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 September 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 November 12, 1997
Common stock, no par value 4,100,537 Shares
This report contains a total of 21 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 6
EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 21
PART 1
ITEM 1 - FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September December
30, 31,
Assets 1997 1996
Cash and due from banks $48,227 $48,126
Federal funds sold and other short term 74,659 28,119
investments
Total cash and equivalents 122,886 76,245
Investment securities:
Available-for-sale securities, at fair value 153,897 116,528
Held-to-maturity securities, at amortized
cost
(fair value of $7,469 and $9,739, 7,457 9,680
respectively)
Loans available for sale 9,725 5,821
Total loans 406,342 388,728
Less allowance for possible loan losses (4,168) (3,672)
Net loans 402,174 385,056
Premises and equipment, net 14,956 15,300
Accrued interest receivable and other, net 12,236 10,809
Total assets $723,331 $619,439
Liabilities and shareholders' equity
Deposits:
Demand, non-interest bearing $157,861 $131,332
Demand, interest bearing 86,911 84,770
Savings and money market 173,461 164,890
Time certificates 228,563 166,190
Total deposits 646,796 547,182
Accrued interest payable and other liabilities 6,292 8,611
Total liabilities 653,088 555,793
Shareholders' equity:
Preferred stock; 20,000,000 shares authorized - -
and unissued
Common stock, no par value; 20,000,000 shares
authorized;
4,100,406 and 4,083,363 shares issued and
outstanding at
September 30, 1997 and at December 31, 49,840 49,388
1996, respectively
Retained earnings 20,111 14,423
Net unrealized gains (losses) on available-for- 292 (165)
sale securities
Total shareholders' equity 70,243 63,646
Total liabilities and shareholders' equity $723,331 $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)
Nine months Nine months
ended ended
September 30, September 30,
1997 1996
Interest income:
Interest and fees on loans $30,452 $24,603
Interest on fed funds sold 1,544 1,394
Interest on investment securities 6,672 6,118
Total interest income 38,668 32,115
Interest expense:
Interest on deposits 12,494 9,644
Other 24 22
Total interest expense 12,518 9,666
Net interest income 26,150 22,449
Provision for possible loan losses 910 185
Net interest income after provision for 25,240 22,264
possible loan losses
Other income:
Service charges 1,872 1,732
Gain on sale of loans 17 21
Net gain on securities transactions 11 15
Other 517 611
Total other income 2,417 2,379
Other expenses:
Salaries and benefits 8,211 8,252
Occupancy 1,706 1,460
Equipment 1,271 1,650
Advertising and promotion 534 478
Stationary and supplies 600 377
Legal and professional fees 658 962
Regulatory assessments 164 109
Other operating 1,813 2,168
Total other expenses 14,957 15,456
Earnings before income taxes 12,700 9,187
Income taxes 5,028 3,615
Net income $7,672 $5,572
Net income per share $1.81 $1.31
Weighted average shares outstanding 4,243,643 4,266,289
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
September September
30, 1997 30, 1996
Interest income:
Interest and fees on loans $10,456 $8,644
Interest on fed funds sold 812 486
Interest on investment securities 2,365 2,071
Total interest income 13,633 11,201
Interest expense:
Interest on deposits 4,510 3,402
Other 3 5
Total interest expense 4,513 3,407
Net interest income 9,120 7,794
Provision for possible loan losses 340 6
Net interest income after provision for 8,780 7,788
possible loan losses
Other income:
Service charges 632 533
Gain on sale of loans 6 6
Other 175 241
Total other income 813 780
Other expenses:
Salaries and benefits 2,768 2,762
Occupancy 582 429
Equipment 443 609
Advertising and promotion 191 195
Stationary and supplies 174 139
Legal and professional fees 237 520
Regulatory assessments 57 37
Other operating 581 892
Total other expenses 5,033 5,583
Earnings before income taxes 4,560 2,985
Income taxes 1,811 1,207
Net income $2,749 $1,778
Net income per share $0.65 $0.41
Weighted average shares outstanding 4,246,811 4,296,973
See accompanying notes to unaudited consolidated financial statements.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine months Nine months
ended ended
September September
30, 1997 30, 1996
Cash flows from operating activities:
Net income $7,672 $5,572
Adjustments to reconcile net income to net
cash used in
operating activities:
Depreciation and amortization 1,096 1,206
Provision for possible loan losses 910 185
Gain on sale of investment securities, net (11) (15)
Net originations of loans available for (3,904) (1,904)
sale
Gain on sale of loans (17) (21)
Deferral of loan origination fees 121 148
Change in accrued interest receivable and (970) (1,976)
other assets
Change in accrued interest payable and (2,291) (531)
other liabilities
Net cash provided by operating activities 2,606 2,664
Investing activities:
Net increase in loans (18,149) (57,079)
Maturities of investment securities 14,799 11,022
Purchases of investment securities (49,945) (41,833)
Proceeds from sale of available-for-sale - 25,695
securities
Capital expenditures, net (752) (2,484)
Net cash used in investing activities (54,047) (64,679)
Financing activities:
Net increase in deposits 99,614 62,719
Cash paid for retirement of stock - (551)
Proceeds from exercise of options 452 292
Cash paid for dividends (1,984) (1,531)
Net cash provided by financing activities 98,082 60,929
Net increase (decrease) in cash and 46,641 (1,086)
equivalents
Cash and equivalents at beginning of period 76,245 79,234
Cash and equivalents at end of period $122,886 $78,148
Supplemental disclosures of cash flow
information:
Cash paid during the period
Interest $12,824 $10,427
Income taxes 4,115 3,229
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 September 30, 1997 and December
31, 1996, the results of its operations and the statements of
cash flows for the periods ended September 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 September 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
interim and annual periods ending 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 SFAS No. 128.
Three Months Ended
September 30, September 30,
1997 1996
Basic Earnings per Share $0.67 $0.44
Diluted Earnings per Share $0.65 $0.41
Nine Months Ended
September 30, September 30,
1997 1996
Basic Earnings per Share $1.87 $1.36
Diluted Earnings per Share $1.81 $1.31
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 September 30, 1997
amounted to approximately $10,733,000.
Note 4 - Commitments
The Company had outstanding standby letters of credit of
approximately $4,216,000 at September 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, April 22, and July 22, 1997, the Company declared
$0.165 per share cash dividends to shareholders of record on
March 14, June 16, and September 15, 1997, payable on March 31,
June 30, and September 30, 1997, respectively.
Note 6 - Taxes
As of September 30, 1997, the Company has a deferred tax asset of
approximately $3,290,000. 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 nine months ended September 30, 1997 was
$7,672,000 or $1.81 per share compared to $5,572,000 or $1.31 per share
during the comparable period in 1996. This 37.7% increase in net income is
due mainly to a $3,701,000 increase in net interest income. The increase in
net interest income is due to growth in average total loans of $83,357,000
partially offset by an increase in average interest bearing deposits of
$70,250,000 as compared to the same 1996 period.
Outstanding loans were $406,342,000 at September 30, 1997 compared to
$388,728,000 at December 31, 1996, a $17,614,000 or 4.5% increase. The
increase in outstanding loans from December 31, 1996 to September 30, 1997
resulted primarily from an increase in real estate loans of $38,649,000,
partially offset by a decrease in commercial loans of $13,189,000 and a
decrease in other loans of $3,415,000.
Federal Funds Sold and Investment Securities at September 30, 1997
were $236,013,000, a $81,686,000 or 52.9% increase from December 31, 1996.
This was primarily due to the increase in total deposits which resulted in
an increase in investments in Federal Funds and investment securities.
The Company's total deposits at September 30, 1997 were $646,796,000
compared to $547,182,000 at December 31, 1996, a $99,614,000 or 18.2%
increase. Non-interest bearing demand deposits increased $26,529,000,
interest bearing demand deposits increased $2,141,000 and savings and money
market deposit accounts increased $8,571,000 in the first nine months of
1997. Certificates of deposit increased by $62,373,000 or 37.5% during the
first nine months of 1997. Management believes that the growth in deposits
is a result of the overall strength in the local tourism and agribusiness
industries. In addition, growth in housing demand and a small influx of
businesses moving into the southern Santa Clara County area have
contributed to the Company's deposit growth.
Loans
Outstanding total loans averaged $410,011,000 for the nine months
ended September 30, 1997 compared to $326,654,000 for the comparable
period in 1996, an increase of $83,357,000, or 25.5%. 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 September 30, 1997
, December 31, 1996, and September 30, 1996 is summarized in the following
table.
Nonperforming Loans
(Dollars in Thousands)
September 30, December 31, September 30,
1997 1996 1996
Accruing loans
past due 90 days
or more:
Commercial $ 29 $ 15 $ 30
Consumer 17 2 32
Real Estate - - 606
Total $ 46 $ 17 $ 668
Nonaccrual loans:
Commercial 524 507 958
Consumer 111 142 116
Real Estate 1,445 915 1,720
Total $2,080 $1,564 $2,794
Total Nonperforming
Loans $2,126 $1,581 $3,462
Nonperforming Loans
To Total Loans 0.52% 0.41% 0.97%
Allowance For Possible
Loan Losses To Total
Non Performing Loans 196.05% 232.26% 101.88%
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 one Other Real Estate
Owned (OREO) property, which totals $1,213,000. 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 September 30,
1997 , December 31, 1996, and September 30, 1996 :
Loan Charge-Off/Recovery Activity
(Dollars in Thousands)
Nine months Year Nine months
Ended Ended Ended
September 30, 1997 December 31,1996September 30, 1996
Loans Outstanding, at period end $406,342 $388,728
$358,204
Average Loans $410,011 $332,421 $326,654
Allowance Balance:
Beginning Of Period 3,672 3,710 3,710
Charge-Offs By Loan Category:
Commercial 357 761 347
Consumer 45 188 158
Real Estate 174 121 56
Total $ 576 $ 1,070 $ 561
Recoveries By Loan Category:
Commercial 102 239 107
Consumer 21 91 69
Real Estate 39 17 17
Total $ 162 $ 347 $ 193
Net Charge-Offs $ 414 $ 723 $ 368
Provision Charged
To Expense $910 $685 $185
Allowance Balance
End Of Period $ 4,168 $ 3,672 $ 3,527
Allowance For Possible
Loan Losses
To Period End Loans 1.03% 0.94% 0.98%
Annualized Net Charge-offs
to Average Loans 0.13% 0.22% 0.15%
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 $4,168,000 or 1.03% of total loans
was adequate as of September 30, 1997 .
Results of Operations
Nine months ended September 30, 1997
Compared with
Nine months ended September 30, 1996
Net income for the nine months ended September 30, 1997 was
$7,672,000, an increase of $2,100,000 or 37.7% 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 $3,701,000 partially offset by an
increase in the provision for loan losses of $725,000. The increase in net
interest income is due to growth in average total loans of $83,357,000
partially offset by an increase in average interest bearing deposits of
$70,250,000 compared to the same 1996 period.
The average balance of interest earning assets during the nine months
ended September 30, 1997 was $591,837,000, an $91,468,000 or 18.3%
increase over the comparable 1996 period. The Company's average yield on
earning assets for the nine months ended September 30, 1997 increased to
8.7% from 8.6% in the comparable 1996 period. Total interest income
increased $6,553,000 or 20.4% for the nine months ended September 30, 1997
compared to the same 1996 period due to an increase in average interest
earning assets of $91,468,000.
Average deposits for the Company for the nine months ended September
30, 1997 were $583,973,000, an $94,237,000 or 19.2% increase compared to
the same period ended September 30, 1996 . The Company's average cost of
funds for the nine months ended September 30, 1997 was 3.7% which yielded
a net interest margin of 5.9%. This compares to an average cost of funds
of 3.4% and a net interest margin of 6.0% for the comparable 1996 period.
Interest expense of $12,518,000 for the nine months ended September 30,
1997 was $2,852,000 or 29.5% over the comparable 1996 period due to an
increase in average interest bearing deposits of $70,250,000 and an
increase in the Company's cost of funds of 0.3%. Net interest income for
the nine months ended September 30, 1997 increased $3,701,000 or 16.5%.
The Company made a provision to the allowance for possible loan losses
of $910,000 in the nine months ended September 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 nine months ended
September 30, 1997 amounted to $414,000 compared to $368,000 for the same
period in 1996. Annualized net loan charge-offs as a percentage of average
loans for the nine months ended September 30, 1997 was 0.13% compared to
0.15% for the nine months ended September 30, 1996 and 0.22% for the year
ended December 31, 1996.
Total other income was $2,417,000 for the nine months ended September
30, 1997, a $38,000 or 1.6% increase compared to the same period in 1996.
Service charges on deposit accounts increased by $140,000 or 8.1% over the
comparable period in 1996. Other income decreased by $94,000 for the nine
months ended September 30, 1997, as compared to the same period in 1996.
Salaries and benefits expense for the nine months ended September 30,
1997 was $8,211,000, a $41,000 or 0.5% 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 271 full time equivalent employees at
September 30, 1997 compared to 259 full time equivalent employees at
December 31, 1996 and 248 full time equivalent employees at September 30,
1996 .
Total other expenses, excluding salaries and benefits, for the nine
months ended September 30, 1997 , was $6,746,000, a $458,000 or 6.4%
decrease from the comparable 1996 period. This was primarily due to a
decrease in equipment expense of $379,000, a decrease in legal and
professional expense of $304,000, and a decrease in other expenses of
$355,000. These decreases were partially offset by an increase in occupancy
expense of $246,000 and an increase in stationery expense of $223,000. The
decrease in equipment expense, legal and professional expense and other
expense were a direct result of cost savings which were targeted in the
merger between South Valley Bancorporation and the Company. The increase in
stationery expense related to one-time ordering of stationery due to the
change in the address of the administrative offices of South Valley
National Bank.
Applicable income taxes of $5,028,000 for the nine months ended
September 30, 1997 were $1,413,000, or 39.1% more than the comparable 1996
period. The Company's effective tax rate for the nine months ended
September 30, 1997 was 39.6% compared to 39.4% for the same period in
1996.
Three months ended September 30, 1997
Compared with
Three months ended September 30, 1996
Net income for the three months ended September 30, 1997 was
$2,749,000, an increase of $971,000 or 54.6% 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 $1,326,000 partially offset by an
increase in the provision for loan losses of $334,000. The increase in net
interest income is due to growth in average total loans of $69,120,000
partially offset by an increase in average interest bearing deposits of
$75,454,000 compared to the same 1996 period.
The average balance of interest earning assets during the three months
ended September 30, 1997 was $630,282,000, a $103,806,000 or 19.7%
increase over the comparable 1996 period. The Company's average yield on
earning assets for the three months ended September 30, 1997 increased to
8.6% from 8.5% in the comparable 1996 period. Total interest income
increased $1,848,000 or 16.5% for the three months ended September 30, 1997
compared to the same 1996 period due to an increase in average interest
earning assets of $103,806,000.
Average deposits for the Company for the quarter ended September 30,
1997 were $622,493,000, a $103,304,000 or 19.9% increase compared to the
same period in 1996. The Company's average cost of funds for the three
months ended September 30, 1997 was 3.7% which yielded a net interest
margin of 5.7%. This compares to an average cost of funds of 3.4% and a
net interest margin of 5.9% for the comparable 1996 period. Interest
expense of $4,513,000 for the quarter ended September 30, 1997 was
$1,106,000 or 32.4% over the comparable 1996 period due to an increase in
average interest bearing deposits of $75,454,000 and an increase in the
Company's cost of funds of 0.3%.
During the quarter ended September 30, 1997 , the Company made a
provision to the allowance for possible loan loss of $340,000. This
compares to a provision of $6,000 which was made in the third quarter 1996
and represents an increase of $334,000.
Total other income was $813,000 for the three months ended September
30, 1997, a $33,000 or 4.2% increase compared to the same period in 1996.
Service charges on deposit accounts increased by $99,000 or 18.6% and
other income decreased by $66,000 or 27.4% from the third quarter of 1997
to the same period in 1996.
Salaries and benefits expense for the three months ended September 30,
1997 was $2,768,000, a $6,000 or 0.2% increase from the comparable 1996
period. Although the benefits component increased during this period, the
overall decrease was due to 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 was $2,265,000,
a $556,000 or 19.7% increase from the comparable 1996 period. This was
primarily due to a decrease in equipment expense of $166,000, a decrease in
legal and professional expense of $283,000, and a decrease in other
expenses of $311,000. These decreases were partially offset by an increase
in occupancy expense of $153,000. The decrease in equipment expense, legal
and professional expense and other expense were a direct result of cost
savings which were targeted in the merger between South Valley
Bancorporation and the Company.
Applicable income taxes of $1,811,000 for the three months ended
September 30, 1997 were $604,000, or 50.0% more than the comparable 1996
period. The Company's effective tax rate for the three months ended
September 30, 1997 was 39.7% compared to 40.4% 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
September 30, 1997, the total of cash and due from banks, overnight fed
funds, money market mutual funds, and available-for-sale securities
represented $276,873,000 or 42.8% of total deposits compared to
$192,773,000 or 35.2% at year end 1996. This increase in liquid assets for
the nine months ended September 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 shareholders' 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 tables on the following page show the Company's risk-based and
leverage capital ratios as of September 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
September 30, 1997 December 31, 1996
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Capital $69,641 14.28% $63,469 13.91%
Tier 1 Capital minimum 19,484 4.00% 18,254 4.00%
requirement
Excess 50,157 10.28% 45,215 9.91%
Total Capital 73,809 15.14% 67,141 14.71%
Total Capital minimum 38,969 8.00% 36,508 8.00%
requirement
Excess 34,840 7.14% 30,633 6.71%
Risk-adjusted assets $487,606 $456,356
Leverage Ratios
September 30, 1997 December 31, 1996
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Capital to average
total assets
(Leverage ratio) $69,641 9.98% 63,469 10.55%
Minimum leverage 20,925 to 3.00% to 18,045 to 3.00% to
requirement
34,875 5.00% 30,075 5.00%
Excess 34,766 to 4.98% to 33,394 to 5.55% to
48,716 6.98% 45,424 7.55%
Average total assets $697,497 $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 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 1/ (*)
3.2 Bylaws of Company as amended 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/
10.41 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/
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/
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
10.52 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
10.57 Employment Agreement dated November 20, 1996 between South (*)
Valley National Bank and Brad L. Smith /12
10.58 Employment Agreement dated August 26, 1997 between Pacific 23
Capital Bancorp and Clayton C. Larson
10.59 Employment Agreement dated August 26, 1997 between Pacific 32
Capital Bancorp and D. Vernon Horton
10.60 Employment Agreement dated August 26, 1997 between Pacific 41
Capital Bancorp and Dennis A. DeCius
10.61 Employment Agreement dated August 26, 1997 between Pacific 50
Capital Bancorp and Dale R. Diederick
10.62 Amended and Restated Executive Salary Continuation Agreement 59
dated September 23, 1997 between Pacific Capital Bancorp and
Clayton C. Larson
10.63 Amended and Restated Executive Salary Continuation Agreement 71
dated September 23, 1997 between Pacific Capital Bancorp and
D. Vernon Horton
10.64 Amended and Restated Executive Salary Continuation Agreement 83
dated September 23, 1997 between Pacific Capital Bancorp and
Dennis A. DeCius
10.65 Amended and Restated Executive Salary Continuation Agreement 95
dated September 23, 1997 between Pacific Capital Bancorp and
Dale R. Diederick
27. Financial Data Schedule 22
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K for the quarter ended September
30, 1997
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.
Pacific Capital Bancorp
Date __ November 13, 1997_____ /S/ D. Vernon Horton
D. Vernon Horton
Chairman of the Board
Chief Executive Officer
Date __ November 13, 1997_______ /S/ Dennis A. DeCius
Dennis A. DeCius
Executive Vice President
Chief Financial Officer