promotion 51 215 (164) (76.3%) 119 407 (288) (70.8%) FDIC insurance premiums 26 14 12 85.7% 52 26 26 100.0% Credit and collection expenses - 26 (26) (100.0%) 2 36 (34) (94.4%) Other real estate owned expenses (6) 17 (23) (135.3%) (4) 35 (39) (111.4%) Valuation adjustments to other real estate owned - - - - - 43 (43) (100.0%) Other expenses 275 362 (87) (24.0%) 579 629 (50) (7.9%) ----------- ---------- ---------- ---------- ----------- ---------- ---------- -------- Total non-interest expense $2,342 $3,021 $ (679) (22.5%) $4,848 $5,957 $(1,109) (18.6%) =========== ========== ========== ========== =========== ========== ========== ========
Non-interest expense for the three months ended June 30, 2000 decreased by $679,000, to $2.3 million, compared to the same period in 1999. This was primarily due to decreases of $320,000, $164,000, and $70,000 in salaries and employee benefits, advertising and promotion, and net occupancy expenses, respectively. Non-interest expense for the six months ended June 30, 2000 decreased by $1.1 million, to $4.8 million, compared to the same period in 1999. This was primarily due to decreases of $562,000, $288,000, and $126,000 in salaries and employee benefits, advertising and promotion, and net occupancy expenses, respectively. Salaries and employee benefits for the three and six months ended June 30, 2000 decreased by $320,000 and $562,000, to $1.4 million and $2.9 million, respectively, as compared to the same periods in 1999. The decreases were primarily due to the following factors: - 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. - 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. 24 Net occupancy expenses decreased by $70,000 and $126,000, to $360,000 and $746,000, respectively, for the three and six months ended June 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 for the commercial marketing representative hired in June 2000. The four SBA officers hired in June 2000 worked out of the Company's San Diego branch office, but the Company plans to open an office for them in San Diego during the third quarter of 2000. Advertising and promotion costs decreased by $164,000 and $288,000, to $51,000 and $119,000, respectively, for the three and six months ended June 30, 2000, compared to the same period in 1999. The Company started reducing the level of advertising and promotion in the third quarter of 1999. INCOME TAX PROVISION For the three months ended June 30, 2000 and 1999, the Company's provision for income taxes was $901,000 and $799,000, respectively, which resulted in effective tax rates of 41.7% and 39.8%, respectively. For the six months ended June 30, 2000 and 1999, the Company's provision for income taxes was $1.9 and $1.6 million, which resulted in effective tax rates of 41.7% and 39.4%, respectively. The difference between the effective tax rates for the three and six months ended June 30, 2000 and 1999 is the result of adjustments made to the tax valuation reserves for the three and six months ended June 30, 1999. 25 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):
JUNE 30, DECEMBER 31, NET CHANGE --------------- -------------- ------------------------------ 2000 1999 $ % --------------- -------------- -------------- --------------- ASSETS Cash and cash equivalents $ 6,552 $ 4,783 $ 1,769 36.99% Investment securities available for sale, at market 240,866 240,760 106 0.04% Net loans 377,223 359,502 17,721 4.93% Other assets 19,102 18,215 887 4.87% --------------- -------------- -------------- --------------- Total assets $ 643,743 $ 623,260 $ 20,483 3.29% =============== ============== ============== =============== LIABILITIES Savings accounts $ 163,310 $ 196,368 $ (33,058) (16.83%) Certificates of deposit 329,096 269,233 59,863 22.23% Money market checking accounts 15,206 18,783 (3,577) (19.04%) --------------- -------------- -------------- --------------- Total deposits 507,612 484,384 23,228 4.80% --------------- -------------- -------------- --------------- Securities sold under repurchase agreements 21,000 30,500 (9,500) (31.15%) 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 101,250 107,750 (6,500) (6.03%) --------------- -------------- -------------- --------------- Total interest-bearing liabilities 608,862 592,134 16,728 2.83% Other liabilities 8,009 5,577 2,432 43.61% --------------- -------------- -------------- --------------- Total liabilities 616,871 597,711 19,160 3.21% =============== ============== ============== =============== SHAREHOLDERS' EQUITY Common stock and additional paid-in capital 27,846 27,915 (69) (0.25%) Retained earnings 12,248 9,978 2,270 22.75% Accumulated other comprehensive loss (6,254) (6,355) 101 (1.59%) Common stock in treasury, at cost (6,968) (5,989) (979) 16.35% --------------- -------------- -------------- --------------- Total shareholders' equity 26,872 25,549 1,323 5.18% =============== ============== ============== =============== Total liabilities and shareholders' equity $ 643,743 $ 623,260 $ 20,483 3.29% =============== ============== ============== ===============
Total assets increased by $20.5 million, to $643.7 million, during the six months ended June 30, 2000, primarily due to a $17.7 million increase in net loans and a $1.8 million increase in cash and cash equivalents. The increase in net loans was principally due to $40.8 million of originations, partially offset by $22.9 million of principal payments. The increase in cash and cash equivalents was attributable to the growth in deposits. Investment securities available for sale increased by $106,000, to $240.9 million, primarily due to an increase in market value. Total liabilities increased by $19.2 million, to $616.9 million, during the six months ended June 30, 2000, primarily due to an increase in deposits of $23.2 million, partially offset by a decrease in borrowings of $6.5 million. This resulted in a shift in the mix of total interest-bearing liabilities to lower rate deposits from higher rate borrowings and helped to decrease interest expense for the first six months of 2000. Deposits as a percentage of total interest-bearing liabilities increased to 83.4% at June 30, 2000 from 81.8% at December 31, 1999. 26 The increase in deposits was attributable to a significant increase in interest rates paid on certificates of deposit during the second quarter of 2000 compared to the first quarter of 2000. In the first quarter, the Company raised the rates only on its six month, one year, two year and five year certificate of deposit products by 22 basis points, nine basis points, nine basis points and eight basis points, respectively, as well as the tiered rates on its savings accounts. Certificates of deposit increased $11.3 million during the quarter, but savings and money market checking accounts together decreased $22.1 million, resulting in an overall decrease in deposits of $10.7 million during the first quarter. This deposit outflow, along with loan originations, was funded with securities sold under repurchase agreements. However, during the second quarter, the Company significantly increased its rates on all of its certificate of deposit products, increased the rate on its highest tier savings account by 27 basis points, and kept unchanged the rate on money market checking accounts. This resulted in an increase in total deposits of $34.0 million, attributable to the growth in certificates of deposit of $48.5 million. This deposit inflow was used to pay down securities sold under repurchase agreements, which had built up during the first quarter, and to fund loans. The $23.2 million increase in deposits during the first six months of 2000 was comprised of an increase of $59.9 million in certificates of deposit, partially offset by decreases of $33.1 million and $3.6 million in savings accounts and money market checking accounts, respectively. The changes in the balances of the Company's deposit products during the first six 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 64.8% at June 30, 2000 from 55.6% at December 31, 1999 and served to increase interest expense for the first six months of 2000. The $6.5 million decrease in borrowings during the first six months of 2000 was comprised of a decrease of $9.5 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 $19.5 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 $6.5 million from an increase in certificates of deposit. Shareholders' equity increased by $1.3 million, to $26.9 million, during the six months ended June 30, 2000. Changes to shareholders' equity were due to the following factors: - The Company recorded $2.6 million of net income for the first six months of 2000. - The Company declared and paid cash dividends of $354,000 for the first six months of 2000. - Accumulated other comprehensive loss decreased by $101,000 during the first six months of 2000 due to an increase in market value of the Company's investment securities available for sale. - Common stock in treasury increased by $979,000 during the first six 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 11,044 shares of common stock in treasury for $170,000 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 June 30, 2000 increased by $632,000 from the level at December 31, 1999, primarily due to $375,000 in provision for loan losses recorded during the first six 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 real estate serves as collateral for virtually all of the Company's loan portfolio. The allowance for loan losses as a percentage of loans stood at 1.84% at June 30, 2000, compared to 1.76% at December 31, 1999. 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. 27 The following table sets forth certain information with respect to the Company's allowance for loan losses for the periods indicated (dollars in thousands):
SIX MONTHS TWELVE MONTHS ENDED ENDED JUNE 30, DECEMBER 31, 2000 1999 ----------------- ----------------- Allowance for loan losses at beginning of period $ 6,450 $ 5,024 Provision for loan losses 375 1,677 Charge-offs: commercial real estate - (280) Charge-offs: commercial business - (7) Recoveries: commercial real estate 257 36 ----------------- ----------------- Allowance for loan losses at end of period $ 7,082 $ 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):
JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- Non-accrual loans $ 1,185 $ 210 OREO - - --------------- --------------- Total non-performing assets $ 1,185 $ 210 --------------- --------------- Total non-performing assets to total assets 0.18% 0.03% --------------- --------------- Restructured loans $ - $ - =============== ===============
During the six months ended June 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. The Company had one non-accrual loan for $1.2 million at June 30, 2000 which had transferred from accruing loans during the second quarter of 2000. 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 June 30, 2000, the market values of U.S. government sponsored agency securities that were available for collateral purposes totaled $133.3 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 June 30, 2000, the Bank's unconsolidated total shareholder's equity was $39.6 million and the Bank's outstanding borrowings from the State of California totaled $33.0 million. 28 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 $3.3 million in cash and investments less current liabilities and short-term debt at June 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 $1.0 million for the first six months of 2000. At June 30, 2000, the Bank had retained earnings of $16.0 million that may be available for dividend payments. On July 27, 2000, the Bank declared a $600,000 cash dividend for the third quarter of 2000 payable to the Parent on September 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 June 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):
JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- PACIFIC CREST CAPITAL, INC. ----------------------------------- Leverage ratio 6.85% 6.89% Tier 1 risk-based capital ratio 10.17% 10.18% Total risk-based capital ratio 12.85% 13.02% Tier 1 capital $ 44,168 $ 42,539 Total risk-based capital 55,825 54,392 Average quarterly total assets 645,243 617,669 Net risk-weighted assets 434,266 417,788 PACIFIC CREST BANK ---------------------- Leverage ratio 7.21% 7.19% Tier 1 risk-based capital ratio 10.61% 10.38% Total risk-based capital ratio 11.87% 11.64% Tier 1 capital $ 45,743 $ 43,586 Total risk-based capital 51,151 48,848 Average quarterly total assets 634,107 606,604 Net risk-weighted assets 431,004 419,747
29 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. 30 The table below provides information about the Company's balance sheet non-derivative financial instruments at June 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):
EXPECTED MATURITY DATE OR REPRICING DATE ------------------------------------------------------------------------------ OVER OVER OVER ESTIMATED WITHIN 3 TO 12 1 TO 3 3 TO 5 OVER FAIR AT JUNE 30, 2000 3 MONTHS MONTHS YEARS YEARS 5 YEARS TOTAL VALUE ---------------- ------------ ------------ ------------- ------------ ------------- ----------- ----------- INTEREST-SENSITIVE ASSETS: Securities purchased under resale agreements (1) $ 4,025 $ - $ - $ - $ - $ 4,025 $ 4,025 average yield (variable rate) 6.34% - - - - 6.34% U.S. government sponsored agency callable bonds available for sale (2) - - 50,272 29,469 153,493 233,234 233,234 average yield (fixed rate) - - 5.65% 6.80% 6.66% 6.46% U.S. government sponsored agency mortgage-backed securities available for sale (2) - - - - 3,778 3,778 3,778 average yield (fixed rate) - - - - 7.09% 7.09% Corporate debt securities available for sale (2) 3,854 - - - - 3,854 3,854 average yield (variable rate) 8.46% - - - - 8.46% Loans, gross (3) 91,218 80,139 90,313 66,130 56,936 384,736 389,353 average yield 10.85% 10.42% 8.76% 8.47% 8.42% 9.48% ------------ ------------ ------------- ------------ ------------- ----------- ----------- Total interest-sensitive assets $ 99,097 $ 80,139 $ 140,585 $ 95,599 $ 214,207 $ 629,627 $ 634,244 ============ ============ ============= ============ ============= =========== =========== INTEREST-SENSITIVE LIABILITIES: Savings accounts (1) $ 163,310 $ - $ - $ - $ - $ 163,310 $ 163,310 average rates (variable rate) 5.46% - - - - 5.46% Certificates of deposit (4) 34,355 171,038 140,894 17,974 835 329,096 327,450 average rates (fixed rate) 5.75% 6.21% 6.57% 6.11% 6.38% 6.26% Money market checking accounts (1) 15,206 - - - - 15,206 15,206 average rates (variable rate) 4.22% - - - - 4.22% Securities sold under repurchase agreements (1) 21,000 - - - - 21,000 21,000 average rates (variable rate) 6.68% - - - - 6.68% Borrowings from State of California (5) 18,000 15,000 - - - 33,000 32,967 average rate (fixed rate) 5.87% 5.70% - - - 5.79% Term borrowings (5) 20,000 10,000 - - - 30,000 29,987 average rates (fixed rate) 5.75% 5.95% - - - 5.82% Trust preferred securities (2) - - - - 17,250 17,250 14,663 average rates (fixed rate) - - - - 9.38% 9.38% ------------ ------------ ------------- ------------ ------------- ----------- ----------- Total interest-sensitive liabilities $ 271,871 $ 196,038 $ 104,894 $ 17,974 $ 18,085 $ 608,862 $ 604,583 ============ ============ ============= ============ ============= =========== ===========
31 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. 32 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 At the annual meeting of the Company's shareholders, held on May 12, 2000, the following matter was submitted to a vote of shareholders with the indicated number of votes being cast for, against or withheld: 1. To elect one member to the board of directors for a term of three years and to serve until his successor is elected and qualified. Number of Votes ------------ ------------ For Withheld ------------ ------------ Rudolph I. Estrada 2,388,290 2,845 The Company's other directors, Martin J. Frank, Steven J. Orlando, Gary Wehrle and Richard S. Orfalea are serving for a term of three years. The terms for Mr. Frank and Mr. Orlando expire at the annual meeting of shareholders in 2001. The terms for Mr. Wehrle and Mr. Orfalea expire at the annual meeting of shareholders in 2002. 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 June 30, 2000. 33 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: August 14, 2000 /s/ GARY WEHRLE -------------------------------------------------- Gary Wehrle President and Chief Executive Officer Date: August 14, 2000 /s/ ROBERT J. DENNEN -------------------------------------------------- Robert J. Dennen Senior Vice President, Chief Financial Officer Corporate Secretary