FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _____________________. Commission File Number 0-13528 Pacific Capital Bancorp ----------------------- (Exact name of registrant as specified in its charter) California 77-0003875 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1001 S. Main Street, Salinas, California 93901 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 757-4900 -------------- (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class May 13, 1998 ----- ------------ Common stock, no par value 4,314,591 Shares This report contains a total of 33 pages. -1- PART I - FINANCIAL INFORMATION ITEM 1 PAGE ---- PACIFIC CAPITAL BANCORP AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-14 PART II - OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 20 -2- PART 1 ITEM 1 - FINANCIAL INFORMATION PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) March 31, December 31, Assets 1998 1997 --------- --------- Cash and due from banks $ 44,309 $ 49,982 Federal funds sold and other short term investments 69,079 28,537 --------- --------- Total cash and equivalents 113,388 78,519 Investment securities: Available-for-sale securities, at fair value 203,831 220,984 Held-to-maturity securities, at amortized cost (fair value of $6,598 and $7,347, respectively) 6,614 7,347 Loans available for sale 11,537 10,523 Total loans 421,422 419,293 Less allowance for possible loan losses (4,280) (4,266) --------- --------- Net loans 417,142 415,027 Premises and equipment, net 15,361 15,331 Accrued interest receivable and other, net 15,601 16,988 --------- --------- Total assets $ 783,474 $ 764,719 ========= ========= Liabilities and shareholders' equity Deposits: Demand, non-interest bearing $ 154,982 $ 174,649 Demand, interest bearing 91,740 97,322 Savings and money market 178,265 173,151 Time certificates 275,638 238,276 --------- --------- Total deposits 700,625 683,398 Accrued interest payable and other liabilities 8,525 8,763 --------- --------- Total liabilities 709,150 692,161 Shareholders' equity: Preferred stock; 20,000,000 shares authorized and unissued -- -- Common stock, no par value; 20,000,000 shares authorized; 4,310,155 and 4,294,403 shares issued and outstanding at March 31, 1998 and at December 31, 1997, respectively 58,310 58,434 Retained earnings 14,780 12,852 Accumulated other comprehensive income 1,234 1,272 --------- --------- Total shareholders' equity 74,324 72,558 --------- --------- Total liabilities and shareholders' equity $ 783,474 $ 764,719 ========= ========= <FN> See accompanying notes to unaudited consolidated financial statements. </FN> -3- PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Three months Three months ended ended March 31, 1998 March 31, 1997 -------------- -------------- Interest income: Interest and fees on loans $ 10,369 $ 9,531 Interest on fed funds sold 635 309 Interest on investment securities 3,521 2,146 ---------- ---------- Total interest income 14,525 11,986 ---------- ---------- Interest expense: Interest on deposits 4,964 3,855 Other 3 7 ---------- ---------- Total interest expense 4,967 3,862 ---------- ---------- Net interest income 9,558 8,124 Provision for possible loan losses 345 285 ---------- ---------- Net interest income after provision for possible loan losses 9,213 7,839 ---------- ---------- Other income: Service charges 751 620 Gain on sale of loans 5 6 Net gain on securities transactions 4 -- Other 181 179 ---------- ---------- Total other income 941 805 ---------- ---------- Other expenses: Salaries and benefits 3,145 2,747 Occupancy 607 564 Equipment 491 391 Advertising and promotion 45 152 Stationary and supplies 160 232 Legal and professional fees 328 204 Regulatory assessments 70 54 Other operating 668 616 ---------- ---------- Total other expenses 5,514 4,960 Earnings before income taxes 4,640 3,684 Income taxes 1,848 1,442 ---------- ---------- Net income $ 2,792 $ 2,242 ========== ========== Basic earnings per share $ 0.65 $ 0.52 ========== ========== Diluted earnings per share $ 0.62 $ 0.50 ========== ========== Weighted average shares outstanding 4,296,567 4,292,912 Dilutive effect of stock options 181,848 161,605 ---------- ---------- Total weighted average diluted shares outstanding 4,478,415 4,454,517 ========== ========== <FN> See accompanying notes to unaudited consolidated financial statements. </FN> -4- PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Three months Three months ended ended March 31, 1998 March 31, 1997 -------------- -------------- Cash flows from operating activities: Net income $ 2,792 $ 2,242 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 390 354 Provision for possible loan losses 345 285 Net originations of loans available for sale (1,014) (2,120) Gain on sale of loans (5) (6) Deferral of loan origination fees (24) (30) Change in accrued interest receivable and other assets 1,349 (926) Change in accrued interest payable and other liabilities (238) (2,032) --------- --------- Net cash provided by (used in) operating activities 3,595 (2,233) --------- --------- Investing activities: Net increase in loans (2,517) (8,165) Recoveries on loans 86 38 Maturities of investment securities 18,529 3,553 Purchases of investment securities (643) (6,504) Capital expenditures, net (420) (457) --------- --------- Net cash provided by (used in) investing activities 15,035 (11,535) --------- --------- Financing activities: Net increase in deposits 17,227 27,241 Cash paid for retirement of stock (875) -- Proceeds from exercise of options 751 104 Cash paid for dividends (864) (653) --------- --------- Net cash provided by financing activities 16,239 26,692 --------- --------- Net increase in cash and equivalents 34,869 12,924 Cash and equivalents at beginning of period 78,519 76,245 ========= ========= Cash and equivalents at end of period $ 113,388 $ 89,169 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period Interest $ 5,432 $ 4,248 Income taxes 150 -- <FN> See accompanying notes to unaudited consolidated financial statements. </FN> -5- PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPRTEHENSIVE INCOME (UNAUDITED) (IN THOUSANDS) Three Months Ended March 31, March 31, 1998 1997 ------- ------- Net income $ 2,792 $ 2,242 Net change in unrealized gain on available-for-sale securities (38) (1,201) ------- ------- Total comprehensive income for the period $ 2,754 $ 1,041 ======= ======= -6- PACIFIC CAPITAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation In the opinion of the Company, the unaudited consolidated financial statements, prepared on the accrual basis of accounting, contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company and subsidiaries at March 31, 1998 and December 31, 1997, the results of its operations, statements of cash flows, and comprehensive income for the periods ended March 31, 1998 and 1997. Certain information and note disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The results of operations for the period ended March 31, 1998 are not necessarily indicative of the operating results for the full year ending December 31, 1998. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement establishes standards for the way the public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not believe it will have a significant impact on its consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This Statement amends the disclosure requirements of Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement standardizes the disclosure requirements of Statements No. 87 and No. 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. The statement is not anticipated to have a material impact on the financial condition or results of operations of the Company. Note 2 - Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, First National Bank of Central California, ("First National"), and South Valley National Bank ("South Valley"). For purposes used herein, the term "Subsidiary Banks" shall mean First National and South Valley, collectively. All material intercompany accounts and transactions have been eliminated in consolidation. Note 3 - Loans to Directors In the ordinary course of business, the Company has made loans to directors of the Company and their affiliates, which at March 31, 1998 amounted to approximately $9,847,000. Note 4 - Commitments The Company had outstanding standby letters of credit of approximately $4,868,000 at March 31, 1998. Note 5 - Net Income Per Share and Dividends Net income per share is computed using the weighted average number of shares of common and -7- common equivalent shares outstanding. On January 28 the Company declared a $0.20 per share cash dividends to shareholders of record on March 16, payable on March 31, 1998. Note 6 - Taxes As of March 31, 1998, the Company had a deferred tax asset of approximately $2,977,000. The asset results primarily from the provisions for possible loan losses and depreciation of premises and equipment, which are recognized in the financial statements but are not yet deductible for income tax reporting purposes. Management of the Company believes that the net deferred tax asset is fully realizable through sufficient taxable income within carryback periods and current year taxable income. PART 1 ITEM II - PACIFIC CAPITAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Changes in the Financial Statements Net income for the three months ended March 31, 1998 was $2,792,000 or $0.62 diluted earnings per share compared to $2,242,000 or $0.50 diluted earnings per share during the comparable period in 1997. This 24.5% increase in net income is due mainly to a $1,434,000 increase in net interest income. The increase in net interest income is due to growth in average total earning assets of $138,942,000 or 24.9% partially offset by an increase in average interest bearing deposits of $96,783,000 as compared to the comparable 1997 period. Outstanding loans were $421,422,000 at March 31, 1998 compared to $419,293,000 at December 31, 1997, a $2,129,000 or 0.5% increase. Federal Funds Sold and Investment Securities at March 31, 1998 were $279,524,000, a $22,656,000 or 8.8% increase from December 31, 1997. This was primarily due to the increase in total deposits which resulted in an increase in investments in Federal Funds and investment securities. The Company's total deposits at March 31, 1998 were $700,625,000 compared to $683,398,000 at December 31, 1997, a $17,227,000 or 2.5% increase. Non-interest bearing demand deposits decreased $19,667,000, interest bearing demand deposits decreased $5,582,000, while savings and money market deposit accounts increased $5,114,000 and certificates of deposit increased by $37,362,000 during the first three months of 1998. Management believes that the growth in deposits is a result of the overall strength in the local tourism and agribusiness industries. In addition, growth in housing demand and a small influx of businesses moving into the southern Santa Clara County area have contributed to the Company's deposit growth. 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 $221,000 and $307,000 in 1998 and 1997, respectively. -8- AVERAGE BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 Average Yield/ Interest Average Yield/ Interest (Dollars in thousands) Balance Rate Amount Balance Rate Amount - ------------------------------------------------------------------------------------------------------------------------------------ Assets Earning assets: Investment securities: Taxable $206,252 6.6% $3,355 $126,269 6.4% $1,982 Non-taxable 14,129 4.8% 166 13,337 5.0% 165 Federal funds sold 47,439 5.4% 635 24,075 5.2% 309 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 267,820 6.3% 4,156 163,681 6.1% 2,456 Loans 429,229 9.8% 10,369 394,426 9.8% 9,530 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 697,049 8.5% 14,525 558,107 8.7% 11,986 Non-earning assets: Premises and equipment 15,340 15,420 Other 46,682 45,592 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-earning assets 62,022 61,012 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $759,071 $619,119 ==================================================================================================================================== Liabilities and Shareholders' Equity Interest-bearing deposits: Demand $91,598 0.8% $187 $81,939 1.1% $220 Savings and money market 177,541 3.0% 1,290 162,906 2.8% 1,128 Time certificates 260,915 5.4% 3,486 188,426 5.4% 2,508 Other interest-bearing liabilities 522 2.3% 3 666 4.3% 7 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 530,576 3.8% 4,966 433,937 3.6% 3,863 Non interest-bearing deposits And other liabilities: Demand, non interest-bearing 148,729 115,163 Other liabilities 5,267 4,826 Shareholder's equity 74,499 65,193 - ------------------------------------------------------------------------------------------------------------------------------------ Total other liabilities 228,495 185,182 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $759,071 $619,119 ==================================================================================================================================== NET INTEREST INCOME $9,559 $8,123 NET INTEREST MARGIN 5.6% 5.9% - ------------------------------------------------------------------------------------------------------------------------------------ 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. Loans Outstanding total loans averaged $429,229,000 for the three months ended March 31, 1998 compared to $394,426,000 for the comparable period in 1997, an increase of $34,803,000, or 8.8%. This increase in loans is due to growth in loan demand from qualified borrowers and reflects stability in most of the primary markets which the Company serves. The Company lends primarily to small and medium sized businesses and consumers within its markets, which are comprised principally of Monterey, Santa Cruz, San Benito, and southern Santa Clara counties. -9- Quality of Loans The composition of non-performing loans as of March 31, 1998 , December 31, 1997, and March 31, 1997 is summarized in the following table. Non-performing Loans (Dollars in Thousands) March 31, December 31, March 31, 1998 1997 1997 ------ ------ ------ Accruing loans past due 90 days or more: Commercial $ -- $ 26 $ 50 Consumer 193 17 41 Real Estate -- -- 671 ------ ------ ------ Total $ 193 $ 43 $ 762 Nonaccrual loans: Commercial 765 1,278 418 Consumer 74 106 113 Real Estate 66 766 1,019 ------ ------ ------ Total $ 905 $2,150 $1,550 Total Non-performing Loans $1,098 $2,193 $2,312 ====== ====== ====== Non-performing Loans To Total Loans 0.26% 0.52% 0.58% Allowance For Possible Loan Losses To Total Non-performing Loans 389.80% 194.53% 168.99% The Company does not expect to sustain losses from any of the non-performing loans in excess of that specifically provided for in the allowance for possible loan losses. Currently, the Company's level of non-performing loans to total loans is below that of peer banks. In addition to the above, the Company holds one Other Real Estate Owned (OREO) property, which totals $1,213,000. The amount recorded represents the lesser of the loan balance or current fair value obtained from a current appraisal less anticipated selling costs; therefore, any identified loss has already been recognized. Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, additions are made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of management's assessment of risk or regulatory examinations conducted by governmental agencies. The Company's entire allowance is a valuation allowance created by direct charges against operations through the provision for possible loan losses. The provision for possible loan losses charged against operations is based upon the actual net loan losses incurred plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses. The Company evaluates the adequacy of its allowance for possible loan losses on a quarterly basis. The Company has also contracted with an independent loan review consulting firm to evaluate overall credit quality and the adequacy of the allowance for possible loan losses. Both internal and external evaluations take into account the following: specific loan conditions as determined by management; the historical relationship between charge-offs and the level of the allowance; the estimated future loss in all significant loans; known deterioration in concentrations of credit, certain classes of loans or pledged collateral; historical loss experience based on volume and types of loans; the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of Company management or by bank -10- regulatory agencies; trends in portfolio volume, maturity and composition; off-balance sheet credit risk; volume and trends in delinquencies and nonaccruals; lending policies and procedures including those for charge-off, collection and recovery; national and local economic conditions and their effects on specific local industries; and the experience, ability and depth of lending management and staff. These factors are essentially judgmental and may not be reduced to a mathematical formula. The Company closely monitors the local markets in which it conducts its lending activities. The overall increase in loan demand from qualified borrowers during the past year is indicative of the strength in the local economic climate. The table set forth below summarizes the actual loan losses and provision for possible losses as of and for the periods ended March 31, 1998 , December 31, 1997, and March 31, 1997 : Loan Charge-Off/Recovery Activity (Dollars in Thousands) Three months Year Three months Ended Ended Ended March 31, 1998 December 31, 1997 March 31, 1997 -------------- ----------------- -------------- Loans Outstanding, at period end $421,422 $419,293 $396,835 Average Loans $429,229 $411,546 $394,426 Allowance Balance: Beginning Of Period 4,266 3,672 3,672 Charge-Offs By Loan Category: Commercial 384 873 53 Consumer 33 59 4 Real Estate -- 211 31 -------- -------- -------- Total $ 417 $ 1,143 $ 88 -------- -------- -------- Recoveries By Loan Category: Commercial 49 120 32 Consumer 34 24 4 Real Estate 3 73 2 -------- -------- -------- Total $ 86 $ 217 $ 38 -------- -------- -------- Net Charge-Offs $ 331 $ 926 $ 50 -------- -------- -------- Provision Charged To Expense $ 345 $ 1,520 $ 285 Allowance Balance End Of Period $ 4,280 $ 4,266 $ 3,907 ======== ======== ======== Allowance For Possible Loan Losses To Period End Loans 1.02% 1.02% 0.98% Annualized Net Charge-offs to Average Loans 0.31% 0.23% 0.05% The provision for possible loan losses charged against earnings is based upon an analysis of the actual migration of loans to losses plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses. While these factors cannot be reduced to a mathematical formula, it is management's view that the allowance for possible loan losses of $4,280,000 or 1.02% of total loans was adequate as of March 31, 1998. -11- Results of Operations Three months ended March 31, 1998 Compared with Three months ended March 31, 1997 Net income for the three months ended March 31, 1998 was $2,792,000, an increase of $550,000 or 24.5% as compared to the same 1997 period. The increase in net income for the period was due primarily to an increase in net interest income of $1,434,000 partially offset by an increase in non-interest expense of $554,000. The increase in net interest income is due to growth in average total earning assets of $138,942,000 partially offset by an increase in average interest bearing deposits of $96,783,000 compared to the same 1997 period. The average balance of interest earning assets during the three months ended March 31, 1998 was $697,049,000, a 24.9% increase over the comparable 1997 period. The Company's average yield on earning assets for the three months ended March 31, 1998 decreased to 8.5% from 8.7% in the comparable 1997 period. Total interest income increased $2,539,000 or 21.2% for the three months ended March 31, 1998 compared to the same 1997 period due to the increase in average interest earning assets. Average deposits for the Company for the three months ended March 31, 1998 was $678,783,000, a $130,349,000 or 23.8% increase compared to the same period ended March 31, 1997 . The Company's average cost of funds for the three months ended March 31, 1998 was 3.8% which yielded a net interest margin of 5.6%. This compares to an average cost of funds of 3.6% and a net interest margin of 5.9% for the comparable 1997 period. Interest expense of $4,967,000 for the three months ended March 31, 1998 was $1,105,000 or 28.6% over the comparable 1997 period due to an increase in average interest bearing deposits of $96,783,000 and an increase in the Company's cost of funds of 0.2%. Net interest income for the three months ended March 31, 1998 increased $1,434,000 or 17.7%. The Company made a provision to the allowance for possible loan losses of $345,000 in the three months ended March 31, 1998 primarily due to the overall growth experienced within the loan portfolio. An analysis of the loan portfolio completed by the Company indicates that the current allowance for loan losses is adequate based on the Company's calculated provision requirements. Total loans charged-off net of recoveries for the three months ended March 31, 1998 amounted to $331,000 compared to $50,000 for the same period in 1997. Annualized net loan charge-offs as a percentage of average loans for the three months ended March 31, 1998 was 0.31% compared to 0.05% for the three months ended March 31, 1997 and 0.23% for the year ended December 31, 1997. Total other income was $941,000 for the three months ended March 31, 1998, a $136,000 or 16.9% increase compared to the same period in 1997. Service charges on deposit accounts increased by $131,000 or 21.1% over the comparable period in 1997. Other income increased by $5,000 for the three months ended March 31, 1998, as compared to the same period in 1997. Salaries and benefits expense for the three months ended March 31, 1998 was $3,145,000, a $398,000 or 14.5% increase over the comparable 1997 period. This variance resulted primarily from an increase in overall staffing levels to accommodate internal growth as well as regular salary increases and an increase in the accrual for salary continuation plans. The Company employed 267 full time equivalent employees at March 31, 1998 compared to 285 full time equivalent employees at December 31, 1997 and 259 full time equivalent employees at March 31, 1997. Total other expenses, excluding salaries and benefits, for the three months ended March 31, 1998 , was $2,369,000, a $156,000 or 7.0% increase from the comparable 1997 period. This was primarily due to increases in equipment expense of $100,000, and an increase in legal and professional expense of $124,000. These increases were partially offset by a decrease in advertising and promotion expense of $107,000 and a decrease in stationery expense of $72,000. Applicable income taxes of $1,848,000 for the three months ended March 31, 1998 were $406,000, or 28.2% more than the comparable 1997 period. The Company's effective tax rate for the three months ended March 31, 1998 was 39.8% compared to 39.1% for the same period in 1997. -12- Year 2000 During 1997, the Company began the implementation of its Year 2000 Plan. The Company is utilizing both internal and external resources to identify, correct or reprogram and test the systems for year 2000 readiness. It is anticipated that all reprogramming efforts will be complete by December 31, 1998, allowing adequate time for testing. To date, confirmations have been received by the Company's primary processing vendors that their systems are year 2000 ready. Based on data received so far, the Company anticipates spending approximately $200,000 over the remainder of 1998 and 1999 to modify and test its systems. Liquidity Management Liquidity represents the ability of the Company to meet the requirements of customer borrowing needs as well as fluctuations in deposit flows. The Company manages its liquidity primarily by maintaining investments in overnight fed funds, money market mutual funds, available-for-sale securities, and by maintaining lines of credit with correspondent banks. At March 31, 1998, the total of cash and due from banks, overnight fed funds, money market mutual funds, and available-for-sale securities represented $317,219,000 or 45.3% of total deposits compared to $299,503,000 or 43.8% at year end 1997. This increase in liquid assets for the three months ended March 31, 1998 resulted primarily from an increase in deposits which were invested in fed funds sold and short term investments. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and projected future levels. Capital Resources Capital management is a continuous process of providing adequate capital for current needs and anticipated future growth. Capital serves as a source of funds for the acquisition of fixed and other assets and protects depositors against potential losses. As the Company's assets increase, so do its capital requirements. The Company and the Subsidiary Banks are subject to Federal Reserve Board guidelines and regulations of the Comptroller of the Currency ("Comptroller"), respectively, governing capital adequacy. The Federal Reserve Board has established final risk-based and leverage capital guidelines for bank holding companies which are the same as the Comptroller's capital regulations for national banks. The Federal Reserve Board capital guidelines for bank holding companies and the Comptroller's regulations for national banks set total capital requirements and define capital in terms of "core capital elements" (comprising Tier 1 capital) and "supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is generally defined as the sum of the core capital elements less goodwill. The following items are defined as core capital elements: common shareholders' equity, qualifying noncumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital elements include: allowance for loan and lease losses (which cannot exceed 1.25% of an institution's risk weighted assets), perpetual preferred stock not qualifying as core capital, hybrid capital instruments and mandatory convertible debt instruments, and term subordinated debt and intermediate-term preferred stock. The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill. Risk-based capital ratios are calculated with reference to risk-weighted assets, including both on and off-balance sheet exposures, which are multiplied by certain risk weights assigned by the Federal Reserve Board to those assets. Both bank holding companies and national banks are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, at least one-half of which must be in the form of Tier 1 capital. There are presently four risk-weight categories: 0% for cash and unconditionally guaranteed government securities; 20% for conditionally guaranteed government securities; 50% for performing residential real estate loans secured by first liens; and 100% for commercial loans. The Federal Reserve Board and the Comptroller also have established a minimum leverage ratio of 3% Tier I capital to total assets for bank holding companies and national banks that have received the highest composite regulatory rating and are not anticipating or experiencing any significant growth. All other institutions will be required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum. -13- The following tables show the Company's and the Subsidiary Banks' risk-based and leverage capital ratios as of March 31, 1998. The Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Management believes that the Company will continue to meet the respective minimum capital requirements in the foreseeable future. - ------------------------------------------------------------------------------------------------------------------------------------ Risk Based Capital Ratio As of March 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------- -------------- ------------ ------------- ------------- ------------- ------------ Tier 1 capital $70,790 13.72% $17,529 11.50% $45,428 12.78% Tier 1 capital minimum requirement 20,632 4.00% 6,097 4.00% 14,215 4.00% ======================================= ============== ============ ============= ============= ============= ============ Excess 50,158 9.72% 11,432 7.50% 31,213 8.78% ======================================= ============== ============ ============= ============= ============= ============ Total capital 75,070 14.55% 19,054 12.50% 48,177 13.56% Total capital minimum requirement 41,265 8.00% 12,194 8.00% 28,429 8.00% - --------------------------------------- -------------- ------------ ------------- ------------- ------------- ------------ Excess 33,805 6.55% 6,860 4.50% 19,748 5.56% ======================================= ============== ============ ============= ============= ============= ============ Risk-adjusted assets $515,811 $152,419 $355,368 ======================================= ============== ============ ============= ============= ============= ============ - ------------------------------------------------------------------------------------------------------------------------------------ Leverage Capital Ratio As of March 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------- ------------- ------------ -------------- -------------- ------------ ----------- Tier 1 capital to quarterly average total assets (leverage ratio) $70,790 9.35% $17,529 7.92% $45,428 8.61% Minimum leverage requirement 22,703 to 3.00% to 6,640 to 3.00% to 15,822 to 3.00% to 37,838 5.00% 11,066 5.00% 26,370 5.00% - --------------------------------------- ------------- ------------ -------------- -------------- ------------ ----------- Excess 32,952 to 4.35% to 6,463 to 2.92% to 19,058 to 3.61% to 48,087 6.35% 10,889 4.92% 29,606 5.61% ======================================= ============= ============ ============== ============== ============ =========== Total quarterly average assets $756,764 $221,319 $527,402 ======================================= ============= ============ ============== ============== ============ =========== Federal banking laws impose restrictions upon the amount of dividends the Subsidiary Banks may declare to the Company. Federal laws also impose restrictions upon the amount of loans or advances that the Subsidiary Banks may extend to the Company. In management's opinion, these do not affect the ability of the Company to meet its cash obligations. -14- PART II -- OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 3.1 Articles of incorporation of the Company as amended 1/ (*) 3.2 Bylaws of Company as amended 2/ (*) 10.1 Lease -- 601 Abrego Street, Monterey, Premises 3/ (*) 10.2 Lease for 1001 South Main Street, Salinas, Banking office 2/ (*) 10.3 Lease dated December 15, 1988 by and between the Bank (*) and James L. Gattis for 307 Main Street, Salinas Old Town Office. 2/ 10.4 Lease dated May 1, 1985 by and between the Bank (*) and Pacific Capital Bancorp. 4/ 10.5 Pacific Capital Bancorp Employee Stock Ownership (*) Plan and Trust Agreement. 5/ 10.6 Master Equipment Lease Agreement between Bank and (*) Parker North American Corporation. 5/ 10.7 Lease dated September 22, 1986 between (*) Bank and The Saunders Company. 5/ */ Not Applicable. - ---------------- 1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1988, and are incorporated herein by reference. 2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual Report on Form 10-K (File No. 2-87513) for the fiscal year ended December 31, 1984, which are incorporated by reference. 3/ Filed as Exhibit to the Company's Registration Statement on Form S-18 (Registration No. 2-87513), which is incorporated by reference. 4/ Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1985, which is incorporated by reference. 5/ Filed as Exhibits 10.24 through 10.26, respectively, to Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1986, which are incorporated by reference. -15- Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.9 Lease dated January 24, 1989 by and between First (*) National Bank of Monterey County and Stanley R. Haynes. 6/ 10.13 Amendment No. One to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 2/ 10.14 Amendment No. Two to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 7/ 10.15 Amendment No. Three to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 7/ 10.16 Lease dated August 10, 1990 by and between the (*) Trustees of the Stanley Family Trust and Pacific Capital Bancorp for Carmel Office. 7/ 10.17 Assignment of Lease dated November 1, 1990 by and (*) between Pacific Capital Bancorp and First National Bank of Monterey-County for Carmel Office. 7/ 10.18 Lease dated November 12, 1990 by and between (*) First National Bank of Monterey County and Carmel Monterey Travel for Premises located at 601 Abrego Street, Monterey, California. 7/ 10.19 Prunetree Shopping Center Lease dated June 28, 1988 (*) by and between Dennis R. Keith and Pajaro Valley Bancorporation. 7/ - ---------------- 6/ Filed as Exhibits 10.20 through 10.24, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1989, which are incorporated by reference. 7/ Filed as Exhibits 10.25 through 10.32 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1990, which are incorporated by reference. -16- Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.20 Lease dated June 21, 1990 by and between Saucito (*) Land Co. and First National Bank of Monterey County. 7/ 10.22 Amendment No. Four to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 8/ 10.23 Amendment dated May 20, 1991 to Lease dated (*) December 15, 1988 by and between the Bank and James L. Gattis for 307 Main Street, Salinas Old Town Office. 8/ 10.24 Pacific Capital Bancorp Directors' Stock Option Plan (*) and Form of Stock Option Agreement. 8/ 10.26 Pacific Capital Bancorp 1984 Stock Option Plan (*) and Forms of Agreements as amended to date. 8/ 10.30 Business Recovery Services Agreement dated September (*) 30, 1991 by and between Bank and J.D.B. & Associates, Inc. 8/ 10.31 Consolidated Agreement dated December 17, 1991 (*) by and between Bank and Unisys with Equipment Sale Agreement, Software License Agreement and Product License Agreement by and between Bank and Information Technology, Inc. 8/ 10.32 Fidelity and Deposit Company of Maryland Directors and Officers (*) Liability Insurance Policy including Bank Reimbursement. 8/ 10.33 Fidelity and Deposit Company of Maryland (*) Financial Institution Bond. 8/ 10.34 Lease dated January 28, 1993 by and between J.W. and R.W. (*) McClellan, Partners, and First National Bank of Central California. 9/ 10.35 Exercise of Lease Option as of September 19, 1992 (*) by and between First National Bank of Central California and James L. Gattis. 9/ - ---------------- 8/ Filed as Exhibits 10.34 through 10.35 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1991, which are incorporated by reference. 9/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1993, which are incorporated by reference. -17- Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.37 Lease dated November 18, 1993 by and between Hazel Graven (*) and Vines Stewart and First National Bank of Central California. 10/ 10.38 Software License Agreement for Platform Transfer Module (*) and Interface dated September 15, 1993 by and between First National Bank of Central California and Information Technology, Inc. 10/ 10.39 Equipment Sale Agreement dated December 16, 1993 by and (*) between First National Bank of Central California and Information Technology, Inc. 10/ 10.42 Consolidated Agreement for the purchase of computer hardware (*) dated December 20, 1993 by and between First National Bank of Central California and Unisys Corporation. 10/ 10.46 Amended Pacific Capital Bancorp 1994 Stock Option Plan (*) and Form of Incentive and Non-Qualified Stock Option Agreements. 9/ 10.47 Amendment No. Five to Pacific Capital Bancorp Employee (*) Stock Ownership Plan and Trust. 10/ 10.48 Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/ (*) 10.49 Equipment Sale Agreement dated March 22, 1995, by and between (*) First National Bank of Central California and Information Technology, Inc. 11/ 10.50 Equipment Sale Agreement dated February 2, 1996, by (*) and between First National Bank of Central California and Information Technology, Inc. 11/ 10.52 Employee Welfare Benefit Plan Agreement dated (*) January 1, 1995, between Pacific Capital Bancorp and Great-West Life & Annuity Insurance Co. 11/ - ---------------- 9/ Filed as Exhibits to the Company's Registration Statement on Form S-8 (File No. 33-83848) as filed on September 8, 1994, and Amendment No. 1 to Form S-8 as filed on November 15, 1994. 10/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1994, which are incorporated by reference. 11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1995, which are incorporated by reference. -18- Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.53 Lease Agreement dated October 29, 1996 by and (*) between James L. Gattis and Pacific Capital Bancorp for property located at 517 S. Main Street, Salinas /12 10.57 Employment Agreement dated November 20, 1996 between South (*) Valley National Bank and Brad L. Smith /12 10.58 Employment Agreement dated August 26, 1997 between Pacific (*) Capital Bancorp and Clayton C. Larson /13 10.59 Employment Agreement dated August 26, 1997 between Pacific (*) Capital Bancorp and D. Vernon Horton /13 10.60 Employment Agreement dated August 26, 1997 between Pacific (*) Capital Bancorp and Dennis A. DeCius /13 10.61 Employment Agreement dated August 26, 1997 between Pacific (*) Capital Bancorp and Dale R. Diederick /13 10.62 Amended and Restated Executive Salary Continuation Agreement (*) dated September 23, 1997 between Pacific Capital Bancorp and Clayton C. Larson /13 10.63 Amended and Restated Executive Salary Continuation Agreement (*) dated September 23, 1997 between Pacific Capital Bancorp and D. Vernon Horton /13 10.64 Amended and Restated Executive Salary Continuation Agreement (*) dated September 23, 1997 between Pacific Capital Bancorp and Dennis A. DeCius /13 10.65 Amended and Restated Executive Salary Continuation Agreement (*) dated September 23, 1997 between Pacific Capital Bancorp and Dale R. Diederick /13 10.67 Executive Salary Continuation Agreement between South Valley 21 National Bank and Brad L. Smith dated March 24, 1998 27. Financial Data Schedule 33 (b) REPORTS ON FORM 8-K No reports were filed on Form 8-K for the quarter ended March 31, 1998 - ---------------- 12/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1996, which are incorporated by reference. 13/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q (File No. 0-13528) for the period ended September 30, 1997 which are incorporated by reference -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pacific Capital Bancorp Date May 13, 1998 /S/ D. Vernon Horton ------------- -------------------- D. Vernon Horton Chairman of the Board Chief Executive Officer Date May 13, 1998 /S/ Edward J. Czajka ------------- -------------------- Edward J. Czajka Senior Vice President Corporate Controller -20-