UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 August 9, 2000 there were 24,648,887 shares of the issuer's
common stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Consolidated Statements of Income
Six and Three-Month Periods Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows
Six-Month Period Ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
Six and Three-Month Periods Ended June 30, 2000 and 1999
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, 1999 as supplemented by the first and second
quarter 2000 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 1. Legal proceedings
Item 4. Submission of Matters to a vote of security holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART 1
FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
June 30, December 31,
2000 1999
---------- ----------
Assets:
Cash and due from banks $ 170,944 $ 121,500
Federal funds sold and securities
purchased under
agreements to resell 105,000 --
---------- ----------
Cash and cash equivalents 275,944 121,500
---------- ----------
Securities (Note 4):
Held-to-maturity 118,034 153,264
Available-for-sale 636,586 528,426
Commercial paper 24,637 --
Loans, net of allowance of $26,568 at
June 30, 2000 and $28,686 at
December 31, 1999 (Note 5) 2,057,871 1,953,193
Premises and equipment, net 44,188 35,175
Accrued interest receivable 19,549 17,345
Other assets (Note 6) 74,636 70,379
---------- ----------
Total assets $3,251,445 $2,879,282
========== ==========
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 560,435 $ 546,193
Interest bearing deposits 2,214,543 1,893,988
---------- ----------
Total Deposits 2,774,978 2,440,181
Securities sold under agreements
to repurchase and Federal funds purchased 82,984 80,507
Long-term debt and other borrowings (Note 7) 108,732 98,801
Accrued interest payable and other liabilities 26,818 25,220
---------- ----------
Total liabilities 2,993,512 2,644,709
---------- ----------
Shareholders' equity
Common stock (no par value; $0.33 per share stated value;
60,000,000 authorized; 24,640,402 outstanding at
June 30, 2000 and 24,554,294 at December 31,
1999 8,215 8,186
Surplus 99,822 99,283
Accumulated other comprehensive income (Note 8) (5,186) (6,447)
Retained earnings 155,082 133,551
----------- -----------
Total shareholders' equity 257,933 234,573
----------- -----------
Total liabilities and shareholders'
equity $ 3,251,445 $ 2,879,282
=========== ===========
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Six-Month For the Three-Month
Period Ended Period Ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 108,551 $ 81,487 $ 46,677 $ 38,292
Interest on securities 22,528 21,866 11,890 10,602
Interest on Federal funds sold and securities
purchased under agreement to resell 7,965 2,673 3,200 703
Interest on commercial paper 1,398 331 1,214 74
--------- --------- --------- ---------
Total interest income 140,442 106,357 62,981 49,671
--------- --------- --------- ---------
Interest expense:
Interest on deposits 46,116 30,011 23,195 14,735
Interest on securities sold under agreements
to repurchase and Federal funds purchased 1,541 746 870 484
Interest on other borrowed funds 3,888 1,723 1,803 991
--------- --------- --------- ---------
Total interest expense 51,545 32,480 25,868 16,210
--------- --------- --------- ---------
Net interest income 88,897 73,877 37,113 33,461
Provision for loan losses 7,501 4,559 1,928 840
--------- --------- --------- ---------
Net interest income after provision for loan losses 81,396 69,318 35,185 32,621
--------- --------- --------- ---------
Other operating income:
Service charges on deposits 4,879 4,531 2,518 2,296
Trust fees 7,210 6,568 3,387 3,159
Other service charges, commissions and fees, net 14,018 12,131 4,243 3,596
Net (loss) gain on securities transactions (498) (286) 1 (109)
Other operating income 622 609 345 342
--------- --------- --------- ---------
Total other income 26,231 23,553 10,494 9,284
--------- --------- --------- ---------
Other operating expense:
Salaries and benefits 28,406 25,326 13,774 12,531
Net occupancy expense 5,266 4,725 2,497 2,467
Equipment expense 2,952 2,992 1,512 1,432
Other expense 19,519 21,837 9,479 10,925
--------- --------- --------- ---------
Total other operating expense 56,143 54,880 27,262 27,355
--------- --------- --------- ---------
Income before income taxes 51,484 37,991 18,417 14,550
Applicable income taxes 20,109 14,427 6,862 5,507
--------- --------- --------- ---------
Net income $ 31,375 $ 23,564 $ 11,555 $ 9,043
========= ========= ========= =========
Earnings per share - basic (Note 2) $ 1.28 $ 0.97 $ 0.47 $ 0.37
Earnings per share - diluted (Note 2) $ 1.26 $ 0.95 $ 0.47 $ 0.37
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<CAPTION>
For the Six-Month
Period Ended June 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 31,375 $ 23,564
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,239 3,132
Provision for loan and lease losses 7,501 4,559
Net amortization of discounts and premiums for
securities and bankers' acceptances and
commercial paper (4,968) (2,915)
Net change in deferred loan origination
fees and costs 170 165
Net loss on sales and calls of securities 498 286
Change in accrued interest receivable and other assets (5,918) (16,610)
Change in accrued interest payable and other liabilities 1,640 (8,141)
--------- ---------
Net cash provided by operating activities 33,537 4,040
--------- ---------
Cash flows from investing activities:
Proceeds from call or maturity of securities 77,019 147,481
Purchase of securities (194,026) (45,537)
Proceeds from sale of securities 47,378 14,807
Proceeds from maturity of commercial paper 102,000 45,000
Purchase of commercial paper (160,484) (29,805)
Proceeds from sale of commercial paper 34,930 --
Net increase in loans made to customers (112,349) (238,648)
Purchase or investment in premises and equipment (11,534) (4,143)
--------- ---------
Net cash used in investing activities (217,066) (110,845)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 334,797 (6,224)
Net increase in borrowings with maturities
of 90 days or less 2,477 20,589
Net increase in long-term debt and other
borrowings 9,931 71,075
Proceeds from issuance of common stock 22 2,370
Dividends paid (9,340) (8,763)
--------- ---------
Net cash provided by financing activities 337,887 79,047
--------- ---------
Net increase (decrease) in cash and cash equivalents 154,358 (27,758)
Cash and cash equivalents at beginning of period 121,586 185,663
--------- ---------
Cash and cash equivalents at end of period $ 275,944 $ 157,905
========= =========
Supplemental disclosure:
Cash paid for the six months ended:
Interest $ 54,941 $ 32,212
Income taxes $ 18,190 $ 16,067
Non-cash additions to loans $ -- $ 178
<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 Six-Month For the Three-Month
Period Ended Period Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 31,375 $ 23,564 $ 11,555 $ 9,043
Other comprehensive income, net of tax (Note 8):
Unrealized loss on securities:
Unrealized holding gains (losses) arising during period 1,767 (5,250) 1,225 (4,030)
Less: reclassification adjustment for losses
included in net income (506) (286) (7) (109)
-------- -------- -------- --------
Other comprehensive income (loss) 1,261 (5,536) 1,218 (4,139)
-------- -------- -------- --------
Comprehensive income $ 32,636 $ 18,028 $ 12,773 $ 4,904
======== ======== ======== ========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
Pacific Capital Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
(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.
<TABLE>
The computation of basic and diluted earnings per share for the six and
three-month periods ended June 30, 2000 and 1999, was as follows (shares and net
income amounts in thousands):
<CAPTION>
Six-month Period Three-month Period
Basic Diluted Basic Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Ended June 30, 2000
Numerator --net income $ 31,375 $ 31,375 $ 11,555 $11,555
Denominator --weighted average
shares outstanding 24,590 24,590 24,613 24,613
Plus: net shares issued in
assumed stock option exercises 244 207
Diluted denominator 24,834 24,820
Earnings per share $ 1.28 $ 1.26 $ 0.47 $ 0.47
Ended June 30, 1999
Numerator --net income $ 23,564 $ 23,564 $ 9,043 $ 9,043
Denominator --weighted average
shares outstanding 24,316 24,316 24,391 24,391
Plus: net shares issued in
assumed stock option exercises 375 372
Diluted denominator 24,691 24,763
Earnings per share $ 0.97 $ 0.95 $ 0.37 $ 0.37
</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 accounting principles generally accepted in the United
States (GAAP) for complete financial statements. In the opinion of Management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been reflected in the financial
statements. However, the results of operations for the six and three-month
periods ended June 30, 2000, are not necessarily indicative of the results to be
expected for the full year. Certain amounts reported for 1999 have been
reclassified to be consistent with the reporting for 2000.
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 agreements 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 and FNB are also members 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 in the available-for-sale portfolio.
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.
<PAGE>
(in thousands) Held-to- Available-
Maturity for-Sale Total
-----------------------------------
June 30, 2000 Amortized cost:
In one year or less $ 48,163 $ 91,932 $140,095
After one year through five years 24,675 448,807 473,482
After five years through ten years 7,537 25,182 32,719
After ten years 37,659 68,560 106,219
Equity securities 0 10,741 10,741
-------- -------- --------
Total securities $118,034 $645,222 $763,256
======== ======== ========
Estimated market value:
In one year or less $ 48,533 $ 91,507 $140,040
After one year through five years 26,796 442,536 469,332
After five years through ten years 8,221 24,129 32,350
After ten years 40,522 67,673 108,195
Equity securities 0 10,741 10,741
-------- -------- --------
Total securities $124,072 $636,586 $760,658
======== ======== ========
December 31,1999 Amortized cost:
In one year or less $ 59,920 $ 92,661 $152,581
After one year through five years 48,445 376,113 424,558
After five years through ten years 7,080 24,277 31,357
After ten years 37,819 34,848 72,667
Equity securities 0 11,649 11,649
-------- -------- --------
Total securities $153,264 $539,548 $692,812
======== ======== ========
Estimated market value:
In one year or less $ 60,466 $ 92,524 $152,990
After one year through five years 51,264 369,999 421,263
After five years through ten years 7,778 22,889 30,667
After ten years 39,642 31,365 71,007
Equity securities 0 11,649 11,649
-------- -------- --------
Total securities $159,150 $528,426 $687,576
======== ======== ========
<PAGE>
<TABLE>
The amortized historical cost, market values and gross unrealized gains and
losses of securities are as follows:
<CAPTION>
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
June 30, 2000
Held-to-maturity:
U.S. Treasury obligations $ 12,483 $ 6 $ (12) $ 12,477
U.S. agency obligations 12,501 -- (69) 12,432
Mortgage-backed securities 394 5 -- 399
State and municipal securities 92,656 6,121 (13) 98,764
-------- -------- -------- --------
Total held-to-maturity 118,034 6,132 (94) 124,072
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations 126,104 155 (788) 125,471
U.S. agency obligations 231,938 156 (1,887) 230,207
Mortgage-backed securities 165,365 64 (5,126) 160,303
Asset-backed securities 33,206 1 (206) 33,001
State and municipal securities 77,868 1,211 (2,216) 76,863
Equity securities 10,741 -- -- 10,741
-------- -------- -------- --------
--------
Total available-for-sale 645,222 1,587 (10,223) 636,586
-------- -------- -------- --------
Total securities $763,256 $ 7,719 $(10,317) $760,658
======== ======== ======== ========
December 31, 1999
Held-to-maturity:
U.S. Treasury obligations $ 35,043 $ 64 $ (40) $ 35,067
U.S. agency obligations 12,502 -- (87) 12,415
Mortgage-backed securities 556 8 (1) 563
State and municipal securities 105,163 6,235 (293) 111,105
-------- -------- -------- --------
Total held-to-maturity 153,264 6,307 (421) 159,150
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations 121,701 49 (691) 121,059
U.S. agency obligations 177,985 -- (2,197) 175,788
Mortgage-backed securities 172,333 21 (4,849) 167,505
Asset-backed securities 10,979 7 (114) 10,872
State and municipal securities 44,901 42 (3,390) 41,553
Equity securities 11,649 -- -- 11,649
-------- -------- -------- --------
Total available-for-sale 539,548 119 (11,241) 528,426
-------- -------- -------- --------
Total securities $692,812 $ 6,426 $(11,662) $687,576
======== ======== ======== ========
</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.
<PAGE>
5. Loans and the Allowance for Credit Losses
<TABLE>
The balances in the various loan categories are as follows:
<CAPTION>
(in thousands) June 30, 2000 December 31, 1999 June 30, 1999
<S> <C> <C> <C>
Real estate:
Residential $ 521,868 $ 484,562 $ 471,342
Non-residential 490,853 435,913 523,145
Construction 134,638 171,870 143,589
Commercial loans 586,968 577,407 387,391
Home equity loans 57,917 49,902 48,296
Consumer loans 169,537 148,051 134,915
Leases 105,428 93,322 92,219
Municipal tax-exempt obligations 11,484 12,530 8,388
Other loans 5,746 8,322 7,918
---------------- ----------------- -----------------
Total loans $ 2,084,439 $ 1,981,879 $ 1,817,203
================ ================= =================
</TABLE>
The loan balances at June 30, 2000, December 31, 1999 and June 30, 1999 are net
of approximately $5,053,000, $4,781,000, and $4,591,000 respectively, in
deferred net loan fees and origination costs.
Specific kinds of loans are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. Because this definition is very similar to that used by
Management to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on nonaccrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income in the current period. No further income is recognized until all recorded
amounts of principal are recovered in full or until circumstances have changed
such that the loan is no longer regarded as impaired.
Impaired loans are reviewed each quarter to determine whether a valuation
allowance for loan loss is required. The amount of the valuation allowance for
impaired loans is determined by comparing the recorded investment in each loan
with its value measured by one of three methods. The first method is to estimate
the expected future cash flows and then discount them at the effective interest
rate. The second method is to use the loan's observable market price if the loan
is of a kind for which there is a secondary market. The third method is to use
the value of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by the selected method exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the related allowance (dollars in thousands) as of June 30,
2000, December 31, 1999 and June 30, 1999:
June 30, 2000 December 31, 1999 June 30, 1999
------------- ----------------- -------------
Loans identified
as impaired $ 8,511 $ 9,496 $12,644
Impaired loans for
which a valuation
allowance has been
determined $ 8,311 $ 8,221 $ 8,551
Amount of valuation
allowance $ 3,415 $ 3,726 $ 5,298
Impaired loans for which
no valuation allowance
was determined necessary $ 200 $ 1,275 $ 4,093
<PAGE>
Because the loans currently identified as impaired have unique risk
characteristics, the valuation allowance is determined on a loan-by-loan basis.
The following table discloses additional information (dollars in thousands)
about impaired loans for the six and three-month periods ended June 30, 2000 and
1999:
Six-month Periods Three-month Periods
Ended June 30, Ended June 30,
2000 1999 2000 1999
Average amount of recorded
investment in impaired loans $7,115 $4,878 $ 7,338 $11,661
Collections of interest from
impaired loans and recognized
as interest income $ -- $ -- $ -- $ --
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, 1999.
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 $3.4 million as of June 30, 2000
is included with the general allowance for credit losses of $26.4 million in the
"All Other Loans" column in the statement of changes in the allowance account
for the first six months of 2000 shown below. The amounts related to tax refund
anticipation loans and to all other loans are shown separately.
(in thousands) All
Tax Refund Other
Loans Loans Total
-------- -------- --------
Balance, December 31, 1999 $ 488 $ 28,198 $ 28,686
Provision for loan losses 3,631 3,844 7,475
Loan losses charged against allowance (6,226) (6,470) (12,696)
Loan recoveries added to allowance 2,248 855 3,103
-------- -------- --------
Balance, June 30, 2000 $ 141 $ 26,427 $ 26,568
======== ======== ========
Balance, December 31, 1998 $ 333 $ 28,963 $ 29,296
Provision for loan losses 2,816 1,657 4,473
Loan losses charged against allowance (5,518) (2,115) (7,633)
Loan recoveries added to allowance 2,369 1,111 3,480
-------- -------- --------
Balance, June 30, 1999 $ 0 $ 29,616 $ 29,616
======== ======== ========
<PAGE>
6. Other Assets
Property acquired as a result of defaulted loans is included within other assets
on the balance sheets. Property from defaulted loans is carried at the lower of
the outstanding balance of the related loan at the time of foreclosure or the
estimate of the market value of the assets less disposal costs. As of June 30,
2000 and December 31, 1999, the Company held some properties which it had
obtained from foreclosure. However, because of the uncertainty relating to
realizing any proceeds from their disposal in excess of the cost of disposal,
the Company had written their carrying value down to zero.
Also included in other assets on the balance sheet for June 30, 2000 and
December 31, 1999, 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 intangibles is $15.8
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 (impairment), a charge against current
earnings would be recorded. No such impairment existed at June 30, 2000 or
December 31, 1999.
7. Long-term Debt and Other Borrowings
Long-term debt and other borrowings included $78.0 million and $85.0 million of
advances from the Federal Home Loan Bank of San Francisco at June 30, 2000 and
December 31, 1999, 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 a 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.
<PAGE>
<TABLE>
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.
<CAPTION>
Tax
(in thousands) Branch Retail Wholesale Refund Northern All
Activities Lending Lending Programs Fiduciary Region Other Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six months ended
June 30, 2000
Revenues from
external customers $ 5,290 $ 31,055 $ 31,386 $ 25,610 $ 7,184 $ 40,686 $ 28,321 $ 169,532
Intersegment revenues 54,833 145 -- 1,982 2,088 -- (39,156) 19,892
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 60,123 $ 31,200 $ 31,386 $ 27,592 $ 9,272 $ 40,686 $ (10,835) $ 189,424
========== ========== ========== ========== ========== ========== ========== ==========
Profit (Loss) $ 13,769 $ 6,033 $ 8,573 $ 17,083 $ 4,162 $ 12,572 $ (7,849) $ 54,343
Interest income 49 30,451 30,818 18,394 -- 37,156 26,433 143,301
Interest expense 33,849 148 3 -- 1,673 12,079 3,794 51,545
Internal charge for funds 456 19,867 18,533 3,153 -- -- (22,117) 19,892
Depreciation 651 95 54 71 67 517 1,066 2,521
Total assets 14,506 771,624 653,937 (85) 1,912 956,486 853,065 3,251,445
Capital expenditures -- -- -- -- -- 2,670 11,494 14,163
Six months ended
June 30, 1999
Revenues from
external customers $ 5,456 $ 25,544 $ 25,416 $ 14,520 $ 5,609 $ 34,296 $ 21,860 $ 132,701
Intersegment revenues 36,260 100 -- 1,937 1,190 -- 6,813 46,300
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 41,716 $ 25,644 $ 25,416 $ 16,457 $ 6,799 $ 34,296 $ 28,673 $ 179,001
========== ========== ========== ========== ========== ========== ========== ==========
Profit (Loss) $ 9,572 $ 6,488 $ 9,125 $ 10,123 $ 3,421 $ 11,147 $ (9,094) $ 40,782
Interest income 30 25,007 24,732 7,968 -- 31,396 20,015 109,148
Interest expense 19,370 102 2 -- 1,054 9,824 2,128 32,480
Internal charge for funds 392 15,113 13,359 641 -- -- 16,795 46,300
Depreciation 780 74 34 48 72 637 769 2,414
Total assets 13,509 656,487 608,278 230 1,306 864,940 613,780 2,758,530
Capital expenditures -- -- -- -- -- 516 2,932 3,448
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tax
(in thousands) Branch Retail Wholesale Refund Northern All
Activities Lending Lending Programs Fiduciary Region Other Total
---------- --------- --------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 2000
Revenues from
external customers $ 2,759 $ 15,905 $ 15,733 $ 1,388 $ 3,363 $ 20,571 $ 15,222 $ 74,941
Intersegment revenues 28,229 93 -- 93 1,238 -- (42,929) (13,276)
---------- --------- --------- -------- ----------- ----------- ----------- -----------
Total revenues $ 30,988 $ 15,998 $ 15,733 $ 1,481 $ 4,601 $ 20,571 $ (27,707) $ 61,665
========== ========= ========= ======== =========== =========== =========== ===========
Profit (Loss) $ 8,182 $ 3,279 $ 4,197 $ 295 $ 2,041 $ 6,363 $ (4,474) $ 19,883
Interest income 24 15,624 15,416 781 -- 18,729 13,876 64,450
Interest expense 16,577 94 1 -- 902 6,171 2,124 25,869
Internal charge for funds 208 10,141 9,363 377 -- -- (33,365) (13,276)
Depreciation 317 49 28 43 34 247 572 1,290
Total assets 14,506 771,624 653,937 (85) 1,912 956,486 853,065 3,251,445
Capital expenditures -- -- -- -- -- 91 8,111 8,202
Three months ended
June 30, 1999
Revenues from
external customers $ 3,379 $ 13,317 $ 13,025 $ 1,136 $ 2,208 $ 17,289 $ 9,961 $ 60,315
Intersegment revenues 18,057 47 -- 224 570 -- 3,276 22,174
---------- --------- --------- -------- ----------- ----------- ----------- -----------
Total revenues $ 21,436 $ 13,364 $ 13,025 $ 1,360 $ 2,778 $ 17,289 $ 13,237 $ 82,489
========== ========= ========= ======== =========== =========== =========== ===========
Profit (Loss) $ 4,990 $ 3,551 $ 4,962 $ 588 $ 1,568 $ 5,370 $ (5,119) $ 15,910
Interest income 16 13,090 12,726 491 -- 15,760 8,951 51,034
Interest expense 9,508 47 2 -- 498 4,843 1,312 16,210
Internal charge for funds 193 7,581 6,937 95 -- -- 7,368 22,174
Depreciation 381 37 11 24 36 306 417 1,212
Total assets 13,509 656,487 608,278 230 1,306 864,940 613,780 2,758,530
Capital expenditures -- -- -- -- -- 481 1,363 1,844
</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 six- and three-month periods ended June 30, 2000 and 1999.
Six months ended Three months ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
Total revenues for
reportable segments $ 189,424 $ 179,001 $ 61,665 $ 82,489
Elimination of
intersegment revenues (19,892) (46,300) 13,276 (22,174)
Elimination of taxable
equivalent adjustment (2,859) (2,791) (1,466) (1,360)
--------- --------- --------- ---------
Total consolidated revenues $ 166,673 $ 129,910 $ 73,475 $ 58,955
========= ========= ========= =========
Total profit or loss
for reportable segments $ 54,343 $ 40,782 $ 19,883 $ 15,910
Elimination of taxable
equivalent adjustment (2,859) (2,791) (1,466) (1,360)
--------- --------- --------- ---------
Income before income taxes $ 51,484 $ 37,991 $ 18,417 $ 14,550
========= ========= ========= =========
10. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued in June of 1998 and will become
effective for the Company as of January 1, 2001. In Management's opinion this
statement is not expected to have a material impact on the operating results or
the financial position of the Company.
The Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB
101) was issued in December of 1999 and will become effective during the fourth
quarter of 2000. Management believes that the Company's revenue recognition
policies comply with the content of Topic 13: Revenue Recognition. As such, this
SAB is not expected to have a material impact on the operating results or the
financial position of the Company.
11. Contingencies
The Company is one of a number of financial institutions named as party
defendants in a patent infringement lawsuit recently filed by an unaffiliated
financial institution. The lawsuit generally relates to the Company's tax refund
program. The Company has retained outside legal counsel to represent its
interest in this matter. The Company does not believe that it has infringed any
patents as alleged in the lawsuit and intends to vigorously defend itself in
this matter. The amount of alleged damages are not specified in the papers
received by the Company. Therefore, Management cannot estimate the amount of any
possible loss at this time in the event of an unfavorable outcome.
<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 $11.6 million for the quarter ended June
30, 2000, up $2.5 million over the same quarter last year. Diluted earnings per
share for the second quarter of 2000 were $0.47 compared to $0.37 earned in the
second quarter of 1999.
In various sections of this discussion and analysis, attention is called to the
significant impacts on the Company's balance sheet and income statement caused
by its tax refund and transfer programs. The actions taken by the Company to
manage this program are discussed in a specific section of this discussion
titled "Refund Anticipation Loan and Refund Transfer Programs." Readers are
referred to this section because Management believes that the explanation of the
impacts will be clearer to the reader if those actions are all described in one
place.
Compared to the second quarter of 1999, net interest income (the difference
between interest income and interest expense) increased by $3.7 million in the
second quarter of 2000, an increase of 10.9%. This was due primarily to
additional interest on loans, as the loan balances increased 14.7% from $1.82
billion at June 30, 1999, to $2.08 billion a year later. Interest income from
loans for the quarter was $46.7 million, up $8.4 million or 21.9%. Deposits
increased $451.5 million or 19.4% over the last 12 months. As explained below, a
substantial portion of this increase related to certificates of deposits issued
to fund the income tax refund loans. Because of these deposits, interest expense
for the three- and six-month periods ended June 30, 2000 was higher compared to
the same periods of 1999.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $1.1 million over the same quarter of 1999. Trust and Investment
Services fees were up $228,000.
Provision expense for the second quarter of 2000 for loans other than tax refund
loans was $1.9 million, compared to the $783,000 provided in the second quarter
of 1999. The increase was due to the growth in the loan portfolios and to
maintain the allowance for credit loss after charging off a few larger loans.
Noninterest expense was slightly less in the second quarter of 2000 than in the
same quarter of 1999. A major reason for this decrease was the expenses incurred
in 1999 in connection with the integration project for data processing systems
after the merger with the former Pacific Capital Bancorp and for addressing the
Century Date Change ("Y2K"). This lower level of expenses in conjunction with
the additional income compared to 1999 resulted in a decrease in the Company's
operating efficiency ratio, which measures what proportion of a dollar of
operating income it takes to earn that dollar, from 61.87% for the second of
1999 to 55.56% for the second quarter of 2000.
<PAGE>
BUSINESS
The Company is a bank holding company. All references to "the Company" apply to
Pacific Capital Bancorp and its subsidiaries. "Bancorp" will be used to refer to
the parent company only. 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.
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; (5) legislation or regulatory
requirements or changes adversely affect the business in which the Company will
be engaged; and (6) other risks detailed in the Pacific Capital Bancorp 1999
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
TOTAL ASSETS AND EARNING ASSETS
The chart below shows the growth in average total assets and deposits since
1996. Annual averages are shown for 1996 and 1997; quarterly averages are shown
for 1998, 1999 and 2000. Because significant but unusual cash flows sometimes
occur at the end of a quarter and 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)
$3,500 AA
$3,450 A
$3,400 A
$3,350 A A
$3,300 AAA
$3,250
$3,200 A
$3,150
$3,100
$3,050 A
$3,000 D
$2,950 A D
$2,900 D D
$2,850 AAAAAAA DDDD
$2,800 AAAA A
$2,750 AAAAA D
$2,700 A
$2,650 A D
$2,600 AAA
$2,550 AA D
$2,500 AAA
$2,450 A DDD DDDDDDD
$2,400 AAAAAAAA D D DD
$2,350 A D DDDD
$2,300 A DDD
$2,250 A DDDDD
$2,200 A D
$2,150 A DDDDDDDD
$2,100 D
$2,050 A
$2,000 A D
$1,950 D
$1,900 A D
$1,850 A D
$1,800 AA D
$1,750
$1,700 A D
$1,650 D
$1,600 D
$1,550 DD
$1,500 D
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd
'96 '97 '98 '98 '98 '98 '99 '99 '99 '99 '00 '00
A = Assets D = Deposits
Deposit balances also have been included in the chart because, prior to 1999, as
reflected in Chart 1, changes in assets were primarily related to changes in
deposit levels. As deposit funds were received, they were either lent to
customers or invested in securities. In 1999, the growth in assets was driven
more by increasing loan demand than by deposit growth. As explained below, the
Company funded much of this growth from the proceeds of maturing securities and
by borrowing funds from other financial institutions. This change is reflected
in the chart by assets increasing more than deposits.
The overall growth trend shown above for the Company prior to 2000 is due in
part to the continuing 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
<PAGE>
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 three 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 although 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 was probably due to funds being
withdrawn for investment purposes as stock markets have continued their strong
rise.
The major reason for the large increase in assets and deposits during the first
quarter of 2000 was the significant expansion of the Company's tax refund loan
program. The Company issued approximately $405 million in certificates of
deposit to fund these loans. The funding of the program is explained in greater
detail in the section below titled "Refund Anticipation Loan and Refund Transfer
Programs".
Earning assets consist of the various assets on which the Company earns interest
income. On average, the Company earned interest on 93.7% of its assets during
the second quarter of 2000. This compares with an average of 89.9% 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. These systems permit the Company to put
the cash to use more quickly. At the Company's current size (excluding the extra
assets due to the certificates of deposits added for the tax refund loan
program), these and other steps have resulted in about $118 million more assets
earning interest during the second quarter of 2000 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 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 first table following shows the average balances of the major categories of
earning assets and liabilities for the six-month periods ended June 30, 1999 and
2000 together with the related interest income and expense. The second table
shows the same data for the three-month periods ended June 30, 1999 and 2000.
The 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 1999 is due to changes in the balances (volume) and how much is due to
changes in rates. For example, Table 1 shows that for the first half of 2000,
NOW accounts averaged $313,111,000, interest expense for them was $1,080,000,
and the average rate paid was 0.69%. In the first half of 1999, NOW accounts
(interest bearing demand) averaged $294,129,000, interest expense for them was
$1,133,000, and the average rate paid was 0.78%. Table 3 shows that the $53,000
decrease in interest expense for demand deposits from the first half of 1999 to
the first half of 2000 is the net result of a $186,000 increase in interest
expense due to the higher balances in 2000, offset by a reduction of $239,000 in
interest expense due to the lower rates paid during 2000.
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) Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------------------------ ----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $315,785 $9,363 5.95% $126,374 $3,004 4.74%
Securities: (2)
Taxable 572,002 17,651 6.19% 587,850 17,399 5.97%
Non-taxable 149,158 7,556 10.13% 133,219 6,966 10.46%
----------- --------- ---------- --------
Total securities 721,160 25,207 7.00% 721,069 24,365 6.46%
----------- --------- ---------- --------
Loans and leases: (3)
Commercial 594,066 28,145 9.50% 385,446 16,953 8.87%
Ready equity 55,431 2,648 9.58% 46,754 2,038 8.79%
Real estate 1,091,106 45,559 8.35% 1,027,928 43,432 8.45%
Installment and consumer loans 178,790 9,166 10.28% 151,618 7,314 9.73%
Leasing 109,036 5,420 9.97% 88,256 4,366 9.98%
Tax refund loans 121,538 17,793 29.36% 24,988 7,595 61.29%
----------- --------- ---------- --------
Total loans and leases 2,149,967 108,731 10.13% 1,724,990 81,698 9.51%
----------- --------- ---------- --------
Total earning assets 3,186,912 143,301 9.01% 2,572,433 109,067 8.50%
Allowance for credit losses (30,211) (31,411)
Other assets 234,754 208,685
----------- ----------
TOTAL ASSETS $3,391,455 $2,749,707
=========== ==========
LIABILITIES
Deposits:
Interest-bearing demand $313,111 1,080 0.69% $294,129 1,133 0.78%
Savings and money market 844,847 13,933 3.31% 770,861 10,253 2.68%
Time deposits 1,132,458 31,103 5.51% 783,427 18,625 4.79%
----------- --------- -------- ---------- --------
Total interest-bearing deposits 2,290,416 46,116 4.04% 1,848,417 30,011 3.27%
Borrowed funds 178,749 5,429 6.09% 94,788 2,469 5.25%
----------- --------- -------- ---------- --------
Total interest-bearing liabilities 2,469,165 51,545 4.19% 1,943,205 32,480 3.37%
Noninterest-bearing demand deposits 626,451 549,319
Other liabilities 45,027 31,523
----------- ----------
TOTAL LIABILITIES 3,140,643 2,524,047
Shareholders' equity 250,812 225,660
TOTAL LIABILITIES AND
----------- ----------
SHAREHOLDERS' EQUITY $2,749,707
==========
$3,391,455
===========
Net interest rate spread 4.82% 5.13%
NET INTEREST INCOME AND NET
--------- --------
INTEREST MARGIN $91,756 5.76% $76,587 5.96%
========= ========
<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 in other assets
(3) Nonaccrual loans are included in loan balances. Interest income includes
related fees income.
</FN>
</TABLE>
<PAGE>
<TABLE>
TABLE 2 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
<CAPTION>
(dollars in thousands) Three months ended Three months ended
June 30, 2000 June 30, 1999
------------------------------------ -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $280,606 $4,414 6.31% $65,734 $777 4.74%
Securities: (2)
Taxable 596,081 9,382 6.31% 569,255 8,399 5.92%
Non-taxable 154,836 3,886 10.04% 131,680 3,413 10.37%
----------- --------- ----------- --------
Total securities 750,917 13,268 7.08% 700,935 11,812 6.76%
----------- --------- ----------- --------
Loans and leases: (3)
Commercial 598,570 14,485 9.71% 394,811 8,673 8.81%
Ready equity 57,777 1,397 9.70% 46,827 1,029 8.81%
Real estate 1,094,265 22,857 8.36% 1,068,385 22,388 8.38%
Installment and consumer loans 185,403 4,501 9.74% 155,026 3,533 9.14%
Leasing 112,198 2,801 10.01% 93,740 2,306 9.87%
Tax refund loans 31,052 724 9.35% 7,672 474 24.78%
----------- --------- ----------- --------
Total loans and leases 2,079,265 46,765 9.01% 1,766,461 38,403 8.71%
----------- --------- ----------- --------
Total earning assets 3,110,788 64,447 8.30% 2,533,130 50,992 8.05%
Allowance for credit losses (29,028) (30,531)
Other assets 235,981 210,436
----------- -----------
TOTAL ASSETS $3,317,741 $2,713,035
=========== ===========
LIABILITIES
Deposits:
Interest-bearing demand $312,939 535 0.69% $297,027 544 0.73%
Savings and money market 862,440 7,398 3.44% 762,690 5,032 2.65%
Time deposits 1,094,808 15,262 5.59% 780,935 9,159 4.70%
----------- --------- -------- ----------- -------- -------
Total interest-bearing deposits 2,270,187 23,195 4.10% 1,840,652 14,735 3.21%
Borrowed funds 174,287 2,673 6.15% 112,214 1,475 5.27%
----------- --------- -------- -------- -------
Total interest-bearing liabilities 2,444,474 25,868 4.24% 1,952,866 16,210 3.33%
Noninterest-bearing demand deposits 558,718 495,835
Other liabilities 58,421 32,740
----------- -----------
TOTAL LIABILITIES 3,061,613 2,481,441
Shareholders' equity 256,128 231,594
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,317,741 $2,713,035
=========== ===========
Net interest rate spread 4.06% 4.72%
NET INTEREST INCOME AND NET
--------- --------
INTEREST MARGIN $38,579 4.96% $34,782 5.48%
========= ========
<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 ANALYSIS (1) (2)
<CAPTION>
(in thousands) Six months ended Three months ended
June 30, 2000 vs June 30, 1999 June 30, 2000 vs June 30, 1999
------------------------------------------ -----------------------------------
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 $189,411 $6,359 4,333 2,026 $214,872 $3,637 $334 $3,303
Securities: (3)
Taxable (15,848) 252 165 87 26,826 983 575 408
Non-taxable 15,939 590 (210) 800 23,156 473 (112) 585
---------------------------------- -------- -----------------------------------
Total securities 91 842 (46) 888 49,982 1,456 463 993
---------------------------------- -------- -----------------------------------
Loans and leases: (4)
Commercial 208,620 11,192 3,907 7,285 203,759 5,812 957 4,855
Ready equity 8,677 610 385 225 10,950 368 111 257
Real estate 63,178 2,127 928 1,199 25,880 469 (67) 536
Installment and consumer loans 27,172 1,852 987 865 30,377 968 242 726
Leasing 20,780 1,054 1 1,053 18,458 495 34 461
Tax refund loans 96,550 10,198 (19,350) 29,548 23,380 250 (1,194) 1,444
---------------------------------- -------- -----------------------------------
Total loans and leases 424,977 27,033 (13,142) 40,175 312,804 8,362 83 8,279
---------------------------------- -------- -----------------------------------
TOTAL EARNING ASSETS $614,479 34,234 (8,855) 43,089 $577,658 13,455 881 12,574
=========== =========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $18,982 (53) (239) 186 $15,912 (9) (37) 28
Savings and money market 73,986 3,680 (1,366) 5,046 99,750 2,366 1,705 661
Time deposits 349,031 12,478 262 12,216 313,873 6,103 2,430 3,673
---------------------------------- -------- -----------------------------------
Total deposits 441,999 16,105 (1,343) 17,448 429,535 8,460 4,098 4,362
Borrowed funds 83,961 2,960 6,488 (3,528) 62,073 1,198 383 815
----------------------
TOTAL INTEREST-BEARING
LIABILITIES $525,960 19,065 5,145 13,920 $491,608 9,658 4,481 5,177
===========----------------------- -------- =========--------------------------
NET INTEREST INCOME (4) $15,169 ($14,000) $29,169 $3,797 ($3,600) $7,397
======================= ======== ==========================
<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>
Because such large proportions of the Company's balance sheet are made up of
interest-earning assets and interest-bearing liabilities, and because such a
large proportion of its earnings is 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, 1999, and June 30, 2000 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, 1999
Net interest income (4.26%) +3.00%
Net economic value +8.84% (6.61%)
As of June 30, 2000
Net interest income (0.77%) +0.21%
Net economic value +28.19% (18.25%)
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 six 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 next twelve months, 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.
The same changes to the balance sheet and mitigating steps mentioned above in
connection with net interest income also 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 the results of the rate
shocks for net economic value from December 31, 1999 to June 30, 2000 are a
result of changes in the balance sheet over that time. Specifically, the
certificates of deposit which were used to help fund the RAL program only had
one month to their maturity as of June 30, 2000. This factor, in addition to the
recent loan growth, will have the effect of increasing the changes in net
economic value when the rates are shocked. When these certificates of deposits
mature, Management anticipates using longer-term liabilities to fund the
continued loan growth which will lessen the changes in net economic value when
rate shocks are applied to the balance sheet.
<PAGE>
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. To the
extent that consumer variable rate loans are a larger proportion of the
portfolio than in a previous period, the caps on loan rates, which generally are
present only in consumer loans, would have more of an adverse impact on the
overall result.
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
1999 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. As
noted in the discussion accompanying the chart and as discussed in the section
entitled "Refund Anticipation Loan and Refund Transfer Programs," there was a
significant increase in deposits during the first quarter of 2000 to fund these
programs. These deposits bear a higher interest rate than other deposits and the
rate paid on time deposits as shown in Tables 1 and 2 reflect this higher rate.
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 normal orderly growth experienced by the Company has been
planned by Management and Management anticipates that it can be sustained
because of the strong 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. The abnormal growth
in deposits related to the tax refund programs was carefully planned to provide
the least expensive source of funding and within the context of maintaining the
Company's well-capitalized classification as measured at each quarter-end.
<PAGE>
LOANS AND RELATED INTEREST INCOME
The end-of-period loan balances as of June 30, 2000, have increased by $102.6
million compared to December 31, 1999, and by $267.2 million compared to June
30, 1999. As shown in the table in Note 5 to the consolidated financial
statements, most of the categories of loans increased in the last 12 months.
Residential real estate loans have continued to increase but at a slower rate
than was seen in 1998 and 1999. Recent increases in interest rates have reduced
the demand for refinancing. 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.
The balances of nonresidential real estate loans tend to vary more than other
loan types because the average size is larger than for other loan types and
typically have shorter maturities. Therefore originations and payoffs have a
proportionally larger impact on the outstanding balance.
Construction loans have also grown over the last year. Silicon Valley, which is
adjacent to the Company's northern market areas, has recently seen rapidly
rising housing prices because of limited supply. This has caused new housing
construction activity to increase in areas that are within commuting distance,
and the Company is financing some of this construction.
Commercial loans have shown the largest increase over the last 12 months as
businesses in the Company's market areas continue to benefit from the strong
economy.
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.
Tables 1 and 2 include average balances and yields for tax refund loans. About
90% or more of tax refund loans are made in the first quarter of each year with
the remainder in the second quarter. Because they are outstanding for only a
short time and because any loans unpaid by June 30 of each year are charged off,
there were no such loans outstanding at December 31, 1999 or at June 30, 1999 or
2000. As explained in the section below titled "Refund Anticipation Loan and
Refund Transfer Programs," the fees charged for the tax refund loans are
unrelated to the time they are outstanding and related more to the cost to
process and the credit risk. The yields reported in Tables 1 and 2 for these
loans therefore are significantly impacted by the length of time they are
outstanding, because the income is annualized. As shown in Tables 1 and 2, the
expanded program in 2000 resulted in significantly higher average balances for
these loans during the first half and during the second quarter of 2000.
Average yields for the three and six-month periods ending June 30, 2000 and 1999
without the effect of tax refund loans were 9.01%, 8.65%, 9.09% and 8.79%,
respectively.
The Federal Open Market Committee of the Federal Reserve Board has increased its
target market rates a number of times in the last 12 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 aside from tax refund loans has remained virtually identical to
the rate in the first quarter of 1999. 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.
<PAGE>
OTHER LOAN INFORMATION
In addition to the outstanding loans reported in the accompanying financial
statements, the Company has made certain commitments with respect to the
extension of credit to customers.
(in thousands) June 30, December 31,
2000 1999
---- ----
Commitments to extend credit
Commercial $434,127 $369,695
Consumer 75,796 70,744
Standby letters of credit 22,904 20,811
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. The Company anticipates that a majority of the
above commitments will not 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 1999 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 second quarter of 2000, and at the end of the previous
four quarters.
Shown for both the Company and its peers 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 by attempting to
achieve particular target ratios, the Company does nonetheless compute its
ratios and compares them with peer ratios as a check on its methodology. Only
two other banks operate national refund loan and transfer programs. Therefore,
refund loans and the portion of the allowance for credit losses that
specifically relates to refund loans are excluded from the Company's figures and
ratios in the table for comparability.
<PAGE>
<TABLE>
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate).
<CAPTION>
Table 4--ASSET QUALITY
(dollars in thousands)
June 30, March 31, December 31, September 30, June 30,
2000 2000 1999 1999 1999
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 920 $ 2,784 $ 80 $ 347 $ 122
Nonaccrual loans 12,358 11,666 14,152 14,313 16,319
--------------- -------------- --------------- --------------- ---------------
Total noncurrent loans 13,278 14,450 14,232 14,660 16,441
Foreclosed real estate -- -- -- -- --
--------------- -------------- --------------- --------------- ---------------
Total nonper-
forming assets $ 13,278 $ 14,450 $ 14,232 $ 14,660 $ 16,441
=============== ============== =============== =============== ===============
Allowance for credit losses
other than RALs $ 26,427 $ 27,635 $ 28,198 $ 28,404 $ 29,616
Allowance for RALs 141 3,209 488 -- --
--------------- -------------- --------------- --------------- ---------------
Total allowance $ 26,568 $ 30,844 $ 28,686 $ 28,404 $ 29,616
=============== ============== =============== =============== ===============
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.27% 1.37% 1.42% 1.49% 1.63%
Coverage ratio of
allowance for credit
losses to noncurrent loans 199% 191% 198% 194% 180%
Ratio of noncurrent
loans to total loans 0.64% 0.72% 0.72% 0.77% 0.90%
Ratio of nonperforming
assets to total assets 0.41% 0.41% 0.49% 0.51% 0.60%
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 1.86% 1.82% 1.85% 1.99%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 217% 221% 210% 223%
Ratio of noncurrent
loans to total loans n/a 0.59% 0.58% 0.62% 0.89%
Ratio of nonperforming
assets to total assets n/a 0.86% 0.83% 0.88% 0.62%
</TABLE>
The allowance for credit losses (other than tax refund loans) compared to total
loans remains slightly 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 net charge-offs to average loans as shown in the following table:
<TABLE>
Ratio of Net Charge-Offs to Average Loans:
<CAPTION>
2000 YTD 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Pacific Capital Bancorp (excl. tax refund loans) 0.47% 0.24% 0.02% (0.03%) 0.12%
FDIC Peers 0.68% 0.68% 1.08% 1.03% 0.89%
</TABLE>
Management identifies and monitors other loans that are potential problem loans
although they are not now delinquent more than 90 days. Table 5 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for June 30, 2000 (amounts in thousands).
<PAGE>
Table 5--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
Noncurrent Other Potential
Loans Problem Loans
--------------------------------------------------------------------------------
Loans secured by real estate:
Construction and
land development $ -- $ 2,783
Agricultural -- 2,434
Home equity lines 338 493
1-4 family mortgage 2,288 4,029
Multifamily -- 453
Nonresidential, nonfarm 2,318 7,969
Commercial and industrial 6,655 12,650
Leases 530 537
Other consumer loans 1,148 1,530
Other Loans -- --
------- -------
Total $13,277 $32,878
======= =======
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of June 30, 2000 (amounts in thousands).
Doubtful $4,247
Substandard $4,735
Special Mention $ 851
The total of the above numbers is less than the total allowance. Most of the
allowance is allocated to loans which are not currently regarded as potential
problem loans, but for which, based on the Company's experience, there are
unidentified losses among them. The amounts allocated both to potential problem
loans and to all other loans are determined based on the factors and methodology
discussed in Note 1 to the Consolidated Financial Statements presented in the
Company's Annual Report on Form 10-K. Based on these considerations, Management
believes that the allowance for credit losses at June 30, 2000 was adequate to
cover the losses inherent in the loan and lease portfolios as of that date.
HEDGES, DERIVATIVES, AND OTHER DISCLOSURES
The Company has established policies and procedures to permit limited types and
amounts of off-balance sheet hedges to help manage interest rate risk. The
Company entered into several interest rate swaps to mitigate interest rate risk
late in 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 June 30, 2000, was $34 million with a market value of approximately $
478,000.
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."
<PAGE>
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cash in excess of the amount needed to fund loans, invest in securities, or
cover deposit withdrawals is sold to other institutions as Federal funds or
invested with other institutions on a collateralized basis as securities
purchased under agreements to resell ("reverse repo agreements"). These
agreements are investments which are collateralized by securities or loans of
the borrower and mature on a daily basis. The sales of Federal funds are on an
overnight basis as well. The amount of Federal funds sold and reverse repo
agreements purchased during the quarter is an indication of Management's
estimation during the quarter of immediate cash needs, the excess of funds
supplied by depositors over funds lent to borrowers, and relative yields of
alternative investment vehicles.
As shown in Tables 1 and 2, the average balance of these short-term investments
for the first six months of 2000 was more than for the first six months of 1999
and more for the second quarter of 2000 than for the second quarter of 1999. As
explained in the section below titled "Refund Anticipation Loan and Refund
Transfer Programs," the reason for this change is that the Company had to
arrange for a substantial amount of funding for the refund loan program. The
funding could not be arranged for as short a period as was needed for the tax
refund loans, and the Company therefore had an excess amount of funds on hand
for much of the first half of 2000. Some of this excess was used to purchase
securities, but most was sold as Federal funds or invested with other
institutions in reverse repo agreements
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 seven quarters.
Table 6--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ------- --------------------
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
December 1999 61.7 5.13 2.2
March 2000 82.2 3.81 2.4
June 2000 75.0 6.26 2.3
The amount of these borrowings rose in the fourth quarter of 1999 as the growth
in loans continued to exceed the growth in deposits and the Company turned to
nondeposit sources to fund the loan growth.
Long-term debt consists of advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). The outstanding advances from the FHLB at June 30, 2000
totaled $78.0 million. The scheduled maturities of the advances are $1.0 million
in 1 year or less, $16.9 million in 1 to 3 years, and $60.1 million in more than
3 years.
<PAGE>
Table 7 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by long-term
debt over the last seven quarters.
Table 7--LONG-TERM DEBT
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ------- --------------------
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
December 1999 88.4 6.07 3.1
March 2000 112.9 7.02 3.3
June 2000 99.7 6.04 3.0
The Company has increased its long-term debt over the last year. This has been
done both to provide funding for the loan growth noted above and as a means of
mitigating the market risk incurred through the growth in fixed rate 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. Most customers do not want CDs with
maturities longer than a few years. The Company can borrow funds from the FHLB
at longer terms to match the loan maturities.
OTHER OPERATING INCOME AND EXPENSE
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 $288,000 of the fees earned in the first three months of 1999
and $306,000 of the fees earned in the first three months of 2000. Other things
being equal, this causes trust fees to be higher in the first quarter than in
other quarters. 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" are the electronic refund transfer fees (described below in
"Refund Anticipation Loan and Refund Transfer Programs" and of which about 90%
are recorded in the first quarter of each year), service fees arising from
credit card processing for merchants, escrow fees, and a number of other fees
charged for special services provided to customers.
<PAGE>
The following table shows some of the major items of other operating income and
expense for the six and three months ended June 30, 2000 and 1999 that are not
specifically listed in the consolidated statements of income.
TABLE 8 --OTHER OPERATING INCOME AND EXPENSE
(dollars in thousands)
Six Months Ended Three Months Ended
June 30, June 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
Noninterest income
Merchant credit card processing $3,761 $3,423 $2,015 $1,865
Trust fees $7,210 $6,568 $3,387 $3,159
Refund transfer fees $7,217 $6,552 $ 607 $ 645
Noninterest expense
Marketing $1,337 $1,357 $ 804 $ 807
Consultants $2,494 $5,927 $1,151 $3,462
Merchant credit card clearing fees $3,037 $2,740 $1,707 $1,526
Consultant expense is lower in the three and six-month periods ended June 30,
2000 than in the corresponding periods of 1999. In 1999, the Company engaged
programming consultants to assist with the conversion of the core banking
systems used at FNB to those used at the Company and for assistance in preparing
for the Century Date Change ("Y2K). 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 2000,
these increases averaged approximately 5%. In addition, some temporary staff is
added in the first quarter for the RAL program.
Employee bonuses are paid from a bonus pool, the amount of which is set by the
Board of Directors based on the Company meeting or exceeding its goals for net
income. The Company accrues compensation expense for the pool for employee
bonuses throughout the year 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 six and three-month periods ended
March 31, 2000 and 1999.
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
Salary and benefits as
a percentage of total
revenues 17.04% 19.49% 18.75% 21.25%
Salary and benefits as
a percentage of average
assets 0.84% 0.92% 0.41% 0.46%
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 cost for the
same amount of space; however, the cost for the additional space may not be
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 2000 than in 1999 because of the additional
space. Eventually, this cost will be offset with subleasing income. The Company
has also offset some of the increase with the discontinuation of lease expense
on other offices as additional employees have moved into the building.
<PAGE>
As will be discussed later in this discussion and analysis, the Company has
announced that it has reached agreements to merge/acquire two other financial
institutions. Some extra expense has been incurred in connection it has with the
system integration for these two institutions, but it is not expected that the
projects will be as extensive as was the integration of the FNB systems.
Additionally, integration of one of the systems is not expected until 2001.
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.
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 June 30, 2000, these
sources of immediate liquidity were well in excess of that minimum.
Sources of intermediate liquidity include maturities or sales of commercial
paper and securities classified as Available For Sale, securities classified as
Held to Maturity maturing within three months, term repurchase agreements,
advances from the FHLB, and deposit increases from special programs. The Company
projects intermediate liquidity needs and sources over the next several weeks
based on historical trends, seasonal factors, and special transactions.
Appropriate action is then taken to cover any anticipated unmet needs. At the
end of June 30, 2000, the Company's intermediate liquidity was adequate to meet
all projected needs.
Long term liquidity is to 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 June 30, 2000, the Company's long term liquidity was adequate to meet
cash needs anticipated over its planning horizon.
<PAGE>
CAPITAL RESOURCES AND COMPANY STOCK
The following table presents a comparison of several important amounts and
ratios for the second quarter of 2000 and 1999 (dollars in thousands).
<TABLE>
Table 9--CAPITAL RATIOS
<CAPTION>
2nd Quarter 2nd Quarter
2000 1999 Change
---------- ---------- --------
<S> <C> <C> <C>
Amounts:
Net Income $ 11,555 $ 9,043 $ 2,512
Average Total Assets 3,317,741 2,713,035 604,706
Average Equity 256,128 231,594 24,534
Ratios:
Equity Capital to Total Assets (period end) 7.93% 8.24% (0.31%)
Annualized Return on Average Assets 1.40% 1.34% 0.06%
Annualized Return on Average Equity 18.14% 15.70% 2.44%
</TABLE>
The operating earnings of the subsidiary banks 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 the tax refund loan and transfer programs. 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
positively impacts earnings. Income from the tax refund loan and transfer
programs, 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 June
30, 2000, the Company's risk-based capital ratio was 11.61%. The Company must
also maintain a Tier I capital (total shareholder equity less goodwill and other
intangibles) to risk adjusted assets ratio of 6%, and 5% of average tangible
assets, respectively. As of June 30, 2000, Tier I capital was 10.49% of risk
adjusted assets and 7.46% 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
several 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 the former 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.
While the earnings of its wholly-owned subsidiaries are recognized as earnings
of the Company, specific dividends must be declared and paid by the subsidiary
banks to the parent in order for it to pay dividends to its shareholders. As a
state-chartered bank, California law limits the amount of dividends that may be
paid by SBB&T to Bancorp. As a nationally-chartered bank, FNB's ability to pay
dividends is governed by federal law and regulations.
<PAGE>
California law limits dividends that may be paid by a bank without specific
approval by the California Department of Financial Institutions 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 Bancorp for
the acquisitions of First Valley Bank and Citizens State Bank 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 Bancorp to partially fund the latter's
quarterly cash dividends to its shareholders and for other incidental purposes.
SBB&T was able to pay $3 million in dividends to Bancorp during the first
quarter of 2000 without specific approval. On June 29, 2000, the CDFI granted
approval to SBB&T to pay up to $32.5 million to Bancorp for the purchase of Los
Robles Bancorp and for the quarterly cash dividend paid to shareholders.
Because the former Pacific Capital's merger with South Valley Bancorporation was
a stock-only transaction, FNB did not have to pay a large dividend to its
holding company as SBB&T did. FNB therefore has ample ability to pay dividends
to the Bancorp for all normal operating needs and for shareholder dividends.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements other than the acquisition of Los Robles Bancorp
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 $0.20 per share. When annualized, this
represents a payout ratio of approximately 38% of earnings per share for the
trailing 12 months.
REGULATION
The Company is closely regulated by Federal and State agencies. The Company and
its subsidiaries may only engage in lines of business that have been approved by
their respective regulators, and cannot open or close offices without their
approval. Disclosure of the terms and conditions of loans made to customers and
deposits accepted from customers are both heavily regulated as to content. The
subsidiary banks are required by the provisions of the Community Reinvestment
Act ("CRA") to make significant efforts to ensure that access to banking
services is available to all members of their communities.
As a bank holding company, Bancorp is primarily regulated by the Federal Reserve
Bank ("FRB"). As a member bank of the Federal Reserve System that is
state-chartered, SBB&T's primary Federal regulator is the FRB and its state
regulator is the CDFI. As a nationally chartered bank, FNB's primary regulator
is the Office of the Comptroller of the Currency. As a non-bank subsidiary of
the Company, Pacific Capital Commercial Mortgage, Inc. is regulated by the FRB.
Each of these regulatory agencies conducts periodic examinations of the Company
and/or its subsidiaries to ascertain their compliance with laws, regulations,
and safe and sound banking practices.
The regulatory agencies may take action against bank holding companies and banks
should they fail to maintain adequate capital or to comply with specific laws
and regulations. Such action could take the form of restrictions on the payment
of dividends to shareholders, requirements to obtain more capital from
investors, or restrictions on operations. The Company and the subsidiary banks
have the highest capital classification, "well capitalized," given by the
regulatory agencies and therefore, except for the need for approval of dividends
paid from SBB&T to Bancorp, are not subject to any restrictions as discussed
above. Management expects the Company and the subsidiary banks to continue to be
classified as well capitalized in the future.
REFUND ANTICIPATION LOAN AND REFUND TRANSFER PROGRAMS
Since 1992, SBB&T has extended tax refund anticipation loans 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. SBB&T 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 for the length of time that
they are outstanding. Nonetheless, the fees are required to be classified as
interest income. Because of the April 17, 2000 tax filing date, almost all of
the loans are made and repaid during the first quarter of the year.
<PAGE>
If a taxpayer meets SBB&T's credit criteria for the refund loan product, and
wishes to receive a loan with the refund as security, the taxpayer applies for
and receives an advance less the transaction fees, which are considered finance
charges. SBB&T is repaid directly by the IRS and remits any refund amount over
the amount due SBB&T to the taxpayer.
There is a higher credit risk associated with refund loans than with other types
of loans because (1) SBB&T does not have personal contact with the customers of
this product; (2) the customers conduct no business with SBB&T other than this
once a year transaction; and (3) contact subsequent to the payment of the
advance, if there is a problem with the tax return, may be difficult because
many of these taxpayers have no permanent address.
If the taxpayer does not meet the credit criteria or does not want a loan, SBB&T
can still facilitate the receipt of the refund by the taxpayer through the
refund transfer program. This is accomplished by SBB&T authorizing the tax
preparer to issue a check to the taxpayer once the refund has been received by
SBB&T from the IRS. The fees received for acting as a transfer agent are less
than the fees received for the loans. These fees are reported among "other
service charges, commissions and fees, net" in the consolidated statements of
income.
While SBB&T is one of very few financial institutions in the country to operate
these electronic loan and transfer programs, the electronic processing of
payments involved in these programs is similar to other payment processing
regularly done by the Company and other commercial banks for their customers
such as direct deposits and electronic bill paying. The refund loan and transfer
programs had significant impacts on the Company's activities and results of
operations during the first quarters of 1999 and 2000. These impacts are
discussed in the following six sections.
1. An IRS Change in the Program Caused Expanded Volume:
Prior to 1995, upon receipt of an electronically filed tax return, the IRS would
send a return notice to the filer indicating whether the IRS had a lien
outstanding against any refund due the taxpayer. Such liens might be placed on
refunds because of prior underpayments, delinquent student loans, or unpaid
taxes. Because the primary source of repayment for tax refund loans is the IRS,
not the taxpayer, banks operating loan programs relied on this notice in
determining whether to make a loan to the taxpayer.
In 1995, the IRS discontinued this practice, and banks had to use other means to
determine whether they were likely to have their loans repaid. These other means
added to the costs of making the loans and they were not as reliable in
determining collectibility. Fees for loans were therefore raised to pay for the
additional transaction costs and to cover the higher credit losses.
Congress has given the IRS a mandate to increase the number of returns that are
filed electronically in order to keep IRS costs down. Greater use of the refund
loan and transfer programs helps the IRS to meet this mandate because they are
connected to electronic filing. In 2000, the IRS resumed sending the return
notice indicating whether it would withhold the taxpayer's refund because of
funds owed the Federal government. The banks running national programs decreased
their transaction fees for loans because better credit determinations could be
made at lower cost. This served to encourage more taxpayers to use the products,
especially the loan product. It also permitted the Company and other providers
to lend against a higher proportion of each refund.
The consequence of this IRS change was to increase the total volume of
transactions, to increase the proportion of loans compared to transfers, and to
increase the size of the loans made.
2. Seasonality Impact on Earnings:
Because the programs relate to the filing of income tax returns, activity is
concentrated in the first quarter of each year. This causes first quarter income
to average in excess of 30% of each year's net income.
3. Product Mix Impact on Revenues:
In 2000, the product mix between loans and transfers was more heavily weighted
towards loans than it had been since 1995. This meant that interest income
arising from the program was higher both because the overall volume of
transactions in the programs was larger and because more of the transactions
were loans rather than transfers. This resulted in higher net interest income
and net interest margin than would otherwise be expected. Even though the
product mix shifted towards loans, as noted below in the summary of operating
results, the expanded program caused income from transfers to increase as well,
but at a lower rate than loans.
<PAGE>
4. Funding Impact on Various Balance Sheet and Income and Expense Accounts:
In prior years, SBB&T funded the loans by first drawing down its overnight
liquid assets and then by borrowing overnight. The borrowing was done through
use of its unsecured Federal funds credit lines with other financial
institutions and by entering into repurchase agreements with other financial
institutions that used SBB&T's securities as collateral for the overnight
borrowings.
Again in 2000, SBB&T used liquid assets and borrowed overnight to fund the
loans. In addition, SBB&T increased its borrowings from the FHLB during this
period. With the larger program, interest expense on these borrowings increased
over the amounts incurred in 1999. However, because of the substantial increase
in the program in 2000, SBB&T could not fund the loans using only these sources.
While it expanded the number and amount of credit lines available to it,
Management decided that the best assured source of funding would be to engage
brokerage firms to sell certificates of deposit. Approximately $385 million of
these CDs were issued with terms of two, three, and six months. Shorter
maturities would have been preferable because the funding need is concentrated
in the only first three weeks of February, but they were not available in
sufficient quantity. The average rate for these CDs was 6.30%. These brokered
CDs account for the increase in the average time deposits outstanding and the
increase in interest expense on these accounts during the three- and six-month
periods ended June 30, 2000, as reported in Tables 1& 2, compared to the amounts
for the comparable periods of 1999.
Among the amounts reported in Note 9 to the financial statements for each
operating segment of the Company are interest expense, internal charges for
funds, and intersegment revenues. Though issued for the refund loan program, the
CDs were booked in the Branch Activities segment, since that is where all
deposit funding is recorded for SBB&T. The proceeds from the CDs were in essence
lent to the Tax Refund Programs segment. This segment reports the cost of
borrowing the funds as an internal charge for funds and the Branch Activities
segment recognizes intersegment revenues in the amount of the charge.
The impact of using this method of funding is that SBB&T had an excess of funds
after the loans began to be repaid by the IRS in substantial quantities. These
funds were initially sold into overnight Federal funds market and reverse repos
with other financial institutions, increasing the average balance of, and the
interest income from, these short-term instruments for the quarter as shown in
Table 1. However, because the rates earned on these overnight investments were
below the interest rate paid on the deposits, the Company began to place the
funds into securities and commercial paper that had maturities matching the CDs
or would be easily salable to provide the funds necessary to redeem the CDs.
These instruments had interest rates more closely matching the CD rates and
therefore the negative carrying cost was reduced.
5. Summary of Operating Results:
Gross revenues for the refund loan and transfer programs were $8.0 million and
$6.6 million, respectively, for the first half of 1999, with operating expenses
of $2.4 million. The Company added $2.8 million to the allowance for credit loss
for refund loans through a charge to provision expense during the first half of
1999 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 refund loans
during this period. The result was a pretax operating profit of approximately
$10.1 million.
During the first half of 2000, the Company recognized fees for refund loans of
$18.4 million and fees for transfers of $7.2 million. Operating expenses totaled
$0.9 million.
About 1.3% of refund loans were not collected in a timely fashion from the IRS.
The Company provided for these potential losses by adding $3.6 million to the
allowance for credit loss from refund loans through a charge to provision
expense and adding another $2.2 million to the allowance from recoveries on
loans charged off in prior years. The Company charged-off $6.2 million in RAL's
against this allowance in the first half of 2000. Some of these loans may yet be
paid during the remainder of this year or during the 2001 filing season.
Following past practice, the Company charged-off all remaining uncollected
refund loans at June 30. The result was a pretax operation profit of
approximately $17.1 million.
<PAGE>
There is no credit risk associated with the refund transfers because checks are
issued only after receipt of the refund payment from the IRS.
6. Expectations for the Remainder of 2000:
During the remainder of the year, the tax refund programs will continue to incur
expenses for salaries, occupancy, legal, data processing, etc. These expenses
will tend to lower the reported profit for the segment compared to the figure
reported in Note 9. However, these expenses are not expected to exceed several
hundred thousand dollars.
--------------------------------------------------------------------------------
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. By asset size, the Company is included
in the group of financial institutions with total assets from $1-10 billion. The
information in this publication is based on year-to-date information provided by
banks each quarter. It takes about 2-3 months to process the information.
Therefore, the published data is always one quarter behind the Company's
information. For this quarter, the peer information is for the first quarter of
2000. All peer information in this discussion and analysis is reported in or has
been derived from information reported in this publication.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is one of a number of financial institutions named as party
defendants in a patent infringement lawsuit recently filed by an unaffiliated
financial institution. The lawsuit generally relates to the Company's tax refund
program. The Company has retained outside legal counsel to represent its
interest in this matter. The Company does not believe that it has infringed any
patents as alleged in the lawsuit and intends to vigorously defend itself in
this matter. The amount of alleged damages are not specified in the papers
received by the Company. Therefore, Management cannot estimate the amount of any
possible loss at this time in the event of an unfavorable outcome.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of stockholders was held on April 25, 2000. A
total of 24,558,936 shares of common tock were outstanding and entitled to vote
as the record date for the meeting. The following matters were submitted to a
vote of the security holders:
Election of Directors The following 12 directors were elected:
Votes For Votes Withheld
Donald M. Anderson 19,513,750 79.46% 237,573
Edward E. Birch 19,549,492 79.60% 201,831
Richard M. Davis 19,454,146 79.21% 297,177
Dale E. Hanst 19,303,826 78.64% 447,497
D. Vernon Horton 19,545,591 79.59% 205,732
Roger C. Knopf 19,435,281 79.14% 316,042
Clayton C. Larson 19,469,409 79.28% 281,914
Kathy J. Odell 19,522,562 79.49% 228,761
William H. Pope 19,547,086 79.59% 204,237
Amendments to the 1996 Directors' Stock Option Plan
Amendments to the 1996 Directors' Stock Option Plan were approved to:
o Increase the number of shares of common stock authorized by 250,000 shares;
o Provide that future amendments to the Directors Plan will not require
stockholder approval unless required by applicable law;
o Permit awards other than stock options, such as restricted stock and stock
appreciation rights, and
o Allow a Committee of the Board to administer the Directors Plan and to have
authority for decisions relating to options and other awards granted under
this plan.
<PAGE>
The shareholder vote was 16,330,884 shares in favor; 2,963,064 shares against
and 457,375 share abstained.
Amendment to the Restricted Stock Option Plan
Amendment to the Restricted Stock Option Plan were approved to:
o Increase the number of shares of common stock authorized by 750,000 share;
o Provide that future amendments to the Restricted Plan will not require
shareholder approval unless required by applicable law;
o Permit awards other than stock options, such as restricted stock and stock
appreciation rights; and
o Allow a Committee of the Board to administer the Restricted Plan and to have
the authority for decisions relating to options and other awards granted
under this plan.
The shareholder vote was 16,558,849 shares in favor; 2,2731,331 shares against
and 471,143 shares abstained
Independent Accountants for the Year Ending December 31, 2000
The appointment of Arthur Andersen LLP as the Company's Independent Accountants
for the year ending December 31, 2000 was approved as follows: 19,553,932 shares
were voted in favor; 124,338 shares voted against; and 73,003 shares abstained.
Item 5. Other Information
YEAR 2000
The Company provided extensive information regarding its preparations for the
Century Date Change in the 1999 10-K MD&A. It was reported in that discussion
that "no significant problems were encountered with the Company's critical
systems and through the writing of this discussion, the Company has become aware
of no significant problems encountered by its customers or the other financial
institutions with which it does business. The Company has become aware of no
significant impact on its customers' abilities to repay loans due to problems
with their systems. The Company will remain alert to the potential for problems
to arise later in 2000, especially because it will be a leap year."
As of the writing of this discussion, the above statements are still correct,
and this topic will not be included in future reports unless problems arise.
MERGER WITH SAN BENITO BANK
In February 2000, the Company signed a merger agreement with Hollister,
California-based San Benito Bank. The agreement provides for existing San Benito
Bank shareholders to receive 0.605 shares of Pacific Capital Bancorp common
stock for each of their outstanding shares of common stock. The merger
transaction will be accounted for as a pooling of interests. On June 20, 2000,
the shareholders of San Benito Bank approved the merger transaction and the
transaction closed as of the close of business on July 31, 2000. One-time
charges taken at the time of closing were $2.8 million after tax. Administrative
and operational support units will be based out of First National Bank of
Central California, creating the merger savings that will make the transaction
accretive to earnings per share in the first full operating year for the
combined company.
At June 30, 2000, San Benito Bank reported net income of $1.1 million, with
total assets of $200 million, total deposits of $173 million, total loans of
$113 million, and total shareholders' equity of $20 million. San Benito Bank
maintains three offices in the communities of Hollister and San Juan Bautista in
San Benito County, and an office in Gilroy in Santa Clara County.
<PAGE>
ACQUISITION OF LOS ROBLES BANCORP
In March 2000, the Company signed a definitive agreement to acquire Thousand
Oaks, California-based Los Robles Bancorp, parent company of Los Robles Bank.
The agreement provides for each outstanding share of Los Robles Bancorp common
stock to be converted into the right to receive $23.12 in cash, and each
outstanding stock option to receive the difference between $23.12 and the
exercise price of the option in cash. The acquisition was finalized after the
close of business June 30, 2000. The acquisition will be accounted for under the
purchase method of accounting. One-time charges taken by Los Robles Bancorp at
the time of closing were $0.9 million after tax. It is anticipated that Los
Robles Bank will be merged into Santa Barbara Bank & Trust in 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description*
3 Articles of Incorporation and Bylaws
3.2 Amended and restated Bylaws of Pacific Capital
Bancorp effective April 25, 2000**
10 Material Contracts
10.1 Compensation Plans and Agreements:
10.1.1 Pacific Capital Bancorp Amended and Restated
Restricted Stock Plan effective April 25,
2000**
10.1.9 Pacific Capital Bancorp Amended and Restated
1996 Directors Stock Plan, as amended April
25, 2000**
27 Financial Data Schedule for June 30, 2000
(b) On June 30, 2000, the closing of the acquisition of Los Robles Bancorp
was reported on a Form 8-K filed with the Commission on July 7, 2000.
--------------------------------------------------------------------------------
Shareholders may obtain a copy of any exhibit by writing to:
Carol Kelleher, Corporate Services Administrator
Pacific Capital Bancorp
P.O. Box 1119
Santa Barbara, CA 93102
* Effective December 30, 1998, Santa Barbara Bancorp and Pacific Capital
Bancorp merged and contemporaneously with effectiveness of the merger,
Santa Barbara Bancorp, the surviving entity, changed its corporate name
to Pacific Capital Bancorp. Documents identified as filed by Santa
Barbara Bancorp prior to December 30, 1998 were filed by Santa Barbara
Bancorp. Documents identified as filed by Pacific Capital Bancorp prior
to December 30, 1998 were filed by Pacific Capital Bancorp as it
existed prior to the merger.
** Filed herewith.
<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/ William S. Thomas, Jr.
William S. Thomas, Jr. August 14, 2000
President
Chief Executive Officer
/s/ Donald Lafler
Donald Lafler August 14, 2000
Executive Vice President
Chief Financial Officer
