UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No.: 0-11113
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
PACIFIC CAPITAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Carrillo Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common Stock - As of August 12, 1999 here were 24,474,907 shares of the issuer's
common stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
Consolidated Statements of Income
Six and Three-Month Periods Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows
Six-Month Period Ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income
Six and Three-Month Periods Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
The financial statements included in this Form 10-Q should be read with
reference to the Pacific Capital Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 as supplemented by the first quarter 1999
Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosures about quantitative and qualitative market risk are
located in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the section on interest
rate sensitivity.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not applicable.
<PAGE>
<TABLE>
PART 1
FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
<CAPTION>
June 30, 1999 December 31, 1998
--------------- ----------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 110,405 $ 114,206
Federal funds sold and securities purchased under
agreement to resell 47,500 69,890
Money market funds - 1,567
-------------- --------------
Cash and cash equivalents 157,905 185,663
-------------- --------------
Securities (Note 4):
Held-to-maturity 166,808 194,769
Available-for-sale 510,533 596,996
Bankers' acceptances and commercial paper 4,995 19,888
Loans, net of allowance of $29,616 at
June 30, 1999 and $29,296 at
December 31, 1998 (Note 5) 1,787,587 1,553,485
Premises and equipment, net 31,645 29,916
Accrued interest receivable 16,500 15,944
Other assets (Note 6) 62,557 52,757
-------------- --------------
Total assets $ 2,738,530 $ 2,649,418
============== ==============
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 486,808 $ 498,266
Interest bearing deposits 1,836,644 1,831,410
-------------- --------------
Total Deposits 2,323,452 2,329,676
Securities sold under agreements
to repurchase and Federal funds purchased 48,385 27,796
Long-term debt and other borrowings (Note 7) 116,028 44,953
Accrued interest payable and other liabilities 24,908 32,993
-------------- --------------
Total liabilities 2,512,773 2,435,418
-------------- --------------
Shareholders' equity
Common stock (no par value; $0.33 per share stated value;
60,000,000 authorized; 24,532,960 outstanding at
June 30, 1999 and 24,208,782 at December 31, 1998) 8,179 8,071
Surplus 97,938 95,498
Accumulated other comprehensive income (Note 8) (2,040) 3,496
Retained earnings 121,680 106,935
-------------- --------------
Total shareholders' equity 225,757 214,000
-------------- --------------
Total liabilities and shareholders' equity $ 2,738,530 $ 2,649,418
============== ==============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Six-Month For the Three-Month
Periods Ended Periods Ended
June 30, June 30,
----------------------------------- -------------------------------
1999 1998 1999 1998
----------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 81,407 $ 69,838 $ 38,253 $ 32,916
Interest on securities 21,866 22,418 10,602 11,185
Interest on Federal funds sold and securities
purchased under agreement to resell 2,673 3,524 703 1,702
Interest on BA's and commercial paper 331 907 74 218
---------------------------------- -----------------------------
Total interest income 106,277 96,687 49,632 46,021
---------------------------------- -----------------------------
Interest expense:
Interest on deposits 30,011 31,678 14,735 15,991
Interest on securities sold under agreements
to repurchase and Federal funds purchased 746 507 484 209
Interest on other borrowed funds 1,723 1,158 991 561
---------------------------------- -----------------------------
Total interest expense 32,480 33,343 16,210 16,761
---------------------------------- -----------------------------
Net interest income 73,797 63,344 33,422 29,260
Provision for loan losses 4,559 6,933 840 984
---------------------------------- -----------------------------
Net interest income after provision for loan losses 69,238 56,411 32,582 28,276
---------------------------------- -----------------------------
Other operating income:
Service charges on deposits 4,785 4,569 2,424 2,297
Trust fees 6,446 5,681 3,095 2,816
Other service charges, commissions and fees, net 10,859 9,053 2,886 2,805
Net (loss) gain on securities transactions (286) 106 (109) 49
Other operating income 688 541 381 292
---------------------------------- -----------------------------
Total other income 22,492 19,950 8,677 8,259
---------------------------------- -----------------------------
Other operating expense:
Salaries and benefits 25,326 24,924 12,531 12,264
Net occupancy expense 4,804 4,104 2,506 2,061
Equipment expense 2,992 2,983 1,432 1,524
Other expense 20,617 13,171 10,240 6,630
---------------------------------- -----------------------------
Total other operating expense 53,739 45,182 26,709 22,479
---------------------------------- -----------------------------
Income before income taxes 37,991 31,179 14,550 14,056
Applicable income taxes 14,427 11,467 5,507 5,065
---------------------------------- -----------------------------
Net income $ 23,564 $ 19,712 $ 9,043 $ 8,991
================================== =============================
Earnings per share - basic (Note 2) $ 0.97 $ 0.83 $ 0.37 $ 0.38
Earnings per share - diluted (Note 2) $ 0.95 $ 0.81 $ 0.37 $ 0.37
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<CAPTION>
For the Six Months Ended June 30,
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 23,564 $ 19,712
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,132 3,103
Provision for loan and lease losses 4,559 6,933
Net amortization of discounts and premiums for
securities and bankers' acceptances and
commercial paper (2,915) (773)
Net change in deferred loan origination
fees and costs 165 (326)
Net (gain) loss on sales and calls of securities 286 114
Change in accrued interest receivable and other assets (16,610) (1,088)
Change in accrued interest payable and other liabilities (8,141) 980
--------------- ---------------
Net cash provided by operating activities 4,040 28,655
--------------- ---------------
Cash flows from investing activities:
Proceeds from call or maturity of securities 147,481 79,254
Purchase of securities (45,537) (149,814)
Proceeds from sale of securities 14,807 56,355
Proceeds from maturity of bankers' acceptances and
commercial paper 45,000 58,488
Purchase of bankers' acceptances and commercial paper (29,805) (14,671)
Net increase in loans made to customers (238,648) (82,545)
Purchase or investment in premises and equipment (4,143) (3,462)
--------------- ---------------
Net cash used in investing activities (110,845) (56,395)
--------------- ---------------
Cash flows from financing activities:
Net increase in deposits (6,224) 76,390
Net decrease in borrowings with maturities
of 90 days or less 20,589 (9,250)
Net increase (decrease) in long-term debt and other
borrowings 71,075 (5,000)
Proceeds from issuance of common stock 2,370 2,244
Payments to retire common stock -- (3,790)
Dividends paid (8,763) (6,019)
--------------- ---------------
Net cash provided by financing activities 79,047 54,575
--------------- ---------------
Net increase in cash and cash equivalents (27,758) 26,835
Cash and cash equivalents at beginning of period 185,663 194,318
--------------- ---------------
Cash and cash equivalents at end of period $ 157,905 $ 221,153
=============== ===============
Supplemental disclosure:
Cash paid for the three months ended:
Interest $ 32,212 $ 33,069
Income taxes $ 16,067 $ 7,630
Non-cash additions to other real estate owned $ -- $ 200
Non-cash additions to loans $ 178 $ 317
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands except per share amounts
For the Six-Month For the Three-Month
Periods Ended Periods Ended
June 30, June 30,
<CAPTION>
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 23,564 $ 19,712 $ 9,043 $ 8,991
Other comprehensive income, net of tax (Note 8):
Unrealized loss on securities:
Unrealized holding losses arising during period (5,250) (349) (4,030) (191)
Less: reclassification adjustment for gains (losses)
included in net income (286) 106 (109) 49
----------- ----------- ---------- -----------
Other comprehensive income (5,536) (243) (4,139) (142)
----------- ----------- ---------- -----------
Comprehensive income $ 18,028 $ 19,469 $ 4,904 $ 8,849
=========== =========== ========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
Pacific Capital Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding company,
Pacific Capital Bancorp ("Bancorp"), and its wholly owned subsidiaries, Santa
Barbara Bank & Trust ("SBB&T"), First National Bank of Central California
("FNB") and its affiliate South Valley National Bank ("SVNB"), and Pacific
Capital Commercial Mortgage, Inc. All references to "the Company" apply to
Pacific Capital Bancorp and its subsidiaries. "Bancorp" will be used to refer to
the parent company only. Material intercompany balances and transactions have
been eliminated.
2. Earnings Per Share
Earnings per share for all periods presented in the Consolidated Statements of
Income are computed based on the weighted average number of shares outstanding
during each year retroactively restated for stock dividends and stock splits.
Diluted earnings per share include the effect of the potential issuance of
common shares. For the Company, these include only shares issuable on the
exercise of outstanding stock options.
The computation of basic and diluted earnings per share for the six and
three-month periods ended June 30, 1999 and 1998, was as follows (shares and net
income amounts in thousands):
<TABLE>
<CAPTION>
Six-month Periods Three-month Periods
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Ended June 30, 1999
Numerator --net income $ 23,564 $ 23,564 $ 9,043 $ 9,043
Denominator --weighted average
shares outstanding 24,316 24,316 24,391 24,391
Plus: net shares issued in
assumed stock option exercises 375 372
Diluted denominator 24,691 24,763
Earnings per share $0.97 $0.95 $0.37 $0.37
Ended June 30, 1998
Numerator --net income $ 19,712 $ 19,712 $ 8,991 $ 8,991
Denominator --weighted average
shares outstanding 23,647 23,647 23,681 23,681
Plus: net shares issued in
assumed stock option exercises 670 667
Diluted denominator 24,317 24,348
Earnings per share $0.83 $0.81 $0.38 $0.37
</TABLE>
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in a condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been reflected in the financial statements. However, the results of
operations for the six and three-month periods ended June 30, 1999, are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported for 1998 have been reclassified to be consistent with the
reporting for 1999.
For the purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, money market funds, Federal funds sold, and securities
purchased under agreement to resell.
4. Securities
The Company's securities are classified as either "held-to-maturity" or
"available-for-sale." Securities for which the Company has positive intent and
ability to hold until maturity are classified as held-to-maturity. Securities
that might be sold prior to maturity because of interest rate changes, to meet
liquidity needs, or to better match the repricing characteristics of funding
sources are classified as available-for-sale. If the Company were to purchase
securities principally for the purpose of selling them in the near term for a
gain, they would be classified as trading securities. The Company holds no
securities that should be classified as trading securities.
SBB&T and FNB are members of the Federal Reserve Bank of San Francisco ("FRB").
SBB&T is a member of the Federal Home Loan Bank of San Francisco ("FHLB"). The
banks are required to hold shares of stock in these two organizations as a
condition of membership. These shares are reported as equity securities.
The amortized historical cost and estimated market value of debt securities by
contractual maturity are shown below. The issuers of certain of the securities
have the right to call or prepay obligations before the contractual maturity
date. Depending on the contractual terms of the security, the Company may
receive a call or prepayment penalty in such instances.
<TABLE>
<CAPTION>
(in thousands) Held-to- Available-
Maturity for-Sale Total
------------------------------------
<S> <C> <C> <C>
June 30, 1999
Amortized cost:
In one year or less $ 46,551 $ 95,239 $ 141,790
After one year through five years 75,665 339,563 415,228
After five years through ten years 6,231 39,799 46,030
After ten years 38,361 30,724 69,085
Equity securities -- 8,681 8,681
-------------------------------------
Total securities $ 166,808 $ 514,006 $ 680,814
=====================================
Estimated market value:
In one year or less $ 47,059 $ 95,503 $ 142,562
After one year through five years 80,195 338,331 418,526
After five years through ten years 7,046 38,770 45,816
After ten years 42,771 29,248 72,019
Equity securities -- 8,681 8,681
-------------------------------------
Total securities $ 177,071 $ 510,533 $ 687,604
=====================================
December 31,1998 Amortized cost:
In one year or less $ 46,931 $ 128,259 $ 175,190
After one year through five years 97,704 371,370 469,074
After five years through ten years 10,973 62,809 73,782
After ten years 39,161 18,725 57,886
Equity securities -- 9,086 9,086
-------------------------------------
Total securities $ 194,769 $ 590,249 $ 785,018
=====================================
Estimated market value:
In one year or less $ 47,222 $ 128,853 $ 176,075
After one year through five years 103,525 376,919 480,444
After five years through ten years 13,664 63,236 76,900
After ten years 46,981 18,902 65,883
Equity securities -- 9,086 9,086
-------------------------------------
Total securities $ 211,392 $ 596,996 $ 808,388
=====================================
</TABLE>
The amortized historical cost, market values and gross unrealized gains and
losses of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1999
Held-to-maturity:
U.S. Treasury obligations $ 50,174 $ 285 $ -- $ 50,459
U.S. agency obligations 12,504 4 (27) 12,481
Mortgage-backed securities 613 17 -- 630
State and municipal securities 103,517 10,000 (16) 113,501
--------------------------------------------------
Total held-to-maturity 166,808 10,306 (43) 177,071
--------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 119,019 741 (42) 119,718
U.S. agency obligations 144,635 108 (928) 143,815
Mortgage-backed securities 193,321 232 (2,743) 190,810
Asset-backed securities 17,116 4 (44) 17,076
State and municipal securities 31,236 79 (882) 30,433
Equity securities 8,681 -- -- 8,681
--------------------------------------------------
Total available-for-sale 514,008 1,164 (4,639) 510,533
--------------------------------------------------
Total securities $ 680,816 $ 11,470 $ (4,682) $ 687,604
==================================================
December 31, 1998 Held-to-maturity:
U.S. Treasury obligations $ 57,872 $ 946 $ -- $ 58,818
U.S. agency obligations 22,491 218 -- 22,709
Mortgage-backed securities 715 22 (4) 733
State and municipal securities 113,691 15,483 (42) 129,132
--------------------------------------------------
Total held-to-maturity 194,769 16,669 (46) 211,392
--------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 147,378 3,112 -- 150,490
U.S. agency obligations 175,780 1,798 (85) 177,493
Mortgage-backed securities 217,823 1,634 (302) 219,155
Asset-backed securities 13,849 45 -- 13,894
State and municipal securities 26,333 564 (19) 26,878
Equity securities 9,086 -- -- 9,086
--------------------------------------------------
Total available-for-sale 590,249 7,153 (406) 596,996
--------------------------------------------------
Total securities $ 785,018 $ 23,822 $ (452) $ 808,388
==================================================
</TABLE>
The Company does not expect to realize any of the unrealized gains or losses
related to the securities in the held-to-maturity portfolio because it is the
Company's intent to hold them to maturity. At that time the par value will be
received. An exception to this expectation occurs when securities are called by
the issuer prior to their maturity. In these situations, gains or losses may be
realized. Gains or losses may be realized on securities in the
available-for-sale portfolio as the result of sales of these securities carried
out in response to changes in interest rates or for other reasons related to the
management of the components of the balance sheet.
5. Loans and the Allowance for Credit Losses
The balances in the various loan categories are as follows:
<TABLE>
<CAPTION>
(in thousands) June 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
<S> <C> <C> <C>
Real estate:
Residential $ 471,342 $ 368,306 $ 301,126
Non-residential 523,145 477,120 439,089
Construction 143,589 109,764 69,962
Commercial loans 387,391 362,262 313,521
Home equity loans 48,296 47,123 53,289
Consumer loans 134,915 123,730 116,737
Leases 92,219 78,627 77,178
Municipal tax-exempt obligations 8,388 9,286 10,048
Other loans 7,918 6,563 8,922
------------ ------------ ------------
Total loans $ 1,817,203 $ 1,582,781 $ 1,389,872
============ ============ ============
</TABLE>
The loan balances at June 30, 1999, December 31, 1998 and June 30, 1998 are net
of approximately $4,591,000, $4,624,000, and $3,322,000 respectively, in
deferred net loan fees and origination costs.
Specific kinds of loans are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. Because this definition is very similar to that used by
Management to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on nonaccrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income in the current period. No further income is recognized until all recorded
amounts of principal are recovered in full or until circumstances have changed
such that the loan is no longer regarded as impaired.
Impaired loans are reviewed each quarter to determine whether a valuation
allowance for loan loss is required. The amount of the valuation allowance for
impaired loans is determined by comparing the recorded investment in each loan
with its value measured by one of three methods. The first method is to estimate
the expected future cash flows and then discount them at the effective interest
rate. The second method is to use the loan's observable market price if the loan
is of a kind for which there is a secondary market. The third method is to use
the value of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by the selected method exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the related allowance (dollars in thousands) as of June 30,
1999, December 31, 1998 and June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
<S> <C> <C> <C>
Loans identified as impaired $ 12,644 $3,286 $4,890
Impaired loans for which a valuation
allowance has been determined $ 8,551 $1,574 $1,250
Impaired loans for which no valuation
allowance was determined necessary $ 4,093 $1,712 $3,640
Amount of valuation allowance $ 5,298 $ 98 $ 257
</TABLE>
Because the loans currently identified as impaired have unique risk
characteristics, the valuation allowance is determined on a loan-by-loan basis.
The following table discloses additional information (dollars in thousands)
about impaired loans for the six and three-month periods ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Six-month Periods Three-month Periods
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average amount of recorded
investment in impaired loans $4,878 $7,829 $11,661 $6,304
Collections of interest from
impaired loans and recognized
as interest income $ -- $ -- $ -- $ --
</TABLE>
The Company also provides an allowance for credit losses for other loans. These
include (1) groups of loans for which the allowance is determined by historical
loss experience ratios for similar loans; (2) specific loans that are not
included in one of the types of loans covered by the concept of "impairment" but
for which repayment is nonetheless uncertain; and (3) losses inherent in the
various loan portfolios, but which have not been specifically identified as of
the period end. The amount of the various components of the allowance for credit
losses are based on review of individual loans, historical trends, current
economic conditions, and other factors. This process is explained in detail in
the notes to the Company's Consolidated Financial Statements in its Annual
Report on Form 10-K for the year ended December 31, 1998.
Loans that are deemed to be uncollectible are charged-off against the allowance
for credit losses. Uncollectibility is determined based on the individual
circumstances of the loan and historical trends.
The valuation allowance for impaired loans of $5.3 million is included with the
general allowance for credit losses to total the $29.6 million reported on the
balance sheet for June 30, 1999, which these notes accompany, and in the "All
Other Loans" column in the statement of changes in the allowance account for the
first six months of 1999 shown below. The amounts related to tax refund
anticipation loans and to all other loans are shown separately. As is done each
year, all remaining uncollected tax refund anticipation loans from the 1999 tax
season were charged-off at June 30. Consequently, there is no need for an
allowance for these loans as of that date.
<TABLE>
<CAPTION>
(in thousands) Refund All
Anticipation Other
Loans Loans Total
---------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 333 $ 28,963 $ 29,296
Provision for loan losses 2,816 1,657 4,473
Loan losses charged against allowance (5,518) (2,115) (7,633)
Loan recoveries added to allowance 2,369 1,111 3,480
----------------------------------------------
Balance, June 30, 1999 $ 0 $ 29,616 $ 29,616
==============================================
</TABLE>
6. Other Assets
Property acquired as a result of defaulted loans is included within other assets
on the balance sheets. Property from defaulted loans is carried at the lower of
the outstanding balance of the related loan at the time of foreclosure or the
estimate of the market value of the assets less disposal costs. As of June 30,
1999 and December 31, 1998, the Company held some properties which it had
obtained in foreclosures. However, because of the uncertainty relating to
realizing any proceeds from their disposal in excess of the cost of disposal,
the Company had written their carrying value down to zero.
Also included in other assets on the balance sheet for June 30, 1999 and
December 31, 1998, are deferred tax assets and goodwill. In connection with the
acquisitions, the Company recognized the excess of the purchase price over the
estimated fair value of the assets received and liabilities assumed as $19.9
million of goodwill. The purchased goodwill is being amortized over 10 and 15
year periods. Intangible assets, including goodwill, are reviewed each year to
determine if circumstances related to their valuation have been materially
affected. In the event that the current market value is determined to be less
than the current book value of the intangible asset, a charge against current
earnings would be recorded.
7. Long-term Debt and Other Borrowings
Long-term debt and other borrowings included $114.0 million and $42.9 million of
advances from the Federal Home Loan Bank of San Francisco at June 30, 1999 and
December 31, 1998, respectively.
8. Comprehensive Income
Components of comprehensive income are changes in equity other than those
resulting from investments by owners and distributions to owners. Net income is
the primary component of comprehensive income. For the Company, the only
component of comprehensive income other than net income is the unrealized gain
or loss on securities classified as available-for-sale. The aggregate amount of
such changes to equity that have not yet been recognized in net income are
reported in the equity portion of the Consolidated Balance Sheets as accumulated
other comprehensive income.
When a security that had been classified as available-for-sale is sold, a
realized gain or loss will be included in net income and, therefore, in
comprehensive income. Consequently, the recognition of any unrealized gain or
loss for that security that had been included in comprehensive income in an
earlier period must be reversed. These adjustments are reported in the
consolidated statements of comprehensive income as reclassification adjustment
for gains (losses) included in net income.
9. Segment Disclosure
While the Company's products and services are all of the nature of commercial
banking, the Company has seven reportable segments. There are six specific
segments: Wholesale Lending, Retail Lending, Branch Activities, Fiduciary, Tax
Refund Processing, and the Northern Region. The remaining activities of the
Company are reported in a segment titled "All Other". Detailed information
regarding the Company's segments is provided in Note 20 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K. This
information includes descriptions of the factors used in identifying these
segments, the types and services from which revenues for each segment are
derived, charges and credits for funds, and how the specific measure of profit
or loss was selected. Readers of these interim statements are referred to that
information to better understand the following disclosures for each of the
segments. There have been no changes in the basis of segmentation or in the
measurement of segment profit or loss from the description given in the annual
report.
The following tables present information for each segment regarding assets,
profit or loss, and specific items of revenue and expense that are included in
that measure of segment profit or loss as reviewed by the chief operating
decision maker.
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Branch Retail Wholesale Northern All
Activities Lending Lending RAL Fiduciary Region Other Total
------------ ------------ ------------ ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six months ended
June 30, 1999
Revenues from
external customers $ 4,302 $ 25,644 $ 25,416 $ 14,520 $ 6,663 $ 33,155 $ 21,860 $ 131,560
Intersegment revenues 72,128 (14,913) (13,359) 3,233 2,380 -- (3,169) 46,300
-------- --------- --------- --------- -------- --------- --------- ------- ---
Total revenues $76,430 $ 10,731 $ 12,057 $ 17,753 $ 9,043 $ 33,155 $ 18,691 $ 177,860
======== ========= ========= ========= ======== ========= ========= ===========
Profit (Loss) $ 9,572 $ 6,488 $ 9,125 $ 10,123 $ 3,421 $ 11,147 $ (9,094) $ 40,782
Interest income 30 25,007 24,732 7,968 -- 31,316 20,015 109,068
Interest expense 19,370 102 2 -- 1,054 9,824 2,128 32,480
Internal charge for funds 392 15,113 13,359 641 -- -- 16,795 46,300
Depreciation 780 74 34 48 72 637 769 2,414
Total assets 13,509 656,487 608,278 230 1,306 864,940 613,780 2,758,530
Capital expenditures -- -- -- -- -- 516 2,932 3,448
Six months ended
June 30, 1998
Revenues from
external customers $ 5,067 $ 20,952 $ 22,331 $ 11,613 $ 4,847 $ 31,286 $ 23,380 $ 119,475
Intersegment revenues 71,309 (12,195) (11,936) 1,319 2,218 -- (7,507) 43,208
-------- --------- --------- --------- -------- --------- --------- -----------
Total revenues $76,376 $ 8,757 $ 10,395 $ 12,932 $ 7,065 $ 31,286 $ 15,873 $ 162,683
======== ========= ========= ========= ======== ========= ========= ===========
Profit (Loss) $ 7,730 $ 4,551 $ 7,372 $ 5,378 $ 3,018 $ 10,394 $ (4,425) $ 34,017
Interest income 12 20,109 21,601 6,804 -- 29,509 21,490 99,525
Interest expense 20,718 15 1 -- 1,041 10,146 1,422 33,343
Internal charge for funds 355 12,223 11,936 625 -- -- 18,069 43,208
Depreciation 944 115 69 25 101 652 603 2,509
Total assets 12,255 461,419 452,307 47 1,667 803,361 703,440 2,434,495
Capital expenditures -- -- -- -- -- 242 9,191 9,433
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Branch Retail Wholesale Northern All
Activities Lending Lending RAL Fiduciary Region Other Total
------------ ------------ ------------ ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999
Revenues from
external customers $ 2,225 $ 13,417 $ 13,025 $ 1,136 $ 3,262 $ 16,643 $ 9,961 $ 59,669
Intersegment revenues 53,925 (14,966) (13,359) 1,520 1,760 -- (6,706) 22,174
-------- --------- --------- --------- -------- --------- --------- -----------
Total revenues $56,150 $ (1,549) $ (334) $ 2,656 $ 5,022 $ 16,643 $ 3,255 $ 81,843
======== ========= ========= ========= ======== ========= ========= ===========
Profit (Loss) $ 4,990 $ 3,551 $ 4,962 $ 588 $ 1,568 $ 5,370 $ (5,119) $ 15,910
Interest income 16 13,090 12,726 491 -- 15,719 8,951 50,993
Interest expense 9,508 47 2 -- 498 4,843 1,312 16,210
Internal charge for funds 193 7,581 6,937 95 -- -- 7,368 22,174
Depreciation 381 37 11 24 36 306 417 1,212
Total assets 13,509 656,487 608,278 230 1,306 864,940 613,780 2,758,530
Capital expenditures -- -- -- -- -- 481 1,363 1,844
Three months ended
June 30, 1998
Revenues from
external customers $ 3,171 $ 10,883 $ 11,579 $ 842 $ 1,885 $ 15,770 $ 11,588 $ 55,717
Intersegment revenues 53,537 (12,203) (11,936) 473 1,687 -- (10,194) 21,364
-------- --------- --------- -------- -------- --------- --------- -----------
Total revenues $56,708 $ (1,321) $ (358) $ 1,315 $ 3,572 $ 15,770 $ 1,394 $ 77,081
======== ========= ========= ======== ======== ========= ========= ===========
Profit (Loss) $ 4,206 $ 2,965 $ 3,402 $ 635 $ 1,435 $ 5,392 $ (2,541) $ 15,493
Interest income 4 10,394 11,195 413 -- 14,831 10,621 47,458
Interest expense 10,380 6 -- -- 547 5,179 649 16,761
Internal charge for funds 174 6,233 5,994 155 -- -- 8,808 21,364
Depreciation 479 60 40 12 53 322 330 1,296
Total assets 12,255 461,419 452,307 47 1,667 803,361 703,440 2,434,495
Capital expenditures -- -- -- -- -- -- 7,248 7,248
</TABLE>
<PAGE>
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively in the consolidated financial
statements.
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
1999 1998 1999 1998
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Total revenues for
reportable segments $177,860 $162,683 $ 81,843 $ 77,081
Elimination of
intersegment revenues (46,300) (43,208) (22,174) (21,364)
Elimination of taxable
equivalent adjustment (2,791) (2,838) (1,360) (1,437)
------------------------- ---------------------------
Total consolidated revenues $128,769 $116,637 $ 58,309 $ 54,280
========================= ===========================
Total profit or loss
for reportable segments $ 40,782 $ 34,017 $ 15,910 $ 15,493
Elimination of taxable
equivalent adjustment (2,791) (2,838) (1,360) (1,437)
------------------------- ---------------------------
Income before income taxes $ 37,991 $ 31,179 $ 14,550 $ 14,056
========================= ===========================
</TABLE>
10. New Accounting Pronouncement
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2001. This
statement is not expected to have a material impact on the operating results or
the financial position of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Pacific Capital Bancorp and its wholly owned subsidiaries (together referred to
as the "Company") posted earnings of $9.0 million for the quarter ended June 30,
1999, up $52,000 over the same quarter last year. Diluted per share earnings for
the second quarter of 1999 were $0.37 compared to $0.37 earned in the second
quarter of 1998.
Compared to the second quarter of 1998, net interest income (the difference
between interest income and interest expense) increased by $4.2 million in the
second quarter of 1999, an increase of 14%. This was due primarily to additional
interest on loans, as the loan balances increased 30.8% from $1.4 billion at
June 30, 1998, to $1.8 billion a year later. Interest income from loans for the
quarter was $38.3 million, up $5.3 million or 16.2%. Interest income increased
at a lower rate than loans because of the decrease in market interest rates
during the last 12 months. Deposits increased $159.5 million or 7.4% over the
last 12 months, while interest expense decreased 7.9% due to the lower rates and
a higher proportion of noninterest bearing accounts.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $0.6 million over the same quarter of 1998. Trust and Investment
Services fees were up $279,000.
Provision expense for the second quarter of 1999 for loans other than tax refund
loans was $783,000, substantially less than the $1,265,000 provided in the
second quarter of 1998. The provision expense for tax refund loans was $57,000
for the second quarter of 1999 compared to a $281,000 reversal in provision for
the corresponding period of 1998.
Noninterest expenses increased in the second quarter of 1999 compared to the
same quarter of 1998. A major reason for this was the expenses incurred in
connection with the integration project for data processing systems after the
merger and with addressing the Century Date Change ("Y2K"). These additional
expenses resulted in an increase in the Company's operating efficiency ratio,
which measures what proportion of a dollar of operating income it takes to earn
that dollar, from 57.8% for the second quarter of 1998 to 61.3% for the second
quarter of 1999.
Exclusive of these non-recurring expenses, the Company's net income would have
been $25.8 million for the first six months and $10.4 million for the second
quarter of 1999, or $1.05 and $0.42 per diluted share, respectively,
representing increases of 29.0% and 13.9%, respectively, over the comparable
periods a year ago.
BUSINESS
The Company is a bank holding company. Its major subsidiaries are Santa Barbara
Bank & Trust ("SBB&T") and First National Bank of Central California ("FNB")
including its affiliate South Valley National Bank ("SVNB"). SBB&T is a
state-chartered commercial bank and is a member of the Federal Reserve System.
FNB is a nationally chartered commercial bank and is also a member of the
Federal Reserve System. They offer a full range of retail and commercial banking
services. These include commercial, real estate, and consumer loans, a wide
variety of deposit products, and full trust services. The Company's third active
subsidiary is Pacific Capital Commercial Mortgage, Inc. ("PCCM"). The primary
business activity of PCCM is brokering commercial real estate loans and
servicing those loans for a fee. Bancorp provides support services, such as data
processing, personnel, training, and financial reporting to the subsidiary
banks. Bancorp has one inactive subsidiary, Pacific Capital Services
Corporation. All references to "the Company" apply to Pacific Capital Bancorp
and its subsidiaries. "Bancorp" will be used to refer to the parent company
only.
FORWARD-LOOKING INFORMATION
This analysis contains forward-looking statements with respect to the financial
conditions, results of operations and businesses of Pacific Capital Bancorp.
These include statements relating to: (a) the cost savings and accretion to
reported earnings that are expected to be realized from the merger; and (b) the
restructuring charges expected to be incurred in connection with the merger.
Other statements about the Company's plans, objectives, expectations and
intentions contained in this Report that are not historical facts may also be
forward-looking statements. When used in this Report, the words "expects",
"anticipates", "plans", "believes", "seeks", "estimates", and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) expected cost savings from the merger are not fully realized or realized
within this expected timeframe; (2) revenues following the merger are lower than
expected; (3) competitive pressure among financial services companies increases
significantly; (4) costs or difficulties related to the integration of the
businesses of the subsidiary banks are greater than expected; (5) changes in the
interest rate environment reduce interest margins; (6) general economic
conditions, internationally, nationally or in the State of California, are less
favorable than expected; (7) changes in the IRS's handling of electronic filing
and refund payments adversely affect the Company's RAL and refund transfer
("RT") programs; and (8) legislation or regulatory requirements or changes
adversely affect the business in which the Company will be engaged.
TOTAL ASSETS AND EARNING ASSETS
The chart below shows the growth in average total assets and deposits since
1995. Annual averages are shown for 1995 and 1996; quarterly averages are shown
for 1997, 1998, and 1999. For the Company, changes in assets are primarily
related to changes in deposit levels, so the deposit balances also have been
included in the chart. Because significant deposits are sometimes received at
the end of a quarter and are quickly withdrawn, especially at year-end, the
overall trend in the Company's growth is better shown by the use of average
balances for the quarters.
<PAGE>
Chart 1 GROWTH IN AVERAGE ASSETS AND DEPOSITS ($ in millions)
$2,800 AAA
AA
$2,700 A AAAA
$2,650
A
$2,600
AAA
$2,550 A
A
$2,500 AAA
A
$2,450 DDD
A D
$2,400 AAAAAAAA D
A D
$2,350 D DDDD
A
$2,300 AAA DDD
D
$2,250 A D
DDD
$2,200 A D
$2,150 D
AAA DDDDDDDD
$2,100 AA D
AAA
$2,050 D
A DDD
$2,000
A D
$1,950 AAA
$1,900 A D
$1,850 DDD
A DD
$1,800 DDD
AAA
$1,750 D
D
$1,700 A DDD
$1,650 D
A
$1,600 D
AAAA
$1,550 DDD
$1,500 D
$1,450
D
$1,400
DDDD
$1,350
$1,300
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd
'95 '96 '97 '97 '97 '97 '98 '98 '98 '98 '99 '99
A = Assets D = Deposits
The overall growth trend shown above for the Company is in part due to the
continued consolidation in the financial services industry. The Company has
obtained new customers as they became dissatisfied when the character of their
local bank was changed by an acquiring institution. The Company also acquired
First Valley Bank and Citizens State Bank in 1997 and merged them into SBB&T.
Contrary to the general pattern of banks losing customers of the acquired
institution, depositors of these two banks have kept their deposits with SBB&T.
The same experience has been seen with the depositors of FNB and SVNB, namely
that deposits have increased 4% since the merger in December of 1998. SBB&T has
also opened six new offices in Ventura County and one new office in Northern
Santa Barbara County during the period covered by the chart. A decrease in
average deposits for the second quarter compared to the first is not unusual
though it did not occur in 1997 or 1998. Such decreases are usually the result
of tax payments and payments of holiday bills. In 1999, some of the decrease
also appears to be due to funds withdrawn for investment purposes as the stock
markets have continued their strong rise.
Earning assets consist of the various assets on which the Company earns interest
income. On average, the Company earned interest on 93.7% of its assets during
the six months of 1999. This compares with an average of 89.7% for peer
FDIC-Insured Commercial Banks. (See Note 1. Notes are found at the end of this
analysis.) Having more of its assets earning interest helps the Company to
maintain its high level of profitability. The Company has achieved this higher
percentage by several means. Loans are structured to have interest payable in
most cases each month so that large amounts of accrued interest receivable
(which are nonearning assets) are not built up. In this manner, the interest
received can be invested to earn additional interest. The Company leases most of
its facilities under long-term contracts rather than owning them. This, together
with the aggressive disposal of real estate obtained as the result of
foreclosure avoids tying up funds that could be earning interest. Lastly, the
Company has developed systems for clearing checks which are faster than those
used by most banks of comparable size. This permits it to put the cash to use
more quickly. At the Company's current size, these and other steps have resulted
in about $107 million more assets earning interest during the first six months
of the year than would be the case if the Company's ratio were similar to its
FDIC peers. The additional earnings from these assets are somewhat offset by
higher lease expense, additional equipment costs, and occasional losses taken on
quick sales of foreclosed property. However, on balance, Management believes
that these steps give the Company an earnings advantage.
INTEREST RATE SENSITIVITY
Most of the Company's earnings arise from its functioning as a financial
intermediary. As such, it takes in funds from depositors and then either lends
the funds to borrowers or invests the funds in securities and other instruments.
The Company earns interest income on the loans and securities and pays interest
expense on deposits and other borrowings. Net interest income is the difference
in dollars between the interest income earned and the interest expense paid. The
net interest margin is the ratio of net interest income to average earning
assets. This ratio is useful in allowing the Company to monitor the spread
between interest income and interest expense from month to month and year to
year irrespective of the growth of the Company's assets. If the Company is able
to maintain the net interest margin as the Company grows, the amount of net
interest income will increase.
The following two tables shows the average balances of the major categories of
earning assets and liabilities for the six and three-month periods ended June
30, 1998 and 1999 together with the related interest income and expense. A third
table, an analysis of volume and rate variances, explains how much of the
difference in interest income or expense compared to the corresponding period of
1998 is due to changes in the balances (volume) and how much due to changes in
rates. For example, the first table shows that for the second quarter of 1999,
NOW and MMDA accounts averaged $297,027,000, interest expense for them was
$544,000, and the average rate paid was 0.73%. In the second quarter of 1998,
NOW and MMDA accounts averaged $271,081,000, interest expense for them was
$834,000, and the average rate paid was 1.23%. Table 3 shows that the $290,000
decrease in interest expense for demand deposits from the second quarter of 1998
to the second quarter of 1999 is the net result of a $79,000 increase in
interest expense due to the higher balances in 1999, offset by a reduction of
$369,000 in interest expense due to the lower rates paid during 1999.
<PAGE>
<TABLE>
TABLE 1 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)
<CAPTION>
(dollars in thousands) Six months ended Six months ended
June 30, 1999 June 30, 1998
---------------------------------------- ------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $ 126,374 $ 3,004 4.74% $ 156,912 $ 4,431 5.63%
Securities: (2)
Taxable 587,850 17,399 5.97% 589,111 17,806 6.10%
Non-taxable 133,219 6,966 10.46% 136,688 7,238 10.59%
----------- --------- ----------- ---------
Total securities 721,069 24,365 6.46% 725,799 25,044 6.72%
----------- --------- ----------- ---------
Loans and leases: (3)
Commercial 385,446 16,953 8.87% 321,102 16,144 10.14%
Ready equity 46,754 2,038 8.79% 54,945 2,628 9.65%
Real estate 1,027,928 43,432 8.45% 762,977 34,481 9.04%
Installment and consumer loans 151,618 7,314 9.73% 130,694 6,231 9.61%
Leasing 88,256 4,366 9.98% 74,579 3,762 10.17%
Tax refund loans 24,988 7,595 61.29% 19,208 6,804 71.43%
----------- --------- ----------- ---------
Total loans and leases 1,724,990 81,699 9.51% 1,363,505 70,050 10.32%
----------- --------- ----------- ---------
Total earning assets 2,572,433 109,068 8.50% 2,246,216 99,525 8.90%
Allowance for credit losses (31,411) (29,569)
Other assets 208,685 182,823
----------- -----------
TOTAL ASSETS $2,749,707 $2,399,470
=========== ===========
LIABILITIES
Deposits:
Interest-bearing demand $ 294,129 1,133 0.78% $271,189 1,543 1.15%
Savings and money market 770,861 10,253 2.68% 730,880 11,824 3.26%
Time deposits 783,427 18,625 4.79% 682,791 18,311 5.41%
----------- --------- ----------- ---------
Total interest-bearing deposits 1,848,417 30,011 3.27% 1,684,860 31,678 3.79%
Borrowed funds 94,788 2,469 5.25% 58,084 1,665 5.78%
----------- --------- ----------- ---------
Total interest-bearing liabilities 1,943,205 32,480 3.37% 1,742,944 33,343 3.86%
Noninterest-bearing demand deposits 549,319 428,865
Other liabilities 31,523 27,912
----------- -----------
TOTAL LIABILITIES 2,524,047 2,199,721
Shareholders' equity 225,660 199,749
TOTAL LIABILITIES AND
----------- -----------
SHAREHOLDERS' EQUITY $2,749,707 $2,399,470
=========== ===========
Net interest rate spread 5.13% 5.05%
NET INTEREST INCOME AND NET
INTEREST MARGIN 76,588 5.96% 66,182 5.91%
Provision for credit losses (4,559) (0.71%) (6,933) (0.62%)
--------- ------- --------- -------
NET FUNDS FUNCTION $ 72,029 5.25% $ 59,249 5.29%
========= ======= ========= =======
<FN>
(1) Income amounts are presented on a fully taxable equivalent basis. The federal statutory rate was 35% for all periods presented.
(2) Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value which are
included in other assets.
(3) Nonaccrual loans are included in loan balances. Interest income includes related fees income.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE 2 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
<CAPTION>
(dollars in thousands) Three months ended Three months ended
June 30, 1999 June 30, 1998
--------------------------------- -------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
--------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $ 65,734 $ 777 4.74% $ 135,960 $ 1,920 5.66%
Securities: (2)
Taxable 569,255 8,399 5.92% 593,731 8,833 5.97%
Non-taxable 131,680 3,413 10.37% 141,259 3,657 10.36%
----------- -------- ----------- --------
Total securities 700,935 11,812 6.76% 734,990 12,490 6.63%
----------- -------- ----------- --------
Loans and leases: (3)
Commercial 394,811 8,673 8.81% 329,230 8,624 10.51%
Ready equity 46,827 1,029 8.81% 54,456 1,307 9.63%
Real estate 1,068,385 22,388 8.38% 769,434 17,506 9.10%
Installment and consumer loans 155,026 3,533 9.14% 134,576 3,250 9.69%
Leasing 93,740 2,306 9.87% 76,114 1,935 10.20%
Tax refund loans 7,672 474 24.78% 4,875 413 33.98%
----------- -------- ----------- --------
Total loans and leases 1,766,461 38,403 8.71% 1,368,685 33,035 9.67%
----------- -------- ----------- --------
Total earning assets 2,533,130 50,992 8.05% 2,239,635 47,445 8.49%
Allowance for credit losses (30,531) (28,077)
Other assets 210,436 184,334
----------- -----------
TOTAL ASSETS $2,713,035 $2,395,892
=========== ===========
LIABILITIES
Deposits:
Interest-bearing demand $297,027 544 0.73% $271,081 834 1.23%
Savings and money market 762,690 5,032 2.65% 739,913 5,960 3.23%
Time deposits 780,935 9,159 4.70% 688,254 9,197 5.36%
----------- -------- ----------- --------
Total interest-bearing deposits 1,840,652 14,735 3.21% 1,699,248 15,991
Borrowed funds 112,214 1,475 5.27% 53,497 770 5.77%
----------- -------- ------- ----------- -------- -------
Total interest-bearing liabilities 1,952,866 16,210 3.33% 1,752,745 16,761 3.84%
Noninterest-bearing demand deposits 495,835 415,482
Other liabilities 32,740 25,323
----------- -----------
TOTAL LIABILITIES 2,481,441 2,193,550
Shareholders' equity 231,594 202,342
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,713,035 $2,395,892
=========== ===========
Net interest rate spread 4.72% 4.65%
NET INTEREST INCOME AND NET
INTEREST MARGIN 34,782 5.48% 30,684 5.48%
Provision for credit losses (840) (0.13%) (984) (0.18%)
-------- ------- -------- -------
NET FUNDS FUNCTION $33,942 5.35% $29,700 5.30%
======== ======= ======== =======
<FN>
(1) Income amounts are presented on a fully taxable equivalent basis. The federal statutory rate was 35% for all periods presented.
(2) Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value which are
included in other assets.
(3) Nonaccrual loans are included in loan balances. Interest income includes related fees income.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE 3 - RATE/VOLUME ANAYSIS (1) (2)
<CAPTION>
(in thousands) Three months ended Six months ended
June 30, 1999 vs June 30, 1998 June 30, 1999 vs June 30, 1998
------------------------------------- ------------------------------------------
Change in Change in Change in Change in
Average Income/ Rate Volume Average Income/ Rate Volume
Balance Expense Effect Effect Balance Expense Effect Effect
------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Short-term investments ($70,226) ($1,143) ($152) ($991) ($30,538) ($1,427) ($563) ($864)
Securities: (3)
Taxable (24,476) (434) (66) (368) (1,261) (407) (369) (38)
Non-taxable (9,579) (244) 5 (249) (3,469) (272) (89) (183)
------------------------------------- ----------------------------------------
Total securities (34,055) (678) (61) (617) (4,730) (679) (458) (221)
------------------------------------- ----------------------------------------
Loans and leases: (4)
Commercial 65,581 49 (1,652) 1,701 64,344 809 (2,426) 3,235
Ready equity (7,629) (278) (94) (184) (8,191) (590) (198) (392)
Real estate 298,951 4,882 (1,925) 6,807 264,951 8,951 (3,023) 11,974
Installment and consumer loans 20,450 283 (209) 492 20,924 1,083 86 998
Leasing 17,626 371 (76) 447 13,677 604 (86) 690
Tax refund loans 2,797 61 (174) 235 5,780 791 (1,256) 2,047
------------------------------------- ----------------------------------------
Total loans and leases 397,776 5,368 (4,130) 9,498 361,485 11,649 (6,903) 18,552
------------------------------------- ----------------------------------------
TOTAL EARNING ASSETS $ 293,495 3,547 (4,343) 7,890 $ 326,217 9,543 (7,924) 17,467
========== =========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $25,946 (290) (369) 79 $22,940 (410) (541) 131
Savings and money market 22,777 (928) (1,099) 171 39,981 (1,571) (2,218) 647
Time deposits 92,681 (38) (1,262) 1,224 100,636 314 (2,385) 2,699
------------------------------------- ---------------------------------------
Total deposits 141,404 (1,256) (2,730) 1,474 163,557 (1,667) (5,143) 3,476
Borrowed funds 58,717 705 (140) 845 36,704 804 (248) 1,052
-------------------
TOTAL INTEREST-BEARING
LIABILITIES $ 200,121 (551) (2,870) 2,319 $200,261 (863) (5,391) 4,528
==========--------------------------- ========------------------------------
NET INTEREST INCOME (4) $ 4,098 ($1,473) $5,571 $10,406 ($2,533) $12,939
========================== ============================
<FN>
(1) Income amounts are presented on a fully taxable equivalent (FTE)basis. The federal statutory rate was 35% for all periods
presented.
(2) The change not solely due to volume or rate has been prorated into rate and volume components.
(3) Average securities balances are based on amortized cost, excluding SFAS 115 adjustments to fair value which are included in
other assets.
(4) Nonaccrual loans are included in loan balances. Interest income includes related fee income.
</FN>
</TABLE>
<PAGE>
With such large proportions of the Company's balance sheet made up of
interest-earning assets and interest-bearing liabilities, and with such a large
proportion of its earnings dependent on the spread between interest earned and
interest paid, it is critical that the Company measure and manage its interest
rate sensitivity. Measurement is done by estimating the impact of changes in
interest rates over the next twelve months on net interest income and on net
economic value. Net economic value is the net present value of the cash flows
arising from assets and liabilities discounted at their acquired rate plus or
minus assumed changes.
Estimating changes in net interest income or net economic value from increases
or decreases in balances is relatively straight forward. Estimating changes that
would result from increases or decreases in interest rates is substantially more
difficult. Estimation is complicated by a number of factors: (1) some financial
instruments have interest rates that are fixed for their term, others that vary
with rates, and others that are fixed for a period and then reprice if rates
have changed; (2) the rates paid on some deposit accounts are set by contract
while others are priced at the option of the Company; (3) the rates for some
loans vary with the market, but only within a limited range; (4) customers may
prepay loans or withdraw deposits if interest rates move to their disadvantage,
effectively forcing a repricing sooner than would be called for by the
contractual terms of the instrument; and (5) interest rates do not change at the
same time or to the same extent.
To address the complexity resulting from these and other factors, a standard
practice developed in the industry is to compute the impacts of hypothetical
interest rate "shocks" on the Company's asset and liability balances. A shock is
an immediate change in all interest rates. The resulting impacts indicate how
much of the Company's net interest income and net economic value are "at risk"
(would deviate from the base level) were rates to change in this manner.
Although interest rates normally would not change suddenly in this manner, this
exercise is valuable in identifying exposures to risk and in providing
comparability both with other institutions and between periods. The results
reported below for the Company's December 31, 1998, and June 30, 1999 balances
indicate that the Company's net interest income at risk over a one year period
and net economic value at risk from 2% shocks are within normal expectations for
such sudden changes:
Shocked by -2% Shocked by +2%
As of December 31, 1998
Net interest income (3.95%) +3.65%
Net economic value +2.43% (12.08%)
As of June 30, 1999
Net interest income +0.45% (3.12%)
Net economic value +20.81% (17.59%)
The differences in the results are due to changes in composition of the
Company's balance sheet over the last six months. Because the effect of changes
on net interest income is measured over the following twelve month period, the
results will depend on whether more assets or liabilities will reprice within
that period. If the Company has more assets repricing within one year than it
has liabilities, then net interest income will increase with increases in rates
and decrease as rates decline. The opposite effects will be observed if more
liabilities than assets reprice in the next twelve months. As indicated in
several other sections of this discussion, much of the growth in loans has
occurred in types which have fixed rates for at least several years and much of
this growth has been funded by lowering short-term investments. These trends
have had the effect since year-end 1998 of reversing the results of the
application of the hypothetical interest rate shocks on net interest income.
The same changes to the balance sheet mentioned above in connection with net
interest income account for the changes in net economic value. However, the
computation of net economic value discounts all cash flows over the life of the
instrument, not only the next twelve months. Therefore, the results tend to be
more pronounced. For example, in estimating the impact on net interest income of
a two percent rise in rates on a security maturing in three years, only the
negative impact during the first year is captured in net interest income. In
estimating the impact on net economic value, the negative impact for all three
years is captured.
The changes in net interest income and net economic value resulting from the
hypothetical increases and decreases in rates are not exactly symmetrical in
that the same percentage of increase and decrease in the hypothetical interest
rate will not cause the same percentage change in net interest income or net
economic value. This occurs because various contractual limits and
non-contractual factors come into play. An example of the former is the
"interest rates cap" on loans, which may limit the amount that rates may
increase. An example of the latter is the assumption on how low rates could be
lowered on administered rate accounts. The degree of symmetry changes as the
base rate changes from period to period and as there are changes in the
Company's product mix. For instance, the assumed floors on deposit rates are
more likely to come into play in a 2% decrease if the base rate is lower. The
caps on loan rates which generally are present only in consumer loans would have
more of an impact on the overall result to the extent that consumer variable
rate loans are a larger proportion of the portfolio than in a previous period.
For these computations, the Company makes certain assumptions that significantly
impact the results. For example, the Company must make assumptions about the
duration of its non-maturity deposits because they have no contractual maturity,
and about the rates that would be paid on the Company's administered rate
deposits as external yields change.
In addition to the simulations using the sudden rate changes, hypothetical
scenarios are also used that include gradual interest rate changes. The most
recent modeling using these more realistic hypothetical scenarios confirms that
the Company's interest rate risk profile is relatively balanced, i.e., the
negative impact on net economic value from hypothetical changes in interest
rates is not excessive, and that the results are within normal expectations.
However, along with the assumptions used for the shock computations, these
computations using gradual changes require certain additional assumptions with
respect to the magnitude, direction and volatility of the interest rate
scenarios selected which affect the results.
The Company's exposure to interest rate risk as of December 31, 1998, is
discussed in more detail in the 10-K MD&A.
DEPOSITS AND RELATED INTEREST EXPENSE
While there occasionally may be slight decreases in average deposits from one
quarter to the next, the overall trend is one of growth as shown in Chart 1. The
rate of growth of any financial institution is restrained by the capital
requirements discussed in the section of this analysis titled "Capital Resources
and Company Stock". Growth at too rapid a pace will result in capital ratios
that are too low. The orderly growth experienced by the Company has been planned
by Management and Management anticipates that it can be sustained because of the
strong capital position and earnings record of the Company. The increases have
come by maintaining competitive deposit rates, introducing new deposit products,
the opening of new retail branch offices, the assumption of deposits in the FVB
and CSB acquisitions, and successfully encouraging former customers of merged
financial institutions to become customers of the Company.
LOANS AND RELATED INTEREST INCOME
The end-of-period loan balance as of June 30, 1999, has increased by $234.4
million compared to December 31, 1998, and by $427.3 million compared to June
30, 1998. Residential real estate loans have increased as a result of increased
purchase activity in the Company's market areas and due to refinancing activity
prompted by the favorable interest rate environment. Most of the residential
real estate loans held are adjustable rate mortgages ("ARMS") that have initial
"teaser" rates. The yield increases for these loans as the teaser rates expire.
Applicants for these loans are qualified based on the fully-indexed rate.
During the second half of 1998 and the first quarter of 1999, the Company
retained a portion of the long term, fixed-rate 1-4 family residential loans it
originated. Previously, the Company had sold almost all of its long term,
fixed-rate residential loans because of concerns for market risk if rates were
to rise. However, with rates at very low levels, most consumers wanted fixed
rate loans and so the Company elected to hold some of these. The Company has
taken several steps to reduce the interest rate risk associated with this
decision. Among these steps are borrowing some of the money to fund the holding
of these loans at fixed rates for terms expected to match the likely length of
time the loans will be outstanding. The Company also entered into some interest
rate swap contracts to mitigate the negative impact from rises in interest
rates.
The consumer loan portfolio has increased primarily because of an increased
number of indirect auto loans. Indirect auto loans are loans purchased from auto
dealers. The dealers' loans must meet the credit criteria set by the Company.
The average balances and yields for the first six months of 1999 and 1998 in
Tables 1 and 2 show the impact of the RAL loans that the Company makes. The RAL
loans are extended to taxpayers who have filed their returns electronically with
the IRS and do not want to wait for the IRS to send them their refund check. The
Company earns a fixed fee per loan for advancing the funds. The fees are more
related to processing cost and credit risk exposure than to the cost of funding
the loans, but nonetheless are required to be classified as interest income.
Because of the April 15 tax filing date, almost all of the loans are made and
repaid during the first quarter of the year. More information on this program
may be found in the section titled "Refund Anticipation Loan and Refund Transfer
Programs" below and in the 10-K MD&A. Average yields for the first six months of
1999 and 1998 without the effect of RAL loans were 8.75% and 9.44%,
respectively.
OTHER LOAN INFORMATION
In addition to the outstanding loans reported in the accompanying financial
statements, the Company has made certain commitments with respect to the
extension of credit to customers.
(in thousands) June 30, December 31,
1999 1998
---- ----
Standby letters of credit $ 26,198 $ 21,782
Loan commitments 123,601 115,401
Undisbursed loans 52,685 63,888
Unused consumer credit lines 79,996 71,544
Unused other credit lines 243,759 146,514
The majority of the commitments are for one year or less. The majority of the
credit lines and commitments may be withdrawn by the Company subject to
applicable legal requirements. With the exception of the undisbursed loans, the
Company does not anticipate that a majority of the above commitments will be
fully drawn on by customers. Consumers do not tend to borrow the maximum amounts
available under their home equity lines and businesses typically arrange for
credit lines in excess of their expected needs to handle contingencies.
The Company defers and amortizes loan fees collected and origination costs
incurred over the lives of the related loans. For each category of loans, the
net amount of the unamortized fees and costs are reported as a reduction or
addition, respectively, to the balance reported. Because the fees collected are
generally less than the origination costs incurred for commercial and consumer
loans, the total net deferred or unamortized amounts for these categories are
additions to the loan balances.
CREDIT QUALITY AND THE ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is provided in recognition that not all loans
will be fully paid according to their contractual terms. The Company is required
by regulation, generally accepted accounting principles, and safe and sound
banking practices to maintain an allowance that is adequate to absorb losses
that are inherent in the portfolio of loans and leases, including those not yet
identified. The adequacy of this general allowance is based on the size of the
portfolio, historical trends of charge-offs, and Management's estimates of
future charge-offs. These estimates are in turn based on the grading of
individual credits and Management's outlook for the local and national economies
and how they might affect borrowers. In addition, generally accepted accounting
principles require the establishment of a valuation allowance for impaired loans
as described in Note 5 to the financial statements.
Table 4 shows the amounts of noncurrent loans and nonperforming assets for the
Company at the end of the second quarter of 1999, and at the end of the previous
four quarters. Also shown for both the Company and its peers (Note 3) are the
coverage ratio of the allowance to total loans and the ratio of noncurrent loans
to total loans. RALs and the portion of the allowance for credit losses that
specifically relates to RALs are excluded from the Company's figures and ratios
for the table for comparability. Only two other banks operate national RAL and
RT programs.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate). The dollar amount of nonperforming assets increased
substantially during the first six months of 1999, as the Company stopped
accruing interest on two large loans. The Company has allocated an appropriate
amount of the allowance for credit losses to these loans to cover any probable
loss.
<TABLE>
Table 4--ASSET QUALITY
(dollars in thousands)
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
1999 1999 1998 1998 1998
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 122 $ 301 $ 78 $ 428 $ 763
Nonaccrual loans 16,319 17,915 8,148 8,706 9,440
-------------- --------------- --------------- --------------- ---------------
Total noncurrent loans 16,441 18,216 8,226 9,134 10,203
Foreclosed real estate -- -- -- 58 200
-------------- --------------- --------------- --------------- ---------------
Total nonper-
forming assets $ 16,441 $ 18,216 $ 8,226 $ 9,192 $ 10,403
============== =============== =============== =============== ===============
Allowance for credit losses
other than RALs $ 29,616 $ 29,637 $ 28,963 $ 28,485 $ 27,866
Allowance for RALs -- 1,871 333 204 --
-------------- --------------- --------------- --------------- ---------------
Total allowance $ 29,616 $ 31,508 $ 29,296 $ 28,689 $ 27,866
============== =============== =============== =============== ===============
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.63% 1.75% 1.83% 1.98% 2.00%
Coverage ratio of
allowance for credit
losses to noncurrent loans 180% 163% 352% 312% 273%
Ratio of noncurrent
loans to total loans 0.90% 1.08% 0.52% 0.63% 0.73%
Ratio of nonperforming
assets to total assets 0.60% 0.68% 0.31% 0.36% 0.43%
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 2.06% 2.04% 2.10% 2.14%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 209% 199% 202% 209%
Ratio of noncurrent
loans to total loans n/a 0.99% 1.02% 1.04% 1.03%
Ratio of nonperforming
assets to total assets n/a 0.69% 0.71% 0.74% 0.73%
</TABLE>
The allowance for credit losses other than RALs compared to total loans remains
lower than the corresponding ratios for the Company's peer group. This is
consistent with the fact that the Company generally has a lower ratio of
nonperforming loans to total loans. Compared to the ratio at December 31, 1998,
the coverage ratio of allowance to noncurrent loans declined primarily because
of the reclassification of the two large loans. While the ratio of noncurrent
loans to total loans increased during 1999, the Company's ratio at 0.90% is less
than the latest ratio available for its peers.
It is expected that the Company's credit ratios will vary more than those of its
peers. First, the Company's ratios will vary more than the peer average simply
because the latter is an average of 317 banks and differences and changes at
individual banks tend to offset each other. Second, some financial institutions
have a large proportion of their loans made up of many, relatively small loans
like consumer installment, credit card, or 1-4 family residential loans. These
institutions will find their nonperforming ratios less variable because of the
diversification effect of the large number of loans, much like the Company
experiences with its RAL program. In addition to loans of these types, the
Company's portfolios also include nonresidential real estate, commercial loans,
and some agricultural loans. These loans are not part of large homogenous groups
for which credit loss experience is relatively stable. Instead, these loans are
relatively few in number and represent relatively large balances for the
Company. Therefore, if one or more of these loans becomes delinquent, as
occurred in the first six months of 1999, the impact tends to be significant.
Statistical models are also less useful in determining how much allowance must
be provided to cover losses inherent in these portfolios. Instead, individual
review of any problem loans in these portfolios is needed in order to estimate
the amount of potential losses. The Company considers these factors in setting
its overall allowance for credit losses, and based on its current knowledge and
judgment, the appropriate amount will vary from the average amount provided by
its peers.
The Company ratios described above are computed exclusive of the RALs and the
related allowance for credit losses. This is done to improve comparability with
the Company's peers. Based on the prior year experience and other factors, the
Company provides an allowance specifically for RALs as the loans are made. As
discussed below in the section titled "Refund Anticipation Loan and Refund
Transfer Programs", almost all of the RALs are made in the first quarter, with
the balance in the second quarter. Therefore, there is a substantial allowance
for RALs at the end of each first quarter, which distorts the ratios. The
Company charges off unpaid RALs significantly earlier than other loans, usually
after about 6 weeks and before these loans would be classified as
"nonperforming" under generally used industry standards. With no RALs in the
total of nonperforming loans, it is more meaningful to exclude them from the
balance for total loans and to exclude the portion of the allowance allocated
specifically to them in computing the ratios. There are small amounts of
allowance for credit losses related to RALs at the end of the third and fourth
quarters that are the result of the collection of previously charged-off RALs.
Management identifies and monitors other loans that are potential problem loans
although they are not now delinquent more than 90 days. Table 5 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for June 30, 1999 (amounts in thousands).
<TABLE>
Table 5--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
<CAPTION>
Noncurrent Other Potential
Loans Problem Loans
----- -------------
<S> <C> <C>
Loans secured by real estate:
Construction and
land development $ -- $ 428
Agricultural 91 2,817
Home equity lines 343 738
1-4 family mortgage 1,690 1,937
Multifamily -- --
Nonresidential, nonfarm 4,995 4,443
Commercial and industrial 8,081 15,863
Leases 254 --
Other consumer loans 1,006 706
Other Loans -- 102
----------- ------------
Total $ 16,460 $ 27,034
=========== ============
</TABLE>
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of June 30, 1999 (amounts in thousands).
Doubtful $5,690
Substandard $4,407
Special Mention $1,489
The total of the above numbers is less than the total allowance. Most of the
allowance is allocated to loans which are not currently regarded as potential
problem loans, but for which, based on the Company's experience, there are
unidentified losses among them. The amounts allocated both to potential problem
loans and to all other loans are determined based on the factors and methodology
discussed in Note 1 to the Consolidated Financial Statements presented in the
Company's Annual Report on Form 10-K. Based on these considerations, Management
believes that the allowance for credit losses at June 30, 1999 was adequate to
cover the losses inherent in the loan and lease portfolios as of that date.
HEDGES, DERIVATIVES, AND OTHER DISCLOSURES
The Company has established policies and procedures to permit limited types and
amounts of off-balance sheet hedges to help manage interest rate risk. The
Company entered into several interest rate swaps to mitigate interest rate risk
late in the second quarter of 1999. Under the terms of these swaps, the Company
pays a fixed rate of interest to the counterparty and receives a floating rate
of interest. Such swaps have the effect of converting fixed rate financial
instruments into variable or floating rate instruments. Such swaps may be
related to specific instruments or pools of instruments--loans, securities, or
deposits with similar interest rate characteristics or terms. The notional
amount of the swaps currently in place is $24 million.
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2001 or earlier
should the Company so choose. The Company expects to implement this reporting on
January 1, 2001. This statement is not expected to have a material impact on the
operating results or the financial position of the Company.
The Company has not purchased any securities arising out of highly leveraged
transactions, and its investment policy prohibits the purchase of any securities
of less than investment grade, the so-called "junk bonds."
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cash in excess of the amount needed to fund loans, invest in securities, or
cover deposit withdrawals is sold to other institutions as Federal funds or
invested with other institutions on a collateralized basis as securities
purchased under agreements to resell ("reverse repo agreements"). These
agreements are investments which are collateralized by securities or loans of
the borrower and mature on a daily basis. The sales of Federal funds are on an
overnight basis as well. The amount of Federal funds sold and reverse repo
agreements purchased during the quarter is an indication of Management's
estimation during the quarter of immediate cash needs, the excess of funds
supplied by depositors over funds lent to borrowers, and relative yields of
alternative investment vehicles.
As shown in Tables 1 and 2, the average balance of these short-term investments
for the first six months of 1999 was less than for the first six months of 1998
and significantly less for the second quarter of 1999 than for the second
quarter of 1998. The reason for this change is seen in Table 2 in the difference
in the average balances for loans and deposits for the three-month periods
ending June 30, 1998 and 1999. Generally over the years, deposit growth has been
more than sufficient to fund the growth in loans. However, from the second
quarter of 1998 to the second quarter of 1999, the average balance for loans
outstanding increased $398 million. During the same time, average deposits
increased $222 million. A large portion, $70.2 million, of the funds needed to
support the $176 million excess of new loans over new deposits came from
reducing the short-term investment portfolio of Federal funds sold and reverse
repos.
OTHER BORROWINGS, LONG-TERM DEBT AND RELATED INTEREST EXPENSE
Other borrowings consist of securities sold under agreements to repurchase,
Federal funds purchased, Treasury Tax and Loan demand notes, and borrowings from
the Federal Reserve Bank ("FRB"). Generally, Federal funds have been purchased
only from other local financial institutions as an accommodation to them.
However, because of the need for additional funding in the last two quarters to
support the very strong loan demand, the Company has purchased additional funds.
Nonetheless, because the average total of other borrowings still represents a
very small portion of the Company's source of funds (less than 5%), all of these
short-term items have been combined for the following table.
Table 6 indicates for other borrowings the average balance (dollars in
millions), the rates and the proportion of total assets funded by them over the
last seven quarters.
<TABLE>
Table 6--OTHER BORROWINGS
<CAPTION>
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ---- --------------------
<S> <C> <C> <C> <C>
December 1997 28.1 4.93 1.2
March 1998 25.2 5.06 1.1
June 1998 18.4 4.88 0.8
September 1998 21.2 4.89 0.9
December 1998 33.5 4.40 1.3
March 1999 26.7 4.43 1.0
June 1999 44.3 4.54 1.6
</TABLE>
Long-term debt consists of advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). The outstanding advances from the FHLB at June 30, 1999
totaled $114 million. The scheduled maturities of the advances are $35 million
in 1 year or less, $19 million in 1 to 3 years, and $60 million in more than 3
years.
Table 7 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by long-term
debt over the last seven quarters.
<TABLE>
Table 7--LONG-TERM DEBT
<CAPTION>
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ---- --------------------
<S> <C> <C> <C> <C>
December 1997 40.1 6.21 1.7
March 1998 37.6 6.19 1.6
June 1998 35.1 6.22 1.5
September 1998 32.6 6.25 1.3
December 1998 35.8 5.96 1.4
March 1999 49.3 5.66 1.8
June 1999 67.9 5.73 2.5
</TABLE>
The Company has increased this long-term debt over the last two quarters. This
has been done both to provide funding for the loan growth noted above and
because much of the loan growth has been in fixed rate products. FHLB advances
are among the easiest means of mitigating the market risk incurred through the
growth in fixed loans. One of the methods of managing interest rate risk is to
match repricing characteristics of assets and liabilities. When fixed-rate
assets are matched by similar term fixed-rate liabilities, the deterioration in
the value of the asset when interest rates rise is offset by the benefit to the
Company from having the matching debt at lower than market rates.
OTHER OPERATING INCOME
Other operating income consists of income earned other than interest. On an
annual basis, trust fees are the largest component of other operating income.
Management fees on trust accounts are generally based on the market value of
assets under administration.
There are several reasons for the variation in fees from quarter to quarter.
Trust customers are charged for the preparation of the fiduciary tax returns.
The preparation generally occurs in the first quarter of the year. This accounts
for approximately $317,000 of the fees earned in the first six months of 1998
and $320,000 of the fees earned in the first six months of 1999. Variation is
also caused by the recognition of probate fees. These fees are accrued when the
work is completed rather than accruing the fees as the work is done because it
is only upon the completion of probate that the amount of the fee is established
by the court.
Other categories of noninterest operating income include various service
charges, fees, and miscellaneous income. Included within "Other Service Charges,
Commissions & Fees" in the following table are the electronic refund transfer
fees (described below in "Refund Anticipation Loan and Refund Transfer
Programs"), service fees arising from credit card processing for merchants,
escrow fees, and a number of other fees charged for special services provided to
customers. The following table shows the categories of all noninterest operating
income for the three and six month periods ended June 30, 1999 and 1998.
<TABLE>
TABLE 8 --NONINTEREST INCOME
(dollars in thousands)
<CAPTION>
Six months ended Three months ended
------------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
-------------------- ----------------------
June 30, Percent June 30, Percent
------------------ -----------------
1999 1998 Amount Change 1999 1998 Amount Change
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on
deposits accounts $ 4,785 $ 4,569 $ 216 4.73% $ 2,424 $ 2,297 $ 127 5.53%
Trust fees 6,446 5,681 765 13.47% 3,095 2,816 279 9.91%
Other service charges/fees 10,859 9,053 1,806 19.95% 2,886 2,805 81 2.89%
Securities gains (losses) (286) 106 (392) (369.81%) (109) 49 (158) (322.45%)
Other noninterest income 688 541 147 27.17% 381 292 89 30.48%
-------------------------- --------------------------
Total Noninterest Income $22,492 $19,950 $2,542 12.74% $ 8,677 $ 8,259 $ 418 5.06%
========================== ==========================
</TABLE>
NONINTEREST EXPENSE
The largest component of noninterest expense is staff expense. Staff size is
closely monitored in relation to the growth in the Company's revenues and
assets.
There is some increase each quarter caused by the addition of staff. Other
factors cause some variation in staff expense from quarter to quarter. Staff
expense will usually increase in the first quarter of each year because all
Company exempt employees have their annual salary review in the first quarter
with merit increases effective on March 1. In 1999, these averaged approximately
5%. In addition, some temporary staff is added in the first quarter for the RAL
program.
Employee bonuses are paid from a bonus pool, the amount of which is set by the
Board of Directors based on the Company meeting or exceeding its goals for net
income. The Company accrues compensation expense for the pool for employee
bonuses throughout the year as they are earned rather than when they are
actually paid. The accrual is based on projected net income for the year.
The following table shows noninterest expense for the three and six months ended
June 30, 1999 and 1998.
<TABLE>
TABLE 9 --NONINTEREST EXPENSE
(dollars in thousands)
<CAPTION>
Six months ended Three months ended
---------------------------------------------- ----------------------------------------------
Increase (Decrease) Increase (Decrease)
------------------------- -------------------------
June 30, Percent June 30, Percent
--------------------- ---------------------
1999 1998 Amount Change 1999 1998 Amount Change
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salary expense $ 21,077 $ 20,212 $ 865 4.28% $ 10,400 $ 9,837 $ 563 5.72%
Employee benefits 4,249 4,712 (463) (9.83%) 2,131 2,427 (296) (12.20%)
Net occupancy 4,804 4,104 700 17.06% 2,506 2,061 445 21.59%
Equipment and furniture 2,992 2,983 9 0.30% 1,432 1,524 (92) (6.04%)
Marketing 1,358 1,160 198 17.07% 808 782 26 3.32%
Other noninterest expense 19,259 12,011 7,248 60.34% 9,432 5,848 3,584 61.29%
---------------------------------- ---------------------------------
Total Noninterest Expense $ 53,739 $ 45,182 $ 8,557 18.94% $ 26,709 $ 22,479 $ 4,230 18.82%
================================== =================================
</TABLE>
The Company leases rather than owns most of its premises. Many of the leases
provide for annual rent adjustments. Equipment expense fluctuates over time as
needs change, maintenance is performed, and equipment is purchased. Some of the
additional occupancy expense relates to new facilities that were leased
subsequent to the fire at the Company's administrative headquarters which
occurred February 20, 1999. 105 employees that worked in the building needed to
be immediately located to different work locations. Vacant commercial office
space of sufficient size is very limited in the area. In order to provide new
work space for the displaced employees, the Company rented a building much
larger than the former administrative building. In general, the new space is
more expensive than the former building. Insurance will cover the additional
cost for the same amount of space, however, the additional space is not
reimbursable. Some of the additional space will be utilized by moving employees
from other leased space and the remainder of the building will be subleased.
Occupancy expense is higher than for 1998 because of the additional space.
Eventually, this cost will be offset with subleasing income and the
discontinuation of other lease expense as employees are moved to the new
building.
Included in other noninterest expense are legal and professional services. A
large proportion of these are consultant fees that were incurred by the
Company's Information Technology department. During this first half of 1999, the
department has been working on two major technology projects. The first is
directed at ensuring that the all of the Company's information systems,
operational processes, and physical facilities are prepared for the Century date
change (also known as "Y2K"). The Company has been preparing for this for
several years, but the intensity of efforts was stepped up considerably in the
first six months of 1999 to resolve all of the issues well in advance of January
1, 2000. The second project has been the integration of the information systems
of First National Bank/South Valley National Bank with those used by Santa
Barbara Bank & Trust. Specifically, the Company does not carry staff levels
sufficient to handle two complex, infrequent projects like these along with
normal operational demands. In addition, the Y2K project must be completed under
a rigid time schedule that permits no slippage from deadlines. Therefore, the
Company engaged outside assistance in the form of contract programming support
to accomplish both of these projects concurrently. While there may be some
continued outside assistance with the Y2K project through year-end, resulting
expenses are expected to be immaterial, and the system integration outsourcing
expense will conclude following completion of the integration on July 31.
<TABLE>
Table 10--Legal & Professional Expense
(in thousands)
<CAPTION>
Six-month Periods Three-month Periods
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
System conversion $2,243 $ -- $1,408 $ --
Y2K 1,634 500 895 201
Other 1,050 1,064 457 650
------ ------ ------ ----
Total $4,927 $1,564 $2,760 $851
====== ====== ====== ====
</TABLE>
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at acceptable cost in
order to meet cash needs, such as might be caused by fluctuations in deposit
levels, customers' credit needs, and attractive investment opportunities. The
Company's objective is to maintain adequate liquidity at all times.
The Company has defined and manages three types of liquidity: (1) "immediate
liquidity," which is the ability to raise funds today to meet today's cash
obligations, (2) "intermediate liquidity," which is the ability to raise funds
during the next few weeks to meet cash obligations over that time period, and
(3) "long term liquidity," which is the ability to raise funds over the entire
planning horizon to meet anticipated cash needs due to strategic balance sheet
changes. Adequate liquidity is achieved by (1) holding liquid assets, (2)
maintaining the ability to raise deposits or borrow funds, and (3) keeping
access open to capital markets.
Immediate liquidity is provided by the prior day's balance of Federal funds sold
and repurchase agreements, any cash in excess of the Federal Reserve balance
requirement, unused Federal funds lines from other banks, and unused repurchase
agreement facilities with other banks or brokers. The Company maintains total
sources of immediate liquidity of not less than 5% of total assets, increasing
to higher targets during RAL/RT season. At the end of June 30, 1999, these
sources of immediate liquidity were well in excess of that minimum.
Sources of intermediate liquidity include maturities or sales of bankers'
acceptances and securities in the Liquidity and Discretionary Portfolios,
securities in the Earnings Portfolio maturing within three months, term
repurchase agreements, advances from the FHLB, and deposit increases from
special programs. The Company projects intermediate liquidity needs and sources
over the next several weeks based on historical trends, seasonal factors, and
special transactions. Appropriate action is then taken to cover any anticipated
unmet needs. At the end of June 1999, the Company's intermediate liquidity was
adequate to meet all projected needs.
Long term liquidity would be provided by special programs to increase core
deposits, reducing the size of the investment portfolios, selling or
securitizing loans, and accessing capital markets. The Company's policy is to
plan ahead to address cash needs over the entire planning horizon from actions
and events such as market expansions, acquisitions, increased competition for
deposits, anticipated loan demand, and economic conditions and the regulatory
outlook. At the end of June 1999, the Company's long term liquidity was adequate
to meet cash needs anticipated over its planning horizon.
CAPITAL RESOURCES AND COMPANY STOCK
The following table presents a comparison of several important amounts and
ratios for the second quarter of 1999 and 1998 (dollars in thousands).
<TABLE>
Table 11--CAPITAL RATIOS
<CAPTION>
2nd Quarter 2nd Quarter
1999 1998 Change
----------------- ----------------- ---------------
<S> <C> <C> <C>
Amounts:
Net Income $ 9,043 $ 8,991 $ 52
Average Total Assets 2,713,035 2,395,892 317,143
Average Equity 231,594 202,342 29,252
Ratios:
Equity Capital to Total Assets (period end) 8.24% 8.38% (0.14%)
Annualized Return on Average Assets 1.33% 1.50% (0.17%)
Annualized Return on Average Equity 15.62% 17.77% (2.15%)
</TABLE>
Earnings are the largest source of capital for the Company. For reasons
mentioned in various sections of this discussion, Management expects that there
will be variations from quarter to quarter in operating earnings. Areas of
uncertainty or seasonal variations include asset quality, loan demand, and RAL
and RT operations. A substantial increase in charge-offs would require the
Company to record a larger provision for loan loss to restore the allowance to
an adequate level, and this would negatively impact earnings. If loan demand
increases, the Company will be able to reinvest proceeds from maturing
investments at higher rates, which would positively impact earnings. RAL and RT
earnings, occurring almost entirely in the first quarter, introduce significant
seasonality and cause the return on average assets and return on average equity
ratios to be substantially higher in the first quarter of each year than they
will be in subsequent quarters.
The FRB sets minimum capital guidelines for U.S. banks and bank holding
companies based on the relative risk of the various types of assets. The
guidelines require banks to have capital equivalent to at least 8% of risk
adjusted assets. To be classified as "well capitalized", the Company is required
to have capital equivalent to at least 10% of risk adjusted assets. As of June
30, 1999, the Company's risk-based capital ratio was 11.77%. The Company must
also maintain a Tier I capital (total shareholder equity less goodwill and other
intangibles) to risk adjusted assets ratio of 6% and 5% of average tangible
assets, respectively. As of June 30, 1999, Tier I capital was 10.52% of risk
adjusted assets and 7.81% of average tangible assets.
State law limits the amount of dividends that may be paid by a bank to the
lesser of the bank's retained earnings or the total of its undistributed net
income for the last three years. The dividends needed to be paid by SBB&T to
Santa Barbara Bancorp for the acquisitions of FVB and CSB exceeded the amount
allowable without prior approval of the California Department of Financial
Institutions ("CDFI"). As part of its approval of the acquisitions, the CDFI
approved the excess distributions. During 1998 and 1999, it also approved other
dividends from SBB&T to the Bancorp to partially fund the latter's quarterly
cash dividends to its shareholders and for other incidental purposes. SBB&T will
continue to need to request approval for dividends until earnings for the
preceding three years exceed dividends paid to Bancorp in the same three years.
Management expects that approval will continue to be granted due to strong
earnings and the well-capitalized position of SBB&T. FNB has the ability to pay
dividends to the Bancorp and is limited only in the amount which may not exceed
the lesser of the bank's retained earnings or the total of its undistributed net
income for the last three years.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements planned at this time. However, as the Company
pursues its stated plan to expand beyond its current market areas, Management
will consider opportunities to form strategic partnerships with other financial
institutions that have compatible management philosophies and corporate cultures
and that share the Company's commitment to superior customer service and
community support. Such transactions, depending on their structure, may be
accounted for as a purchase of the other institution by the Company. To the
extent that consideration is paid in cash rather than Company stock, the assets
of the Company would increase by more than its equity and therefore the ratio of
capital to assets would decrease.
The current quarterly dividend rate is $0.18 per share. When annualized, this
represents a payout ratio of approximately 42% of earnings per share, exclusive
of merger costs for the trailing 12 months.
REGULATION
The Company is closely regulated by Federal and State agencies. The Company and
its subsidiaries may only engage in lines of business that have been approved by
their respective regulators, and cannot open or close offices without their
approval. Disclosure of the terms and conditions of loans made to customers and
deposits accepted from customers are both heavily regulated as to content. The
subsidiary banks are required by the provisions of the Community Reinvestment
Act ("CRA") to make significant efforts to ensure that access to banking
services is available to all members of their communities. As a bank holding
company, Bancorp is primarily regulated by the Federal Reserve Bank ("FRB"). As
a member bank of the Federal Reserve System that is state-chartered, SBB&T's
primary Federal regulator is the FRB and its state regulator is the CDFI. As a
nationally chartered bank, FNB's primary regulator is the Office of the
Comptroller of the Currency. As a non-bank subsidiary of the Company, Pacific
Capital Commercial Mortgage, Inc. is regulated by the FRB. Each of these
regulatory agencies conducts periodic examinations of the Company and/or its
subsidiaries to ascertain their compliance with laws, regulations, and safe and
sound banking practices.
The regulatory agencies may take action against bank holding companies and banks
should they fail to maintain adequate capital or to comply with specific laws
and regulations. Such action could take the form of restrictions on the payment
of dividends to shareholders, requirements to obtain more capital from
investors, or restrictions on operations. The Company and the subsidiary banks
have the highest capital classification, "well capitalized," given by the
regulatory agencies and therefore, except for the need for approval of dividends
paid from SBB&T to Bancorp, are not subject to any restrictions as discussed
above. Management expects the Company and the subsidiary banks to continue to be
classified as well capitalized in the future.
REFUND ANTICIPATION LOAN AND REFUND TRANSFER PROGRAMS
Since 1992, the Company has provided loans and refund transfers to taxpayers who
file their income tax returns electronically. These loans and transfers are made
through tax preparers across the country. The Company collects a fee for each
transaction.
If a taxpayer meets the Company's credit criteria for the RAL product, and
wishes to receive a loan with the refund as security, the taxpayer applies for
and receives an advance less the transaction fees, which are considered finance
charges. The Company is repaid directly by the IRS and remits any refund amount
over the amount due the Company to the taxpayer.
There is a higher credit risk associated with RALs than with other types of
loans because (1) the Company does not have personal contact with the customers
of this product; (2) the customers conduct no business with the Company other
than this once a year transaction; and (3) contact subsequent to the payment of
the advance, if there is a problem with the tax return, may be difficult because
many of these taxpayers have no permanent address.
If the taxpayer does not meet the credit criteria or does not want a loan, the
Company can still facilitate the receipt of the refund by the taxpayer through
the RT program. This is accomplished by the Company authorizing the tax preparer
to issue a check to the taxpayer once the refund has been received by the
Company from the IRS. The fees received for acting as a transfer agent are less
than the fees received for the loans.
While the Company is one of very few financial institutions in the country to
operate these electronic loan and transfer programs, the electronic processing
of payments involved in these programs is similar to other payment processing
regularly done by the Company and other commercial banks for their customers
such as direct deposits and electronic bill paying. The RAL and RT programs had
significant impacts on the Company's activities and results of operations during
the first quarters of 1998 and 1999. A more extended description of these
programs may be found in the Company's Form 10-K for 1998.
Gross revenues for the RAL and RT programs were $8.0 million and $6.6 million,
respectively, for the first six months of 1999, with operating expenses of $2.4
million. During the first six months of 1999, the Company added $2.8 million to
the RAL allowance for credit loss through charges to provision expense during
the quarter and added another $2.4 million to the allowance from recoveries on
loans charged off in prior years. The Company charged-off $5.5 million in RALs
during this time. The result was a pre-tax operating income of approximately
$9.3 million.
The 1998 results compare to the 1999 results as follows. During the first half
of 1998, the Company recognized fees for RALs of $6.8 million and fees for RTs
of $4.8 million. Operating expenses totaled $1.4 million. The Company added $4.9
million to the RAL allowance for credit loss through a charge to provision
expense during the first half of 1998 and added another $2.0 million to the
allowance from recoveries on loans charged off in prior years. Charge offs for
1998 totaled $7.2 million. The result was a pre-tax net operating income of
approximately $5.3 million.
There is no credit risk associated with the refund transfers because checks are
issued only after receipt of the refund payment from the IRS.
YEAR 2000
The Company provided extensive information regarding its preparations for the
Century Date Change in the 1998 10-K MD&A. The discussion here is intended to
update that information.
State of readiness - Since early 1997, the Company has been addressing the
impact of the Year 2000 to its data processing systems. Key financial
information and operational systems were assessed and detailed plans were
developed to ensure that Year 2000 systems modifications were in place for all
critical systems. As most of the critical software is purchased from vendors,
the Company is concentrating its efforts on implementation and testing of "Year
2000 Compliant" versions provided by these vendors. Full system validation and
certification of these versions has been completed on 151 of the 152 systems
identified as critical.
Costs - The Company estimates that it will spend approximately $2.6 million to
address the Year 2000 issue. Through June 30, 1999, approximately $2.5 million
has been spent. However, the impact on operating results for 1999 will be less
than the approximately $1.6 million spent during the first six months of the
year because many of these costs related to the reassignment of internal staff
from other projects and to the purchase of equipment and software, the cost of
which will be amortized over a number of years
Risks - The primary risk of failure to adequately address the Year 2000 problem
would be the inability to process loans and deposit transactions for customers.
The Company also is exposed to risk if its customers, funds providers, or
correspondent financial institutions and brokerage firms are unable to
adequately address the Year 2000 dates in their own data processing systems. The
Company has contacted all of its major loan customers and those other financial
institutions with whom it has backup borrowing arrangements to ensure that these
third parties are addressing the issue for themselves and their customers. The
Company's risk with respect to loan customers who do not address the Year 2000
problem is the risk of non-payment or late payment of loans. The Company's risk
with respect to funds providers is that in the event of a shortage of liquidity
they would not be able to meet their commitments to the Company. The Company's
risk with respect to other financial institutions and brokerage firms is that it
may be unable to settle security transactions.
Contingency Plans - The Company assumes that its critical computer systems will
be prepared for the Century Date Change, but continues the process of preparing
contingency plans for business operations in the event of power or
telecommunications failures. For non-core operations, the Company will rely on
manual processing until modifications or replacement systems are in place.
- --------------------------------------------------------------------------------
Note 1 - To obtain information on the performance ratios for peer banks, the
Company primarily uses The FDIC Quarterly Banking Profile, published by the FDIC
Division of Research and Statistics. This publication provides information about
all FDIC insured banks and certain subsets based on size and geographical
location. Geographically, the Company is included in a subset that includes 12
Western States plus the Pacific Islands. The information in this publication is
based on year-to-date information provided by banks each quarter. It takes about
2-3 months to process the information. Therefore, the published data is always
one quarter behind the Company's information. For this quarter, the peer
information is for the first quarter of 1999. All peer information in this
discussion and analysis is reported in or has been derived from information
reported in this publication.
Note 2 - As required by applicable regulations, tax-exempt non-security
obligations of municipal governments are reported as part of the loan portfolio.
These totaled approximately $8.4 million as of June 30, 1999. The average yields
presented in Table 1 and Table 2 give effect to the tax-exempt status of the
interest received on these obligations by the use of a taxable equivalent yield,
assuming a combined Federal and State tax rate of approximately 42% (while not
tax exempt for the State of California, the State taxes paid on this
Federal-exempt income is deductible for Federal tax purposes). If their
tax-exempt status were not taken into account, interest earned on loans for the
second quarter of 1999 would be $38.3 million and the average yield would be
8.69%. There would also be corresponding reductions for the other quarters shown
in the Table 1. The computation of the taxable equivalent yield is explained in
the section titled "Securities and Related Interest Income."
Note 3 - Peer data are computed from statistics reported in FDIC Quarterly
Banking Profile, First Quarter, 1999 for banks with total assets from $1-10
billion.
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stock Holders was held on May 18, 1999. A total
of 24,350,456 shares of common stock were outstanding and entitled to vote as
the record date for the meeting. The following matters were submitted to a vote
of the security holders:
Election of Directors The following 12 directors were elected:
Votes For Votes Withheld
Donald M. Anderson 18,200,642 95.03% 786,948
Edward E. Birch 18,129,831 94.61% 866,758
Richard M. Davis 18,140,838 94.72% 846,751
Dale E. Hanst 18,164,152 94.84% 823,437
D. Vernon Horton 18,203,831 95.05% 783,759
Roger C. Knopf 18,089,912 94.45% 897,678
Clayton C. Larson 18,104,264 94.53% 883,326
Kathy J. Odell 18,166,772 94.85% 820,818
William H. Pope 18,197,710 95.01% 789,880
Harry B. Powell 18,155,108 94.79% 832,481
David W. Spainhour 18,205,033 95.05% 782,557
William S. Thomas, Jr. 18,205,196 95.05% 782,394
Amendment to the Company's Articles of Incorporation, Readopt Article Fourth
The Stockholders approved readopting Article Fourth of the Company's Articles of
Incorporation which provides that certain business combinations must be approved
by a super-majority vote of the outstanding common stock. 13,194,165 shares
voted in favor; 626,707 shares voted against; 197,310 shares abstained, and
there were 5,134,299 broker non-votes. See the fair price provision discussion
below.
Amendment to the Company's Articles of Incorporation, Amend Article Third
An amendment to the Company's Articles of Incorporation to increase the
authorized number of shares of common stock to 60,000,000 was approved as
follows: 18,205,737 shares voted in favor; 781,853 shares voted against; 164,891
shares abstained, and there were 5,134,299 broker non-votes.
Amendment to the Company's Articles of Incorporation , Amend Article Third
An amendment to the Company's Articles of Incorporation to authorize 1,000,000
shares of undesignated preferred stock was approved as follows: 12,148,851
shares voted in favor; 1,620,026 shares voted against; 247,860 shares abstained;
and there were 5,135,744 broker non-votes.
Independent Accountants for the Year Ending December 31, 1999
The appointment of Arthur Andersen LLP as the Company's Independent Accountants
for the year ending December 31, 1999 was approved as follows: 18,984,276 shares
were voted in favor; 88,737 shares voted against; and 79,468 shares abstained.
Fair Price Provision
Article FOURTH of the Company's Articles of Incorporation contains a
fair price provision. Article FOURTH was originally adopted in 1988. The fair
price provision is designed to insure that shareholders will receive equitable
treatment in the event of a business combination or other significant
transaction between the Company and a shareholder of the Company (or an
affiliate of such shareholder) who holds a 10% or greater stock interest at the
time of the proposed transaction. The fair price provision generally requires
that any such business combination or transaction must either be approved by a
majority of the Board of Directors, satisfy certain procedural requirements for
the fair treatment of all shareholders, or be approved by a super-majority vote
of the shareholders.
Section 710 of the California General Corporation Law provides that any
provision of a corporation's articles of incorporation which requires a
super-majority vote of the shareholders for any action will remain effective
only for a period of two years after the filing of the most recent amendment to
such super-majority vote requirement. The shareholders of the corporation may
readopt such super-majority vote provision at any time prior to the expiration
of such two-year period.
The Company submitted the fair price provision for re-approval by the
shareholders at the May 18, 1999 Annual Meeting in order to comply with the
provisions of California law. The fair price provision was reapproved by the
shareholders by the affirmative vote of the holders of 54.5% of the outstanding
Common Stock.
The Company submitted to the California Secretary of State a
Certificate of Amendment of Articles of Incorporation to reflect the readoption
of Article FOURTH reflecting a lower super-majority vote of 54.5%. The Secretary
of State of California refused to file the Certificate of Amendment and has
advised the Company that Section 710 does not apply to the Company's fair price
provision, as the provision was adopted in 1988 and prior to the adoption of
Section 710.
As a result of the action by the California Secretary of State, Article
FOURTH, as originally adopted, continues in full force and effect and applies to
any business combination or other significant transaction between the Company
and a shareholder who holds a 10% or greater stock interest in the Company at
the time of the proposed transaction. Also, the super-majority vote required for
approval of any such business combination or transaction by the shareholders
remains a vote of the holders of 66 2/3% of the outstanding Common Stock of the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description
27 Financial Data Schedule for June 30, 1999
(b) There were no Forms 8-K filed during the quarter ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized:
PACIFIC CAPITAL BANCORP
/s/ David W. Spainhour
David W. Spainhour August 12, 1999
President
Chief Executive Officer
/s/ Donald Lafler August 12, 1999
Donald Lafler
Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 110,405
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 47,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 510,533
<INVESTMENTS-CARRYING> 166,808
<INVESTMENTS-MARKET> 177,071
<LOANS> 1,817,203
<ALLOWANCE> 29,616
<TOTAL-ASSETS> 2,738,530
<DEPOSITS> 2,323,452
<SHORT-TERM> 50,413
<LIABILITIES-OTHER> 24,908
<LONG-TERM> 114,000
<COMMON> 8,179
0
0
<OTHER-SE> 217,578
<TOTAL-LIABILITIES-AND-EQUITY> 2,738,530
<INTEREST-LOAN> 81,407
<INTEREST-INVEST> 21,866
<INTEREST-OTHER> 3,004
<INTEREST-TOTAL> 106,277
<INTEREST-DEPOSIT> 30,011
<INTEREST-EXPENSE> 32,480
<INTEREST-INCOME-NET> 73,797
<LOAN-LOSSES> 4,559
<SECURITIES-GAINS> (286)
<EXPENSE-OTHER> 53,739
<INCOME-PRETAX> 37,991
<INCOME-PRE-EXTRAORDINARY> 37,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,564
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 5.73
<LOANS-NON> 16,319
<LOANS-PAST> 122
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 27,034
<ALLOWANCE-OPEN> 29,296
<CHARGE-OFFS> 7,633
<RECOVERIES> 3,480
<ALLOWANCE-CLOSE> 29,616
<ALLOWANCE-DOMESTIC> 29,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
