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, 2003

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		95-4437818
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30343 Canwood Street Agoura Hills, California		91301
(Address of principal executive offices)		(Zip Code)

(818) 865-3300
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ý No o

As of October 31, 2003, the number of shares outstanding of the registrant’s $.01 par value Common Stock was 4,552,085.

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, 2003 FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements

	Consolidated Balance Sheets September 30, 2003 and December 31, 2002

	Consolidated Statements of Income Three and Nine Months Ended September 30, 2003 and 2002

	Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2003 and 2002

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and 2002

	Notes to Consolidated Financial Statements

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

PACIFIC CREST CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

	September 30, 2003			December 31, 2002
	(Unaudited)
Assets
Cash	$	4,096		$	3,199
Securities purchased under resale agreements	95			7,802
Cash and cash equivalents	4,191			11,001
Investment securities available for sale, at market	141,749			73,418
Unsettled mortgage-backed securities trades	—			56,672
Loans:
Loans held for investment	422,566			432,196
Loans held for sale	15,386			23,734
Gross loans	437,952			455,930
Deferred loan (fees) costs	(190		)	197
Allowance for loan losses	(8,735		)	(8,585		)
Net loans	429,027			447,542
Other assets:
Investment in FHLB stock	9,401			6,306
Deferred income taxes, net	3,236			3,596
Accrued interest receivable	2,387			2,353
Prepaid expenses and other assets	1,367			1,749
Premises and equipment	920			1,107
Total other assets	17,311			15,111
Total assets	$	592,278		$	603,744

Liabilities
Deposits:
Non-interest-bearing checking	$	4,424		$	2,800
Interest-bearing checking	14,454			13,214
Total checking accounts	18,878			16,014
Savings accounts	131,926			128,420
Certificates of deposit	185,230			215,062
Total deposits	336,034			359,496
Borrowings:
FHLB advances	174,700			120,000
Trust preferred securities	29,330			17,250
Total borrowings	204,030			137,250
Accrued interest payable and other liabilities	8,994			5,807
Accounts payable for unsettled securities trades	—			56,012
Total liabilities	549,058			558,565

Shareholders’ Equity
Common stock, $.01 par value (10,000,000 shares authorized, 5,973,060 shares issued at September 30, 2003 and December 31, 2002)	60			60
Additional paid-in capital	27,309			27,471
Retained earnings	30,258			25,628
Accumulated other comprehensive income	1,303			1,296
Common stock in treasury, at cost (1,420,975 shares at September 30, 2003 and 1,119,418 shares at December 31, 2002)	(15,710		)	(9,276		)
Total shareholders’ equity	43,220			45,179
Total liabilities and shareholders’ equity	$	592,278		$	603,744

Book value per common share	$	9.49		$	9.31

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,
	2003		2002			2003		2002
Interest income:
Loans	$	8,047	$	9,438		$	24,881	$	28,321
Securities purchased under resale agreements	14		30			28		151
Investment securities available for sale	1,332		1,016			4,295		2,806
Total interest income	9,393		10,484			29,204		31,278

Interest expense:
Deposits:
Checking accounts	33		58			124		182
Savings accounts	481		644			1,450		2,014
Certificates of deposit	1,458		2,085			4,653		7,756
Total interest on deposits	1,972		2,787			6,227		9,952
Borrowings:
FHLB advances	1,116		611			3,306		1,323
Term borrowings	—		478			—		1,662
Trust preferred securities	606		404			1,729		1,213
Total interest on borrowings	1,722		1,493			5,035		4,198
Total interest expense	3,694		4,280			11,262		14,150
Net interest income	5,699		6,204			17,942		17,128
Provision for loan losses	50		175			150		425
Net interest income after provision for loan losses	5,649		6,029			17,792		16,703

Non-interest income:
Loan prepayment and late fee income	243		227			581		584
Gain on sale of SBA 7(a) loans	424		25			1,281		221
Gain on sale of SBA 504 loans and broker fee income	70		704			302		1,136
Gain (loss) on sale of investment securities	—		(682		)	516		(682		)
Other income	364		270			912		776
Total non-interest income	1,101		544			3,592		2,035

Non-interest expense:
Salaries and employee benefits	2,174		2,452			6,539		6,722
Net occupancy expenses	425		466			1,313		1,387
Communication and data processing	239		261			748		775
Legal, audit, and other professional fees	219		158			665		337
Travel and entertainment	125		116			351		358
Write-off of deferred issuance costs on trust preferred securities	493		—			852		—
Merger related costs	415		—			415		—
Credit and collection expenses	4		4			4		26
Other expenses	153		165			506		440
Total non-interest expense	4,247		3,622			11,393		10,045
Income before income taxes	2,503		2,951			9,991		8,693
Income tax provision	1,224		1,000			4,385		3,476
Net income	$	1,279	$	1,951		$	5,606	$	5,217

Earnings per common share:
Basic	$	0.28	$	0.40		$	1.19	$	1.07
Diluted	$	0.25	$	0.36		$	1.06	$	0.97

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			Common Stock in Treasury					Additional Paid-in Capital			Retained Earnings				Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount		Shares		Amount			Additional Paid-in Capital			Retained Earnings				Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
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

Balance at December 31, 2002	5,973	$	60	(1,119	)	$	(9,276	)	$	27,471		$	25,628			$	1,296		$	45,179
Comprehensive income:
Net income	—	—		—		—			—			5,606				—			5,606
Unrealized gain on investment securities available for sale, net of income taxes	—	—		—		—			—			—				7			7
Total comprehensive income																			5,613
Issuances of common stock in treasury:
Employee stock purchase plan	—	—		6		47			13			—				—			60
Non-employee directors’ stock purchase plan	—	—		2		19			20			—				—			39
Employee stock option plan	—	—		54		508			(195		)	—				—			313
Purchase of common stock in treasury	—	—		(364	)	(7,008		)	—			—				—			(7,008		)
Cash dividends paid ($0.21 per share)	—	—		—		—			—			(976			)	—			(976		)
Balance at September 30, 2003	5,973	$	60	(1,421	)	$	(15,710	)	$	27,309		$	30,258			$	1,303		$	43,220

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2003			2002
Operating activities:
Net income	$	5,606		$	5,217
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	150			425
Gain on sale of SBA 7(a) loans held for sale	(1,281		)	(221		)
Gain on sale of SBA 504 loans held for sale	(83		)	(203		)
(Gain) loss on sale of investment securities	(516		)	682
Depreciation and amortization of premises and equipment	290			304
Amortization (accretion) of deferred loan costs (fees)	18			(59		)
Amortization of premium on investment securities	1,224			675
Dividends on FHLB stock	(285		)	(92		)
Deferred income tax expense (benefit)	354			(250		)
Proceeds from sales of SBA 7(a) loans held for sale	17,125			3,213
Proceeds from sales of SBA 504 loans held for sale	1,454			3,608
Originations of SBA 7(a) loans held for sale	(11,812		)	(12,565		)
Originations of SBA 504 loans held for sale	(205		)	(2,544		)
Federal income tax refund	—			804
(Increase) decrease in accrued interest receivable	(34		)	111
Decrease in prepaid expenses and other assets	870			293
Increase in accrued interest payable and other liabilities	3,187			1,635
Net cash provided by operating activities	16,062			1,033

Investing activities:
Purchases of mortgage-backed securities	(136,667		)	(47,694		)
Principal payments on mortgage-backed securities	46,521			21,869
Proceeds from sales of investment securities	21,780			—
Originations of loans held for investment	(57,423		)	(63,225		)
Purchases of loans held for investment	—			(4,915		)
Principal payments on loans	70,084			76,836
Purchases of FHLB stock	(2,810		)	(3,933		)
Purchases of premises and equipment, net	(103		)	(208		)
Net cash used in investing activities	(58,618		)	(21,270		)

Financing activities:
Net increase in checking accounts	2,864			1,151
Net increase (decrease) in savings accounts	3,506			(3,556		)
Net decrease in certificates of deposit	(29,832		)	(29,304		)
Net increase in FHLB advances	54,700			71,000
Net decrease in term borrowings	—			(30,000		)
Net increase in trust preferred securities	12,080			—
Proceeds from issuances of common stock in treasury	412			508
Purchase of common stock in treasury, at cost	(7,008		)	(1,222		)
Cash dividends paid	(976		)	(632		)
Net cash provided by financing activities	35,746			7,945

Net decrease in cash and cash equivalents	(6,810		)	(12,292		)
Cash and cash equivalents at beginning of year	11,001			18,682
Cash and cash equivalents at end of period	$	4,191		$	6,390

See accompanying Notes to Consolidated Financial Statements.

PACIFIC CREST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(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, 2002.

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”), PCC Capital I (“PCC Capital”), Pacific Crest Capital Trust I (“PCC Trust I”), Pacific Crest Capital Trust II (“PCC Trust II”), and Pacific Crest Capital Trust III (“PCC Trust III”), 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. Merger with Pacific Capital Bancorp

On October 16, 2003, the Company announced that it had signed a definitive merger agreement under which the Company will be acquired by Pacific Capital Bancorp in an all cash transaction valued at $135.8 million, or $26.00 for each diluted share of the Company’s common stock. The transaction, which is subject to regulatory and Company shareholder approval, is expected to close in the first quarter of 2004. In connection with the merger, the Company incurred pre-tax costs of $415,000 for the three and nine months ended September 30, 2003, which are reflected on the Company’s Consolidated Statements of Income as “Merger related costs”.

Note 3. Book Value Per Common Share

The tables below present the computation of book value per common share as of the dates indicated (in thousands, except share data):

	September 30, 2003			December 31, 2002
Total shareholders’ equity	$	43,220		$	45,179

Common shares issued	5,973,060			5,973,060
Less: common shares held in treasury	(1,420,975		)	(1,119,418		)
Common shares outstanding	4,552,085			4,853,642
Book value per common share	$	9.49		$	9.31

Note 4. 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,
	2003		2002
Cash paid during the period for:
Interest	$	11,260	$	14,566
Income taxes	3,960		4,025

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,
	2003		2002		2003		2002

Net income	$	1,279	$	1,951	$	5,606	$	5,217

Basic weighted average common shares outstanding	4,578		4,863		4,709		4,860
Dilutive effect of potential common share issuances from stock options	573		520		556		492
Diluted weighted average common shares outstanding	5,151		5,383		5,265		5,352

Earnings per common share :
Basic	$	0.28	$	0.40	$	1.19	$	1.07
Diluted	$	0.25	$	0.36	$	1.06	$	0.97

Note 6. Stock Options

The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), in accounting for its stock options, whereby compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value at the grant date, and accordingly, under APB 25, no compensation cost is recognized for them. Had compensation cost been determined based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, Accounting for Stock-based Compensation, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table for the periods presented (dollars and shares in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
*Net income:*
As reported	$	1,279		$	1,951		$	5,606		$	5,217
Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of income taxes	(53		)	(43		)	(158		)	(128		)
Pro forma	$	1,226		$	1,908		$	5,448		$	5,089

*Basic earnings per common share:*
As reported	$	0.28		$	0.40		$	1.19		$	1.07
Pro forma	0.27			0.39			1.16			1.05

*Diluted earnings per common share*:
As reported	$	0.25		$	0.36		$	1.06		$	0.97
Pro forma	0.24			0.35			1.03			0.95

*Weighted average common shares outstanding*:
Basic	4,578			4,863			4,709			4,860
Diluted	5,151			5,383			5,265			5,352

*Assumptions:*
Dividend yield	1.45		%	1.30		%	1.45		%	1.30		%
Expected volatility	25		%	25		%	25		%	25		%
Risk free interest rate	3.5		%	3.5		%	3.5		%	3.5		%
Expected life	7.4 years			7.1 years			7.4 years			7.1 years

Note 7. 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):

										Weighted Average Yield
	Amortized Cost		Gross Unrealized					Estimated Fair Value
	Amortized Cost		Gains		Losses			Estimated Fair Value
September 30, 2003
Investment securities available for sale:
Mortgage-backed securities	$	137,217	$	2,567	$	—		$	139,784	4.23	%
Corporate debt securities	2,284		—		(319		)	1,965		2.36	%
Total investment securities	$	139,501	$	2,567	$	(319	)	$	141,749	4.20	%

December 31, 2002
Investment securities available for sale:
Mortgage-backed securities	$	68,466	$	2,050	$	—		$	70,516	4.34	%
Corporate debt securities	3,377		—		(475		)	2,902		4.07	%
Total investment securities	$	71,843	$	2,050	$	(475	)	$	73,418	4.33	%

Unsettled mortgage-backed securities trades	$	56,012	660		$	—		$	56,672	N/A

In December of 2002, the Company executed trades to purchase $56 million of fixed rate, GNMA mortgage-backed securities with an estimated interest rate yield of 5%. The $56 million in GNMA securities trades did not fund until late January of 2003, and are reflected on the Consolidated Balance Sheets as “Unsettled mortgage-backed securities trades,” with the related liability reported as “Accounts payable for unsettled securities trades.” The securities did not earn interest for the Company until the trades were funded in late January of 2003.

The Company’s investment securities portfolio at September 30, 2003 consisted of fixed rate investments in mortgage-backed securities issued by Ginnie Mae (“GNMA”) and Fannie Mae (“FNMA”) (together the “mortgage-backed securities”), as well as adjustable rate investments in corporate debt securities. As of September 30, 2003, the Company’s entire investment securities portfolio was scheduled to mature after ten years. However, the average life of the Company’s mortgage-backed securities portfolio may be shorter due to principal prepayments.

At September 30, 2003, the Company had utilized $25.1 million of its mortgage-backed securities to secure outstanding FHLB advances. No mortgage-backed securities were pledged to secure borrowings at December 31, 2002.

Note 8. Loans

The following table presents the composition of the Company’s gross loan portfolio as of the dates indicated (in thousands):

	September 30, 2003		December 31, 2002
*Income property loans:*
Non-residential real estate loans	$	377,516	$	386,691
Multi-family residential loans	21,388		24,535
Total income property loans	398,904		411,226

*SBA business loans:*
7(a) loans - guaranteed portion	14,159		21,314
7(a) loans - unguaranteed portion	12,957		10,969
Total 7(a) loans	27,116		32,283
504 first lien loans	1,899		3,113
504 second lien loans	2,458		1,886
Total 504 loans	4,357		4,999
Total SBA business loans	31,473		37,282

*Other loans:*
Commercial business/other loans	7,575		7,127
Single-family residential loans	—		295
Total other loans	7,575		7,422

Total gross loans	$	437,952	$	455,930

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, 2003		December 31, 2002
*SBA loans held for sale:*
SBA 7(a) loans - guaranteed portion	$	13,487	$	20,621
SBA 504 first lien loans	1,899		3,113
Total SBA loans held for sale	$	15,386	$	23,734

Note 9. FHLB Advances

The tables below describe the terms of the Company’s Federal Home Loan Bank (“FHLB”) advances as of the dates indicated (dollars in thousands):

	September 30, 2003
Borrowing Date	Amount			Rate		Original Term	Maturity Date
*Short-term, variable rate advances:*
September 2003	$	14,700		1.13	%	Overnight	October 2003

*Long-term, fixed rate advances:*
November 2001	20,000		(1)	3.01	%	24 months	November 2003
July 2002	20,000		(1)	2.29	%	18 months	January 2004
November 2001	20,000		(1)	3.30	%	30 months	May 2004
July 2002	10,000		(1)	2.68	%	24 months	July 2004
January 2003	30,000			2.28	%	30 months	July 2005
August 2002	20,000			3.03	%	36 months	August 2005
October 2002	30,000			3.06	%	36 months	October 2005
March 2003	10,000			2.16	%	36 months	March 2006
Total long-term advances	160,000			2.76	%

Total FHLB advances	$	174,700		2.62	%

	December 31, 2002
Borrowing Date	Amount		Rate		Original Term	Maturity Date
*Long-term, fixed rate advances:*
November 2001	$	20,000	3.01	%	24 months	November 2003
July 2002	20,000		2.29	%	18 months	January 2004
November 2001	20,000		3.30	%	30 months	May 2004
July 2002	10,000		2.68	%	24 months	July 2004
August 2002	20,000		3.03	%	36 months	August 2005
October 2002	30,000		3.06	%	36 months	October 2005
Total FHLB advances	$	120,000	2.93	%

(1) These borrowings, which total $70.0 million, will be replaced at maturity by long-term, fixed rate FHLB advances whose interest rates have been pre-determined. See Note 10: “Future Borrowing Contracts with FHLB.”

As of September 30, 2003, the Company’s FHLB advances were secured by income property loans and mortgage-backed securities. As of December 31, 2002, the Company’s FHLB advances were secured only by income property loans. As of September 30, 2003 and December 31, 2002, the Company’s required investment in FHLB stock was $9.4 million and $6.3 million, respectively.

Note 10. Future Borrowing Contracts with FHLB

During June and July of 2003, the Company entered into future fixed rate, long-term borrowing contracts totaling $70.0 million with the Federal Home Loan Bank of San Francisco (“FHLB”). The Company matched the funding dates of these future borrowings with the maturity dates of $70.0 million in existing fixed rate FHLB borrowings scheduled to mature through July of 2004. The future $70.0 million in fixed rate FHLB borrowings will mature at various times in 2006 and 2007 and have a weighted average fixed interest rate of 2.51%, 33 basis points lower than the weighted average fixed interest rate of 2.84% on the existing borrowings.

The terms of these future borrowing contracts are as follows (dollars in thousands):

Future Borrowing Date	Amount		Rate		Original Term	Maturity Date
*Long-term, fixed rate advances:*
November 2003	$	10,000	2.00	%	36 months	November 2006
November 2003	10,000		2.39	%	48 months	November 2007
January 2004	20,000		2.41	%	24 months	January 2006
May 2004	20,000		2.86	%	24 months	May 2006
July 2004	10,000		2.68	%	18 months	January 2006
Total future advances	$	70,000	2.51	%

Note 11. Trust Preferred Securities

The tables below describe the terms of the Company’s trust preferred securities as of the dates indicated (dollars in thousands):

	September 30, 2003
Issuer	Amount		Rate		Original Term	Maturity Date
PCC Trust I	$	13,330	6.34	%	30 years	March 2033
PCC Trust II	6,000		6.58	%	30 years	April 2033
PCC Trust III	10,000		6.80	%	30 years	October 2033
Total Trust Preferred Securities	$	29,330	6.55	%

	December 31, 2002
Issuer	Amount		Rate		Original Term	Maturity Date
PCC Capital I	$	17,250	9.38	%	30 years	October 2027

During the first nine months of 2003, Pacific Crest redeemed the entire $17,250,000 of 9.375% Trust Preferred Securities issued by its wholly owned subsidiary, PCC Capital I. Pacific Crest retired $7,250,000 on June 30, 2003 and $10,000,000 on September 15, 2003. The securities were redeemed at par value, plus accrued interest. In connection with these redemptions, the Company recorded an aggregate pre-tax charge of $852,000 during the first nine months of 2003, in order to expense the deferred issuance costs related to these securities. Of this total, $359,000 was taken in the second quarter of 2003, and $493,000 was recorded during the third quarter of 2003. This charge is reflected on the Company’s Consolidated Statements of Income as “Write-off of deferred issuance costs on trust preferred securities.”

On March 20, 2003, the Company announced that a newly established subsidiary of the Parent, Pacific Crest Capital Trust I (“PCC Trust I”), had issued $13,330,000 of trust preferred securities in a private placement offering. There were no commissions or expenses charged by the underwriter on this transaction. The trust preferred securities have a maturity of 30 years, but are callable by the Company in part or in total at par after five years. The trust preferred securities have a fixed interest rate of 6.335% during the first five years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25%. Interest is to be paid quarterly on March 30, June 30, September 30, and December 30.

On April 23, 2003, the Company announced that a second newly established subsidiary of the Parent, Pacific Crest Capital Trust II (“PCC Trust II”), had issued $6,000,000 of trust preferred securities in a private placement offering. There were no commissions or expenses charged by the underwriter on this transaction. The trust preferred securities have a maturity of 30 years, but are callable by the Company in part or in total at par after five years. The trust preferred securities have a fixed interest rate of 6.58% during the first five years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.15%. Interest is to be paid quarterly on January 30, April 30, July 30, and October 30.

On August 12, 2003, the Company announced that a third newly established subsidiary of the Parent, Pacific Crest Capital Trust III (“PCC Trust III”) had issued $10,000,000 of trust preferred securities in a private placement offering. The trust preferred securities have a maturity of 30 years, but are callable by the Company in part or in total at par after five years. The trust preferred securities have a fixed interest rate of 6.80% during the first five years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.10%. Interest is to be paid quarterly.

Concurrent with the issuances of these trust preferred securities, PCC Trust I, PCC Trust II, and PCC Trust III invested the offering proceeds in junior subordinated debentures issued by Pacific Crest, bearing interest at the same terms as the trust preferred securities. Pacific Crest, in turn, lent the money to the Bank, which used the funds to purchase GNMA mortgage-backed securities.

The interest on the junior subordinated debentures paid by Pacific Crest to PCC Trust I, PCC Trust II, and PCC Trust III represents the sole revenue of PCC Trust I, PCC Trust II, and PCC Trust III and the sole source of dividend distributions to the holders of the trust preferred securities . Pacific Crest fully and unconditionally guaranteed all of the obligations of PCC Trust I, PCC Trust II, and PCC Trust III.

The trust preferred securities are presented on the Company’s Consolidated Balance Sheets under the caption “Trust preferred securities.” The dividends distributed on the trust preferred securities are recorded as “Interest expense – trust preferred securities” on the Company’s Consolidated Statements of Income.

Note 12. Recent Accounting Pronouncements

In December of 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation —Transition and Disclosure, an amendment of FASB Statement No. 123 (“SFAS 148”). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002 and did not have a material impact on the Company’s consolidated financial position or results of operations.

In January of 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of certain entities. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which the enterprise holds a variable interest it acquired before February 1, 2003.

The Company is currently evaluating the impact of FIN 46. The impact of FIN 46 on the treatment of the trust preferred securities that the Company has issued is currently being evaluated by the accounting community. Under one potential interpretation of FIN 46, the business trust subsidiaries through which the Company has issued its trust preferred securities would no longer be consolidated. Conversely, SFAS No. 150, discussed below, requires the consolidation of these subsidiaries and the presentation of the related trust preferred securities as liabilities. The accounting community is currently working to resolve this contradictory guidance. The Company’s current presentation is in compliance with the requirements of SFAS No. 150. One potential impact of not consolidating these business trust subsidiaries is that the related trust preferred securities may no longer count towards Tier 1 capital. The Federal Reserve has issued regulations which allow for the inclusion of these instruments in Tier 1 capital regardless of the FIN 46 interpretation, although such a determination could potentially be changed at a later date. The Company does not expect the adoption of FIN 46 to have any additional material impact on the Company’s consolidated financial condition or results of operations.

In April of 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”), which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except under certain circumstances, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 did not have, nor is expected to have, a material impact on the Company’s consolidated financial position or results of operations.

In May of 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 aims to eliminate diversity in practice by requiring that certain types of financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150 are effective for instruments entered into or modified after May 15, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The adoption of SFAS 150 did not have, nor is 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 current period. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 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, 2002.

Merger with Pacific Capital Bancorp

Increase in FHLB Credit Line

In July of 2003, the FHLB increased the Bank’s borrowing limit from 35% to 40% of the Bank’s unconsolidated total assets, which increased the Bank’s credit line from $210 million to $240 million.

Future Borrowing Contracts with FHLB

During June and July of 2003, the Company entered into future fixed rate, long-term borrowing contracts totaling $70.0 million with the Federal Home Loan Bank of San Francisco (“FHLB”). The Company matched the funding dates of these future borrowings with the maturity dates of $70.0 million in existing fixed rate FHLB borrowings scheduled to mature through July of 2004. The Company’s strategy is to, in effect, refinance and extend this existing $70.0 million in FHLB borrowings at current market interest rates, in anticipation of higher market interest rates at later dates when these borrowings mature. The future $70.0 million in fixed rate FHLB borrowings will mature at various times in 2006 and 2007 and have a weighted average fixed interest rate of 2.51%, 33 basis points lower than the weighted average fixed interest rate of 2.84% on the existing borrowings.

Redemption of 9.375% Trust Preferred Securities

Issuances of Trust Preferred Securities

Capital

As of September 30, 2003, Pacific Crest’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 9.47%, 13.13%, and 18.00%, respectively. The Bank’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 10.58%, 14.53%, and 15.79%, 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 16, 2003, the Company announced that the Board of Directors had declared a cash dividend of $0.10 per common share for the fourth quarter of 2003. The dividend will be paid on December 12, 2003, to shareholders of record at the close of business on November 28, 2003.

On July 17, 2003, the Company announced that the Board of Directors had declared a cash dividend of $0.10 per common share for the third quarter of 2003. The dividend was paid on September 12, 2003, to shareholders of record at the close of business on August 29, 2003.

On April 15, 2003, the Company announced that the Board of Directors had declared a cash dividend of $0.06 per common share for the second quarter of 2003. The dividend was paid on June 13, 2003, to shareholders of record at the close of business on May 30, 2003.

On January 23, 2003, the Company announced that the Board of Directors had declared a cash dividend of $0.05 per common share for the first quarter of 2003. The dividend was paid on March 14, 2003 to shareholders of record at the close of business on February 28, 2003.

Stock Repurchase Plan

During the nine months ended September 30, 2003, pursuant to its common stock repurchase program, the Company repurchased 363,908 shares of its common stock at an average cost per share of $19.26. The total amount paid for these shares was approximately $7.0 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 62,351 shares. As of September 30, 2003, the Company had 106,292 shares remaining authorized for repurchase under its common stock repurchase program.

On July 24, 2003 and April 9, 2003, the Company’s Board of Directors approved increases of 100,000 and 300,000 shares, respectively, under the stock repurchase program.

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 was 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, 2003 and 2002, the amount of deferred gain amortization totaled $240,000 and $415,000, respectively, which resulted in a reduction in interest expense on deposits.

Low Interest Rate Environment

During the first nine months of 2003, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) reduced the federal funds target rate by 25 basis points, to 1.00%, on June 25, 2003. During 2002, the Federal Reserve lowered the federal funds target rate by 50 basis points, to 1.25% on November 6, 2002. During 2001, the Federal Reserve reduced the federal funds target rate by 475 basis points to 1.75%. The impact of this cumulative 550 basis point reduction led to a low interest rate environment in 2002 and 2001, which continued into the first nine months of 2003, and resulted in (i) downward repricing of the Company’s adjustable rate loans, and (ii) 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 Company’s loan originations for the periods indicated (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	Amounts				% Change		Amounts				% Change
	2003		2002		% Change		2003		2002		% Change
Income property loans	$	8,938	$	7,744	15.4	%	$	50,571	$	57,250	(11.7	)%
Commercial business loans	—		—		100.0	%	450		—		100.0	%
SBA business loans:
7(a) - guaranteed portion	6,036		8,080		(25.3	)%	11,812		12,565		(6.0	)%
7(a) - unguaranteed portion	1,972		2,642		(25.4	)%	4,136		4,011		3.1	%
Total 7(a) loans	8,008		10,722		(25.3	)%	15,948		16,576		(3.8	)%
504 first lien loans	—		1,642		(100.0	)%	205		2,544		(91.9	)%
504 second lien loans	525		1,275		(58.8	)%	2,266		1,964		15.4	%
Total 504 loans	525		2,917		(82.0	)%	2,471		4,508		(45.2	)%
Total SBA loans	8,533		13,639		(37.4	)%	18,419		21,084		(12.6	)%
Total loan originations	$	17,471	$	21,383	(18.3	)%	$	69,440	$	78,334	(11.4	)%

Loan Sales

The following table presents the Company’s SBA loan sales for the periods indicated (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	Amounts				% Change		Amounts				% Change
	2003		2002		% Change		2003		2002		% Change
SBA 7(a) guaranteed loans	$	5,975	$	320	1767.2	%	$	15,666	$	2,929	434.9	%
SBA 504 first lien loans	—		2,645		(100.0	)%	1,382		3,427		(59.7	)%
Total SBA loan sales	$	5,975	$	2,965	101.5	%	$	17,048	$	6,356	168.2	%

Unsettled Securities Trades

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.

The charters of all of the Company’s Board committees require that (1) each committee consist of no fewer than three members of the Board, and (2) all members must be independent outside directors, as defined by Company’s policy for determining independence and the National Association of Securities Dealers, Inc. listing standards. On April 9, 2003, the non-employee directors of the Board formally reviewed each member of the Board and determined that all of the Board members, except Gary Wehrle, Chairman of the Board, President, and CEO, qualify as independent directors, as required under the various committee charters. Accordingly, Mr. Wehrle, as an employee director, is not a member of any Board committees.

On April 9, 2003, the non-employee directors of the Board, excluding Steve Orlando, Chairman of the Audit Committee, reviewed the qualifications and experience of Mr. Orlando, and determined that he qualifies as a financial expert under the Company’s current Audit Committee guideline requirements and Section 10A of the Securities Exchange Act of 1934, and the regulations promulgated thereunder as amended by the Sarbanes Oxley Act of 2002.

In May of 2003, Institutional Shareholder Services, a leading provider of proxy voting and corporate governance services, gave Pacific Crest Capital, Inc. a 99.8% corporate governance rating.

Non-Operating Items

During the three and nine months ended September 30, 2003, the Company recorded the following items which it considers non-operating:

• The Company incurred pre-tax merger related costs of $415,000, or $415,000 after-tax, during the third quarter of 2003 related to the aforementioned definitive merger agreement with Pacific Capital Bancorp. The pre-tax and after-tax amounts are the same because merger related costs are not tax deductible.

• The Company also incurred pre-tax non-operating expenses of $493,000, or $286,000 after-tax, during the third quarter of 2003 and $852,000, or $494,000 after-tax, during the nine months ended September 30, 2003, related to the early retirement of $17,250,000 in 9.375% Trust Preferred Securities. The Company redeemed $7,250,000 of these securities during the second quarter of 2003 and recorded an after-tax charge of $208,000 in order to expense the pro rata portion of deferred issuance costs. The Company redeemed the remaining $10.0 million of these securities during the third quarter of 2003 and recorded an after-tax charge of $286,000 in order to expense the remaining deferred issuance costs.

Taken together, the two non-operating items reduced net income for the three and nine months ended September 30, 2003 by $701,000, or $0.13 per diluted share, and $909,000, or $0.18 per diluted share, respectively.

RESULTS OF OPERATIONS

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)
	2003			2002			$			%		2003			2002			$			%
Interest income	$	9,393		$	10,484		$	(1,091	)	(10.4	)%	$	29,204		$	31,278		$	(2,074	)	(6.6	)%
Interest expense	3,694			4,280			(586		)	(13.7	)%	11,262			14,150			(2,888		)	(20.4	)%
Net interest income	5,699			6,204			(505		)	(8.1	)%	17,942			17,128			814			4.8	%
Provision for loan losses	50			175			(125		)	(71.4	)%	150			425			(275		)	(64.7	)%
Non-interest income	1,101			544			557			102.4	%	3,592			2,035			1,557			76.5	%
Non-interest expense	4,247			3,622			625			17.3	%	11,393			10,045			1,348			13.4	%
Income before income taxes	2,503			2,951			(448		)	(15.2	)%	9,991			8,693			1,298			14.9	%
Income tax provision	1,224			1,000			224			22.4	%	4,385			3,476			909			26.2	%
Net income	$	1,279		$	1,951		$	(672	)	(34.4	)%	$	5,606		$	5,217		$	389		7.5	%

Diluted earnings per share	$	0.25		$	0.36		$	(0.11	)	(30.6	)%	$	1.06		$	0.97		$	0.09		9.3	%
Cash dividends per share	$	0.10		$	0.05		$	0.05		100.0	%	$	0.21		$	0.13		$	0.08		61.5	%
Return on average equity (1)	12.12		%	18.94		%						17.01		%	17.45		%
Return on average assets	0.87		%	1.39		%						1.24		%	1.26		%
Net interest rate spread	3.76		%	4.20		%						3.94		%	3.92		%
Net interest margin	3.93		%	4.46		%						4.12		%	4.20		%
Operating expense to average assets (2)	2.26		%	2.58		%						2.25		%	2.41		%
Efficiency ratio (3)	49.04		%	48.69		%						48.16		%	50.49		%

(1) Prior period ratios have been restated to conform to the current calculation, which includes average accumulated other comprehensive income (loss) in average shareholders’ equity.

(2) Operating expense is defined as total non-interest expense less write-off of deferred issuance costs on trust preferred securities, merger related costs, credit and collection expenses, and OREO expenses.

(3) 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.

Earnings Performance Summary

Three Months Ended September 30, 2003 and 2002

Net income was $1.3 million (or $0.25 per diluted common share) for the three months ended September 30, 2003, compared to $2.0 million (or $0.36 per diluted common share) for the corresponding period in 2002. Pre-tax income was $2.5 million for the three months ended September 30, 2003 and $3.0 million for the same period in 2002. The following describes the changes in the major components of pre-tax income for the three months ended September 30, 2003 compared to the same period in 2002:

• Net interest income declined by $505,000, to $5.7 million, primarily due to a $1.1 million decrease in interest income, partially offset by a $586,000 drop in interest expense. The decrease in interest income was principally due to lower interest income on loans, which was primarily due to the impact of declining interest rates on the Company’s adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations. This was partially offset by higher interest income on mortgage-backed securities, which was principally due to $136.7 million in fixed rate, GNMA purchases made during the first nine months of 2003.

The drop in interest expense was primarily due to lower interest expense on deposits, which was principally attributable to the Company’s lowering of interest rates on its deposits and related certificates of deposit run-off. The decreases in interest rates on the Company’s deposits resulted from a lower interest rate environment due to the cumulative reduction of 550 basis points, to 1.00%, in the federal funds target rate by the Federal Reserve in 2003, 2002 and 2001. The lower interest expense on deposits was partially offset by higher interest expense on borrowings, primarily due to the growth in FHLB advances and trust preferred securities.

• Provision for loan losses declined by $125,000, to $50,000, 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, 2003, the allowance for loan losses increased by $50,000, to $8.7 million, which reflected the $50,000 provision and no charge-offs or recoveries. During the three months September 30, 2002, the allowance for loan losses increased by $54,000, to $8.6 million, which reflected a $175,000 provision and net charge-offs of $121,000. The allowance for loan losses as a percentage of total loans was 2.00% and 1.86% at September 30, 2003 and 2002, respectively, and 1.88% at December 31, 2002.

• Non-interest income grew by $557,000, to $1.1 million, primarily due to a $682,000 loss on sale of investment securities recorded in the third quarter of 2002 not repeated in the third quarter of 2003. This loss was attributable to the write-down to market value on one of the Company’s corporate debt securities. Contributing to the growth in non-interest income was a $399,000 increase in gain on sale of SBA 7(a) loans, which was due to the sale of $6.0 million in the guaranteed portion of SBA 7(a) loans during the third quarter of 2003, whereas $320,000 of such loans were sold in the third quarter of 2002. Partially offsetting these factors was a $634,000 decline in gain on sale of SBA 504 loans and broker fee income.

• Non-interest expense grew by $625,000, to $4.2 million, primarily due to increases of $493,000 and $415,000 in write-off of deferred issuance costs on trust preferred securities and merger related costs, respectively, partially offset by a $278,000 decline in salaries and employee benefits. The $493,000 write-off of deferred issuance costs on trust preferred securities was incurred in connection with the $10.0 million redemption of the Company’s 9.375% Trust Preferred Securities on September 15, 2003. The $415,000 in merger related costs relate to the aforementioned definitive merger agreement with Pacific Capital Bancorp, which was announced on October 16, 2003. The $278,000 reduction in salaries and employee benefits was primarily due to decreases in (i) senior management bonuses, and (ii) marketing bonuses, attributable to the current year reduction in loan originations and brokered SBA 504 loans.

Earnings Performance Summary

Nine Months Ended September 30, 2003 and 2002

Net income was $5.6 million (or $1.06 per diluted common share) for the nine months ended September 30, 2003, compared to $5.2 million (or $0.97 per diluted common share) for the corresponding period in 2002. Pre-tax income was $10.0 million for the nine months ended September 30, 2003 and $8.7 million for the same period in 2002. The following describes the changes in the major components of pre-tax income for the nine months ended September 30, 2003 compared to the same period in 2002:

• Net interest income grew by $814,000, to $17.9 million, primarily due to a $2.9 million decline in interest expense, partially offset by a $2.1 million drop in interest income. The reasons for the decreases in interest expense and interest income were previously discussed under “Earnings Performance Summary - Three Months Ended September 30, 2003 and 2002.”

• Provision for loan losses decreased by $275,000, to $150,000, 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, 2003, the allowance for loan losses increased by $150,000, to $8.7 million, which reflected the $150,000 provision and no charge-offs or recoveries. During the nine months ended September 30, 2002, the allowance for loan losses increased by $637,000, to $8.6 million, which reflected a $425,000 provision and net recoveries of $212,000.

• Non-interest income grew by $1.6 million, to $3.6 million, primarily due to increases of $1.2 million and $1.1 million in gain on sale of investment securities and gain on sale of SBA 7(a) loans, respectively, partially offset by a reduction of $834,000 in gain on sale of SBA 504 loans and broker fee income. The $1.2 million increase in gain on sale of investment securities was due to (i) a $496,000 gain on sale in June of 2003 of $20.2 million in GNMA mortgage-backed securities, (ii) a $20,000 gain on sale in January of 2003 of one of the Company’s corporate debt securities, and (iii) a $682,000 write-down to market value on the above corporate debt security, recorded in the third quarter of 2002, but not repeated in 2003. The growth in gain on sale of SBA 7(a) loans was due to the sale of $15.7 million in the guaranteed portion of SBA 7(a) loans during the first nine months of 2003, whereas $2.9 million of SBA 7(a) loans were sold during the same period in 2002.

• Non-interest expense grew by $1.3 million, to $11.4 million, primarily due to increases of $852,000, $415,000, and $328,000 in write-off of deferred issuance costs on trust preferred securities, merger related costs, and legal, audit, and other professional fees, respectively, partially offset by a $183,000 reduction in salaries and employee benefits. The $852,000 write-off of deferred issuance costs on trust preferred securities was incurred in connection with the $17,250,000 redemption of the Company’s 9.375% Trust Preferred Securities during the second and third quarters of 2003. The $415,000 in merger related costs relate to the aforementioned definitive merger agreement with Pacific Capital Bancorp, which was announced on October 16, 2003. The growth in legal, audit, and other professional fees was primarily due to the $175,000 reversal in the first quarter of 2002 of expenses related to obtaining a favorable ruling on an Internal Revenue Service (“IRS”) income tax refund claim and settling a legal claim brought against the Bank. Contributing to the increase in this category were consulting fees paid related to the Company’s asset/liability management, as well as legal fees incurred in connection with the review of the Company’s corporate financing transactions. The $328,000 reduction in salaries and employee benefits was primarily due to decreases in (i) senior management bonuses, and (ii) marketing bonuses, attributable to the current year reduction in loan originations and brokered SBA 504 loans.

Average Balances, Interest Income and Expense, Yields and Rates

Three Months Ended September 30, 2003 and 2002

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,
	2003							2002
	Average Balance			Interest Income/ Expense		Average Yield/ Rate		Average Balance			Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets:
Loans (1)	$	443,389		$	8,047	7.20	%	$	466,822		$	9,438	8.02	%
Securities purchased under resale agreements	5,243			14		1.06	%	7,324			30		1.63	%
Investment securities available for sale (2):
Mortgage-backed securities	124,562			1,317		4.23	%	73,450			977		5.32	%
Corporate debt securities	2,283			15		2.63	%	4,127			39		3.78	%
Total investment securities	126,845			1,332		4.20	%	77,577			1,016		5.24	%
Total interest-earning assets	575,477			9,393		6.48	%	551,723			10,484		7.54	%
Investment in FHLB stock	9,438							4,624
Unrealized gain on investment securities	1,391							627
Non-interest-earning assets	12,577							12,054
Allowance for loan losses	(8,733		)					(8,621		)
Total assets	$	590,150						$	560,407

Interest-Bearing Liabilities:
Checking accounts	$	17,546		33		0.75	%	$	15,874		58		1.45	%
Savings accounts	133,980			481		1.42	%	131,514			644		1.94	%
Certificates of deposit	192,389			1,458		3.01	%	228,005			2,085		3.63	%
Total deposits	343,915			1,972		2.27	%	375,393			2,787		2.95	%
Short-term FHLB advances	1,478			4		1.07	%	12,617			60		1.89	%
Long-term FHLB advances	160,000			1,112		2.76	%	75,218			551		2.91	%
Total FHLB advances	161,478			1,116		2.74	%	87,835			611		2.76	%
Term borrowings	—			—		—		28,261			478		6.62	%
Trust preferred securities	33,026			606		7.26	%	17,250			404		9.37	%
Total borrowings	194,504			1,722		3.51	%	133,346			1,493		4.43	%
Total interest-bearing liabilities	538,419			3,694		2.72	%	508,739			4,280		3.34	%
Non-interest-bearing liabilities	9,535							10,089
Shareholders’ equity	42,196							41,579
Total liabilities and shareholders’ equity	$	590,150						$	560,407

Excess of interest-earning assets over interest-bearing liabilities	$	37,058						$	42,984
Net interest income				$	5,699						$	6,204
Net interest rate spread (3)						3.76	%						4.20	%
Net interest margin (4)						3.93	%						4.46	%

(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, 2003 and 2002

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,
	2003						2002						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	$	443,389	77.1	%	7.20	%	$	466,822	84.6	%	8.02	%	$	(23,433	)	(7.5	)%	(0.82	)%
Securities purchased under resale agreements	5,243		0.9	%	1.06	%	7,324		1.3	%	1.63	%	(2,081		)	(0.4	)%	(0.57	)%

Investment securities available for sale:
Mortgage-backed securities	124,562		21.6	%	4.23	%	73,450		13.3	%	5.32	%	51,112			8.3	%	(1.09	)%
Corporate debt securities	2,283		0.4	%	2.63	%	4,127		0.8	%	3.78	%	(1,844		)	(0.4	)%	(1.15	)%
Total investment securities	126,845		22.0	%	4.20	%	77,577		14.1	%	5.24	%	49,268			7.9	%	(1.04	)%
Total interest-earning assets	$	575,477	100.0	%	6.48	%	$	551,723	100.0	%	7.54	%	$	23,754				(1.06	)%

Interest-Bearing Liabilities:
Checking accounts	$	17,546	3.3	%	0.75	%	$	15,874	3.1	%	1.45	%	$	1,672		0.2	%	(0.70	)%
Savings accounts	133,980		24.9	%	1.42	%	131,514		25.9	%	1.94	%	2,466			(1.0	)%	(0.52	)%
Certificates of deposit	192,389		35.7	%	3.01	%	228,005		44.8	%	3.63	%	(35,616		)	(9.1	)%	(0.62	)%
Total deposits	343,915		63.9	%	2.27	%	375,393		73.8	%	2.95	%	(31,478		)	(9.9	)%	(0.68	)%

Short-term FHLB advances	1,478		0.3	%	1.07	%	12,617		2.5	%	1.89	%	(11,139		)	(2.2	)%	(0.82	)%
Long-term FHLB advances	160,000		29.7	%	2.76	%	75,218		14.8	%	2.91	%	84,782			14.9	%	(0.15	)%
Total FHLB advances	161,478		30.0	%	2.74	%	87,835		17.3	%	2.76	%	73,643			12.7	%	(0.02	)%
Term borrowings	—		0.0	%	0.00	%	28,261		5.5	%	6.62	%	(28,261		)	(5.5	)%	(6.62	)%
Trust preferred securities	33,026		6.1	%	7.26	%	17,250		3.4	%	9.37	%	15,776			2.7	%	(2.11	)%
Total borrowings	194,504		36.1	%	3.51	%	133,346		26.2	%	4.43	%	61,158			9.9	%	(0.92	)%
Total interest-bearing liabilities	$	538,419	100.0	%	2.72	%	$	508,739	100.0	%	3.34	%	$	29,680				(0.62	)%

Excess of interest-earning assets over interest-bearing liabilities	$	37,058					$	42,984					$	(5,926	)
Net interest rate spread					3.76	%					4.20	%						(0.44	)%
Net interest margin					3.93	%					4.46	%						(0.53	)%

Volume and Rate Variance Analysis of Net Interest Income

Three Months Ended September 30, 2003 and 2002

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, 2003 vs. 2002
	Increase (Decrease) Due To
	Volume			Rate			Total
Interest Income:
Loans	$	(458	)	$	(933	)	$	(1,391	)
Securities purchased under resale agreements	(7		)	(9		)	(16		)
Investment securities available for sale:
Mortgage-backed securities	574			(234		)	340
Corporate debt securities	(14		)	(10		)	(24		)
Total investment securities	560			(244		)	316
Total interest income	95			(1,186		)	(1,091		)

Interest Expense:
Checking accounts	5			(30		)	(25		)
Savings accounts	12			(175		)	(163		)
Certificates of deposit	(300		)	(327		)	(627		)
Total deposits	(283		)	(532		)	(815		)

FHLB advances	509			(4		)	505
Term borrowings	(478		)	—			(478		)
Trust preferred securities	310			(108		)	202
Total borrowings	341			(112		)	229
Total interest expense	58			(644		)	(586		)

*Net Interest Income*	$	37		$	(542	)	$	(505	)

Net Interest Income – Three Months Analysis

On an overall basis, net interest income declined by $505,000, to $5.7 million, during the three months ended September 30, 2003 compared to the same period in 2002, primarily due to a $1.1 million decrease in interest income, partially offset by a $586,000 drop in interest expense. The decrease in interest income was principally due to lower interest income on loans, which was primarily due to the impact of declining interest rates on the Company’s adjustable rate loans and the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations. This was partially offset by higher interest income on mortgage-backed securities, which was principally due to $136.7 million in fixed rate, GNMA purchases made during the first nine months of 2003.

The impact of the federal funds target rate decreases in 2003, 2002 and 2001 caused downward repricing on the Company’s adjustable rate loans, which are primarily based on LIBOR (“London Interbank Offered Rate”) and the prime rate. The federal funds target rate is the rate at which banks lend to each other in the overnight market. Reductions in the federal funds target rate generally result in reductions of LIBOR as well as the prime rates offered by major banks, including Bank of America. The Company’s LIBOR loans are generally priced at a margin above six-month LIBOR. 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, 2003 and 2002, 86.7% and 85.1% of the Company’s gross loans consisted of adjustable 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.

The net interest rate spread declined by 44 basis points, to 3.76%, during the three months ended September 30, 2003, compared to the same period in 2002. This was primarily due to a decrease of 106 basis points, to 6.48%, in the yield on average total interest-earning assets, partially offset by a decrease of 62 basis points, to 2.72%, in the rate paid on average total interest-bearing liabilities. The decrease in the yield earned on average total interest-earning assets was primarily due to (i) a drop in the yield on loans, which was discussed above, (ii) a decrease in the yield on mortgage-backed securities, which was principally due to $136.7 million of lower rate purchases made in a declining interest rate environment, and (iii) a change in the composition of average total interest-earning assets to lower yield mortgage-backed securities from higher yield loans.

The decrease in the rate paid on average total interest-bearing liabilities was principally attributable to the lowering by the Company of the interest rates on its deposits, as well as (i) maturities in 2002 of higher rate term borrowings, and (ii) a decline in the aggregate rate on the Company’s trust preferred securities due to the issuance in 2003 of $29.3 million of trust preferred securities with a weighted average rate of 6.55%, lower than the rate on the $17,250,000 of 9.375% Trust Preferred Securities, retired during the second and third quarters of 2003. These factors were 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.

Total Interest Income – Three Months Analysis

On an overall basis, total interest income decreased by $1.1 million, to $9.4 million, during the three months ended September 30, 2003 compared to the same period in 2002. This was primarily due to the $1.4 million reduction in interest income on the Company’s loans, principally attributable to (i) downward repricing on the Company’s adjustable rate loans, and (ii) the weighted average interest rate on loan payoffs exceeding the weighted average interest rate on loan originations. Additionally, the balance of the Company’s loans declined due to the combination of loan payoffs and sales exceeding loan originations. The lower interest income on loans was partially offset by the $340,000 growth in interest income on the Company’s mortgage-backed securities, which was primarily due to fixed rate purchases of $136.7 million made during the first nine months of 2003. Such purchases were made at lower interest rates due to the declining interest rate environment. The Company made these purchases in order to help offset the decline in interest income on loans. 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 $1.2 million.

Average total interest-earning assets grew by $23.8 million, to $575.5 million, during the three months ended September 30, 2003 compared to the same period in 2002, and was principally due to an increase of $49.3 million in average investment securities, partially offset by reductions of $23.4 million and $2.1 million in average loans and average securities purchased under resale agreements, respectively. The changes in average investment securities and average loans resulted in a shift in the mix of average total interest-earning assets to lower yield investment securities from higher yield loans. The percentage of average investment securities to average total interest-earning assets increased to 22.0% during the three months ended September 30, 2003 from 14.1% during the same period in 2002.

The increase in average investment securities of $49.3 million, to $126.8 million, was primarily due to the growth in average mortgage-backed securities of $51.1 million, partially offset by a decline in average corporate debt securities of $1.8 million. The growth in average mortgage-backed securities was principally due to fixed rate GNMA purchases of $136.7 million during the first nine months of 2003, partially offset by a sale of $20.2 million in the second quarter of 2003 and principal payments received on these securities The Company made the purchases in order to help offset the decrease in interest income on the Company’s loans. The decline in average corporate debt securities was primarily due to Company write-downs to market value of $682,000 and $81,000 in the third and fourth quarters of 2002, respectively, on one of the Company’s corporate debt securities, as well as the sale of that security during the first quarter of 2003.

The yield earned on average total interest-earning assets decreased by 106 basis points, to 6.48%, during the three months ended September 30, 2003 compared to the same period in 2002, primarily due to the following decreases in yields attributable to the declining interest rate environment during 2003, 2002, and 2001:

• The yield on average loans declined by 82 basis points, to 7.20%, 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 57 basis points, to 1.06%.

• The yield on average fixed rate mortgage-backed securities dropped by 109 basis points, to 4.23%, primarily due to lower yielding purchases of $136.7 million made during the first nine months of 2003, as well as 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 115 basis points, to 2.63%, reflecting the downward repricing of these adjustable rate instruments.

Contributing to 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 lower yield investment securities from higher yield loans.

Total Interest Expense – Three Months Analysis

On an overall basis, total interest expense decreased by $586,000, to $3.7 million, during the three months ended September 30, 2003 compared to the same period in 2002. This was primarily due to the $815,000 reduction in interest expense on deposits, principally attributable to the Company’s lowering of interest rates on its deposits and the related certificates of deposit run-off. This was partially offset by the $229,000 growth in interest expense on borrowings, which was principally due to the growth in FHLB advances and trust preferred securities. These factors were mitigated by the maturities of higher rate term borrowings in 2002. 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 reduced interest expense by $644,000, partially offset by the growth in the balance of these liabilities, which increased interest expense by $58,000.

Average total interest-bearing liabilities grew by $29.7 million, to $538.4 million, during the three months ended September 30, 2003 compared to the same period in 2002, and was primarily due to an increase of $61.2 million in average borrowings, partially offset by a reduction of $31.5 million in average deposits. The changes in average deposits and average borrowings resulted in a change in the composition 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 36.1% during the three months ended September 30, 2003 from 26.2% during the same period in 2002.

The decline in average deposits of $31.5 million, to $343.9 million, during the three months ended September 30, 2003 compared to the same period in 2002, was principally due to a reduction of $35.6 million in average certificates of deposit. This decrease was 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 cumulative 550 basis point reduction, to 1.00%, in the federal funds target rate by the Federal Reserve during 2003, 2002, and 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 44.1% during the three months ended September 30, 2003, from 39.3% during the same period in 2002.

The growth in average borrowings of $61.2 million, to $194.5 million, during the three months ended September 30, 2003 compared to the same period in 2002, was principally due to an increase of $73.6 million in average combined short-term and long-term FHLB advances, as well as an increase of $15.8 million in average trust preferred securities, partially offset by a reduction of $28.3 million in average term borrowings. The increase in average combined short-term and long-term FHLB advances was primarily due to $70.0 million in long-term advances, with a weighted average interest rate of 2.60%, that the Company obtained during the 12-month period from September 30, 2002 to September 30, 2003. The growth in average trust preferred securities was primarily due to the Company’s issuances in March, April, and August of 2003 of $13.3 million, $6.0 million, and $10.0 million in trust preferred securities, respectively, bearing respective interest rates of 6.335%, 6.58%, and 6.80% during the first five years of their 30-year terms. This was partially offset by the retirement of $17,250,000 in 9.375% Trust Preferred Securities in June and September of 2003. The average term borrowings declined due to maturities of $20.0 million and $10.0 million in September and October of 2002. These matured term borrowings had a weighted average interest rate of 6.62%.

The changes in the average balances of the Company’s borrowing facilities resulted in a shift in the composition of average borrowings to lower rate FHLB advances from higher rate non-FHLB borrowings. This reflected the Company’s strategy in using the FHLB’s low cost credit facility primarily for fixed rate advances with 12-36 month terms to insulate the Company from potentially higher interest rates in 2003, 2004, and 2005. The percentage of average FHLB advances to average borrowings rose to 83.0% during the three months ended September 30, 2003, from 65.9% during the same period in 2002.

The rate on average total interest-bearing liabilities decreased by 62 basis points, to 2.72%, during the three months ended September 30, 2003 compared to the same period in 2002, and was principally due to the reduction of 68 basis points, to 2.27%, in the rate on average deposits, as well as the reduction of 92 basis points, to 3.51%, in the rate on average borrowings. Partially offsetting these factors was a change in the composition of average total interest-bearing liabilities to higher rate borrowings, with a weighted average rate of 3.51%, from lower rate deposits, with a weighted average rate of 2.27%.

The 68 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 70 basis points, 52 basis points, and 62 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 92 basis point decrease in the rate on average borrowings was primarily due to (i) the reduction of 662 basis points in the rate on average term borrowings, which matured during 2002, (ii) the reduction of 211 basis points, to 7.26%, in the rate on average trust preferred securities, due to the issuances in March, April, and August of 2003 of $13.3 million, $6.0 million, and $10.0 million in trust preferred securities, respectively, bearing respective interest rates of 6.335%, 6.58%, and 6.80%, which were lower than the 9.375% rate on the $17.3 million in trust preferred securities retired during the second and third quarters of 2003, and (iii) the change in the composition of average borrowings to lower rate FHLB advances from higher rate non-FHLB borrowings.

Average Balances, Interest Income and Expense, Yields and Rates

Nine Months Ended September 30, 2003 and 2002

	Nine Months Ended September 30,
	2003							2002
	Average Balance			Interest Income/ Expense		Average Yield/ Rate		Average Balance			Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets:
Loans (1)	$	451,259		$	24,881	7.37	%	$	462,543		$	28,321	8.19	%
Securities purchased under resale agreements	3,455			28		1.08	%	12,213			151		1.65	%
Investment securities available for sale (2):
Mortgage-backed securities	124,874			4,245		4.53	%	66,508			2,689		5.39	%
Corporate debt securities	2,329			50		2.86	%	4,128			117		3.78	%
Total investment securities	127,203			4,295		4.50	%	70,636			2,806		5.30	%
Total interest-earning assets	581,917			29,204		6.71	%	545,392			31,278		7.67	%
Unsettled mortgage-backed securities trades	4,515							—
Investment in FHLB stock	9,090							3,224
Unrealized gain on investment securities	1,933							219
Non-interest-earning assets	11,988							12,816
Allowance for loan losses	(8,707		)					(8,418		)
Total assets	$	600,736						$	553,233

Interest-Bearing Liabilities:
Checking accounts	$	16,770		124		0.99	%	$	15,526		182		1.57	%
Savings accounts	133,310			1,450		1.45	%	133,459			2,014		2.02	%
Certificates of deposit	200,336			4,653		3.11	%	242,716			7,756		4.27	%
Total deposits	350,416			6,227		2.38	%	391,701			9,952		3.40	%
Short-term FHLB advances	10,802			108		1.34	%	10,363			146		1.88	%
Long-term FHLB advances	154,213			3,198		2.77	%	51,868			1,177		3.03	%
Total FHLB advances	165,015			3,306		2.68	%	62,231			1,323		2.84	%
Term borrowings	—			—		0.00	%	33,077			1,662		6.63	%
Trust preferred securities	29,085			1,729		7.89	%	17,250			1,213		9.38	%
Total borrowings	194,100			5,035		3.46	%	112,558			4,198		4.96	%
Total interest-bearing liabilities	544,516			11,262		2.77	%	504,259			14,150		3.75	%
Non-interest-bearing liabilities	12,275							8,988
Shareholders’ equity	43,945							39,986
Total liabilities and shareholders’ equity	$	600,736						$	553,233

Excess of interest-earning assets over interest-bearing liabilities	$	37,401						$	41,133
Net interest income				$	17,942						$	17,128
Net interest rate spread (3)						3.94	%						3.92	%
Net interest margin (4)						4.12	%						4.20	%

(2) 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.

(5) 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, 2003 and 2002

	Nine Months Ended September 30,
	2003						2002						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	$	451,259	77.5	%	7.37	%	$	462,543	84.8	%	8.19	%	$	(11,284	)	(7.3	)%	(0.82	)%
Securities purchased under resale agreements	3,455		0.6	%	1.08	%	12,213		2.2	%	1.65	%	(8,758		)	(1.6	)%	(0.57	)%

Investment securities available for sale:
Mortgage-backed securities	124,874		21.5	%	4.53	%	66,508		12.2	%	5.39	%	58,366			9.3	%	(0.86	)%
Corporate debt securities	2,329		0.4	%	2.86	%	4,128		0.8	%	3.78	%	(1,799		)	(0.4	)%	(0.92	)%
Total investment securities	127,203		21.9	%	4.50	%	70,636		13.0	%	5.30	%	56,567			8.9	%	(0.80	)%
Total interest-earning assets	$	581,917	100.0	%	6.71	%	$	545,392	100.0	%	7.67	%	$	36,525				(0.96	)%

Interest-Bearing Liabilities:
Checking accounts	$	16,770	3.1	%	0.99	%	$	15,526	3.1	%	1.57	%	$	1,244		0.0	%	(0.58	)%
Savings accounts	133,310		24.5	%	1.45	%	133,459		26.5	%	2.02	%	(149		)	(2.0	)%	(0.57	)%
Certificates of deposit	200,336		36.8	%	3.11	%	242,716		48.1	%	4.27	%	(42,380		)	(11.3	)%	(1.16	)%
Total deposits	350,416		64.4	%	2.38	%	391,701		77.7	%	3.40	%	(41,285		)	(13.3	)%	(1.02	)%

Short-term FHLB advances	10,802		2.0	%	1.34	%	10,363		2.0	%	1.88	%	439			0.0	%	(0.54	)%
Long-term FHLB advances	154,213		28.3	%	2.77	%	51,868		10.3	%	3.03	%	102,345			18.0	%	(0.26	)%
Total FHLB advances	165,015		30.3

For the quarterly period ended September 30, 2003

Sale of Interest Rate Cap Agreement

Net Interest Income – Three Months Analysis

Total Interest Income – Three Months Analysis

PACIFIC CREST CAPITAL INC 10-Q