FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________.
Commission File Number 0-13528
Pacific Capital Bancorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0003875
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1001 S. Main Street, Salinas, California 93901
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 757-4900
------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class November 8, 1996
----- ----------------
Common stock, no par value 2,600,174 Shares
This report contains a total of 18 pages.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 PAGE
PACIFIC CAPITAL BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4-5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9 - 16
PART II - OTHER INFORMATION
ITEM 5
OTHER EVENTS 17
SIGNATURES 18
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<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
September 30, December 31,
1996 1995
Assets --------- ---------
<S> <C> <C>
Cash and due from banks $ 28,482 $ 24,891
Federal funds sold and other short term investments 26,468 17,007
--------- ---------
Total cash and equivalents 54,950 41,898
Investment securities:
Available-for-sale securities, at fair value 76,829 75,896
Held-to-maturity securities, at amortized cost
(fair value of $5,305 and $8,662, respectively) 5,315 8,596
Loans available for sale at cost, which approximates market 5,034 3,876
Loans:
Commercial 62,008 49,862
Consumer 12,558 12,108
Real estate - mortgage 144,304 126,048
Real estate - construction 12,183 17,071
Other 24,111 6,501
Less deferred loan fees (320) (246)
--------- ---------
Total loans 254,844 211,344
Less allowance for possible loan losses (2,188) (2,397)
--------- ---------
Net loans 252,656 208,947
Premises and equipment, net 9,156 7,523
Accrued interest receivable and other, net 8,570 6,843
--------- ---------
Total assets $ 412,510 $ 353,579
========= =========
Liabilities and shareholders' equity
Deposits:
Demand, non-interest bearing $ 82,643 $ 71,988
Demand, interest bearing 59,000 56,527
Savings and money market 104,191 97,087
Time certificates 118,888 82,217
--------- ---------
Total deposits 364,722 307,819
Accrued interest payable and other liabilities 2,783 2,784
--------- ---------
Total liabilities 367,505 310,603
Shareholders' equity:
Preferred stock; 20,000,000 shares authorized and unissued -- --
Common stock, no par value; 20,000,000 shares authorized;
2,599,899 and 2,603,839 shares issued and outstanding at
September 30, 1996 and at December 31, 1995, respectively 30,961 31,235
Retained earnings 14,377 11,435
Net unrealized (losses) gains on available-for-sale securities (333) 306
--------- ---------
Total shareholders' equity 45,005 42,976
--------- ---------
Total liabilities and shareholders' equity $ 412,510 $ 353,579
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
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<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
Nine months Nine months
ended ended
Sept 30, 1996 Sept 30, 1995
----------- -----------
Interest income:
<S> <C> <C>
Interest and fees on loans $ 16,704 $ 15,353
Interest on investment securities 3,860 2,870
Interest on federal funds sold & short-term investments 739 832
----------- -----------
Total interest income 21,303 19,055
----------- -----------
Interest expense:
Demand, interest bearing 434 422
Savings 2,066 2,082
Time certificates 4,139 2,513
----------- -----------
Total interest expense 6,639 5,017
----------- -----------
Net interest income 14,664 14,038
Provision for possible loan losses -- --
----------- -----------
Net interest income after provision for possible loan losses 14,664 14,038
----------- -----------
Other income:
Service charges 1,062 1,074
Gain on sale of loans 21 15
Mortgage banking fees 123 95
Net gain (loss) on securities transactions 15 (18)
Other 295 264
----------- -----------
Total other income 1,516 1,430
----------- -----------
Other expenses:
Salaries and benefits 5,306 4,852
Occupancy 1,076 1,024
Equipment 800 772
Advertising and promotion 358 326
Stationary and supplies 241 229
Legal and professional fees 535 409
Regulatory assessments 67 373
Other operating 1,110 1,069
----------- -----------
Total other expenses 9,493 9,054
Earnings before income taxes 6,687 6,414
Income taxes 2,575 2,491
----------- -----------
Net income $ 4,112 $ 3,923
=========== ===========
Net income per share $ 1.50 $ 1.44
=========== ===========
Weighted average shares outstanding 2,740,857 2,722,082
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
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<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
Three months Three months
ended ended
Sept 30, 1996 Sept 30, 1995
------------- -----------
Interest income:
<S> <C> <C>
Interest and fees on loans $ 5,847 $ 5,108
Interest on investment securities 1,524 1,125
Interest on federal funds sold 68 373
----------- -----------
Total interest income 7,439 6,606
----------- -----------
Interest expense:
Demand, interest bearing 155 145
Savings 691 706
Time certificates 1,533 1,074
----------- -----------
Total interest expense 2,379 1,925
----------- -----------
Net interest income 5,060 4,681
Provision for possible loan losses -- --
----------- -----------
Net interest income after provision for possible loan losses 5,060 4,681
----------- -----------
Other income:
Service charges 356 351
Gain on sale of loans 6 (1)
Mortgage banking fees 22 40
Net gain (loss) on securities transactions -- (4)
Other 92 92
----------- -----------
Total other income 476 478
----------- -----------
Other expenses:
Salaries and benefits 1,766 1,645
Occupancy 360 369
Equipment 268 281
Advertising and promotion 132 134
Stationary and supplies 90 75
Legal and professional fees 267 131
Regulatory assessments 23 (1)
Other operating 433 375
----------- -----------
Total other expenses 3,339 3,009
Earnings before income taxes 2,197 2,150
Income taxes 844 839
----------- -----------
Net income $ 1,353 $ 1,311
=========== ===========
Net income per share $ 0.49 $ 0.48
=========== ===========
Weighted average shares outstanding 2,737,657 2,720,462
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
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<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months Ended September 30, 1996 and September 30, 1995
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
September 30, September 30,
1996 1995
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 4,112 $ 3,923
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 873 677
Provision for possible loan losses -- --
(Gain) loss on sale of investment securities, net (15) 18
Net originations of loans held for sale (1,158) (1,320)
Gain on sale of loans (21) (16)
Deferral of loan origination fees (costs) 50 (11)
Change in accrued interest receivable and other assets (2,366) (313)
Change in accrued interest payable and other liabilities 20 865
-------- --------
Net cash provided by operating activities 1,495 3,823
-------- --------
Investing activities:
Net change in loans (43,759) 2,980
Maturities of investment securities 4,158 14,736
Purchases of investment securities (27,680) (46,620)
Proceeds from sale of available-for-sale securities 25,695 24,839
Capital expenditures, net (2,316) (718)
-------- --------
Net cash used in investing activities (43,902) (4,783)
-------- --------
Financing activities:
Net increase in deposits 56,903 12,618
Cash paid for retirement of stock (551) (111)
Proceeds from exercise of options 277 157
Cash paid for dividends (1,170) (930)
-------- --------
Net cash provided by financing activities 55,459 11,734
-------- --------
Net increase in cash and equivalents 13,052 10,774
Cash and equivalents beginning of period 41,898 42,262
-------- --------
Cash and equivalents at end of period $ 54,950 $ 53,036
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period
Interest 7,378 5,707
Income taxes 2,158 2,525
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
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<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
In the opinion of the Company, the unaudited consolidated
financial statements, prepared on the accrual basis of
accounting, contain all adjustments (consisting of only normal
recurring adjustments) which are necessary to present fairly
the financial position of the Company and subsidiaries at
September 30, 1996 and December 31, 1995, the results of its
operations and the statements of cash flows for the periods
ended September 30, 1996 and 1995.
Certain information and footnote disclosures normally
presented in financial statements prepared in accordance with
generally accepted accounting principles have been omitted.
The results of operations for the period ended September 30,
1996 are not necessarily indicative of the operating results
for the full year ending December 31, 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation
plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments
of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's
stock. Examples are stock options, restricted stock, and
stock appreciation rights. This statement defines a fair
value based method of accounting for an employee stock option
or similar equity instrument. Under this method, compensation
costs are measured at the grant date based on the value of
the award and are recognized over the service period, which
is the vesting period. SFAS No. 123 encourages but does not
require employers to adopt the new method in place of the
provisions of Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees. This statement
applies to fiscal years beginning after December 15, 1995. On
January 1, 1996, the Company adopted SFAS No. 123 and has
elected to use the method prescribed in APB No. 25. The
Company does not anticipate that the required disclosures
will have a material impact on the financial condition or
results of operations.
Note 2 - Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, First National
Bank of Central California, (the "Bank"), and Pacific Capital
Services Corporation, an inactive subsidiary. All material
intercompany accounts and transactions have been eliminated in
consolidation.
Note 3 - Loans to Directors
In the ordinary course of business, the Company has made loans
to directors of the Company which at September 30, 1996
amounted to approximately $4,980,000.
Note 4 - Commitments
The Company had outstanding standby letters of credit of
approximately $5,650,000 at September 30, 1996.
Note 5 - Net Income Per Share and Dividends
Net income per share is computed using the weighted average
number of shares of common and common equivalent shares
outstanding (as adjusted retroactively to reflect the 5% stock
dividend paid on December 1, 1995). On January 23, 1996, April
23, 1996, and July 23, 1996 the Company declared $0.15 per
share cash dividends to shareholders of record on March 15,
1996, June 14, 1996, and September 16, 1996 payable on March
29, 1996, June 28, 1996, and September 30, 1996, respectively.
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<PAGE>
Note 6 - Taxes
As of September 30, 1996, the Company has a deferred tax asset
of approximately $2,022,000. The asset results primarily from
the provisions for possible loan losses and depreciation of
premises and equipment, which are recognized in the financial
statements but are not yet deductible for income tax reporting
purposes. Management of the Company believes that the net
deferred tax asset is fully realizable through sufficient
taxable income within carryback periods and current year
taxable income.
Note 7 - Proposed Merger
On July 18, 1996, the Company entered into an Agreement and
Plan of Reorganization ("Agreement") with South Valley
Bancorporation (Commission File # 2-78293-LA), ("South
Valley") pursuant to which South Valley will merge with and
into the Company in a merger transaction expected to be
accounted for as a pooling-of-interests. The Company plans to
issue .92 shares of Pacific Capital Bancorp common stock for
each share of South Valley common stock, subject to certain
potential downward adjustments described in the Agreement. It
is anticipated that the transaction will be consummated during
the fourth quarter of 1996. Based on the outstanding shares of
South Valley as of September 30, 1996, and the exchange ratio
specified in the Agreement, the Company expects to issue
approximately 1,285,000 shares in connection with the merger.
As of September 30, 1996, South Valley had total assets of
$183,230,000.
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<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Changes in the Financial Statements
As used herein, the term Company shall mean the Company or the Bank as
the context requires. Net income for the nine months ended September 30, 1996
was $4,112,000 or $1.50 per share compared to $3,923,000 or $1.44 per share
during the same period in 1995. This 4.8% increase in net income is due mainly
to a $626,000 increase in net interest income partially offset by a $439,000
increase in non-interest expense. The increase in net interest income is due to
growth in average total loans of $32,570,000 partially offset an increase in
average interest bearing deposits of $39,052,000 as compared to the same 1995
period.
Outstanding loans were $254,844,000 at September 30, 1996 compared to
$211,344,000 at December 31, 1995, a $43,500,000 or 20.6% increase. The increase
in outstanding loans from December 31, 1995 to September 30, 1996 resulted
primarily from an increase in real estate mortgage loans of $18,256,000, an
increase in commercial loans of $12,146,000 and an increase in other loans of
$17,610,000 partially offset by a decrease in real estate construction loans of
$4,888,000
Federal Funds Sold and Investment Securities at September 30, 1996 were
$108,612,000, a $7,113,000 or 6.5% increase from December 31, 1995. This was
primarily due to the increase in total deposits which resulted in an increase in
cash invested in Federal Funds.
The Company's total deposits at September 30, 1996 were $364,722,000
compared to $307,819,000 at December 31, 1995, a $56,903,000 or 18.5% increase.
Non-interest bearing demand deposits increased $10,655,000, interest bearing
demand deposits increased $2,473,000 and savings and money market deposit
accounts increased $7,104,000 in the first nine months of 1996. Certificates of
deposit increased by $36,671,000 or 44.6% during the first nine months of 1996.
Management believes that the growth in deposits is a result of the recent
strength in the tourism and agribusiness industries within the local economies
in which the Company operates. The loan to deposit ratio at September 30, 1996
was 69.9% as compared to 68.6% at December 31, 1995. The Company's total assets
as of September 30, 1996 increased 16.7% compared to year end 1995.
Loans
Outstanding total loans averaged $233,915,000 for the nine months ended
September 30, 1996 compared to $201,345,000 for the same period in 1995, an
increase of $32,570,000, or 16.2%. This increase in loans is due to increased
loan demand from qualified borrowers and reflects the strength of the economy in
most of the primary markets which the Company serves. The Company lends
primarily to small and medium sized businesses within its markets, which are
comprised principally of the Salinas, Watsonville, Monterey and Carmel areas. A
majority of the Company's loan portfolio consists of loans secured by
commercial, industrial and residential real estate.
Quality of Loans
The Company follows the policy of discontinuing the accrual of interest
income and reversing any accrued and unpaid interest when the payment of
principal or interest is 90 days past due unless the loan is both well-secured
and in the process of collection.
The composition of non-performing loans as of September 30, 1996,
December 31, 1995, and September 30, 1995 is summarized in the following table.
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<PAGE>
Nonperforming Loans
(Dollars in Thousands)
September December September
30, 30, 30,
1996 1995 1995
---- ---- ----
Accruing loans
past due 90 days
or more
Commercial $ 0 $ 0 $ 0
Consumer 11 1 0
Real Estate 147 140 423
------ ------ ------
Total $ 158 $ 141 $ 423
Nonaccrual loans
Commercial 663 110 229
Consumer 108 136 151
Real Estate 1,195 747 834
------ ------ ------
Total $1,966 $ 993 $1,214
Total Nonperforming
Loans $2,124 $1,134 $1,637
====== ====== ======
Nonperforming Loans
To Total Loans 0.83% 0.54% 0.83%
Allowance For Possible
Loan Losses To Total
Non Performing Loans 103.01% 211.38% 137.14%
The increase in non-performing loans is primarily due to one real
estate loan for $800,000 which has become delinquent and is consequently on
non-accrual status as of September 30, 1996. The Company does not expect to
sustain losses from any of the non-performing loans in excess of that
specifically provided for in the allowance for possible loan losses. Currently,
the Company's level of non-performing loans to total loans is below that of peer
banks.
In addition to the above, the Company holds six Other Real Estate Owned
(OREO) properties, which aggregate $1,344,000. In all cases, the amount recorded
represented the lesser of the loan balance or current fair value obtained from a
current appraisal less anticipated selling costs; therefore, any identified loss
has already been recognized.
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan extended
and the creditworthiness of the borrower. To reflect the estimated risks of loss
associated with its loan portfolio, additions are made to the Company's
allowance for possible loan losses. As an integral part of this process, the
allowance for possible loan losses is subject to review and possible adjustment
as a result of management's assessment of risk or regulatory examinations
conducted by governmental agencies. The Company's entire allowance is a
valuation allocation created by direct charges against operations through the
provision for possible loan losses.
The provision for possible loan losses charged against operations is
based upon the actual net loan losses incurred plus an amount for other factors
which, in management's judgment, deserve recognition in estimating possible loan
losses. The Company evaluates the adequacy of its allowance for possible loan
losses on a quarterly basis. For the last several years, the Company has also
contracted with an independent loan review consulting firm to evaluate overall
credit quality and the adequacy of the allowance for possible loan losses. Both
internal and external evaluations take into account the following: specific loan
conditions as determined by management; the historical relationship between
charge-offs and the level of the allowance; the estimated future loss in all
significant loans; known deterioration in concentrations of credit, certain
classes of loans or pledged collateral; historical loss experience based on
volume and types of loans; the results of any independent review or evaluation
of the loan portfolio quality conducted by or at the direction of Company
management or by bank regulatory agencies; trends in portfolio volume, maturity
and composition; off-balance sheet credit risk; volume and trends in
delinquencies and nonaccruals; lending policies and procedures including those
for
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<PAGE>
charge-off, collection and recovery; national and local economic conditions and
their effects on specific local industries; and the experience, ability and
depth of lending management and staff. These factors are essentially judgmental
and may not be reduced to a mathematical formula.
The Company closely monitors the local markets in which it conducts its
lending activities. The overall increase in loan demand from qualified borrowers
during the past year is indicative of the strength in the local economic
climate.
<TABLE>
The table set forth below summarizes the actual loan losses and
provision for possible losses for the periods ended September 30, 1996, December
31, 1995, and September 30, 1995.
Charge-Off/Recovery Activity
(Dollars in Thousands)
<CAPTION>
Nine months Year Nine months
Ended Ended Ended
September 30, 1996 December 31,1995 September 30, 1995
------------------ ---------------- ------------------
<S> <C> <C> <C>
Total Loans Outstanding $254,844 $211,344 $197,618
Average Net Loans $233,915 $201,360 $201,345
Allowance Balance
Beginning Of Period 2,397 2,438 2,438
Charge-Offs By Loan Category
Commercial 151 129 114
Consumer 111 61 49
Real Estate 0 131 130
Other 0 0 0
------- ------- -------
Total $ 262 $ 321 $ 293
------- ------- -------
Recoveries By Loan Category
Commercial 5 58 28
Consumer 31 38 29
Real Estate 17 49 43
Other 0 0 0
------- ------- -------
Total $ 53 $ 145 $100
------- ------- -------
Net Charge-Offs $ 209 $ 176 $ 193
------- ------- -------
Provision Charged
To Expense $0 $135 $0
Allowance Balance
End Of Period $ 2,188 $ 2,397 $ 2,245
======= ======= =======
Allowance For Possible
Loan Losses
To Total Loans 0.86% 1.13% 1.14%
Annualized Net Charge-
Offs To Average Loans 0.12% 0.09% 0.13%
</TABLE>
The Company did not provide an additional provision to the allowance
for possible loan losses for the nine months ended September 30, 1996, or
September 30, 1995, primarily due to management's recognition of the strength
and growth of the local economy, resulting in a lower level of classified loans
and the reduced potential of future charge-offs.
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<PAGE>
The provision for possible loan losses charged against earnings is
based upon an analysis of the actual migration of loans to losses plus an amount
for other factors which, in management's judgment, deserve recognition in
estimating possible loan losses. While these factors cannot be reduced to a
mathematical formula, it is management's view that the allowance for possible
loan losses of $2,188,000 or .86% of total loans was adequate as of September
30, 1996.
Results of Operations
Nine months Ended September 30, 1996
Compared with
Nine months Ended September 30, 1995
Net income for the nine months ended September 30, 1996 was $4,112,000,
an increase of $189,000 or 4.8% as compared to the same 1995 period. The
increase in net income for the period was due primarily to an increase in net
interest income of $626,000 partially offset by an increase in non-interest
expense of $439,000. In addition, other income increased by $86,000 over the
same period in 1995. The increase in net interest income is due to growth in
average total loans of $32,570,000 partially offset by an increase in average
interest bearing deposits of $39,052,000 compared to the same 1995 period.
The average balance of interest earning assets during the nine months
ended September 30, 1996 was $342,446,000, a $44,290,000 or 14.9% increase over
the comparable 1995 period. The Company's average yield on earning assets for
the nine months ended September 30, 1996 decreased to 8.3% compared to 8.5%
during the comparable period in 1995. Total interest income increased $2,248,000
or 11.8% for the nine months ended September 30, 1996 compared to the same 1995
period due to an increase in average interest earning assets of $44,290,000.
Average deposits for the Company for the nine months ended September
30, 1996 were $334,172,000, a $44,185,000 or 15.2% increase compared to the
period ended September 30, 1995. The Company's average cost of funds for the
nine months ended September 30, 1996 was 3.4% which yielded a net interest
margin of 5.7%. This compares to an average cost of funds of 3.0% and a net
interest margin of 6.3% for the comparable 1995 period. Interest expense of
$6,639,000 for the nine months ended September 30, 1996 was $1,622,000 or 32.3%
over the comparable 1995 period due to an increase in average interest bearing
deposits of $39,052,000 and an increase in the average rate paid on deposits of
0.4%. Net interest income for the nine months ended September 30, 1996 increased
$626,000 or 4.5% and resulted from the increase of $2,248,000 in total interest
income partially offset by an increase of $1,622,000 in total interest expense.
The Company did not make any additional provisions to the allowance for
possible loan loss for the nine months ended September 30, 1996 or 1995. The
analysis of the loan portfolio completed by the Company indicates that the
current allowance for loan losses is adequate based on the Company's calculated
provision requirements.
Total loans charged-off net of recoveries for the nine months ended
September 30, 1996 amounted to $209,000 compared to $193,000 net of recoveries
for the same period in 1995. Annualized net loan charge-offs as a percentage of
average loans for the nine months ended September 30, 1996 was 0.12% compared to
0.13% for the nine months ended September 30, 1995 and .09% for the year ended
December 31, 1995.
Total other income was $1,516,000 for the nine months ended September
30, 1996, an $86,000 or 6.0% increase compared to the same period of 1995. Gain
on sale of investment securities increased by $33,000, other fees increased by
$31,000, and mortgage banking fees increased $28,000 for the nine months ended
September 30, 1995 partially offset by a decrease in deposit service charges of
$12,000 as compared to the same period in 1995.
Salaries and benefits expense for the nine months ended September 30,
1996 was $5,306,000, a $454,000 or 9.4% increase over the comparable 1995
period. This variance resulted primarily from normal salary increases and an
increase in the Company's health insurance premiums. The Company employed 163
full time equivalent employees at September 30, 1996 compared to 165 full time
equivalent employees at December 31, 1995 and 158 full time equivalent employees
at September 30, 1995.
Total other expenses, excluding salaries and benefits, for the nine
months ended September 30, 1996, was $4,187,000, a $15,000 or 0.4% decrease from
the comparable 1995 period. This decrease was the result of a decrease in the
Company's FDIC Assessment of $306,000 compared to the same period in 1995. In
addition,
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<PAGE>
legal and professional fees increased from $409,000 in 1995 to $535,000 in 1996
primarily due to legal and accounting fees incurred due to the pending merger of
South Valley Bancorporation with and into Pacific Capital Bancorp. (See Item 5,
Other Information) Other variances included occupancy expense which increased
$52,000 due to normal rent increases and costs associated with the remodeling of
the Company's Salinas Main Branch. Advertising and promotion expense also
increased during the nine months ended September 30, 1996 by $32,000 or 9.8%
over the comparable period in 1995.
Applicable income taxes of $2,575,000 for the nine months ended
September 30, 1996 were $84,000, or 3.4% more than the comparable 1995 period.
The Company's effective tax rate for the nine months ended September 30, 1996
was 38.5% compared to 38.8% for the same period in 1995.
Results of Operations
Three Months Ended September 30, 1996
Compared with
Three Months Ended September 30, 1995
Net income of $1,353,000 for the three months ended September 30, 1996
increased by $42,000 or 3.2% as compared to the same 1995 period. The increase
in net income for the period was due primarily to an increase in net interest
income of $379,000 mostly offset by an increase in non-interest expense of
$330,000.
The average balance of interest earning assets during the three months
ended September 30, 1996 was $361,637,000, a $49,578,000 increase over the
comparable 1995 period due to a $49,087,000 increase in average loans
outstanding during the quarter. The Company's average yield on earning assets
for the three months ended September 30, 1996 decreased to 8.2% from 8.4% during
the comparable period in 1995. The decrease in average yields is due to a
decrease in rates paid on adjustable rate loans within the loan portfolio due to
rate decreases in the Prime Rate over the latter part of 1995. Total interest
income increased $833,000 or 12.6% for the three months ended September 30, 1996
compared to the same 1995 period due to the increase in average interest earning
assets.
Average deposits for the Company for the three month period ended
September 30, 1996 were $355,621,000, a $52,224,000 or 17.2% increase compared
to the three months ended September 30, 1995. The Company's average cost of
funds for the three months ended September 30, 1996 was 3.4% which yielded a net
interest margin of 5.6%. This compares to an average cost of funds of 3.2% and a
net interest margin of 6.0% for the same period in 1995. Interest expense of
$2,379,000 for the three months ended September 30, 1996 was $454,000 or 23.6%
over the comparable 1995 period due to an increase in average interest bearing
deposits of $43,218,000 and, to a lesser extent, an increase in the average rate
paid on deposits of 0.2%. Net interest income for the three month period ended
September 30, 1996 increased $379,000 or 8.1% and resulted from the increase of
$833,000 in total interest income and an increase of $454,000 in total interest
expense.
Total loan charge-offs net of recoveries for the three months ended
September 30, 1996 amounted to $155,000, compared to $177,000 of net recoveries
for the same period in 1995. Annualized net loan charge-offs as a percentage of
average loans for the three months ended September 30, 1996 was 0.25% compared
to 0.35% for the three months ended September 30, 1995.
Total other income was $476,000 for the three months ended September
30, 1996, a $2,000 or 0.4% decrease compared to the same period of 1995.
Mortgage banking fees decreased by $18,000 or 45.0% during the third quarter of
1996 compared to the same period in 1995. Other variances include gain on sale
of loans which increased by $7,000 and deposit service charges which increased
from $351,000 to $356,000 in the third quarter of 1996.
Salaries and benefits expense for the three months ended September 30,
1996 was $1,766,000, a $121,000 or 7.4% increase over the comparable 1995
period, and resulted primarily from normal salary increases and an increase in
the Company's group insurance premiums. The Company employed 161 full time
equivalent employees at September 30, 1996 compared to 165 full time equivalent
employees at December 31, 1995 and 158 full time equivalent employees at
September 30, 1995.
Total other expenses, excluding salaries and benefits, for the three
months ended September 30, 1996, was $1,573,000, a $209,000 or 15.3% increase
from the comparable 1995 period. The increase resulted primarily from an
increase in legal and professional fees of $136,000 principally associated with
the pending merger of South Valley Bancorporation with and into Pacific Capital
Bancorp. (See Item 5, Other Information)
-13-
<PAGE>
Other expense also increased in the third quarter of 1996 to $433,000 from
$375,000 in the same period in 1995 due primarily to expense associated with
OREO.
Applicable income taxes of $844,000 for the three months ended
September 30, 1996 were $5,000, or 0.6% more than the comparable 1995 period.
The Company's effective tax rate for the three months ended September 30, 1996
was 38.4% compared to 39.0% for the same period in 1995.
Liquidity Management
Liquidity represents the ability of the Company to meet the
requirements of customer borrowing needs as well as fluctuations in deposit
flows.
Core deposits, which include demand, savings and interest bearing
demand accounts, money market accounts and time deposits of less than $100,000,
provide a relatively stable funding base. Core deposits averaged $183,019,000 or
43.1% of average total assets during the three months ended September 30, 1996,
as compared to $158,984,000 or 45.9% of average total assets for the same period
in 1995. At September 30, 1996 core deposits were $184,672,000 or 44.8% of total
assets, compared to $164,574,000 or 46.5% of total assets at year end 1995.
The Company's principal sources of asset liquidity are cash and cash
due from banks, time deposits with other financial institutions, Federal Funds
sold, short term investments, and available-for-sale investment securities. At
September 30, 1996 these sources represented $131,779,000 or 36.1% of total
deposits compared to $117,794,000 or 38.3% at year end 1995. This increase in
liquid assets for the nine months ended September 30, 1996 resulted primarily
from an increase in Federal Funds sold and short term investments.
In the opinion of management, there are sufficient resources to meet
the liquidity needs of the Company at present and projected future levels.
Capital Resources
Capital management is a continuous process of providing adequate
capital for current needs and anticipated future growth. Capital serves as a
source of funds for the acquisition of fixed and other assets and protects
depositors against potential losses. As the Company's assets increase, so do its
capital requirements.
The Company and the Bank are subject to Federal Reserve Board
guidelines and regulations of the Comptroller of the Currency ("Comptroller"),
respectively, governing capital adequacy. The Federal Reserve Board has
established final risk-based and leverage capital guidelines for bank holding
companies which are the same as the Comptroller's capital regulations for
national banks.
The Federal Reserve Board capital guidelines for bank holding companies
and the Comptroller's regulations for national banks set total capital
requirements and define capital in terms of "core capital elements" (comprising
Tier 1 capital) and "supplemental capital elements" (comprising Tier 2 capital).
Tier 1 capital is generally defined as the sum of the core capital elements less
goodwill. The following items are defined as core capital elements: common
stockholders' equity, qualifying noncumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries.
Supplementary capital elements include: allowance for loan and lease losses
(which cannot exceed 1.25% of an institution's risk weighted assets), perpetual
preferred stock not qualifying as core capital, hybrid capital instruments and
mandatory convertible debt instruments, and term subordinated debt and
intermediate-term preferred stock. The maximum amount of supplemental capital
elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital,
net of goodwill.
Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures, which
are multiplied by certain risk weights assigned by the Federal Reserve Board to
those assets. Both bank holding companies and national banks are required to
maintain a minimum ratio of qualifying total capital to risk-weighted assets of
8%, at least one-half of which must be in the form of Tier 1 capital. There are
presently four risk-weight categories: 0% for cash and unconditionally
guaranteed government securities; 20% for conditionally guaranteed government
securities; 50% for performing residential real estate loans secured by first
liens; and 100% for commercial loans.
-14-
<PAGE>
The Federal Reserve Board and the Comptroller also have established a
minimum leverage ratio of 3% Tier I capital to total assets for bank holding
companies and national banks that have received the highest composite regulatory
rating and are not anticipating or experiencing any significant growth. All
other institutions will be required to maintain a leverage ratio of at least 100
to 200 basis points above the 3% minimum.
The following tables show the Company's and the Bank's risk-based and
leverage capital ratios as of September 30, 1996 and December 31, 1995. As
indicated in these tables, the Company's and the Bank's capital ratios
significantly exceeded the minimum capital levels required by current federal
regulations. Management believes that the Company and the Bank will continue to
meet their respective minimum capital requirements in the foreseeable future.
Risk Based Capital Ratio
(Dollars in Thousands)
(Unaudited)
Pacific Capital Bancorp
September 30, 1996 December 31, 1995
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Capital $45,005 14.96% $42,976 17.60%
Tier 1 Capital Minimum
Requirement 12,035 4.00% 9,765 4.00%
------- -------
Excess $32,970 11.79% $33,211 13.60%
======= =======
Total Capital $47,193 15.69% $45,373 18.59%
Total Capital Minimum
Requirement 24,070 8.00% 19,529 8.00%
------- -------
Excess $23,123 7.69% $25,844 10.59%
======= =======
Risk Adjusted Assets $300,870 $244,114
======== ========
First National Bank of Central California
September 30, 1996 December 31, 1995
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Capital $40,731 13.73% $40,532 16.78%
Tier 1 Capital Minimum
Requirement 11,864 4.00% 9,662 4.00%
------- -------
Excess $28,867 9.73% $30,870 12.78%
======= =======
Total Capital $42,919 14.47% $42,929 17.77%
Total Capital Minimum
Requirement 23,728 8.00% 19,325 8.00%
------- -------
Excess $19,191 6.47% $23,604 9.77%
======= =======
Risk Adjusted Assets $296,600 $241,561
======== ========
-15-
<PAGE>
Leverage Ratio
(Dollars in Thousands)
(Unaudited)
Pacific Capital Bancorp
September 30, 1996 December 31, 1995
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Capital to Average
Total Assets $45,005 11.15% $42,976 12.00%
Minimum Leverage $12,104 to 3.00% to $10,747 to 3.00% to
Requirement $20,173 5.00% $17,912 5.00%
Excess $24,832 to 6.15% to $25,064 to 7.00% to
$32,901 8.15% $32,229 9.00%
Average Total Assets $403,452 $358,232
======== ========
First National Bank of Central California
September 30, 1996 December 31, 1995
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Capital to Average
Total Assets $40,731 10.18% $40,532 11.38%
Minimum Leverage $11,999 to 3.00% to $10,685 to 3.00% to
Requirement $19,998 5.00% $17,809 5.00%
Excess $20,733 to 5.18% to $22,723 to 6.38% to
$28,732 7.18% $29,847 8.38%
Average Total Assets $399,963 $356,173
======== ========
Federal banking laws impose restrictions upon the amount of dividends
the Bank may declare to the Company. Federal laws also impose restrictions upon
the amount of loans or advances that the Bank may extend to the Company. In
management's opinion, these do not affect the ability of the Company to meet its
cash obligations.
-16-
<PAGE>
PART II -- OTHER INFORMATION
Item 5. Other Information
On July 18, 1996, the Company entered into an Agreement and
Plan of Reorganization ("Agreement") with South Valley
Bancorporation (Commission File # 2-78293-LA), ("South
Valley") pursuant to which South Valley will merge with and
into the Company in a merger transaction expected to be
accounted for as a pooling-of-interests. The Company plans to
issue .92 shares of Pacific Capital Bancorp common stock for
each share of South Valley common stock, subject to certain
potential downward adjustments described in the Agreement. It
is anticipated that the transaction will be consummated
during the fourth quarter of 1996.Based n the outstanding
shares of South Valley as of September 30, 1996, and the
exchange ratio specified in the Definitive Agreement, the
Company expects to issue approximately 1,285,000 shares in
connection with the merger. As of September 30, 1996, South
Valley had total assets of $183,230,000.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 8, 1996 /S/ D. Vernon Horton
----------------- -----------------------
D. Vernon Horton
Chief Executive Officer
Date November 8, 1996 /S/ Dennis A. DeCius
----------------- -----------------------
Dennis A. DeCius
Executive Vice President
Chief Financial Officer
-18-
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,482
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 2,188
<INVENTORY> 0
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<PP&E> 0
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<TOTAL-ASSETS> 412,510
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<COMMON> 30,961
0
0
<OTHER-SE> 14,044
<TOTAL-LIABILITY-AND-EQUITY> 412,510
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