FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR ( ) 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 0-13528 Pacific Capital Bancorp (Exact name of registrant as specified in its charter) California 77-0003875 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1001 S. Main Street, Salinas, California 93901 (Address of principal executive offices) (Zip Code) (408) 757-4900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class August 12, 1997 Common stock, no par value 4,092,986 Shares This report contains a total of 22 pages. PART I - FINANCIAL INFORMATION ITEM 1 PAGE PACIFIC CAPITAL BANCORP AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 - 15 PART II - OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 6 OTHER EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 22 PART 1 ITEM 1 - FINANCIAL INFORMATION PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) June 30, December 31, Assets 1997 1996 Cash and due from banks $43,375 $48,126 Federal funds sold and other short term 64,643 28,119 investments Total cash and equivalents 108,018 76,245 Investment securities: Available-for-sale securities, at fair value 117,681 116,528 Held-to-maturity securities, at amortized cost (fair value of $9,041 and $9,739, 9,040 9,680 respectively) Loans available for sale 8,557 5,821 Total loans 414,018 388,728 Less allowance for possible loan losses (4,074) (3,672) Net loans 409,944 385,056 Premises and equipment, net 15,199 15,300 Accrued interest receivable and other, net 11,572 10,809 Total assets $680,011 $619,439 Liabilities and shareholders' equity Deposits: Demand, non-interest bearing $133,782 $131,332 Demand, interest bearing 85,226 84,770 Savings and money market 174,035 164,890 Time certificates 214,551 166,190 Total deposits 607,594 547,182 Accrued interest payable and other liabilities 5,005 8,611 Total liabilities 612,599 555,793 Shareholders' equity: Preferred stock; 20,000,000 shares authorized - - and unissued Common stock, no par value; 20,000,000 shares authorized; 4,092,436 and 4,083,363 shares issued and outstanding at June 30, 1997 and at December 31, 1996, 49,775 49,388 respectively Retained earnings 18,031 14,423 Net unrealized losses on available-for-sale (394) (165) securities Total shareholders' equity 67,412 63,646 Total liabilities and shareholders' equity $680,011 $619,439 See accompanying notes to unaudited consolidated financial statements. PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Six months Six months ended ended June 30, June 30, 1997 1996 Interest income: Interest and fees on loans $19,996 $15,959 Interest on fed funds sold 732 1,144 Interest on investment securities 4,307 3,811 Total interest income 25,035 20,914 Interest expense: Interest on deposits 7,984 6,242 Other 21 17 Total interest expense 8,005 6,259 Net interest income 17,030 14,655 Provision for possible loan losses 570 179 Net interest income after provision for 16,460 14,476 possible loan losses Other income: Service charges 1,240 1,199 Gain on sale of loans 11 15 Net gain on securities transactions 11 15 Other 342 370 Total other income 1,604 1,599 Other expenses: Salaries and benefits 5,443 5,490 Occupancy 1,124 1,031 Equipment 828 1,041 Advertising and promotion 343 283 Stationary and supplies 426 238 Legal and professional fees 421 442 Regulatory assessments 107 72 Other operating 1,232 1,276 Total other expenses 9,924 9,873 Earnings before income taxes 8,140 6,202 Income taxes 3,217 2,408 Net income $4,923 $3,794 Net income per share $1.16 $0.89 Weighted average shares outstanding 4,238,308 4,247,087 See accompanying notes to unaudited consolidated financial statements. PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Three months Three months ended ended June 30, June 30, 1997 1996 Interest income: Interest and fees on loans $10,465 $8,178 Interest on fed funds sold 423 473 Interest on investment securities 2,161 1,975 Total interest income 13,049 10,626 Interest expense: Interest on deposits 4,129 3,154 Other 14 4 Total interest expense 4,143 3,158 Net interest income 8,906 7,468 Provision for possible loan losses 285 74 Net interest income after provision for 8,621 7,394 possible loan losses Other income: Service charges 620 634 Gain on sale of loans 5 6 Net gain on securities transactions 11 3 Other 163 174 Total other income 799 817 Other expenses: Salaries and benefits 2,696 2,740 Occupancy 560 522 Equipment 437 534 Advertising and promotion 191 142 Stationary and supplies 194 125 Legal and professional fees 217 223 Regulatory assessments 53 36 Other operating 616 640 Total other expenses 4,964 4,962 Earnings before income taxes 4,456 3,249 Income taxes 1,775 1,256 Net income $2,681 $1,993 Net income per share $0.63 $0.47 Weighted average shares outstanding 4,239,356 4,251,526 See accompanying notes to unaudited consolidated financial statements. PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Six Months Six Months Ended Ended June 30, June 30, 1997 1996 Cash flows from operating activities: Net income $4,923 $3,794 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 725 676 Provision for possible loan losses 570 179 Gain on sale of investment securities, net (11) (15) Net originations of loans available for (2,736) (1,165) sale Gain on sale of loans (11) (15) Deferral of loan origination costs (90) (16) Change in accrued interest receivable and (992) (2,836) other assets Change in accrued interest payable and (3,584) (608) other liabilities Net cash used in operating activities (1,206) (6) Investing activities: Net increase in loans (25,368) (28,713) Maturities of investment securities 8,516 6,064 Purchases of investment securities (9,029) (36,858) Proceeds from sale of available-for-sale - 25,695 securities Capital expenditures, net (624) (1,920) Net cash used in investing activities (26,505) (35,732) Financing activities: Net increase in deposits 60,412 35,952 Cash paid for retirement of stock - (60) Proceeds from exercise of options 387 4 Cash paid for dividends (1,315) (1,010) Net cash provided by financing activities 59,484 34,886 Net increase (decrease) in cash and 31,773 (852) equivalents Cash and equivalents at beginning of period 76,245 79,234 Cash and equivalents at end of period $108,018 $78,382 Supplemental disclosures of cash flow information: Cash paid during the period Interest $8,137 $6,837 Income taxes 2,450 2,359 See accompanying notes to unaudited consolidated financial statements. PACIFIC CAPITAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation In the opinion of the Company, the unaudited consolidated financial statements, prepared on the accrual basis of accounting, contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company and subsidiaries at June 30, 1997 and December 31, 1996, the results of its operations and the statements of cash flows for the periods ended June 30, 1997 and 1996. Certain information and note disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The results of operations for the period ended June 30, 1997 are not necessarily indicative of the operating results for the full year ending December 31, 1997. In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting of Comprehensive Income. This statement establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. This statement is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement establishes standards for the way the public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not believe it has any separately reportable business segments. In February 1997, the FASB issued SFAS No. 128, Earnings Per Share and SFAS No. 129, Disclosure of Information about Capital Structure. SFAS No. 128 supersedes APB Opinion No. 15 Earnings Per Share, and specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. SFAS No. 128 replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively. Upon adoption, it also requires dual presentation of Basic EPS and Diluted EPS on the face of the Statement of Income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator of the Diluted EPS computation. SFAS No. 129 establishes standards for disclosing information about an entity's capital structure for those entities deemed to have complex capital structures. Statements No. 128 and 129 are effective for financial statements for periods beginning after December 15, 1997. The adoption of these statements is not anticipated to have a material impact on the financial condition or results of operations of the Company. The following table represents pro forma Earnings per Share as it would appear after adoption of these statements. Three Months Ended June 30, 1997 June 30, 1996 Basic Earnings per Share $0.66 $0.48 Diluted Earnings per Share $0.63 $0.47 Six Months Ended June 30, 1997 June 30, 1996 Basic Earnings per Share $1.17 $0.92 Diluted Earnings per Share $1.16 $0.89 Note 2 - Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, First National Bank of Central California, ("First National"), and South Valley National Bank ("South Valley"). For purposes used herein, the term "Subsidiary Banks" shall mean First National and South Valley, collectively. All material intercompany accounts and transactions have been eliminated in consolidation. Note 3 - Loans to Directors In the ordinary course of business, the Company has made loans to directors of the Company and their affiliates which at June 30, 1997 amounted to approximately $10,648,000. Note 4 - Commitments The Company had outstanding standby letters of credit of approximately $1,915,000 at June 30, 1997. Note 5 - Net Income Per Share and Dividends Net income per share is computed using the weighted average number of shares of common and common equivalent shares outstanding. On January 28, 1997 and April 22, 1997, the Company declared $0.165 per share cash dividends to shareholders of record on March 14, 1997 and June 16, 1997, payable on March 31, 1997 and June 30, 1997, respectively. Note 6 - Taxes As of June 30, 1997, the Company has a deferred tax asset of approximately $3,187,000. The asset results primarily from the provisions for possible loan losses and depreciation of premises and equipment, which are recognized in the financial statements but are not yet deductible for income tax reporting purposes. Management of the Company believes that the net deferred tax asset is fully realizable through sufficient taxable income within carryback periods and current year taxable income. PART 1 ITEM II - PACIFIC CAPITAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Changes in the Financial Statements Net income for the six months ended June 30, 1997 was $4,923,000 or $1.16 per share compared to $3,794,000 or $0.89 per share during the comparable period in 1996. This 29.8% increase in net income is due mainly to a $2,375,000 increase in net interest income. The increase in net interest income is due to growth in average total loans of $89,562,000 partially offset by an increase in average interest bearing deposits of $67,963,000 as compared to the same 1996 period. Outstanding loans were $414,018,000 at June 30, 1997 compared to $388,728,000 at December 31, 1996, a $25,290,000 or 6.5% increase. The increase in outstanding loans from December 31, 1996 to June 30, 1997 resulted primarily from an increase in real estate mortgage loans of $17,332,000, an increase in real estate construction loans of $14,447,000 partially offset by a decrease in other loans of $5,789,000. Federal Funds Sold and Investment Securities at June 30, 1997 were $191,364,000, a $37,037,000 or 24.0% increase from December 31, 1996. This was primarily due to the increase in total deposits which resulted in an increase in cash invested in Federal Funds. The Company's total deposits at June 30, 1997 were $607,594,000 compared to $547,182,000 at December 31, 1996, a $60,412,000 or 11.0% increase. Non-interest bearing demand deposits increased $2,450,000, interest bearing demand deposits increased $456,000 and savings and money market deposit accounts increased $9,145,000 in the first six months of 1997. Certificates of deposit increased by $48,361,000 or 29.1% during the first six months of 1997. Management believes that the growth in deposits is a result of the overall strength in the local tourism, agribusiness, and high-tech industries within the local economies in which the Company operates. The loan to deposit ratio at June 30, 1997 was 68.1% as compared to 71.0% at December 31, 1996. Loans Outstanding total loans averaged $404,858,000 for the six months ended June 30, 1997 compared to $315,296,000 for the comparable period in 1996, an increase of $89,562,000, or 28.4%. This increase in loans is due to increased loan demand from qualified borrowers and reflects stability and economic growth in most of the primary markets which the Company serves. The Company lends primarily to small and medium sized businesses and consumers within its markets, which are comprised principally of Monterey, Santa Cruz, San Benito, and southern Santa Clara counties. A majority of the Company's loan portfolio consists of loans secured by commercial, industrial and residential real estate. Quality of Loans The composition of non-performing loans as of June 30, 1997, December 31, 1996, and June 30, 1996 is summarized in the following table. Nonperforming Loans (Dollars in Thousands) June 30, December 31, June 30, 1997 1996 1996 Accruing loans past due 90 days or more: Commercial $ 17 $ 15 $ 46 Consumer 32 2 2 Real Estate - - - Total $ 49 $ 17 $ 48 Nonaccrual loans: Commercial 821 507 1,056 Consumer 130 142 143 Real Estate 831 915 363 Total $1,782 $1,564 $1,562 Total Nonperforming Loans $1,831 $1,581 $1,610 Nonperforming Loans To Total Loans 0.44% 0.41% 0.49% Allowance For Possible Loan Losses To Total Non Performing Loans 222.62% 232.26% 235.71% The Company does not expect to sustain losses from any of the non- performing loans in excess of that specifically provided for in the allowance for possible loan losses. Currently, the Company's level of non- performing loans to total loans is below that of peer banks. In addition to the above, the Company holds two Other Real Estate Owned (OREO) properties, which aggregate $1,490,000. In both cases, the amount recorded represents the lesser of the loan balance or current fair value obtained from a current appraisal less anticipated selling costs; therefore, any identified loss has already been recognized. Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, additions are made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of management's assessment of risk or regulatory examinations conducted by governmental agencies. The Company's entire allowance is a valuation allowance created by direct charges against operations through the provision for possible loan losses. The provision for possible loan losses charged against operations is based upon the actual net loan losses incurred plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses. The Company evaluates the adequacy of its allowance for possible loan losses on a quarterly basis. The Company has also contracted with an independent loan review consulting firm to evaluate overall credit quality and the adequacy of the allowance for possible loan losses. Both internal and external evaluations take into account the following: specific loan conditions as determined by management; the historical relationship between charge-offs and the level of the allowance; the estimated future loss in all significant loans; known deterioration in concentrations of credit, certain classes of loans or pledged collateral; historical loss experience based on volume and types of loans; the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of Company management or by bank regulatory agencies; trends in portfolio volume, maturity and composition; off-balance sheet credit risk; volume and trends in delinquencies and nonaccruals; lending policies and procedures including those for charge- off, collection and recovery; national and local economic conditions and their effects on specific local industries; and the experience, ability and depth of lending management and staff. These factors are essentially judgmental and may not be reduced to a mathematical formula. The Company closely monitors the local markets in which it conducts its lending activities. The overall increase in loan demand from qualified borrowers during the past year is indicative of the strength in the local economic climate. The table set forth below summarizes the actual loan losses and provision for possible losses as of and for the periods ended June 30, 1997, December 31, 1996, and June 30, 1996: Loan Charge-Off/Recovery Activity (Dollars in Thousands) Six months Year Six months Ended Ended Ended June 30, 1997 December 31,1996 June 30, 1996 Loans Outstanding, at period end $414,018 $388,728 $330,073 Average Loans $404,858 $332,421 $315,296 Allowance Balance: Beginning Of Period 3,672 3,710 3,710 Charge-Offs By Loan Category: Commercial 91 761 135 Consumer 20 188 55 Real Estate 166 121 56 Other 4 - - Total $ 281 $ 1,070 $ 246 Recoveries By Loan Category: Commercial 90 239 74 Consumer 14 91 63 Real Estate 6 17 15 Other 3 - - Total $ 113 $ 347 $ 152 Net Charge-Offs $ 168 $ 723 $ 94 Provision Charged To Expense $570 $685 $179 Allowance Balance End Of Period $ 4,074 $ 3,672 $ 3,795 Allowance For Possible Loan Losses To Period End Loans 0.98% 0.94% 1.15% Annualized Net Charge-offs to Average Loans 0.08% 0.22% 0.06% The provision for possible loan losses charged against earnings is based upon an analysis of the actual migration of loans to losses plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses. While these factors cannot be reduced to a mathematical formula, it is management's view that the allowance for possible loan losses of $4,074,000 or .98% of total loans was adequate as of June 30, 1997. Results of Operations Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996 Net income for the six months ended June 30, 1997 was $4,923,000, an increase of $1,129,000 or 29.8% as compared to the same 1996 period. The increase in net income for the period was due primarily to an increase in net interest income of $2,375,000 partially offset by an increase in the provision for loan losses of $391,000. The increase in net interest income is due to growth in average total loans of $89,562,000 partially offset by an increase in average interest bearing deposits of $67,971,000 compared to the same 1996 period. The average balance of interest earning assets during the six months ended June 30, 1997 was $571,705,000, an $83,981,000 or 17.2% increase over the comparable 1996 period. The Company's average yield on earning assets for the six months ended June 30, 1997 increased to 8.8% from 8.6% in the comparable 1996 period. Total interest income increased $4,121,000 or 19.7% for the six months ended June 30, 1997 compared to the same 1996 period due to an increase in average interest earning assets of $83,981,000. Average deposits for the Company for the six months ended June 30, 1997 were $564,508,000, an $88,331,000 or 18.6% increase compared to the same period ended June 30, 1996. The Company's average cost of funds for the six months ended June 30, 1997 was 3.6% which yielded a net interest margin of 6.0%. This compares to an average cost of funds of 3.4% and a net interest margin of 6.1% for the comparable 1996 period. Interest expense of $8,005,000 for the six months ended June 30, 1997 was $1,746,000 or 27.9% over the comparable 1996 period due to an increase in average interest bearing deposits of $67,974,000 and an increase in the Company's cost of funds of 0.2%. Net interest income for the six months ended June 30, 1997 increased $2,375,000 or 16.2%. The Company made a provision to the allowance for possible loan loss of $570,000 in the six months ended June 30, 1997 primarily due to the recent growth experienced within the loan portfolio. An analysis of the loan portfolio completed by the Company indicates that the current allowance for loan losses is adequate based on the Company's calculated provision requirements. Total loans charged-off net of recoveries for the six months ended June 30, 1997 amounted to $168,000 compared to $94,000 for the same period in 1996. Annualized net loan charge-offs as a percentage of average loans for the six months ended June 30, 1997 was 0.08% compared to 0.06% for the six months ended June 30, 1996 and 0.22% for the year ended December 31, 1996. Total other income was $1,604,000 for the six months ended June 30, 1997, a $5,000 or 0.3% increase compared to the same period in 1996. Service charges on deposit accounts increased by $41,000 or 3.4% over the comparable period in 1996. Other income decreased by $28,000 from year to year. Salaries and benefits expense for the six months ended June 30, 1997 was $5,443,000, a $47,000 or 0.9% decrease from the comparable 1996 period. This variance resulted primarily from the reduction in officers as a result of the merger between South Valley Bancorporation and the Company in 1996. The Company employed 266 full time equivalent employees at June 30, 1997 compared to 259 full time equivalent employees at December 31, 1996 and 245 full time equivalent employees at June 30, 1996. Total other expenses, excluding salaries and benefits, for the six months ended June 30, 1997, was $4,481,000, a $98,000 or 2.2% increase from the comparable 1996 period. This was primarily due to an increase in stationery and supplies expense of $188,000 due to increased orders of printed forms for statements and various mailings. In addition, occupancy expense increased by $93,000, or 9.0% due to normal rental rate increases from year to year. Partially offsetting these increases was a decrease in equipment expense of $213,000 associated with data processing costs which were targeted for significant cost savings from the merger through systems consolidation. Applicable income taxes of $3,217,000 for the six months ended June 30, 1997 were $809,000, or 33.6% more than the comparable 1996 period. The Company's effective tax rate for the six months ended June 30, 1997 was 39.5% compared to 38.8% for the same period in 1996. Three Months ended June 30, 1997 Compared with Three Months Ended June 30, 1996 Net income for the three months ended June 30, 1997 was $2,681,000, an increase of $688,000 or 34.5% as compared to the same 1996 period. The increase in net income for the period was due primarily to an increase in net interest income of $1,438,000 partially offset by an increase in the provision for loan losses of $211,000. The increase in net interest income is due to growth in average total loans of $92,532,000 partially offset by an increase in average interest bearing deposits of $68,156,000 compared to the same 1996 period. The average balance of interest earning assets during the three months ended June 30, 1997 was $587,603,000, an $92,532,000 or 17.2% increase over the comparable 1996 period. The Company's average yield on earning assets for the three months ended June 30, 1997 increased to 8.9% from 8.6% in the comparable 1996 period. Total interest income increased $2,423,000 or 22.8% for the three months ended June 30, 1997 compared to the same 1996 period due to an increase in average interest earning assets of $92,532,000. Average deposits for the Company for the quarter ended June 30, 1997 were $579,997,000, a $94,556,000 or 19.5% increase compared to the same period in 1996. The Company's average cost of funds for the three months ended June 30, 1997 was 3.7% which yielded a net interest margin of 6.1%. This compares to an average cost of funds of 3.3% and a net interest margin of 6.1% for the comparable 1996 period. Interest expense of $4,143,000 for the quarter ended June 30, 1997 was $985,000 or 31.2% over the comparable 1996 period due to an increase in average interest bearing deposits of $68,156,000 and an increase in the Company's cost of funds of 0.3%. During the quarter ended June 30, 1997, the Company made a provision to the allowance for possible loan loss of $285,000. This compares to a provision of $74,000 which was made in the second quarter 1996 and represents an increase of $211,000. Total other income was $799,000 for the three months ended June 30, 1997, an $18,000 or 2.2% increase compared to the same period in 1996. Service charges on deposit accounts decreased by $14,000 or 2.2% over the comparable period in 1996. Other income decreased by $11,000 from year to year and net gains on securities transactions was $11,000, an increase of $8,000 from the second quarter of 1996. Salaries and benefits expense for the three months ended June 30, 1997 was $2,696,000, a $44,000 or 1.6% decrease from the comparable 1996 period. This variance resulted primarily from the reduction in administrative officers as a result of the merger between South Valley Bancorporation and the Company in 1996. Total other expenses, excluding salaries and benefits, for the three months ended June 30, 1997, was $2,268,000, a $46,000 or 2.1% increase from the comparable 1996 period. This was primarily due to an increase in stationery and supplies expense of $69,000, an increase in advertising and promotion of $49,000, partially offset by a decrease in equipment expense of $97,000 due to cost savings through systems consolidation. Applicable income taxes of $1,775,000 for the three months ended June 30, 1997 were $519,000, or 41.3% more than the comparable 1996 period. The Company's effective tax rate for the three months ended June 30, 1997 was 39.8% compared to 38.7% for the same period in 1996. Liquidity Management Liquidity represents the ability of the Company to meet the requirements of customer borrowing needs as well as fluctuations in deposit flows. The Company manages its liquidity primarily by maintaining investments in overnight fed funds, money market mutual funds, available-for-sale securities, and by maintaining lines of credit with correspondent banks. At June 30, 1997 the total of cash and due from banks, overnight fed funds, money market mutual funds, and available-for-sale securities represented $225,699,000 or 37.1% of total deposits compared to $192,773,000 or 35.2% at year end 1996. This increase in liquid assets for the six months ended June 30, 1997 resulted primarily from an increase in deposits which were invested in fed funds sold and short term investments. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and projected future levels. Capital Resources Capital management is a continuous process of providing adequate capital for current needs and anticipated future growth. Capital serves as a source of funds for the acquisition of fixed and other assets and protects depositors against potential losses. As the Company's assets increase, so do its capital requirements. The Company and the Subsidiary Banks are subject to Federal Reserve Board guidelines and regulations of the Comptroller of the Currency ("Comptroller"), respectively, governing capital adequacy. The Federal Reserve Board has established final risk-based and leverage capital guidelines for bank holding companies which are the same as the Comptroller's capital regulations for national banks. The Federal Reserve Board capital guidelines for bank holding companies and the Comptroller's regulations for national banks set total capital requirements and define capital in terms of "core capital elements" (comprising Tier 1 capital) and "supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is generally defined as the sum of the core capital elements less goodwill. The following items are defined as core capital elements: common stockholders' equity, qualifying noncumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital elements include: allowance for loan and lease losses (which cannot exceed 1.25% of an institution's risk weighted assets), perpetual preferred stock not qualifying as core capital, hybrid capital instruments and mandatory convertible debt instruments, and term subordinated debt and intermediate- term preferred stock. The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill. Risk-based capital ratios are calculated with reference to risk- weighted assets, including both on and off-balance sheet exposures, which are multiplied by certain risk weights assigned by the Federal Reserve Board to those assets. Both bank holding companies and national banks are required to maintain a minimum ratio of qualifying total capital to risk- weighted assets of 8%, at least one-half of which must be in the form of Tier 1 capital. There are presently four risk-weight categories: 0% for cash and unconditionally guaranteed government securities; 20% for conditionally guaranteed government securities; 50% for performing residential real estate loans secured by first liens; and 100% for commercial loans. The Federal Reserve Board and the Comptroller also have established a minimum leverage ratio of 3% Tier I capital to total assets for bank holding companies and national banks that have received the highest composite regulatory rating and are not anticipating or experiencing any significant growth. All other institutions will be required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum. The following tables show the Company's risk-based and leverage capital ratios as of June 30, 1997 and December 31, 1996. The Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Management believes that the Company will continue to meet the respective minimum capital requirements in the foreseeable future. Risk-Based Capital Ratios June 30, 1997 December 31, 1996 (Dollars in thousands) Amount Ratio Amount Ratio Tier 1 Capital $67,484 13.89% $63,469 13.91% Tier 1 Capital minimum 19,431 4.00% 18,254 4.00% requirement Excess 48,053 9.89% 45,215 9.91% Total Capital 71,558 14.73% 67,141 14.71% Total Capital minimum 38,861 8.00% 36,508 8.00% requirement Excess 32,697 6.73% 30,633 6.71% Risk-adjusted assets $485,766 $456,356 Leverage Ratios June 30, 1997 December 31, 1996 (Dollars in thousands) Amount Ratio Amount Ratio Tier 1 Capital to average total assets (Leverage ratio) $67,484 10.38% 63,469 10.55% Minimum leverage 19,509 to 3.00% to 18,045 to 3.00% to requirement 32,515 5.00% 30,075 5.00% Excess 34,969 to 5.38% to 33,394 to 5.55% to 47,975 7.38% 45,424 7.55% Average total assets $650,292 $601,496 Federal banking laws impose restrictions upon the amount of dividends the Subsidiary Banks may declare to the Company. Federal laws also impose restrictions upon the amount of loans or advances that the Subsidiary Banks may extend to the Company. In management's opinion, these do not affect the ability of the Company to meet its cash obligations. PART II -- OTHER INFORMATION Item 4. Submission of matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 22, 1997. (c) At the Annual Meeting the shareholders voted to: (i) Elect Directors of the Company; Votes Cast for Votes Election Withheld Charles E. Bancroft 2,711,368 11,309 Gene DiCicco 2,718,848 3,829 Lewis L. Fenton 2,718,848 3,829 Gerald T. Fry 2,717,334 5,343 Eugene R. Guglielmo 2,718,848 3,829 James L. Gattis 2,718,439 4,238 Stanley R. Haynes 2,718,848 3,829 D. Vernon Horton 2,717,743 4,934 Hubert W. Hudson 2,718,848 3,829 William J. Keller 2,718,848 3,829 Roger C. Knopf 2,695,749 26,928 Clayton C. Larson 2,718,848 3,829 William S. McAfee 2,718,848 3,829 William H. Pope 2,715,717 6,950 Mary Lou Rawitser 2,711,473 11,204 William K. Sambrailo 2,718,439 4,192 Robert B. Sheppard 2,718,848 3,783 Clyn Smith, Jr. 2,718,848 3,783 In the voting for Directors, there were no abstentions and 1,368,080 broker nonvotes (ii) Ratify the appointment of KPMG Peat Marwick LLP as independent public accountants for the 1996 fiscal year; For 2,709,994 Against 3,578 Abstain 8,683 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page 3.1 Articles of incorporation of the Company as amended to date. 1/ (*) 3.2 Bylaws of Company as amended to date. 2/ (*) 10.1 Lease -- 601 Abrego Street, Monterey, Premises. 3/ (*) 10.2 Lease for 1001 South Main Street, Salinas, Banking office. 2/ (*) 10.3 Lease dated December 15, 1988 by and between the Bank (*) and James L. Gattis for 307 Main Street, Salinas Old Town Office. 2/ 10.4 Lease dated May 1, 1985 by and between the Bank (*) and Pacific Capital Bancorp. 4/ 10.5 Pacific Capital Bancorp Employee Stock Ownership (*) Plan and Trust Agreement. 5/ 10.6 Master Equipment Lease Agreement between Bank and (*) Parker North American Corporation. 5/ 10.7 Lease dated September 22, 1986 between (*) Bank and The Saunders Company. 5/ */ Not Applicable. 1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1988, and are incorporated herein by reference. 2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual Report on Form 10-K (File No. 2-87513) for the fiscal year ended December 31, 1984, which are incorporated by reference. 3/ Filed as Exhibit to the Company's Registration Statement on Form S-18 (Registration No. 2-87513), which is incorporated by reference. 4/ Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1985, which is incorporated by reference. 5/ Filed as Exhibits 10.24 through 10.26, respectively, to Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1986, which are incorporated by reference. Exhibit Sequentially Number Exhibit Numbered Page 10.8 Matrix Funding Corporation Master Lease Agreement. 1/ (*) 10.9 Lease dated January 24, 1989 by and between First National Bank (*) of Monterey County and Stanley R. Haynes. 6/ 10.13 Amendment No. One to Pacific Capital Bancorp(*) Employee Stock Ownership Plan. 2/ 10.14 Amendment No. Two to Pacific Capital Bancorp(*) Employee Stock Ownership Plan. 7/ 10.15 Amendment No. Three to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 7/ 10.16 Lease dated August 10, 1990 by and between the (*) Trustees of the Stanley Family Trust and Pacific Capital Bancorp for Carmel Office. 7/ 10.17 Assignment of Lease dated November 1, 1990 by and (*) between Pacific Capital Bancorp and First National Bank of Monterey-County for Carmel Office. 7/ 10.18 Lease dated November 12, 1990 by and between(*) First National Bank of Monterey County and Carmel Monterey Travel for Premises located at 601 Abrego Street, Monterey, California. 7/ 10.19 Prunetree Shopping Center Lease dated June 28, 1988 (*) by and between Dennis R. Keith and Pajaro Valley Bancorporation. 7/ 6/ Filed as Exhibits 10.20 through 10.24, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1989, which are incorporated by reference. 7/ Filed as Exhibits 10.25 through 10.32 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1990, which are incorporated by reference. Exhibit Sequentially Number Exhibit Numbered Page 10.20 Lease dated June 21, 1990 by and between Saucito (*) Land Co. and First National Bank of Monterey County. 7/ 10.22 Amendment No. Four to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 8/ 10.23 Amendment dated May 20, 1991 to Lease dated(*) December 15, 1988 by and between the Bank and James L. Gattis for 307 Main Street, Salinas Old Town Office. 8/ 10.24 Pacific Capital Bancorp Directors' Stock Option Plan (*) and Form of Stock Option Agreement. 8/ 10.26 Pacific Capital Bancorp 1984 Stock Option Plan (*) and Forms of Agreements as amended to date. 8/ 10.30 Business Recovery Services Agreement dated(*) September 30, 1991 by and between Bank and J.D.B. & Associates, Inc. 8/ 10.31 Consolidated Agreement dated December 17, 1991 (*) by and between Bank and Unisys with Equipment Sale Agreement, Software License Agreement and Product License Agreement by and between Bank and information Technology, Inc. 8/ 10.32 Fidelity and Deposit Company of Maryland Directors and (*) Officers Liability Insurance Policy including Bank Reimbursement. 8/ 10.33 Fidelity and Deposit Company of Maryland (*) Financial Institution Bond. 8/ 10.34 Lease dated January 28, 1993 by and between J.W. and R.W. (*) McClellan, Partners, and First National Bank of Central California. 9/ 10.35 Exercise of Lease Option as of September 19, 1992 by and (*) between First National Bank of Central California and James L. Gattis. 9/ 8/ Filed as Exhibits 10.34 through 10.35 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1991, which are incorporated by reference. 9/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1993, which are incorporated by reference. Exhibit Sequentially Number Exhibit Numbered Page 10.37 Lease dated November 18, 1993 by and between Hazel Graven (*) and Vines Stewart and First National Bank of Central California. 10/ 10.38 Software License Agreement for Platform Transfer Module and Interface (*) dated September 15, 1993 by and between First National Bank of Central California and Information Technology, Inc. 10/ 10.39 Equipment Sale Agreement dated December 16, 1993 by and (*) between First National Bank of Central California and Information Technology, Inc. 10/ 10.40 Asset/Liability Management Software Agreement dated (*) December 31, 1993 by and between First National Bank of Central California and Profitstar, Inc. 10/ 10.41 Applications dated December 28, 1993 by First National Bank (*) of Central California to become a member of the California Bankers Clearing House Association. 10/ 10.42 Consolidated Agreement for the purchase of computer hardware (*) dated December 20, 1993 by and between First National Bank of Central California and Unisys Corporation. 10/ 10.46 Amended Pacific Capital Bancorp 1994 Stock Option Plan and Form of (*) Incentive and Non-Qualified Stock Option Agreements. 9/ 10.47 Amendment No. Five to Pacific Capital Bancorp Employee (*) Stock Ownership Plan and Trust. 10/ 10.48 Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/ (*) 10.49 Equipment Sale Agreement dated March 22, 1995, by and between (*) First National Bank of Central California and Information Technology, Inc. 11/ 10.50 Equipment Sale Agreement dated February 2, 1996, by and between (*) First National Bank of Central California and Information Technology, Inc. 11/ 9/ Filed as Exhibits to the Company's Registration Statement on Form S-8 (File No. 33-83848) as filed on September 8, 1994, and Amendment No. 1 to Form S-8 as filed on November 15, 1994. 10/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1994, which are incorporated by reference. 11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1995, which are incorporated by reference. Exhibit Sequentially Number Exhibit Numbered Page 10.51 Standard Form of Agreement between Owner (Pacific Capital Bancorp) (*) and Contractor (Daniels & House Construction Co.) for the renovation of existing building and construction of new addition for First National Bank of Central California at 1001 S. Main Street, Salinas, CA, 93901, dated June 15, 1995. 11/ 10.52 Employee Welfare Benefit Plan Agreement dated January 1, 1995, (*) between Pacific Capital Bancorp and Great-West Life & Annuity Insurance Co. 11/ 10.53 Lease Agreement dated October 29, 1996 by and between James L. (*) Gattis and Pacific Capital Bancorp for property located at 517 S. Main Street, Salinas /12 10.54 Employment Agreement dated May 22, 1996 between First (*) National Bank of Central California and Clayton C. Larson /12 10.55 Employment Agreement dated May 22, 1996 between First (*) National Bank of Central California and D. Vernon Horton /12 10.56 Employment Agreement dated May 22, 1996 between First (*) National Bank of Central California and Dennis A. DeCius /12 10.57 Employment Agreement dated November 20, 1996 between South (*) Valley National Bank and Brad L. Smith /12 27. Financial Data Schedule 23 11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1995, which are incorporated by reference. 12/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1996, which are incorporated by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date __ August 12, 1997_____ /S/ D. Vernon Horton D. Vernon Horton Chairman of the Board Chief Executive Officer Date __ August 12, 1997_______ /S/ Dennis A. DeCius Dennis A. DeCius Executive Vice President Chief Financial Officer