SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended: December 31, 1995
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number: 0-13528
PACIFIC CAPITAL BANCORP
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(Exact Name of registrant as specified in its charter)
California 77-0003875
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
307 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 757-4900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ]
Aggregate market value of Common Stock held by nonaffiliates of Pacific Capital
Bancorp at March 1, 1996: $53,050,518 Number of shares of Common Stock
outstanding at March 1, 1996: 2,600,588
Documents Incorporated by Reference:
1995 Annual Report to Shareholders. Part II, Items 5, 6, 7 and 8
Proxy Statement for 1996 Annual Part III, Items 10, 11, 12 and 13
Meeting of Shareholders to be filed
pursuant to Regulation 14A.
THIS REPORT INCLUDES A TOTAL OF PAGES
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EXHIBIT INDEX IS ON PAGE
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TABLE OF CONTENTS
PAGE
ITEM 1 BUSINESS....................................................................................................4
ITEM 2 PROPERTIES.................................................................................................16
ITEM 3 LEGAL PROCEEDINGS..........................................................................................19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................19
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.......................................20
ITEM 6 SELECTED FINANCIAL DATA....................................................................................20
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................................20
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................20
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................20
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................21
ITEM 11 EXECUTIVE COMPENSATION.....................................................................................21
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................................................21
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................21
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................22
1
PART I
ITEM 1 BUSINESS
GENERAL
Pacific Capital Bancorp (the Company) is a California corporation and
bank holding company which was incorporated on January 26, 1983. First National
Bank of Central California, the Company's wholly-owned banking subsidiary (the
Bank), commenced operations on April 2, 1984, under the name First National Bank
of Monterey County. The Bank is a full service commercial bank serving Monterey,
Salinas, Carmel, Watsonville, Prunedale and surrounding areas in Monterey and
Santa Cruz Counties in California.
The Company itself does not engage in any business activities other
than the ownership of the Bank and the ownership of one other wholly-owned
subsidiary, Pacific Capital Services Corporation (PCSC). PCSC has no active
operations at this time. If specific opportunities were to present themselves,
the Company would consider expanding the operations of its banking subsidiary
and would seek opportunities for acquiring or forming other non-banking
subsidiaries.
GENERAL BANKING SERVICES
The Bank provides a wide range of commercial banking services to
individuals, professionals, and small and medium sized businesses. The services
provided include those typically offered by commercial banks, such as: checking,
interest checking and savings accounts, travelers checks, safe deposit boxes,
collection services, night depository facilities and wire and telephone
transfers. In addition to the above deposit services, the Bank also provides a
full array of loan products including commercial, real estate and consumer loans
as well as a variety of government assisted loan programs such as SBA or Rural
Economic Community Development Service guaranteed loans. The Bank is a member of
the Federal Deposit Insurance Corporation (the FDIC) and the deposits of each
depositor of the Bank are insured up to $100,000. Professional firms,
individuals and businesses form the core of the Bank's customer and deposit
base.
The Bank maintains lobby hours between 9:00 a.m. and 5:00 p.m., Monday
through Thursday and between 9:00 a.m. and 6:00 p.m. on Friday. In addition to a
broad range of retail products and services, the Bank offers courier pick-up
service, nationwide ATM access available through the Star(R) system, Cirrus(R),
Explore(R) and Ca$h24(R), and point of sale transactions through Explore(R),
Maestro(R) and Discover/Novus(R), merchant bank card support with electronic
ticket capture, self directed IRA'S, discount brokerage services and business
credit cards. Effective January 1, 1994, the Bank reduced its services at its
Prunedale branch, eliminating the acceptance of deposits and cashing of checks,
and on October 15, 1994, closed this branch office and converted it to an ATM
branch offering 24-hour ATM services and night depository facilities. The Bank's
loan administration department has been relocated to this location The Bank does
not offer trust services.
2
DEPOSITS
Most of the Bank's deposits are obtained from individuals,
professionals and small and medium-sized businesses. As of December 31, 1995,
the Bank had a total of 21,803 accounts representing 11,248 demand deposit
(checking) accounts with an average balance of approximately $6,410 each; 7,473
savings, interest-bearing demand, and money market accounts with an average
balance of approximately $20,458 each; and 3,082 other time accounts with an
average balance of approximately $27,355 each.
LENDING ACTIVITIES
The Bank engages in a full complement of lending activities, including
commercial, consumer/installment and short-term real estate loans, with a
particular emphasis on short- and medium-term commercial obligations. Commercial
lending activities are directed principally toward small- to medium-sized
businesses, such as professional firms, retail, light industry and manufacturing
to which the Bank makes (a) loans for working capital, (b) loans secured by
receivable and inventory, (c) term loans for equipment; and (d) real estate
development loans. In addition to conventional commercial lending, the Bank also
offers an array of government assisted loan products including SBA guaranteed
loans, SBA 504 loans (primarily for commercial real estate transactions), Rural
Economic Community Development Services guaranteed loans and loans guaranteed
under the State of California guarantee program. The Bank also works to meet the
needs of the local municipalities by providing lease financing for a wide
variety of equipment purchases including energy retrofit, fire trucks, police
cars, portable classrooms, etc. Consumer lending is oriented primarily to the
needs of the Bank's customers, with an emphasis on automobile financing and real
estate loans. Real estate loans include home loans, equity advance loans and
construction loans.
The Bank concentrates its lending activities in the following areas:
real estate loans, commercial loans and consumer loans to individuals. As of
December 31, 1995, these three categories accounted for approximately 67.7%,
23.6% and 5.7%, respectively, of the Bank's loan portfolio. As of December 31,
1995, the Bank had total loans outstanding of $211,344,000. No material portion
of the Bank's loan portfolio is concentrated within a single industry or group
of related industries.
The interest rates charged for the various loans made by the Bank vary
with the degree of risk and the size and maturity of the loans involved and are
generally affected by competition, governmental regulation and by current money
market rates.
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio. The Bank follows the policy of non-accrual of interest on a loan
when principal or interest is 90 days or more past due unless the loan is well
secured and in the process of collection. Interest income from non-accrual loans
is not accrued on the books, but rather is recorded only when and if received.
When a loan is placed on a non-accrual basis, any previously accrued but unpaid
interest is reversed and charged against current income unless there is adequate
collateral to assure recovery of the accrued interest.
3
CORRESPONDENT BANKS
The Bank has correspondent relationships with First Interstate Bank of
California, Bank of California, N.A., Bank of America, N.T.& S.A. and the
Federal Reserve Bank of San Francisco. These relationships are a result of the
Bank's efforts to obtain a wide range of services for the Bank and its customers
and, as net sellers of federal funds (overnight interbank loans), to minimize
the risk of an undue concentration of its resources with a few entities. The
Bank does not currently serve, nor does it have plans to serve, as a
correspondent to other banks.
The correspondent banks perform the following services for the Bank:
arrange loan participations; purchase and sell federal funds; obtain lines for
letters of credit; buy and sell investment securities; safekeep the Bank's
investment securities; and perform stock transfer agent, and data processing
services.
EXISTING LOCATIONS
The Bank currently operates five branch offices: the Monterey branch
located at 495 Washington Street, Monterey; the Salinas branch located at 1001
South Main Street, Salinas; the Oldtown office located at 307 Main Street,
Salinas; the Carmel branch located in the Carmel Rancho Shopping Center, Carmel;
and the Watsonville branch located at 655 Main Street, Watsonville. Effective
January 1, 1994, the Bank reduced the services offered at its Prunedale branch
located in the Prunedale Shopping Center, Prunedale, discontinuing accepting
deposits or cashing checks, and on October 15, 1994, the Prunedale branch was
closed and converted to an ATM branch offering 24-hour ATM services and night
depository facilities. The Bank's loan administration department has been
relocated to this location. In addition to a banking office, the Oldtown office
in Salinas houses all of the Bank's administrative functions as well as Data
Processing/Operations department and a Community/Board room.
On January 25, 1995, the Bank filed a branch application for a new
branch office to be located at the Westridge Center in Salinas, California,
northwest of U.S. 101 and Laurel Drive. On March 7, 1996, the Bank withdrew the
application.
On March 7, 1996, the Bank filed an application for permission to
establish a Customer Bank Communication Terminal (CBCT) branch at Monterey
Peninsula College.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries employed 165
full-time equivalent employees.
4
OTHER INFORMATION CONCERNING THE COMPANY AND THE BANK
The Company and the Bank hold no material patents, trademarks,
licenses, franchises or concessions except for the licenses issued by the
Comptroller of the Currency (the Comptroller) for the Bank's banking offices.
No material expenditures were made by the Company or the Bank during
their last three fiscal years on research and development activities relating to
the development of services or the improvement of existing services.
Based upon present business activities, compliance with Federal, State
and local provisions regulating discharge of materials into the environment will
have no material effect upon the capital expenditures, earnings and competitive
position of the Company or the Bank.
PACIFIC CAPITAL SERVICES CORPORATION
Pacific Capital Services Corporation (PCSC), a wholly-owned subsidiary
of the Company, was incorporated on April 22, 1985, to arrange and broker
residential, commercial and construction loans and other extensions of credit.
PCSC commenced operations on July 1, 1985, with a primary emphasis in the area
of residential mortgage loans. In December, 1988, the functions performed by
PCSC were taken over by the Bank and PCSC ceased operations. The Company
maintains PCSC as an inactive subsidiary.
SELECTED STATISTICAL INFORMATION
Consolidated statistical information concerning the business of the
Company and the Bank is set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations (Management's Discussion and
Analysis) on pages 44 through 60 of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1995, (the Annual Report) and in Note
1-11 to the Consolidated Financial Statements on pages 30 through 43 of the
Annual Report, which pages of the Annual Report are incorporated herein by
reference. This information should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included in the Annual Report which
have been incorporated herein by reference.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The Company's average consolidated balance sheet and an analysis of net
interest earnings for the years ended December 31, 1995, 1994 and 1993 is set
forth in Management's Discussion and Analysis on page 45 of the Annual Report.
A table setting forth the changes in interest income and interest
expense in 1995 and 1994 resulting from changes in volume and changes in rates
is set forth in Management's Discussion and Analysis on page 46 of the Annual
Report.
5
INVESTMENT PORTFOLIO
The amortized cost and estimated fair values of each category of
investment securities at December 31, 1995, and 1994 and the maturities of
investment securities at December 31, 1995, are set forth in Note 3 of the Notes
to Consolidated Financial Statements on pages 33 and 34 of the Annual Report.
At December 31, 1995, investment securities from the following issuers
each totaled over ten percent (10%) of shareholder's equity of the Company:
Amortized Estimated
Cost Fair value
Held-to-maturity securities:
State and municipal $6,633,000 $6,692,000
Available-for-sale securities:
U.S. Treasury $57,328,000 $57,787,000
U.S. Government Agencies $14,000,000 $13,999,000
LOAN AND LEASE PORTFOLIO
The composition of the loan and lease portfolio for the five years
ended at December 31, 1995, is set forth in Management's Discussion and Analysis
on page 47of the Annual Report.
Maturities and sensitivity to changes in interest rates in the loan and
lease portfolio, including real estate-mortgage and consumer loans, as of
December 31, 1995, are summarized in Management's Discussion and Analysis on
page 48 of the Annual Report.
The composition of nonaccrual, past due and restructured loans and
leases for the five years ended December 31, 1995, and a discussion of the
Company's policy for placing loans on nonaccrual status is set forth in
Management's Discussion and Analysis on page 51 of the Annual Report.
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of loan loss experience for the five years ended December
31, 1995, and a description of the factors which influenced management's
judgment in determining the amount of the additions to the allowance charged to
operating expenses in each fiscal period, as well as a discussion of the risk
elements in the loan portfolio, is set forth in Management's Discussion and
Analysis on page 49 of the Annual Report.
6
DEPOSITS
The average amount of and the average rate paid on major deposit
categories for the years ended December 31, 1995, 1994 and 1993 is set forth in
Management's Discussion and Analysis on page 52 of the Annual Report.
The maturity of time certificates of deposit of $100,000 or more and
other time deposits of $100,000 or more at December 31, 1995, is set forth in
Management's Discussion and Analysis on page 53 of the Annual Report.
FINANCIAL RATIOS
Certain ratios of profitability, liquidity and capital for the years
ended December 31, 1995, and 1994 are summarized in the Selected Financial Data
on page 24 of the Annual Report and in Management's Discussion and Analysis on
page 56 of the Annual Report.
COMPETITION
In California and in the Bank's primary service areas, major banks
dominate the commercial banking industry. Among the advantages which these banks
have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets, including loans, to regions
of higher yield and demand. By virtue of their larger amounts of capital, such
institutions have substantially greater lending limits than the Bank and perform
certain functions, including trust services and international banking, which are
not offered directly by the Bank but are offered indirectly through its
correspondent institutions.
The service area of the Monterey and Carmel offices of the Bank
encompasses the greater Monterey Peninsula, including the cities of Monterey,
Pacific Grove, Carmel, Seaside, Marina, Sand City, Del Rey Oaks, and the
unincorporated communities of Pebble Beach and Carmel Valley. As of June 30,
1995, there were twenty-seven (27) operating bank offices, including the Bank's
Monterey and Carmel offices, in the service area. There were also nineteen (19)
operating savings and loan and credit union offices in the service area as of
June 30, 1995.
The service area of the Salinas offices are comprised primarily of the
City of Salinas, Prunedale and the unincorporated areas of North Monterey
County. There were sixteen (16) bank offices in these areas, including the
Bank's Salinas and Oldtown offices, as of June 30, 1995. There were also ten
(10) savings and loan and credit union offices in the service area as of June
30, 1995.
The service area of the Bank's Watsonville office includes the City of
Watsonville and neighboring areas. As of June 30, 1995, there were eight (8)
operating bank offices, including the Bank's Watsonville office, in the service
area. There were also four (4) savings and loan and credit union offices in the
service area as of June 30, 1995.
7
Other entities, both governmental and in private industry, seeking to
raise capital through the issuance and sale of debt securities, as well as other
depository institutions such as thrift and loan companies and credit unions,
also provide competition for the Bank in the acquisition of deposits. Banks also
compete with money market funds and other money market instruments which are not
subject to interest rate ceilings.
From time to time, legislation is proposed or enacted which has the
effect of increasing the cost of doing business, limiting permissible activities
or affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Bank in particular.
SUPERVISION AND REGULATION
THE EFFECT OF GOVERNMENTAL POLICY ON BANKING
The earnings and growth of the Company and the Bank are affected not
only by local market area factors and general economic conditions, but also by
government monetary and fiscal policies. For example, the Board of Governors of
the Federal Reserve System (the FRB) influences the supply of money through its
open market operations in U.S. Government securities, and adjustments to the
discount rates applicable to borrowings by depository institutions and others.
Such actions influence the growth of loans, investments and deposits and also
effect interest rates charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business and earnings of the
Company and the Bank cannot be predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities, or enhancing the competitive
position of other financial institutions. Any change in applicable laws or
regulations may have a material adverse effect on the business and prospects of
the Company.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (BHCA). The Company reports to, registers with,
and may be examined by the FRB. The FRB also has the authority to examine the
Company's subsidiaries.
The FRB requires the Company to maintain certain levels of capital. See
"Capital Standards" herein. The FRB also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations, or conditions imposed in
writing by the FRB. See "Prompt Corrective Action and other Enforcement
Mechanisms" herein.
8
Under the BHCA, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over, or acquires directly
or indirectly, more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. Thus, the Company is required to
obtain the prior approval of the FRB before it acquires, merges or consolidates
with any bank or bank holding company; any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the FRB's
approval.
The Company is generally prohibited under the BHCA from acquiring
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval of
the FRB, may engage, or acquire the voting shares of companies engaged, in
activities that the FRB has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. A bank holding
company must demonstrate that the benefits to the public of the proposed
activity will outweigh the possible adverse effects associated with such
activity.
The FRB generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition.
Transactions between the Company and the Bank and any future
subsidiaries are subject to a number of other restrictions. FRB policies forbid
the payment by bank subsidiaries of management fees which are unreasonable in
amount or exceed the fair market value of the services rendered (or, if no
market exists, actual costs plus a reasonable profit). Additionally, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
9
BANK REGULATION AND SUPERVISION
As a national bank, the Bank is regulated, supervised and regularly
examined by the office of the Comptroller of the Currency (OCC). Deposit
accounts at the Bank are insured by the Bank Insurance Fund (BIF), as
administered by the Federal Deposit Insurance Corporation (FDIC), to the maximum
amount permitted by law. The Bank is also subject to applicable provisions of
California law, insofar as such provisions are not in conflict with or preempted
by federal banking law.
CAPITAL STANDARDS
The OCC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are reported as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by one
of several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, noncumulative perpetual preferred stock and
minority interests in certain subsidiaries, less most other intangible assets.
Tier 2 capital may consist of a limited amount of the allowance for possible
loan and lease losses and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital are subject to certain other
requirements and limitations of the federal banking agencies. Since December 31,
1992, the federal banking agencies have required a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
10
The following tables present the capital ratios for the Company and the
Bank as of December 31, 1995.
THE COMPANY THE BANK
---------------------------- ---------------------------
Amount Ratio Amount Ratio
------- ------ ------- -----
(000's) (000's)
Risk-Based Capital Ratio:
Tier 1 Capital $42,976 17.60% $40,532 16.78%
Minimum Requirement $9,765 4.00% $9,662 4.00%
Excess $33,211 13.60% $30,870 12.78%
======= ====== ======= ======
Total Capital $45,373 18.59% $42,929 17.77%
Minimum Requirement $19,529 8.00% $19,325 8.00%
Excess $25,844 10.59% $23,604 9.77%
======= ====== ======= =====
Risk-Adjusted Assets $244,114 $241,561
THE COMPANY THE BANK
---------------------------- ---------------------------
Amount Ratio Amount Ratio
------- ------ ------- ------
(000's) (000's)
Leverage Ratio:
Tier 1 Capital $42,976 12.00% $40,532 11.38%
Minimum Requirement $14,330 4.00% $14,247 4.00%
Excess $28,646 8.00% $26,285 7.38%
======= ===== ======= =====
Average Quarterly Assets $358,232 $356,173
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. Federal law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
11
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibits a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend shall be paid. Moreover, even if a bank's surplus exceeds its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by the Bank is
governed by the Bank's ability to maintain minimum required capital levels and
an adequate allowance for loan losses. Regulators also have the authority to
prohibit a depository institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including payments of dividends or
other payments under certain circumstances even if such payments are not
expressly prohibited by statue.
The Bank has paid a stock dividend every year since 1986 and cash
dividends were paid in 1993, 1994 and 1995.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
As an insured depository institution, the Company is required to pay
premiums for FDIC deposit insurance. The FDIC has adopted a risk-based
assessment system for deposit insurance premiums. Under this system, depository
institutions were charged anywhere from 23 cents to 31 cents for every $100 in
insured deposits based on that institution's capital levels and supervisory
subgroup assignment.
In May 1995, the BIF achieved its target goal of bringing the ratio of
insurance fund reserves to $1.25 for each $100 of insured deposits. Based on
this reserve level, the FDIC in September 1995, reduced the range of insurance
assessments to a range of $.04 to $.31 per $100 in insured deposits. In November
1995, the FDIC further reduced the range of insurance assessment rates to $0 to
$.31 per $100 in insured deposits. Due to these changes in assessment rates, the
Company's FDIC Assessment expense decreased for 1995 by $316,000 or 94.6%.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the Interstate Act) was signed into law. This Interstate
Act effectively permits nationwide banking. The Interstate Act provides that one
year after enactment, adequately capitalized and adequately managed bank holding
companies may acquire banks in any state, even in those jurisdictions that
currently bar acquisition by out-of-state institutions, subject to deposit
concentration limits. The deposit concentration limits provide that regulatory
approval by the Federal Reserve Board may not be granted for a proposed
interstate acquisition if after the acquisition, the acquiror on a consolidated
basis would control more than 10% of the total deposits nationwide or would
control more than 30% of
12
deposits in the state where the acquiring institution is located. The deposit
concentration state limit does not apply for initial acquisitions in a state and
in every case, may be waived by the state regulatory authority. Interstate
acquisitions are subject to compliance with the Community Reinvestment Act
(CRA). States are permitted to impose age requirements not to exceed five years
on target banks for interstate acquisitions. States are not allowed to opt-out
of interstate banking.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks is not permitted until
June 1, 1997, provided that the state has not passed legislation "opting-out" of
interstate branching. If a state opts-out prior to June 1, 1997, then banks
located in that state may not participate in interstate banking. A state may
opt-in to interstate branching by bank consolidation or by de novo branching by
passing appropriate legislation earlier than June 1, 1997. Interstate branching
is also subject to a 30% statewide deposit concentration limit on a consolidated
basis, and a 10% nationwide deposit concentration limit. The laws of the host
state regarding community reinvestment, fair lending, consumer protection
(including usury limits) and establishment of branches shall apply to the
interstate branches.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
Effective October 2, 1995, California opted in early to interstate
branching by permitting other state's banks to acquire an entire California bank
by merger or purchase and thereby establish one or more California branch
offices, provided the acquired bank has been in existence at lease five years.
Effective one year after enactment, the Interstate Act permits bank
subsidiaries of a bank holding company to act as agents for affiliated
depository institutions in receiving deposits, renewing time deposits, closing
loans, servicing loans and receiving payments on loans and other obligations. A
bank acting as agent for an affiliate shall not be considered a branch of the
affiliate. Any agency relationship between affiliates must be on terms that are
consistent with safe and sound banking practices. The authority for an agency
relationship for receiving deposits includes the taking of deposits for an
existing account but is not meant to include the opening or origination of new
deposit accounts. Subject to certain conditions, insured saving associations
which were affiliated with banks as of June 1, 1994, may act as agents for such
banks. An affiliate bank or savings association may not conduct any activity as
an agent which such institution if prohibited from conducting as principal.
If an interstate bank decides to close a branch located in a low-or
moderate-income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies are
directed to implement regulations prohibiting interstate branches from being
used as "deposit production offices." The regulations to implement its
13
provisions are due by June 1, 1997. The regulations must include a provision to
the effect that if loans made by an interstate branch are less than fifty
percent of the average of all depository institutions in the state, then the
regulatory must review the loan portfolio of the branch. If the regulator
determines that the branch is not meeting the credit needs of the community, it
has the authority to close the branch and to prohibit the bank from opening new
branches in the state.
ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Account
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. Examples are stock options, restricted stock, and stock
appreciation rights. This statement defines a fair value based method of
accounting for an employee stock option or similar equity instrument. Under this
method, compensation costs are measured at the grant date based on the value of
the award and are recognized over the service period, which is the vesting
period. SFAS No. 123 encourages (but does not require) employers to adopt the
new method in place of the provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. This statement applies
to fiscal years beginning after December 15, 1995. The Company has elected to
use current practice under APB No. 25 and does not anticipate that the required
disclosures will have a material impact on the financial condition or results of
operations of the Company.
ITEM 2 PROPERTIES
SALINAS
The Salinas office of the Bank is located at 1001 South Main Street in
Salinas on premises owned by the Company. The Bank leased the premises from the
Company at the rate of $6,000 per month pursuant to the terms of a ten-year
lease executed as of April 1, 1984. On April 1, 1994, the lease was renegotiated
for an additional 10 years. The amount of monthly rent payable under the new
lease is subject to annual negotiation between the Company and the Bank. The
Bank's rental rate for 1995 is $6,000 per month. The Bank pays for all utilities
used at the premises.
The current Salinas office consist of a building which contains 4,800
square feet and is located on a lot of approximately 26,700 square feet. Parking
spaces are available for thirty-five (35) automobiles. During July 1995, a major
renovation and construction project was started that will double the size of the
Salinas Office. This project is expected to be completed approximately May 1,
1996, and cost approximately one million four hundred dollars ($1,400,000). The
Bank had previously purchased an adjacent 12,000 square foot parcel of property
located at 14 and 16 E. Romie Lane at a total cost of $430,397 for future
expansion plans. This property will now become a part of the new Salinas Office
complex by providing parking for 41 automobiles. At the completion of the
project, the Company will negotiate the Bank's rental rate for the remaining
term of the lease.
14
As of December 31, 1995, the Bank had invested $415,205 for furniture,
fixtures, equipment and leasehold improvements for the Salinas Office.
The Bank's Administrative and Oldtown office is leased at market rates
from Director James L. Gattis under a lease for 15,371 square feet of office
space in a building located at 307 Main Street, Salinas, California. This
facility houses the Bank's Oldtown Banking Office, its Data
Processing/Operations department, and Community/Board room. The initial lease
term, which commenced on May 1, 1989, is for five (5) years at an initial rental
rate of $10,600 per month for the first year of the rental term. For each year
after the first year of the term, the rental rate is increased to reflect
increases in the consumer Price Index for all items for the San
Francisco/Oakland Metropolitan Area, using October, 1988 as the base month. on
September 19, 1992, the Bank exercised an option to lease the 1,662 square feet
of space in the building which it did not already occupy. The Bank, in addition
to this rental rate, pays all taxes and assessments levied against the leased
premises and pays for all utilities on the leased premises. The lease also
provides the Bank with three successive five-year options to renew at a rental
rate to be determined based on increases in the Consumer Price Index as
described above. The Bank has exercised its option to renew the lease for an
additional five year period commencing on January 1, 1994. The Bank's rental
rate for 1995 is $15,780 per month.
The Bank has invested $442,236 in leasehold improvements and $2,227,700
in furniture, fixtures and equipment for the Information Services Department and
the Administrative and Oldtown offices as of December 1995.
On February 2, 1996, the Bank entered into an agreement with
Information Technology, Inc., for the purpose of purchasing a new computer
mainframe and mainframe software at a cost of $304,603. The new computer system
is expected to be installed and operational by mid-April 1996.
Pursuant to a lease entered into on October 26, 1993, the Bank leases
from Chairman Stanley R. Haynes, 4,340 square feet of warehouse space located at
632 E. Alisal Street, Salinas, for a term of sixty months ending on October 31,
1998. The lease is cancelable by either party by giving twelve months notice.
CARMEL
The Bank's Carmel office opened for business on June 17, 1991. The
Carmel office consists of a 3,400 square foot portion of the Carmel Rancho
Shopping Center. The Carmel office is held under a lease with an initial term of
ten (10) years, commencing on November 1, 1990. The lease provides the Bank with
four (4) five-year options to extend the term for an aggregate lease term of
thirty (30) years. The Bank's rental obligation under the lease was $6,000 per
month for the first twelve (12) months and the lease provides for adjustment in
subsequent periods (including any renewal period) to reflect changes in the
Consumer Price Index for All Urban Consumers in the San Francisco-Oakland Area.
Accordingly, the Bank's rental rate for 1995 was adjusted to $7,200 per month.
The Bank had invested $423,757 in leasehold improvements and $257,997
in furniture, fixtures and equipment for the Carmel office as of December 31,
1995.
15
WATSONVILLE
The Bank's Watsonville office is located at 655 Main Street in downtown
Watsonville, California in a 3,600 square foot modular building located on a
45,000 square foot parcel of land which was purchased in 1986 at a cost of
approximately $400,000. As of December 31, 1995, the Company has invested
approximately $680,146 in furniture, fixtures and equipment, $1,943,811 in
construction costs and $79,010 in leasehold improvements for the Watsonville
office.
MONTEREY
The Bank's Monterey banking office is located at 495 Washington Street,
has approximately 10,000 square feet of space, and is situated on a 21,962
square foot parcel leased by the Bank. The Bank's lease for the property has an
initial term of fifteen (15) years, commencing on July 1, 1990. The lease
provides the Bank with an initial option to extend the term for an additional
ten (10) years and with a second option to extend the term for a period which
will cause the aggregate lease term to extend to a total of thirty-four (34)
years and eleven (11) months from June 28, 1989. The lease agreement also
provides the Bank with a right of first refusal to purchase the premises and to
lease or purchase an adjacent parcel containing approximately 8,500 square feet.
The Bank's rental obligation under the lease is $7,000 per month for the first
sixty (60) months and will be adjusted in subsequent periods (including upon the
exercise of any renewal option) to reflect changes in the Consumer Price Index
for All Urban Consumers in the San Francisco-Oakland-San Jose Area, using
December, 1987 as the base month. The Bank's rental rate for 1996 was adjusted
to $8,208 per month.
The Bank had invested a total of $1,642,192 in construction costs for
the new building and an additional $437,376 in furniture, fixtures and equipment
as of December 31, 1995.
In connection with the relocation of its Monterey office in 1991, the
Bank entered into an agreement to sublease its original Monterey banking
facility, located at 601 Abrego Street. The sublease agreement, which was
entered into as of November 12, 1990, and expires on December 31, 2003, provided
for initial monthly rent of $4,971, to be adjusted each January 1, commencing
January 1, 1994, to reflect changes in the Consumer Price Index for All Urban
Consumers in the San Francisco-Oakland Metropolitan Area and to reflect
adjustments in the underlying lease.
The Bank's lease on this property was renewed for an additional ten
(10) years beginning on January 1, 1994, and ending on December 31, 2003, the
same date as the sublease discussed above. The initial rental is $4,000 per
month, to be adjusted each January l to reflect changes in the Consumer Price
Index for all Urban Consumers in the San Francisco-Oakland Metropolitan Area.
Accordingly, the Bank's rental rate for 1995 was adjusted to $4,162 per month.
The Company had invested approximately $416,718 in construction costs
in the 601 Abrego Street office as of December 31, 1995.
16
PRUNEDALE
The Bank's Prunedale facility is located in a 2,847 square foot portion
of the Prunetree Shopping Center under a lease entered into as of June 28, 1988,
with an initial term of ten (10) years. The rental obligation under the lease
commenced on July 1, 1989, at an initial monthly rent of $2,847. The lease
provides for annual increases in rent during the initial term and the Company's
monthly rental obligation from July 1, 1994, to June 30, 1995, is $4,578. On
July 1, 1996, the monthly rental obligation will increase to $4,807. The Bank's
Loan Department is located at this office. The Bank offers 24-hour ATM services
and a night depository facility at this location.
The lease provides the Company with three (3) five-year options to
extend the term for an aggregate lease term of twenty-five (25) years. The
Company's minimum rental obligation under any renewal period will be the
prevailing market value rent for equivalent space, as negotiated by the Company
and the lessor, provided that the minimum rental amount in any such renewal
period will not be less than the rental amount paid during the last year of the
original lease term or the last year of the previous option period. The minimum
rental obligation during any renewal period will then be increased annually by
five percent (5%) over the rental amount for the preceding year.
The lease also provides the Company with a right of first refusal to
lease premises adjacent to the Prunedale office in the event those adjacent
premises become available during the lease term, including renewal periods.
The Company had invested approximately $154,649 in construction costs
and an additional $330,120 in furniture, fixtures and equipment in the Prunedale
office as of December 31, 1995.
ITEM 3 LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses nor are
any such proceedings known to be contemplated by governmental authorities.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information concerning the Company's Common Stock and related
security holder matters, see "Pacific Capital Bancorp Stock Activity" at Page 61
of the Annual Report, which is incorporated herein by reference.
As of March 1, 1996, there were 1,602 holders of record of the
Company's Common Stock.
ITEM 6 SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Selected
Financial Information and Comparative Per Share Data" at Page 1 of the Annual
Report, which is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For Management's discussion and analysis of financial condition and
results of operations, see "Management's Discussion and Analysis" at Pages 45
through 60 of the Annual Report, which pages of the Annual Report are
incorporated herein by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see Pages 25 through 30 of the
Annual Report and the "Independent Auditors" Report thereon at Page 65 which
pages of the Annual Report are incorporated herein by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A (the Proxy Statement), which is incorporated herein
by reference.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and any persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no persons who own
more than ten-percent of the Company's Common Stock.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for the fiscal year ended
December 31, 1995, all filing requirements applicable to its officers and
directors have been satisfied.
ITEM 11 EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial
owners and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE COMPANY" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"INDEBTEDNESS OF MANAGEMENT" in the Proxy Statement, which is incorporated
herein by reference.
19
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of Pacific Capital
Bancorp and Subsidiaries, other financial information and the Independent
Auditors' Report on Consolidated Financial Statements are contained herein
following this Item 14.
2. FINANCIAL STATEMENT SCHEDULES.
In accordance with Regulation S-X, the financial statement schedules
have been omitted because (a) they are not applicable to or required of the
Company; or (b) the information required is included in the consolidated
financial statements or notes thereto.
With the exception of such information in the 1995 Annual Report
incorporated herein by reference, the 1995 Annual Report is not deemed "filed"
as part of this report.
3. EXHIBITS.
See Index to Exhibits at pages 69-73 of this Form 10-K.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K dated February 28, 1995, was filed with the
Commission on March 21, 1995, reporting under Item 5 -- Other Events - The stock
repurchase program was amended to increase the price per share at which the
Company will repurchase shares from $18.00 per share to $22.00 per share of not
more than 300,000 shares of the Company's outstanding common stock at an
aggregate purchase price not to exceed $5,000,000.
A report on Form 8-K dated August 22, 1995, was filed with the
Commission on August 22, 1995, reporting under Item 5 -- Other Events - The
stock repurchase program was amended to increase the price per share at which
the Company will repurchase shares from $22.00 per share to $24.00 per share of
not more than 300,000 shares of the Company's outstanding common stock at an
aggregate purchase price not to exceed $5,000,000.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statement on Form
S-8 No. 2-98004:
20
Insofar as indemnification for liabilities arising under the Securities
Act Of 1933 (the Act) may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being registered the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
21
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1995, 1994, and 1993
(With Independent Auditors' Report Thereon)
1
SELECTED FINANCIAL INFORMATION AND
COMPARATIVE PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Interest Income $25,845 $22,156 $20,257 $21,429 $24,643
Interest Expense 7,029 5,185 5,175 7,131 10,875
- ------------------------------------------------------------------ --------------------------------------------------
Net Interest Income 18,816 16,971 15,082 14,298 13,768
Provision for Possible Loan Losses 135 100 890 925 441
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 18,681 16,871 14,192 13,373 13,327
Other Income 1,948 2,105 2,245 2,336 2,168
Other Expense 12,342 11,968 11,691 11,251 10,908
Net Gain (Loss) on Securities Transactions (73) (17) 120 3 5
- ---------------------------------------------------------------------------------------------------- ----------------
Earnings Before Income taxes 8,214 6,991 4,866 4,461 4,592
Income Taxes 3,180 2,652 1,727 1,540 1,633
- ----------------------------------------------------------------------------- ---------------------- ----------------
Income From Continuing Operations 5,034 4,339 3,139 2,921 2,959
Cumulative Effect of Accounting Change - - 549 - -
- ---------------------------------------------------------------------------------------------------------------------
Net Income $5,034 $4,339 $3,688 $2,921 $2,959
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Income From Continuing Operations (1) $1.86 $1.65 $1.18 $1.10 $1.11
Net Income (1) 1.86 1.65 1.39 1.10 1.11
Cash Dividends Declared .53 .40 .30 - -
Book Value 16.50 15.65 15.23 14.80 14.20
BALANCES AT YEAR END
Total Assets 353,579 343,879 308,767 307,737 291,240
Total Loans 211,344 200,780 180,592 183,744 196,743
Allowance for Possible Loan Losses 2,397 2,438 2,507 2,352 2,148
Total Deposits 307,819 303,229 271,773 272,940 259,991
Total Shareholders' Equity 42,976 38,750 35,432 32,787 29,751
AVERAGE DAILY BALANCES
Total Assets 339,351 324,919 311,867 297,747 277,957
Total Loans 201,360 190,721 177,988 191,099 198,495
Allowance for Possible Loan Losses 2,359 2,475 2,343 2,202 2,248
Total Deposits 295,560 287,293 277,246 264,799 247,199
Total Shareholders' Equity 41,280 37,216 34,131 31,401 28,658
PERFORMANCE AND CAPITAL RATIOS
Return on Average Assets 1.48% 1.34% 1.18% 0.98% 1.06%
Return on Average Equity 12.19% 11.66% 10.81% 9.30% 10.33%
Average Equity to Average Assets 12.16% 11.46% 10.94% 10.55% 10.31%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Weighted average shares outstanding and all share and per share amounts
have given effect to all stock dividends and stock splits.
</FN>
2
Pacific Capital Bancorp
and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1990 1989 1988 1987 1986
- ----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Interest Income $26,882 $25,116 $21,013 $16,662 $13,020
Interest Expense 12,698 11,916 9,543 7,573 6,351
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income 14,184 13,200 11,470 9,089 6,669
Provision for Possible Loan Losses 225 379 554 650 650
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 13,959 12,821 10,916 8,439 6,019
Other Income 2,257 2,208 1,094 873 703
Other Expense 11,530 9,776 7,433 6,651 5,361
Net Gain (Loss) on Securities Transactions (7) 43 44 41 27
- ------------------------------------------------------------------------------------------------------ ---------------
Earnings Before Income taxes 4,679 5,296 4,621 2,702 1,388
Income Taxes 1,738 1,959 1,559 986 402
- ----------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations
Cumulative Effect of Accounting Change 2,941 3,337 3,062 1,716 986
- ----------------------------------------------------------------------------------------------------------------------
Net Income $2,941 $3,337 $3,062 $1,716 $986
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Income From Continuing Operations (1) $1.07 $1.64 $1.53 $1.01 $.75
Net Income (1) 1.07 1.64 1.53 1.01 .75
Cash Dividends Declared - - - - -
Book Value 13.97 13.19 10.71 10.00 8.55
BALANCES AT YEAR END
Total Assets 273,865 262,208 239,034 212,207 179,906
Total Loans 195,461 185,689 157,160 137,575 103,117
Allowance for Possible Loan Losses 2,193 1,853 1,790 1,391 1,145
Total Deposits 243,960 234,672 204,011 188,337 136,885
Total Shareholders' Equity 28,301 24,781 20,021 18,248 11,256
AVERAGE DAILY BALANCES
Total Assets 269,592 242,871 223,884 187,851 141,739
Total Loans 196,562 169,513 143,111 113,916 85,380
Allowance for Possible Loan Losses 2,042 1,840 1,626 1,310 1,071
Total Deposits 241,079 216,627 200,690 170,256 129,107
Total Shareholders' Equity 26,454 23,207 19,607 14,909 11,243
PERFORMANCE AND CAPITAL RATIOS
Return on Average Assets 1.09% 1.37% 1.37% .91% .70%
Return on Average Equity 11.12% 14.38% 15.62% 11.51% 8.77%
Average Equity to Average Assets 9.81% 9.56% 8.76% 7.94% 7.93%
- -----------------------------------------------------------------------------------------------------------------------
3
Pacific Capital Bancorp
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts) 1995 1994
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $24,891 $25,977
Federal funds sold 10,326 15,961
Money market funds 6,681 324
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 41,898 42,262
Investment securities:
Held-to-maturity securities, at amortized cost
(fair value of $8,662 and $62,367, respectively) 8,596 64,131
Available-for-sale securities, at fair value 75,896 22,258
- -------------------------------------------------------------------------------------------------------------------
Total investment securities 84,492 86,389
Loans available for sale 3,876 2,301
Loans 211,344 200,780
Less allowance for possible loan losses 2,397 2,438
- -------------------------------------------------------------------------------------------------------------------
Net loans 208,947 198,342
Premises and equipment, net 7,523 7,238
Accrued interest receivable and other assets 6,843 7,347
- -------------------------------------------------------------------------------------------------------------------
Total assets $353,579 $343,879
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $71,988 $70,638
Demand, interest bearing 56,527 53,410
Savings and money market 97,087 122,816
Time certificates 82,217 56,365
- -------------------------------------------------------------------------------------------------------------------
Total deposits 307,819 303,229
Accrued interest payable and other liabilities 2,784 1,900
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 310,603 305,129
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock; no par value, 20,000,000 shares authorized and unissued - -
Common stock; no par value, 20,000,000 shares authorized: 2,603,839
and 2,476,517 shares issued and outstanding, respectively 31,235 28,056
Retained earnings 11,435 10,850
Net unrealized gain (loss) on available-for-sale securities 306 (156)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,976 38,750
Commitments and contingencies - -
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $353,579 $343,879
===================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
Pacific Capital Bancorp
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994, and 1993
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $20,461 $17,329 $15,557
Interest on federal funds sold and other short-term investments 1,230 770 638
Interest on investment securities:
U.S. Treasury 3,205 3,139 2,726
U.S. government agencies 282 247 524
State and municipal 588 596 656
Other interest income 79 75 156
- ---------------------------------------------------------------------------------------------------------------
Total interest income 25,845 22,156 20,257
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Demand, interest bearing 566 551 607
Savings and money market 2,747 2,837 2,944
Time certificates 3,716 1,795 1,599
Other interest expense - 2 25
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 7,029 5,185 5,175
- ---------------------------------------------------------------------------------------------------------------
Net interest income 18,816 16,971 15,082
Provision for possible loan losses 135 100 890
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 18,681 16,871 14,192
- ---------------------------------------------------------------------------------------------------------------
Other income:
Service charges 1,805 1,838 1,733
Mortgage banking fees 123 153 302
Gain on sale of loans 20 114 210
Gains on securities transactions 70 79 173
Losses on securities transactions (143) (96) (53)
- ---------------------------------------------------------------------------------------------------------------
Total other income 1,875 2,088 2,365
- ---------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 6,638 6,027 5,801
Occupancy 1,399 1,271 1,309
Equipment 1,035 1,038 1,035
Advertising and promotion 476 480 317
Stationery and supplies 310 272 267
Legal and professional fees 572 653 616
Regulatory assessments 423 736 722
Other 1,489 1,491 1,624
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 12,342 11,968 11,691
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 8,214 6,991 4,866
Income taxes 3,180 2,652 1,727
- ---------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 5,034 4,339 3,139
- ---------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting for income taxes - - 549
- ---------------------------------------------------------------------------------------------------------------
Net income $5,034 $4,339 $3,688
===============================================================================================================
Earnings per share:
Income before cumulative effect of accounting change $1.86 $1.65 $1.18
Cumulative effect of accounting change - - 0.21
- ---------------------------------------------------------------------------------------------------------------
Net income $1.86 $1.65 $1.39
===============================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
5
Pacific Capital Bancorp
and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995, 1994, and 1993
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain (loss) on Total
Common stock Retained Guaranteed available-for- shareholders'
(In thousands, except share amounts) shares Amount earnings ESOP note sale securities equity
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1992 2,215,038 $24,726 $8,356 ($295) - $32,787
Net income for the year ended
December 31, 1993 - - 3,688 - - 3,688
Purchase and retirement of shares (77,484) (1,172) - - - (1,172)
Exercise of stock options
(net of 5,452 shares retired in
connection with cashless exercises) 78,460 526 - - - 526
5% stock dividend, including
payment of fractional shares 111,153 1,722 (1,735) - - (13)
Cash dividend declared - - (671) - - (671)
Repayment of ESOP note - - - 83 - 83
Recognition of net unrealized gain
on available-for-sale securities - - - - 204 204
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 2,327,167 25,802 9,638 (212) 204 35,432
Net income for the year ended
December 31, 1994 - - 4,339 - - 4,339
Purchase and retirement of shares (42,772) (717) - - - (717)
Exercise of stock options
(net of 5,284 shares retired in
connection with cashless exercises) 75,071 806 - - - 806
5% stock dividend, including
payment of fractional shares 117,051 2,165 (2,181) - - (16)
Cash dividends declared - - (946) - - (946)
Repayment of ESOP note - - - 212 - 212
Recognition of net unrealized loss
on available-for-sale securities - - - - (360) (360)
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 2,476,517 28,056 10,850 - (156) 38,750
Net income for the year ended
December 31, 1995 - - 5,034 - - 5,034
Purchase and retirement of shares (5,606) (111) - - - (111)
Exercise of stock options 9,590 158 - - - 158
5% stock dividend, including
payment of fractional shares 123,338 3,132 (3,147) - - (15)
Cash dividends declared - - (1,302) - - (1,302)
Recognition of net unrealized
gain on available-for-sale securities - - - - 462 462
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 2,603,839 $31,235 $11,435 $ - $306 $42,976
========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
6
Pacific Capital Bancorp
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
- --------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,034 $4,339 $3,688
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting method - - (549)
Depreciation and amortization 886 869 971
Accretion and amortization on investment securities (459) 721 469
Provision for possible loan losses 135 100 890
Loss (gain) on sale of investment securities, net 73 17 (120)
Net originations of loans available for sale (1,575) (2,759) (5,001)
Proceeds from sale of loans - 3,412 2,955
Gain on sale of loans (20) (114) (210)
Deferral of loan origination fees 8 (41) 138
Change in accrued interest receivable and other assets 966 (1,578) (332)
Change in accrued interest payable and other liabilities 906 338 (523)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,954 5,304 2,376
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in loans (10,750) (20,316) 2,069
Maturities of investment securities 22,368 21,062 22,488
Purchases of investment securities (62,174) (32,373) (74,493)
Proceeds from sale of available-for-sale securities 42,089 13,494 30,630
Capital expenditures, net (1,171) (789) (396)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,638) (18,922) (19,702)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 4,590 31,456 (1,167)
Cash paid for retirement of stock (111) (717) (1,172)
Proceeds from exercise of stock options 158 806 526
Cash paid in lieu of fractional shares (15) (16) (13)
Cash paid for dividends (1,302) (946) (671)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,320 30,583 (2,497)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (364) 16,965 (19,823)
Cash and cash equivalents at beginning of year 42,262 25,297 45,120
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $41,898 $42,262 $25,297
==============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $7,888 $5,289 $5,456
Income taxes 3,410 2,578 1,952
Release of guarantee of ESOP note - 212 83
==============================================================================================================
Noncash investing and financing activities:
Transfer from retained earnings to common stock due to
stock dividends $3,132 $2,165 $1,722
Transfer of securities from held-to-maturity
to available-for-sale 30,234 - -
Transfer from loans to other real estate owned 366 1,308 380
==============================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
7
Pacific Capital Bancorp
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(1) Summary of Significant Accounting Policies
The accounting policies of Pacific Capital Bancorp (the Company) and
subsidiaries are in accordance with generally accepted accounting
principles and conform to general practices within the banking
industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Pacific Capital Bancorp is a California corporation and bank holding
company which was incorporated on January 26, 1983. First National Bank
of Central California (the Bank), the Company's wholly owned
subsidiary, commenced operations on April 2, 1984 under the name First
National Bank of Monterey County. The Bank is a full service commercial
bank serving Monterey, Salinas, Carmel, Watsonville, Prunedale and
surrounding areas in Monterey and Santa Cruz Counties in California.
Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
First National Bank of Central California, and Pacific Capital Services
Corporation (an inactive corporation). All material intercompany
accounts and transactions have been eliminated in consolidation.
Investment Securities - The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities, as of December 31, 1993. SFAS No. 115
requires entities to classify investments in debt and equity securities
with readily determinable fair values as "held-to-maturity",
"available-for-sale", or "trading", and establishes accounting and
reporting requirements for each classification. In accordance with SFAS
No. 115, the Company has classified those securities for which it has
the positive intent and ability to hold to maturity as held-to-maturity
securities. Such securities are reported at amortized cost.
In November 1995, the Financial Accounting Standards Board (FASB)
issued a special report, A Guide to Implementation of Statement No.
115, on Accounting for Certain Investments in Debt and Equity
Securities Questions and Answers, (the Special Report). The Special
Report allowed companies to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications at fair value. Reclassifications from this one-time
reassessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future, provided that
reclassification was performed by December 31, 1995.
The Company adopted the reclassification provision in the Special
Report prior to December 31, 1995 and transferred $30,234,000 of
held-to-maturity securities into available-for-sale. The unrealized
pretax gain upon transfer was $38,000 at December 31, 1995.
8
Pacific Capital Bancorp
and Subsidiaries
The Company has classified certain securities for which it does not
have the intent to hold to maturity and which are not held principally
for the purpose of selling them in the near term as available-for-sale
securities. Such securities are reported at fair value, with unrealized
gains and losses, net of income taxes, reported in a separate component
of shareholders' equity.
Amortization of premiums and accretion of discounts arising at
acquisition of investment securities are included in income using
methods that approximate the interest method. Gains or losses on the
sale of securities are determined based on the specific identification
method.
Loans - Loans are stated at the principal amount outstanding. Interest
on loans is credited to income on a simple interest basis. Loan
origination fees and direct origination costs are deferred and
amortized to income by a method approximating the level yield interest
method over the estimated lives of the underlying loans. Loans
contractually past due over 90 days or considered impaired are placed
on nonaccrual status, unless they are well-secured by underlying
collateral and are in the process of collection.
The allowance for possible loan losses is a valuation allowance that is
maintained at a level estimated to be adequate to provide for future
loan losses through charges to current operating expense. The allowance
is based upon a continuing review of loans by management which includes
consideration of changes in the character of the loan portfolio,
current and anticipated economic conditions, past lending experience,
loan loss experience, and such other factors which, in management's
judgment, deserve recognition in estimating potential loan losses. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for possible loan
losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgment of information available to them
at the time of their examination.
In May 1993, the FASB issued SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. This statement addresses the accounting treatment
of certain impaired loans. Management considers a loan impaired when it
is contractually past due over 90 days and when the fair value of
assets collateralizing the loan (for collateral dependent loans) has
suffered significant deterioration. SFAS No. 114 requires that impaired
loans generally be measured based on the present value of expected
future cash flows discounted at the loans' effective rate or the loans'
observable market price or the fair value of it's collateral. In
October 1995, the FASB issued SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". SFAS
No. 118 amends SFAS No. 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. Both of these
Statements apply to financial statements for fiscal years beginning
after December 15, 1994. The Company has adopted both SFAS No. 114 and
SFAS No. 118 and there has been no material impact on its financial
condition or results of operation.
Loans Available for Sale - The Bank originates loans that are
guaranteed in part by the Small Business Administration. The guaranteed
portion of such loans may be sold without recourse. The Bank retains
the servicing and credit risk in the remaining unguaranteed portion.
Loans available for sale are valued at lower of cost or estimated
market value and are comprised of the portion of loans originated for
sale, which are guaranteed by the Small Business Administration. When
participating interests in loans are sold without recourse, gains are
recognized at the time of the sale which are equal to the premium
received less estimated future loan servicing costs and profits. Any
discounts related to loan interests retained are amortized using
methods that approximate the level yield basis over the remaining life
of the loan.
Mortgage Banking Fees - The Mortgage Banking Division of the Bank
operates solely as a brokerage operation. The Bank does not originate,
purchase, or sell loans in this area and thus retains no servicing
risk. The fee income derived from mortgage banking operations is
recognized when earned.
9
Pacific Capital Bancorp
and Subsidiaries
Premises and Equipment - Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and
amortization are charged to expense over the estimated useful lives of
the assets or the lease term on a straight-line basis as follows:
- --------------------------------------------------------------------------------
Buildings 40 years
Furniture and equipment 2-5 years
Leasehold improvements 5 years
Property under capital lease 5 years
- --------------------------------------------------------------------------------
Income Taxes - Income taxes are provided for under the asset and
liability method of SFAS No. 109, Accounting for Income Taxes. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. To the extent that current available evidence
about the future raises doubt about the realization of a deferred tax
asset, a valuation allowance is established to reduce that deferred tax
asset if it is more likely than not that the related tax benefits will
not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
which those differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Effective January 1, 1993, the Company adopted SFAS No. 109 and has
reported the cumulative effect of that change in method of accounting
for income taxes in the 1993 consolidated statement of income.
Net Income Per Share - Net income per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the year plus shares issuable assuming exercise of
all employee stock options, except where antidilutive. The weighted
average shares outstanding were 2,700,850, 2,627,561, and 2,650,127 in
1995, 1994, and 1993, respectively. Weighted average shares outstanding
and all per share amounts included in the accompanying consolidated
financial statements and notes thereto have given effect to all stock
dividends.
Dividends - During 1995, the Company declared a quarterly $0.125 cash
dividend payable on March 31, June 30, and September 30, to holders of
record on March 15, June 15, and September 15. In addition, the Company
declared a $0.15 cash dividend payable on December 15, 1995 to holders
of record on November 15, 1995. The Company also declared a 5% stock
dividend payable on December 1, 1995 to holders of record as of
November 15, 1995.
Reclassifications - Certain amounts in the 1994 and 1993 consolidated
financial statements have been reclassified to conform to the 1995
presentation.
(2) Cash and Due from Banks
Cash and due from banks includes approximately $4,528,000 and
$2,805,000 as of December 31, 1995 and 1994, respectively, held by the
Federal Reserve Bank of San Francisco to meet required reserve
balances.
10
Pacific Capital Bancorp
and Subsidiaries
(3) Investment Securities
The amortized cost and estimated fair values of investment securities
as of December 31 are as follows:
- ---------------------------------------------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized fair
(In thousands) cost gain loss value
- ---------------------------------------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
State and municipal $6,633 $72 $(13) $6,692
Mortgage-backed securities
and other 1,963 7 - 1,970
- -------------------------------------------------------------------------------------------------- ------------------
$8,596 $79 $(13) $8,662
=====================================================================================================================
Available-for-sale securities:
U.S. Treasury $57,328 $536 $(77) $57,787
State and municipal 4,074 45 (9) 4,110
U.S. government agencies 14,000 9 (10) 13,999
- -------------------------------------------------------------------------------- ------------------------------------
$75,402 $590 $(96) $75,896
=====================================================================================================================
1994
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury $51,234 $2 $(1,701) $49,535
State and municipal 12,043 68 (134) 11,977
Mortgage-backed securities
and other 854 2 (1) 855
- --------------------------------------------------------------------------------- -----------------------------------
$64,131 $72 $(1,836) $62,367
=====================================================================================================================
Available-for-sale securities:
U.S. Treasury $19,846 $- $(295) $19,551
U.S. government agencies 2,671 38 (2) 2,707
- ---------------------------------------------------------------------------------------------------------------------
$22,517 $38 $(297) $22,258
=====================================================================================================================
The amortized cost and estimated fair values of investment securities
as of December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Held-to-maturity Available-for-sale
securities securities
-----------------------------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
(In thousands) cost value cost value
- ---------------------------------------------------------------------------------------------------------------------
Due within one year $5,282 $5,317 $3,000 $3,020
Due after one through five years 1,527 1,562 72,402 72,876
Due after five through ten years 1,247 1,243 - -
Due after ten years - - - -
- ---------------------------------------------------------------------------------------------------------------------
8,056 8,122 75,402 75,896
Federal Reserve Bank stock 540 540 - -
- ------------------------------------------------------------- -------------------------------------------------------
$8,596 $8,662 $75,402 $75,896
=====================================================================================================================
As of December 31, 1995 and 1994, securities with carrying values of
approximately $23,621,000 and $31,084,000, respectively, were pledged
as collateral for such items as deposits of public funds, Federal
Reserve Bank borrowings, bankruptcy court accounts, and U.S. Treasury,
tax, and loan deposits.
11
Pacific Capital Bancorp
and Subsidiaries
Investments classified as state and municipal securities include
obligations issued by the state of California and its political
subdivisions and agencies having an aggregate carrying value of
$4,607,000 and an aggregate market value of $4,648,000 as of December
31, 1995.
The Company uses Standard & Poor's and Moody's rating services to
evaluate the quality of its investment portfolio. Of the $10,743,000 in
state and municipal securities held by the Company, $10,177,000 were
rated AAA, $425,000 were rated A, and $141,000 were nonrated
securities. For those bonds not rated, the market values were confirmed
with independent brokers. All mortgage backed securities are rated AAA.
(4) Loans
A summary of loans as of December 31 is as follows:
- ----------------------------------------------------------------------------------------- ---------------------------
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Commercial $49,862 $43,783
Consumer 12,108 11,328
Real estate - mortgage 126,048 116,630
Real estate - construction 17,071 22,539
Bankers' acceptances and commercial paper - 709
Other 6,501 6,090
- ---------------------------------------------------------------------------------------------------------------------
211,590 201,079
Less deferred loan fees 246 299
- ---------------------------------------------------------------------------------------------------------------------
$211,344 $200,780
=====================================================================================================================
The following is an analysis of the allowance for possible loan losses
for the years ended December 31:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $2,438 $2,507 $2,352
Provision charged to expense 135 100 890
Loans charged off (321) (304) (884)
Recoveries on loans previously
charged off 145 135 149
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $2,397 $2,438 $2,507
=====================================================================================================================
Loans for which interest is no longer being accrued totaled $993,000,
$2,023,000, and $2,286,000 as of December 31, 1995, 1994, and 1993,
respectively. Interest that would have been recognized on nonaccrual
loans was $256,000, $241,000, and $414,000 during 1995, 1994, and 1993,
respectively.
12
Pacific Capital Bancorp
and Subsidiaries
The Company makes loans to executive officers, directors, and their
affiliates in the ordinary course of business. The following is an
analysis of activity with respect to such loans for the years ended
December 31, 1995, and 1994:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $4,838 $4,581
New loan commitments 4,203 5,690
Repayment of loans (2,251) (2,217)
Undisbursed commitments, end of year (2,557) (3,216)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $4,233 $4,838
=====================================================================================================================
The Company and its subsidiaries operate in a geographic region
comprising Monterey and Santa Cruz Counties. The Bank's credit risk is
therefore dependent in part to the economic condition of this region.
Loans are made on the basis of a secure repayment source, namely the
cash flows generated by the borrowing entity, collateral is generally a
secondary source for loan qualification. It is the Bank's policy to
maintain the loan to value ratio on secured loans below 75%. Management
believes this practice tends to mitigate risks caused by the local
economy
(5) Premises and Equipment
Premises and equipment as of December 31 are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Land $1,606 $1,606
Buildings 5,050 4,468
Furniture and equipment 5,072 4,679
Leasehold improvements 1,273 1,192
- ---------------------------------------------------------------------------------------------------------------------
13,001 11,945
Less accumulated depreciation and amortization 5,478 4,707
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $7,523 $7,238
=====================================================================================================================
(6) Time Deposits
As of December 31, 1995 and 1994, the Company had liabilities of
$42,976,000 and $34,885,000, respectively, for time deposits in
denominations of $100,000 or more. Interest expense for these deposits
was $2,168,000 and $1,107,000 in 1995 and 1994, respectively.
13
Pacific Capital Bancorp
and Subsidiaries
(7) Income Taxes
As discussed in Note 1, the Company adopted SFAS No. 109 as of January
1, 1993. The cumulative effect of this change in accounting for income
taxes of $549,000 is determined as of January 1, 1993, and is reported
separately in the consolidated statement of income for the year ended
December 31, 1993.
Components of income tax expense for the years ended December 31, 1995,
1994, and 1993 are as follows:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Current:
Federal $2,420 $1,994 $1,149
State 982 809 526
- ---------------------------------------------------------------------------------------------------------------------
3,402 2,803 1,675
- ---------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (157) (137) 39
State (65) (14) 13
- ------------------------------------------------------------------------------------------------- -------------------
(222) (151) 52
- ---------------------------------------------------------------------------------------------------------------------
Total $3,180 $2,652 $1,727
=====================================================================================================================
The temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
significant components of the deferred tax asset and liability amounts
relate to the following as of December 31
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Book provision for loan losses in excess of tax provision $740 $759
Book depreciation in excess of tax 422 530
State franchise taxes 192 144
Unrealized loss on securities available-for-sale - 103
Loan fees and other, net 499 255
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 1,853 1,791
Less valuation allowance - 22
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets, net 1,853 1,769
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Difference in recognition of organization costs and other (16) (19)
Unrealized gain on securities available-for-sale (188) -
Total deferred tax liabilities (204) (19)
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,649 $1,750
=====================================================================================================================
<FN>
The net deferred tax asset represents recoverable taxes and is included
in other assets in the accompanying consolidated balance sheets.
</FN>
14
Pacific Capital Bancorp
and Subsidiaries
Actual income tax expense differs from the "expected" tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to earnings before
income taxes) for the years ended December 31, as follows:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Computed "expected" tax expense $2,793 $2,377 $1,654
Increase (reduction) in income taxes resulting from:
Tax exempt income (236) (237) (305)
Franchise taxes, net of federal income tax benefit 605 511 356
Other, net 18 1 22
- ---------------------------------------------------------------------------------------------------------------------
$3,180 $2,652 $1,727
=====================================================================================================================
(8) Benefit Plans
Stock Option Plans - The Company has a stock option plan (the 1984
Plan) under which incentive stock options or nonqualified stock options
may be granted to certain key employees or directors to purchase an
aggregate of 56,778 shares of authorized, but unissued, common stock of
the Company. Unexercised options were granted and outstanding as of
December 31, 1995, for an aggregate of 56,778 shares. Options have been
granted at an exercise price not less than the fair market value of
such stock at the date of grant. All stock options become exercisable
at the rate determined by the Company's Board of Directors and expire
no later than 10 years after the date of grant.
The Company has a Directors Stock Option Plan (the 1991 Plan) under
which, nonqualified options may be granted to non-employee directors of
the Company and its subsidiaries to purchase an aggregate of 172,304
shares of authorized, but unissued, common stock of the Company
according to a formula set forth in the 1991 Plan. Unexercised options
were granted and outstanding as of December 31, 1995, for an aggregate
of 89,306 shares with an exercise price equal to the fair market value
of the Company's common stock at the date of grant. The 1991 Plan
provides that options granted thereunder vest 6 months after the date
of grant and expire no later than 10 years after the date of grant.
In May 1995, the Company's shareholders approved the 1994 Stock Option
Plan (the 1994 Plan). Under the terms of the 1994 Plan, incentive stock
options or nonqualified stock options may be granted to certain key
employees or directors to purchase an aggregate of 539,091 shares of
authorized, but unissued, common stock of the Company. Unexercised
options were granted and outstanding as of December 31, 1995, for an
aggregate of 169,594 shares with an exercise price equal to the fair
market value of the Company's common stock at the date of grant. The
1994 Plan provides that options granted thereunder vest 6 months after
the date of grant and expire no later than 10 years after the date of
grant.
Below is a summary of stock option activity under the 1984, 1991, and
1994 Plans:
- ---------------------------------------------------------------------------------------------------------------------
Options outstanding
----------------------------
Shares
available Price
for grant Shares per share
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1992 304,892 317,262 $5.43 - 18.57
Additions related to 5% stock dividend 15,284 11,640 5.43 - 18.57
Exercised - (83,912) 5.43 - 8.30
Canceled 6,394 (6,394) 5.43 - 15.98
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 326,570 238,596 5.43 - 18.57
Additions related to 5% stock dividend 13,733 10,523 5.43 - 18.57
Exercised - (80,355) 5.17 - 15.22
Expirations (281,069) - -
15
Pacific Capital Bancorp
and Subsidiaries
Canceled 13,723 (13,723) 13.57 - 17.69
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 72,957 155,041 5.55 - 17.69
Additions related to the adoption of
the 1994 Plan 371,022 168,100 16.33 - 24.63
Additions related to 5% stock dividend 3,662 7,272 5.55 - 17.69
Granted (1,525) 1,525 19.17 - 24.63
Exercised - (9,590) 5.29 - 18.10
Expirations (291) - 12.93 - 12.93
Canceled 6,670 (6,670) 12.93 - 14.50
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 452,495 315,678 $7.53 - 24.63
=====================================================================================================================
Options to purchase 302,162 shares of stock were exercisable as of
December 31, 1995. All per share amounts give retroactive effect to
stock dividends.
Employee Stock Ownership Plan - In 1986, the Company adopted an
Employee Stock Ownership Plan (ESOP) covering substantially all
employees. Effective March 1, 1991, the Company adopted an amendment to
the ESOP to restructure it as a leveraged employee stock ownership
plan, which qualifies as a stock bonus plan under the Internal Revenue
Code. The Company may make annual contributions to the ESOP in an
amount determined by the Board of Directors. Contributions are not
intended to exceed an amount estimated to be an allowable deduction for
tax purposes. The Company made contributions to the ESOP of $200,000,
$221,000, and $115,000 in 1995, 1994, and 1993, respectively.
The ESOP borrowed $500,000 to finance the acquisition of the Company's
stock in 1992. Repayment of principal and interest is wholly funded
through the Company's contributions to the ESOP. The Company's 1994
contribution included $212,000 in debt repayment and $9,000 for the
interest accrued on the loan. The note was fully repaid in September
1994.
401(k) Plan - The Company also has a tax deferred profit sharing plan
and thrift plan covering all eligible employees. The Company's
contributions amounted to $40,000, $35,000, and $29,000 for the years
ended December 31, 1995, 1994, and 1993.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans.
Those plans include all arrangements by which employees receive shares
of stock or other equity instruments of the employer or the employer
incurs liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock options, restricted stock, and
stock appreciation rights. This statement defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. Under this method, compensation costs are measured at the
grant date based on the value of the award and are recognized over the
service period, which is the vesting period. SFAS No. 123 encourages
(but does not require) employers to adopt the new method in place of
the provisions of Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. This statement applies to
fiscal years beginning after December 15, 1995. The Company has elected
to use current practice under APB No. 25 and does not anticipate that
the required disclosures will have a material impact on the financial
condition or results of operations of the Company.
(9) Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair value for its
financial instruments. Fair value estimates, methods, and assumptions
are set forth below for the Company's financial instruments.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
16
Pacific Capital Bancorp
and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994
----------------- -----------------
Carrying Estimated Carrying Estimated
(In thousands) amounts fair value amounts fair value
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash cash equivalents $41,898 $41,898 $42,262 $42,262
Investment securities 84,492 84,558 86,389 84,625
Net loans 212,823 208,517 200,643 196,277
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Demand deposits, noninterest bearing $71,988 $71,988 $70,638 $70,638
Demand deposits, interest bearing 56,527 56,527 53,410 53,410
Savings and money market 97,087 97,087 122,816 122,816
Time certificates 82,217 82,483 56,365 56,459
- ---------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and Cash Equivalents - The carrying amount approximates fair value
because of the short maturities of these instruments.
Investment Securities - The fair value of investments and
mortgage-backed securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
17
Pacific Capital Bancorp
and Subsidiaries
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan. The estimate of maturity is based on
the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. The fair value of performing
variable rate loans is judged to approximate book value for those loans
whose rates reprice in less than 90 days. Rate floors and rate ceilings
are not considered for fair value purposes as the number of loans with
such limitations is not significant.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit Liabilities - The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings and NOW
accounts, and money market and checking accounts, approximates the
amount payable on demand. The fair value of certificates of deposit is
judged to approximate book value for those certificates whose remaining
maturities are less than 90 days. For all other certificates, estimated
cash flows are discounted using rates currently offered for deposits of
similar remaining maturities.
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in many of the estimates.
18
Pacific Capital Bancorp
and Subsidiaries
(10) Commitments and Contingencies
Future minimum rental payments for Bank premises under noncancelable
operating leases as of December 31, 1995 are as follows:
- --------------------------------------------------------------------------------
Minimum lease
payments
Year ending December 31, (In thousands)
- --------------------------------------------------------------------------------
1996 $508
1997 499
1998 468
1999 296
2000 224
Thereafter 547
- --------------------------------------------------------------------------------
2,542
Minimum rentals receivable under noncancelable subleases (501)
- --------------------------------------------------------------------------------
$2,041
================================================================================
Rent expense under operating leases totaled $503,000, $470,000, and
$473,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. Related sublease rental income totaled $82,000, $99,000,
and $93,000, respectively.
In December 1988, the Company entered into an operating lease with a
member of its Board of Directors for rental of its administrative
headquarters. This lease required payments totaling approximately
$188,000, $185,000, and $182,000 for the years ended December 31, 1995,
1994, and 1993, respectively. The lease will expire on April 30, 1999.
In the normal course of business, there are outstanding commitments,
such as commitments to extend credit, which are not reflected in the
accompanying consolidated financial statements. These commitments
involve elements of credit and interest rate risk. Management does not
anticipate any loss will result from such commitments. As of December
31, 1995, amounts committed to extend credit under normal lending
agreements aggregated approximately $53,201,000. These amounts are
subject to the same loan collateral requirements described in Note 4.
Management reviews the risk associated with these credits in evaluating
the overall adequacy of the allowance for possible loan losses.
Additionally, there are approximately $1,462,000 in outstanding standby
letters of credit which, in effect, are guarantees of obligations of
customers.
The Bank has borrowing lines of approximately $24,000,000 with primary
correspondent banks. There were no borrowings outstanding under these
lines as of December 31, 1995.
19
Pacific Capital Bancorp
and Subsidiaries
(11) Pacific Capital Bancorp (Parent Company Only
The following are the financial statements of Pacific Capital Bancorp:
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
Years ended December 31, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $144 $135
Loans - 1,675
Premises and equipment (net of accumulated depreciation) 1,865 1,409
Investment in subsidiaries 40,532 35,244
Other assets 688 465
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $43,229 $38,928
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $253 $178
Shareholders' equity 42,976 38,750
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $43,229 $38,928
=====================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years ended December 31, 1995, 1994, and 1993
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Equity in income of subsidiaries $4,826 $2,482 $2,166
Cash dividend received from Bank 500 2,120 1,171
Interest income and fees on loans 69 58 53
Other expenses (361) (321) (251)
- ---------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 5,034 4,339 3,139
Cumulative effect of accounting change - - 549
- ---------------------------------------------------------------------------------------------------------------------
Net income $5,034 $4,339 $3,688
=====================================================================================================================
20
Pacific Capital Bancorp
and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,034 $4,339 $3,688
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of subsidiary bank (5,326) (4,602) (3,886)
Receipt of dividend from subsidiary 500 2,120 1,171
Depreciation and amortization 37 40 49
(Increase) decrease in other assets (223) (427) 551
(Decrease) increase in other liabilities (47) 54 (217)
Cumulative effect of change in accounting method - - (549)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (25) 1,524 807
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net maturities of bankers' acceptances and
commercial paper 1,675 (636) -
Capital expenditures (493) (89) (11)
Reimbursement for premises and equipment from
subsidiary bank 122 122 122
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,304 (603) 111
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase and retirement of stock (111) (717) (1,172)
Proceeds from stock options exercised 158 806 526
Cash paid for fractional shares (15) (16) (13)
Cash paid for dividends (1,302) (946) (671)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,270) (873) (1,330)
- -------------------------------------------------------------------------------------------------- ------------------
Net increase (decrease) in cash and cash equivalents 9 48 (412)
Cash and cash equivalents at beginning of year 135 87 499
=====================================================================================================================
Cash and cash equivalents at end of year $144 $135 $87
=====================================================================================================================
Supplemental disclosures:
Noncash investment and financing activities:
Transfer from retained earnings to common stock
due to stock dividend $3,132 $2,165 $1,722
=====================================================================================================================
The ability of the Company to pay dividends will largely depend upon
the dividends paid to it by the Bank. There are legal limitations on
the ability of the Bank to provide funds to the Company in the form of
loans, advances, or dividends. Under the National Bank Act, the Bank
may not declare dividends in any calendar year that exceed certain
legal limitations. The approximate amount of restricted equity of the
Bank as of December 31, 1995 was $29,871,000.
21
Pacific Capital Bancorp
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
1995
THE COMPANY
Pacific Capital Bancorp (the Company) through its wholly owned
subsidiary, First National Bank of Central California (the Bank), engages in a
broad range of financial service activities. The Company's other subsidiary,
Pacific Capital Services Corporation, currently is inactive.
The following sections set forth a discussion of the significant
operating changes, business trends, financial condition, earnings, capital
position, and liquidity that have occurred in the three-year period ended
December 31, 1995, together with an assessment, when considered appropriate, of
external factors that may affect the Company in the future. This discussion
should be read in conjunction with the Company's consolidated financial
statements and notes on pages 4 of this annual report.
SUMMARY OF FINANCIAL RESULTS
Net income for 1995 was a record $5,034,000 or $1.86 per share, an
increase of $695,000 or $0.21 per share over 1994. The Company's net operating
income increased significantly for the second straight year in 1995 after
remaining relatively constant in 1993, 1992, and 1991. The Company's net income
for 1994 of $4,339,000 or $1.65 per share represented an increase of $651,000 or
$0.26 per share over 1993. Net income for 1993 included an additional $549,000
or $0.21 per share as a result of a cumulative effect of an accounting change
upon adoption of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The Company's increased earnings in 1995 resulted
from an interest rate environment which had a beneficial impact on the net
interest margin, active management of noninterest expense and maintaining a low
level of credit losses.
In 1995 the Company paid three cash dividends of $0.125 in March, June,
and September, and one cash dividend of $0.15 paid in December. In 1994, the
Company distributed four $0.10 quarterly cash dividends. In addition, the
Company distributed a 5% stock dividend in each of the years in the three year
period ended December 31, 1995. Earnings per share amounts have been
retroactively restated to reflect these stock dividends. The return on average
shareholders' equity was 12.2% in 1995, compared to 11.7% in 1994 and 10.8% in
1993.
The Company believes that the economies in which it operates, the
Monterey and Santa Cruz Counties, have stabilized in the past two years. (See
"Earning Assets") Signs of this stabilization include sustained quality loan
demand and modest deposit growth as seen in 1995. On a national scale, the
Company is forecasting a slight decrease in interest rates due to a weakening
overall economy in 1996. If the economy does continue to slow, interest rates
will likely decline which, in turn, could lead to a reduction in net interest
income in 1996.
Certain information concerning the Company's average balances, yields
and rates on average interest-earning assets and interest-bearing liabilities is
set forth in the following table. Interest yields and amounts earned include net
loan fees of $191,000, $147,000, and $108,000 in 1995, 1994, and 1993,
respectively.
22
Pacific Capital Bancorp
and Subsidiaries
AVERAGE BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest
(Dollars in thousands) Balance Rate Amount Balance Rate Amount Balance Rate Amount
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets
Short-Term Investments:
Time Deposits with Other
Financial Institutions $769 6.1% $47 $107 3.5% $4 $- - $-
Federal Funds Sold 15,033 5.9% 887 18,057 4.3% 770 22,144 2.9% 638
Money Market Funds 6,284 5.5% 344 397 3.8% 15 4,119 3.0% 123
- ---------------------------------------------------------------------------------------------------------------------
Total 22,086 5.8% 1,278 18,561 4.2% 789 26,263 2.9% 761
Investment Securities:
Taxable 68,517 5.1% 3,527 70,472 4.8% 3,410 63,139 5.1% 3,250
Non-Taxable 11,249 5.2% 588 11,419 5.2% 596 11,836 5.5% 656
Federal Reserve Bank Stock 540 5.9% 32 540 5.9% 32 532 6.2% 33
- ---------------------------------------------------------------------------------------------------------------------
Total 80,306 5.2% 4,147 82,431 4.9% 4,038 75,507 5.2% 3,939
Loans: 201,360 10.1% 20,420 190,721 9.1% 17,329 177,988 8.7% 15,557
- ---------------------------------------------------------------------------------------------------------------------
Total Earning Assets 303,752 8.5% 25,845 291,713 7.6% 22,156 279,758 7.2% 20,257
Allowance for Possible Loan
Losses (2,359) (2,475) (2,342)
Non-Earning Assets
Premises and Equipment 7,287 7,253 7,635
Other 30,671 28,428 26,816
- ---------------------------------------------------------------------------------------------------------------------
Total Non-Earning Assets 37,958 35,681 34,451
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $339,351 $324,919 $311,867
=====================================================================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Deposits:
Demand $52,428 1.1% $566 $50,059 1.1% $551 $46,943 1.3% $607
Savings and Money Market 105,531 2.6% 2,747 121,079 2.3% 2,837 120,984 2.4% 2,944
Time Certificates 70,575 5.3% 3,716 52,803 3.4% 1,795 52,556 3.0% 1,599
Other Interest-Bearing
Liabilities - - - 25 8.0% 2 118 21.2% 25
- ---------------------------------------------------------------------------------------------------------------------
Total 228,534 3.1% 7,029 223,966 2.3% 5,185 220,601 2.3% 5,175
Non Interest-Bearing Deposits
and Other Liabilities:
Demand, Non Interest-Bearing 67,026 63,352 56,645
Other Liabilities 2,511 385 490
Shareholder's Equity 41,280 37,216 34,131
- ---------------------------------------------------------------------------------------------------------------------
Total 110,817 100,953 91,266
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $339,351 $324,919 $311,867
=====================================================================================================================
NET INTEREST INCOME $18,816 $16,971 $15,082
NET INTEREST MARGIN 6.2% 5.8% 5.4%
- ---------------------------------------------------------------------------------------------------------------------
The net interest margin is expressed as the percentage of net interest income to
average total earning assets. The average balance on non-accrual loans is
immaterial as a percentage of total loans and as such has been included in total
loans. Non-taxable securities and leases have not been calculated on a tax
equivalent basis.
NET INTEREST INCOME
Net interest income, the difference between interest earned on loans
and investments and the interest paid on deposits and other sources of funds, is
the principal component of the Company's earnings. The preceding table shows the
23
composition of average earning assets and average interest-bearing liabilities,
average yields and rates, and the net interest margin for 1993 through 1995.
Interest income increased $3,689,000 or 16.7% from $22,156,000 in 1994 to
$25,845,000 in 1995, after increasing $1,899,000 or 9.4% from 1993 to 1994. The
increase in 1995 is the result of higher average loan and investment yields
during 1995 and an increase in interest earning assets. The increase in 1994 was
due to primarily to the same factors which contributed to the increase in 1995,
primarily, higher loan yields and an increase in average interest earning
assets. Total interest and fees produced a 8.5% yield on average earning assets
in 1995, compared to 7.6% and 7.2% yields on average earning assets in 1994 and
1993, respectively. The yield increase in 1995 was the result of several
interest rate increases in the Bank's reference rate (the rate charged to the
Bank's most creditworthy customers) which took place during the course of 1994
and early 1995. The increase in yields in 1994 was due to the same interest rate
increases which had a beneficial impact on yields during 1995.
During 1995, the Company increased its available-for-sale portfolio
relative to held-to-maturity securities. This shift has resulted in increased
liquidity for the Company and an increase in the average yield on the portfolio
from 4.78% in 1994 to 5.30% in 1995.
Total interest expense for 1995 was $7,029,000, an increase of
$1,844,000 or 35.6% over 1994, compared to a small increase of $10,000 or 0.2%
from 1993 to 1994. The Company's cost of funds increased in 1995 by 0.58% over
1994 due to a substantial change in the mix of deposits. Certificates of
deposits increased to $82,217,000 in 1995 compared to $56,365,000 in 1994 while
savings and money market deposits decreased in 1995 by $25,729,000. The rates
paid on certificates of deposit generally are substantially higher than those
paid on savings and money market deposits thus resulting in a higher cost of
funds for the Company in 1995
The Company's net yield on interest-earning assets is affected by
changes in the rates earned and paid and the volume of interest-earning assets
and interest-bearing liabilities. The impact of changes in volume and rate on
net interest income in 1995 and 1994 is shown in the following table. Changes
attributable to both volume and rate have been allocated to rate.
- ----------------------------------------------------------------------------------------------------------------------
1995 Compared to 1994 1994 Compared to 1993
------------------------------------------------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
Time Deposits with other
Financial Institutions $40 $3 $43 $4 $0 $4
Federal Funds Sold (129) 246 117 (118) 250 132
Money Market Funds 222 107 329 (111) 3 (108)
Investment Securities:
Taxable (95) 212 117 377 (217) 160
Nontaxable (9) 1 (8) (23) (37) (60)
Federal Reserve Bank
Stock - - - 0 (1) (1)
Loans 967 2,124 3,091 1,113 659 1,772
- ---------------------------------------------------------------------------------------------------------------------
Total 996 2,693 3,689 1,242 657 1,899
- ---------------------------------------------------------------------------------------------------------------------
Demand, Interest Bearing 25 (10) 15 40 (96) (56)
Savings (363) 273 (90) 2 (109) (107)
Time Certificates 604 1,317 1,921 8 188 196
Fed Funds Purchased (2) - (2) (20) (3) (23)
- ---------------------------------------------------------------------------------------------------------------------
Total 264 1,580 1,844 30 (20) 10
- ---------------------------------------------------------------------------------------------------------------------
Increase in Net Interest
Income $732 $1,113 $1,845 $1,212 $677 $1,889
=====================================================================================================================
24
Pacific Capital Bancorp
and Subsidiaries
EARNING ASSETS
Outstanding total loans averaged $201,360,000 in 1995 compared to
$190,721,000 during 1994. This represents an increase of $10,639,000 or 5.6%,
compared to an increase of $12,733,000 or 7.2% from 1993 to 1994. The increase
in total loans outstanding during 1995 is due to increased loan demand from
qualified borrowers and is reflective of the stabilization of the economy in
most of the primary markets which the Bank serves. The following table
summarizes the composition of the loan portfolio as of December 31:
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
Commercial $49,862 $43,783 $40,588 $45,919 $47,585
Real Estate - Construction 17,071 22,539 10,394 7,637 16,373
Real Estate - Mortgage 126,048 116,630 110,618 106,237 105,690
Consumer 12,108 11,328 12,124 13,603 13,623
Bankers' Acceptances and
Commercial Paper - 709 1,542 5,047 11,022
Other 6,255 5,791 5,326 5,301 2,450
- ------------------------------------------------------------------- -------------------------------------------------
Total $211,344 $200,780 $180,592 $183,744 $196,743
=====================================================================================================================
The Company lends primarily to small- and medium-sized businesses
within its markets, which is comprised principally of Monterey and Santa Cruz
Counties.
A majority of the Company's loan portfolio consists of loans secured by
commercial, industrial, and residential real estate. As of December 31, 1995,
real estate mortgage and construction loans represented $143,119,000 or 67.7% of
total loans, an increase of $3,950,000 or 2.8% from the prior year.
Real estate mortgage loans included commercial real estate loans of
approximately $89,180,000, one-to-four family home loans of approximately
$13,972,000, equity lines of credit of approximately $16,223,000, multifamily
dwelling loans of approximately $4,242,000 and farm land loans of approximately
$2,431,000. Management believes that the Bank does not have any significant loss
exposure with respect to such loans, due to the Bank's collateral position. In
general, advances do not exceed 65% of appraised value on commercial real estate
loans and 75% on residential mortgages. Continued emphasis is placed on this
policy and, accordingly, appraisals are periodically updated as conditions
change.
Construction loans totaled $17,071,000 or 8.1% of the loan portfolio as
of December 31, 1995, which represents a decrease of $5,468,000 or 24.3% from
December 31, 1994. Construction loans increased by $12,145,000 or 116.8% from
December 31, 1993 to December 31, 1994.
The Bank finances the construction of residential and commercial real
estate properties. These loans are all at variable rates, are secured by first
deeds of trust on the underlying properties, and generally have maturities of
less than 12 months. As of December 31, 1995, 56.2% of the construction
portfolio was for residential development and the remaining 43.8% was
commercial. Repayment is based on a pre-qualification analysis of the borrower's
ability to obtain take-out financing. The Bank's construction lending has been
in areas which management believes to have favorable market conditions. Advances
on residential and commercial projects are limited in general to the lower of
approximately 75% and 65%, respectively, of cost or appraised value.
Commercial loans not secured by real estate totaled $49,862,000 or
23.6% of the total loan portfolio at December 31, 1995. This represented an
increase of $6,079,000 or 13.9% over 1994. Management believes that this
increase in demand is a further indicator of the stabilization in the local
economy. Commercial loans with maturities greater than one year include
approximately $3,975,000 of fixed rate loans.
Consumer loans increased $780,000 or 6.9% during 1995. Consumer loans,
as of December 31, 1995, represent 5.7% of the total loan portfolio, compared to
5.6% of the 1994 loan portfolio.
25
Pacific Capital Bancorp
and Subsidiaries
The Company had undisbursed loans totaling $54,663,000 as of December
31, 1995, primarily representing available lines of credit and the unfunded
portion of construction loan commitments.
The following table sets forth the maturity distribution of the loan portfolio
as of December 31, 1995:
- ---------------------------------------------------------------------------------------------------------------------
After One
In One Year Year Through After Five
(In thousands) or Less Five Years Years Total
- ---------------------------------------------------------------------------------------------------------------------
Commercial $45,826 $3,654 $382 $49,862
Real Estate - Construction 17,071 - - 17,071
Real Estate - Mortgage 58,353 28,999 38,696 126,048
Consumer 6,806 5,023 279 12,108
Other 2,907 1,207 2,141 6,255
- ---------------------------------------------------------------------------------------------------------------------
Gross Loans $130,963 $38,883 $41,498 $211,344
=====================================================================================================================
The fixed rate loan categories discussed above mature as follows:
$15,191,000 in 1996, $6,666,000 in 1997 $6,776,000 in 1998, $6,576,000 in 1999,
and $5,134,000 in 2000, with the remaining $41,498,000 maturing thereafter.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest
rates and net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities than assets reprice in a given period (a
liability sensitive position), market interest rate changes will be reflected
more quickly in liability rates. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets reprice
more quickly than liabilities in a given period (an asset sensitive position) a
decline in market rates will have an adverse effect on net interest income.
The table below presents the interest rate sensitivity of the Company
as of December 31, 1995. For any given period, the structure is matched when an
equal amount of assets and liabilities reprice. Any excess of assets or
liabilities over these matched items results in the gap, or mismatch, shown at
the foot of the table. A negative gap indicates liability sensitivity and a
positive gap indicates asset sensitivity.
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity as of December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
Repricing Opportunity
0 - 90 91 - 180 181 - 365 Over
(In thousands) Days Days Days One Year Total
- --------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $17,007 - - - $17,007
Loans 112,307 7,005 17,496 74,536 211,344
Taxable Investments - 1,287 3,000 69,498 73,785
Non-taxable Investments 240 727 3,027 6,713 10,707
- ---------------------------------------------------------------------------------------------------------------------
Total Earning Assets 129,554 9,019 23,523 150,747 312,843
- ---------------------------------------------------------------------------------------------------------------------
Interest Bearing Demand 56,527 - - - 56,527
Savings Deposits 90,139 3,693 3,255 - 97,087
Time Certificates 24,095 29,301 27,592 1,229 82,217
- ---------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 170,761 32,994 30,847 1,229 235,831
- ---------------------------------------------------------------------------------------------------------------------
Gap $(41,207) $(23,975) $(7,324) $149,518 $77,012
Cumulative Gap (41,207) (65,182) (72,506) 77,012
=====================================================================================================================
The Company has remained flexible in determining the point at which to
reprice deposits. This flexibility mitigates the Company's liability sensitive
position in the under one year category.
26
Pacific Capital Bancorp
and Subsidiaries
QUALITY OF LOANS
The Company had net loan charge-offs of $176,000 and $169,000 in 1995
and 1994, respectively. Net charge-offs as a percent of average loans remained
relatively flat between 1994 and 1995 after a substantial decrease from 1993 to
1994. The net charge-offs in 1993 generally resulted from the recessionary
environment prevalent in the local economy during that period. Over the last
five years, the low amount of net charge-offs is reflective of management's
continued emphasis on quality credit standards in the loan approval process as
well as close monitoring of the loan portfolio. The Bank's net charge-offs as a
percent of average loans have been below most industry averages in each year
reflected in the table below.
Management anticipates the Bank's charge-off experience in 1996 to be
consistent with that experienced in 1995 primarily due to the stabilization in
the local economy. This factor continues to be addressed in assessing the
adequacy of the allowance for possible loan losses.
The following table summarizes the actual loan losses and provision for
possible loan losses during the last five fiscal years by loan category:
- ---------------------------------------------------------------------------------------------------------------------
Summary of Loan Loss Activity
(In thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
Total loans outstanding, end of year $211,344 $200,780 $180,592 $183,744 $196,743
Average net loans during the year 201,360 190,721 177,988 191,099 198,495
Allowance for possible loan losses:
Balance, beginning of year 2,438 2,507 2,352 2,148 2,193
Charge-off by loan category
Commercial 129 175 333 504 303
Consumer 61 108 292 207 261
Real estate 131 21 259 200 50
- ---------------------------------------------------------------------------------------------------------------------
Total 321 304 884 911 614
- ---------------------------------------------------------------------------------------------------------------------
Recoveries by loan category
Commercial 58 85 42 94 17
Consumer 38 30 45 94 67
Real estate 49 20 62 2 44
- ---------------------------------------------------------------------------------------------------------------------
Total 145 135 149 190 128
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs 176 169 735 721 486
Provision charged to expense 135 100 890 925 441
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $2,397 $2,438 $2,507 $2,352 $2,148
=====================================================================================================================
Ratios:
Net charge-offs to
average loans 0.09% 0.09% 0.41% 0.38% 0.24%
Allowance to loans at end of year 1.13% 1.21% 1.39% 1.28% 1.09%
- ---------------------------------------------------------------------------------------------------------------------
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, provisions 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 regulatory examinations conducted by governmental agencies and
through management's assessment of risk. The Company's entire allowance is a
valuation allocation; that is, it has been created by direct charges against
earnings through the provision for possible loan losses. For additional
information regarding the allowance for possible loan losses, see Note 1 to the
accompanying consolidated financial statements.
27
Pacific Capital Bancorp
and Subsidiaries
The Company evaluates the allowance for possible loan losses based upon
an individual analysis of specific categories of loans. The adequacy of the
allowance can be determined only on an approximate basis, since estimates as to
the magnitude and timing of loan losses are not predictable because of the
impact of external events. In addition, the Company has for the last several
years contracted with an independent loan review consulting firm to evaluate
overall credit quality on an ongoing basis. Management then considers the
adequacy of the allowance for possible loan losses in relation to the total loan
portfolio.
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. These factors include: 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 downturns
in specific local industries; and the experience, ability, and depth of lending
management and staff. The Company evaluates the adequacy of its allowance for
possible loan losses on a quarterly basis.
While these factors cannot be reduced to a mathematical formula, it is
management's view that the allowance for possible loan losses of $2,397,000 or
1.13% of total loans as of December 31, 1995, was adequate. This allowance is
compared to $2,438,000 or 1.21% in 1994 and $2,507,000 or 1.39% in 1993. There
are, however, no assurances that in any given period the Company will not
sustain charge-offs which are substantial in relation to the size of the
allowance. Loans are charged to the allowance for loan losses when the loans are
deemed uncollectible. It is the policy of management to make additions to the
allowance so that it remains adequate to cover anticipated losses inherent in
the Bank's loan portfolio.
Any allocation or breakdown in the allowance lends an appearance of an
exactness which does not exist. Thus, the allocation below should not be
interpreted as an indication of expected amounts or categories where charge-offs
will occur. The allocation of the allowance for possible loan losses as of the
end of the last five fiscal years is summarized in the table below:
- -------------------------------------------------------------------------------------------------------------------
Allocation of Allowance 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
(Dollars in $ to Total $ to Total $ to Total $ to Total $ to Total
thousands) Loans Loans Loans Loans Loans
- ------------------------------------------------------------------------------------------------------------------
Balance
Applicable to:
Commercial $647 23.59% $848 21.81% $731 22.47% $822 24.99% $852 24.19%
Real Estate -
Construction 161 8.08% 443 11.23% 92 5.76% 78 4.16% 147 8.32%
Real Estate -
Mortgage 1,380 56.64% 884 58.09% 1,474 61.25% 1,221 57.82% 947 53.72%
Consumer 193 5.72% 253 5.64% 194 6.71% 199 7.40% 172 6.92%
Bankers'
Acceptances and
Commercial
Paper - 0.00% - 0.35% - 0.85% - 2.75% - 5.60%
Other 16 2.97% 10 2.88% 16 2.95% 32 2.88% 30 1.25%
- ------------------------------------------------------------------------------------------------------------------
Total 2,397 100.0% 2,438 100.0% 2,507 100.0% 2,352 100.0% 2,148 100.0%
==================================================================================================================
28
Pacific Capital Bancorp
and Subsidiaries
NONPERFORMING LOANS Interest income on the loan portfolio is recorded
on the accrual basis. However, the Company follows the policy of discontinuing
the accrual of interest income and reversing any accrued and unpaid interest
when the payment of principal or interest is 90 days past due unless the loan is
both well secured and in the process of collection. The Bank's Lending Policy
provides for strict requirements for exempting loans from nonaccrual status. The
composition of nonperforming loans as of the end of the last five fiscal years
is summarized in the following table:
- ---------------------------------------------------------------------------------------------------------------------
Nonperforming Loans
(In thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
Loans accounted for on a
nonaccrual basis $993 $2,023 $2,286 $2,926 $1,078
Other loans contractually
past due 90 days or more 141 7 - 342 1,027
- ---------------------------------------------------------------------------------------------------------------------
Total $1,134 $2,030 $2,286 $3,268 $2,105
=====================================================================================================================
Loans accounted for on a nonaccrual basis experienced a substantial
decrease in 1995 to $993,000 compared to $2,023,000 at December 31, 1994. This
decrease was due to management's continuing efforts to resolve significantly
past due loans combined with a stabilizing economy.
Of total nonperforming loans as of December 31, 1995, 78.2% are secured
by real property where the loan to collateral value ratios are consistent with
the Bank's existing policies. In addition, the overall coverage of the allowance
as a percent of nonperforming loans is 211.4%. The Bank's ratio of nonperforming
loans to average loans has been below most industry averages in each year
reflected in the table above.
The Bank does not expect to sustain losses in excess of that provided
for in the allowance for possible loan losses. There were no loans which were
current as of December 31, 1995 where serious doubt existed as to the ability of
the borrower to comply with the present loan repayment terms or which represent
"troubled debt restructurings".
INVESTMENTS The average balance of Federal Funds Sold (overnight
investments with other banks) and other short-term investments (primarily money
market mutual funds) was $22,086,000 in 1995, $18,561,000 in 1994, and
$26,263,000 in 1993. These investments are maintained primarily for the
short-term liquidity needs of the Company. The major factors influencing the
levels of required liquidity are loan demand of the Company's customers and
fluctuations in the Company's level of deposits. The Company's loan to deposit
ratio averaged 68.1% in 1995, compared to 66.4% in 1994, and 64.2% in 1993. This
change in 1995 is due to the increase in average loans outstanding during the
year partially offset by an increase in certificates of deposits.
Average total investment securities were $80,306,000 in 1995, a
decrease of $2,125,000 over the 1994 average. This decrease was the result of a
slight shift from U.S. Treasury securities to Federal Funds Sold and other short
term investments in order to maximize investment yields. As of December 31,
1995, the aggregate market value of the investment portfolio exceeded book value
by $66,000. At December 31, 1994, the market value was below book value by
$1,764,000. This increase was the result of increasing prices in the bond market
during the course of 1995. It is the Company's policy not to engage in
securities trading transactions. There are no investments in the portfolio
deemed to be permanently or temporarily impaired. See Note 3 to the accompanying
consolidated financial statements.
29
Pacific Capital Bancorp
and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized Estimated
(In thousands) Amortized cost gain loss fair value
- ---------------------------------------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
State and municipal $6,633 $72 $(13) $6,692
Mortgage-backed securities
and other 1,963 7 - 1,970
- ---------------------------------------------------------------------------------------------------------------------
$8,596 $79 $(13) $8,662
=====================================================================================================================
Available-for-sale securities:
U.S. Treasury $57,328 $536 $(77) $57,787
State and municipal 4,074 45 (9) 4,110
U.S. government agencies 14,000 9 (10) 13,999
- ---------------------------------------------------------------------------------------------------------------------
$75,402 $590 $(96) $75,896
=====================================================================================================================
1994
- ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury $51,234 $2 $(1,701) $49,535
State and municipal 12,043 68 (134) 11,977
Mortgage -backed securities and
other 854 2 (1) 855
- ---------------------------------------------------------------------------------------------------------------------
$64,131 $72 $(1,836) $62,367
=====================================================================================================================
Available-for-sale securities:
U.S. Treasury $19,846 $- $(295) $19,551
U.S. government agencies 2,671 38 (2) 2,707
- -------------------------------------------------------------------------- ------------------------------------------
$22,517 $38 $(297) $22,258
=====================================================================================================================
FUNDING
Average total deposits increased $8,267,000 or 2.9% during 1995,
compared to an increase of $10,047,000 or 3.6% during 1994 and an increase of
$12,446,000 or 4.7% in 1993. Average non-interest bearing deposits grew
$3,674,000 or 5.8% during 1995 compared to growth of $6,707,000 or 11.8% in 1994
and $5,866,000 or 11.6% in 1993. Average interest-bearing deposits increased
$4,593,000 or 2.1% in 1995, compared with increases of $3,458,000 or 1.6% in
1994 and $6,580,000 or 3.1% during 1993. Total deposit growth in 1996 is
expected to continue but may not increase at the same rate or in the same
categories. The Company is able to attract deposits by providing interest rates
and services competitive with other institutions located in its market area. The
Company does not have any brokered deposits or large concentrations with any one
customer.
- ---------------------------------------------------------------------------------------------------------------------
Average Deposits 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------------
Demand, Noninterest Bearing $67,026 - $63,352 - $56,645 -
Demand, Interest Bearing 52,428 1.08% 50,059 1.10% 47,061 1.29%
Savings 105,531 2.60% 121,079 2.34% 120,984 2.43%
Time Certificates 70,575 5.27% 52,803 3.40% 52,556 3.04%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
The table above sets forth information for the last three fiscal years
regarding the Bank's average deposits and the average rates paid on each of the
deposit categories.
</FN>
30
Pacific Capital Bancorp
and Subsidiaries
Average interest-bearing deposits as a percentage of average earning
assets have decreased slightly over the last three years to 75.2% in 1995 from
76.8% and 78.9% in 1994 and 1993, respectively.
In 1995, average time certificates of deposit of $100,000 or more
increased by $9,537,000, or 30.4%, to $40,915,000 and were 13.8% of total
average deposits, compared to 10.9% in 1994. Almost all of the certificates of
deposit represent local deposits. Given the Bank's forecast for interest rates,
management believes that maturing certificates of deposit will continue to be
directed into short to medium term deposits.
The remaining maturities of the Company's certificates of deposit,
including public funds, in amounts of $100,000 or more as of December 31, 1995,
are indicated in the table below. Interest expense on these certificates of
deposit totaled $2,168,000 in 1995.
- --------------------------------------------------------------------------------
(In thousands) 1995
- --------------------------------------------------------------------------------
Three month or less $14,315
Over three through six months 16,437
Over six through twelve months 12,358
Over twelve months 628
- --------------------------------------------------------------------------------
Total $43,738
================================================================================
OTHER INCOME
Total other income decreased in 1995 to $1,875,000 from $2,088,000 in
1994. The decrease was primarily due to a $94,000 decrease in gains on sale of
loans resulting from decreased activity. In addition, net losses on securities
transactions increased in 1995 to $73,000 from $17,000 in 1994. This variance
was due to a larger number of securities sales in 1995 associated with the
one-time securities reclassification as allowed under SFAS No. 115. Total other
income also decreased in 1994 by $277,000 from $2,365,000 in 1993. This decrease
was mainly the result of a decrease in mortgage banking fees of $149,000, a
decrease in net gains on securities transactions of $137,000, offset by an
increase in customer service charges of $105,000. As discussed in Note 1 of the
accompanying consolidated financial statements, the Mortgage Banking Division of
the Bank is solely a brokerage operation. The Bank does not originate, purchase,
or sell loans in this area and thus retains no credit or servicing risk.
The Bank originates and sells loans which are guaranteed in part by the
SBA. The sold portion is equal to the guaranteed portion of the loan and is sold
without recourse. The Bank retains the credit risk in the remaining unguaranteed
portion, which amounted to approximately $6,160,000 as of December 31, 1995.
OTHER EXPENSE
In 1995, total other operating expenses increased 3.1% to $12,342,000,
after an increase of 2.4% in 1994. Salaries and benefits expense increased
$611,000 or 10.1% in 1995, compared to an increase of $226,000 or 3.9% in 1994.
The increase in salaries and benefits was mainly the result of a greater number
of employees in 1995 and normal salary increases. As a percentage of average
earning assets, salaries and benefits were 2.2% in 1995 compared to 2.1% for
1994 and 1993. The Company employed 165 full-time equivalent employees at
year-end 1995, 155 at year-end 1994, and 152 at year-end 1993.
Occupancy expense increased $128,000 or 10.1% in 1995 compared to a
decrease of $38,000 or 2.9% in 1994. The increase in 1995 was due to the use of
temporary facilities during the year due to the expansion of the Salinas Office.
All other operating expenses totaled $4,305,000 in 1995 compared to
$4,670,000 in 1994, a decrease of $365,000 or 7.8%. This reduction was mainly
due to the decrease in regulatory assessments of $313,000 in 1995. In 1995, the
FDIC reduced the Bank Insurance Fund assessment for the healthiest banks from
$.23 per $100 in insured deposits to $.04 per $100 of insured deposits due to
the recapitalization of the Bank Insurance Fund. In 1994, other operating
expense increased by $89,000 or 1.9% as compared to an increase of $185,000 or
4.2% in 1993. The
31
Pacific Capital Bancorp
and Subsidiaries
increase in 1994 was due mainly to advertising and promotion which increased by
$163,000 partially offset by a decline in other miscellaneous expenses of
$133,000. Overall growth in other operating expenses in 1995 is expected to be
consistent with the overall growth of the Company. The major components of other
expenses in dollars and as a percentage of average earning assets are as
indicated in the table below.
- ---------------------------------------------------------------------------------------------------------------------
Other Expenses 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Average of Average of Average
(Dollars in thousands) Amount Earning Assets Amount Earning Assets Amount Earning Assets
- ---------------------------------------------------------------------------------------------------------------------
Salaries and benefits $6,638 2.19% $6,027 2.07% $5,801 2.07%
Occupancy 1,399 0.46% 1,271 0.44% 1,309 0.47%
Equipment 1,035 0.34% 1,038 0.36% 1,035 0.37%
Advertising and promotion 476 0.16% 480 0.16% 317 0.11%
Forms and supplies 310 0.10% 272 0.09% 267 0.10%
Legal and professional fees 572 0.19% 653 0.22% 616 0.22%
Assessments 423 0.14% 736 0.25% 722 0.26%
Other 1,489 0.48% 1,491 0.51% 1,624 0.58%
- ---------------------------------------------------------------------------------------------------------------------
Total $12,342 4.06% $11,968 4.10% $11,691 4.18%
=====================================================================================================================
INCOME TAXES
The provision for income taxes was $3,180,000 in 1995, compared to
$2,652,000 in 1994 and $1,727,000 in 1993. The Company's effective tax rate for
1995 was 38.7%, compared with 37.9% for 1994, and 35.5% for 1993. The increases
in 1995 and 1994 were due to slightly higher state income tax rates as well as
decreases in tax-exempt income relative to total income.
The Financial Accounting Standards Board issued SFAS No. 109 in 1992
which established new guidelines with respect to accounting and reporting for
income taxes. The Company adopted this statement effective January 1, 1993, and
recognized a cumulative benefit of $549,000 in 1993 from adoption of SFAS No.
109. The adoption of SFAS No. 109 has not had an impact on the earnings of the
Company in 1994 or 1995.
CAPITAL
Shareholders' equity increased $4,226,000 or 10.9% in 1995. The
increase was primarily a result of retention of the Company's 1995 net income
and the exercise of stock options, offset in part by a repurchase of outstanding
shares and a total cash dividend of $0.53 per share paid during 1995. The
Company paid $111,000 during 1995 to repurchase 5,606 shares. The Company
regularly assesses future capital needs so that it will remain in compliance
with the capital adequacy guidelines issued by the Federal Reserve Board for
bank holding companies and by the Comptroller of the Currency (the Comptroller)
for national banks. The Company's capital plan for 1995 contemplates continued
growth in shareholders' equity through the retention of net income.
The Company and the Bank are subject to the guidelines and regulations
of the Federal Reserve Board and the 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.
32
Pacific Capital Bancorp
and Subsidiaries
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. The Company and the Bank's Tier 1 capital ratios at December
31, 1995 were 17.60% and 16.78% respectively, well in excess of the required
minimum of 4.0%.
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 or
the Comptroller 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 Company and the
Bank's total risk-based capital ratios were 18.59% and 17.77% respectively, as
compared to the required minimum of 8.0%.
The federal banking agencies have issued a joint advance notice of
proposed rulemaking to solicit comments on a framework for revising their
risk-based capital guidelines to take account of interest rate risk. As required
by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
the notice seeks comment on a proposed method of incorporating an interest rate
risk component into the current risk-based capital guidelines, with the goal of
ensuring that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk is a measure of
the relationship between a change in market interest rates and the resultant
change in net interest income due to the repricing and/or maturity
characteristics of the assets and liabilities of the Company. As financial
intermediaries, depository institutions accept interest rate risk as a normal
part of their business. They assume this risk whenever the interest rate
sensitivity of their assets does not match the sensitivity of their liabilities
or off balance sheet positions. Thus, when interest-sensitive assets and
liabilities reprice at mismatched intervals, an increase or decrease in interest
rates will affect net interest income. Under the proposal, interest rate risk
exposures would be quantified by weighing assets, liabilities and off-balance
sheet items by risk factors which approximate sensitivity to interest rate
fluctuations. Institutions identified as having an interest rate risk exposure
greater than a defined threshold would be required to allocate additional
capital to support this higher risk. The capital to be allocated would be a
dollar amount equal to the percentage by which the risk exceeds the defined
threshold multiplied by the institution's total assets. Higher individual
capital allocations could be required by the bank regulators based on
supervisory concerns.
Federal banking agencies have solicited comments on this proposal but
have not yet proposed regulations to implement any interest rate risk component
into the risk-based capital guidelines. Accordingly, the ultimate impact on the
Bank and the Company of a final regulation in this area cannot be predicted at
this time.
Leverage Capital Guidelines
The Federal Reserve Board and the Comptroller have established a
minimum leverage ratio of 3% Tier 1 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.
33
Pacific Capital Bancorp
and Subsidiaries
Set forth below are the Company's and the Bank's risk-based and leverage capital
ratios as of December 31, 1995:
- ---------------------------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 capital $42,976 17.60% $40,532 16.78%
Tier 1 capital minimum
requirement 9,765 4.00% 9,662 4.00%
- ---------------------------------------------------------------------------------------------------------------------
Excess 33,211 13.60% 30,870 12.78%
=====================================================================================================================
Total capital 45,373 18.59% 42,929 17.77%
Total capital minimum
requirement 19,529 8.00% 19,325 8.00%
- ---------------------------------------------------------------------------------------------------------------------
Excess 25,844 10.59% 23,604 9.77%
=====================================================================================================================
Risk-adjusted assets $244,114 $241,561
=====================================================================================================================
As indicated in the table above, the Company's capital ratios
significantly exceeded the minimum capital levels required by current federal
regulations. Management believes that the Company and the Bank will continue to
meet their respective minimum capital requirements in the foreseeable future.
- ---------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 capital to quarterly average
total assets (Leverage Ratio) $42,976 12.00% $40,532 11.38%
Minimum leverage requirement 10,747 to 3.00% to 10,685 to 3.00% to
17,912 5.00% 17,809 5.00%
- ---------------------------------------------------------------------------------------------------------------------
Excess 25,064 to 7.00% to 22,723 to 6.38% to
32,229 9.00% 29,847 8.38%
=====================================================================================================================
Total quarterly average assets $358,232 $356,173
=====================================================================================================================
Federal banking laws impose restrictions upon the amount of dividends
the Bank may declare to the Company (see Note 11 to the accompanying
consolidated financial statements). Federal laws also impose restrictions upon
the amount of loans or advances that the Bank may extend to the Company. In
management's opinion, these do not affect the ability of the Company to meet its
cash obligations.
34
Pacific Capital Bancorp
and Subsidiaries
On September 29, 1995, the Reigle/Neal Interstate Banking and Branching
Efficiency act of 1995 (the Interstate Act) was signed into law. The Interstate
Act effectively permits nationwide banking. The Interstate Act provides that one
year after enactment, adequately capitalized and adequately managed bank holding
companies may acquire banks in any state, even in those jurisdictions that
currently bar acquisition by out-of-state institutions, subject to deposit
concentration limits. The deposit concentration limits provide that regulatory
approval by the Federal Reserve Board may not be granted for a proposed
interstate acquisition if after the acquisition, the acquirer on a consolidated
basis would control more than 10% of the total deposits nationwide or would
control more than 30% of deposits in the state where the acquiring institution
is located. The deposit concentration state limit does not apply for initial
acquisitions in a state and in every case, may be waived by the state regulatory
authority. Interstate acquisitions are subject to compliance with the Community
Reinvestment Act (CRA). States are permitted to impose age requirements not to
exceed five years on target banks for interstate acquisitions. States are not
allowed to opt-out of interstate banking.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks is not permitted until
June 1, 1997 provided that the state has not passed legislation "opting-out" of
interstate branching. If a state opts-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state may
opt-in to interstate branching by bank consolidation or by de novo branching by
passing appropriate legislation earlier than June 1, 1997. California has
elected to opt-in to interstate branching effective October 2, 1995. Interstate
branching is also subject to a 30% statewide deposit concentration limit on a
consolidated basis, and a 10% nationwide deposit concentration limit. The laws
of the host state regarding community reinvestment, fair lending, consumer
protection (including usury limits) and establishment of branches shall apply to
the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in a host state other than
the deposit concentration limits.
Effective one year after enactment, the Interstate Act permits bank
subsidiaries of a bank holding company to act as agents for affiliated
depository institutions in receiving deposits, renewing time deposits, closing
loans, servicing loans and receiving payments on loans and other obligations. A
bank acting as an agent for an affiliate shall not be considered a branch of the
affiliate. Any agency relationship between affiliates must be on terms that are
consistent with safe and sound banking practices. The authority for an agency
relationship for receiving deposits includes the taking of deposits for an
existing account but is not meant to include the opening or origination of new
deposit accounts. Subject to certain conditions, insured savings associations
which were affiliated with banks as of June 1, 1994, may act as agents for such
banks. An affiliate bank or savings association may not conduct any activity as
an agent with such institution if prohibited from conducting as principal.
If an interstate bank decides to close a branch located in a low-or
moderate-income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies are
directed to implement regulations prohibiting interstate branches from being
used as "deposit production offices." The regulations to implement its
provisions are due by June 1, 1997. The regulations must include a provision to
the effect that if loans made by an interstate branch are less than fifty
percent of the average of all depository institutions in the state, then the
regulator must review the loan portfolio of the branch. If the regulator
determines that the branch is not meeting the credit needs of the community, it
has the authority to close the branch and to prohibit the bank from opening new
branches in the state.
35
Pacific Capital Bancorp
and Subsidiaries
Bank holding companies are also restricted as to the extent to which
they, and their subsidiaries can borrow or otherwise obtain credit from one
another, or engage in certain other transactions. The "covered transactions"
that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following
amounts: (I) in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed 10% of the capital stock and the surplus of the insured depository
institution; and (II) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed 20% of the capital stock and the surplus of the insured depository
institution. In addition, extension of credit that constitute covered
transactions must be collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a loan or
extension of credit to the affiliate, a purchase of securities issued by an
affiliate, a purchase of assets from the affiliate (unless otherwise exempted by
the Federal Reserve Board) the acceptance of securities issued by the affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
LIQUIDITY
Liquidity represents the ability of the Company to meet the
requirements of customer borrowing needs as well as fluctuations in deposit
flows.
Core deposits, which include demand, savings and interest-bearing
demand accounts, money market accounts, and time deposits of less than $100,000,
provide a relatively stable funding base. Core deposits averaged $158,213,000 or
46.6% of average total assets in 1995, compared with $156,753,000 or 48.2% in
1994. As of December 31, 1995, core deposits were $164,574,000 or 46.5% of total
assets, compared to $154,515,000 or 44.9% as of December 31, 1994.
The Company's principal sources of asset liquidity are cash and due
from banks, time deposits with other financial institutions, federal funds sold,
short-term investments, and marketable investment securities. As of December 31,
1995 these sources represented $117,794,000 or 38.3% of total deposits, compared
to 33.9% in 1994 and 42.2% in 1993. The increase in 1995 reflects the effort
made by management to provide increased liquidity for the Company by allocating
a large percentage of the investment portfolio to available-for-sale. Other
sources of asset liquidity are maturing loans and borrowing lines of
approximately $24,000,000 with primary correspondent banks. There were no
borrowings outstanding under these lines as of December 31, 1995.
The Company guarantees the obligations or performance of its customers
by issuing standby letters of credit to a third party. These standby letters of
credit are frequently issued in support of third-party obligations, such as
retail company transactions and travel agency issuances.
The risk involved in issuing standby letters of credit is essentially
the same as the credit risk in extending loans to customers, and they are
subject to the same credit origination, maintenance, and management procedures
in effect to monitor other credit products. As of December 31, 1995 and 1994,
outstanding standby letters of credit totaled $1,462,000 and $1,288,000,
respectively. The Company does not offer or engage in any other off-balance
sheet products such as commitments to purchase and sell foreign exchange,
interest rate or currency swaps, or financial futures and options.
In the opinion of management, there are sufficient resources to meet
the liquidity needs of the Company at present and projected future levels.
EFFECTS OF CHANGING PRICES
36
Pacific Capital Bancorp
and Subsidiaries
The most direct effect of inflation is higher interest rates. However,
the Company's earnings are not necessarily dependent on the absolute level of
interest rates. Instead, earnings are affected by the spread between the yield
on loans and investments and the cost of deposits and borrowing money. Another
effect of inflation is upward pressure of the Company's operating expenses. It
is management's opinion that the effects of inflation on the consolidated
financial statements have not been material.
37
Pacific Capital Bancorp
and Subsidiaries
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
PACIFIC CAPITAL BANCORP STOCK ACTIVITY
The common stock of Pacific Capital Bancorp is not listed on any
exchange, nor is it listed for quotation with NASDAQ. It is, however, listed
with the National Quotation Service and on the Over the Counter (OTC) Bulletin
Board.
The high and low bid and ask prices listed below have been reported by
three brokerage firms known to effect transactions in the Company's stock:
Kidder Peabody & Co., Inc.; Dean Witter Reynolds, Inc.; and Hoefer & Arnett,
Inc. The quotations listed below reflect interdealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.
According to the Company's records, there were 1,602 shareholders as of
March 1, 1996. In 1995 the Company paid three cash dividends of $0.125 per share
to holders of record on March 15, June 15, September 15, payable on March 31,
June 30, and September 30. The Company also paid a $0.15 per share cash dividend
to holders of record on November 15, payable on December 15, and a five percent
(5%) stock dividend payable to shareholders of record as of November 15, 1995.
For information regarding restrictions on the payment of dividends see
Note 11 to the accompanying consolidated financial Statements.
- ---------------------------------------------------------------------------------------------------------------------
Ranges of Common Stock Prices
1995
- ---------------------------------------------------------------------------------------------------------------------
Low High Low High
Quarter Bid Bid Ask Ask
- ---------------------------------------------------------------------------------------------------------------------
First $19.00 $19.25 $20.00 $20.50
Second 19.50 20.00 20.50 21.75
Third 20.00 20.13 21.75 22.00
Fourth 20.13 21.00 22.00 25.75
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
1994
- ---------------------------------------------------------------------------------------------------------------------
Low High Low High
Quarter Bid Bid Ask Ask
- ---------------------------------------------------------------------------------------------------------------------
First $16.00 $17.00 $17.00 $18.00
Second 17.00 17.50 18.00 18.50
Third 17.50 18.50 18.50 19.50
Fourth 17.75 18.50 18.75 19.75
- ---------------------------------------------------------------------------------------------------------------------
38
Pacific Capital Bancorp
and Subsidiaries
BOARD OF DIRECTORS
PACIFIC CAPITAL BANCORP James L. Gattis William K. Sambrailo
Investor President
Stanley R. Haynes Civic Leader Charles Sambrailo
Chairman of the Board Company
President D. Vernon Horton
Cinderella Carpets President/Chief Robert B. Sheppard
Executive Officer Vice Chairman, Retired
William S. McAfee First National Bank of Allstate Insurance
Vice Chairman of the Board Central California Companies
Physician
Hubert H.Hudson Clyn Smith, Jr.
Charles E. Bancroft Consultant Physician, Retired
Chairman of the Board McSherry & Hudson
CLM Insurance Agencies, Inc Insurance DIRECTORS EMERITUS
Gene DiCicco William J. Keller Howard S. Bucquet Clinton F. Miller
Owner Physician Property Management President
Watsonville Nurseries Clint Miller Farms, Inc.
Wayne O. Hall
Lewis L. Fenton Clayton C. Larson President June Duran-Stock
Attorney President Wayne O. Hall President
Fenton & Keller Pacific Capital Bancorp Insurance Agency Legal Research &
Services Center
Gerald T. Fry Thomas M. Merrill
President William H. Pope President
Office Products, Inc. Certified Public Accountant Merrill Farms
39
Pacific Capital Bancorp
and Subsidiaries
THE CORPORATION
Pacific Capital Bancorp (the Company) is a California corporation and
bank holding company that was incorporated on January 26, 1983. First National
Bank of Central California (First National Bank), a wholly owned subsidiary of
the Company, commenced operations on April 2, 1984.
First National Bank is a nationally chartered commercial bank serving
Monterey and Santa Cruz Counties and surrounding areas in California. The
Company itself does not engage in any business activities other than the
ownership of First National Bank.
FIRST NATIONAL BANK OF ADMINISTRATION CENTER REGISTRAR & TRANSFER AGENT FORM 10-K
CENTRAL CALIFORNIA 307 Main Street First Interstate Bank A COPY OF THE COMPANY'S
BANKING OFFICES Salinas, California Stock Transfer FORM 10-K AS FILED WITH THE
1001 South Main Street 93902-1786 Administration SECURITIES AND EXCHANGE
Salinas, California (408) 757-4900 345 California Street COMMISSION IS AVAILABLE,
93902-1786 Eighth Floor WITHOUT CHARGE, UPON
(408) 757-4900 CREDIT ADMINISTRATION San Francisco, California WRITTEN REQUEST.
CENTER 94104 PLEASE DIRECT REQUESTS TO:
495 Washington Street 17547 Vierra Canyon Road
Monterey, California Salinas, California MARKET MAKERS DENNIS A. DECIUS
93942-2718 93907-1329 Paine Webber EXECUTIVE VICE PRESIDENT
(408) 373-4900 (408) 663-9100 26435 Carmel Rancho CHIEF FINANCIAL OFFICER
Boulevard PACIFIC CAPITAL BANCORP
307 Main Street CORPORATE COUNSEL Carmel, California 93923 P.O. BOX 1786
Salinas, California Graham & James SALINAS, CALIFORNIA
93902-1786 One Maritime Plaza Dean Witter Reynolds, Inc. 93902-1786
(408) 757-4900 San Francisco, California 1400 Del Monte Center
94111 Monterey, California 93940
655 Main Street
Watsonville, California CERTIFIED PUBLIC 111 Mission Street
95077-1540 ACCOUNTANTS Santa Cruz, California 95061
(408) 728-2265 KPMG Peat Marwick LLP
50 West San Fernando Street Hoefer & Arnett, Inc.
26380 Carmel Rancho Lane San Jose, California 95113 353 Sacramento Street
Carmel, California Tenth Floor
93922-2017 San Francisco, California
(408) 626-2900 94111
40
KPMG Peat Marwick LLP
Consent of Independent Auditors
-------------------------------
Shareholders and Board of Directors
Pacific Capital Bancorp
We consent to incorporation by reference in the registration statement (No.
33-83848) on Form S-8 of Pacific Capital Bancorp and subsidiaries of our report
dated January 10, 1996, relating to the consolidated balance sheets of Pacific
Capital Bancorp and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statments of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1995, which
report appears in the December 31, 1995 annual report on Form 10-K of Pacific
Capital Bancorp and subsidiaries.
/s/ KPMG Peat Marwick LLP
March 25, 1996
KPMG Peat Marwick LLP
Independent Auditors' Report
The Board of Directors
Pacific Capital Bancorp
We have audited the accompanying consolidated balance sheets of Pacific Capital
Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accpeted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Capital
Bancorp and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 7 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, in 1993.
/s/ KPMG Peat Marwick LLP
San Jose, California
January 10, 1996
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
Date: March 27, 1996 PACIFIC CAPITAL BANCORP
-------------------------------
By: /S/ Clayton C. Larson
----------------------------------
CLAYTON C. LARSON
President
/S/ Clayton C. Larson
- -------------------------------------- Date: March 27, 1996
Charles E. Bancroft,
Director
/S/ Dennis A. DeCius
- -------------------------------------- Date: March 27, 1996
Dennis A. DeCius
Executive Vice President
and Chief Financial Officer
(principal financial officer and
principal accounting officer)
/S/ Gene DiCicco
- -------------------------------------- Date: March 27, 1996
Gene DiCicco,
Director
/S/ Clayton C. Larson
- -------------------------------------- Date: March 27, 1996
Lewis L. Fenton,
Director
/S/ Gerald T. Fry
- -------------------------------------- Date: March 27, 1996
Gerald T. Fry,
Director
/S/ James L. Gattis
- -------------------------------------- Date: March 27, 1996
James L. Gattis,
Director and Secretary
/S/ Hubert W. Hudson
- -------------------------------------- Date: March 27, 1996
Hubert W. Hudson,
Director
/S/ Stanley R. Haynes
- -------------------------------------- Date: March 27, 1996
Stanley R. Haynes
Chairman of the Board
and Director
/S/ D. Vernon Horton
- -------------------------------------- Date: March 27, 1996
D. Vernon Horton,
Chief Executive officer
(principal executive
officer) and Director
/S/ William J. Keller
- -------------------------------------- Date: March 27, 1996
William J. Keller,
Director
/S/ Clayton C. Larson
- -------------------------------------- Date: March 27, 1996
Clayton C. Larson,
President and Director
/S/ William S. McAfee
- -------------------------------------- Date: March 27, 1996
William S. McAfee,
Director
/S/ William H. Pope
- -------------------------------------- Date: March 27, 1996
William H. Pope,
Director
/S/ William K. Sambrailo
- -------------------------------------- Date: March 27, 1996
William K. Sambrailo,
Director
/S/ Robert B. Sheppard
- -------------------------------------- Date: March 27, 1996
Robert B. Sheppard,
Director
/S/ Clyn Smith, Jr.
- -------------------------------------- Date: March 27, 1996
Clyn Smith, Jr.,
Director
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
------- ------- -------------
3.1 Articles of incorporation of the Company an amended to date. 1/ (*)
3.2 Bylaws of Company as amended to date. 2/ (*)
4. Not applicable. (*)
9. Not applicable. (*)
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/
<FN>
*/ 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, which are incorporated 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.
</FN>
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/
10.10 Executive Salary Continuation Agreement entered into (*)
August 22, 1989 by and between First National Bank of
Monterey County and Clayton C. Larson. 6/
10.11 Executive Salary Continuation Agreement entered into (*)
August 22, 1989 by and between First National Bank of
Monterey County and D. Vernon Horton. 6/
10.12 Executive Salary Continuation Agreement entered into (*)
August 22, 1989 by and between First National Bank of
Monterey County and Dennis A. DeCius. 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/
<FN>
- --------------------------------------------------
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.
</FN>
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.
10.35 Exercise of Lease Option as of September 19, 1992 by and (*)
between First National Bank of Central California and James L. Gattis.
10.36 Software License Agreement and Product License Agreements dated (*)
March 3, 1993 by and between First National Bank of Central California
and Information Technology, Inc.
10.37 Lease dated November 18, 1993 by and between Hazel Graven (*)
and Vines Stewart and First National Bank of Central
California.
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.
<FN>
- ------------------------------------------------------
8/ Filed as Exhibits 10.23 through 10.34 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.
</FN>
Exhibit Sequentially
Number Exhibit Numbered Page
------- ------- -------------
10.39 Equipment Sale Agreement dated December 16, 1993 by and (*)
between First National Bank of Central California and
Information Technology, Inc.
10.40 Asset/Liability Management Software Agreement dated (*)
December 31, 1993 by and between First National Bank of
Central California and Profitstar, Inc.
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.
10.42 Consolidated Agreement for the purchase of computer hardware (*)
dated December 20, 1993 by and between First National Bank of
Central California and Unisys Corporation.
10.43 Employment Agreement dated may 22, 1993 between (*)
First National Bank of Central California and D. Vernon Horton.
10.44 Employment Agreement dated May 22, 1993 between (*)
First National Bank of Central California and Clayton C. Larson.
10.45 Employment Agreement dated May 22, 1993 between
First National Bank of Central California and Dennis A. De Cius. (*)
10.46 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 75
First National Bank of Central California and
Information Technology, Inc.
10.50 Equipment Sale Agreement dated February 2, 1996, by and between 80
First National Bank of Central California and
Information Technology, Inc.
<FN>
- --------------------------------------------------------
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 10.47 through 10.48 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.
</FN>
Exhibit Sequentially
Number Exhibit Numbered Page
------- ------- -------------
10.51 Standard Form of Agreement between Owner (Pacific Capital Bancorp) 86
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.
10.52 Employee Welfare Benefit Plan Agreement dated January 1, 1995, 118
between Pacific Capital Bancorp and
Great-West Life & Annuity Insurance Co.
11. Not applicable. (*)
12. Not applicable. (*)
13. Pacific Capital Bancorp 1994 Annual Report to Shareholders 24
(parts not incorporated by reference are furnished for
informational purposes only and are not filed only and are not
filed herewith).
18. Not applicable. (*)
19. Not applicable. (*)
21. Subsidiaries of the Company 74
23. Not applicable. (*)
24. Consent of KPMG Peat Marwick LLP. 64
25. Power of Attorney. 201
SUBSIDIARY OF PACIFIC CAPITAL BANCORP
PACIFIC CAPITAL SERVICES CORPORATION (INACTIVE).