UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 2000 there were 26,422,943 shares of the
issuer's common stock outstanding.
1
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
Consolidated Statements of Income
Nine and Three-Month Periods Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows
Nine-Month Period Ended September 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
Nine and Three-Month Periods Ended September 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
2
SIGNATURES
<PAGE>
<TABLE>
FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 139,963 $ 131,422
Federal funds sold and securities purchased under
agreements to resell 31,380 9,640
Money market funds 2,544 2,555
-------------- ---------------
Cash and cash equivalents 173,887 143,617
-------------- ---------------
Securities (Note 5):
Held-to-maturity 148,605 185,398
Available-for-sale 664,595 555,306
Commercial paper - -
Loans, net of allowance of $34,434 at
September 30, 2000 and $30,454 at
December 31, 1999 (Note 6) 2,418,778 2,059,579
Premises and equipment, net 49,727 37,511
Accrued interest receivable 22,934 18,570
Other assets (Note 7) 104,826 80,328
-------------- ---------------
Total assets $ 3,583,352 $ 3,080,309
============== ===============
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 678,101 $ 583,601
Interest bearing deposits 2,368,681 2,037,856
-------------- ---------------
Total Deposits 3,046,782 2,621,457
Securities sold under agreements
to repurchase and Federal funds purchased 87,392 80,507
Long-term debt and other borrowings (Note 8) 135,180 98,801
Accrued interest payable and other liabilities 30,276 26,503
-------------- ---------------
Total liabilities 3,299,630 2,827,268
-------------- ---------------
Shareholders' equity
Common stock (no par value; $0.33 per share stated value;
60,000,000 authorized; 26,422,943 outstanding at
September 30, 2000 and 26,278,958 at December 31, 1999) 8,809 8,761
Surplus 115,208 114,336
Accumulated other comprehensive income (Note 9) (2,214) (6,765)
Retained earnings 161,919 136,709
-------------- ---------------
Total shareholders' equity 283,722 253,041
-------------- ---------------
Total liabilities and
shareholders' equity $ 3,583,352 $ 3,080,309
============== ===============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Nine-Month For the Three-Month
Period Ended Period Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
----------------------- ----------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 170,175 $ 129,168 $ 55,716 $ 42,888
Interest on securities 37,802 35,108 13,388 11,412
Interest on Federal funds sold and securities
purchased under agreement to resell 9,435 3,623 877 826
Interest on commercial paper 1,449 336 51 5
----------------------- ----------------------
Total interest income 218,861 168,235 70,032 55,131
----------------------- ----------------------
Interest expense:
Interest on deposits 73,121 48,459 24,406 16,317
Interest on securities sold under agreements
to repurchase and Federal funds purchased 2,935 1,057 1,336 308
Interest on other borrowed funds 6,323 3,393 1,960 1,660
----------------------- ----------------------
Total interest expense 82,379 52,909 27,702 18,285
----------------------- ----------------------
Net interest income 136,482 115,326 42,330 36,846
Provision for loan losses 13,245 5,677 5,294 968
----------------------- ----------------------
Net interest income after provision for loan losses 123,237 109,649 37,036 35,878
----------------------- ----------------------
Other operating income:
Service charges on deposits 8,187 7,145 2,979 2,285
Trust fees 10,679 9,720 3,441 3,132
Other service charges, commissions and fees, net 18,028 15,407 3,955 3,241
Net (loss) gain on securities transactions (512) (274) (14) 12
Other operating income 1,869 1,235 683 479
----------------------- ----------------------
Total other income 38,251 33,233 11,044 9,149
----------------------- ----------------------
Other operating expense:
Salaries and benefits 50,413 41,156 19,823 13,936
Net occupancy expense 8,021 7,142 2,536 2,199
Equipment expense 5,205 4,974 1,898 1,632
Other expense 32,785 34,221 11,851 11,429
----------------------- ----------------------
Total other operating expense 96,424 87,493 36,108 29,196
----------------------- ----------------------
Income before income taxes 65,064 55,389 11,972 15,831
Applicable income taxes 25,931 20,218 5,284 5,246
----------------------- ----------------------
Net income $ 39,133 $ 35,171 $ 6,688 $ 10,585
======================= ======================
Earnings per share - basic (Note 2) $ 1.48 $ 1.35 $ 0.25 $ 0.40
Earnings per share - diluted (Note 2) $ 1.47 $ 1.33 $ 0.25 $ 0.40
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<CAPTION>
For the Nine-Month
Periods Ended September 30,
2000 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 39,133 $ 35,171
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 5,945 5,144
Provision for loan and lease losses 13,245 5,638
Net amortization of discounts and premiums for
securities and bankers' acceptances and
commercial paper (6,512) (4,406)
Net change in deferred loan origination
fees and costs 1,525 165
Net loss on sales and calls of securities 509 287
Change in accrued interest receivable and other assets (26,403) (25,852)
Change in accrued interest payable and other liabilities 2,380 (4,834)
--------------- --------------
Net cash provided by operating activities 29,822 11,313
--------------- --------------
Cash flows from investing activities:
Proceeds from call or maturity of securities 104,660 198,514
Purchase of securities (227,459) (108,005)
Proceeds from sale of securities 54,860 14,807
Proceeds from maturity of commercial paper 127,000 49,995
Purchase of commercial paper (160,484) (29,805)
Proceeds from sale of commercial paper 34,930 --
Net increase in loans made to customers (373,281) (341,561)
Purchase or investment in premises and equipment (16,757) (8,169)
--------------- --------------
Net cash used in investing activities (456,531) (224,224)
--------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits 425,325 131,470
Net increase in borrowings with maturities
of 90 days or less 6,885 26,396
Net increase in long-term debt and other
borrowings 36,379 55,857
Proceeds from issuance of common stock 920 2,729
Payments to retire common stock -- (2,050)
Dividends paid (12,530) (14,177)
--------------- --------------
Net cash provided by financing activities 456,979 200,265
--------------- --------------
Net increase (decrease) in cash and cash equivalents 30,270 (12,646)
Cash and cash equivalents at beginning of period 143,617 200,524
--------------- --------------
Cash and cash equivalents at end of period $ 173,887 $ 187,878
=============== ==============
Supplemental disclosure:
Cash paid for the six months ended:
Interest $ 52,816 $ 52,641
Income taxes $ 26,190 $ 18,354
Non-cash additions to loans $ -- $ 215
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
5
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Nine-Month For the Three-Month
Period Ended Period Ended
September 30, September 30,
-------------------------- -----------------------
2000 1999 2000 1999
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 39,133 $ 35,171 $ 6,688 $ 10,585
Other comprehensive income, net of tax (Note 8):
Unrealized loss on securities:
Unrealized holding gains (losses) arising 5,071 (6,826) 3,276 (1,262)
during period
Less: reclassification adjustment for
gains (losses)
included in net
income (520) (274) (14) 12
------------ ----------- ---------- -----------
Other comprehensive income (loss) 4,551 (7,100) 3,262 (1,250)
------------ ----------- ---------- -----------
Comprehensive income $ 43,684 $ 28,071 $ 9,950 $ 9,335
============ =========== ========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
6
</TABLE>
<PAGE>
Pacific Capital Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
September 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"), Los Robles Bank
("LRB") 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 nine and
three-month periods ended September 30, 2000 and 1999, was as follows (shares
and net income amounts in thousands):
<CAPTION>
Nine-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 September 30, 2000
Numerator -- Net Income $ 39,133 $ 39,133 $ 6,688 $ 6,688
=============== =============== =============== ==============
Denominator -- weighted average
shares outstanding 26,353 26,353 26,408 26,408
Plus: net shares issued in
assumed stock option exercises 233 213
--------------- --------------
Diluted denominator 26,586 26,621
=============== ==============
Earnings per share $1.48 $1.47 $0.25 $0.25
Ended September 30, 1999
Numerator -- Net Income $ 35,171 $ 35,171 $ 10,585 $ 10,585
=============== =============== =============== ==============
Denominator -- weighted average
shares outstanding 26,059 26,059 26,213 26,213
Plus: net shares issued in
assumed stock option exercises 438 423
--------------- --------------
Diluted denominator 26,497 26,636
=============== ==============
Earnings per share $1.35 $1.33 $0.40 $0.40
7
</TABLE>
<PAGE>
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 nine and three-month
periods ended September 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. Acquisitions
Los Robles Bancorp
After the close of business on June 30, 2000, the Company acquired Los Robles
Bancorp ("LRBC"), holding company of LRB, for $32.5 million. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated on the basis of the estimated fair value of the assets
acquired and liabilities assumed as follows (in thousands):
Net fair value of tangible assets acquired $ 12,769
Goodwill 19,731
------------------
Purchase consideration $ 32,500
==================
The purchased goodwill, included in other assets on the balance sheet as of
September 30, 2000, is being amortized over 15 years. Intangible assets,
including goodwill, are reviewed each year to determine if circumstances related
to their valuation have been materially affected. In the event that the current
market value is determined to be less than the current book value of the
intangible asset, a charge against current earnings would be recorded.
For purposes of reporting cash flows, the securities, loans, and deposits
acquired this transaction are included within purchases of securities, net
increase in loans made to customers, and net increase in deposits, respectively.
San Benito Bank
After the close of business on July 31, 2000, the Company merged with San Benito
Bank ("SBB") of Hollister, California. Under the terms of the merger, SBB
shareholders received .605 shares for each share of SBB common stock. This
transaction was accounted for using the pooling-of-interest method of
accounting. Simultaneous with the merger of the Company and SBB, SBB was merged
with and into FNB. SBB will continue to operate under its existing name as an
affiliate of FNB.
Under the pooling-of-interests method of accounting, the assets and liabilities
of the two parties are combined together for each year presented in the
financial statements.
8
<PAGE>
The effect of this presentation is to report as if the merger had occurred as of
the beginning of the earliest period presented.
The following summarizes the results of operations of Pacific Capital Bancorp
and San Benito Bank in 2000 prior to and subsequent to the merger.
Interest Net
Income Income
---------------------
San Benito Bank, January 1 through June 30 $ 8,764 $(1,936)
Pacific Capital Bancorp January 1 through June 30 161,632 38,591
---------------------
Totals through January 1 through June 30 170,396 36,655
Combined Entity, August 1 through September 30 48,465 2,478
---------------------
Totals, January 1 through September 30 $218,861 $39,133
=====================
5. 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.
9
<PAGE>
<TABLE>
<CAPTION>
Held-to- Available-
Maturity For-Sale Total
-------------------------------------------------------
<S> <C> <C> <C>
September 30, 2000 Amortized cost:
In one year or less $ 41,336 $ 94,836 $ 136,172
After one year through five years 43,040 463,747 506,787
After five years through ten years 22,963 24,908 47,871
After ten years 41,266 72,319 113,585
Equity securities - 11,894 11,894
-------------------------------------------------------
Total Securities $ 148,605 $ 667,704 $ 816,309
=======================================================
Estimated market value:
In one year or less $ 41,565 $ 94,519 $ 136,084
After one year through five years 44,929 461,325 506,254
After five years through ten years 23,202 24,312 47,514
After ten years 44,398 72,546 116,944
Equity securities - 11,894 11,894
-------------------------------------------------------
Total Securities $ 154,094 $ 664,595 $ 818,689
=======================================================
December 31, 1999 Amortized cost:
In one year or less $ 60,420 92,661 153,081
After one year through five years 57,660 400,111 457,771
After five years through ten years 23,749 24,277 48,026
After ten years 43,569 37,314 80,883
Equity securities - 12,604 12,604
-------------------------------------------------------
Total Securities $ 185,398 $ 566,967 $ 752,365
=======================================================
Estimated market value:
In one year or less $ 60,967 92,524 153,491
After one year through five years 60,219 393,431 453,650
After five years through ten years 23,406 22,889 46,295
After ten years 44,988 33,780 78,768
Equity securities - 12,682 12,682
-------------------------------------------------------
Total Securities $ 189,580 $ 555,306 $ 744,886
=======================================================
10
</TABLE>
<PAGE>
<TABLE>
The amortized historical cost, market values and gross unrealized gains and
losses of securities are as follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 2000 Held-to-maturity:
U.S. Treasury obligations $ 12,488 $ 15 $ (6) $ 12,497
U.S. agency obligations 28,957 - (915) 28,042
Mortgage-backed securities 8,996 9 (3) 9,002
State and municipal securities 98,164 6,607 (218) 104,553
-------------------------------------------------------------
Total held-to-maturity 148,605 6,631 (1,142) 154,094
-------------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 127,134 451 (229) 127,356
U.S. agency obligations 254,494 679 (1,219) 253,954
Mortgage-backed securities 164,725 158 (2,923) 161,960
Asset-backed securities 30,726 3 (153) 30,576
State and municipal securities 78,731 1,850 (1,726) 78,855
Equity securities 11,894 - - 11,894
-------------------------------------------------------------
Total available-for-sale 667,704 3,141 (6,250) 664,595
-------------------------------------------------------------
Total securities $ 816,308 $ 9,773 $ (7,391) $ 818,689
=============================================================
December 31, 1999 Held-to-maturity:
U.S. Treasury obligations $ 35,543 $ 65 $ (40) $ 35,568
U.S. agency obligations 36,456 - (1,431) 35,025
Mortgage-backed securities 776 10 (2) 784
State and municipal securities 112,623 6,298 (718) 118,203
-------------------------------------------------------------
Total held-to-maturity 185,398 6,373 (2,191) 189,580
-------------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 121,701 49 (691) 121,059
U.S. agency obligations 201,984 - (2,763) 199,221
Mortgage-backed securities 174,798 21 (4,900) 169,919
Asset-backed securities 10,979 7 (114) 10,872
State and municipal securities 44,901 42 (3,390) 41,553
Equity securities 12,604 78 - 12,682
-------------------------------------------------------------
Total available-for-sale 566,967 197 (11,858) 555,306
-------------------------------------------------------------
Total securities $ 752,365 $ 6,570 $ (14,049) $ 744,886
=============================================================
</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.
11
<PAGE>
6. Loans and the Allowance for Credit Losses
<TABLE>
The balances in the various loan categories are as follows:
<CAPTION>
(in thousands) September 30, 2000 December 31, 1999 September 30, 1999
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Real estate:
Residential $ 555,676 $ 494,540 $ 479,746
Non-residential 576,126 457,575 441,487
Construction 173,513 200,804 190,544
Commercial loans 748,711 614,897 590,392
Home equity loans 66,977 49,902 44,923
Consumer loans 201,558 154,381 144,578
Leases 119,447 97,005 88,963
Municipal tax-exempt obligations 4,382 12,530 15,509
Other loans 6,822 8,399 9,424
--------------------- -------------------- --------------------
Total loans $ 2,453,212 $2,090,033 $2,005,566
===================== ==================== ====================
</TABLE>
The loan balances at September 30, 2000, December 31, 1999 and September 30,
1999 are net of approximately $6,502,000, $5,240,000, and $5,255,000
respectively, in deferred net loan fees and origination costs.
Specific kinds of loans are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. Because this definition is very similar to that used by
Management to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on nonaccrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income in the current period. No further income is recognized until all recorded
amounts of principal are recovered in full or until circumstances have changed
such that the loan is no longer regarded as impaired.
Impaired loans are reviewed each quarter to determine whether a valuation
allowance for loan loss is required. The amount of the valuation allowance for
impaired loans is determined by comparing the recorded investment in each loan
with its value measured by one of three methods. The first method is to estimate
the expected future cash flows and then discount them at the effective interest
rate. The second method is to use the loan's observable market price if the loan
is of a kind for which there is a secondary market. The third method is to use
the value of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by the selected method exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the related allowance (dollars in thousands) as of September
30, 2000, December 31, 1999 and September 30, 1999:
September 30, 2000 December 31, 1999 September 30, 1999
------------------ ----------------- ------------------
Loans identified
as impaired $ 7,400 $10,970 $10,538
Impaired loans for
which a valuation
allowance has been
determined $ 7,400 $ 9,695 $ 6,593
Amount of valuation
allowance $ 2,908 $ 4,383 $ 3,212
Impaired loans for which
no valuation allowance
was determined necessary $ -- $ 1,275 $ 3,945
12
<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 nine and three-month periods ended September 30,
2000 and 1999:
Nine-month Periods Three-month Periods
Ended September Ended September 30,
2000 1999 2000 1999
Average amount of recorded
investment in impaired loans $7,408 $12,298 $ 7,770 $8,362
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.
<TABLE>
The valuation allowance for impaired loans of $2.9 million as of September 30,
2000 is included with the general allowance for credit losses of $33.9 million
in the "All Other Loans" column in the statement of changes in the allowance
account for the first nine months of 2000 shown below. The amounts related to
tax refund anticipation loans and to all other loans are shown separately.
<CAPTION>
Tax All
Refund Other
Loans Loans Total
------------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1999 $ 488 $ 29,966 $ 30,454
Provision for loan losses 3,631 9,514 13,145
Loan losses charged against allowance (6,226) (8,705) (14,931)
Loan recoveries added to allowance 2,620 2,007 4,627
Addition of Allowance from Los Robles Bank -- 1,139 1,139
------------- ------------- ------------
Balance, September 30, 2000 $ 513 $ 33,921 $ 34,434
============= ============= ============
Balance, December 31, 1998 $ 333 $ 30,166 $ 30,499
Provision for loan losses 2,816 2,823 5,639
Loan losses charged against allowance (5,518) (5,091) (10,609)
Loan recoveries added to allowance 2,639 1,649 4,288
------------- ------------- ------------
Balance, September 30, 1999 $ 270 $ 29,547 $ 29,817
============= ============= ============
13
</TABLE>
<PAGE>
7.Other Assets
Property acquired as a result of defaulted loans is included within other assets
on the balance sheets. Property from defaulted loans is carried at the lower of
the outstanding balance of the related loan at the time of foreclosure or the
estimate of the market value of the assets less disposal costs. As of September
30, 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 September 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 $34.9
million. The purchased goodwill is being amortized over 10 and 15 year periods.
Intangible assets, including goodwill, are reviewed each year to determine if
circumstances related to their valuation have been materially affected. In the
event that the current market value is determined to be less than the current
book value of the intangible asset (impairment), a charge against current
earnings would be recorded. No such impairment existed at September 30, 2000 or
December 31, 1999.
8. Long-term Debt and Other Borrowings
Long-term debt and other borrowings included $98.5 million and $85.0 million of
advances from the Federal Home Loan Bank of San Francisco at September 30, 2000
and December 31, 1999, respectively.
9. 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.
14
<PAGE>
10. Segment Disclosure
While the Company's products and services are all of the nature of commercial
banking, the Company has eight reportable segments. There are seven specific
segments: Wholesale Lending, Retail Lending, Branch Activities, Fiduciary, Tax
Refund Processing, Northern Region and Los Robles Bank. 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. A segment for Los Robles Bank was added in the third quarter of 2000 due
to the acquisition mentioned in Note 4. The results of operations for the nine
months and three months ended September 30, 2000 and 1999 for San Benito have
been included in the Northern Region because San Benito Bank was merged into
FNB.
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.
15
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Los
Branch Retail Wholesale Refund Tax Northern Robles All
Activities Lending Lending Programs Fiduciary Region Bank Other Total
---------- ---------- ---------- --------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nine months ended
September 30, 2000
Revenues from
external customers $ 8,155 $ 48,170 $ 48,473 $ 25,999 $ 10,546 $ 75,853 $ 3,938 $ 40,649 $ 257,845
Intersegment revenues 81,155 326 -- 2,147 3,310 -- -- (55,162) 31,776
-------- -------- -------- -------- -------- ---------- ------- -------- ----------
Total revenues $ 89,310 $ 48,496 $ 48,473 $ 28,146 $ 13,856 $ 75,853 $ 3,938 $(14,513) $ 289,621
======== ======== ======== ======== ======== ========== ======= ======== ==========
Profit (Loss) $ 22,003 $8,855 $ 12,249 $ 16,380 $6,166 $ 16,130 $ 540 $(12,048) $ 69,735
Interest income 70 47,397 47,769 18,725 -- 83,754 3,588 40,160 237,875
Interest expense 48,243 331 5 -- 2,569 22,829 936 7,470 81,446
Internal charge for funds 667 30,885 29,253 3,255 -- -- -- (32,284) 31,776
Depreciation 997 152 85 138 102 517 220 1,743 3,734
Total assets 15,542 814,134 732,612 (495) 1,578 1,181,089 164,499 674,393 3,583,352
Capital expenditures -- -- -- -- -- 8,475 -- 15,352 23,826
Nine months ended
September 30, 1999
Revenues from
external customers $ 6,784 $ 39,694 $ 39,440 $ 14,604 $9,845 $ 64,044 $ - $ 31,252 $ 205,663
Intersegment revenues 55,263 166 -- 1,967 1,784 -- -- 10,386 69,566
-------- -------- -------- -------- -------- ---------- ------- -------- ----------
Total revenues $ 62,047 $ 39,860 $ 39,440 $ 16,571 $ 11,629 $ 64,044 $ - $ 41,638 $ 275,229
======== ======== ======== ======== ======== ========== ======= ======== ==========
Profit (Loss) $ 12,878 $9,815 $ 13,795 $9,822 $6,460 $ 19,636 $ - $(12,822) $ 59,584
Interest income 50 38,898 38,518 8,023 -- 58,623 -- 28,662 172,774
Interest expense 29,236 169 3 -- 1,558 18,063 -- 3,880 52,909
Internal charge for funds 599 23,831 20,919 641 -- -- -- 23,576 69,566
Depreciation 1,179 119 78 71 108 1,167 -- 1,083 3,805
Total assets 16,659 676,219 636,420 320 3,853 1,132,389 -- 582,981 3,048,841
Capital expenditures -- -- -- -- -- 1,042 -- 6,126 7,168
16
<PAGE>
(in thousands) Los
Branch Retail Wholesale Refund Tax Northern Robles All
Activities Lending Lending Programs Fiduciary Region Bank Other Total
---------- ---------- ---------- --------- --------- ---------- --------- ---------- ----------
Three months ended
September 30, 2000
Revenues from
external customers $ 2,865 $ 17,115 $ 17,086 $ 389 $ 3,362 $ 35,167 $ 3,938 $ 12,328 $ 92,251
Intersegment revenues 26,322 181 -- 165 1,222 -- (16,006) 11,884
-------- -------- -------- -------- -------- ---------- ------- --------- ----------
Total revenues $ 29,187 $ 17,296 $ 17,086 $ 554 $ 4,584 $ 35,167 $ 3,938 $ (3,678) $ 104,135
======== ======== ======== ======== ======== ========== ======= ========= ==========
Profit (Loss) $ 8,234 $ 2,822 $3,676 $ (703) $ 2,004 $ 3,558 $ 540 $ (6,602) $ 13,529
Interest income 21 16,946 16,951 331 -- 46,598 3,588 13,727 98,162
Interest expense 14,394 183 2 -- 896 10,750 936 3,675 30,836
Internal charge for funds 211 11,018 10,720 102 -- -- -- (10,167) 11,884
Depreciation 346 57 31 67 35 -- 220 677 1,433
Total assets 15,542 814,134 732,612 (495) 1,578 1,181,089 164,499 674,393 3,583,352
Capital expenditures -- -- -- -- -- 5,805 -- 3,858 9,663
Three months ended
September 30, 1999
Revenues from
external customers $ 1,328 $ 14,150 # $14,024 #$ 84 #$ 4,236 #$ 29,748 $ -- $ 9,392 $ 72,962
Intersegment revenues 19,003 66 -- 30 594 -- -- 3,573 23,266
-------- -------- -------- -------- -------- ---------- ------- -------- ----------
Total revenues $ 20,331 $ 14,216 $14,024 $ 114 $ 4,830 $ 29,748 $ -- $ 12,965 $ 96,228
======== ======== ======== ======== ======== ========== ======= ======== ==========
Profit (Loss) $ 3,306 $ 3,327 $4,670 $ (301) $ 3,039 $ 8,489 $ -- $ (5,142) $ 17,388
Interest income 20 13,891 13,786 55 -- 27,227 -- 8,647 63,626
Interest expense 9,866 67 1 -- 504 8,239 -- 1,752 20,429
Internal charge for funds 207 8,718 7,560 -- -- -- -- 6,781 23,266
Depreciation 399 45 44 23 36 530 -- 314 1,391
Total assets 16,659 676,219 636,420 320 3,853 1,132,389 -- 582,981 3,048,841
Capital expenditures -- -- -- -- -- 526 -- 3,194 3,720
</TABLE>
17
<PAGE>
<TABLE>
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively, in the consolidated statements
of income for the nine-and three-month periods ended September 30, 2000 and
1999.
<CAPTION>
Nine months Three months
ended September 30, ended September 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Total revenues for
reportable segments $293,559 $ 275,229 $ 94,517 $ 89,030
Elimination of
intersegment revenues (31,776) (69,566) (11,884) (23,266)
Elimination of taxable
equivalent adjustment (4,671) (4,195) (1,557) (1,484)
-------------------------- --------------------------
Total consolidated revenues $257,112 $ 201,468 $ 81,076 $ 64,280
========================== ==========================
Total profit or loss
for reportable segments $ 69,735 $59,584 $ 13,529 $ 17,315
Elimination of taxable
equivalent adjustment (4,671) (4,195) (1,557) (1,484)
-------------------------- --------------------------
Income before income taxes $ 65,064 $55,389 $ 11,972 $ 15,831
========================== ==========================
</TABLE>
11. 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.
12. 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 is not specified in the complaint served on the
Company. Therefore, Management cannot estimate the amount of any possible loss
at this time in the event of an unfavorable outcome.
18
<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 core earnings (reported income excluding merger-related
charges) of $11.3 million for the quarter ended September 30, 2000, up $0.8
million compared to the same quarter last year. Diluted core earnings per share
for the third quarter of 2000 were $0.43 compared to $0.40 earned in the third
quarter of 1999. Net reported income of the Company was $6.8 million or $0.25
diluted earnings per share for the quarter ended September 30, 2000. The Company
incurred significant merger-related charges in the third quarter related to both
the acquisition of LRB and the merger with SBB.
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 these programs 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 third quarter of 1999, net interest income (the difference
between interest income and interest expense) increased by $5.5 million in the
third quarter of 2000, an increase of 14.9%. This was due primarily to
additional interest on loans, as average loan balances increased from $1.95
billion during the third quarter of 1999, to $2.37 billion during the same
quarter of 2000, a 21.5% increase. Interest income from loans for the quarter
was $55.7 million, up $12.8 million or 29.9%. Deposits increased $427.0 million
or 16.3% over the last 12 months. During the first quarter of 2000, the Company
issued about $405 million of certificates of deposit to fund its tax refund loan
program. While these deposits had all matured by September 30, 2000, because of
these deposits, interest expense for the three- and nine-month periods ended
September 30, 2000 was higher compared to the same periods of 1999.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $1.9 million or 21.0% over the same quarter of 1999. Trust and
Investment Services fees were up $309,000.
Provision expense for the third quarter of 2000 for loans other than tax refund
loans was $5.3 million, compared to the $968,000 provided in the third quarter
of 1999. Of this $5.3 million in provision expense, $3.4 million was related to
differences in grading practices between the acquired institutions' loan
portfolios and those of the Company. The remainder of this increase was due to
the growth in the loan portfolios.
Noninterest expense was $36.1 million in the third quarter of 2000 compared to
$29.2 million in the same quarter of 1999, a $6.9 million increase. A major
reason for this increase was related to the Company's two acquisitions.
Specifically, the Company incurred $3.8 million in merger-related charges in the
third quarter of 2000. Of that amount, $2.7 million was related to severance and
salary continuation expenses and $1.1 million was related to legal, accounting
and consultant costs. Without these merger charges, noninterest expense would
have increased $3.1 million, an increase of 10.6% compared to a growth in
average assets from the third quarter of 1999 to the third quarter of 2000 of
20.0%. The higher level of expenses
19
<PAGE>
with merger related costs compared to 1999 resulted in an increase in the
Company's operating efficiency ratio, which measures what proportion of a dollar
of operating income it takes to earn that dollar, from 61.51% for the third
quarter of 1999 to 65.44% for the third quarter of 2000. Without the
merger-related charges, the Company's efficiency ratio would have decreased to
58.53%.
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"), First National Bank of Central California ("FNB") including its
affiliates South Valley National Bank ("SVNB") and San Benito Bank ("SBB") as
well as Los Robles Bank ("LRB"). SBB&T and LRB are state-chartered commercial
banks. SBB&T 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 its 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
("1999 10-K MD&A").
TOTAL ASSETS AND EARNING ASSETS
The table 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.
20
<PAGE>
Table 1 GROWTH IN AVERAGE ASSETS AND DEPOSITS ($ in millions)
Average Average
Assets Deposits Difference
------------------ ------------------ ----------------
1996 $1,866 $ 1,688 $178
1997 2,241 1,985 256
1st Quarter 1998 2,540 2,215 325
2nd Quarter 1998 2,541 2,221 320
3rd Quarter 1998 2,662 2,330 332
4th Quarter 1998 2,784 2,423 361
1st Quarter 1999 2,965 2,589 376
2nd Quarter 1999 2,891 2,477 414
3rd Quarter 1999 2,971 2,543 428
4th Quarter 1999 3,046 2,582 464
1st Quarter 2000 3,675 3,147 528
2nd Quarter 2000 3,516 2,968 548
3rd Quarter 2000 3,567 3,032 535
Deposit balances also have been included in the table because, prior to 1999, as
reflected in Table 1, changes in assets were primarily related to changes in
deposit levels, as can be seen by the difference between average assets and
deposits remaining relatively stable from the first quarter of 1998 through the
first quarter of 1999. As deposit funds were received, they were either lent to
customers or invested in securities. From the second quarter of 1999 to the
current quarter, the growth in assets has been driven more by increasing loan
demand than by deposit growth. This change is reflected in the table by the
trend of increasing differences between total deposits and total assets. As
explained below, the Company funded much of this growth in loans from the
proceeds of maturing securities and by borrowing funds from other financial
institutions.
The overall growth trend shown above for the Company 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. In addition, the Company's
experience with acquisitions has been contrary to the general pattern of banks
losing customers of the acquired institution, in that depositors of acquired
banks have kept their deposits with the Company. The same experience has been
seen with the depositors of the merged banks, namely that deposits have
increased since the mergers. Because mergers are accounted for as a pooling of
interests, asset and deposit totals for periods prior to the mergers 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 table.
The major reason for the large increase in assets and deposits during the first
quarter of 2000 as well as the decrease in the second quarter 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 sections
titled "Refund Anticipation Loan and Refund Transfer Programs" in the Company's
quarterly reports on Form 10-Q for the first and second quarters of 2000.
21
<PAGE>
In the third quarter of 2000, average earning assets and average deposits
increased by $162.4 million and $145.7 million, respectively, over the 3rd Qtr
of 1999, due to the acquisition of Los Robles Bank. Earning assets consist of
the various assets on which the Company earns interest income. On average, the
Company earned interest on 92.0% of its assets during the third quarter of 2000.
This compares with an average of 90.1% 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 $68 million more assets earning interest during the third
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.
Table 2 shows the average balances of the major categories of earning assets and
liabilities for the nine-month periods ended September 30, 2000 and 1999
together with the related interest income and expense. Table 3 shows the same
data for the three-month periods ended September 30, 2000 and 1999. Table 4, 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 2 shows that for the first nine months of 2000, NOW accounts
averaged $352,753,000, interest expense for them was $1,905,000, and the average
rate paid was 0.72%. In the first nine months of 1999, NOW accounts (interest
bearing demand) averaged $310,307,000, interest expense for them was $1,651,000,
and the average rate paid was 0.71%. Table 4 shows that the $254,000 increase in
interest expense for demand deposits from the first nine months of 1999 to the
first nine months of 2000 is the result of a $208,000 increase in interest
expense due to higher balances in 2000, and an increase of $46,000 due to higher
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.
22
<PAGE>
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.
<TABLE>
TABLE 2 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)
<CAPTION>
(dollars in thousands) Nine months ended Nine months ended
September 30, 2000 September 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 $ 236,057 $ 10,989 6.20% $ 111,173 $ 4,079 4.91%
Securities: (2)
Taxable 659,676 29,810 6.02% 627,309 27,943 5.96%
Non-taxable 164,782 12,265 9.92% 142,137 10,817 10.15%
------------- ------------ ------------ -----------
Total securities 824,458 42,075 6.80% 769,446 38,760 6.73%
------------- ------------ ------------ -----------
Loans and leases: (3)
Commercial 729,895 49,228 8.98% 456,104 30,903 9.06%
Ready equity 63,051 4,648 9.82% 52,845 3,502 8.86%
Real estate 1,166,344 74,989 8.57% 1,087,855 68,921 8.45%
Installment and consumer loans 204,136 14,305 9.33% 155,383 11,736 10.10%
Leasing 112,014 8,573 10.20% 95,531 6,929 9.70%
Tax refund loans 80,365 18,725 -- 16,567 7,600 --
------------- ------------ ------------ -----------
Total loans and leases 2,355,805 170,468 9.64% 1,864,285 129,591 9.28%
------------- ------------ ------------ -----------
Total earning assets 3,416,320 223,532 8.72% 2,744,904 172,430 8.38%
Allowance for credit losses (32,535) (32,078)
Other assets 288,440 227,895
------------- ------------
TOTAL ASSETS $3,672,225 $2,940,721
============= ============
LIABILITIES
Deposits:
Interest-bearing demand $352,753 1,905 0.72% $310,307 1,651 0.71%
Savings and money market 925,143 22,470 3.24% 815,251 16,311 2.67%
Time deposits 1,177,269 48,746 5.52% 858,053 30,497 4.75%
------------- ------------ --------- ------------ -----------
Total interest-bearing 2,455,165 73,121 3.97% 1,983,611 48,459 3.27%
deposits
Borrowed funds 194,753 9,258 6.33% 109,863 4,450 5.42%
------------- ------------ --------- ------------ -----------
Total interest-bearing 2,649,918 82,379 4.14% 2,093,474 52,909 3.38%
liabilities
Noninterest-bearing demand deposits 695,320 573,901
Other liabilities 43,449 30,585
------------- ------------
TOTAL LIABILITIES 3,388,687 2,697,960
Shareholders' equity 283,538 242,761
TOTAL LIABILITIES AND
------------- ------------
SHAREHOLDERS' EQUITY $3,672,225 $2,940,721
============= ============
Net interest rate spread 4.58% 5.00%
NET INTEREST INCOME AND NET
------------ ----------
INTEREST MARGIN $141,153 5.51% $119,521 5.81%
============ ==========
<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 fee income.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
TABLE 3 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)
<CAPTION>
(dollars in thousands) Three months ended Three months ended
September 30, 2000 September 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 $ 61,367 $ 965 6.24% $ 67,600 $ 870 5.11%
Securities: (2)
Taxable 668,271 10,522 6.25% 601,952 8,989 5.92%
Non-taxable 176,981 4,507 10.19% 144,655 3,663 10.13%
------------- ---------- ------------ ----------
Total securities 845,252 15,029 7.07% 746,607 12,652 6.74%
------------- ---------- ------------ ----------
Loans and leases: (3)
Commercial 761,601 19,003 9.90% 530,604 12,183 9.11%
Ready equity 67,553 1,724 10.13% 56,205 1,243 8.77%
Real estate 1,209,128 26,419 8.74% 1,109,435 23,244 8.38%
Installment and consumer loans 218,532 5,290 9.60% 158,636 3,918 9.80%
Leasing 118,001 3,060 10.29% 99,659 2,418 9.63%
Tax refund loans -- 331 -- -- -- --
------------- ---------- ------------ ----------
Total loans and leases 2,374,815 55,827 9.36% 1,954,539 43,006 8.77%
------------- ---------- ------------ ----------
Total earning assets 3,281,434 71,821 8.71% 2,768,746 56,528 8.13%
Allowance for credit losses (30,990) (30,901)
Other assets 316,289 232,746
------------- ------------
TOTAL ASSETS $3,566,733 $2,970,591
============= ============
LIABILITIES
Deposits:
Interest-bearing demand $354,986 715 0.80% $332,015 577 0.69%
Savings and money market 930,975 8,219 3.50% 815,844 5,544 2.70%
Time deposits 1,081,990 15,472 5.67% 870,029 10,212 4.66%
------------- ---------- ---------- ------------ ---------- ---------
Total interest-bearing deposits 2,367,951 24,406 4.09% 2,017,888 16,333 3.21%
Borrowed funds 215,046 3,296 6.08% 138,477 1,967 5.64%
------------- ---------- ---------- ------------ ---------- ---------
Total interest-bearing 2,582,997 27,702 4.25% 2,156,365 18,300 3.37%
liabilities
Noninterest-bearing demand deposits 664,147 542,758
Other liabilities 34,879 28,289
------------- ------------
TOTAL LIABILITIES 3,282,023 2,727,412
Shareholders' equity 284,710 243,179
------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,566,733 $2,970,591
============= ==============
Net interest rate spread 4.46% 5.50%
NET INTEREST INCOME AND NET
---------- ----------
INTEREST MARGIN $44,119 5.36% $38,228 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 fee income.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
TABLE 4 - RATE/VOLUME ANALYSIS (1) (2)
<CAPTION>
Three months ended Nine months ended
(in thousands) September 30, 2000 September 30, 2000
vs September 30, 1999 vs September 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 ($6,233) $ 95 $ 180 ($85) $124,884 $ 6,910 39,613 (32,703)
Securities:
Taxable 66,319 1,533 512 1,021 32,367 1,867 372 1,495
Non-taxable 32,326 844 21 823 22,645 1,448 (54) 1,502
--------------------------------------------- -----------------------------------------------
Total securities 98,645 2,377 533 1,844 55,012 3,315 318 2,997
--------------------------------------------- -----------------------------------------------
Loans and leases:
Commercial 230,997 6,820 1,131 5,689 273,791 18,325 365 17,960
Ready equity 11,348 481 208 273 10,206 1,146 1,174 (28)
Real estate 99,693 3,175 1,026 2,149 78,489 6,068 2,092 3,976
Installment and 59,896 1,372 (80) 1,452 48,753 2,569 (294) 2,863
consumer loans
Leasing 18,342 642 156 486 16,483 1,644 1,124 520
Tax refund loans 0 331 0 331 63,798 11,125 0 11,125
--------------------------------------------- -----------------------------------------------
Total loans and leases 420,276 12,821 2,443 10,047 491,520 40,877 4,462 36,415
--------------------------------------------- -----------------------------------------------
TOTAL EARNING ASSETS $512,688 15,293 3,156 12,137 $671,416 51,102 44,393 6,709
============ ============
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $22,971 138 98 40 $42,446 254 46 208
Savings and money market 115,131 2,675 1,889 786 109,892 6,159 1,598 4,561
Time deposits 211,961 5,260 2,767 2,493 319,216 18,249 15,504 2,745
--------------------------------------------- -----------------------------------------------
Total deposits 350,063 8,073 4,753 3,320 471,554 24,662 17,148 7,514
Borrowed funds 76,569 1,329 239 1,090 84,890 4,808 43,458 (38,650)
------------------------
TOTAL INTEREST-BEARING
LIABILITIES $426,632 9,402 4,993 4,409 $556,444 29,470 60,605 (31,135)
============--------------------------------- ============-----------------------------------
NET INTEREST INCOME (4) $5,891 ($1,837) $7,728 $21,632 ($16,212) $37,844
================================= ===================================
<FN>
(1) Income amounts are presented on a fully taxable equivalent (FTE) basis.
(2) The change not solely due to volume or rate has been prorated into rate and
volume components.
</FN>
</TABLE>
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
25
<PAGE>
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 September 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 September 30, 2000
Net interest income (2.50%) +2.31%
Net economic value +14.50% (11.87%)
The differences in the results are due to changes in the relative size of the
various components of the Company's balance sheet (the product mix) over the
last nine months and the changes in the maturities and/or repricing
opportunities of the financial instruments held. Because the effect of changes
on net interest income is measured over the 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
26
<PAGE>
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 September 30, 2000 are a
result of changes in the balance sheet over that time which includes the
acquisition of LRBC.
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 Table 1. As
noted in the discussion accompanying the table, there was a significant increase
in deposits during the first quarter of 2000 to fund the tax refund loan
program. These deposits bear a higher interest rate than other deposits and the
rate paid on time deposits as shown in Tables 2 and 3 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
27
<PAGE>
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, CSB
and LRBC 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.
LOANS AND RELATED INTEREST INCOME
The end-of-period loan balances as of September 30, 2000, have increased by
$363.2 million compared to December 31, 1999, and by $447.6 million compared to
September 30, 1999. As shown in the table in Note 6 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 have increased and tend to vary
more than other loan types because the average size is larger than for other
loan types and typically these loans have shorter maturities. Therefore
originations and payoffs have a proportionally larger impact on the outstanding
balance.
Construction loans at September 30, 2000 are lower than a year ago. However,
over the past two years and up until this quarter, the Silicon Valley, which is
adjacent to the Company's northern market areas, had recently seen rapidly
rising housing prices because of limited supply. This caused new housing
construction activity to increase in areas that are within commuting distance,
and the Company is financing some of this construction, and the Company's
balance of construction loans at various times during the first nine months of
2000 was higher than the balance at September 30, 1999.
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.
Table 2 includes average balances 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 September 30, 1999 or 2000.
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 and
yields computed by dividing annualized interest income is not meaningful. As
shown in Table 2, the expanded
28
<PAGE>
program in 2000 resulted in significantly higher average balances for these
loans during the first nine months of 2000.
Without the effect of tax refund loans, average yields for the three and
nine-month periods ended September 30, 2000 were 9.31% and 8.89%, respectively,
and for the three and nine month periods ended September 30, 1999 were 8.77% and
8.81%, 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. Because of these increases, the average rate
earned on loans aside from tax refund loans has increased by 0.65% in the third
quarter of 2000 compared to the third quarter of 1999.
OTHER LOAN INFORMATION
In addition to the outstanding loans reported in the accompanying financial
statements, the Company has made certain commitments with respect to the
extension of credit to customers.
(in thousands) September 30, December 31,
2000 1999
---- ----
Commitments to extend credit
Commercial $550,100 $396,350
Consumer 83,520 74,748
Standby letters of credit 31,473 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,
29
<PAGE>
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 6
to the financial statements.
Table 6 shows the amounts of noncurrent loans and nonperforming assets for the
Company at the end of the third 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 tax 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.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate).
<TABLE>
Table 5--ASSET QUALITY
(dollars in thousands)
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
------------------------------ --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 743 $ 1,530 $ 2,869 $ 715 $ 640
Nonaccrual loans 12,609 14,261 13,575 15,626 14,600
------------------------------ --------------- -------------- -----------------
Total noncurrent loans 13,352 15,791 16,444 16,341 15,240
Foreclosed real estate -- -- -- -- --
------------------------------ --------------- -------------- -----------------
Total nonper-
forming assets $ 13,352 $ 15,791 $ 16,444 $ 16,341 $ 15,240
============================== =============== ============== =================
Allowance for credit losses
other than RALs $ 33,921 $ 28,563 $ 29,464 $ 29,966 $ 29,817
Allowance for RALs 513 141 3,209 488 --
------------------------------ --------------- -------------- -----------------
Total allowance $ 34,434 $ 28,704 $ 32,673 $ 30,454 $ 29,817
============================== =============== ============== =================
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.38% 1.30% 1.34% 1.43% 1.49%
Coverage ratio of
allowance for credit
losses to noncurrent loans 254% 181% 179% 183% 196%
Ratio of noncurrent
loans to total loans 0.54% 0.72% 0.75% 0.78% 0.76%
Ratio of nonperforming
assets to total assets 0.37% 0.46% 0.44% 0.53% 0.50%
30
<PAGE>
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 1.71% 1.86% 1.82% 1.85%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 205% 217% 221% 210%
Ratio of noncurrent
loans to total loans n/a 0.58% 0.59% 0.58% 0.62%
Ratio of nonperforming
assets to total assets n/a 0.83% 0.86% 0.83% 0.88%
</TABLE>
The allowance for credit losses (other than tax refund loans) compared to total
loans remains lower than the corresponding ratios for the Company's peer group.
However, the Company's ratio of allowance for loan loss compared to non-current
loans is higher than the ratio for its peers and the Company's ratio of
non-performing assets to total assets is less than half that of its peers. The
Company generally has a lower ratio of net charge-offs to average loans as shown
in the following table:
Ratio of Net Charge-Offs
to Average Loans:
2000 YTD 1999 1998 1997 1996
Pacific Capital Bancorp
(excl. tax refund loans) 0.42% 0.37% 0.36% 0.33% 0.09%
FDIC Peers 0.59% 0.68% 1.08% 1.03% 0.89%
Management identifies and monitors other loans that are potential problem loans
although they are not now delinquent more than 90 days. Table 6 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for September 30, 2000 (amounts in thousands).
Table 6--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
Noncurrent Other Potential
Loans Problem Loans
----- -------------
Loans secured by real estate:
Construction and
land development $ -- $ 3,749
Agricultural -- 276
Home equity lines 290 690
1-4 family mortgage 2,167 306
Multifamily -- --
Nonresidential, nonfarm 1,861 2,956
Commercial and industrial 7,093 30,563
Leases 808 1,393
Other consumer loans 1,133 2,573
Other Loans -- --
---------- -----------
Total $ 13,352 $ 42,506
========== ===========
31
<PAGE>
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of September 30, 2000 (amounts in thousands).
Doubtful $4,579
Substandard $8,272
Special Mention $1,922
The total of the above numbers is less than the total allowance. Most of the
allowance is allocated to loans which are not currently regarded as potential
problem loans, but for which, based on the Company's experience, there are
unidentified losses among them. The amounts allocated both to potential problem
loans and to all other loans are determined based on the factors and methodology
discussed in Note 1 to the Consolidated Financial Statements presented in the
Company's Annual Report on Form 10-K. Based on these considerations, Management
believes that the allowance for credit losses at September 30, 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 $62.6 million with a market value of approximately
$254,000 less than their recorded amount.
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2001 or earlier
should the Company so choose. The Company expects to implement this reporting on
January 1, 2001. This statement is not expected to have a material impact on the
operating results or the financial position of the Company.
The Company has not purchased any securities arising out of highly leveraged
transactions, and its investment policy prohibits the purchase of any securities
of less than investment grade, the so-called "junk bonds."
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cash in excess of the amount needed to fund loans, invest in securities, or
cover deposit withdrawals is sold to other institutions as Federal funds or
invested with other institutions on a collateralized basis as securities
purchased under agreements to resell ("reverse repo agreements"). These
agreements are investments which are collateralized by securities or loans of
the borrower and mature on a daily basis. The sales of Federal funds are on an
overnight basis as well. The amount of Federal funds sold and reverse repo
agreements purchased during the
32
<PAGE>
quarter is an indication of Management's estimation during the quarter of
immediate cash needs, the difference between funds supplied by depositors
compared to funds lent to borrowers, and relative yields of alternative
investment vehicles.
As shown in Tables 2 and 3, the average balance of these short-term investments
for the first nine months of 2000 was more than for the first nine months of
1999. 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 occasionally 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 7 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 7--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------------- -------------- ---------------------
March 1999 $ 27.0 4.44% 0.9%
June 1999 45.1 4.55 1.6
September 1999 30.6 4.69 1.0
December 1999 62.0 5.08 2.0
March 2000 82.6 3.82 2.3
June 2000 78.8 6.31 2.2
September 2000 127.2 6.15 3.6
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 September 30, 2000
totaled $98.5 million. The scheduled maturities of the advances are $4.5 million
in 1 year or less, $48.5 million in 1 to 3 years, and $74.1 million in more than
3 years.
Table 8 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.
33
<PAGE>
<TABLE>
Table 8--LONG-TERM DEBT
<CAPTION>
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------------- ------------- ----------------------
<S> <C> <C> <C> <C>
March 1999 $ 49.3 5.68% 1.7%
June 1999 67.9 5.74 2.4
September 1999 107.9 5.90 3.6
December 1999 88.4 6.00 2.9
March 2000 112.9 7.02 3.1
June 2000 99.7 6.04 2.8
September 2000 87.9 5.99 2.5
</TABLE>
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. 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.
The following table shows of the major items of other operating income and
expense for the nine and three months ended September 30, 2000 and 1999 that are
not specifically listed in the consolidated statements of income.
34
<PAGE>
<TABLE>
TABLE 8 --OTHER OPERATING INCOME AND EXPENSE
(dollars in thousands)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Noninterest income
Merchant credit card processing $ 6,004 $ 4,057 $ 2,229 $ 1,841
Trust fees $ 10,742 $ 9,719 $ 3,441 $ 2,353
Refund transfer fees $ 7,263 $ 6,568 $ 46 $ 16
Noninterest expense
Marketing $ 2,090 $ 2,038 $ 672 $ 838
Consultants $ 5,450 $ 8,660 $ 2,441 $ 2,569
Merchant credit card clearing fees $ 4,807 $ 2,859 $ 1,765 $ 1,339
</TABLE>
Consultant expense is lower in the three and nine-month periods ended September
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 nine and three-month periods ended
September 30, 2000 and 1999.
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
Salary and benefits as
a percentage of total
revenues 19.61% 20.43% 24.45% 21.68%
Salary and benefits as
a percentage of average
assets 1.37% 1.40% 0.56% 0.47%
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<PAGE>
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 covered the cost for the same
amount of space; however, the cost for the additional space was not
reimbursable. Some of the additional space has been utilized by moving employees
from other leased space and the remainder of the building is being 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.
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.
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<PAGE>
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 of September 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
September 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
September 30, 2000, the Company's long term liquidity was adequate to meet cash
needs anticipated over its planning horizon.
CAPITAL RESOURCES AND COMPANY STOCK
The following table presents a comparison of several important amounts and
ratios for the third quarter of 2000 and 1999 (dollars in thousands).
<TABLE>
Table 9--CAPITAL RATIOS
<CAPTION>
3rd Quarter 3rd Quarter
2000 1999 Change
---------------- --------------- -------------
<S> <C> <C> <C>
Amounts:
Net Income $ 6,688 $ 10,585 $ (3,897)
Average Total Assets 3,566,733 2,970,591 596,142
Average Equity 284,710 243,179 41,531
Ratios:
Equity Capital to Total Assets (period end) 7.92% 8.04% (0.12%)
Annualized Return on Average Assets 0.74% 1.41% (0.67%)
Annualized Return on Average Equity 9.32% 17.27% (7.95%)
</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
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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
September 30, 2000, the Company's risk-based capital ratio was 10.48%. The
Company must also maintain a Tier I capital (total shareholder equity less
goodwill and other intangibles) to risk adjusted assets ratio of 6%, and 5% of
average tangible assets, respectively. As of September 30, 2000, Tier I capital
was 9.23% of risk adjusted assets and 7.10% of average tangible assets.
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
state-chartered banks, California law limits the amount of dividends that may be
paid by SBB&T and LRB to Bancorp. As a nationally-chartered bank, FNB's ability
to pay dividends is governed by federal law and regulations.
As described in the section below titled "Refund Anticipation Loan and Refund
Transfer Programs," the Company is planning to use a sell almost all of the
refunds loans that will be made in 2001. This will significantly reduce the
demand for liquidity in the first quarter of 2001.
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. Under
this approval, SBB&T has paid $13.5 million to Bancorp.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements planned at this time. However, as the Company
pursues its stated plan to expand beyond its current market areas, Management
will consider opportunities to form strategic partnerships with other financial
institutions that have compatible management philosophies and corporate cultures
and that share the Company's commitment to superior customer service and
community support. Such transactions, depending on their structure, may be
accounted for as a purchase of the other institution by the Company. To the
extent that consideration is paid in cash rather than Company stock, the assets
of the Company would increase by more than its equity and therefore the ratio of
capital to assets would decrease.
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<PAGE>
The current quarterly dividend rate is $0.22 per share. When annualized, this
represents a payout ratio of approximately 47% of earnings per share for the
trailing 12 months. Without the merger-related charges in the third quarter of
2000, the dividend payout ratio would have been 42%.
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 state-chartered member bank of the Federal Reserve System,
SBB&T's primary Federal regulator is the FRB and its state regulator is the
CDFI. As a state-chartered bank that is not a member of the Federal Reserve
System, LRB's primary Federal regulator is the FDIC 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 mid-April tax filing deadline, almost all of the
loans are made and repaid during the first quarter of the year.
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.
39
<PAGE>
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 detail in the Company's Quarterly Reports on Form 10-Q for the
first two quarters of 2000.
Expectations for the Remainder of 2000 and for 2001:
During the remainder of 2000, 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.
The Company expects the programs to grow in volume by up to 40% in 2001. This
expectation is due to growth in the demand for these products, growth in market
share by enrolling new tax preparers into the Company's programs, and the
introduction of products for individuals using the Internet to file their
returns. As explained in those Form 10-Q's, the Company has used deposits, other
borrowings, and liquid assets to fund the refund loans. The expected growth in
the programs has led the Company to enter into agreements that would provide for
the sale of almost all of these loans. This arrangement will lessen the negative
capital and funding impacts of the program while retaining the processing
component. The funding costs will be more expensive for the Company with this
method than the for deposits, borrowings, and liquid assets used in prior years,
but it allows the Company to significantly increase the volume of loans it is
able to process. Net revenues are expected to increase with this increased
volume.
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
40
<PAGE>
of alleged damages is not specified in the complaint served on the Company.
Therefore, Management cannot estimate the amount of any possible loss at this
time in the event of an unfavorable outcome.
--------------------------------------------------------------------------------
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 second quarter of
2000. All peer information in this discussion and analysis is reported in or has
been derived from information reported in this publication.
41
<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 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description*
27.0900 Financial Data Schedule for September 30, 2000
27.0999 Restated Financial Data Schedule for September 30, 1999
The restatement of the Financial Data Schedule gives effect to the merger
between Pacific Capital Bancorp and San Benito Bank which was accounted for as a
pooling of interest.
(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.
(c) On August 7, 2000, the closing of the merger with San Benito Bank was
reported on a Form 8-K filed with the Commission on August 8, 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
* Filed herewith.
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<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. November 13, 2000
President
Chief Executive Officer
/s/ Donald Lafler
Donald Lafler November 13, 2000
Executive Vice President
Chief Financial Officer
