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 September 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, Suite 300
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 November 10, 1999 here were 24,519,528 shares of the
issuer's common stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
Consolidated Statements of Income
Nine and Three-Month Periods Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows
Nine-Month Period Ended September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income
Nine and Three-Month Periods Ended September 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 and second
quarter 1999 Forms 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>
PART 1
FINANCIAL INFORMATION
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
<CAPTION>
September 30, 1999 December 31, 1998
------------------- ----------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 113,052 $ 114,206
Federal funds sold and securities purchased under
agreement to resell 49,000 69,890
Money market funds - 1,567
--------------- ---------------
Cash and cash equivalents 162,052 185,663
--------------- ---------------
Securities (Note 4):
Held-to-maturity 159,639 194,769
Available-for-sale 536,339 596,996
Bankers' acceptances and commercial paper - 19,888
Loans, net of allowance of $28,404 at
September 30, 1999 and $29,296 at
December 31, 1998 (Note 5) 1,873,629 1,553,485
Premises and equipment, net 33,601 29,916
Accrued interest receivable 16,679 15,944
Other assets (Note 6) 66,897 52,757
--------------- ---------------
Total assets $ 2,848,836 $ 2,649,418
=============== ===============
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 533,188 $ 498,266
Interest bearing deposits 1,906,122 1,831,410
--------------- ---------------
Total Deposits 2,439,310 2,329,676
Securities sold under agreements
to repurchase and Federal funds purchased 54,192 27,796
Long-term debt and other borrowings (Note 7) 100,810 44,953
Accrued interest payable and other liabilities 26,821 32,993
--------------- ---------------
Total liabilities 2,621,133 2,435,418
--------------- ---------------
Shareholders' equity
Common stock (no par value; $0.33 per share
stated value; 60,000,000 authorized;
24,518,629 outstanding at September 30, 1999
and 24,208,782 at December 31, 1998) 8,175 8,071
Surplus 96,120 95,498
Accumulated other comprehensive income (Note 8) (3,292) 3,496
Retained earnings 126,700 106,935
--------------- ---------------
Total shareholders' equity 227,703 214,000
--------------- ---------------
Total liabilities and shareholders' equity $ 2,848,836 $ 2,649,418
=============== ===============
<FN>
See accompanying notes to consolidated condensed financialstatements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Nine-Month For the Three-Month
Periods Ended Periods Ended
September 30, September 30,
------------------------------------------------------------
1999 1998 1999 1998
---------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 121,609 $ 103,267 $ 40,122 $ 33,362
Interest on securities 32,395 34,021 10,529 11,603
Interest on Federal funds sold and securities
purchased under agreement to resell 3,391 6,014 718 2,490
Interest on BA's and commercial paper 336 930 5 23
---------------------------- -------------------------
Total interest income 157,731 144,232 51,374 47,478
---------------------------- -------------------------
Interest expense:
Interest on deposits 45,163 48,451 15,152 16,773
Interest on securities sold under agreements
to repurchase and Federal funds purchased 1,054 748 308 241
Interest on other borrowed funds 3,376 1,687 1,653 529
---------------------------- -------------------------
Total interest expense 49,593 50,886 17,113 17,543
---------------------------- -------------------------
Net interest income 108,138 93,346 34,261 29,935
Provision for loan losses 5,352 8,028 793 1,095
---------------------------- -------------------------
Net interest income after provision for loan losses 102,786 85,318 33,468 28,840
---------------------------- -------------------------
Other operating income:
Service charges on deposits 6,621 6,613 2,090 2,218
Trust fees 9,693 8,732 3,125 2,954
Other service charges, commissions and fees, net 15,343 13,375 3,212 3,232
Net (loss) gain on securities transactions (286) 209 -- 103
Other operating income 952 664 343 193
---------------------------- -------------------------
Total other income 32,323 29,593 8,770 8,700
---------------------------- -------------------------
Other operating expense:
Salaries and benefits 38,251 36,716 12,925 11,792
Net occupancy expense 6,809 6,249 2,084 2,215
Equipment expense 4,416 4,672 1,424 1,689
Other expense 32,803 22,573 10,966 8,322
---------------------------- -------------------------
Total other operating expense 82,279 70,210 27,399 24,018
---------------------------- -------------------------
Income before income taxes 52,830 44,701 14,839 13,522
Applicable income taxes 19,331 16,545 4,904 5,078
---------------------------- -------------------------
Net income $ 33,499 $ 28,156 $ 9,935 $ 8,444
============================ =========================
Earnings per share - basic (Note 2) $ 1.37 $ 1.18 $ 0.41 $ 0.35
Earnings per share - diluted (Note 2) $ 1.35 $ 1.15 $ 0.40 $ 0.34
<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 Nine Months Ended September 30,
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 33,499 $ 28,156
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 4,664 4,791
Provision for loan and lease losses 5,313 8,028
Net amortization of discounts and premiums for
securities and bankers' acceptances and
commercial paper (4,419) (2,031)
Net change in deferred loan origination
fees and costs 165 (261)
Net (gain) loss on sales and calls of securities 287 (209)
Change in accrued interest receivable and other assets (22,741) 1,842
Change in accrued interest payable and other liabilities (6,225) 4,586
--------------- ---------------
Net cash provided by operating activities 10,543 44,902
--------------- ---------------
Cash flows from investing activities:
Proceeds from call or maturity of securities 189,815 111,191
Purchase of securities (105,005) (204,627)
Proceeds from sale of securities 14,807 68,940
Proceeds from maturity of bankers' acceptances and
commercial paper 49,995 63,357
Purchase of bankers' acceptances and commercial paper (29,805) (14,671)
Net increase in loans made to customers (325,407) (134,672)
Purchase or investment in premises and equipment (7,271) (4,810)
--------------- ---------------
Net cash used in investing activities (212,871) (115,292)
--------------- ---------------
Cash flows from financing activities:
Net increase in deposits 109,634 182,528
Net decrease in borrowings with maturities
of 90 days or less 26,396 1,407
Net increase (decrease) in long-term debt and other
borrowings 55,857 (7,500)
Proceeds from issuance of common stock 2,561 4,905
Payments to retire common stock (2,050) (3,790)
Dividends paid (13,681) (9,229)
--------------- ---------------
Net cash provided by financing activities 178,717 168,321
--------------- ---------------
Net increase in cash and cash equivalents (23,611) 97,931
Cash and cash equivalents at beginning of period 185,663 194,318
--------------- ---------------
Cash and cash equivalents at end of period $ 162,052 $ 292,249
=============== ===============
Supplemental disclosure:
Cash paid for the three months ended:
Interest $ 49,325 $ 50,493
Income taxes $ 17,467 $ 10,180
Non-cash additions to other real estate owned $ -- $ 200
Non-cash additions to loans $ 215 $ 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)
<CAPTION>
For the Nine-Month For the Three-Month
Periods Ended Periods Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 33,499 $ 28,156 $ 9,935 $ 8,444
Other comprehensive income, net of tax (Note 8):
Unrealized loss on securities:
Unrealized holding losses arising during period (6,502) 3,947 (1,252) 4,296
Less: reclassification adjustment for gains (losses)
included in net income (286) 209 - 103
----------- ----------- ---------- -----------
Other comprehensive income (6,788) 4,156 (1,252) 4,399
----------- ----------- ---------- -----------
Comprehensive income $ 26,711 $ 32,312 $ 8,683 $ 12,843
=========== =========== ========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
Pacific Capital Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
September 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 nine and
three-month periods ended September 30, 1999 and 1998, was as follows (shares
and net income amounts in thousands):
<TABLE>
<CAPTION>
Nine-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 September 30, 1999
Numerator --net income $ 33,499 $ 33,499 $ 9,935 $ 9,935
========= ========= ======== ========
Denominator --weighted average
shares outstanding $ 24,379 $ 24,379 $24,504 $24,504
Plus: net shares issued in
assumed stock option exercises 375 359
--------- --------
Diluted denominator $ 24,754 $ 24,863
========= ========
Earnings per share $1.37 $1.35 $0.41 $0.40
Ended September 30, 1998
Numerator --net income $ 28,156 $ 28,156 $ 8,444 $ 8,444
========= ========= ======== ========
Denominator --weighted average
shares outstanding 23,785 $ 23,785 24,058 $24,058
Plus: net shares issued in
assumed stock option exercises 621 506
--------- --------
Diluted denominator $ 24,406 $24,564
========= ========
Earnings per share $1.18 $1.15 $0.35 $0.34
</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 nine and three-month periods ended September, 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>
September 30, 1999
Amortized cost:
In one year or less $ 50,565 $ 94,732 $ 145,297
After one year through five years 64,440 370,777 435,217
After five years through ten years 7,246 33,757 41,003
After ten years 37,388 33,986 71,374
Equity securities -- 8,765 8,765
-------------------------------------
Total securities $ 159,639 $ 542,017 $ 701,656
=====================================
Estimated market value:
In one year or less $ 51,027 $ 94,886 $ 145,913
After one year through five years 68,342 368,649 436,991
After five years through ten years 8,121 32,536 40,657
After ten years 40,248 31,503 71,751
Equity securities -- 8,765 8,765
-------------------------------------
Total securities $ 167,738 $ 536,339 $ 704,077
=====================================
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>
September 30, 1999
Held-to-maturity:
U.S. Treasury obligations $ 42,597 $ 217 $ -- $ 42,814
U.S. agency obligations 12,503 -- (44) 12,459
Mortgage-backed securities 584 15 (1) 598
State and municipal securities 103,955 7,939 (27) 111,867
-------------------------------------------------------
Total held-to-maturity 159,639 8,171 (72) 167,738
-------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 127,037 588 (73) 127,552
U.S. agency obligations 172,921 187 (1,166) 171,942
Mortgage-backed securities 181,569 93 (3,160) 178,502
Asset-backed securities 12,403 3 (86) 12,320
State and municipal securities 39,322 81 (2,145) 37,258
Equity securities 8,765 -- -- 8,765
-------------------------------------------------------
Total available-for-sale 542,017 952 (6,630) 536,339
-------------------------------------------------------
Total securities $ 701,656 $ 9,123 $ (6,702) $ 704,077
=======================================================
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) September 30, 1999 December 31, 1998 September 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Real estate:
Residential $ 470,966 $ 368,306 $ 328,550
Non-residential 421,033 477,120 437,806
Construction 158,601 109,764 82,702
Commercial loans 558,409 362,262 322,391
Home equity loans 44,923 47,123 50,398
Consumer loans 138,478 123,730 122,594
Leases 84,785 78,627 68,692
Municipal tax-exempt obligations 15,509 9,286 19,864
Other loans 9,329 6,563 8,870
------------ ------------ ------------
Total loans $ 1,902,033 $ 1,582,781 $ 1,441,867
============ ============ ============
</TABLE>
The loan balances at September 30, 1999, December 31, 1998 and September 30,
1998 are net of approximately $4,799,000, $4,624,000, and $3,470,000
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 September
30, 1999, December 31, 1998 and September 30, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998 September 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Loans identified as impaired $10,251 $3,286 $4,738
Impaired loans for which a valuation
allowance has been determined $ 6,306 $1,574 $1,213
Amount of valuation allowance $ 3,084 $ 98 $ 205
Impaired loans for which no valuation
allowance was determined necessary $ 3,945 $1,712 $3,525
</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 nine and three-month periods ended September 30,
1999 and 1998:
<TABLE>
<CAPTION>
Nine-month Periods Three-month Periods
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average amount of recorded
investment in impaired loans $11,953 $6,372 $8,013 $5,310
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 $3.1 million is included with the
general allowance for credit losses of $28.4 million reported on the
balance sheet for September 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 nine 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. The balances at September 30, 1999
and December 31, 1998 are due to collections recovered on charged-off loans
subsequent to June 30, 1999 and June 30, 1998, respectively.
<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 2,498 5,314
Loan losses charged against allowance (5,518) (4,958) (10,476)
Loan recoveries added to allowance 2,639 1,631 4,270
-----------------------------------------
Balance, September 30, 1999 $ 270 $ 28,134 $ 28,404
=========================================
</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 September
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 September 30, 1999 and
December 31, 1998, are deferred tax assets and goodwill. In connection with
acquisitions of other financial institutions, the Company recognized the excess
of the purchase price over the estimated fair value of the assets received and
liabilities assumed as goodwill. The current balance of this intangible is $19.9
million. 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 $92.0 million and $42.9 million of
advances from the Federal Home Loan Bank of San Francisco at September 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>
Nine months ended
September 30, 1999
Revenues from
external customers $ 6,784 $ 39,694 $ 39,440 $ 14,604 $ 9,845 $ 52,630 $ 31,252 $ 194,249
Intersegment revenues 55,263 166 -- 1,967 1,784 -- 10,386 69,566
--------- --------- --------- --------- --------- --------- --------- ----------
Total revenues $ 62,047 $ 39,860 $ 39,440 $ 16,571 $ 11,629 $ 52,630 $ 41,638 $ 263,815
========= ========= ========= ========= ========= ========= ========= ==========
Profit (Loss) $ 12,878 $ 9,815 $ 13,795 $ 9,822 $ 6,460 $ 17,077 $(12,822) $ 57,025
Interest income 50 38,898 38,518 8,023 -- 48,119 28,662 162,270
Interest expense 29,236 169 3 -- 1,558 14,747 3,880 49,593
Internal charge for funds 599 23,831 20,919 641 -- -- 23,576 69,566
Depreciation 1,179 119 78 71 108 947 1,083 3,585
Total assets 16,659 676,219 636,420 320 3,853 932,384 582,981 2,848,836
Capital expenditures -- -- -- -- -- 627 5,513 6,140
Nine months ended
September 30, 1998
Revenues from
external customers $ 7,809 $ 31,967 $ 33,924 $ 11,630 $ 7,218 $ 49,860 $ 35,730 $ 178,138
Intersegment revenues 54,700 26 -- 984 1,750 -- 7,747 65,207
--------- --------- --------- --------- --------- --------- --------- ----------
Total revenues $ 62,509 $ 31,993 $ 33,924 $ 12,614 $ 8,968 $ 49,860 $ 43,477 $ 243,345
========= ========= ========= ========= ========= ========= ========= ==========
Profit (Loss) $ 11,631 $ 7,350 $ 11,042 $ 5,149 $ 4,295 $ 16,364 $ (6,817) $ 49,014
Interest income -- -- -- -- -- -- -- --
Interest expense (26) 26 -- -- -- -- -- --
Internal charge for funds -- -- -- -- -- -- -- --
Depreciation -- -- -- -- -- -- -- -
Total assets 1,462 174 106 42 157 970 991 3,902
Capital expenditures 13,200 494,689 452,970 (166) 4,206 837,524 763,995 2,566,418
</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
September 30, 1999
Revenues from
external customers $ 1,328 $ 14,150 $ 14,024 $ 84 $ 4,236 $ 18,334 $ 9,392 $ 61,548
Intersegment revenues 19,003 66 -- 30 594 -- 3,573 23,266
--------- --------- --------- --------- --------- --------- --------- ----------
Total revenues $ 20,331 $ 14,216 $ 14,024 $ 114 $ 4,830 $ 18,334 $ 12,965 $ 84,814
========= ========= ========= ========= ========= ========= ========= ==========
Profit (Loss) $ 3,306 $ 3,327 $ 4,670 $ (301) $ 3,039 $ 5,930 $ (3,728) $ 16,243
Interest income 20 13,891 13,786 55 -- 16,803 8,647 53,202
Interest expense 9,866 67 1 -- 504 4,923 1,752 17,113
Internal charge for funds 207 8,718 7,560 -- -- -- 6,781 23,266
Depreciation 399 45 44 23 36 310 314 1,171
Total assets 16,659 676,219 636,420 320 3,853 932,384 582,981 2,848,836
Capital expenditures -- -- -- -- -- 111 2,581 2,692
Three months ended
September 30, 1998
Revenues from
external customers $ 2,742 $ 11,015 $ 11,593 $ 17 $ 2,371 $ 17,564 $ 12,350 $ 57,652
Intersegment revenues 18,868 12 -- 12 641 -- 2,466 21,999
--------- --------- --------- --------- --------- --------- --------- ----------
Total revenues $ 21,610 $ 11,027 $ 11,593 $ 29 $ 3,012 $ 17,564 $ 14,816 $ 79,651
========= ========= ========= ========= ========= ========= ========= ==========
Profit (Loss) $ 3,901 $ 2,799 $ 3,670 $ (229) $ 1,277 $ 5,970 $ (2,392) $ 14,996
Interest income (12) (20,109) (21,601) (6,804) -- (29,509) (21,490) (99,525)
Interest expense (20,744) 11 (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 1,462 174 106 42 157 970 991 3,902
Capital expenditures 13,200 494,689 452,970 (166) 4,206 837,282 760,852 2,563,033
</TABLE>
<PAGE>
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively in the consolidated statements
of income for the nine- and three-month periods ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
Nine months ended Sept. 30, Three months ended Sept. 30,
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Total revenues for
reportable segments $ 263,815 $ 243,345 $ 84,814 $ 79,651
Elimination of
intersegment revenues (69,566) (65,207) (23,266) (21,999)
Elimination of taxable
equivalent adjustment (4,195) (4,313) (1,404) (1,474)
---------------------------- ---------------------------
Total consolidated revenues $ 190,054 $ 173,825 $ 60,144 $ 56,178
============================ ===========================
Total profit or loss
for reportable segments $ 57,025 $ 49,014 $ 16,243 $ 14,996
Elimination of taxable
equivalent adjustment (4,195) (4,313) (1,404) (1,474)
---------------------------- ---------------------------
Income before income taxes $ 52,830 $ 44,701 $ 14,839 $ 13,522
============================ ===========================
</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 $9.9 million for the quarter ended
September 30, 1999, up $1.5 million over the same quarter last year. Diluted per
share earnings for the third quarter of 1999 were $0.40 compared to $0.34 earned
in the third quarter of 1998.
Compared to the third quarter of 1998, net interest income (the difference
between interest income and interest expense) increased by $4.3 million in the
third quarter of 1999, an increase of 14%. This was due primarily to additional
interest on loans, as the loan balances increased 32% from $1.4 billion at
September 30, 1998, to $1.9 billion a year later. Interest income from loans for
the quarter was $40.1 million, up $6.8 million or 20%. Deposits increased $169.2
million or 7.5% over the last 12 months, while interest expense decreased 6.8%.
As explained more fully in the sections below covering loans and deposits, loan
interest income and deposit interest expense have increased less than the growth
in loans and deposits. This is due to the lagging effect on average loan and
deposit rates caused by fixed-rate term instruments and by noninterest bearing
accounts.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $1.1 million over the same quarter of 1998. Trust and Investment
Services fees were up $293,000.
Provision expense for the third quarter of 1999 for loans other than tax refund
loans was $793,000, less than the $1,095,000 provided in the third quarter of
1998. Noninterest expenses increased in the third 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 60.0% for the third of 1998 to 61.7% for the third quarter of
1999.
Exclusive of these non-recurring expenses, the Company's net income would have
been $36.4 million for the first nine months and $10.6 million for the third
quarter of 1999, or $1.47 and $0.43 per diluted share, respectively,
representing increases of 27.8% and 25.2%, 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 report contains forward-looking statements with respect to the financial
conditions, results of operations and business of the Company. These include
statements about the Company's plans, objectives, expectations and intentions
that are not historical facts. 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) competitive pressure among financial services companies increases
significantly; (2) changes in the interest rate environment reduce interest
margins; (3) general economic conditions, internationally, nationally or in the
State of California, are less favorable than expected; (4) changes in the IRS's
handling of electronic filing and refund payments adversely affect the Company's
RAL and refund transfer ("RT") programs; and (5) 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)
$2,850 AAAA
$2,800 AAA A
A
$2,750 A A
AAA
$2,700 A
$2,650
A
$2,600
AAA
$2,550 A
A
$2,500 AAA
A
$2,450 DDD
A D DDDD
$2,400 AAAAAAAA D D
A D D
$2,350 D DDD
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 3rd
'95 '96 '97 '97 '97 '97 '98 '98 '98 '98 '99 '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 ("FVB") and Citizens State Bank ("CSB") 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 since the merger in December of 1998.
Because this merger was accounted for as a pooling of interests, asset and
deposit totals for periods prior to the merger have been restated to include
their balances. 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 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 93.5% of its assets during
the nine months of 1999. This compares with an average of 89.5% for peer
FDIC-Insured Commercial Banks. (See Note A. Notes are found at the end of this
report.) 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 $111 million more assets earning interest during the first nine 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 following two tables show the average balances of the major categories of
earning assets and liabilities for the nine and three-month periods ended
September 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 is to changes in rates. For example, Table 2 shows that for the third
quarter of 1999, NOW and MMDA accounts averaged $311,648,000, interest expense
for them was $524,000, and the average rate paid was 0.67%. In the third quarter
of 1998, NOW and MMDA accounts averaged $280,188,000, interest expense for them
was $802,000, and the average rate paid was 1.14%. Table 3 shows that the
$278,000 decrease in interest expense for demand deposits from the third quarter
of 1998 to the third quarter of 1999 is the net result of a $90,000 increase in
interest expense due to the higher balances in 1999, offset by a reduction of
$368,000 in interest expense due to the lower rates paid during 1999.
These tables also disclose the net interest margin for the reported periods. 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. If the net interest margin decreases, net
interest income can still increase, but earning assets must increase at a higher
rate. This serves to replace the net interest income that is lost by the
decreasing rate by increasing the volume.
<PAGE>
<TABLE>
TABLE 1 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)
<CAPTION>
(dollars in thousands) Nine months ended Nine months ended
September 30, 1999 September 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 $ 102,114 $ 3,727 4.88% $ 163,216 $ 6,944 5.69%
Securities: (2)
Taxable 576,644 25,636 5.94% 596,910 27,026 6.05%
Non-taxable 134,350 10,531 10.45% 138,281 10,832 10.44%
----------- --------- ----------- ---------
Total securities 710,994 36,167 6.80% 735,191 37,858 6.88%
----------- --------- ----------- ---------
Loans and leases: (3)
Commercial 427,241 28,596 8.95% 324,173 24,829 10.24%
Ready equity 47,925 3,178 8.87% 53,934 3,892 9.65%
Real estate 1,037,705 64,875 8.34% 778,027 52,754 9.04%
Installment and consumer loans 146,825 11,065 10.08% 134,454 9,666 9.61%
Leasing 90,718 6,718 9.90% 76,415 5,790 10.13%
Tax refund loans 16,567 7,600 61.33% 14,280 6,812 63.78%
----------- --------- ----------- ---------
Total loans and leases 1,766,981 122,032 9.22% 1,381,283 103,743 10.03%
----------- --------- ----------- ---------
Total earning assets 2,580,089 161,926 8.38% 2,279,690 148,545 8.70%
Allowance for credit losses (30,789) (30,774)
Other assets 209,584 184,890
----------- -----------
TOTAL ASSETS $2,758,884 $2,433,806
=========== ===========
LIABILITIES
Deposits:
Interest-bearing demand $296,246 1,485 0.67% $274,213 2,345 1.14%
Savings and money market 779,041 15,789 2.71% 743,502 18,512 3.33%
Time deposits 784,048 27,889 4.76% 695,865 27,594 5.30%
----------- --------- ----------- ---------
Total interest-bearing deposits 1,859,335 45,163 3.25% 1,713,580 48,451 3.78%
Borrowed funds 109,327 4,430 5.42% 56,627 2,435 5.75%
----------- --------- ----------- ---------
Total interest-bearing liabilities 1,968,662 49,593 3.37% 1,770,207 50,886 3.84%
Noninterest-bearing demand deposits 535,110 433,476
Other liabilities 29,419 25,896
----------- -----------
TOTAL LIABILITIES 2,533,191 2,229,579
Shareholders' equity 225,693 204,227
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,758,884 $2,433,806
=========== ===========
Net interest rate spread 5.01% 4.86%
NET INTEREST INCOME AND NET
INTEREST MARGIN 112,333 5.81% 97,659 5.72%
Provision for credit losses (5,352) (0.28%) (8,028) (0.47%)
--------- ------- --------- -------
NET FUNDS FUNCTION $106,981 5.53% $ 89,631 5.25%
========= ======= ========= =======
<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
September 30, 1999 September 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 $ 56,674 $ 723 5.06% $ 175,581 $ 2,513 6.80%
Securities: (2)
Taxable 552,097 8,235 5.92% 614,214 9,219 5.95%
Non-taxable 136,817 3,567 10.43% 141,524 3,699 10.45%
----------- --------- ----------- ---------
Total securities 688,914 11,802 6.81% 755,738 12,918 5.68%
----------- --------- ----------- ---------
Loans and leases: (3)
Commercial 499,451 11,331 9.00% 330,268 8,515 10.23%
Ready equity 51,054 1,127 8.76% 51,936 1,265 9.66%
Real estate 1,053,661 21,759 8.26% 809,369 18,272 9.03%
Installment and consumer loans 149,885 3,677 9.73% 141,845 3,436 9.61%
Leasing 95,234 2,353 9.80% 80,019 2,026 10.05%
Tax refund loans 0 6 0.00% 0 8 0.00%
----------- --------- ----------- ---------
Total loans and leases 1,849,285 40,253 8.67% 1,413,437 33,522 9.45%
----------- --------- ----------- ---------
Total earning assets 2,594,873 52,778 8.10% 2,344,756 48,953 8.31%
Allowance for credit losses (29,563) (28,563)
Other assets 213,415 186,227
----------- -----------
TOTAL ASSETS $2,778,725 $2,502,420
=========== ===========
LIABILITIES
Deposits:
Interest-bearing demand $311,648 524 0.67% $280,188 802 1.14%
Savings and money market 778,752 5,364 2.73% 768,356 6,688 3.45%
Time deposits 790,417 9,264 4.65% 721,585 9,283 5.10%
----------- --------- ----------- ---------
Total interest-bearing deposits 1,880,817 15,152 1,770,129 16,773
Borrowed funds 137,924 1,961 5.64% 53,759 770 5.68%
----------- --------- ------- ----------- --------- -------
Total interest-bearing liabilities 2,018,741 17,113 3.36% 1,823,888 17,543 3.82%
Noninterest-bearing demand deposits 507,103 443,530
Other liabilities 27,083 21,936
----------- -----------
TOTAL LIABILITIES 2,552,927 2,289,354
Shareholders' equity 225,798 213,066
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,778,725 $2,502,420
=========== ===========
Net interest rate spread 4.74% 4.50%
NET INTEREST INCOME AND NET
INTEREST MARGIN 35,665 5.48% 31,410 5.35%
Provision for credit losses (793) (0.12%) (1,095) (0.19%)
--------- ------- --------- -------
NET FUNDS FUNCTION $ 34,872 5.36% $ 30,315 5.16%
========= ======= ========= =======
<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 Nine months ended
Sept 30, 1999 vs Sept 30, 1998 Sept 30, 1999 vs Sept 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 ($118,907) ($1,790) (490) (1,300) ($ 61,102) ($3,217) (718) (2,499)
Securities: (3)
Taxable (62,117) (984) (57) (927) (20,266) (1,390) (663) (727)
Non-taxable (4,707) (132) (9) (123) (3,931) (301) (2) (299)
------------------------------------- -------------------------------------------
Total securities (66,824) (1,116) (66) (1,050) (24,197) (1,691) (665) (1,026)
------------------------------------- -------------------------------------------
Loans and leases: (4)
Commercial 169,183 2,816 (1,121) 3,937 103,068 3,767 (3,800) 7,567
Ready equity (882) (138) (117) (21) (6,009) (714) (1,428) 714
Real estate 244,292 3,487 (1,682) 5,169 259,678 12,121 768 11,353
Installment and consumer loans 8,040 241 44 197 12,371 1,399 2,985 (1,586)
Leasing 15,215 327 (48) 375 14,303 928 57 871
Tax refund loans 0 (2) 0 (2) 2,287 788 (303) 1,091
------------------------------------- ------------------------------------------
Total loans and leases 435,848 6,731 (2,924) 9,655 385,698 18,289 (1,721) 20,010
------------------------------------- ------------------------------------------
TOTAL EARNING ASSETS $ 250,117 3,825 (3,480) 7,305 $ 300,399 13,381 (3,104) 16,485
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 31,460 (278) (368) 90 $ 22,033 (860) (2,381) 1,521
Savings and money market 10,396 (1,324) (1,414) 90 35,539 (2,723) (6,964) 4,241
Time deposits 68,832 (19) (905) 886 88,183 295 (2,640) 2,935
------------------------------------- ------------------------------------------
Total deposits 110,688 (1,621) (2,687) 1,066 145,755 (3,288) (11,985) 8,697
Borrowed funds 84,165 1,191 (15) 1,206 52,700 1,995 (93) 2,088
------------------------------------- ------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES $ 194,853 (430) (2,702) 2,272 $ 198,455 (1,293) (12,078) 10,785
==========--------------------------- ==========---------------------------------
NET INTEREST INCOME (4) $ 4,255 ($778) $5,033 $14,674 $ 8,974 $5,700
========================== ==============================
<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 using then
current rates; (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) if rates were 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 September 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 September 30, 1999
Net interest income (4.72%) +3.01%
Net economic value +5.07% (5.82%)
The differences in the results are due to changes in the relative size of the
various components of the Company's balance sheet (the product mix) over the
last nine months and the changes in the maturities and/or repricing
opportunities of the financial instruments held. 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. As indicated,
these changes tend to cause liabilities to reprice sooner than assets and reduce
net interest income at least over the next 12 months. To offset this effect, the
Company took several actions late in the 2nd quarter and throughout the 3rd
quarter. These included sales of securities, fixed-rate longer-term borrowing,
and entering into fixed-for-variable interest rate swaps.
The same changes to the balance sheet and mitigating steps 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. These assumptions are reviewed each quarter
and changed as deemed appropriate to reflect the best information available to
Management.
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 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 report 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 September 30, 1999, has increased by $319.3
million compared to December 31, 1998, and by $460.2 million compared to
September 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 three quarters of 1999, the Company
has 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. Loans are retained
when the rate at origination exceeds the cost of matching funds by an amount
sufficient to cover credit risk, origination and servicing costs, and meet the
Company's profit goals. 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 has 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 nine 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 nine months
of 1999 and 1998 without the effect of RAL loans were 8.74% and 9.43%,
respectively.
The Federal Open Market Committee of the Federal Reserve Board has increased its
target market rates twice in the last several months. Along with most other
financial institutions, the Company has increased its prime rate to reflect the
change in market rates. Despite these increases, the average rate earned on
loans has declined over the last year. Among the reasons for this are (1) only
those loans which are indexed to prime are repriced by this change, (2) many
customers have refinanced or repaid their fixed rate loans made in prior years
when rates were higher, and (3) customers are now presented with a number of
nonbank sources from which to borrow. This competition has brought about a
lowering of the rates to attract borrowers.
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) September 30, December 31,
1999 1998
---- ----
Commitments to extend credit
Commercial $397,645 $325,803
Consumer 64,804 71,544
Standby letters of credit 22,045 21,782
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 methodology used to determine the adequacy of the allowance for
credit loss is discussed in detail in Note 1 to the Consolidated Financial
Statements presented in the Company's Annual Report for 1998 on Form 10-K. This
methodology involves estimating the amount of credit loss inherent in each of
the loan and lease portfolios taking into account such factors as historical
charge-off rates, economic conditions, and concentrations by industry,
geography, and collateral type. 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 third quarter of 1999, and at the end of the previous
four quarters.
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. While
the Company does not determine its allowance for credit loss to achieve
particular target ratios, nonetheless, the Company does compute its ratios and
compares them with peer ratios as a check on its methodology. Only two other
banks operate national RAL and RT programs. Therefore, 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.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate). The dollar amount of nonperforming assets increased
substantially during the first quarter 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>
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1998
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 347 $ 122 $ 301 $ 78 $ 428
Nonaccrual loans 14,313 16,319 17,915 8,148 8,706
-------------- --------------- --------------- --------------- ---------------
Total noncurrent loans 14,660 16,441 18,216 8,226 9,134
Foreclosed real estate -- -- -- -- 58
-------------- --------------- --------------- --------------- ---------------
Total nonper-
forming assets $ 14,660 $ 16,441 $ 18,216 $ 8,226 $ 9,192
============== =============== =============== =============== ===============
Allowance for credit losses
other than RALs $ 28,404 $ 29,616 $ 29,637 $ 28,963 $ 28,485
Allowance for RALs -- -- 1,871 333 204
-------------- --------------- --------------- --------------- ---------------
Total allowance $ 28,404 $ 29,616 $ 31,508 $ 29,296 $ 28,689
============== =============== =============== =============== ===============
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.49% 1.63% 1.75% 1.83% 1.98%
Coverage ratio of
allowance for credit
losses to noncurrent loans 194% 180% 163% 352% 312%
Ratio of noncurrent
loans to total loans 0.77% 0.90% 1.08% 0.52% 0.63%
Ratio of nonperforming
assets to total assets 0.51% 0.60% 0.68% 0.31% 0.36%
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 1.99% 2.06% 2.04% 2.10%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 223% 209% 199% 202%
Ratio of noncurrent
loans to total loans n/a 0.89% 0.99% 1.02% 1.04%
Ratio of nonperforming
assets to total assets n/a 0.62% 0.69% 0.71% 0.74%
</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 0.77% 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. 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 quarter 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.
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 September 30, 1999 (amounts in thousands).
Table 5--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
Noncurrent Other Potential
Loans Problem Loans
----- -------------
Loans secured by real estate:
Construction and
land development $ -- $ 487
Agricultural 96 2,370
Home equity lines 305 863
1-4 family mortgage 1,524 3,698
Multifamily -- --
Nonresidential, nonfarm 5,245 6,194
Commercial and industrial 5,964 13,350
Leases 358 --
Other consumer loans 858 698
Other Loans -- 61
----------- ------------
Total $ 14,350 $ 27,721
=========== ============
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of September 30, 1999 (amounts in thousands).
Doubtful $3,250
Substandard $4,844
Special Mention $1,040
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 September 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 has entered into several interest rate swaps to mitigate interest rate
risk late in 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 in
place at September 30, 1999, was $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 nine months of 1999 was less than for the first nine months of
1998 and significantly less for the third quarter of 1999 than for the third
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 September 30, 1998 and 1999. Generally over the years, deposit growth has
been more than sufficient to fund the growth in loans. However, from the third
quarter of 1998 to the third quarter of 1999, the average balance for loans
outstanding increased $436 million. During the same time, average deposits
increased $174 million. A large portion, $119 million, of the funds needed to
support the $262 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 this year 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 eight quarters.
Table 6--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ------- --------------------
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
September 1999 30.1 4.68 1.1
Long-term debt consists of advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). The outstanding advances from the FHLB at September 30, 1999
totaled $92.0 million. The scheduled maturities of the advances are $14.5
million in 1 year or less, $17.5 million in 1 to 3 years, and $60.0 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 eight quarters.
Table 7--LONG-TERM DEBT
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ------- ----------------------
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
September 1999 107.9 5.90 3.9
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 $331,000 of the fees earned in the first nine months of 1998
and $330,000 of the fees earned in the first nine months of 1999. Variation is
also caused by the recognition of probate fees. These fees are accrued when the
work is completed, rather than 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 nine month periods ended September 30, 1999 and 1998.
<TABLE>
TABLE 8 --NONINTEREST INCOME
(dollars in thousands)
<CAPTION>
Nine months ended Three months ended
--------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
-------------------- ----------------------
September 30, Percent September 30, Percent
------------------- ------------------
1999 1998 Amount Change 1999 1998 Amount Change
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on
deposits accounts $ 6,621 $ 6,613 $ 8 0.12% $ 2,090 $ 2,218 $(128) (5.77%)
Trust fees 9,693 8,732 961 11.01% 3,125 2,954 171 5.79%
Other service charges/fees 15,343 13,375 1,968 14.71% 3,212 3,232 (20) (0.62%)
Securities gains (losses) (286) 209 (495) (236.84%) 0 103 (103) (100.00%)
Other noninterest income 952 664 288 43.37% 343 193 150 77.72%
---------------------------- ---------------------------
Total Noninterest Income $ 32,323 $29,593 $2,730 9.23% $ 8,770 $ 8,700 $ 70 0.80%
============================ ===========================
</TABLE>
NONINTEREST EXPENSE
The following table shows noninterest expense for the three and nine months
ended September 30, 1999 and 1998.
<TABLE>
TABLE 9 --NONINTEREST EXPENSE
(dollars in thousands)
<CAPTION>
Nine months ended Three months ended
---------------------------------------------- ----------------------------------------------
Increase (Decrease) Increase (Decrease)
------------------------- -------------------------
September 30, Percent September 30, Percent
--------------------- ---------------------
1999 1998 Amount Change 1999 1998 Amount Change
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salary expense $ 32,043 $ 29,788 $ 2,255 7.57% $ 10,976 $ 9,575 $ 1,401 14.63%
Employee benefits 6,208 6,928 (720) (10.39%) 1,949 2,217 (268) (12.09%)
Net occupancy 6,809 6,249 560 8.96% 2,084 2,215 (131) (5.91%)
Equipment and furniture 4,416 4,672 (256) (5.48%) 1,424 1,689 (265) (15.69%)
Marketing 1,987 2,101 (114) (5.43%) 816 941 (125) (13.28%)
Other noninterest expense 30,816 20,472 10,344 50.53% 10,150 7,381 2,769 37.52%
---------------------------------- ---------------------------------
Total Noninterest Expense $ 82,279 $ 70,210 $ 12,069 17.19% $ 27,399 $ 24,018 $ 3,381 14.08%
================================== =================================
</TABLE>
The largest component of noninterest expense is staff expense.
There is some increase in this expense 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 early part of each year
because adjustments arising from the annual salary review for all Company exempt
employees are effective on either January 1 or March 1. In 1999, these increases
averaged approximately 5%. In addition, some temporary staff is added in the
first quarter for the RAL program and a number of the PCB staff reductions that
were to occur because of the merger could not be effected until the data
processing systems were combined in the third quarter.
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 based on projected net income for the year.
Staff size is closely monitored in relation to the growth in the Company's
revenues and assets. The following table compares salary and benefit costs as a
percentage of revenues and assets for the nine- and three-month periods ended
September 30, 1999 and 1998.
Nine Months Ended Three Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
Salary and benefits as
a percentage of total
revenues 20.1% 21.1% 21.5% 21.0%
Salary and benefits as
a percentage of average
assets 1.39% 1.51% 0.47% 0.47%
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 in 1999 than in 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 1999, the department has
been working on two major technology projects. The first is directed at ensuring
that 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
concluded following completion of the integration on July 31.
Table 10--Merger & Y2K Consulting:
(dollars in thousands)
Nine-month Periods Three-month Periods
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
System conversion $3,350 $ -- $1,107 $ --
Y2K $1,634 $ 506 $ -- $ 6
INCOME TAX
Income tax expense is comprised of a current tax provision and a deferred tax
provision for both Federal income tax and state franchise tax. The current tax
provision recognizes an expense for what must be paid to taxing authorities for
taxable income earned this year. The deferred tax provision recognizes an
expense or benefit related to items of income or expense that are included in or
deducted from taxable income in a period different than when the items are
recognized in the financial statements under generally accepted accounting
principles. Examples of such timing differences and the impact of the major
items are shown in Note 8 to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K.
With each period end, it is necessary for Management to make certain estimates
and assumptions to compute the provision for income tax. Management uses the
best information available to develop these estimates and assumptions, but
generally some of these estimates and assumptions are revised when the Company
files its tax return in the middle of the following year. In accordance with
generally accepted accounting principles, revisions to estimates are recorded as
income tax expense or benefit in the period in which they become known.
For the last several years, the effective tax rate (income tax expense divided
by pre-tax income) for the Company has been increasing. This has occurred
because taxable income has increased at a higher rate than tax-exempt income.
However, for the third quarter of 1999 the effective rate was 33.0% compared to
37.6% for the third quarter of 1998. The late date of December 30, 1998 relative
to year-end for the closing of the merger with PCB resulted in the need to rely
on more estimates and assumptions than would otherwise be the case. When the
Company's 1998 income tax return was completed in the third quarter of 1999, a
number of these estimates and assumptions needed to be revised. The net effect
was to reduce income tax expense recognized in the quarter by $815,000. Without
the adjustment from the revision of the estimates and assumptions, the effective
tax rate would have been 38.5%.
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 (a) holding liquid assets, (b)
maintaining the ability to raise deposits or borrow funds, and (c) 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 September 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 September 1999, the Company's intermediate liquidity
was adequate to meet all projected needs.
Long term liquidity is 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
address cash needs over the entire planning horizon from actions and events such
as market expansions, acquisitions, increased competition for deposits,
anticipated loan demand, economic conditions and the regulatory outlook. At the
end of September 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 third quarter of 1999 and 1998 (dollars in thousands).
<TABLE>
Table 11--CAPITAL RATIOS
<CAPTION>
3rd Quarter 3rd Quarter
1999 1998 Change
------------- -------------- ------------
<S> <C> <C> <C>
Amounts:
Net Income $ 9,935 $ 8,444 $ 1,491
Average Total Assets 2,778,725 2,502,420 276,305
Average Equity 225,798 213,066 12,732
Ratios:
Equity Capital to Total Assets (period end) 7.99% 8.47% (0.48%)
Annualized Return on Average Assets 1.43% 1.35% 0.08%
Annualized Return on Average Equity 17.46% 15.72% 1.74%
</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 might 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. As loan demand has
increased, the Company has been 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.
Capital must be managed at both the Company and at the individual bank levels.
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
September 30, 1999, the Company's risk-based capital ratio was 11.49%. 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 September 30, 1999, Tier I capital
was 10.24% of risk adjusted assets and 7.73% of average tangible assets.
The ratio of equity capital to total assets has decreased over the last year as
assets have increased at a higher rate than equity capital. This occurred for
two reasons. The first is that the strong loan demand noted above has caused a
high rate of asset growth. The second is that in the fourth quarter of 1998, the
Company's net income was significantly reduced by the one-time costs incurred in
connection with the closing of the merger with Pacific Capital Bancorp. The
Company, however, did not reduce its dividend to shareholders for this quarter
and therefore more capital was paid out in dividends to shareholders than was
added to capital from net income.
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 the
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 to an amount which may not exceed
the lesser of FNB'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 the one-time merger closing costs in the fourth quarter of 1998) 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 and FNB 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. More detailed descriptions of the programs may be found in
Management's Discussion and Analysis presented in the Annual Report on Form 10-K
for 1998 and in the Quarterly Reports on Form 10-Q for the first and second
quarters of 1999.
Virtually no lending or transfer activity takes place in the third or fourth
quarters of each year. However, the following information is provided for the
reader to understand the impact of the programs on the year-to-date results.
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. In the third quarter of 1999, the Company recovered an additional
$270,000 from charged-off loans.
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. During the second half of 1998, $333,000 in
charged-off loans were recovered.
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 the systems identified as
critical.
Costs - The Company estimates that it will spend approximately $2.6 million to
address the Year 2000 issue. Through September 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 nine 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 is confident 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 A - 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 second 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 B - As required by applicable regulations, tax-exempt non-security
obligations of municipal governments are reported as part of the loan portfolio.
These totaled approximately $7.2 million as of September 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 using 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
third quarter of 1999 would be $40.1 million and the average yield would be
8.60%. There would also be corresponding reductions for the other periods shown
in Tables 1 and 2. The computation of the taxable equivalent yield is explained
in the section titled "Securities and Related Interest Income."
Note C - Peer data are computed from statistics reported in FDIC Quarterly
Banking Profile, Second 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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description
27 Financial Data Schedule for September 30, 1999
(b) There were no Forms 8-K filed during the quarter ended September 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 November 12, 1999
President
Chief Executive Officer
/s/ Donald Lafler
Donald Lafler November 12, 1999
Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 113,052
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 49,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 536,339
<INVESTMENTS-CARRYING> 159,639
<INVESTMENTS-MARKET> 167,738
<LOANS> 1,902,033
<ALLOWANCE> 28,404
<TOTAL-ASSETS> 2,848,836
<DEPOSITS> 2,439,310
<SHORT-TERM> 63,002
<LIABILITIES-OTHER> 26,821
<LONG-TERM> 92,000
<COMMON> 8,175
0
0
<OTHER-SE> 219,528
<TOTAL-LIABILITIES-AND-EQUITY> 2,848,836
<INTEREST-LOAN> 121,609
<INTEREST-INVEST> 32,395
<INTEREST-OTHER> 3,727
<INTEREST-TOTAL> 157,731
<INTEREST-DEPOSIT> 45,163
<INTEREST-EXPENSE> 49,593
<INTEREST-INCOME-NET> 108,138
<LOAN-LOSSES> 5,352
<SECURITIES-GAINS> (286)
<EXPENSE-OTHER> 82,279
<INCOME-PRETAX> 52,830
<INCOME-PRE-EXTRAORDINARY> 52,830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,499
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 5.60
<LOANS-NON> 14,313
<LOANS-PAST> 347
<LOANS-TROUBLED> 11
<LOANS-PROBLEM> 27,721
<ALLOWANCE-OPEN> 29,296
<CHARGE-OFFS> 10,476
<RECOVERIES> 4,270
<ALLOWANCE-CLOSE> 28,404
<ALLOWANCE-DOMESTIC> 28,404
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
