PACIFIC CREST CAPITAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
o	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 (State or other jurisdiction of incorporation or organization)		95-4437818 (I.R.S. Employer Identification No.)
30343 Canwood Street Agoura Hills, California (Address of principal executive offices)		91301 (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 ý No o

As of October 24, 2002, the number of shares outstanding of the registrant's $.01 par value Common Stock on a pre-split basis was 2,416,740.

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.

SEPTEMBER 30, 2002 FORM 10-Q

TABLE OF CONTENTS

				Page No.
PART I. FINANCIAL INFORMATION
	ITEM 1.	Consolidated Financial Statements
		Consolidated Balance Sheets September 30, 2002 and December 31, 2001		1
		Consolidated Statements of Income Three and Nine Months Ended September 30, 2002 and 2001		2
		Consolidated Statements of Changes in Shareholders' Equity Nine Months Ended September 30, 2002 and 2001		3
		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001		4
		Notes to Consolidated Financial Statements		5
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11
			Overview	11
			Quarterly Financial Data	17
			Quarterly Income Statements	19
			Quarterly Balance Sheets	20
			Quarterly Average Balance Sheets and Spread Data	21
			Results of Operations	22
			Financial Condition	37
			Non-Performing Assets	41
			Liquidity	41
			Dividends	42
			Capital Resources	43
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		43
	ITEM 4.	Controls and Procedures		45
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings		46
	ITEM 2.	Changes in Securities		46
	ITEM 3.	Defaults Upon Senior Securities		46
	ITEM 4.	Submission of Matters to a Vote of Security Holders		46
	ITEM 5.	Other Information		46
	ITEM 6.	Exhibits and Reports on Form 8-K		46
Signatures				47
CEO and CFO Certifications, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				48
CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				50

PACIFIC CREST CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

				September 30, 2002			December 31, 2001
				(Unaudited)			(Audited)
Assets
	Cash			$	3,170		$	2,508
	Securities purchased under resale agreements				3,220			16,174

		Cash and cash equivalents			6,390			18,682

	Investment securities available for sale, at market				85,225			58,952
	Loans:
		Commercial real estate loans			418,829			430,420
		SBA loans held for investment			14,248			11,369
		SBA loans held for sale, at lower of cost or market			21,955			12,797
		Other loans			6,935			7,393

			Gross loans		461,967			461,979
		Deferred loan costs (fees)			228			(4	)
		Allowance for loan losses			(8,583	)		(7,946	)

			Net loans		453,612			454,029

	Other assets:
		Investment in FHLB stock			6,025			2,000
		Deferred income taxes, net			4,091			5,203
		Accrued interest receivable			2,421			2,532
		Prepaid expenses and other assets			1,861			2,087
		Premises and equipment			1,177			1,273

			Total other assets		15,575			13,095

			Total assets	$	560,802		$	544,758

Liabilities
	Deposits:
		Checking accounts		$	16,063		$	14,912
		Savings accounts			132,589			136,145
		Certificates of deposit			221,162			250,466

			Total deposits		369,814			401,523

	Borrowings:
		FHLB advances			111,000			40,000
		Term borrowings			10,000			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		138,250			97,250

	Accrued interest payable and other liabilities				9,845			8,010

		Total liabilities			517,909			506,783

Shareholders' Equity (See Note 2)
	Common stock, $.01 par value (10,000,000 shares authorized, 5,973,060 shares issued at September 30, 2002 and December 31, 2001)				60			60
	Additional paid-in capital				27,584			27,750
	Retained earnings				23,725			19,140
	Accumulated other comprehensive income (loss)				849			(198	)
	Common stock in treasury, at cost (1,134,678 shares at
	September 30, 2002 and 1,132,762 shares at December 31, 2001)				(9,325	)		(8,777	)

			Total shareholders' equity		42,893			37,975

			Total liabilities and shareholders' equity	$	560,802		$	544,758

Tangible book value per common share				$	8.87		$	7.85

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)

				Three Months Ended September 30,					Nine Months Ended September 30,
				2002			2001		2002			2001
Interest income:
	Loans			$	9,438		$	9,428	$	28,321		$	28,194
	Securities purchased under resale agreements				30			135		151			352
	Investment securities available for sale				1,016			1,760		2,806			7,251

		Total interest income			10,484			11,323		31,278			35,797

Interest expense:
	Deposits:
		Checking accounts			58			107		182			327
		Savings accounts			644			1,182		2,014			4,039
		Certificates of deposit			2,085			3,960		7,756			13,692

			Total interest on deposits		2,787			5,249		9,952			18,058

	Borrowings:
		Securities sold under repurchase agreements			—			29		—			211
		State of California borrowings			—			193		—			609
		FHLB advances			611			—		1,323			—
		Term borrowings			478			677		1,662			2,009
		Trust preferred securities			404			404		1,213			1,213

			Total interest on borrowings		1,493			1,303		4,198			4,042

			Total interest expense		4,280			6,552		14,150			22,100

Net interest income					6,204			4,771		17,128			13,697
Provision for loan losses					175			150		425			230

		Net interest income after provision for loan losses			6,029			4,621		16,703			13,467

Non-interest income:
	Loan prepayment and late fee income				227			47		584			257
	Gain on sale of SBA 7(a) loans				25			95		221			405
	Gain on sale of SBA 504 loans and broker fee income				704			69		1,136			298
	Gain (loss) on sale of investment securities				(682	)		106		(682	)		95
	Other income				270			219		776			579

		Total non-interest income			544			536		2,035			1,634

Non-interest expense:
	Salaries and employee benefits				2,452			1,718		6,722			4,973
	Net occupancy expenses				466			397		1,387			1,199
	Communication and data processing				261			247		775			762
	Legal, audit, and other professional fees				158			261		337			507
	Travel and entertainment				116			105		358			313
	Credit and collection expenses				4			—		26			—
	Other expenses				165			120		440			404

		Total non-interest expense			3,622			2,848		10,045			8,158

Income before income taxes					2,951			2,309		8,693			6,943
Income tax provision					1,000			989		3,476			2,924

			Net income	$	1,951		$	1,320	$	5,217		$	4,019

Earnings per common share:
	Basic			$	0.40		$	0.27	$	1.07		$	0.81
	Diluted			$	0.36		$	0.25	$	0.97		$	0.76

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(dollars and shares in thousands)

						Common Stock in Treasury
			Common Stock														Accumulated Other Comprehensive Income (Loss)
			Common Stock								Additional Paid-in Capital			Retained Earnings						Total Shareholders' Equity
			Shares	Amount		Shares		Amount			Additional Paid-in Capital			Retained Earnings						Total Shareholders' Equity
Balance at December 31, 2000			2,986	$	30	(471	)	$	(6,900	)	$	27,790		$	14,542		$	(1,532	)	$	33,930
2-for-1 stock split on distribution date of November 12, 2002			2,987		30	(471	)		—			(30	)		—			—			—
Comprehensive income:
	Net income		—		—	—			—			—			5,385			—			5,385
	Unrealized loss on investment securities available for sale, net of income taxes		—		—	—			—			—			—			1,334			1,334

		Total comprehensive income																			6,719
Issuances of common stock in treasury:
	Employee stock purchase plan		—		—	8			62			(7	)		—			—			55
	Non-employee directors' stock purchase plan		—		—	6			42			7			—			—			49
	Employee stock option plan		—		—	4			32			(10	)		—			—			22
Purchase of common stock in treasury			—		—	(209	)		(2,013	)		—			—			—			(2,013	)
Cash dividends paid ($0.16 per share)			—		—	—			—			—			(787	)		—			(787	)

Balance at December 31, 2001			5,973	$	60	(1,133	)	$	(8,777	)	$	27,750		$	19,140		$	(198	)	$	37,975

Comprehensive income:
	Net income		—		—	—			—			—			5,217			—			5,217
	Unrealized gain on investment securities available for sale, net of income taxes		—		—	—			—			—			—			1,047			1,047

		Total comprehensive income																			6,264
Issuances of common stock in treasury:
	Employee stock purchase plan		—		—	7			55			(4	)		—			—			51
	Non-employee directors' stock purchase plan		—		—	3			24			15			—			—			39
	Employee stock option plan		—		—	76			595			(177	)		—			—			418
Purchase of common stock in treasury			—		—	(88	)		(1,222	)		—			—			—			(1,222	)
Cash dividends paid ($0.13 per share)			—		—	—			—			—			(632	)		—			(632	)

Balance at September 30, 2002			5,973	$	60	(1,135	)	$	(9,325	)	$	27,584		$	23,725		$	849		$	42,893

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

				Nine Months Ended September 30,
				2002			2001
Operating activities:
	Net income			$	5,217		$	4,019
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses			425			230
		Gain on sale of SBA 7(a) loans held for sale			(221	)		(405	)
		Gain on sale of SBA 504 loans held for sale			(203	)		(145	)
		Loss (gain) on sale of investment securities			682			(95	)
		Depreciation and amortization of premises and equipment			304			289
		Amortization (accretion) of deferred loan costs (fees)			(59	)		(64	)
		Amortization of premium on investment securities			675			276
		Dividends on FHLB stock			(92	)		—
		Deferred income tax expense (benefit)			(250	)		90
		Proceeds from sales of SBA 7(a) loans held for sale			3,213			7,871
		Proceeds from sales of SBA 504 loans held for sale			3,608			2,865
		Originations of SBA 7(a) loans held for sale			(12,565	)		(7,941	)
		Originations of SBA 504 loans held for sale			(2,544	)		(2,888	)
		Federal income tax refund			804			—
		Decrease in accrued interest receivable			111			4,009
		Decrease (increase) in prepaid expenses and other assets			293			(177	)
		Increase in accrued interest payable and other liabilities			1,635			2,476

			Net cash provided by operating activities		1,033			10,410

Investing activities:
	Purchases of mortgage-backed securities				(47,694	)		(107,955	)
	Principal payments on mortgage-backed securities				21,869			7,770
	Proceeds from calls and sales of callable bonds				—			229,187
	Proceeds from sales of mortgage-backed securities				—			42,423
	Originations of loans held for investment				(63,225	)		(60,314	)
	Purchases of loans held for investment				(4,915	)		(2,879	)
	Principal payments on loans				76,836			39,382
	Purchases of FHLB stock				(3,933	)		(832	)
	Purchases of premises and equipment, net				(208	)		(229	)

		Net cash (used in) provided by investing activities			(21,270	)		146,553

Financing activities:
	Net increase in checking accounts				1,151			2,882
	Net decrease in savings accounts				(3,556	)		(4,796	)
	Net decrease in certificates of deposit				(29,304	)		(70,374	)
	Net decrease in securities sold under repurchase agreements				—			(23,500	)
	Net decrease in State of California borrowings				—			(28,000	)
	Net increase in FHLB advances				71,000			—
	Net decrease in term borrowings				(30,000	)		—
	Purchase of common stock in treasury, at cost				(1,222	)		(1,422	)
	Cash dividends paid				(632	)		(594	)
	Proceeds from exercise of stock options				418			23
	Proceeds from employees and directors stock purchase plans				90			92

		Net cash provided by (used in) financing activities			7,945			(125,689	)

Net (decrease) increase in cash and cash equivalents					(12,292	)		31,274
Cash and cash equivalents at beginning of period					18,682			5,336

Cash and cash equivalents at end of period				$	6,390		$	36,610

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

Note 1. Basis of Presentation

The interim consolidated financial statements included herein have been prepared by Pacific Crest Capital, Inc., without audit, in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such SEC rules and regulations. 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 Annual Report on Form 10-K for the year ended December 31, 2001.

The consolidated financial statements include the accounts of Pacific Crest Capital, Inc. ("Pacific Crest" or the "Parent") and its wholly owned subsidiaries, Pacific Crest Bank (the "Bank") and PCC Capital I ("PCC Capital"), which together are referred to as the "Company". All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior period consolidated financial statements in order to conform to the current period presentation.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations for the interim period presented. The results of operations for this current interim period are not necessarily indicative of the results expected for any subsequent period or for the full year.

Note 2. Two-For-One Stock Split

On October 17, 2002, the Company announced that its Board of Directors had approved a 2-for-1 stock split, to be effected in the form of a 100 percent stock dividend. Shareholders received one additional share of common stock for each share that they held on the record date of October 30, 2002. The additional shares were distributed on November 12, 2002.

The stock split resulted in the issuance of 2,986,530 shares of common stock. Par value of the stock remained unchanged at $0.01 per share. Accordingly, the Company recorded the transaction by transferring $29,865 from "Additional paid-in capital" to "Common stock" on November 12, 2002. The effect of the stock split has been recognized retroactively in "Common stock" and "Additional paid-in capital" on the Consolidated Balance Sheets, as well as in all share and per share amounts in the Consolidated Financial Statements.

Note 3. Supplemental Disclosure of Cash Flow Information

For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, cash and cash equivalents include "Cash" and "Securities purchased under resale agreements." Supplemental disclosure of cash flow information is as follows for the periods indicated (in thousands):

		Nine Months Ended September 30,
		2002		2001
Cash paid during the period for:
	Interest	$	14,566	$	22,652
	Income taxes		4,025		2,035

Note 4. Computation of Tangible Book Value Per Common Share

Tangible 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 tangible book value per common share as of the dates indicated (in thousands, except share data):

	September 30, 2002			December 31, 2001
Total shareholders' equity	$	42,893		$	37,975

Common shares issued(1)		5,973,060			5,973,060
Less: common shares held in treasury(1)		(1,134,678	)		(1,132,762	)

Common shares outstanding(1)		4,838,382			4,840,298

Tangible book value per common share(1)	$	8.87		$	7.85

(1): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.

Note 5. 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 basic weighted average common shares outstanding were increased to include additional common shares that would have been outstanding if dilutive stock options had been exercised. The dilutive effect of stock options was calculated using 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 September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001
Net income		$	1,951	$	1,320	$	5,217	$	4,019

Basic weighted average common shares outstanding(1)			4,863		4,927		4,860		4,965
Dilutive effect of potential common share issuances from stock options(1)			520		388		492		352

Diluted weighted average common shares outstanding(1)			5,383		5,315		5,352		5,317

Earnings per common share(1):
	Basic	$	0.40	$	0.27	$	1.07	$	0.81
	Diluted	$	0.36	$	0.25	$	0.97	$	0.76

(1): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.

Note 6. Investment Securities

The Company has classified its investment securities as available for sale, which are recorded at market value. Unrealized gains or losses on securities available for sale are excluded from earnings and reported in "Accumulated other comprehensive income (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 as of the dates indicated (in thousands):

					Gross Unrealized
			Amortized Cost		Gross Unrealized					Estimated Fair Value		Weighted Average Yield
			Amortized Cost		Gains		Losses			Estimated Fair Value		Weighted Average Yield
September 30, 2002
Investment securities available for sale:
	U.S. government sponsored agency mortgage-backed securities		$	80,305	$	1,912	$	—		$	82,217	5.29	%
	Corporate debt securities			3,455		—		(447	)		3,008	3.63	%

		Total investment securities	$	83,760	$	1,912	$	(447	)	$	85,225	5.22	%

December 31, 2001
Investment securities available for sale:
	U.S. government sponsored agency mortgage-backed securities			55,169		368		—			55,537	5.31	%
	Corporate debt securities			4,124		—		(709	)		3,415	4.21	%

		Total investment securities	$	59,293		368	$	(709	)	$	58,952	5.24	%

During the third quarter of 2002, the Company wrote down to market value one of its corporate debt securities in order to reflect an other than temporary decline in the market value of that security. The write-down was based on a variety of factors, including a recent rating agency downgrade of the security's debt rating. This write-down totaled $682,000 and is included in "Gain (loss) on sale of investment securities" in the Consolidated Statements of Income.

The Company's investment securities portfolio at September 30, 2002 consisted of fixed rate investments in U.S. government sponsored agency mortgage-backed securities issued by Fannie Mae and Ginnie Mae, as well as adjustable rate investments in corporate debt securities. The Company's entire investment securities portfolio at September 30, 2002 was scheduled to mature after ten years. U.S. government sponsored agency securities with market values totaling $16.6 million and $47.3 million were pledged to secure borrowings aggregating $10.0 million and $40.0 million at September 30, 2002 and at December 31, 2001, respectively.

Note 7. SBA Loans Held for Sale

The table below presents the Company's U.S. Small Business Administration ("SBA") loans held for sale as of the dates indicated (in thousands):

		September 30, 2002		December 31, 2001
SBA guaranteed 7(a) loans		$	20,172	$	11,308
SBA 504 loans			1,783		1,489

	Total SBA loans held for sale	$	21,955	$	12,797

Note 8. FHLB Advances

As of September 30, 2002 and December 31, 2001, the Company had Federal Home Loan Bank ("FHLB") advances secured by real estate loans and a required investment in FHLB stock of

$6.0 million and $2.0 million, respectively. The tables below describe the attributes of the FHLB advances as of the dates indicated (dollars in thousands):

			September 30, 2002
			Amount		Rate		Maturity Date
Borrowing Date
*Short-term, variable rate:*
	September 2002		$	21,000	2.01	%	October 2002
*Long-term, fixed rate:*
	November 2001			20,000	3.01	%	November 2003
	July 2002			20,000	2.29	%	January 2004
	November 2001			20,000	3.30	%	May 2004
	July 2002			10,000	2.68	%	July 2004
	August 2002			20,000	3.03	%	August 2005

		Total long-term		90,000	2.88	%

		Total FHLB advances	$	111,000	2.72	%

			December 31, 2001
			Amount		Rate		Maturity Date
Borrowing Date
*Long-term, fixed rate:*
	November 2001		$	20,000	3.01	%	November 2003
	November 2001			20,000	3.30	%	May 2004

		Total FHLB advances	$	40,000	3.16	%

Note 9. Term Borrowings

The Company had fixed rate, long-term borrowings arranged through one investment banking firm at September 30, 2002 and December 31, 2001. This debt is secured by pledging specific amounts of certain U.S. government sponsored agency securities. The tables below reflect the attributes of the Company's term borrowings as of the dates indicated (dollars in thousands):

			September 30, 2002
			Amount		Rate		Maturity Date
Borrowing Date
	October 2000		$	10,000	6.61	%	October 2002

			December 31, 2001
			Amount		Rate		Maturity Date
Borrowing Date
	October 2000		$	10,000	6.65	%	April 2002
	September 2000			20,000	6.62	%	September 2002
	October 2000			10,000	6.61	%	October 2002

		Total term borrowings	$	40,000	6.63	%

Note 10. Federal Income Tax Refund

In April of 2002, the Company received a payment from the Internal Revenue Service ("IRS") in connection with a refund claim filed by the Company for a prior year's income taxes. The total amount of the payment was $1,218,000, which was comprised of $804,000 for income taxes and $414,000 for interest. The $804,000 was applied as a reduction of "Deferred income taxes, net" on the Consolidated Balance Sheets, while the $414,000 was applied to a receivable included in "Prepaid expenses and other assets". The Company had accrued as "Other income" $300,000 of the interest during the fourth quarter of 2001 and accrued the remaining $114,000 during the first quarter of 2002.

Note 11. Recent Accounting Pronouncements

In June of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 was effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's consolidated financial position or results of operations.

In April of 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt ("SFAS 4"), and an amendment of that SFAS, SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. Further, SFAS 145 amends SFAS No. 13, Accounting for Leases ("SFAS 13"), to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or described their applicability under changed conditions. This pronouncement requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, have been met. Further, lease modifications with economic effects similar to sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to SFAS 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS 145 did not have and is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In July of 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires costs associated with exit or disposal activities to be recognized when they are incurred, and applies prospectively to such activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In October of 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions ("SFAS 147"), which provides guidance on the accounting for the acquisitions of a financial institution. This statement requires that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that

should be accounted for under SFAS No. 142, Goodwill and other Intangible Assets. Thus, the specialized accounting guidance in paragraph 5 of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, will not apply after September 30, 2002. If certain criteria in SFAS 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of the statement. Financial institutions meeting conditions outlined in SFAS 147 will be required to restate previously issued financial statements. Additionally, the scope of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is amended to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. This statement is effective beginning October 1, 2002. The adoption of SFAS 147 is not expected to have a material impact on the Company's consolidated financial position or results of operations.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of the major factors that influenced the consolidated results of operations and financial condition of the Company for the period ended September 30, 2002. This analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission, and with the unaudited financial statements and notes as set forth in this report.

OVERVIEW

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. These risks include, but are not limited to, general economic conditions nationally and in California, unanticipated credit losses in the Company's loan portfolio, rapid changes in interest rates, and other risks discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Two-For-One Stock Split

The effect of the stock split has been recognized retroactively in "Common stock" and "Additional paid-in capital," as well as in all share and per share amounts, in the financial tables and text of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Capital

As of September 30, 2002, Pacific Crest's leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 10.01%, 12.59%, and 14.57%, respectively. The Bank's leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 9.86%, 12.37%, and 13.63%, respectively. These ratios placed Pacific Crest and the Bank in the "well-capitalized" category as defined by federal regulations, which require corresponding capital ratios of 5%, 6% and 10%, respectively, to qualify for that designation.

Dividends

On October 17, 2002, the Company announced that the Board of Directors had declared a cash dividend of $0.05 per common share on a post-split basis for the fourth quarter of 2002. The dividend will be paid on December 13, 2002, to shareholders of record at the close of business on November 29, 2002.

On July 26, 2002, the Company announced that the Board of Directors had declared a cash dividend of $0.10 per common share on a pre-split basis, or $0.05 on a post-split basis, for the third quarter of 2002. The dividend was paid on September 13, 2002 to shareholders of record at the close of business on August 30, 2002. During the first six months of 2002, the Company declared and paid cash

dividends of $0.08 per common share on a post-split basis. The total amount of cash dividends paid during the nine months ended September 30, 2002 was $632,000.

Stock Repurchase Plan

During the nine months ended September 30, 2002, pursuant to its common stock repurchase program, the Company repurchased 88,200 shares of its common stock at an average cost per share of $13.86 on a post-split basis. The total amount paid for these shares was approximately $1.2 million. 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 86,284 shares on a post-split basis. As of September 30, 2002, the Company had 80,800 shares remaining authorized for repurchase under its common stock repurchase program on a post-split basis.

Sale of Interest Rate Cap Agreement

On February 8, 2000, the Company sold its interest rate cap agreement and recognized a deferred gain of $1.8 million, which was reported in the Consolidated Balance Sheets under the caption, "Accrued interest payable and other liabilities". The deferred gain is being amortized as a credit to "Interest expense—deposits" over the remaining life of the original interest rate cap agreement, which had a maturity date of June 8, 2003. During the nine months ended September 30, 2002 and 2001, the amount of deferred gain amortization totaled $415,000, which resulted in a reduction in interest expense on deposits. As of September 30, 2002, the remaining, unamortized deferred gain totaled $380,000 and will be amortized as follows: $140,000 for the last three months of 2002 and $240,000 for the first six months of 2003.

Preferred Lender Status

In September of 2002, the Company was awarded "Preferred Lender" status in the San Francisco SBA district by the U.S. Small Business Administration ("SBA"). This district includes the following 14 California counties: Alameda, Contra Costa, Del Norte, Humboldt, Lake, Marin, Mendocino, Napa, San Francisco, San Mateo, Santa Clara, Santa Cruz, Solano, and Sonoma. The Company was previously awarded "Preferred Lender" status in the San Diego SBA district (which includes San Diego and Imperial counties), the Los Angeles SBA district (which includes Los Angeles, Ventura, and Santa Barbara counties), the Santa Ana SBA district (which includes Orange County), and the Portland SBA district (which covers the entire state of Oregon). "Preferred Lender" status is the highest designation granted lenders by the SBA.

FHLB Credit Line Expansion and Recent Long-Term Advances

In July of 2002, the FHLB approved an increase in Pacific Crest Bank's available credit line from 20% of total assets to 35% of total assets. As a result, the Bank's credit line increased by $81.5 million, to $190.2 million, based on total assets at that time. All FHLB advances must be secured by eligible loans and/or eligible securities. The FHLB credit facility serves as an excellent source of low cost funding and is an important component of the Company's strategy to reduce funding costs. The Company is focusing on using the FHLB credit facility primarily for fixed rate advances with 12-36 month terms as part of its hedging strategy to insulate the Company from potentially higher interest rates in 2003 and 2004.

During the third quarter of 2002 and in October of 2002, the Company obtained a total of $80.0 million in long-term, fixed rate advances from the FHLB, with a weighted average interest rate of 2.81%, in order to take advantage of favorable long-term borrowing rates.

The advances were obtained as follows:

•: $50.0 million in July and August of 2002, with a weighted average interest rate of 2.66%, and maturities ranging from 1.5 years to 3.0 years. These advances replaced the Company's $42.5 million in short-term, overnight advances outstanding at June 30, 2002.
•: $30.0 million in October of 2002, with an interest rate of 3.06% and a maturity of 3.0 years. This advance replaced $30.0 million of term borrowings with a weighted average interest rate of 6.62% that matured in late September and early October of 2002.

Corporate Governance

The following are some of the key corporate governance practices at the Company, which are oriented to ensure that there are no conflicts of interest and that the Company is operated in the best interest of shareholders:

•: Four of the Company's five directors are independent outside directors.
•: None of the Company's officers and directors has loans from the Company.
•: There are no loans by the Company to outside companies controlled by or affiliated with officers or directors.
•: Outside directors do not receive compensation from the Company other than director fees. In recent years, outside directors have elected to receive 50% of their director fees in shares of Pacific Crest common stock.
•: The Company's Board of Directors has audit, compensation, and corporate governance/nominating committees comprised solely of independent outside directors.

Additionally, one of the Company's directors, Rudolph I. Estrada, is a member of the National Association of Corporate Directors and Chairman of the Company's Nominating and Governance Committee.

Declining Interest Rate Environment

During the first nine months of 2002, the Federal Reserve left the federal funds rate unchanged at 1.75%. However, during 2001, the Federal Reserve lowered the federal funds rate by a total of 475 basis points, to 1.75%. The impact of this cumulative reduction led to a lower interest rate environment in 2001, which continued into the first nine months of 2002, and resulted in (i) issuer calls of $219.2 million and Company sales of $10.0 million of the Company's fixed rate, U.S. government sponsored agency callable bonds (the "callable bonds"), (ii) downward repricing of the Company's adjustable rate loans, and (iii) the Company's lowering of interest rates on all of its deposit products. Additionally, the interest rates declined on the Company's adjustable rate investments and borrowings.

Loan Originations

The following table presents the Bank's loan originations for the periods indicated (dollars in thousands):

				Three Months Ended September 30,						Nine Months Ended September 30,
				Amounts						Amounts
				Amounts				% Change		Amounts				% Change
				2002		2001		% Change		2002		2001		% Change
Commercial real estate loans				$	7,744	$	24,938	(68.9	%)	$	57,250	$	51,565	11.0	%
Commercial business loans(1)					—		3,075	(100.0	)%		—		3,075	(100.0	)%
SBA business loans:
	7(a)—guaranteed portion				8,080		4,316	87.2	%		12,565		7,941	58.2	%
	7(a)—unguaranteed portion				2,642		1,382	91.2	%		4,011		2,514	59.5	%

		Total 7(a) loans			10,722		5,698	88.2	%		16,576		10,455	58.5	%

	504 first lien loans				1,642		797	106.0	%		2,544		2,888	(11.9	)%
	504 second lien loans				1,275		1,383	(7.8	)%		1,964		3,160	(37.8	)%

		Total 504 loans			2,917		2,180	33.8	%		4,508		6,048	(25.5	)%

			Total SBA loans		13,639		7,878	73.1	%		21,084		16,503	27.8	%

			Total loan originations	$	21,383	$	35,891	(40.4	)%	$	78,334	$	71,143	10.1	%

(1): Primarily represents unsecured loans to financial institutions.

Non-Recurring Items

During the third quarter of 2002, the Company recorded the following items which it considers non-recurring:

•: The Company wrote down to market value one of its corporate debt securities in order to reflect an other than temporary decline in the market value of that security. The write-down was based on a variety of factors, including a recent rating agency downgrade of the security's debt rating. This write-down totaled $682,000 on a pre-tax basis, or $395,000 after tax, and is included in "Gain (loss) on sale of investment securities" in the Consolidated Statements of Income.
•: The Company recorded a one-time reduction of $220,000 in the "Income tax provision" on the Consolidated Statements of Income, which was related to the following change in the California state tax law. In September of 2002, the state of California passed a law that impacted the Company's allowable tax deduction for loan loss reserves. Under this recently enacted law, the state of California has conformed to the federal income tax law and the Company is not allowed to use the reserve method to determine its California tax bad debt deduction for taxable years beginning on or after January 1, 2002. This recently enacted law also allows for permanent forgiveness of 50% of the California tax that was related to loan loss reserves that existed as of January 1, 2002. The permanent impact of this change in the tax law was recognized in the third quarter of 2002 and resulted in the one-time $220,000 income tax reduction.

Taken together, the two non-recurring items reduced net income for the third quarter of 2002 by $175,000, or $0.03 per share on a post-split diluted basis.

Earnings Performance Summary

The following table presents condensed statements of income and related performance data for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):

		Three Months Ended September 30,										Nine Months Ended September 30,
		Amounts						Increase (Decrease)				Amounts						Increase (Decrease)
		2002			2001			$		%		2002			2001			$		%
Net interest income		$	6,204		$	4,771		$	1,433	30.0	%	$	17,128		$	13,697		$	3,431	25.0	%
Provision for loan losses			175			150			25	16.7	%		425			230			195	84.8	%
Non-interest income			544			536			8	1.5	%		2,035			1,634			401	24.5	%
Non-interest expense			3,622			2,848			774	27.2	%		10,045			8,158			1,887	23.1	%

	Income before income taxes		2,951			2,309			642	27.8	%		8,693			6,943			1,750	25.2	%
Income tax provision			1,000			989			11	1.1	%		3,476			2,924			552	18.9	%

	Net income	$	1,951		$	1,320		$	631	47.8	%	$	5,217		$	4,019		$	1,198	29.8	%

Diluted earnings per share(1)		$	0.36		$	0.25						$	0.97		$	0.76
Cash dividends per share(1)		$	0.05		$	0.04						$	0.13		$	0.12
Return on average equity(2)			18.94	%		14.29	%						17.45	%		14.82	%
Return on average assets			1.39	%		0.96	%						1.26	%		0.93	%
Annualized operating expense to average total assets			2.58	%		2.06	%						2.41	%		1.90	%
Efficiency ratio			48.69	%		54.76	%						50.49	%		53.54	%

(1): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.
(2): Calculation excludes average accumulated other comprehensive income (loss) from average shareholders' equity.

Three Months Ended September 30, 2002 and 2001

Net income was $2.0 million (or $0.36 per common share on a post-split diluted basis) for the three months ended September 30, 2002, compared to $1.3 million (or $0.25 per common share on a post-split diluted basis) for the corresponding period in 2001. Pre-tax income was $3.0 million for the three months ended September 30, 2002 and $2.3 million for the same period in 2001. The following describes the changes in the major components of pre-tax income for the three months ended September 30, 2002 compared to the same period in 2001:

•: Net interest income grew by $1.4 million, to $6.2 million, primarily due to a $2.3 million decline in interest expense, which was principally attributable to the Company's lowering of interest rates on its deposits and related deposit run-off. The decreases in interest rates on the Company's deposits resulted from a lower interest rate environment due to the reduction of 475 basis points, to 1.75%, in the federal funds rate by the Board of Governors of the Federal Reserve System (the "Federal Reserve") during 2001. Partially offsetting the decline in interest expense was a $839,000 drop in interest income, which was primarily due to the calls and sales of the Company's callable bonds in 2001.
•: Provision for loan losses increased by $25,000, to $175,000, reflecting management's evaluation of the allowance for loan losses and the risk inherent in the Company's loan portfolio. During the three months ended September 30, 2002, the allowance for loan losses increased by $54,000, to $8.6 million, which reflected the $175,000 provision and net charge-offs of $121,000. During the three months ended September 30, 2001, the allowance for loan losses increased by $145,000, to $7.6 million, which reflected a $150,000 provision and net charge-offs of $5,000. The allowance for loan losses as a percentage of total loans was 1.86% and 1.78% at September 30, 2002 and 2001, respectively, and 1.72% at December 31, 2001.

•: Non-interest income increased by $8,000, to $544,000, primarily due to increases of $635,000 and $180,000 in gain on sale of SBA 504 loans and broker fee income and loan prepayment and late fee income, respectively. The increase in gain on sale of SBA 504 loans and broker fee income was principally due to an increase of $485,000 in broker fee income, attributable to the growth in brokered SBA 504 loans. These factors were partially offset by a $788,000 reduction in gain on sale of investment securities, which was attributable to a $682,000 write-down to market value on one of the Company's corporate debt securities.
•: Non-interest expense grew by $774,000, to $3.6 million, primarily due to increases of $734,000 and $69,000 in salaries and employee benefits and net occupancy expenses, respectively, partially offset by a reduction of $103,000 in legal, audit, and other professional fees. The growth in salaries and employee benefits was principally attributable to (i) an increase in marketing commissions attributable to the growth in brokered SBA 504 loans, and (ii) an increase in personnel bonuses, which are partially tied to the Company's return on equity performance, attributable to the higher level of return on equity in 2002 compared to 2001.

Nine Months Ended September 30, 2002 and 2001

Net income was $5.2 million (or $0.97 per common share on a post-split diluted basis) for the nine months ended September 30, 2002, compared to $4.0 million (or $0.76 per common share on a post-split diluted basis) for the corresponding period in 2001. Pre-tax income was $8.7 million for the nine months ended September 30, 2002 and $6.9 million for the same period in 2001. The following describes the changes in the major components of pre-tax income for the nine months ended September 30, 2002 compared to the same period in 2001:

•: Net interest income grew by $3.4 million, to $17.1 million, primarily due to a $7.9 million decline in interest expense, which was principally attributable to the Company's lowering of interest rates on its deposits and related deposit run-off. The decreases in interest rates on the Company's deposits resulted from a lower interest rate environment due to the reduction of 475 basis points, to 1.75%, in the federal funds rate by the Federal Reserve during 2001. Partially offsetting the decline in interest expense was a $4.5 million drop in interest income, which was primarily due to the calls and sales of the Company's callable bonds in 2001.
•: Provision for loan losses increased by $195,000, to $425,000, reflecting management's evaluation of the allowance for loan losses and the risk inherent in the Company's loan portfolio. During the nine months ended September 30, 2002, the allowance for loan losses increased by $637,000, to $8.6 million, which reflected the $425,000 provision and net recoveries of $212,000. During the nine months ended September 30, 2001, the allowance for loan losses increased by $319,000, to $7.6 million, which reflected a $230,000 provision and net recoveries of $89,000.
•: Non-interest income increased by $401,000, to $2.0 million, primarily due to increases of $838,000 and $327,000 in gain on sale of SBA 504 loans and broker fee income and loan prepayment and late fee income, respectively. The increase in gain on sale of SBA 504 loans and broker fee income was principally due to an increase of $780,000 in broker fee income, attributable to the growth in brokered SBA 504 loans. These factors were partially offset by a $777,000 reduction in gain on sale of investment securities, which was attributable to a $682,000 write-down to market value on one of the Company's corporate debt securities.
•: Non-interest expense grew by $1.9 million, to $10.0 million, primarily due to an increase of $1.7 million and $188,000 in salaries and employee benefits and net occupancy expenses, respectively, partially offset by a reduction of $170,000 in legal, audit, and other professional fees. The growth in salaries and employee benefits was principally attributable to (i) an increase in marketing commissions attributable to the growth in brokered SBA 504 loans, and (ii) an increase in personnel bonuses, which are partially tied to the Company's return on equity performance, attributable to the higher level of return on equity in 2002 compared to 2001. The

increase in net occupancy expenses was primarily due to a cost of approximately $110,000 related to a defalcation at one of the Company's branches. The reduction in legal, audit, and other professional fees was primarily due to the $175,000 reversal in the first quarter of 2002 of a portion of an accrual originally taken in the fourth quarter of 2001 for estimated expenses relating to (i) obtaining a favorable ruling on an IRS income tax refund claim, and (ii) settling a legal claim brought against the Bank.

QUARTERLY FINANCIAL DATA
(dollars and shares in thousands, except per share data)

					At or For the Three Months Ended
					September 30, 2002			June 30, 2002			March 31, 2002			December 31, 2001			September 30, 2001
Loan Originations:
	Commercial real estate loans				$	7,744		$	28,813		$	20,693		$	48,048		$	24,938
	Commercial business loans(1)					—			—			—			3,150			3,075
	SBA business loans:
		7(a) loans—guaranteed portion				8,080			3,028			1,457			2,726			4,316
		7(a) loans—unguaranteed portion				2,642			965			404			880			1,382

			Total 7(a) loans			10,722			3,993			1,861			3,606			5,698

		504 first lien loans				1,642			902			—			1,870			797
		504 second lien loans				1,275			689			—			1,429			1,383

			Total 504 loans			2,917			1,591			—			3,299			2,180

			Total SBA business loans			13,639			5,584			1,861			6,905			7,878

				Total loan originations	$	21,383		$	34,397		$	22,554		$	58,103		$	35,891

Loan Sales:
	SBA guaranteed 7(a) loans				$	320		$	2,609		$	—		$	—		$	1,950
	SBA 504 first lien loans					2,645			782			—			1,872			299

			Total SBA loan sales		$	2,965		$	3,391		$	—		$	1,872		$	2,249

Performance Ratios:
	Return on average equity(2)					18.94	%		17.48	%		15.85	%		14.56	%		14.29	%
	Return on average assets					1.39	%		1.27	%		1.10	%		1.02	%		0.96	%
	Net interest rate spread					4.20	%		3.94	%		3.60	%		3.73	%		3.11	%
	Net interest margin					4.46	%		4.22	%		3.90	%		4.06	%		3.48	%
	Annualized operating expense to average total assets(3)					2.58	%		2.43	%		2.23	%		2.76	%		2.06	%
	Efficiency ratio(4)					48.69	%		50.69	%		52.53	%		58.69	%		54.76	%
Average Balances:
	Average shareholders' equity				$	41,579		$	39,946		$	38,429		$	37,743		$	36,840
	Average realized shareholders' equity(2)					41,198			39,889			38,442			37,540			36,956
	Average total assets					560,407			547,667			551,527			536,363			552,589
Per Common Share Data(5):
	Cash dividends				$	0.05		$	0.04		$	0.04		$	0.04		$	0.04
	Basic earnings					0.40			0.36			0.31			0.28			0.27
	Diluted earnings					0.36			0.33			0.29			0.26			0.25
	Tangible book value					8.87			8.47			8.06			7.85			7.70
Common Shares(5):
	Weighted average basic					4,863			4,867			4,849			4,863			4,927
	Weighted average diluted					5,383			5,361			5,296			5,251			5,315
	End of period, net of treasury shares					4,838			4,872			4,850			4,840			4,899

(1): Primarily represents unsecured loans to financial institutions.
(2): Calculation excludes average accumulated other comprehensive income (loss) from average shareholders' equity.
(3): Operating expense is defined as total non-interest expense less any OREO valuation adjustments, other OREO expenses, and credit and collection expenses. Calculation is based on annualized operating expense.
(4): Efficiency ratio is defined as operating expense divided by the sum of net interest income, loan prepayment and late fee income, gain on sale of SBA 7(a) loans, gain on sale of SBA 504 loans and broker fee income, and other income.
(5): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.

QUARTERLY FINANCIAL DATA
(dollars in thousands)

				At or For the Three Months Ended
				September 30, 2002			June 30, 2002			March 31, 2002			December 31, 2001			September 30, 2001
Non-Performing Assets:
	Non-accrual loans			$	—		$	—		$	153		$	—		$	—
	Other real estate owned (OREO)				—			—			—			—			—

		Total non-performing assets		$	—		$	—		$	153		$	—		$	—

	Non-accrual loans to total loans				0.00	%		0.00	%		0.03	%		0.00	%		0.00	%
	Total non-performing assets to total assets				0.00	%		0.00	%		0.03	%		0.00	%		0.00	%
Allowance for Loan Losses Activity:
	Allowance at beginning of quarter			$	8,529		$	8,376		$	7,946		$	7,559		$	7,414
	Provision for loan losses				175			150			100			430			150
	Net (charge-offs) recoveries:
		Charge-offs			(166	)		—			—			(52	)		(25	)
		Recoveries			45			3			330			9			20

			Total net (charge-offs) recoveries		(121	)		3			330			(43	)		(5	)

	Allowance at end of quarter			$	8,583		$	8,529		$	8,376		$	7,946		$	7,559

	Allowance to total loans				1.86	%		1.82	%		1.84	%		1.72	%		1.78	%
	Allowance to non-accrual loans				NM			NM			5474.51	%		NM			NM
	Annualized net (charge-offs) ecoveries to average loans				(0.10	)%		0.00	%		0.29	%		(0.04	)%		0.00	%
Regulatory Capital Ratios:
	Pacific Crest Capital, Inc.
		Leverage ratio			10.01	%		9.97	%		9.53	%		9.49	%		9.06	%
		Tier 1 risk-based capital ratio			12.59	%		11.90	%		11.78	%		11.11	%		11.77	%
		Total risk-based capital ratio			14.57	%		13.94	%		13.96	%		13.36	%		14.14	%
	Pacific Crest Bank
		Leverage ratio			9.86	%		9.82	%		9.52	%		9.61	%		9.17	%
		Tier 1 risk-based capital ratio			12.37	%		11.69	%		11.75	%		11.22	%		11.89	%
		Total risk-based capital ratio			13.63	%		12.94	%		13.00	%		12.47	%		13.15	%
Regulatory Capital Data:
	Pacific Crest Capital, Inc.
		Tier 1 capital		$	56,030		$	54,584		$	52,568		$	50,887		$	50,076
		Total risk-based capital			64,866			63,950			62,281			61,165			60,145
		Average total assets			559,997			547,581			551,515			536,150			552,675
		Risk-weighted assets			445,096			458,786			446,093			457,958			425,425
	Pacific Crest Bank
		Tier 1 capital		$	54,826		$	53,389		$	52,154		$	51,165		$	50,340
		Total risk-based capital			60,405			59,135			57,739			56,895			55,659
		Average total assets			556,005			543,465			547,735			532,367			548,779
		Risk-weighted assets			443,254			456,889			443,988			456,171			423,296

QUARTERLY INCOME STATEMENTS
(in thousands)

			Three Months Ended
			September 30, 2002			June 30, 2002		March 31, 2002			December 31, 2001			September 30, 2001
Interest income:
	Loans		$	9,438		$	9,380	$	9,503		$	9,897		$	9,428
	Securities purchased under resale agreements			30			18		103			104			135
	Investment securities available for sale			1,016			1,032		758			855			1,760

		Total interest income		10,484			10,430		10,364			10,856			11,323

Interest expense:
	Checking accounts			58			61		63			76			107
	Savings accounts			644			669		701			814			1,182
	Certificates of deposit			2,085			2,681		2,990			3,302			3,960

		Total interest on deposits		2,787			3,411		3,754			4,192			5,249

	Securities sold under repurchase agreements			—			—		—			5			29
	State of California borrowings			—			—		—			—			193
	FHLB advances			611			401		311			166			—
	Term borrowings			478			521		663			677			677
	Trust preferred securities			404			405		404			404			404

		Total interest on borrowings		1,493			1,327		1,378			1,252			1,303

		Total interest expense		4,280			4,738		5,132			5,444			6,552

Net interest income				6,204			5,692		5,232			5,412			4,771
Provision for loan losses				175			150		100			430			150

	Net interest income after provision for loan losses			6,029			5,542		5,132			4,982			4,621

Non-interest income:
	Loan prepayment and late fee income			227			151		206			88			47
	Gain (loss) on sale of SBA 7(a) loans			25			196		—			(10	)		95
	Gain on sale of SBA 504 loans and broker fee income			704			300		132			205			69
	Gain (loss) on sale of investment securities			(682	)		—		—			—			106
	Other income			270			220		286			614			219

		Total non-interest income		544			867		624			897			536

Non-interest expense:
	Salaries and employee benefits			2,452			2,089		2,181			2,179			1,718
	Net occupancy expenses			466			516		405			466			397
	Communication and data processing			261			268		246			295			247
	Legal, audit, and other professional fees			158			180		(1	)		479			261
	Travel and entertainment			116			135		107			144			105
	Other expenses			165			137		138			140			120

		Total operating expenses		3,618			3,325		3,076			3,703			2,848
	Credit and collection expenses			4			22		—			—			—
	OREO valuation adjustments and other expenses			—			—		—			—			—

		Total non-interest expense		3,622			3,347		3,076			3,703			2,848

Income before income taxes				2,951			3,062		2,680			2,176			2,309
Income tax provision				1,000			1,319		1,157			810			989

		Net income	$	1,951		$	1,743	$	1,523		$	1,366		$	1,320

QUARTERLY BALANCE SHEETS
(in thousands)

			September 30, 2002			June 30, 2002			March 31, 2002			December 31, 2001			September 30, 2001
Cash			$	3,170		$	7,367		$	6,920		$	2,508		$	3,298
Securities purchased under resale agreements				3,220			3,456			4,162			16,174			33,312

	Cash and cash equivalents			6,390			10,823			11,082			18,682			36,610

Investment securities available for sale:
	U.S. agency mortgage-backed securities			80,305			66,820			73,988			55,169			61,363
	Corporate debt securities			3,455			4,133			4,128			4,124			4,120

		Total amortized cost		83,760			70,953			78,116			59,293			65,483
	Unrealized gain (loss)			1,465			511			(606	)		(341	)		284

		Total market value		85,225			71,464			77,510			58,952			65,767

Loans:
	Commercial real estate loans			418,829			434,327			422,326			430,420			400,275
	SBA business loans			36,203			25,687			24,189			24,166			20,356
	Other loans			6,935			8,580			7,830			7,393			4,114

		Gross loans		461,967			468,594			454,345			461,979			424,745
	Deferred loan costs (fees)			228			21			7			(4	)		13
	Allowance for loan losses			(8,583	)		(8,529	)		(8,376	)		(7,946	)		(7,559	)

		Net loans		453,612			460,086			445,976			454,029			417,199

Other assets				15,575			13,807			13,436			13,095			11,586

		Total assets	$	560,802		$	556,180		$	548,004		$	544,758		$	531,162

Deposits:
	Checking accounts		$	16,063		$	15,523		$	18,836		$	14,912		$	17,296
	Savings accounts			132,589			133,407			133,509			136,145			143,551
	Certificates of deposit			221,162			228,039			252,092			250,466			265,702

		Total deposits		369,814			376,969			404,437			401,523			426,549

Borrowings:
	FHLB advances			111,000			82,500			40,000			40,000			—
	Term borrowings			10,000			30,000			40,000			40,000			40,000
	Trust preferred securities			17,250			17,250			17,250			17,250			17,250

		Total borrowings		138,250			129,750			97,250			97,250			57,250

		Total interest-bearing liabilities		508,064			506,719			501,687			498,773			483,799
Other liabilities				9,845			8,205			7,223			8,010			9,619

		Total liabilities	$	517,909		$	514,924		$	508,910		$	506,783		$	493,418

Shareholders' equity:
	Common stock, at par(1)		$	60		$	30		$	30		$	30		$	30
	Additional paid-in capital(1)			27,584			27,622			27,712			27,780			27,778
	Beginning retained earnings			19,140			19,140			19,140			14,542			14,542
	Year-to-date earnings			5,217			3,266			1,523			5,385			4,019
	Year-to-date dividends			(632	)		(389	)		(194	)		(787	)		(594	)
	Common stock in treasury, at cost			(9,325	)		(8,709	)		(8,766	)		(8,777	)		(8,195	)

		Total realized shareholders' equity		42,044			40,960			39,445			38,173			37,580
	Accumulated other comprehensive income (loss)—unrealized gain (loss) on investment securities, net of taxes			849			296			(351	)		(198	)		164

		Total shareholders' equity	$	42,893		$	41,256		$	39,094		$	37,975		$	37,744

(1): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.

QUARTERLY AVERAGE BALANCE SHEETS AND SPREAD DATA
(dollars in thousands)

				Three Months Ended
				September 30, 2002			June 30, 2002			March 31, 2002			December 31, 2001			September 30, 2001
Average Interest-Earning Assets:
	Loans, net of deferred loan fees			$	466,822		$	461,725		$	458,994		$	445,169		$	413,909
	Securities purchased under resale agreements				7,324			3,897			25,620			20,353			15,719
	Investment securities available for sale:
		Callable bonds						—			—			—			51,714
		Mortgage-backed securities			73,450			70,687			55,187			58,861			58,951
		Corporate debt securities			4,127			4,131			4,126			4,122			4,119

			Total investment securities		77,577			74,818			59,313			62,983			114,784

			Total interest-earning assets	$	551,723		$	540,440		$	543,927		$	528,505		$	544,412

Average Interest-Bearing Liabilities:
	Checking accounts			$	15,874		$	15,861		$	14,831		$	16,779		$	15,276
	Savings accounts				131,514			133,524			135,381			140,005			141,308
	Certificates of deposit				228,005			243,979			256,477			253,219			268,154

		Total deposits			375,393			393,364			406,689			410,003			424,738

	Securities sold under repurchase agreements				—			—			—			826			2,918
	State of California borrowings				—			—			—			—			20,946
	FHLB advances				87,835			58,332			40,000			20,870			—
	Term borrowings				28,261			31,099			40,000			40,000			40,000
	Trust preferred securities				17,250			17,250			17,250			17,250			17,250

		Total borrowings			133,346			106,681			97,250			78,946			81,114

		Total interest-bearing liabilities		$	508,739		$	500,045		$	503,939		$	488,949		$	505,852

Yields on Average Interest-Earning Assets:
	Loans, net of deferred loan fees				8.02	%		8.15	%		8.40	%		8.82	%		9.04	%
	Securities purchased under resale agreements				1.63	%		1.85	%		1.63	%		2.03	%		3.41	%
	Investment securities available for sale:
		Callable bonds			—			—			—			—			6.51	%
		Mortgage-backed securities			5.32	%		5.62	%		5.21	%		5.48	%		5.81	%
		Corporate debt securities			3.78	%		3.78	%		3.78	%		4.66	%		6.02	%

			Total investment securities		5.24	%		5.52	%		5.11	%		5.43	%		6.13	%

			Total interest-earning assets		7.54	%		7.74	%		7.73	%		8.15	%		8.25	%

Rates on Average Interest-Bearing Liabilities:
	Checking accounts				1.45	%		1.54	%		1.72	%		1.80	%		2.78	%
	Savings accounts				1.94	%		2.01	%		2.10	%		2.31	%		3.32	%
	Certificates of deposit				3.63	%		4.41	%		4.73	%		5.17	%		5.86	%

		Total deposits			2.95	%		3.48	%		3.74	%		4.06	%		4.90	%

	Securities sold under repurchase agreements				—			—			—			2.40	%		3.94	%
	State of California borrowings				—			—			—			—			3.61	%
	FHLB advances				2.76	%		2.76	%		3.15	%		3.18	%		—
	Term borrowings				6.62	%		6.63	%		6.63	%		6.62	%		6.62	%
	Trust preferred securities				9.37	%		9.39	%		9.37	%		9.37	%		9.37	%

		Total borrowings			4.43	%		4.96	%		5.68	%		6.27	%		6.33	%

		Total interest-bearing liabilities			3.34	%		3.80	%		4.13	%		4.42	%		5.14	%

Net Interest Rate Spread					4.20	%		3.94	%		3.60	%		3.73	%		3.11	%
Net Interest Margin					4.46	%		4.22	%		3.90	%		4.06	%		3.48	%

RESULTS OF OPERATIONS

Average Balances, Interest Income and Expense, Yields and Rates
Three Months Ended September 30, 2002 and 2001

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 September 30,
					2002							2001
					Average Balance			Interest Income/ Expense		Average Yield/ Rate		Average Balance			Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets:
	Loans(1)				$	466,822		$	9,438	8.02	%	$	413,909		$	9,428	9.04	%
	Securities purchased under resale agreements					7,324			30	1.63	%		15,719			135	3.41	%
	Investment securities available for sale(2):
		U.S. government sponsored agency securities:
			Callable bonds			—			—	0.00	%		51,714			842	6.51	%
			Mortgage-backed securities			73,450			977	5.32	%		58,951			856	5.81	%
		Corporate debt securities				4,127			39	3.78	%		4,119			62	6.02	%

				Total investment securities		77,577			1,016	5.24	%		114,784			1,760	6.13	%

				Total interest-earning assets		551,723			10,484	7.54	%		544,412			11,323	8.25	%

Non-interest-earning assets						17,305							15,636
Less: allowance for loan losses						(8,621	)						(7,459	)

		Total assets			$	560,407						$	552,589

Interest-Bearing Liabilities:
	Checking accounts				$	15,874			58	1.45	%	$	15,276			107	2.78	%
	Savings accounts					131,514			644	1.94	%		141,308			1,182	3.32	%
	Certificates of deposit					228,005			2,085	3.63	%		268,154			3,960	5.86	%

			Total deposits			375,393			2,787	2.95	%		424,738			5,249	4.90	%

	Securities sold under repurchase agreements					—			—	0.00	%		2,918			29	3.94	%
	State of California borrowings					—			—	0.00	%		20,946			193	3.61	%
	FHLB advances					87,835			611	2.76	%		—			—	0.00	%
	Term borrowings					28,261			478	6.62	%		40,000			677	6.62	%
	Trust preferred securities					17,250			404	9.37	%		17,250			404	9.37	%

			Total borrowings			133,346			1,493	4.43	%		81,114			1,303	6.33	%

			Total interest-bearing liabilities			508,739			4,280	3.34	%		505,852			6,552	5.14	%

Non-interest-bearing liabilities						10,089							9,897
Shareholders' equity						41,579							36,840

		Total liabilities and shareholders' equity			$	560,407						$	552,589

Excess of interest-earning assets over interest-bearing liabilities					$	42,984						$	38,560

Net interest income								$	6,204						$	4,771

Net interest rate spread(3)										4.20	%						3.11	%

Net interest margin(4)										4.46	%						3.48	%

(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.
(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.

Net Changes in Average Balances, Composition, Yields and Rates
Three Months Ended September 30, 2002 and 2001

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, composition, and yield/rate between these respective periods (dollars in thousands):

				Three Months Ended September 30,
				2002						2001						Increase (Decrease)
				Average Balance		% of Total		Average Yield/ Rate		Average Balance		% of Total		Average Yield/ Rate		Average Balance			% of Total		Average Yield/ Rate
Interest-Earning Assets:
	Loans			$	466,822	84.6	%	8.02	%	$	413,909	76.0	%	9.04	%	$	52,913		8.6	%	(1.02	)%
	Securities purchased under resale agreements				7,324	1.3	%	1.63	%		15,719	2.9	%	3.41	%		(8,395	)	(1.6	)%	(1.78	)%
	Investment securities available for sale:
		U.S. government sponsored agency securities:
			Callable bonds		—	—		0.00	%		51,714	9.5	%	6.51	%		(51,714	)	(9.5	)%	(6.51	)%
			Mortgage-backed securities		73,450	13.3	%	5.32	%		58,951	10.8	%	5.81	%		14,499		2.5	%	(0.49	)%
		Corporate debt securities			4,127	0.8	%	3.78	%		4,119	0.8	%	6.02	%		8		0.0	%	(2.24	)%

			Total investment securities		77,577	14.1	%	5.24	%		114,784	21.1	%	6.13	%		(37,207	)	(7.0	)%	(0.89	)%

			Total interest-earning assets	$	551,723	100.0	%	7.54	%	$	544,412	100.0	%	8.25	%	$	7,311				(0.71	)%

Interest-Bearing Liabilities:
	Checking accounts			$	15,874	3.1	%	1.45	%	$	15,276	3.0	%	2.78	%	$	598		0.1	%	(1.33	)%
	Savings accounts				131,514	25.9	%	1.94	%		141,308	28.0	%	3.32	%		(9,794	)	(2.1	)%	(1.38	)%
	Certificates of deposit				228,005	44.8	%	3.63	%		268,154	53.0	%	5.86	%		(40,149	)	(8.2	)%	(2.23	)%

			Total deposits		375,393	73.8	%	2.95	%		424,738	84.0	%	4.90	%		(49,345	)	(10.2	)%	(1.95	)%

	Securities sold under repurchase agreements				—	—		0.00	%		2,918	0.6	%	3.94	%		(2,918	)	(0.6	)%	(3.94	)%
	State of California borrowings				—	—		0.00	%		20,946	4.1	%	3.61	%		(20,946	)	(4.1	)%	(3.61	)%
	FHLB advances				87,835	17.3	%	2.76	%		—	—		0.00	%		87,835		17.3	%	2.76	%
	Term borrowings				28,261	5.5	%	6.62	%		40,000	7.9	%	6.62	%		(11,739	)	(2.4	)%	0.00	%
	Trust preferred securities				17,250	3.4	%	9.37	%		17,250	3.4	%	9.37	%		—		0.0	%	0.00	%

			Total borrowings		133,346	26.2	%	4.43	%		81,114	16.0	%	6.33	%		52,232		10.2	%	(1.90	)%

			Total interest-bearing liabilities	$	508,739	100.0	%	3.34	%	$	505,852	100.0	%	5.14	%	$	2,887		(1.80	)%

Excess of interest-earning assets over interest-bearing liabilities				$	42,984					$	38,560					$	4,424
Net interest rate spread								4.20	%					3.11	%						1.09	%
Net interest margin								4.46	%					3.48	%						0.98	%

Volume and Rate Variance Analysis of Net Interest Income
Three Months Ended September 30, 2002 and 2001

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 September 30, 2002 vs. 2001
					Increase (Decrease) Due To
					Volume			Rate			Total
Interest Income:
	Loans				$	1,136		$	(1,126	)	$	10
	Securities purchased under resale agreements					(53	)		(52	)		(105	)
	Investment securities available for sale:
		U.S. government sponsored agency securities:
			Callable bonds			(842	)		—			(842	)
			Mortgage-backed securities			199			(78	)		121
		Corporate debt securities				—			(23	)		(23	)

				Total investment securities		(643	)		(101	)		(744	)

				Total interest income		440			(1,279	)		(839	)

Interest Expense:
	Checking accounts					4			(53	)		(49	)
	Savings accounts					(77	)		(461	)		(538	)
	Certificates of deposit					(529	)		(1,346	)		(1,875	)

			Total deposits			(602	)		(1,860	)		(2,462	)

	Securities sold under repurchase agreements					(29	)		—			(29	)
	State of California borrowings					(193	)		—			(193	)
	FHLB advances					611			—			611
	Term borrowings					(199	)		—			(199	)
	Trust preferred securities					—			—			—

			Total borrowings			190			—			190

			Total interest expense			(412	)		(1,860	)		(2,272	)

				*Net Interest Income*	$	852		$	581		$	1,433

Net Interest Income—Three Months Analysis

On an overall basis, net interest income grew by $1.4 million, to $6.2 million, during the three months ended September 30, 2002 compared to the same period in 2001, primarily due to a $2.3 million decline in interest expense, which was principally attributable to the Company's lowering of interest rates on its deposits and related deposit run-off. The decreases in interest rates on the Company's deposits resulted from a lower interest rate environment due to the reduction of 475 basis points, to 1.75%, in the federal funds rate by the Federal Reserve in 2001. Partially offsetting the

decline in interest expense was a $839,000 drop in interest income, which was primarily due to the calls and sales of the Company's callable bonds in 2001.

On a volume and rate analysis basis, the $1.4 million growth in net interest income was due to increases of $852,000 and $581,000 attributable to changes in volume and interest rates, respectively. The $852,000 increase attributable to changes in volume was principally due to a $1.1 million increase in interest income attributable to loan growth, and a $0.6 million decrease in interest expense resulting from deposit run-off. Partially offsetting these factors was a $0.8 million reduction in interest income resulting from the calls and sales of the Company's callable bonds.

The $581,000 increase in net interest income attributable to changes in interest rates was primarily due to a $1.9 million decrease in interest expense resulting from the Company's lowering of interest rates on its deposits. This factor was partially offset by a $1.1 million decrease in interest income on loans, which resulted from the downward repricing of the Company's adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations. All of these factors resulted from a lower interest rate environment attributable to a cumulative 475 basis point reduction, to 1.75%, in the federal funds rate by the Federal Reserve during 2001.

The impact of the federal funds rate decreases in 2001 caused downward repricing on the Company's adjustable 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. Reductions in the federal funds rate generally result in reductions of the prime rates offered by major banks, including Bank of America. The Company's prime rate loans are priced at a margin above either Bank of America's prime lending rate or the published Wall Street Journal prime lending rate. As of September 30, 2002, 85.1% and 41.4% of the Company's loan portfolio consisted of adjustable rate loans and prime rate loans, respectively.

The downward repricing of the Company's adjustable rate loans was partially offset by the impact of the interest rate floors that exist on most of the Company's adjustable rate loans. Interest rate floors protect the Company in a declining interest rate environment, as affected loans do not reprice downward to their fully indexed rate when interest rates fall. Another offsetting factor was that the Company's adjustable rate loans generally can reprice only up to a maximum of 200 basis points in a year, and thus did not reprice downward the full 475 basis points of the federal funds rate.

The net interest rate spread grew by 109 basis points, to 4.20%, during the three months ended September 30, 2002, compared to the same period in 2001. This was primarily due to a decrease of 180 basis points, to 3.34%, in the rate paid on average total interest-bearing liabilities, partially offset by a decrease of 71 basis points, to 7.54%, in the yield earned on average total interest-earning assets. The decrease in the rate paid on average total interest-bearing liabilities was principally attributable to the previously mentioned lowering by the Company of the interest rates on its deposits, partially offset by a change in the composition of the Company's average total interest-bearing liabilities to higher rate borrowings from lower rate deposits. The decrease in the yield earned on average total interest-earning assets was primarily due to a decline in the yield on loans, partially offset by a change in the composition of average total interest-earning assets to higher yield loans from lower yield investment securities, which resulted principally from the calls and sales of the callable bonds.

Total Interest Income—Three Months Analysis

On an overall basis, total interest income decreased by $839,000, to $10.5 million, during the three months ended September 30, 2002 compared to the same period in 2001, primarily due to the calls and sales of the Company's callable bonds. On a volume and rate analysis basis, the decrease in interest income was primarily due to a decline in the yield earned on average total interest-earning assets,

which decreased interest income by $1.3 million, partially offset by the growth in the balance of these assets, which increased interest income by $440,000.

Average total interest-earning assets grew by $7.3 million, to $551.7 million, during the third quarter of 2002 compared to the same period in 2001, and was principally due to increases of $52.9 million and $15.0 million in average loans and average mortgage-backed securities, respectively, partially offset by a reduction of $51.7 million in average callable bonds. The changes in average investment securities and average loans resulted in a shift in the mix of average total interest-earning assets to higher yield loans from lower yield investment securities. The percentage of average loans to average total interest-earning assets increased to 84.6% during the three months ended September 30, 2002 from 76.0% during the same period in 2001.

The reduction in average callable bonds of $51.7 million, to zero, was due to the liquidation of the Company's fixed rate callable bond portfolio during the first nine months of 2001. The liquidation occurred primarily through issuer calls of $219.2 million, as well as Company sales of $10.0 million. The issuer calls were attributable to the declining interest rate environment caused by the Federal Reserve's 350 basis point lowering of the federal funds rate during the first nine months of 2001.

The increase in average mortgage-backed securities of $15.0 million, to $73.5 million, was primarily due to fixed rate purchases of $25.5 million in March of 2002, as well as $22.2 million in late July and August of 2002, partially offset by principal payments received on these securities.

The yield earned on average total interest-earning assets decreased by 71 basis points, to 7.54%, during the three months ended September 30, 2002 compared to the same period in 2001, primarily due to the following decreases in yields attributable to the declining interest rate environment during 2001, which continued into the first nine months of 2002:

•: The yield on average loans declined by 102 basis points, to 8.02%, primarily due to the downward repricing of the Company's adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations.
•: The yield on average short-term securities purchased under resale agreements decreased by 178 basis points, to 1.63%.
•: The yield on average fixed rate mortgage-backed securities dropped by 49 basis points, to 5.32%, primarily due to a slightly faster acceleration in the amortization of the premiums paid on the mortgage-backed securities, which was attributable to an increase in the payoffs of the underlying mortgage loans.
•: The yield on average adjustable rate corporate debt securities declined by 224 basis points, to 3.78%, reflecting the downward repricing of these adjustable rate instruments.

Partially offsetting the decline in the yield earned on average total interest-earning assets was the change in the composition of average total interest-earning assets to higher yield loans from lower yield investment securities.

Total Interest Expense—Three Months Analysis

On an overall basis, total interest expense decreased by $2.3 million, to $4.3 million, during the three months ended September 30, 2002 compared to the same period in 2001, primarily due to the Company's lowering of interest rates on its deposits and the related deposit run-off. On a volume and rate analysis basis, the decrease in interest expense was primarily due to a decline in the rate paid on average interest-bearing liabilities, which decreased interest expense by $1.9 million.

Average total interest-bearing liabilities grew by $2.9 million, to $508.7 million, during the third quarter of 2002 compared to the same period in 2001, and was primarily due to an increase of

$52.2 million in average borrowings, partially offset by a reduction of $49.3 million in average deposits. 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 26.2% during the three months ended September 30, 2002 from 16.0% during the same period in 2001.

The decline in average deposits of $49.3 million, to $375.4 million, during the third quarter of 2002 compared to the same period in 2001, was principally due to reductions of $40.1 million and $9.8 million in average certificates of deposit and average savings accounts, respectively. These decreases were primarily attributable to the Company's lowering of interest rates on all of its deposit products in response to the lower interest rate environment resulting from the 475 basis point reduction in the federal funds rate by the Federal Reserve during 2001.

The changes in the average balances of the Company's deposit products resulted in a shift in the composition of average deposits to lower rate checking and savings accounts from higher rate certificates of deposit. This reflected the Company's strategy and efforts to help reduce the overall cost of its deposits. The percentage of average checking and savings accounts to average deposits rose to 39.3% during the third quarter of 2002, from 36.9% during the same period in 2001.

The growth in average borrowings of $52.2 million, to $133.3 million, during the three months ended September 30, 2002 compared to the same period in 2001, was principally due to increases of $12.6 million and $75.2 million in average short-term and long-term FHLB advances, respectively. The Company started using short-term, variable rate FHLB advances in April of 2002. The Company obtained long-term, fixed rate FHLB advances of $40.0 million, $30.0 million, and $20.0 million in November of 2001, July of 2002, and August of 2002, respectively. The increase in FHLB advances was partially offset by decreases of $20.9 million and $2.9 million in short-term average State of California borrowings and average securities sold under repurchase agreements, respectively, as well as a decrease of $11.7 million in average term borrowings. The short-term borrowings matured at various times during 2001 and were paid off by the Company primarily using the proceeds from the calls and sales of the callable bonds. The average term borrowings declined due to maturities of $10.0 million in April of 2002 and $20.0 million in late September of 2002. These matured term borrowings had a weighted average interest rate of 6.63%. The Company paid off these borrowings using lower rate, short-term FHLB advances.

The rate on average total interest-bearing liabilities decreased by 180 basis points, to 3.34%, during the three months ended September 30, 2002 compared to the same period in 2001, and was principally due to the reduction of 195 basis points, to 2.95%, in the rate on average deposits, as well as the reduction of 190 basis points, to 4.43%, in the rate on average borrowings. Partially offsetting these factors was a shift in the mix of average total interest-bearing liabilities to higher rate borrowings from lower rate deposits.

The 195 basis point decline in the rate on average deposits reflected the Company's lowering of interest rates on its deposit products, which resulted in reductions of 133 basis points, 138 basis points, and 223 basis points in the rates on average checking accounts, average savings accounts, and average certificates of deposit, respectively. Contributing to the decrease in the rate on average deposits was a change in the composition of average deposits to lower rate checking and savings accounts from higher rate certificates of deposit.

The Company anticipates that the rate on its average certificates of deposit will decline in the fourth quarter of 2002, from the 3.63% average rate for the third quarter of 2002, as older, higher rate certificates mature and are replaced by newer, lower rate certificates. The current tiered certificate of deposit rates offered by the Company as of September 6, 2002, the date of the Company's most recent

rate changes, are 92 basis point to 165 basis points below the 3.63% average rate for the 2002 third quarter, and are listed as follows:

•: 1.98% (all tiers) for both one and three month certificates.
•: 2.23% (all tiers) for six month certificates.
•: 2.47% (all tiers) for one year certificates.
•: 2.71% (all tiers) for two to five year certificates.

The 190 basis point decrease in the rate on average borrowings was primarily due to the change in the composition of average borrowings resulting from (i) the payoffs and maturities during 2001 of short-term securities sold under repurchase agreements and State of California borrowings, bearing higher average rates of 3.94% and 3.61%, respectively, for the three months ended September 30, 2001, (ii) the addition of short-term, variable rate FHLB advances bearing a lower weighted average rate of 1.89% for the three months ended September 30, 2002, and (iii) the addition of long-term, fixed rate FHLB advances bearing a lower weighted average rate of 2.91% for the three months ended September 30, 2002.

Average Balances, Interest Income and Expense, Yields and Rates
Nine Months Ended September 30, 2002 and 2001

					Nine Months Ended September 30,
					2002							2001
					Average Balance			Interest Income/ Expense		Average Yield/ Rate		Average Balance			Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets:
	Loans(1)				$	462,543		$	28,321	8.19	%	$	403,478		$	28,194	9.34	%
	Securities purchased under resale agreements					12,213			151	1.65	%		11,224			352	4.19	%
	Investment securities available for sale(2):
		U.S. government sponsored agency securities:
			Callable bonds			—			—	0.00	%		99,414			4,853	6.51	%
			Mortgage-backed securities			66,508			2,689	5.39	%		48,601			2,181	5.98	%
		Corporate debt securities				4,128			117	3.78	%		4,115			217	7.03	%

				Total investment securities		70,636			2,806	5.30	%		152,130			7,251	6.36	%

				Total interest-earning assets		545,392			31,278	7.67	%		566,832			35,797	8.44	%

Non-interest-earning assets						16,259							14,023
Less: allowance for loan losses						(8,418	)						(7,423	)

		Total assets			$	553,233						$	573,432

Interest-Bearing Liabilities:
	Checking accounts				$	15,526			182	1.57	%	$	14,154			327	3.09	%
	Savings accounts					133,459			2,014	2.02	%		141,919			4,039	3.81	%
	Certificates of deposit					242,716			7,756	4.27	%		293,634			13,692	6.23	%

			Total deposits			391,701			9,952	3.40	%		449,707			18,058	5.37	%

	Securities sold under repurchase agreements					—			—	0.00	%		5,089			211	5.54	%
	State of California borrowings					—			—	0.00	%		16,963			609	4.73	%
	FHLB advances					62,231			1,323	2.84	%		—			—	0.00	%
	Term borrowings					33,077			1,662	6.63	%		40,000			2,009	6.62	%
	Trust preferred securities					17,250			1,213	9.38	%		17,250			1,213	9.38	%

			Total borrowings			112,558			4,198	4.96	%		79,302			4,042	6.75	%

			Total interest-bearing liabilities			504,259			14,150	3.75	%		529,009			22,100	5.59	%

Non-interest-bearing liabilities						8,988							8,680
Shareholders' equity						39,986							35,743

		Total liabilities and shareholders' equity			$	553,233						$	573,432

Excess of interest-earning assets over interest-bearing liabilities					$	41,133						$	37,823

Net interest income								$	17,128						$	13,697

Net interest rate spread(3)										3.92	%						2.85	%

Net interest margin(4)										4.20	%						3.23	%

(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.
(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.

Net Changes in Average Balances, Composition, Yields and Rates
Nine Months Ended September 30, 2002 and 2001

				Nine Months Ended September 30,
				2002						2001						Increase (Decrease)
				Average Balance		% of Total		Average Yield/ Rate		Average Balance		% of Total		Average Yield/ Rate		Average Balance			% of Total		Average Yield/ Rate
Interest-Earning Assets:
	Loans			$	462,543	84.8	%	8.19	%	$	403,478	71.2	%	9.34	%	$	59,065		13.6	%	(1.15	)%
	Securities purchased under resale agreements				12,213	2.2	%	1.65	%		11,224	2.0	%	4.19	%		989		0.2	%	(2.54	)%
	Investment securities available for sale:
		U.S. government sponsored agency securities:
			Callable bonds		—	—		0.00	%		99,414	17.5	%	6.51	%		(99,414	)	(17.5	)%	(6.51	)%
			Mortgage-backed securities		66,508	12.2	%	5.39	%		48,601	8.6	%	5.98	%		17,907		3.6	%	(0.59	)%
		Corporate debt securities			4,128	0.8	%	3.78	%		4,115	0.7	%	7.03	%		13		0.1	%	(3.25	)%

			Total investment securities		70,636	13.0	%	5.30	%		152,130	26.80	%	6.36	%		(81,494	)	(13.8	)%	(1.06	)%

			Total interest-earning assets	$	545,392	100.0	%	7.67	%	$	566,832	100.0	%	8.44	%	$	(21,440	)			(0.77	)%

Interest-Bearing Liabilities:
	Checking accounts			$	15,526	3.1	%	1.57	%	$	14,154	2.7	%	3.09	%	$	1,372		0.4	%	(1.52	)%
	Savings accounts				133,459	26.5	%	2.02	%		141,919	26.8	%	3.81	%		(8,460	)	(0.3	)%	(1.79	)%
	Certificates of deposit				242,716	48.1	%	4.27	%		293,634	55.5	%	6.23	%		(50,918	)	(7.4	)%	(1.96	)%

			Total deposits		391,701	77.7	%	3.40	%		449,707	85.0	%	5.37	%		(58,006	)	(7.3	)%	(1.97	)%

	Securities sold under repurchase agreements				—	—		0.00	%		5,089	1.0	%	5.54	%		(5,089	)	(1.0	)%	(5.54	)%
	State of California borrowings				—	—		0.00	%		16,963	3.2	%	4.73	%		(16,963	)	(3.2	)%	(4.73	)%
	FHLB advances				62,231	12.3	%	2.84	%		—	—		0.00	%		62,231		12.3	%	2.84	%
	Term borrowings				33,077	6.6	%	6.63	%		40,000	7.6	%	6.62	%		(6,923	)	(1.0	)%	0.01	%
	Trust preferred securities				17,250	3.4	%	9.38	%		17,250	3.2	%	9.38	%		—		0.2	%	0.00	%

			Total borrowings		112,558	22.3	%	4.96	%		79,302	15.0	%	6.75	%		33,256		7.3	%	(1.79	)%

			Total interest-bearing liabilities	$	504,259	100.0	%	3.75	%	$	529,009	100.0	%	5.59	%	$	(24,750	)			(1.84	)%

Excess of interest-earning assets over interest-bearing liabilities				$	41,133					$	37,823					$	3,310
Net interest rate spread								3.92	%					2.85	%						1.07	%
Net interest margin								4.20	%					3.23	%						0.97	%

Volume and Rate Variance Analysis of Net Interest Income
Nine Months Ended September 30, 2002 and 2001

segregated have been allocated proportionately based on the absolute dollar amounts of the changes due to volume and rate (dollars in thousands):

					Nine Months Ended September 30, 2002 vs. 2001
					Increase (Decrease) Due To
					Volume			Rate			Total
Interest Income:
	Loans				$	3,839		$	(3,712	)	$	127
	Securities purchased under resale agreements					29			(230	)		(201	)
	Investment securities available for sale:
		U.S. government sponsored agency securities:
			Callable bonds			(4,853	)		—			(4,853	)
			Mortgage-backed securities			739			(231	)		508
		Corporate debt securities				1			(101	)		(100	)

				Total investment securities		(4,113	)		(332	)		(4,445	)

				Total interest income		(245	)		(4,274	)		(4,519	)

Interest Expense:
	Checking accounts					29			(174	)		(145	)
	Savings accounts					(228	)		(1,797	)		(2,025	)
	Certificates of deposit					(2,109	)		(3,827	)		(5,936	)

			Total deposits			(2,308	)		(5,798	)		(8,106	)

	Securities sold under repurchase agreements					(211	)		—			(211	)
	State of California borrowings					(609	)		—			(609	)
	FHLB advances					1,323			—			1,323
	Term borrowings					(350	)		3			(347	)
	Trust preferred securities					—			—			—

			Total borrowings			153			3			156

			Total interest expense			(2,155	)		(5,795	)		(7,950	)

				*Net interest income*	$	1,910		$	1,521		$	3,431

Net Interest Income—Nine Months Analysis

On an overall basis, net interest income grew by $3.4 million, to $17.1 million, during the nine months ended September 30, 2002 compared to the same period in 2001, primarily due to a $7.9 million decline in interest expense, which was principally attributable to the Company's lowering of interest rates on its deposits and related deposit run-off. The decreases in interest rates on the Company's deposits resulted from a lower interest rate environment due to the reduction of 475 basis points, to 1.75%, in the federal funds rate by the Federal Reserve in 2001. Partially offsetting the decline in interest expense was a $4.5 million drop in interest income, which was primarily due to the calls and sales of the Company's callable bonds in 2001.

On a volume and rate analysis basis, the $3.4 million growth in net interest income was due to increases of $1.9 million and $1.5 million attributable to changes in volume and interest rates, respectively. The $1.9 million increase attributable to changes in volume was principally due to increases in interest income of $3.8 million and $0.7 million attributable to growth in loans and mortgage-backed securities, respectively, and a $2.3 million decrease in interest expense resulting from

deposit run-off. Partially offsetting these factors was a $4.9 million reduction in interest income resulting from the calls and sales of the Company's callable bonds.

The $1.5 million increase in net interest income attributable to changes in interest rates was primarily attributable to a $5.8 million decrease in interest expense resulting from the Company's lowering of the interest rates on its deposits. This factor was partially offset by a $3.7 million decrease in interest income on loans, which resulted from the downward repricing of the Company's adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations. All of these factors resulted from a lower interest rate environment attributable to a cumulative 475 basis point reduction, to 1.75%, in the federal funds rate by the Federal Reserve during 2001.

The net interest rate spread grew by 107 basis points, to 3.92%, during the nine months ended September 30, 2002, compared to the same period in 2001. This was primarily due to a decrease of 184 basis points, to 3.75%, in the rate paid on average total interest-bearing liabilities, partially offset by a decrease of 77 basis points, to 7.67%, in the yield earned on average total interest-earning assets. The decrease in the rate paid on average total interest-bearing liabilities was principally attributable to the previously mentioned lowering by the Company of the interest rates on its deposits, as well as a change in the composition of the Company's average total interest-bearing liabilities to higher rate borrowings from lower rate deposits. The decrease in the yield earned on average total interest-earning assets was primarily due to a decline in the yield on loans, partially offset by a change in the composition of average total interest-earning assets to higher yield loans from lower yield investment securities, which resulted principally from the calls and sales of the callable bonds.

Total Interest Income—Nine Months Analysis

On an overall basis, total interest income decreased by $4.5 million, to $31.3 million, during the nine months ended September 30, 2002 compared to the same period in 2001, primarily due to the calls and sales of the Company's callable bonds. On a volume and rate analysis basis, the decrease in interest income was due to a decline in the yield earned on average total interest-earning assets, which decreased interest income by $4.3 million, as well as to a reduction in the balance of these assets, which decreased interest income by $245,000.

Average total interest-earning assets declined by $21.4 million, to $545.4 million, during first nine months of 2002 compared to the same period in 2001, and was principally due to a reduction in average callable bonds of $99.4 million, partially offset by increases of $59.1 million and $17.9 million in average loans and average mortgage-backed securities, respectively. The changes in average investment securities and average loans resulted in a shift in the mix of average total interest-earning assets to higher yield loans from lower yield investment securities. The percentage of average loans to average total interest-earning assets increased to 84.8% during the nine months ended September 30, 2002 from 71.2% during the same period in 2001.

The reduction in average callable bonds of $99.4 million, to zero, was due to the liquidation of the Company's fixed rate callable bond portfolio during the first nine months of 2001. The liquidation occurred primarily through issuer calls of $219.2 million, as well as Company sales of $10.0 million. The issuer calls were attributable to the declining interest rate environment caused by the Federal Reserve's 350 basis point lowering of the federal funds rate during the first nine months of 2001.

The increase in average mortgage-backed securities of $17.9 million, to $66.5 million, was primarily due to fixed rate purchases of $25.5 million, in March of 2002, as well as $22.2 million in late July and August of 2002, partially offset by principal payments received on these securities.

The yield earned on average total interest-earning assets decreased by 77 basis points, to 7.67%, during the nine months ended September 30, 2002 compared to the same period in 2001, primarily due

to the following decreases in yields attributable to the declining interest rate environment during 2001, which continued into the first nine months of 2002:

•: The yield on average loans declined by 115 basis points, to 8.19%, primarily due to the downward repricing of the Company's adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations.
•: The yield on average short-term securities purchased under resale agreements decreased by 254 basis points, to 1.65%.
•: The yield on average fixed rate mortgage-backed securities dropped by 59 basis points, to 5.39%, primarily due to a slightly faster acceleration in the amortization of the premiums paid on the mortgage-backed securities, which was attributable to an increase in the payoffs of the underlying mortgage loans.
•: The yield on average adjustable rate corporate debt securities declined by 325 basis points, to 3.78%, reflecting the downward repricing of these adjustable rate instruments.

Total Interest Expense—Nine Months Analysis

On an overall basis, total interest expense decreased by $7.9 million, to $14.2 million, during the nine months ended September 30, 2002 compared to the same period in 2001, primarily due to the Company's lowering of interest rates on its deposits and the related deposit run-off. On a volume and rate analysis basis, the decrease in interest expense was due to a decline in the rate paid on average interest-bearing liabilities, which decreased interest expense by $5.8 million, as well as to a reduction in the balance of these liabilities, which reduced interest expense by $2.1 million.

Average total interest-bearing liabilities declined by $24.8 million, to $504.3 million, during the first nine months of 2002 compared to the same period in 2001, and was primarily due to a decrease of $58.0 million in average deposits, partially offset by an increase of $33.2 million in average borrowings. 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 22.3% during the nine months ended September 30, 2002 from 15.0% during the same period in 2001.

The decline in average deposits of $58.0 million, to $391.7 million, during the nine months ended September 30, 2002 compared to the same period in 2001, was principally due to reductions of $50.9 million and $8.5 million in average certificates of deposit and average savings accounts, respectively. These decreases were primarily attributable to the Company's lowering of interest rates on all of its deposit products in response to the lower interest rate environment resulting from the 475 basis point reduction in the federal funds rate by the Federal Reserve during 2001.

The changes in the average balances of the Company's deposit products resulted in a shift in the composition of average deposits to lower rate checking and savings accounts from higher rate certificates of deposit. This reflected the Company's current strategy and efforts to help reduce the overall cost of its deposits. The percentage of average checking and savings accounts to average deposits rose to 38.0% during the nine months ended September 30, 2002, from 34.7% during the same period in 2001.

The growth in average borrowings of $33.2 million, to $112.6 million, during the first nine months of 2002 compared to the same period in 2001, was principally due to increases of $10.3 million and $51.9 million in average short-term and long-term FHLB advances, respectively. The Company started

using short-term, variable rate advances in April of 2002. The Company started using long-term, fixed rate FHLB advances in November of 2001. The increase in FHLB advances was partially offset by decreases of $17.0 million and $5.1 million in short-term average State of California borrowings and average securities sold under repurchase agreements, respectively, as well as a decrease of $6.9 million in average term borrowings. The short-term borrowings matured at various times during 2001 and were paid off by the Company primarily using the proceeds from the calls and sales of the callable bonds. The average term borrowings declined due to maturities of $10.0 million in April of 2002 and $20.0 million in late September of 2002.

The rate on average total interest-bearing liabilities decreased by 184 basis points, to 3.75%, during the nine months ended September 30, 2002 compared to the same period in 2001, and was principally due to the reduction of 197 basis points, to 3.40%, in the rate on average deposits, as well as the reduction of 179 basis points, to 4.96%, in the rate on average borrowings. Partially offsetting these factors was the shift in the mix of average total interest-bearing liabilities to higher rate borrowings from lower rate deposits.

The 197 basis point decline in the rate on average deposits reflected the Company's lowering of interest rates on its deposit products, which resulted in reductions of 152 basis points, 179 basis points, and 196 basis points in the rates on average checking accounts, average savings accounts, and average certificates of deposit, respectively. Contributing to the decrease in the rate on average deposits was the previously mentioned change in the composition of average deposits to lower rate checking and savings accounts from higher rate certificates of deposit.

The 179 basis point decrease in the rate on average borrowings was primarily due to the change in the composition of average borrowings resulting from (i) the payoffs and maturities during 2001 of short-term securities sold under repurchase agreements and State of California borrowings, bearing higher average rates of 5.54% and 4.73%, respectively, for the nine months ended September 30, 2001, (ii) the addition of short-term, variable rate FHLB advances, bearing a lower weighted average rate of 1.88% for the nine months ended September 30, 2002, and (iii) the addition of long-term, fixed rate FHLB advances, bearing a lower weighted average rate of 3.03% for the nine months ended September 30, 2002.

Provision for Loan Losses

During the three months ended September 30, 2002, the Company increased its provision for loan losses by $25,000, to $175,000, compared to the same period in 2001. During the nine months ended September 30, 2002, the Company increased its provision for loan losses by $195,000, to $425,000, compared to the same period in 2001. The Company uses the provision for loan losses to establish the allowance for loan losses based on management's evaluation of the risk inherent in the loan portfolio. 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 September 30,										Nine Months Ended September 30,
			Amounts					Increase (Decrease)					Amounts					Increase (Decrease)
			2002			2001		$			%		2002			2001		$			%
Loan prepayment and late fee income			$	227		$	47	$	180		383.0	%	$	584		$	257	$	327		127.2	%
Gain on sale of SBA 7(a) loans				25			95		(70	)	(73.7	)%		221			405		(184	)	(45.4	)%
Gain on sale of SBA 504 loans and broker fee income:
	Gain on sale of loans			159			9		150		1666.7	%		203			145		58		40.0	%
	Broker fee income			545			60		485		808.3	%		933			153		780		509.8	%

		Total		704			69		635		920.3	%		1,136			298		838		281.2	%

Gain (loss) on sale of investment securities				(682	)		106		(788	)	(743.4	)%		(682	)		95		(777	)	(817.9	)%
Other income				270			219		51		23.3	%		776			579		197		34.0	%

	Total non-interest income		$	544		$	536	$	8		1.5	%	$	2,035		$	1,634	$	401		24.5	%

Non-interest income for the three months ended September 30, 2002 grew by $8,000, to $544,000, compared to the same period in 2001. This was primarily due to increases of $635,000 and $180,000 in gain on sale of SBA 504 loans and broker fee income and loan prepayment and late fee income, respectively, partially offset by a $788,000 reduction in gain on sale of investment securities.

Non-interest income for the nine months ended September 30, 2002 grew by $401,000, to $2.0 million, compared to the same period in 2001. This was primarily due to increases of $838,000 and $327,000 in gain on sale of SBA 504 loans and broker fee income and loan prepayment and late fee income, respectively, partially offset by a $777,000 reduction in gain on sale of investment securities.

The increases in gain on sale of SBA 504 loans and broker fee income for the three and nine months ended September 30, 2002 were primarily due to increases in broker fee income of $485,000 and $780,000, respectively, which were attributable to the growth in brokered SBA 504 loans.

The increases in loan prepayment and late fee income for the three and nine months ended September 30, 2002 reflected higher prepayment fees attributable to a lower interest rate environment and a resulting greater amount of loan payoffs. Such payoffs grew by 195.5% and 126.1%, to $26.3 million and $74.6 million, for the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001.

The reductions in gain on sale of investment securities for the three and nine months ended September 30, 2002 were due to a $682,000 write-down to market value on one of the Company's corporate debt securities during the third quarter of 2002.

Gain on sale of SBA 7(a) loans decreased by $70,000 and $184,000 during the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001, due to reduced loan sales by the Company. The Company bases its SBA 7(a) loan sales on the level of SBA 7(a) loan originations, the premiums available in the secondary market for the sale of such loans, and general liquidity considerations of the Company.

Other income grew by $51,000 and $197,000 during the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001. This was primarily due to $42,000 and $92,000 of dividend income that the Company recorded on its investment in FHLB stock during the three and nine months ended September 30, 2002, respectively. The increase in other income for the first nine months of 2002 was also attributable to $114,000 of interest income that the Company recorded in connection with a favorable IRS ruling that the Company received on an income tax refund claim.

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 September 30,									Nine Months Ended September 30,
		Amounts				Increase (Decrease)					Amounts				Increase (Decrease)
		2002		2001		$			%		2002		2001		$			%
Salaries and employee benefits		$	2,452	$	1,718	$	734		42.7	%	$	6,722	$	4,973	$	1,749		35.2	%
Net occupancy expenses			466		397		69		17.4	%		1,387		1,199		188		15.7	%
Communication and data processing			261		247		14		5.7	%		775		762		13		1.7	%
Legal, audit, and other professional fees			158		261		(103	)	(39.5	)%		337		507		(170	)	(33.5	)%
Travel and entertainment			116		105		11		10.5	%		358		313		45		14.4	%
Credit and collection expenses			4		—		4		100.0	%		26		—		26		100.0	%
Other expenses			165		120		45		37.5	%		440		404		36		8.9	%

	Total non-interest expense	$	3,622	$	2,848	$	774		27.2	%	$	10,045	$	8,158	$	1,887		23.1	%

Non-interest expense for the three months ended September 30, 2002 grew by $774,000, to $3.6 million, compared to the same period in 2001. This was primarily due to increases of $734,000 and $69,000 in salaries and employee benefits and net occupancy expenses, respectively, partially offset by a reduction of $103,000 in legal, audit, and other professional fees.

Non-interest expense for the nine months ended September 30, 2002 grew by $1.9 million, to $10.0 million, compared to the same period in 2001. This was primarily due to increases of $1.7 million and $188,000 in salaries and employee benefits and net occupancy expenses, respectively, partially offset by a reduction of $170,000 in legal, audit, and other professional fees.

The increases in salaries and employee benefits for the three and nine months ended September 30, 2002, compared to the same periods in 2001, was primarily due to the following factors:

•: Marketing commissions increased due to the growth in brokered SBA 504 loans.
•: Personnel bonuses, which are partially tied to the Company's return on equity performance, increased due to the higher level of return on equity achieved during 2002 compared to 2001.
•: In January of 2002, employee base salaries increased by approximately 4%.
•: In January of 2002, the Company hired a Senior Vice President in connection with the Company's new business lending program for business professionals and small businesses.
•: The Company expanded the staffing level of its SBA lending program. The average number of full-time employees increased by two and four for the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001.

The increase in net occupancy expenses for the nine months ended September 30, 2002, compared to the same period in 2001, was primarily due to a cost of approximately $110,000 related to a defalcation at one of the Company's branches.

The reduction in legal, audit, and other professional fees for the nine months ended September 30, 2002, compared to the same period in 2001, was primarily due to the $175,000 reversal in the first quarter of 2002 of a portion of an accrual originally taken during the fourth quarter of 2001 for estimated expenses relating to (i) obtaining a favorable ruling on an IRS income tax refund claim, and (ii) settling a legal claim brought against the Bank.

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 (dollars in thousands):

									Increase (Decrease)
			September 30, 2002			December 31, 2001			Increase (Decrease)
			September 30, 2002			December 31, 2001			$			%
Assets
	Cash and cash equivalents		$	6,390		$	18,682		$	(12,292	)	(65.8	)%
	Investment securities available for sale, at market			85,225			58,952			26,273		44.6	%
	Net loans			453,612			454,029			(417	)	(0.1	)%
	Other assets			15,575			13,095			2,480		18.9	%

		Total assets	$	560,802		$	544,758		$	16,044		2.9	%

Liabilities
	Checking accounts		$	16,063		$	14,912		$	1,151		7.7	%
	Savings accounts			132,589			136,145			(3,556	)	(2.6	)%
	Certificates of deposit			221,162			250,466			(29,304	)	(11.7	)%

		Total deposits		369,814			401,523			(31,709	)	(7.9	)%

	FHLB advances			111,000			40,000			71,000		177.5	%
	Term borrowings			10,000			40,000			(30,000	)	(75.0	)%
	Trust preferred securities			17,250			17,250			—		—

		Total borrowings		138,250			97,250			41,000		42.2	%

		Total interest-bearing liabilities		508,064			498,773			9,291		1.9	%
	Other liabilities			9,845			8,010			1,835		22.9	%

		Total liabilities		517,909			506,783			11,126		2.2	%

Shareholders' Equity
	Common stock, at par(1)			60			60			—		—
	Additional paid-in capital(1)			27,584			27,750			(166	)	(0.6	)%
	Retained earnings			23,725			19,140			4,585		24.0	%
	Accumulated other comprehensive income (loss)—unrealized gain (loss) on investment securities available for sale, net of income taxes			849			(198	)		1,047		528.8	%
	Common stock in treasury, at cost			(9,325	)		(8,777	)		(548	)	(6.2	)%

		Total shareholders' equity		42,893			37,975			4,918		13.0	%

		Total liabilities and shareholders' equity	$	560,802		$	544,758		$	16,044		2.9	%

(1): Retroactively adjusted to reflect the 2-for-1 stock split that took effect on the distribution date, November 12, 2002.

Total assets grew by $16.0 million, to $560.8 million, during the nine months ended September 30, 2002, primarily due to increases of $26.3 million and $2.5 million in investment securities and other assets, respectively, partially offset by a decrease of $12.3 million in cash and cash equivalents.

The $26.3 million increase in investment securities, to $85.2 million, was principally due to mortgage-backed securities purchases of $25.5 million in March of 2002 and $22.2 million in late July

and August of 2002. Partially offsetting this increase were principal payments on mortgage-backed securities totaling $21.9 million.

The $12.3 million decrease in cash and cash equivalents, to $6.4 million, was principally due to the redemption of securities purchased under resale agreements to fund purchases of mortgage-backed securities, partially offset by principal payments received on mortgage-backed securities and proceeds received from FHLB advances.

Net loans declined slightly by $417,000, to $453.6 million, during the nine months ended September 30, 2002, primarily due to $76.8 million of loan payoffs and principal payments and $6.4 million of SBA loan sales, partially offset by $78.3 million of loan originations and $4.9 million of loan purchases. The significant amount of loan payoffs was due to a high level of refinance activity attributable to a lower interest rate environment.

On a gross loan by category basis, commercial real estate loans and other loans decreased by $11.6 million and $0.4 million, respectively, offset by a $12.0 million growth in SBA loans. The decline in commercial real estate loans was primarily due to $73.7 million of loan payoffs and principal payments, partially offset by $57.2 million of loan originations and $4.9 million of loan purchases. The increase in SBA loans was primarily due to $21.1 million of loan originations, partially offset by $6.4 million in loan sales and $2.7 million of loan payoffs and principal payments.

Total liabilities grew by $11.1 million, to $517.9 million, during the nine months ended September 30, 2002, primarily due to an increase of $71.0 million in FHLB advances, partially offset by reductions of $29.3 million and $30.0 million in certificates of deposit and term borrowings, respectively. The additional FHLB advances consisted of (i) $21.0 million of short-term, variable rate advances, with an interest rate of 2.01% at September 30, 2002, which the Company started using in April of 2002, and (ii) $50.0 million of long-term, fixed rate advances, which were obtained in late July and August of 2002, with a weighted average interest rate of 2.66% and maturities ranging from 1.5 years to 3.0 years.

The lower rate FHLB advances were principally used to (i) replace maturing higher rate certificates of deposit, (ii) payoff $30.0 million in maturing term borrowings, bearing a higher weighted average interest rate of 6.63%, and (iii) purchase mortgage-backed securities.

Shareholders' equity increased by $4.9 million, to $42.9 million, during the nine months ended September 30, 2002. Changes in shareholders' equity were due to the following factors:

•: The Company recorded $5.2 million of net income for the first nine months of 2002.
•: The Company declared and paid cash dividends of $632,000 for the first nine months of 2002.
•: The $198,000 accumulated other comprehensive loss (i.e. unrealized loss on investment securities available for sale, net of income taxes) at December 31, 2001, decreased by $1.0 million, to a $849,000 accumulated other comprehensive income position at September 30, 2002, primarily due to unrealized gains on the Company's mortgage-backed securities portfolio and a $682,000 write-down to market value on one of the Company's corporate debt securities available for sale.
•: Common stock in treasury increased by $548,000 during the first nine months of 2002, primarily due to the $1.2 million purchase of 88,100 shares of the Company's common stock on a post-split basis under its stock repurchase plan. This increase in treasury stock was partially offset by the issuance of 86,284 shares of common stock in treasury on a post-split basis, at an aggregate cost of $674,000, 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 increased by $637,000, to $8.6 million, during the nine months ended September 30, 2002, due to $425,000 in provision for loan losses and $212,000 in net recoveries. The allowance for loan losses as a percentage of loans was 1.86% at September 30, 2002, as compared to 1.72% at December 31, 2001.

The overall economic factors and conditions affecting the Company's allowance for loan losses at September 30, 2002, are consistent with the various factors that the Company has experienced over the last 15 to 24 months. While the economy declined during the third and fourth quarters of 2001, the economy recorded growth during the first three quarters of 2002. However, the economy has continued to show signs of weakness within specific segments and industries, such as telecommunications and manufacturing.

The Company's management considered the following recent loan loss and credit experience in evaluating the allowance for loan losses at September 30, 2002:

•: During the nine months ended September 30, 2002, recoveries exceeded charge-offs by $212,000.
•: During the years ended December 31, 2001 and 2000, recoveries exceeded charge-offs by $46,000 and $186,000, respectively.
•: There were no non-accrual loans and other real estate owned at September 30, 2002 and at eight of the last eleven quarter-end periods as of September 30, 2002.
•: During the first nine months of 2002, the prime rate remained unchanged at 4.75%. However, during 2001, the prime rate dropped 475 basis points, to 4.75%. As a result, most of the Company's adjustable rate borrowers experienced some decline in the interest payments on their loans, which strengthened their debt service capabilities. However, these borrowers did not realize the full impact of the prime rate reduction on their loan payments due to interest rate floors that exist on most of the Company's adjustable rate loans. As of September 30, 2002, 85.1% of the Company's loan portfolio consisted of adjustable rate loans, and 41.4% consisted of prime rate loans.

In addition to recent loan loss and credit experience, management considers historical loan loss experience as well as changes within the loan portfolio in evaluating the adequacy of the allowance for loan losses. Changes in the loan portfolio include (i) the growth in SBA lending, (ii) changes in geographic concentration, (iii) changes in the collateral mix of the loan portfolio, and (iv) the debt service ability of borrowers. In addition, management attempts to factor in the changes that relate to the economy in specific cities or locations. Most of these factors (geographic concentration, collateral concentration, debt service coverage of borrowers, and current vacancy rates) are favorable to the Company's current loan portfolio as compared to the loan portfolio of the 1991 - 1994 economic period. Management believes that the ability to predict the direction of the current U.S. economy is difficult given the continued risk of possible terrorism, the continued negative impact of declines in corporate earnings and the stock market, and the loss of consumer confidence. Management feels that the economy may only experience slow to modest growth during the remainder of 2002 and possibly into 2003. In considering all of the above factors, management believes that the allowance for loan losses as of September 30, 2002 is adequate.

Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations.

The following table sets forth certain information with respect to the Company's allowance for loan losses for the periods indicated (dollars in thousands):

				Nine Months Ended September 30, 2002			Nine Months Ended September 30, 2001			Twelve Months Ended December 31, 2001
Allowance at beginning of period				$	7,946		$	7,240		$	7,240
	Provision for loan losses				425			230			660
	Net (charge-offs) recoveries:
		Charge-offs			(166	)		(59	)		(111	)
		Recoveries			378			148			157

			Total net (charge-offs) recoveries		212			89			46

Allowance at end of period				$	8,583		$	7,559		$	7,946

Allowance to total loans					1.86	%		1.78	%		1.72	%
Allowance to non-accrual loans					NM			NM			NM
Annualized net (charge-offs) recoveries to average loans					0.06	%		0.03	%		0.01	%

NM means Not Meaningful

NON-PERFORMING ASSETS

The following table sets forth non-accrual loans and OREO as of the dates indicated (dollars in thousands):

		September 30, 2002			December 31, 2001			September 30, 2001
Non-accrual loans		$	—		$	—		$	—
Other real estate owned (OREO)			—			—			—

	Total non-performing assets	$	—		$	—		$	—

Non-accrual loans to total loans			0.00	%		0.00	%		0.00	%
Total non-performing assets to total assets			0.00	%		0.00	%		0.00	%

During the second quarter of 2002, the Company changed its non-accrual loan policy to place loans on non-accrual status starting at 90 days past due, rather than at 61 days past due. However, the Company may place a loan on non-accrual status sooner if management determines that the collectibility of principal or interest is unlikely prior to the loan becoming 90 days past due. This change was made in order to be consistent with general banking industry practice.

LIQUIDITY

The Company's primary sources of funds are deposits, borrowings, and payments of principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonably predictable source of funds, deposit flows and mortgage loan prepayments are greatly influenced by the level of interest rates, economic conditions, and competition. As a measure of protection against these uncertainties, the Company maintains borrowing relationships with several brokers, whereby the Company is able to borrow funds that are secured by pledging specific amounts of certain U.S. government sponsored agency securities. The Company is generally able to borrow up to 98% of the market value of these securities. As of September 30, 2002, the market values of U.S. government sponsored agency securities that were available for collateral purposes totaled $65.6 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. The State of California requires collateral with a value of at least 110% of the outstanding borrowing amount. The Bank has pledged specific amounts of certain U.S. government sponsored agency securities to meet the collateral requirement under this borrowing facility. As of September 30, 2002, the Bank's unconsolidated total shareholder's equity was $55.7 million and the Bank had no outstanding borrowings from the State of California.

During the second quarter of 2001, the Bank became a member of the FHLB, which serves as a source of both fixed rate and adjustable rate borrowings, with maturities ranging from one day to 30 years. Under the FHLB's borrowing program, the Bank is able to borrow an FHLB-approved percentage of the Bank's unconsolidated total assets. All FHLB advances must be secured by eligible collateral, subject to FHLB guidelines and limitations. Such collateral may consist of either commercial real estate loans, multi-family residential loans, or U.S. government sponsored agency mortgage-backed securities, or a combination thereof. For pledged commercial real estate loans, the FHLB will lend up to 55% on an individual loan basis and up to 20% of the Bank's unconsolidated total assets on an aggregate basis. For multi-family residential loans, the FHLB will lend up to 80% on an individual basis. For mortgage-backed securities, the FHLB will lend up to 97% of the market value.

As of September 30, 2002, the Bank's FHLB credit line totaled $193.0 million, based on 35% of its unconsolidated total assets of $551.3 million. However, total commercial real estate and multi-family residential loan secured advances were limited to $129.8 million at September 30, 2002, primarily due to the 20% of assets aggregate limitation on commercial real estate loans. The Bank had $111.0 million of outstanding advances as of September 30, 2002.

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. Pacific Crest, on an unconsolidated basis, had approximately $3.3 million in cash and investments less current liabilities and short-term debt at September 30, 2002. However, these funds are necessary to pay future operating expenses of Pacific Crest, 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, Pacific Crest must rely solely on existing cash, investments, and the ability to secure borrowings.

The Bank's ability to pay dividends to Pacific Crest is restricted by California state law, which requires that sufficient retained earnings be available to pay the dividend. On September 13, 2002, the Bank paid a cash dividend of $800,000 to Pacific Crest for the third quarter of 2002. During the first six months of 2002, the Bank declared and paid cash dividends of $1.6 million to Pacific Crest. At September 30, 2002, the Bank had retained earnings of $25.1 million available for future dividend payments.

dividends of $0.08 per common share on a post-split basis. The total amount of cash dividends paid during the nine months ended September 30, 2002 was $632,000.

CAPITAL RESOURCES

The Company's objective is to maintain a level of capital that will support sustained asset growth, provide for anticipated credit risks, and ensure that regulatory guidelines and industry standards are met. Pacific Crest and the Bank are subject to certain minimum capital adequacy and minimum well capitalized category guidelines adopted by the Federal Reserve and the FDIC. These guidelines relate primarily to the leverage ratio, the Tier 1 risk-based capital ratio, and the total risk-based capital ratio. The minimum well capitalized required ratios are 5.00% leverage, 6.00% Tier 1 risk-based capital, and 10.00% total risk-based capital. The minimum capital adequacy required ratios are 4.00% leverage, 4.00% Tier 1 risk-based capital, and 8.00% total risk-based capital. At September 30, 2002, Pacific Crest and the Bank were in compliance with all such capital requirements.

The following table presents the regulatory ratios of Pacific Crest and the Bank as of the dates indicated:

Actual			Leverage Ratio		Tier 1 Risk-Based Capital Ratio		Total Risk-Based Capital Ratio
	September 30, 2002
		Pacific Crest Capital, Inc.	10.01	%	12.59	%	14.57	%
		Pacific Crest Bank	9.86	%	12.37	%	13.63	%
	December 31, 2001
		Pacific Crest Capital, Inc.	9.49	%	11.11	%	13.36	%
		Pacific Crest Bank	9.61	%	11.22	%	12.47	%
Requirements
	Minimum Well Capitalized		5.00	%	6.00	%	10.00	%
	Minimum Capital Adequacy		4.00	%	4.00	%	8.00	%

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-sensitive assets and interest-sensitive liabilities anticipated to mature or reprice during future periods, based on certain assumptions. In general, the GAP report presents the carrying amounts of these assets and liabilities in a particular period based on either the date that they first reprice, for variable rate products, or the maturity date, for fixed rate products. 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.

The following table is a summary of the Company's one-year GAP as of the dates indicated (in thousands):

	September 30, 2002		December 31, 2001			Increase (Decrease)
Total interest-sensitive assets maturing or repricing within one year ("one-year assets")	$	341,252	$	329,491		$	11,761
Total interest-sensitive liabilities maturing or repricing within one year ("one-year liabilities")		318,564		408,971			(90,407	)

One-year GAP	$	22,688	$	(79,480	)	$	102,168

The one-year GAP increased by $102.2 million during the first nine months of 2002, principally due to an increase in one-year assets of $11.8 million and a decrease in one-year liabilities of $90.4 million.

The growth in one-year assets was primarily due to a $25.1 million increase in the one-year loan category, partially offset by a $13.0 million decline in securities purchased under resale agreements. The increase in one-year loans was principally due to loans that moved into the one-year category from longer term categories because they were initially fixed rate for a period of one to five years and have now converted to the adjustable rate period of their terms. Additionally, the Company's loan originations during the nine months ended September 30, 2002 primarily consisted of adjustable rate loans.

The $13.0 million decrease in short-term securities purchased under resale agreements was principally attributable to the redemption of such securities to purchase long-term, fixed rate mortgage-backed securities. This factor was partially offset by the investment into these short-term securities of cash proceeds received from principal payments on loans and mortgage-backed securities.

The decline in one-year liabilities was primarily due to decreases of $79.0 million and $30.0 million in one-year certificates of deposit and term borrowings, respectively, partially offset by an increase of $21.0 million in short-term, adjustable rate FHLB advances.

The Company has assumed, for purposes of the GAP table below, that its checking and savings accounts reprice immediately.

In October of 2002, the Company obtained a $30.0 million fixed rate FHLB advance with an interest rate of 3.06% and a maturity of 3.0 years. This advance replaced the following items which were included in the "Within 6 months" category on the GAP table at September 30, 2002: (i) $21.0 million of short-term, variable rate FHLB advances, and (ii) $10.0 million of term borrowings that matured in October of 2002.

While the Company's one-year GAP at September 30, 2002 indicates that interest-sensitive assets exceed interest-sensitive liabilities, GAP analysis is an imprecise measure of the impact of rising or falling interest rates because variable rate assets and liabilities are tied to different interest rate indices and/or are affected by different market forces. Additionally, the Company has certain variable rate loans included in the under one-year asset categories which are at their contractual interest rate floors, and therefore will not immediately adjust after an interest rate increase. The Company is attempting to mitigate the effect on net interest income of this loan floor issue by extending the maturities of its interest-sensitive liabilities beyond one year wherever practical. Such efforts primarily involve the replacement of maturing certificates of deposit and term borrowings with fixed rate FHLB advances and certificates of deposit, which generally have terms of 12 to 36 months.

The following table presents the Company's GAP information as of the date indicated (dollars in thousands):

			Maturity or Repricing Date
September 30, 2002			Within 6 Months			Over 6 to 12 Months			Over 12 to 18 Months			Over 18 to 24 Months			Over 24 Months			Total
Interest-Sensitive Assets:
	Securities purchased under resale agreements		$	3,220		$	—		$	—		$	—		$	—		$	3,220
		average yield (variable rate)		1.80	%		—			—			—			—			1.80	%
	U.S. government sponsored agency mortgage-backed securities			—			—			—			—			82,217			82,217
		average yield (fixed rate)		—			—			—			—			5.29	%		5.29	%
	Corporate debt securities			3,008			—			—			—			—			3,008
		average yield (variable rate)		3.63	%		—			—			—			—			3.63	%
	Loans, gross			296,722			38,302			23,575			29,780			73,588			461,967
		average yield		7.59	%		8.35	%		8.36	%		8.26	%		8.36	%		7.86	%

	Total interest-sensitive assets		$	302,950		$	38,302		$	23,575		$	29,780		$	155,805		$	550,412

Interest-Sensitive Liabilities:
	Checking accounts		$	16,063		$	—		$	—		$	—		$	—		$	16,063
		average rate (variable rate)		1.33	%		—			—			—			—			1.33	%
	Savings accounts			132,589			—			—			—			—			132,589
		average rate (variable rate)		2.21	%		—			—			—			—			2.21	%
	Certificates of deposit			94,248			44,664			36,235			36,258			9,757			221,162
		average rate (fixed rate)		3.08	%		2.82	%		3.38	%		4.70	%		5.01	%		3.43	%
	FHLB advances			21,000			—			40,000			30,000			20,000			111,000
		average rate (fixed rate)		2.01	%		—			2.65	%		3.09	%		3.03	%		2.72	%
	Term borrowings			10,000			—			—			—			—			10,000
		average rate (fixed rate)		6.61	%		—			—			—			—			6.61	%
	Trust preferred securities			—			—			—			—			17,250			17,250
		average rate (fixed rate)		—			—			—			—			9.38	%		9.38	%

	Total interest-sensitive liabilities		$	273,900		$	44,664		$	76,235		$	66,258		$	47,007		$	508,064

GAP			$	29,050		$	(6,362	)	$	(52,660	)	$	(36,478	)	$	108,798		$	42,348

Cumulative GAP				29,050			22,688			(29,972	)		(66,450	)		42,348

ITEM 4. Controls and Procedures

(a): Based on their evaluation of the Company's disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended) are effective.

(b): There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings—

None.

ITEM 2. Changes in Securities and Use of Proceeds

On October 17, 2002, the Company announced that its Board of Directors had approved a 2-for-1 stock split, to be effected in the form of a 100% stock dividend. The additional shares were distributed on November 12, 2002 to shareholders of record at the close of business on October 30, 2002.

ITEM 3. Defaults upon Senior Securities—

None.

ITEM 4. Submission of Matters to a Vote of Security Holders—

None.

ITEM 5. Other Information—

None.

ITEM 6. Exhibits and Reports on Form 8-K

(a): Exhibits

None.

(b): Reports on Form 8-K

The Company filed no reports on Form 8-K during the quarter ended September 30, 2002.

On October 25, 2002, the Company filed a Form 8-K with the Securities and Exchange Commission dated October 17, 2002, announcing that the Company's Board of Directors had approved a 2-for-1 stock split, to be effected in the form of a 100% stock dividend. The additional shares would be distributed on November 12, 2002 to shareholders of record at the close of business on October 30, 2002.

SIGNATURES

Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PACIFIC CREST CAPITAL, INC.

Date: November 12, 2002	/s/ GARY WEHRLE Gary Wehrle President and Chief Executive Officer
Date: November 12, 2002	/s/ ROBERT J. DENNEN Robert J. Dennen Senior Vice President, Chief Financial Officer, and Corporate Secretary

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Gary Wehrle, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Pacific Crest Capital, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ GARY WEHRLE

Gary Wehrle
Chief Executive Officer

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Robert J. Dennen, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Pacific Crest Capital, Inc.;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ ROBERT J. DENNEN

Robert J. Dennen
Chief Financial Officer

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Pacific Crest Capital, Inc. (the "Company") for the period ended September 30, 2002, as filed with the Securities and Exchange Commission (the "Report"), we, Gary Wehrle, Chief Executive Officer, and Robert J. Dennen, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 12, 2002	/s/ GARY WEHRLE Gary Wehrle Chief Executive Officer
Date: November 12, 2002	/s/ ROBERT J. DENNEN Robert J. Dennen Chief Financial Officer

QuickLinks

PACIFIC CREST CAPITAL, INC. SEPTEMBER 30, 2002 FORM 10-Q TABLE OF CONTENTS
PACIFIC CREST CAPITAL, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (dollars in thousands, except per share data)
PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (dollars and shares in thousands)
PACIFIC CREST CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
PACIFIC CREST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited)

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
QUARTERLY FINANCIAL DATA (dollars and shares in thousands, except per share data)
QUARTERLY FINANCIAL DATA (dollars in thousands)
QUARTERLY INCOME STATEMENTS (in thousands)
QUARTERLY BALANCE SHEETS (in thousands)
QUARTERLY AVERAGE BALANCE SHEETS AND SPREAD DATA (dollars in thousands)
RESULTS OF OPERATIONS
FINANCIAL CONDITION
NON-PERFORMING ASSETS
LIQUIDITY
DIVIDENDS
CAPITAL RESOURCES

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

ITEM 4. Controls and Procedures

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings—

ITEM 2. Changes in Securities and Use of Proceeds

ITEM 3. Defaults upon Senior Securities—

ITEM 4. Submission of Matters to a Vote of Security Holders—

ITEM 5. Other Information—

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002