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 March 31, 1998
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 May 13, 1998
----- ------------
Common stock, no par value 4,314,591 Shares
This report contains a total of 33 pages.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 PAGE
----
PACIFIC CAPITAL BANCORP AND
SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-14
PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 20
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<PAGE>
<TABLE>
PART 1
ITEM 1 - FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
March 31, December 31,
Assets 1998 1997
--------- ---------
<S> <C> <C>
Cash and due from banks $ 44,309 $ 49,982
Federal funds sold and other short term investments 69,079 28,537
--------- ---------
Total cash and equivalents 113,388 78,519
Investment securities:
Available-for-sale securities, at fair value 203,831 220,984
Held-to-maturity securities, at amortized cost
(fair value of $6,598 and $7,347, respectively) 6,614 7,347
Loans available for sale 11,537 10,523
Total loans 421,422 419,293
Less allowance for possible loan losses (4,280) (4,266)
--------- ---------
Net loans 417,142 415,027
Premises and equipment, net 15,361 15,331
Accrued interest receivable and other, net 15,601 16,988
--------- ---------
Total assets $ 783,474 $ 764,719
========= =========
Liabilities and shareholders' equity
Deposits:
Demand, non-interest bearing $ 154,982 $ 174,649
Demand, interest bearing 91,740 97,322
Savings and money market 178,265 173,151
Time certificates 275,638 238,276
--------- ---------
Total deposits 700,625 683,398
Accrued interest payable and other liabilities 8,525 8,763
--------- ---------
Total liabilities 709,150 692,161
Shareholders' equity:
Preferred stock; 20,000,000 shares authorized and unissued -- --
Common stock, no par value; 20,000,000 shares authorized;
4,310,155 and 4,294,403 shares issued and outstanding at
March 31, 1998 and at December 31, 1997, respectively 58,310 58,434
Retained earnings 14,780 12,852
Accumulated other comprehensive income 1,234 1,272
--------- ---------
Total shareholders' equity 74,324 72,558
--------- ---------
Total liabilities and shareholders' equity $ 783,474 $ 764,719
========= =========
<FN>
See accompanying notes to unaudited 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
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 10,369 $ 9,531
Interest on fed funds sold 635 309
Interest on investment securities 3,521 2,146
---------- ----------
Total interest income 14,525 11,986
---------- ----------
Interest expense:
Interest on deposits 4,964 3,855
Other 3 7
---------- ----------
Total interest expense 4,967 3,862
---------- ----------
Net interest income 9,558 8,124
Provision for possible loan losses 345 285
---------- ----------
Net interest income after provision for possible loan losses 9,213 7,839
---------- ----------
Other income:
Service charges 751 620
Gain on sale of loans 5 6
Net gain on securities transactions 4 --
Other 181 179
---------- ----------
Total other income 941 805
---------- ----------
Other expenses:
Salaries and benefits 3,145 2,747
Occupancy 607 564
Equipment 491 391
Advertising and promotion 45 152
Stationary and supplies 160 232
Legal and professional fees 328 204
Regulatory assessments 70 54
Other operating 668 616
---------- ----------
Total other expenses 5,514 4,960
Earnings before income taxes 4,640 3,684
Income taxes 1,848 1,442
---------- ----------
Net income $ 2,792 $ 2,242
========== ==========
Basic earnings per share $ 0.65 $ 0.52
========== ==========
Diluted earnings per share $ 0.62 $ 0.50
========== ==========
Weighted average shares outstanding 4,296,567 4,292,912
Dilutive effect of stock options 181,848 161,605
---------- ----------
Total weighted average diluted shares outstanding 4,478,415 4,454,517
========== ==========
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Three months Three months
ended ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,792 $ 2,242
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 390 354
Provision for possible loan losses 345 285
Net originations of loans available for sale (1,014) (2,120)
Gain on sale of loans (5) (6)
Deferral of loan origination fees (24) (30)
Change in accrued interest receivable and other assets 1,349 (926)
Change in accrued interest payable and other liabilities (238) (2,032)
--------- ---------
Net cash provided by (used in) operating activities 3,595 (2,233)
--------- ---------
Investing activities:
Net increase in loans (2,517) (8,165)
Recoveries on loans 86 38
Maturities of investment securities 18,529 3,553
Purchases of investment securities (643) (6,504)
Capital expenditures, net (420) (457)
--------- ---------
Net cash provided by (used in) investing activities 15,035 (11,535)
--------- ---------
Financing activities:
Net increase in deposits 17,227 27,241
Cash paid for retirement of stock (875) --
Proceeds from exercise of options 751 104
Cash paid for dividends (864) (653)
--------- ---------
Net cash provided by financing activities 16,239 26,692
--------- ---------
Net increase in cash and equivalents 34,869 12,924
Cash and equivalents at beginning of period 78,519 76,245
========= =========
Cash and equivalents at end of period $ 113,388 $ 89,169
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period
Interest $ 5,432 $ 4,248
Income taxes 150 --
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPRTEHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31, March 31,
1998 1997
------- -------
Net income $ 2,792 $ 2,242
Net change in unrealized gain on
available-for-sale securities (38) (1,201)
------- -------
Total comprehensive income for the period $ 2,754 $ 1,041
======= =======
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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 March 31, 1998 and December 31, 1997, the results of
its operations, statements of cash flows, and comprehensive income for
the periods ended March 31, 1998 and 1997.
Certain information and note 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 March 31, 1998 are not necessarily indicative of the
operating results for the full year ending December 31, 1998.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Statement
establishes standards for the way the public business enterprises are
to report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. This statement is effective for fiscal years
beginning after December 15, 1997. The Company does not believe it will
have a significant impact on its consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. This Statement amends
the disclosure requirements of Statements No. 87, Employers' Accounting
for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This Statement standardizes the
disclosure requirements of Statements No. 87 and No. 106 to the extent
practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. This Statement is
effective for fiscal years beginning after December 15, 1997. The
statement is not anticipated to have a material impact on the financial
condition or results of operations of the Company.
Note 2 - Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, First National Bank of
Central California, ("First National"), and South Valley National Bank
("South Valley"). For purposes used herein, the term "Subsidiary Banks"
shall mean First National and South Valley, collectively. 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 and their affiliates, which at March 31, 1998
amounted to approximately $9,847,000.
Note 4 - Commitments
The Company had outstanding standby letters of credit of approximately
$4,868,000 at March 31, 1998.
Note 5 - Net Income Per Share and Dividends
Net income per share is computed using the weighted average number of
shares of common and
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<PAGE>
common equivalent shares outstanding. On January 28 the Company
declared a $0.20 per share cash dividends to shareholders of record on
March 16, payable on March 31, 1998.
Note 6 - Taxes
As of March 31, 1998, the Company had a deferred tax asset of
approximately $2,977,000. 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.
PART 1
ITEM II - PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Changes in the Financial Statements
Net income for the three months ended March 31, 1998 was $2,792,000 or
$0.62 diluted earnings per share compared to $2,242,000 or $0.50 diluted
earnings per share during the comparable period in 1997. This 24.5% increase in
net income is due mainly to a $1,434,000 increase in net interest income. The
increase in net interest income is due to growth in average total earning assets
of $138,942,000 or 24.9% partially offset by an increase in average interest
bearing deposits of $96,783,000 as compared to the comparable 1997 period.
Outstanding loans were $421,422,000 at March 31, 1998 compared to
$419,293,000 at December 31, 1997, a $2,129,000 or 0.5% increase. Federal Funds
Sold and Investment Securities at March 31, 1998 were $279,524,000, a
$22,656,000 or 8.8% increase from December 31, 1997. This was primarily due to
the increase in total deposits which resulted in an increase in investments in
Federal Funds and investment securities.
The Company's total deposits at March 31, 1998 were $700,625,000
compared to $683,398,000 at December 31, 1997, a $17,227,000 or 2.5% increase.
Non-interest bearing demand deposits decreased $19,667,000, interest bearing
demand deposits decreased $5,582,000, while savings and money market deposit
accounts increased $5,114,000 and certificates of deposit increased by
$37,362,000 during the first three months of 1998. Management believes that the
growth in deposits is a result of the overall strength in the local tourism and
agribusiness industries. In addition, growth in housing demand and a small
influx of businesses moving into the southern Santa Clara County area have
contributed to the Company's deposit growth.
Certain information concerning the Company's average balances, yields,
and rates on average interest-earning assets and interest-bearing liabilities is
set forth in the following table. Interest yields and amounts earned include net
loan fees of $221,000 and $307,000 in 1998 and 1997, respectively.
-8-
<PAGE>
<TABLE>
AVERAGE BALANCE SHEETS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
Average Yield/ Interest Average Yield/ Interest
(Dollars in thousands) Balance Rate Amount Balance Rate Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Investment securities:
Taxable $206,252 6.6% $3,355 $126,269 6.4% $1,982
Non-taxable 14,129 4.8% 166 13,337 5.0% 165
Federal funds sold 47,439 5.4% 635 24,075 5.2% 309
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 267,820 6.3% 4,156 163,681 6.1% 2,456
Loans 429,229 9.8% 10,369 394,426 9.8% 9,530
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 697,049 8.5% 14,525 558,107 8.7% 11,986
Non-earning assets:
Premises and equipment 15,340 15,420
Other 46,682 45,592
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-earning assets 62,022 61,012
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $759,071 $619,119
====================================================================================================================================
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Demand $91,598 0.8% $187 $81,939 1.1% $220
Savings and money market 177,541 3.0% 1,290 162,906 2.8% 1,128
Time certificates 260,915 5.4% 3,486 188,426 5.4% 2,508
Other interest-bearing liabilities 522 2.3% 3 666 4.3% 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 530,576 3.8% 4,966 433,937 3.6% 3,863
Non interest-bearing deposits
And other liabilities:
Demand, non interest-bearing 148,729 115,163
Other liabilities 5,267 4,826
Shareholder's equity 74,499 65,193
- ------------------------------------------------------------------------------------------------------------------------------------
Total other liabilities 228,495 185,182
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $759,071 $619,119
====================================================================================================================================
NET INTEREST INCOME $9,559 $8,123
NET INTEREST MARGIN 5.6% 5.9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net interest margin is expressed as the percentage of net interest income to
average total earning assets. The average balance on non-accrual loans is
immaterial as a percentage of total loans and as such has been included in total
loans. Non-taxable securities and leases have not been calculated on a tax
equivalent basis.
Loans
Outstanding total loans averaged $429,229,000 for the three months
ended March 31, 1998 compared to $394,426,000 for the comparable period in 1997,
an increase of $34,803,000, or 8.8%. This increase in loans is due to growth in
loan demand from qualified borrowers and reflects stability in most of the
primary markets which the Company serves. The Company lends primarily to small
and medium sized businesses and consumers within its markets, which are
comprised principally of Monterey, Santa Cruz, San Benito, and southern Santa
Clara counties.
-9-
<PAGE>
Quality of Loans
The composition of non-performing loans as of March 31, 1998 , December
31, 1997, and March 31, 1997 is summarized in the following table.
Non-performing Loans
(Dollars in Thousands)
March 31, December 31, March 31,
1998 1997 1997
------ ------ ------
Accruing loans
past due 90 days
or more:
Commercial $ -- $ 26 $ 50
Consumer 193 17 41
Real Estate -- -- 671
------ ------ ------
Total $ 193 $ 43 $ 762
Nonaccrual loans:
Commercial 765 1,278 418
Consumer 74 106 113
Real Estate 66 766 1,019
------ ------ ------
Total $ 905 $2,150 $1,550
Total Non-performing
Loans $1,098 $2,193 $2,312
====== ====== ======
Non-performing Loans
To Total Loans 0.26% 0.52% 0.58%
Allowance For Possible
Loan Losses To Total
Non-performing Loans 389.80% 194.53% 168.99%
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 one Other Real Estate Owned
(OREO) property, which totals $1,213,000. The amount recorded represents 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 allowance 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. 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
-10-
<PAGE>
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 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.
The table set forth below summarizes the actual loan losses and
provision for possible losses as of and for the periods ended March 31, 1998 ,
December 31, 1997, and March 31, 1997 :
<TABLE>
Loan Charge-Off/Recovery Activity
(Dollars in Thousands)
<CAPTION>
Three months Year Three months
Ended Ended Ended
March 31, 1998 December 31, 1997 March 31, 1997
-------------- ----------------- --------------
<S> <C> <C> <C>
Loans Outstanding, at period end $421,422 $419,293 $396,835
Average Loans $429,229 $411,546 $394,426
Allowance Balance:
Beginning Of Period 4,266 3,672 3,672
Charge-Offs By Loan Category:
Commercial 384 873 53
Consumer 33 59 4
Real Estate -- 211 31
-------- -------- --------
Total $ 417 $ 1,143 $ 88
-------- -------- --------
Recoveries By Loan Category:
Commercial 49 120 32
Consumer 34 24 4
Real Estate 3 73 2
-------- -------- --------
Total $ 86 $ 217 $ 38
-------- -------- --------
Net Charge-Offs $ 331 $ 926 $ 50
-------- -------- --------
Provision Charged
To Expense $ 345 $ 1,520 $ 285
Allowance Balance
End Of Period $ 4,280 $ 4,266 $ 3,907
======== ======== ========
Allowance For Possible
Loan Losses
To Period End Loans 1.02% 1.02% 0.98%
Annualized Net Charge-offs
to Average Loans 0.31% 0.23% 0.05%
</TABLE>
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 $4,280,000 or 1.02% of total loans was adequate as of March 31,
1998.
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<PAGE>
Results of Operations
Three months ended March 31, 1998
Compared with
Three months ended March 31, 1997
Net income for the three months ended March 31, 1998 was $2,792,000, an
increase of $550,000 or 24.5% as compared to the same 1997 period. The increase
in net income for the period was due primarily to an increase in net interest
income of $1,434,000 partially offset by an increase in non-interest expense of
$554,000. The increase in net interest income is due to growth in average total
earning assets of $138,942,000 partially offset by an increase in average
interest bearing deposits of $96,783,000 compared to the same 1997 period.
The average balance of interest earning assets during the three months
ended March 31, 1998 was $697,049,000, a 24.9% increase over the comparable 1997
period. The Company's average yield on earning assets for the three months ended
March 31, 1998 decreased to 8.5% from 8.7% in the comparable 1997 period. Total
interest income increased $2,539,000 or 21.2% for the three months ended March
31, 1998 compared to the same 1997 period due to the increase in average
interest earning assets.
Average deposits for the Company for the three months ended March 31,
1998 was $678,783,000, a $130,349,000 or 23.8% increase compared to the same
period ended March 31, 1997 . The Company's average cost of funds for the three
months ended March 31, 1998 was 3.8% which yielded a net interest margin of
5.6%. This compares to an average cost of funds of 3.6% and a net interest
margin of 5.9% for the comparable 1997 period. Interest expense of $4,967,000
for the three months ended March 31, 1998 was $1,105,000 or 28.6% over the
comparable 1997 period due to an increase in average interest bearing deposits
of $96,783,000 and an increase in the Company's cost of funds of 0.2%. Net
interest income for the three months ended March 31, 1998 increased $1,434,000
or 17.7%.
The Company made a provision to the allowance for possible loan losses
of $345,000 in the three months ended March 31, 1998 primarily due to the
overall growth experienced within the loan portfolio. An 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 three months ended
March 31, 1998 amounted to $331,000 compared to $50,000 for the same period in
1997. Annualized net loan charge-offs as a percentage of average loans for the
three months ended March 31, 1998 was 0.31% compared to 0.05% for the three
months ended March 31, 1997 and 0.23% for the year ended December 31, 1997.
Total other income was $941,000 for the three months ended March 31,
1998, a $136,000 or 16.9% increase compared to the same period in 1997. Service
charges on deposit accounts increased by $131,000 or 21.1% over the comparable
period in 1997. Other income increased by $5,000 for the three months ended
March 31, 1998, as compared to the same period in 1997.
Salaries and benefits expense for the three months ended March 31, 1998
was $3,145,000, a $398,000 or 14.5% increase over the comparable 1997 period.
This variance resulted primarily from an increase in overall staffing levels to
accommodate internal growth as well as regular salary increases and an increase
in the accrual for salary continuation plans. The Company employed 267 full time
equivalent employees at March 31, 1998 compared to 285 full time equivalent
employees at December 31, 1997 and 259 full time equivalent employees at March
31, 1997.
Total other expenses, excluding salaries and benefits, for the three
months ended March 31, 1998 , was $2,369,000, a $156,000 or 7.0% increase from
the comparable 1997 period. This was primarily due to increases in equipment
expense of $100,000, and an increase in legal and professional expense of
$124,000. These increases were partially offset by a decrease in advertising and
promotion expense of $107,000 and a decrease in stationery expense of $72,000.
Applicable income taxes of $1,848,000 for the three months ended March
31, 1998 were $406,000, or 28.2% more than the comparable 1997 period. The
Company's effective tax rate for the three months ended March 31, 1998 was 39.8%
compared to 39.1% for the same period in 1997.
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<PAGE>
Year 2000
During 1997, the Company began the implementation of its Year 2000
Plan. The Company is utilizing both internal and external resources to identify,
correct or reprogram and test the systems for year 2000 readiness. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received by the Company's primary processing vendors that their systems are year
2000 ready. Based on data received so far, the Company anticipates spending
approximately $200,000 over the remainder of 1998 and 1999 to modify and test
its systems.
Liquidity Management
Liquidity represents the ability of the Company to meet the
requirements of customer borrowing needs as well as fluctuations in deposit
flows.
The Company manages its liquidity primarily by maintaining investments
in overnight fed funds, money market mutual funds, available-for-sale
securities, and by maintaining lines of credit with correspondent banks. At
March 31, 1998, the total of cash and due from banks, overnight fed funds, money
market mutual funds, and available-for-sale securities represented $317,219,000
or 45.3% of total deposits compared to $299,503,000 or 43.8% at year end 1997.
This increase in liquid assets for the three months ended March 31, 1998
resulted primarily from an increase in deposits which were invested in fed 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 Subsidiary Banks 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
shareholders' 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.
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.
-13-
<PAGE>
<TABLE>
The following tables show the Company's and the Subsidiary Banks'
risk-based and leverage capital ratios as of March 31, 1998. The Company's
capital ratios significantly exceeded the minimum capital levels required by
current federal regulations. Management believes that the Company will continue
to meet the respective minimum capital requirements in the foreseeable future.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------- -------------- ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $70,790 13.72% $17,529 11.50% $45,428 12.78%
Tier 1 capital minimum requirement 20,632 4.00% 6,097 4.00% 14,215 4.00%
======================================= ============== ============ ============= ============= ============= ============
Excess 50,158 9.72% 11,432 7.50% 31,213 8.78%
======================================= ============== ============ ============= ============= ============= ============
Total capital 75,070 14.55% 19,054 12.50% 48,177 13.56%
Total capital minimum requirement 41,265 8.00% 12,194 8.00% 28,429 8.00%
- --------------------------------------- -------------- ------------ ------------- ------------- ------------- ------------
Excess 33,805 6.55% 6,860 4.50% 19,748 5.56%
======================================= ============== ============ ============= ============= ============= ============
Risk-adjusted assets $515,811 $152,419 $355,368
======================================= ============== ============ ============= ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------- ------------- ------------ -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to quarterly average
total assets (leverage ratio) $70,790 9.35% $17,529 7.92% $45,428 8.61%
Minimum leverage requirement 22,703 to 3.00% to 6,640 to 3.00% to 15,822 to 3.00% to
37,838 5.00% 11,066 5.00% 26,370 5.00%
- --------------------------------------- ------------- ------------ -------------- -------------- ------------ -----------
Excess 32,952 to 4.35% to 6,463 to 2.92% to 19,058 to 3.61% to
48,087 6.35% 10,889 4.92% 29,606 5.61%
======================================= ============= ============ ============== ============== ============ ===========
Total quarterly average assets $756,764 $221,319 $527,402
======================================= ============= ============ ============== ============== ============ ===========
</TABLE>
Federal banking laws impose restrictions upon the amount of dividends
the Subsidiary Banks may declare to the Company. Federal laws also impose
restrictions upon the amount of loans or advances that the Subsidiary Banks may
extend to the Company. In management's opinion, these do not affect the ability
of the Company to meet its cash obligations.
-14-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
3.1 Articles of incorporation of the Company as amended 1/ (*)
3.2 Bylaws of Company as amended 2/ (*)
10.1 Lease -- 601 Abrego Street, Monterey, Premises 3/ (*)
10.2 Lease for 1001 South Main Street, Salinas, Banking office 2/ (*)
10.3 Lease dated December 15, 1988 by and between the Bank (*)
and James L. Gattis for 307 Main Street, Salinas Old
Town Office. 2/
10.4 Lease dated May 1, 1985 by and between the Bank (*)
and Pacific Capital Bancorp. 4/
10.5 Pacific Capital Bancorp Employee Stock Ownership (*)
Plan and Trust Agreement. 5/
10.6 Master Equipment Lease Agreement between Bank and (*)
Parker North American Corporation. 5/
10.7 Lease dated September 22, 1986 between (*)
Bank and The Saunders Company. 5/
*/ Not Applicable.
- ----------------
1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's Annual
Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31,
1988, and are incorporated herein by reference.
2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual Report
on Form 10-K (File No. 2-87513) for the fiscal year ended December 31, 1984,
which are incorporated by reference.
3/ Filed as Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 2-87513), which is incorporated by reference.
4/ Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1985, which is incorporated by
reference.
5/ Filed as Exhibits 10.24 through 10.26, respectively, to Company's Annual
Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31,
1986, which are incorporated by reference.
-15-
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.9 Lease dated January 24, 1989 by and between First (*)
National Bank of Monterey County and Stanley R.
Haynes. 6/
10.13 Amendment No. One to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 2/
10.14 Amendment No. Two to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 7/
10.15 Amendment No. Three to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 7/
10.16 Lease dated August 10, 1990 by and between the (*)
Trustees of the Stanley Family Trust and Pacific
Capital Bancorp for Carmel Office. 7/
10.17 Assignment of Lease dated November 1, 1990 by and (*)
between Pacific Capital Bancorp and First National
Bank of Monterey-County for Carmel Office. 7/
10.18 Lease dated November 12, 1990 by and between (*)
First National Bank of Monterey County and Carmel
Monterey Travel for Premises located at 601 Abrego
Street, Monterey, California. 7/
10.19 Prunetree Shopping Center Lease dated June 28, 1988 (*)
by and between Dennis R. Keith and Pajaro Valley
Bancorporation. 7/
- ----------------
6/ Filed as Exhibits 10.20 through 10.24, respectively, to the Company's Annual
Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31,
1989, which are incorporated by reference.
7/ Filed as Exhibits 10.25 through 10.32 to the Company's Annual Report on Form
10-K (File No. 0-13528) for the fiscal year ended December 31, 1990, which are
incorporated by reference.
-16-
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.20 Lease dated June 21, 1990 by and between Saucito (*)
Land Co. and First National Bank of Monterey County. 7/
10.22 Amendment No. Four to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 8/
10.23 Amendment dated May 20, 1991 to Lease dated (*)
December 15, 1988 by and between the Bank and
James L. Gattis for 307 Main Street, Salinas Old
Town Office. 8/
10.24 Pacific Capital Bancorp Directors' Stock Option Plan (*)
and Form of Stock Option Agreement. 8/
10.26 Pacific Capital Bancorp 1984 Stock Option Plan (*)
and Forms of Agreements as amended to date. 8/
10.30 Business Recovery Services Agreement dated September (*)
30, 1991 by and between Bank and J.D.B. & Associates,
Inc. 8/
10.31 Consolidated Agreement dated December 17, 1991 (*)
by and between Bank and Unisys with Equipment Sale Agreement,
Software License Agreement and Product License Agreement by
and between Bank and Information Technology, Inc. 8/
10.32 Fidelity and Deposit Company of Maryland Directors and Officers (*)
Liability Insurance Policy including Bank Reimbursement. 8/
10.33 Fidelity and Deposit Company of Maryland (*)
Financial Institution Bond. 8/
10.34 Lease dated January 28, 1993 by and between J.W. and R.W. (*)
McClellan, Partners, and First National Bank of Central
California. 9/
10.35 Exercise of Lease Option as of September 19, 1992 (*)
by and between First National Bank of Central California
and James L. Gattis. 9/
- ----------------
8/ Filed as Exhibits 10.34 through 10.35 to the Company's Annual Report on Form
10-K (File No. 0-13528) for the fiscal year ended December 31, 1991, which are
incorporated by reference.
9/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1993, which are incorporated by
reference.
-17-
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.37 Lease dated November 18, 1993 by and between Hazel Graven (*)
and Vines Stewart and First National Bank of
Central California. 10/
10.38 Software License Agreement for Platform Transfer Module (*)
and Interface dated September 15, 1993 by and between
First National Bank of Central California and Information
Technology, Inc. 10/
10.39 Equipment Sale Agreement dated December 16, 1993 by and (*)
between First National Bank of Central California and
Information Technology, Inc. 10/
10.42 Consolidated Agreement for the purchase of computer hardware (*)
dated December 20, 1993 by and between First National Bank of
Central California and Unisys Corporation. 10/
10.46 Amended Pacific Capital Bancorp 1994 Stock Option Plan (*)
and Form of Incentive and Non-Qualified Stock Option
Agreements. 9/
10.47 Amendment No. Five to Pacific Capital Bancorp Employee (*)
Stock Ownership Plan and Trust. 10/
10.48 Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/ (*)
10.49 Equipment Sale Agreement dated March 22, 1995, by and between (*)
First National Bank of Central California and
Information Technology, Inc. 11/
10.50 Equipment Sale Agreement dated February 2, 1996, by (*)
and between First National Bank of Central California
and Information Technology, Inc. 11/
10.52 Employee Welfare Benefit Plan Agreement dated (*)
January 1, 1995, between Pacific Capital Bancorp
and Great-West Life & Annuity Insurance Co. 11/
- ----------------
9/ Filed as Exhibits to the Company's Registration Statement on Form S-8 (File
No. 33-83848) as filed on September 8, 1994, and Amendment No. 1 to Form S-8 as
filed on November 15, 1994.
10/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1994, which are incorporated by
reference.
11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1995, which are incorporated by
reference.
-18-
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.53 Lease Agreement dated October 29, 1996 by and (*)
between James L. Gattis and Pacific Capital
Bancorp for property located at 517 S. Main
Street, Salinas /12
10.57 Employment Agreement dated November 20, 1996 between South (*)
Valley National Bank and Brad L. Smith /12
10.58 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Clayton C. Larson /13
10.59 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and D. Vernon Horton /13
10.60 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Dennis A. DeCius /13
10.61 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Dale R. Diederick /13
10.62 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Clayton C. Larson /13
10.63 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
D. Vernon Horton /13
10.64 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Dennis A. DeCius /13
10.65 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Dale R. Diederick /13
10.67 Executive Salary Continuation Agreement between South Valley 21
National Bank and Brad L. Smith dated March 24, 1998
27. Financial Data Schedule 33
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K for the quarter ended March 31, 1998
- ----------------
12/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1996, which are incorporated by
reference.
13/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q (File No.
0-13528) for the period ended September 30, 1997 which are incorporated by
reference
-19-
<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.
Pacific Capital Bancorp
Date May 13, 1998 /S/ D. Vernon Horton
------------- --------------------
D. Vernon Horton
Chairman of the Board
Chief Executive Officer
Date May 13, 1998 /S/ Edward J. Czajka
------------- --------------------
Edward J. Czajka
Senior Vice President
Corporate Controller
-20-
EXECUTIVE SALARY CONTINUATION BENEFITS AGREEMENT
This Agreement is by and between SOUTH VALLEY NATIONAL BANK , a
national association (the "Bank"), and BRAD L. SMITH (the "Executive") and is
dated as of March 24, 1998.
A. The Executive is employed by the Bank as its President;
B. The Bank desires that the Executive's services be retained as
hereinafter provided;
C. The Executive is willing to continue in the employ of the Bank,
provided that the Bank agrees to pay to the Executive or the Executive's
Designated Beneficiaries (as defined below), certain benefits in accordance with
the terms and conditions hereinafter set forth; and
D. Both the Executive and the Bank acknowledge and agree that in order
to retain the Executive and provide him with appropriate benefits, the prior
Agreement is amended and restated in its entirety as follows.
In consideration of the services to be performed in the future, as well
as the mutual promises and covenants herein contained, it is agreed as follows:
ARTICLE 1
DEFINITIONS
1.1. Change of Control shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied after the date of this Agreement:
(a) any Person (as defined below) becomes the Beneficial
Owner (as defined below), directly or indirectly, of
securities of the Corporation representing 25% or
more of the combined voting power of the
Corporation's then outstanding securities; or
(b) the majority of the Board of Directors of the
Corporation ceases to be comprised of the members of
the Board on the date hereof or the nominees of such
members; or
(c) the shareholders of the Corporation approve a merger
or consolidation of the Corporation with any other
corporation, other than (i) a merger or consolidation
which would result in the voting securities of the
Corporation outstanding immediately prior thereto
<PAGE>
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity), in combination
with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of
the Corporation, at least 51% of the combined voting
power of the voting securities of the Corporation or
such surviving entity outstanding immediately after
such merger or consolidation, or (ii) a merger or
consolidation effected to implement a
recapitalization of the Corporation (or similar
transaction) in which no Person acquires more than
49% of the combined voting power of the Corporation's
then outstanding securities; or
(d) the shareholders of the Corporation approve a plan of
complete liquidation of the Corporation or an
agreement for the sale or disposition by the
Corporation of all or substantially all of the
Corporation's assets.
For the purposes of this Paragraph 1.1, "Person" shall have the meaning
given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as modified and used in Sections 13(d) and 14(d) thereof;
however, a Person shall not include (i) the Corporation or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or any of its subsidiaries, or (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities. "Beneficial Owner" shall have the meaning defined in Rule 13d-3
under the Exchange Act.
1.2. Designated Beneficiary shall mean the person or persons whom the
Executive shall designate in a valid Beneficiary Designation Notice to receive
the benefits provided hereunder. A Beneficiary Designation Notice shall be valid
only if:
(a) it is in the form attached hereto as Exhibit A and
made a part hereof; and
(b) it is received by the Named Fiduciary and Plan
Administrator prior to the Executive's death.
1.3. Disability shall mean an inability to substantially perform the
essential functions of the Executive's position at the Bank for a period of one
hundred eighty (180) days due to a physical or mental disability, as determined
by a physician in the case of physical disability, or psychiatrist in the case
of mental disability, licensed to practice medicine in California and selected
jointly by the Bank and the Executive.
1.4. Employment Agreement shall mean the written employment agreement,
if any, between the Executive and the Bank.
1.5. Named Fiduciary and Plan Administrator shall mean the Bank.
2
<PAGE>
1.6. Surviving Spouse shall mean the person, if any, who is legally
married to the Executive on the date of the Executive's death.
1.7. Termination for Cause shall mean termination of the employment of
the Executive by reason of any of the following:
(a) failure to qualify for a surety bond as provided in
Paragraph 11 of the Employment Agreement;
(b) violation of any law, rule or regulation (other than
a traffic violation or similar offense);
(c) acts causing termination of the Bank's Banker's
Blanket Bond with respect to the Executive;
(d) repeated insobriety or usage of drugs without
prescription;
(e) misappropriation of the Bank's property;
(f) any act of dishonesty;
(g) neglect of duties or negligence in carrying out
duties;
(h) repeated unexcused absence;
(i) breach of any material provision of this Agreement;
and
(j) any act or omission that is seriously detrimental to
the Bank's interests.
ARTICLE 2
EMPLOYMENT
2.1. Employment. The Bank agrees to employ the Executive as President
or in such other capacity as the Bank may from time to time determine in
accordance with the Employment Agreement with the Executive. The Executive shall
continue in the employ of the Bank in such capacity and shall hold and perform
the customary responsibilities and duties of this position as designated by the
Bylaws of the Bank and as directed by the Bank through its Boards of Directors
in accordance with the Employment Agreement. The Executive has a separate
Employment Agreement with the Bank, and in the event of any discrepancy or
different treatment of any term or condition in this Agreement from such
Employment Agreement, or any renewal or extension thereof, such Employment
Agreement shall control, except that such Employment Agreement shall not limit
in any way the timing or the amount of benefits to be paid to the Executive
under this Agreement.
3
<PAGE>
2.2. Full Efforts. The Executive agrees to devote his full time and
attention exclusively to the business and affairs of the Bank except during
vacation periods, and to use his best efforts to furnish faithfully and
satisfactorily services to the Bank.
2.3. Fringe Benefits. The salary continuation benefits provided by this
Agreement are granted by the Bank as an additional fringe benefit to the
Executive and are not a part of any salary reduction plan or any arrangement
deferring a bonus or a salary increase. The Executive has no option to take any
current payments or bonus in lieu of these salary continuation benefits.
ARTICLE 3
BENEFITS PAYABLE UPON NORMAL RETIREMENT
3.1. Normal Retirement. If the Executive shall continue in the
employment of the Bank at least until attaining the age of sixty-five (65)
years, the Executive may retire from active daily employment as of the first day
of the month following attainment of the age of sixty-five (65), or upon such
later date as may be mutually agreed upon by the Executive and the Bank ("Normal
Retirement"). Notwithstanding anything to the contrary, this Section 3.1 does
not prohibit the Executive from continuing to work after the age of sixty-five
(65) years.
3.2. Normal Retirement Benefits. Upon Normal Retirement, the Bank shall
pay to the Executive, Fifty Thousand Dollars ($50,000.00) per year, payable in
equal monthly installments commencing on the first day of the first month
following the date of Normal Retirement, for a period of One Hundred Eighty
(180) months, subject to the conditions and limitations hereafter set forth
("Normal Retirement Benefits"). The Normal Retirement Benefits shall be in lieu
of any other retirement, death, disability or termination benefits under this
Agreement.
3.3. Payment of Normal Retirement Benefits to Designated Beneficiary or
Surviving Spouse. In the event the Executive dies before receiving the full
amount of Normal Retirement Benefits to which he is entitled under Section 3.2,
the Bank will continue to make payments of the remaining balance of the Normal
Retirement Benefits to the Designated Beneficiary. If there is no Designated
Beneficiary prior to the Executive's death, the Bank will continue to make
payments of the remaining balance of the Normal Retirement Benefits to the
Executive's Surviving Spouse at the time of death, or if there is no Surviving
Spouse, to a duly qualified personal representative, executor or administrator
of the Executive's estate.
4
<PAGE>
ARTICLE 4
BENEFITS PAYABLE UPON DEATH OR DISABILITY
4.1. Death Benefits. In the event the Executive should die while
actively employed by the Bank at any time after the date of this Agreement and
after the age of 55, but prior to (a) Early Retirement (as defined in Article
6.1), (b) Normal Retirement or (c) retirement after the age of sixty-five (65),
the Bank will pay to the benefits set forth in Section 3.2 commencing on the
first day of the first month following the Executive's death ("Death Benefits")
in accordance with the payment provisions set forth in Section 3.2 and 3.3.
Death Benefits shall be in lieu of any other retirement disability or
termination benefits under this Agreement.
4.2. Disability Benefits. In the event the Executive incurs a
Disability while actively employed by the Bank at any time after the date of the
Agreement and after the age of 55, but prior to (a) Early Retirement (as defined
in Article 6.1), (b) Normal Retirement or (c) retirement after the age of
sixty-five (65) (the "Disability Date") , he shall be entitled to receive
disability benefits determined by the following formula:
Multiplying the Normal Retirement Benefits determined under Section 3.2 by a
fraction, the numerator of which is actual number of months the Executive has
been employed by the Bank (including any period of service with any predecessor
of the Bank) until the Disability Date, and the denominator of which is the
total number of months the Executive would have been employed by the Bank
(including any period of service with any predecessor of the Bank) at the date
the Executive would have attained age 65 ("Disability Benefits").
The Disability Benefits shall be payable to the Executive in equal monthly
installments over a period not to exceed One Hundred Eighty (180) months as
mutually agreed upon by the Bank and the Executive commencing on the first day
of the first month following the Disability Date. The Disability Benefits shall
be in lieu of any other retirement, death or termination benefits under this
Agreement. In the event the Executive dies before receiving the full amount of
Disability Benefits to which he is entitled under this Section 4.2, the Bank
will continue to make payments of the remaining balance of the Disability
Benefits in accordance with Section 3.3.
ARTICLE 5
BENEFITS PAYABLE UPON TERMINATION OF EMPLOYMENT
BY THE BANK AND CHANGE OF CONTROL
5.1. Termination of Employment. The Bank reserves the right to
terminate employment of the Executive at any time prior to retirement in
accordance with the Employment Agreement. In the event that the employment of
the Executive is terminated prior to (a) Early Retirement (as defined in Article
6.1), (b) Normal Retirement or
5
<PAGE>
(c) retirement after the age of sixty-five (65), the Executive shall be entitled
to the following benefits under the following circumstances:
(a) Termination Without Cause. If the Executive's termination
of employment is not a Voluntary Termination, nor a Termination For
Cause and the Executive has not reached the age of 55, then the
Executive shall not be entitled to any benefits or payments under this
Agreement. If the Executive's termination of employment is not a
Voluntary Termination nor a Termination for Cause and the Executive is
at least 55 years old, then the Bank shall pay to the Executive
benefits set forth in Section 3.2 commencing on the first day of the
first month following such date of termination of employment subject to
the conditions and limitations hereafter set forth ("Termination
Benefits"). The Termination Benefits shall be payable to the Executive
in equal monthly installments over a period not to exceed One Hundred
Eighty (180) months, as mutually agreed upon by the Bank and the
Executive commencing on the first day of the first month following the
date of termination under this Section 5.1(a). The Termination Benefits
shall be in lieu of any other retirement disability, death or
termination benefits under this Agreement. In the event the Executive
dies before receiving the full amount of Termination Benefits to which
he is entitled, the Termination Benefits shall be payable pursuant to
the payment provisions set forth in Section 3.3.
(b) Termination for Cause. If the Executive's termination of
employment is Termination For Cause, then the Executive shall not be
entitled to any benefits or payments under this Agreement.
(c) Voluntary Termination. It is understood and acknowledged
by the Executive that the purpose of this Agreement is to ensure the
Executive's continued employment with the Bank. In the event the
Executive voluntarily terminates his employment with the Bank for
reason other than an Early Retirement defined in Section 6.1 then the
Executive shall not be entitled to any benefits or payments under this
Agreement.
5.2 Change of Control. In the event of a Change of Control after the
date of this Agreement and after the Executive has reach 55 years of age, the
Executive shall be paid the benefits set forth in Section 3.2 commencing on the
first day of the first month after the date of such Change of Control. Said full
amount is referred to in this Subsection 5.2 as the "Change of Control Payment".
The Change of Control Payment shall be paid in accordance with the payment
provisions of Section 3.2. The Change of Control Payment shall be in lieu of any
other retirement, disability, death or termination benefits under this
Agreement, but shall be in addition to any payment under the Executive's
Employment Agreement. In the event the Executive dies before receiving the full
amount of Change of Control Payment to which he is entitled, such Change of
Control Payment shall be payable pursuant to the payment provisions set forth in
Section 3.3. The Executive acknowledges that the Change of Control Payment paid
to the Executive may be characterized as "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as
6
<PAGE>
amended (the "Code") and subject to an excise tax. The Executive also
acknowledges that the payment of such excise tax is the sole responsibility of
the Executive.
ARTICLE 6
EARLY RETIREMENT
6.1. Early Retirement. The Executive shall have the right to retire
before reaching Normal Retirement, provided he shall have attained the age of
fifty-five (55) years and shall have completed ten (10) years of full time
service with the Bank, including any period of service with any predecessor of
the Bank ("Early Retirement").
6.2. Early Retirement Benefits. Upon the Executive's election for Early
Retirement, he shall be entitled to receive retirement benefits determined by
the following formula:
Multiplying the Normal Retirement Benefits determined under Section 3.2
by a fraction, the numerator of which is the actual number of months
the Executive has been employed by the Bank (including any period of
service with any predecessor of the Bank) until the Early Retirement
Date, and the denominator of which is the total number of months the
Executive would have been employed by the Bank (including any period of
service with any predecessor of the Bank) at the date the Executive
would have attained age 65 ("Early Retirement Benefits").
6.3. Payment. The Early Retirement Benefits shall be payable in one
hundred eighty (180) equal monthly installments commencing on the first day of
the first month after the date of Early Retirement. The Early Retirement
Benefits shall be in lieu of any other retirement, disability, death or
termination benefits under this Agreement.
6.4. Payment of Early Retirement Benefits to Designated Beneficiary or
Surviving Spouse. In the event the Executive dies before receiving the full
amount of Early Retirement Benefits to which he is entitled under Section 6.2,
the Bank will continue to make payments of the remaining balance of the Early
Retirement Benefits in accordance with Section 3.3.
ARTICLE 7
RIGHTS AS UNSECURED GENERAL CREDITOR
7.1 Unsecured General Creditor. The Executive and the Executive's
Designated Beneficiary shall have no legal or equitable rights, interest or
claims in or to any property or assets of the Bank. All the Bank's assets shall
be and remain the general unpledged, unrestricted assets of the Bank. The Bank's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Bank to pay money in the future. The
7
<PAGE>
Executive and his Designated Beneficiary shall be unsecured creditors with
respect to any benefits hereunder.
ARTICLE 8
CLAIMS PROCEDURE
8.1. Filing of Claim. The Executive or his Designated Beneficiary (the
"Claimant") may file a claim for a benefit pursuant to this Agreement. The claim
shall be deemed filed when a written, signed communication is delivered by the
Claimant or the Claimant's authorized representative to the Company. The claim
must state the name of the Claimant and the basis on which the claim is made.
8.2. Action on Claim. Each claim must be acted upon and approved or
disapproved by the Company in writing within thirty (30) days of the date on
which the Company received the claim, unless special circumstances require
further time for processing and the Claimant is advised of the extension. In no
event shall the Company fail to act for more than forty-five (45) days after the
Company received the claim. If the Claimant does not receive such written notice
within such 45-day period, the claim shall be deemed to be denied. If the claim
is denied, in whole or in part, the written notice shall set forth, in a manner
calculated to be understood by the Claimant, the following matters:
1. the specific reason or reasons for the denial;
2. specific reference to pertinent provisions of this Agreement on
which the denial is based;
3. a description of any additional material or information
necessary for the Claimant to perfect the claim and an explanation of
why such material or information is necessary; and
4. an explanation of this Agreement's review procedures.
8.3. Claim Review Procedure. If a claim is denied in whole or in part,
the Claimant or his authorized representative may file a request for review of
the decision of denial within ten (10) days after receipt by the Claimant of the
written notice of denial. The request for review shall be in writing and shall
be delivered to the Company. The request must specify issues or comments which
the Claimant deems pertinent to the Claim. A decision by the Board of Directors
on the request for review shall be made promptly, but not later than ten (10)
days after the Company receives the Claimant's request for review. The Board's
decision on review will be in writing and will include specific reasons for the
Board's decision written in a manner calculated to be understood by the
Claimant.
8
<PAGE>
ARTICLE 9
GENERAL PROVISIONS
9.1. Right to Terminate Employment. No provisions under the Agreement
shall restrict the right of the Bank to terminate the employment of the
Executive.
9.2. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, among the parties hereto with respect to
the salary continuation benefits of the Executive by the Bank and contains all
of the covenants and agreements among the parties, subject to the terms of the
Employment Agreement. Each party acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party or anyone acting on behalf of a party which are not embodied herein, and
that no other agreement, statement, representation, inducement or promise
regarding the subject matter of this Agreement not contained in this Agreement
shall be valid or binding. Any modification, waiver or amendment of this
Agreement will be effective only if it is in writing and signed by the party to
be charged.
9.3. Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. Any failure of a party to assert his or its rights under any
provision of this Agreement at any time (including his right to claim a Change
of Control Payment), shall not prevent such person from asserting and receiving
the full benefit of such rights at any subsequent time. The failure of a party
to insist upon strict adherence to any term of this Agreement on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement.
9.4. Choice of Law and Forum. This Agreement shall be governed by and
construed in accordance with the laws of the State of California. Any action or
proceeding brought upon or arising out of this Agreement or its termination
shall be brought in a forum located within the State of California.
9.5. Binding Effect of Agreement. This Agreement shall inure to the
benefit of and be binding upon the Bank, its successors and assigns, including
without limitation, any person, partnership or corporation which may acquire all
or substantially all of the Bank's assets and business or with or into which the
Bank or its subsidiary banks may be consolidated, merged or otherwise
reorganized, and this provision shall apply in the event of any subsequent
merger, consolidation, reorganization or transfer. The provisions of this
Agreement shall be binding upon and inure to the benefit of Executive and his
heirs and personal representatives. The benefits payable to the Executive under
this Agreement shall not be transferable by the Executive or his Designated
Beneficiary or Surviving Spouse by assignment or otherwise and such rights shall
not be subject to commutation, encumbrance or the claims of the creditors the
Executive, his Designated Beneficiary or Surviving Spouse and any attempt to do
any of the foregoing shall be void.
9
<PAGE>
9.6. Severability. In the event that any term or condition contained in
this Agreement shall for any reason be held by a court of competent jurisdiction
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other term or condition of
this Agreement, but this Agreement shall be construed as if such invalid or
illegal or unenforceable term or condition had never been contained herein.
9.7. Headings. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
9.8. Notices. Any notices to be given hereunder by any party to another
party may be effected either by personal delivery, in writing or by mail,
registered or certified, postage prepaid with return receipt requested, or by
confirmed electronic mail. Mailed notices shall be addressed to the parties at
the addresses indicated at the end of this Agreement, but each party may change
his or her address by written notice in accordance with this paragraph. Notices
delivered personally shall be deemed communicated as of actual receipt; mailed
notices shall be deemed communicated as of five (5) days after mailing.
9.9. Arbitration. Any controversy or claim arising out of or relating
to this Agreement or alleged breach of this Agreement not resolved through the
Claims Procedure set forth in Article 8.1 shall be settled by arbitration in
accordance with the then current rules of the American Arbitration Association
pertaining to employment disputes, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction. Each party shall
pay the fees of the arbitrator he/it selects and of his/its own attorneys, and
the expenses of his/its witnesses and all other expenses connected with
presenting his/its case. Except as otherwise required by law, other costs of the
arbitration, including the cost of any record or transcripts of the arbitration,
administrative fees and all other fees and costs, shall be borne equally by the
parties. Full discovery shall be permitted to the parties to any such
arbitration, including depositions of all relevant witnesses.
9.10. Attorneys' Fees and Costs. If any action at law or in equity is
brought by a party upon or arising out of this Agreement, the prevailing party
shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements incurred in the action, in addition to any other relief to which
it may be entitled.
9.11 Assignment. Except as specifically provided in this Agreement,
neither party may assign or otherwise transfer this Agreement or any of its
rights or obligations hereunder to any third party by operation of law or
otherwise without the prior written consent of the other party; provided,
however, that the Bank (as determined by the Board of Directors of the Bank in
its sole discretion) may assign this entire Agreement to one or more of the
Bank's affiliates, without the consent of the Executive.
10
<PAGE>
IN WITNESS WHEREOF, the Bank and the Executive have executed this
Agreement as of date and year first above written.
SOUTH VALLEY NATIONAL BANK
"Bank"
By: /S/ Clayton C. Larson
- --------------------------
Clayton C. Larson
Vice Chairman, South Valley National Bank
"Executive"
/S/ Brad L. Smith
- -----------------
Brad L. Smith
11
<PAGE>
EXHIBIT A
BENEFICIARY DESIGNATION NOTICE
UNDER THE EXECUTIVE SALARY
CONTINUATION BENEFITS AGREEMENT (THE "AGREEMENT")
Name of Executive: Brad L. Smith
If I shall die prior to the full receipt of benefits under the
Agreement, then all rights under this Agreement that I hereby hold upon my
death, to the extent not previously terminated or forfeited, shall be
transferred to Kathleen M. Smith in the manner provided for in the Agreement.
/S/ Brad L.Smith
---------------------------------
Brad L. Smith
Date:
---------------------------------
Receipt acknowledged on behalf of SOUTH VALLEY NATIONAL BANK by:
/S/ Naomi Kinney
---------------------------------
Naomi Kinney, Director of Human Resources
Date:
---------------------------------
12
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