PRELIMINARY DOCUMENT
Used for drafting 10-Q submission
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission File No.: 0-11113
OR
- - ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
PACIFIC CAPITAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
- - -------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Carrillo Street, Suite 300
Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------------ ----------------
Common Stock - As of May 10, 2000 there were 24,605,308 shares of the issuer's
common stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
Consolidated Statements of Income
Three-Month Periods Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows
Three-Month Periods Ended March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income
Three-Month Periods Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
The financial statements included in this Form 10-Q should be read with
reference to the Pacific Capital Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosures about quantitative and qualitative market risk are
located in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the section on interest
rate sensitivity.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not applicable.
2
<PAGE>
PART 1
FINANCIAL INFORMATION
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 188,973 $ 121,500
Federal funds sold and securities
purchased under
agreement to resell 475,000 --
Money market funds -- --
----------- -----------
Cash and cash equivalents 663,973 121,500
----------- -----------
Securities (Note 4):
Held-to-maturity 125,571 153,264
Available-for-sale 561,005 528,426
Bankers' acceptances and commercial paper 39,450 --
Loans, net of allowance of $30,844 at
March 31, 2000 and $28,686 at
December 31, 1999 (Note 5) 2,030,854 1,953,193
Premises and equipment, net 37,325 35,175
Accrued interest receivable 17,505 17,345
Other assets (Note 6) 68,927 70,379
----------- -----------
Total assets $ 3,544,610 $ 2,879,282
=========== ===========
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 627,347 $ 546,193
Interest bearing deposits 2,421,289 1,893,988
----------- -----------
Total Deposits 3,048,636 2,440,181
Securities sold under agreements
to repurchase and Federal funds purchased 57,925 80,507
Long-term debt and other borrowings (Note 7) 122,854 98,801
Accrued interest payable and other liabilities 65,082 25,220
----------- -----------
Total liabilities 3,294,497 2,644,709
----------- -----------
Shareholders' equity
Common stock (no par value; $0.33 per
share stated value; 60,000,000 authorized;
24,605,308 outstanding at March 31, 2000
and 24,554,294 at December 31, 1999) 8,203 8,186
Surplus 99,863 99,283
Accumulated other comprehensive income (Note 8) (6,404) (6,447)
Retained earnings 148,451 133,551
----------- -----------
Total shareholders' equity 250,113 234,573
----------- -----------
Total liabilities and
shareholders' equity $ 3,544,610 $ 2,879,282
=========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
3
<PAGE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
For the Three-Month
Periods Ended
March 31,
--------------------
2000 1999
-------- --------
Interest income:
Interest and fees on loans $ 61,872 $ 43,193
Interest on securities 10,638 11,264
Interest on Federal funds sold and securities
purchased under agreement to resell 4,765 1,970
Interest on commercial paper 184 257
-------- --------
Total interest income 77,459 56,684
-------- --------
Interest expense:
Interest on deposits 22,921 15,277
Interest on securities sold under agreements
to repurchase and Federal funds purchased 671 262
Interest on other borrowed funds 2,085 731
-------- --------
Total interest expense 25,677 16,270
-------- --------
Net interest income 51,782 40,414
Provision for loan losses (Note 5) 5,573 3,719
-------- --------
Net interest income after provision for loan losses 46,209 36,695
-------- --------
Other operating income:
Service charges on deposits 2,361 2,235
Trust fees 3,823 3,409
Other service charges, commissions and fees, net 9,775 8,537
Net (loss) gain on securities transactions (499) (177)
Other operating income 278 267
-------- --------
Total other income 15,738 14,271
-------- --------
Other operating expense:
Salaries and benefits 14,632 12,795
Net occupancy expense 2,769 2,258
Equipment expense 1,440 1,560
Other expense 10,040 10,912
-------- --------
Total other operating expense 28,881 27,525
-------- --------
Income before income taxes 33,066 23,441
Applicable income taxes 13,246 8,920
-------- --------
Net income $ 19,820 $ 14,521
======== ========
Earnings per share - basic (Note 2) $ 0.81 $ 0.60
Earnings per share - diluted (Note 2) $ 0.80 $ 0.59
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended March 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 19,820 $ 14,521
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,591 1,573
Provision for loan and lease losses 5,573 3,719
Net amortization of discounts and premiums for
securities and commercial paper (1,864) (1,663)
Net change in deferred loan origination
fees and costs 170 165
Net (gain) loss on sales and calls of securities 499 178
Change in accrued interest receivable and other assets 976 (8,091)
Change in accrued interest payable and other liabilities 39,907 7,364
--------- ---------
Net cash provided by operating activities 66,672 17,766
--------- ---------
Cash flows from investing activities:
Proceeds from call or maturity of securities 42,449 96,066
Purchase of securities (75,854) (30,404)
Proceeds from sale of securities 29,883 9,881
Proceeds from maturity of commercial paper -- 35,000
Purchase of commercial paper (39,449) (24,868)
Net increase in loans made to customers (83,404) (126,510)
Purchase or investment in premises and equipment (3,382) (1,618)
--------- ---------
Net cash used in investing activities (129,757) (42,453)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 608,455 32,034
Net decrease in borrowings with maturities
of 90 days or less (22,582) (11,126)
Net increase (decrease) in long-term debt and other
borrowings 24,053 12,356
Proceeds from issuance of common stock 552 1,308
Payments to retire common stock -- --
Dividends paid (4,920) (4,358)
--------- ---------
Net cash provided by financing activities 605,558 30,214
--------- ---------
Net increase in cash and cash equivalents 542,473 5,527
Cash and cash equivalents at beginning of period 121,500 185,663
--------- ---------
Cash and cash equivalents at end of period $ 663,973 $ 191,190
========= =========
Supplemental disclosure:
Cash paid for the three months ended:
Interest $ 30,035 $ 16,809
Income taxes $ 327 $ 4,662
Non-cash additions to other real estate owned $ -- $ --
Non-cash additions to loans $ -- $ 142
</TABLE>
5
<PAGE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands except per share amounts)
For the Three-Month
Periods Ended
March 31,
---------------------
2000 1999
-------- --------
Net income $ 19,820 $ 14,521
Other comprehensive income, net of tax (Note 8):
Unrealized loss on securities:
Unrealized holding gains (losses) arising
during period 542 (1,220)
Less: reclassification adjustment for
gains (losses) included in net income (499) (177)
-------- --------
Other comprehensive income (loss) 43 (1,397)
-------- --------
Comprehensive income $ 19,863 $ 13,124
======== ========
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
Pacific Capital Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding company,
Pacific Capital Bancorp ("Bancorp"), and its wholly owned subsidiaries, Santa
Barbara Bank & Trust ("SBB&T"), First National Bank of Central California
("FNB") and its affiliate South Valley National Bank ("SVNB"), and Pacific
Capital Commercial Mortgage, Inc. All references to "the Company" apply to
Pacific Capital Bancorp and its subsidiaries. "Bancorp" will be used to refer to
the parent company only. Material intercompany balances and transactions have
been eliminated.
2. Earnings Per Share
Earnings per share for all periods presented in the Consolidated Statements of
Income are computed based on the weighted average number of shares outstanding
during each year. Diluted earnings per share include the effect of the potential
issuance of common shares. For the Company, these include only shares issuable
on the exercise of outstanding stock options.
The computation of basic and diluted earnings per share for the three-month
period ended March 31, 2000 and 1999, was as follows (shares and net income
amounts in thousands):
Three-month Periods
Basic Diluted
Earnings Earnings
Per Share Per Share
------------- ------------
Ended March 31, 2000
Numerator--net income $19,820 $19,820
======= =======
Denominator--weighted average
shares outstanding 24,568 24,568
Plus: net shares issued in
assumed stock option exercises 280
-------
Diluted denominator 24,848
=======
Earnings per share $ 0.81 $ 0.80
Ended March 31, 1999
Numerator--net income $14,521 $14,521
======= =======
Denominator--weighted average
shares outstanding 24,240 24,240
Plus: net shares issued in
assumed stock option exercises 372
-------
Diluted denominator 24,612
=======
Earnings per share $ 0.60 $ 0.59
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in a condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been reflected in the financial statements. However, the results of
operations for the
7
<PAGE>
three-month period ended March 31, 2000, especially considering the highly
seasonal nature of the Company's income tax refund programs, are not necessarily
indicative of the results to be expected for the full year. Certain amounts
reported for 1999 have been reclassified to be consistent with the reporting for
2000.
For the purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, money market funds, Federal funds sold, and securities
purchased under agreement to resell.
4. Securities
The Company's securities are classified as either "held-to-maturity" or
"available-for-sale." Securities for which the Company has positive intent and
ability to hold until maturity are classified as held-to-maturity. Securities
that might be sold prior to maturity because of interest rate changes, to meet
liquidity needs, or to better match the repricing characteristics of funding
sources are classified as available-for-sale. If the Company were to purchase
securities principally for the purpose of selling them in the near term for a
gain, they would be classified as trading securities. The Company holds no
securities that should be classified as trading securities.
SBB&T and FNB are members of the Federal Reserve Bank of San Francisco ("FRB").
SBB&T and FNB aremembers of the Federal Home Loan Bank of San Francisco ("FHLB")
and FNB became a member in January 2000. The banks are required to hold shares
of stock in these two organizations as a condition of membership. These shares
are reported as equity securities.
The amortized historical cost and estimated market value of debt securities by
contractual maturity are shown below. The issuers of certain of the securities
have the right to call or prepay obligations before the contractual maturity
date. Depending on the contractual terms of the security, the Company may
receive a call or prepayment penalty in such instances.
8
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Held-to- Available-
Maturity for-Sale Total
------------------------------------------------------
<S> <C> <C> <C>
March 31, 2000
Amortized cost:
In one year or less $ 48,334 $ 97,465 $ 145,799
After one year through five years 32,569 408,251 440,820
After five years through ten years 6,988 15,363 22,351
After ten years 37,680 33,538 71,218
Equity securities -- 17,256 17,256
----------------------------------------------------------
Total securities $ 125,571 $ 571,873 $ 697,444
==========================================================
Estimated market value:
In one year or less $ 48,920 $ 97,138 $ 146,058
After one year through five years 34,833 400,628 435,461
After five years through ten years 7,619 14,286 21,905
After ten years 40,635 31,697 72,332
Equity securities -- 17,256 17,256
----------------------------------------------------------
Total securities $ 132,007 $ 561,005 $ 693,012
==========================================================
December 31,1999
Amortized cost:
In one year or less $ 59,920 $ 92,661 $ 152,581
After one year through five years 48,445 376,113 424,558
After five years through ten years 7,080 24,277 31,357
After ten years 37,819 34,848 72,667
Equity securities -- 11,649 11,649
----------------------------------------------------------
Total securities $ 153,264 $ 539,548 $ 692,812
==========================================================
Estimated market value:
In one year or less $ 60,466 $ 92,524 $ 152,990
After one year through five years 51,264 369,999 421,263
After five years through ten years 7,778 22,889 30,667
After ten years 39,642 31,365 71,007
Equity securities -- 11,649 11,649
------------------------------------------------------
Total securities $ 159,150 $ 528,426 $ 687,576
======================================================
</TABLE>
9
<PAGE>
<TABLE>
The amortized historical cost, market values and gross unrealized gains and
losses of securities are as follows:
<CAPTION>
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 2000
Held-to-maturity:
U.S. Treasury obligations $ 20,001 $ 7 $ (38) $ 19,970
U.S. agency obligations 12,502 -- (97) 12,405
Mortgage-backed securities 471 5 -- 476
State and municipal securities 92,597 6,571 (12) 99,156
---------------------------------------------------------------------
Total held-to-maturity 125,571 6,583 (147) 132,007
---------------------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 131,138 107 (1,000) 130,245
U.S. agency obligations 197,064 1 (2,246) 194,819
Mortgage-backed securities 165,383 22 (5,706) 159,699
Asset-backed securities 14,590 2 (119) 14,473
State and municipal securities 46,442 271 (2,200) 44,513
Equity securities 17,256 -- -- 17,256
---------------------------------------------------------------------
Total available-for-sale 571,873 403 (11,271) 561,005
---------------------------------------------------------------------
Total securities $ 697,444 $ 6,986 $ (11,418) $ 693,012
=====================================================================
December 31, 1999
Held-to-maturity:
U.S. Treasury obligations $ 35,043 $ 64 $ (40) $ 35,067
U.S. agency obligations 12,502 -- (87) 12,415
Mortgage-backed securities 556 8 (1) 563
State and municipal securities 105,163 6,235 (293) 111,105
---------------------------------------------------------------------
Total held-to-maturity 153,264 6,307 (421) 159,150
---------------------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 121,701 49 (691) 121,059
U.S. agency obligations 177,985 -- (2,197) 175,788
Mortgage-backed securities 172,333 21 (4,849) 167,505
Asset-backed securities 10,979 7 (114) 10,872
State and municipal securities 44,901 42 (3,390) 41,553
Equity securities 11,649 -- -- 11,649
---------------------------------------------------------------------
Total available-for-sale 539,548 119 (11,241) 528,426
---------------------------------------------------------------------
Total securities $ 692,812 $ 6,426 $ (11,662) $ 687,576
=====================================================================
</TABLE>
The Company does not expect to realize any of the unrealized gains or losses
related to the securities in the held-to-maturity portfolio because it is the
Company's intent to hold them to maturity. At that time the par value will be
received. An exception to this expectation occurs when securities are called by
the issuer prior to their maturity. In these situations, gains or losses may be
realized. Gains or losses may be realized on securities in the
available-for-sale portfolio as the result of sales of these securities carried
out in response to changes in interest rates or for other reasons related to the
management of the components of the balance sheet.
10
<PAGE>
5. Loans and the Allowance for Credit Losses
<TABLE>
The balances in the various loan categories are as follows:
<CAPTION>
(in thousands) March 31, 2000 December 31, 1999 March 31, 1999
---------------- ----------------- -----------------
<S> <C> <C> <C>
Real estate:
Residential $ 493,613 $ 484,562 $ 432,025
Nonresidential 476,718 435,913 496,821
Construction 150,158 171,870 119,274
Commercial loans 569,275 577,407 368,427
Home equity loans 52,742 49,902 44,588
Consumer loans 154,601 148,051 125,177
Tax refund loans 46,718 -- 18,389
Leases 99,775 93,322 89,057
Municipal tax-exempt obligations 11,915 12,530 8,540
Other loans 6,183 8,322 5,463
---------------- ----------------- -----------------
Total loans $ 2,061,698 $ 1,981,879 $ 1,707,761
================ ================= =================
</TABLE>
The loan balances at March 31, 2000, December 31, 1999 and March 31, 1999 are
net of approximately $5,035,000, $4,781,000, and $4,162,000 respectively, in
deferred net loan fees and origination costs.
Specific kinds of loans are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. Because this definition is very similar to that used by
Management to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on nonaccrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income in the current period. No further income is recognized until all recorded
amounts of principal are recovered in full or until circumstances have changed
such that the loan is no longer regarded as impaired.
<TABLE>
Impaired loans are reviewed each quarter to determine whether a valuation
allowance for loan loss is required. The amount of the valuation allowance for
impaired loans is determined by comparing the recorded investment in each loan
with its value measured by one of three methods. The first method is to estimate
the expected future cash flows and then discount them at the effective interest
rate. The second method is to use the loan's observable market price if the loan
is of a kind for which there is a secondary market. The third method is to use
the value of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by the selected method exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the related allowance (dollars in thousands) as of March 31,
2000, December 31, 1999 and March 31, 1999:
<CAPTION>
March 31, 2000 December 31, 1999 March 31, 1999
-------------- ----------------- --------------
<S> <C> <C> <C>
Loans identified as impaired $ 8,355 $9,496 $13,273
Impaired loans for which a valuation
allowance has been determined $ 8,355 $8,221 $ 8,632
Amount of valuation allowance $ 3,370 $3,726 $ 3,342
Impaired loans for which no valuation
allowance was determined necessary $ -- $1,275 $ 4,641
</TABLE>
Because the loans currently identified as impaired have unique risk
characteristics, the valuation allowance is determined on a loan-by-loan basis.
The following table discloses additional information (dollars in thousands)
about impaired loans for the three-month periods ended March 31, 2000 and 1999:
11
<PAGE>
Three-month Periods
Ended March 31,
2000 1999
---- ----
Average amount of recorded
investment in impaired loans $6,449 $13,368
Collections of interest from
impaired loans and recognized
as interest income $ -- $ --
The Company also provides an allowance for credit losses for other loans. These
include (1) groups of loans for which the allowance is determined by historical
loss experience ratios for similar loans; (2) specific loans that are not
included in one of the types of loans covered by the concept of "impairment" but
for which repayment is nonetheless uncertain; and (3) losses inherent in the
various loan portfolios, but which have not been specifically identified as of
the period end. The amount of the various components of the allowance for credit
losses are based on review of individual loans, historical trends, current
economic conditions, and other factors. This process is explained in detail in
the notes to the Company's Consolidated Financial Statements in its Annual
Report on Form 10-K for the year ended December 31, 1999.
Loans that are deemed to be uncollectible are charged-off against the allowance
for credit losses. Uncollectibility is determined based on the individual
circumstances of the loan and historical trends.
The valuation allowance for impaired loans of $3.4 million is included with the
general allowance for credit losses of $27.6 million and allowance for credit
losses from tax refund loans of $3.2 million reported on the balance sheet for
March 31, 2000, which these notes accompany, and in the "All Other Loans" column
in the statement of changes in the allowance account for the first three months
of 2000 shown below. The amounts related to tax refund anticipation loans and to
all other loans are shown separately.
(in thousands) Refund
Tax Refund Other
Loans Loans Total
-------- -------- --------
Balance, December 31, 1999 $ 488 $ 28,198 $ 28,686
Provision for loan losses 3,631 1,915 5,546
Loan losses charged against allowance (2,869) (5,964) (8,833)
Loan recoveries added to allowance 1,959 3,486 5,445
-------- -------- --------
Balance, March 31, 2000 $ 3,209 $ 27,635 $ 30,844
======== ======== ========
Balance, December 31, 1998 $ 333 $ 28,963 $ 29,296
Provision for loan losses 2,759 960 3,719
Loan losses charged against allowance (3,323) (965) (4,288)
Loan recoveries added to allowance 2,102 679 2,781
-------- -------- --------
Balance, March 31, 1999 $ 1,871 $ 29,637 $ 31,508
======== ======== ========
6. Other Assets
Property acquired as a result of defaulted loans is included within other assets
on the balance sheets. Property from defaulted loans is carried at the lower of
the outstanding balance of the related loan at the time of foreclosure or the
estimate of the market value of the assets less disposal costs. As of March 31,
2000 and December 31, 1999, the Company held some properties which it had
obtained in foreclosures. However, because of the uncertainty relating to
realizing any proceeds from their disposal in excess of the cost of disposal,
the Company had written their carrying value down to zero.
12
<PAGE>
Also included in other assets on the balance sheet for March 31, 2000 and
December 31, 1999, are deferred tax assets and goodwill. In connection with
acquisitions of other financial institutions, the Company recognized the excess
of the purchase price over the estimated fair value of the assets received and
liabilities assumed as goodwill. The current balance of this intangible is $16.1
million. The purchased goodwill is being amortized over 10 and 15 year periods.
Intangible assets, including goodwill, are reviewed each year to determine if
circumstances related to their valuation have been materially affected. In the
event that the current market value is determined to be less than the current
book value of the intangible asset, a charge against current earnings would be
recorded .
7. Long-term Debt and Other Borrowings
Long-term debt and other borrowings included $118.5 million and $85.0 million of
advances from the Federal Home Loan Bank of San Francisco at March 31, 2000 and
December 31, 1999, respectively.
8. Comprehensive Income
Components of comprehensive income are changes in equity other than those
resulting from investments by owners and distributions to owners. Net income is
the primary component of comprehensive income. For the Company, the only
component of comprehensive income other than net income is the unrealized gain
or loss on securities classified as available-for-sale. The aggregate amount of
such changes to equity that have not yet been recognized in net income are
reported in the equity portion of the Consolidated Balance Sheets as accumulated
other comprehensive income.
When a security that had been classified as available-for-sale is sold, a
realized gain or loss will be included in net income and, therefore, in
comprehensive income. Consequently, the recognition of any unrealized gain or
loss for that security that had been included in comprehensive income in an
earlier period must be reversed. These adjustments are reported in the
consolidated statements of comprehensive income as reclassification adjustment
for gains (losses) included in net income.
9. Segment Disclosure
While the Company's products and services are all of the nature of commercial
banking, the Company has seven reportable segments. There are six specific
segments: Wholesale Lending, Retail Lending, Branch Activities, Fiduciary, Tax
Refund Processing, and the Northern Region. The remaining activities of the
Company are reported in a segment titled "All Other". Detailed information
regarding the Company's segments is provided in Note 20 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K. This
information includes descriptions of the factors used in identifying these
segments, the types and services from which revenues for each segment are
derived, charges and credits for funds, and how the specific measure of profit
or loss was selected. Readers of these interim statements are referred to that
information to better understand the following disclosures for each of the
segments. There have been no changes in the basis of segmentation or in the
measurement of segment profit or loss from the description given in the annual
report.
The following tables present information for each segment regarding assets,
profit or loss, and specific items of revenue and expense that are included in
that measure of segment profit or loss as reviewed by the chief operating
decision maker.
13
<PAGE>
<TABLE>
<CAPTION>
Tax
(in thousands) Branch Retail Wholesale Refund Northern All
Activities Lending Lending Programs Fiduciary Region Other Total
------------ ------------ ----------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
March 31, 2000
Revenues from
external customers $ 2,532 $ 15,150 $ 15,653 $ 24,222 $ 3,821 $ 20,115 $ 13,098 $ 94,590
Intersegment revenues 26,604 52 -- 1,889 850 -- 3,773 33,168
------------ ------------ ----------- ---------- ----------- ----------- ------------ -------------
Total revenues $ 29,136 $ 15,202 $ 15,653 $ 26,111 $ 4,671 $ 20,115 $ 16,871 $ 127,758
============ ============ =========== ========== =========== =========== ============ =============
Profit (Loss) $ 5,587 $ 2,754 $ 4,376 $ 16,788 $ 2,121 $ 6,209 $ (3,376) $ 34,459
Interest income 25 14,827 15,402 17,613 -- 18,428 12,557 78,852
Interest expense 17,272 53 1 -- 771 5,908 1,671 25,677
Internal charge for funds 248 9,726 9,170 2,776 -- -- 11,248 33,168
Depreciation 334 46 26 28 33 270 494 1,231
Total assets 14,536 726,506 660,855 41,257 1,811 946,779 1,152,866 3,544,610
Capital expenditures -- -- -- -- -- 2,579 3,383 5,961
Three months ended
March 31, 1999
Revenues from
external customers $ 2,077 $ 12,227 $ 12,391 $ 13,384 $ 3,401 $ 17,007 $ 11,899 $ 72,386
Intersegment revenues 18,203 53 -- 1,713 620 -- 3,537 24,126
------------ ------------ ----------- ---------- ----------- ----------- ------------ -------------
Total revenues $ 20,280 $ 12,280 $ 12,391 $ 15,097 $ 4,021 $ 17,007 $ 15,436 $ 96,512
============ ============ =========== ========== =========== =========== ============ =============
Profit (Loss) $ 4,582 $ 2,937 $ 4,163 $ 9,535 $ 1,853 $ 5,777 $ (3,975) $ 24,872
Interest income 14 11,918 12,006 7,477 -- 15,636 11,064 58,115
Interest expense 9,862 55 -- -- 556 4,981 816 16,270
Internal charge for funds 199 7,532 6,422 546 -- -- 9,427 24,126
Depreciation 399 37 23 24 36 331 352 1,202
Total assets 13,035 611,099 538,730 13,552 1,408 851,006 671,432 2,700,262
Capital expenditures -- -- -- -- -- 35 1,569 1,604
</TABLE>
14
<PAGE>
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively in the consolidated statements
of income for the three-month periods ended March 31, 2000 and 1999.
Three Months ended March 31,
2000 1999
--------- ---------
Total revenues for
reportable segments $ 127,758 $ 96,512
Elimination of
intersegment revenues (33,168) (24,126)
Elimination of taxable
equivalent adjustment (1,393) (1,431)
--------- ---------
Total consolidated revenues $ 93,197 $ 70,955
========= =========
Total profit or loss
for reportable segments $ 34,459 $ 24,872
Elimination of taxable
equivalent adjustment (1,393) (1,431)
--------- ---------
Income before income taxes $ 33,066 $ 23,441
========= =========
15
<PAGE>
10. New Accounting Pronouncement
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2001. This
statement is not expected to have a material impact on the operating results or
the financial position of the Company.
11. Contengencies
The Company is one of a number of financial institutions named as party
defendants in a patent infringement lawsuit recently filed by an unaffilliated
financial institution. The lawsuit generally relates to the Company's tax refund
program.
The Company has retained outside legal counsel to represent its interests in
this matter. The Company does not believe that it has infringed any patents as
alleged in the lawsuit and intends to vigorously defend itself in this matter.
The amount of alleged damages are not specified in the papers received by the
Company. Therefore, Management cannot estimate the amount of any possible loss
at this time in the event of an unfavorable outcome.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Pacific Capital Bancorp and its wholly owned subsidiaries (together referred to
as the "Company") posted earnings of $19.8 million for the quarter ended March
31, 2000, up $5.3 million over the same quarter last year. Diluted per share
earnings for the first quarter of 2000 were $0.80 compared to $0.59 earned in
the first quarter of 1999.
In various sections of this discussion and analysis, attention is called to the
significant impacts on the Company's balance sheet and income statement caused
by its tax refund and transfer programs. The actions taken by the Company to
manage this program are discussed in a specific section of this discussion
titled "Refund Anticipation Loan and Refund Transfer Programs." Readers are
referred to this section because Management believes that the explanation of the
impacts will be clearer to the reader if those actions are all described in one
place.
Compared to the first quarter of 1999, net interest income (the difference
between interest income and interest expense) increased by $11.4 million in the
first quarter of 2000, an increase of 28.13%. This was due primarily to the
seasonal impact of the income tax refund loan programs and additional interest
on other loans. Loans other than tax refund loans increased 19% from $1.693
billion at March 31, 1999, to $2.018 billion a year later. Interest income from
loans for the quarter was $61.9 million, up $18.7 million or 43%. Of this
increase, $5.7 million related to the substantially expanded refund loan
program.
Deposits increased $686.9 million or 29.1% during the last 12 months, while
interest expense increased $7.6 million. As explained more fully in the section
below covering the tax refund products, approximately $385 million of this
growth was due to issuing certificates of deposits through brokerage firms to
fund the tax refund loans.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $1.8 million over the same quarter of 1999. Trust and Investment
Services fees were up $414,000.
Provision expense for the first quarter of 2000 for loans other than tax refund
loans was $1,915,000, compared to $960,000 provided in the first quarter of
1999. The provision for tax refund loans for the first quarter of 2000 was
$3,631,000 compared to $2,759,000 for the first quarter of 1999.
Noninterest expenses increased in the first quarter of 2000 compared to the same
quarter of 1999, from $27.5 million to $28.8 million. However, because of the
increases in net interest income and noninterest income, the Company's operating
efficiency ratio, which measures what proportion of a dollar of operating income
it takes to earn that dollar, improved from 48.9% for the first quarter of 1999
to 41.6% for the first quarter of 2000.
The Company earned $0.80 per diluted share in the first quarter of 2000 compared
with $0.59 in the first quarter of 1999.
BUSINESS
The Company is a bank holding company. All references to "the Company" apply to
Pacific Capital Bancorp and its subsidiaries. "Bancorp" will be used to refer to
the parent company only. Its major subsidiaries are Santa Barbara Bank & Trust
("SBB&T") and First National Bank of Central California ("FNB") including its
affiliate South Valley National Bank ("SVNB"). SBB&T is a state-chartered
commercial bank and is a member of the Federal Reserve System. FNB is a
nationally chartered commercial bank and is also a member of the Federal Reserve
System. They offer a full range of retail and commercial banking services. These
include commercial, real estate, and consumer loans, a wide variety of deposit
products, and full trust services. The Company's third active subsidiary is
Pacific Capital Commercial Mortgage, Inc. ("PCCM"). The primary business
activity of PCCM is brokering commercial real estate loans and servicing those
loans for a fee. Bancorp provides support services, such as data processing,
personnel, training, and financial reporting to the subsidiary banks. Bancorp
has one inactive subsidiary, Pacific Capital Services Corporation.
17
<PAGE>
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements with respect to the financial
conditions, results of operations and business of the Company. These include
statements about the Company's plans, objectives, expectations and intentions
that are not historical facts. When used in this Report, the words "expects",
"anticipates", "plans", "believes", "seeks", "estimates", and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressure among financial services companies increases
significantly; (2) changes in the interest rate environment reduce interest
margins; (3) general economic conditions, internationally, nationally or in the
State of California, are less favorable than expected; (4) changes in the IRS's
handling of electronic filing and refund payments adversely affect the Company's
RAL and refund transfer ("RT") programs; (5) legislation or regulatory
requirements or changes adversely affect the business in which the Company will
be engaged; and (6) other risks detailed in the Pacific Capital Bancorp 1999
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
TOTAL ASSETS AND EARNING ASSETS
The chart below shows the growth in average total assets and deposits since
1996. Annual averages are shown for 1996 and 1997; quarterly averages are shown
for 1998, 1999 and 2000. Because significant but unusual cash flows sometimes
occur at the end of a quarter and at year-end, the overall trend in the
Company's growth is better shown by the use of average balances for the
quarters.
18
<PAGE>
Chart 1 GROWTH IN AVERAGE ASSETS AND DEPOSITS ($ in millions)
$3,500 AAA
$3,450
$3,400
$3,350 A
$3,300
$3,250
$3,200 A
$3,150
$3,100
$3,050 A
$3,000 DDD
$2,950 A
$2,900 D
$2,850 AAAAAAA
$2,800 AAA A
A D
$2,750 A A
AAA
$2,700 A
$2,650 D
A
$2,600
AAA
$2,550 A
A D
$2,500 AAA
A
$2,450 DDD
A D DDDDDDD
$2,400 AAAAAAA D D
A D D
$2,350 D DDD
A
$2,300 DDD
D
$2,250 A D
DDD
$2,200 D
A
$2,150 D
A DDDDDDD
$2,100
D
$2,050 A
$2,000 A D
$1,950
A D
$1,900
D
$1,850 A
D
$1,800
AA D
$1,750
$1,700 A D
$1,650 D
$1,600 D
$1,550 DD
$1,500 D
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st
'96 '97 '98 '98 '98 '98 '99 '99 '99 '99 '00
A = Assets D = Deposits
19
<PAGE>
Deposit balances also have been included in the chart because, prior to 1999, as
reflected in Chart 1, changes in assets were primarily related to changes in
deposit levels. As deposit funds were received, they were either lent to
customers or invested in securities. In 1999, the growth in assets was driven
more by increasing loan demand than by deposit growth. As explained below, the
Company funded much of this growth from the proceeds of maturing securities and
by borrowing funds from other financial institutions. This change is reflected
in the chart by assets increasing more than deposits.
The overall growth trend shown above for the Company prior to 2000 is due in
part to the continuing consolidation in the financial services industry. The
Company has obtained new customers as they became dissatisfied when the
character of their local bank was changed by an acquiring institution. The
Company also acquired First Valley Bank ("FVB") and Citizens State Bank ("CSB")
in 1997 and merged them into SBB&T. Contrary to the general pattern of banks
losing customers of the acquired institution, depositors of these two banks have
kept their deposits with SBB&T. The same experience has been seen with the
depositors of FNB and SVNB, namely that deposits have increased since the merger
in December of 1998. Because this merger was accounted for as a pooling of
interests, asset and deposit totals for periods prior to the merger have been
restated to include their balances. SBB&T has also opened three new offices in
Ventura County and one new office in northern Santa Barbara County during the
period covered by the chart. A decrease in average deposits for the second
quarter compared to the first is not unusual although it did not occur in 1997
or 1998. Such decreases are usually the result of tax payments and payments of
holiday bills. In 1999, some of the decrease was probably due to funds being
withdrawn for investment purposes as stock markets have continued their strong
rise.
The major reason for the large increase in assets and deposits during the first
quarter of 2000 was the significant expansion of the Company's tax refund loan
program. The Company issued approximately $405 million in certificates of
deposit to fund these loans. The funding of the program is explained in greater
detail in the section below titled "Refund Anticipation Loan and Refund Transfer
Programs".
Earning assets consist of the various assets on which the Company earns interest
income. On average, the Company earned interest on 94.2% of its assets during
the first three months of 2000. This compares with an average of 89.8% for peer
FDIC-Insured Commercial Banks. (See Note A. Notes are found at the end of this
report.) Having more of its assets earning interest helps the Company to
maintain its high level of profitability. The Company has achieved this higher
percentage by several means. Loans are structured to have interest payable in
most cases each month so that large amounts of accrued interest receivable
(which are nonearning assets) are not built up. In this manner, the interest
received can be invested to earn additional interest. The Company leases most of
its facilities under long-term contracts rather than owning them. This, together
with the aggressive disposal of real estate obtained as the result of
foreclosure, avoids tying up funds that could be earning interest. Lastly, the
Company has developed systems for clearing checks which are faster than those
used by most banks of comparable size. These systems permit the Company to put
the cash to use more quickly. At the Company's current size (excluding the extra
assets due to the certificates of deposits added for the tax refund loan
program), these and other steps have resulted in about $141 million more assets
earning interest during the first three months of the year than would be the
case if the Company's ratio were similar to its FDIC peers. The additional
earnings from these assets are somewhat offset by higher lease expense,
additional equipment costs, and occasional losses taken on quick sales of
foreclosed property. However, on balance, Management believes that these steps
give the Company an earnings advantage.
INTEREST RATE SENSITIVITY
Most of the Company's earnings arise from its functioning as a financial
intermediary. As such, it takes in funds from depositors and then either lends
the funds to borrowers or invests the funds in securities and other instruments.
The Company earns interest income on loans and securities and pays interest
expense on deposits and other borrowings. Net interest income is the difference
in dollars between the interest income earned and the interest expense paid.
The following first table shows the average balances of the major categories of
earning assets and liabilities for the three-month periods ended March 31, 1999
and 2000 together with the related interest income and expense. A second table,
an analysis of volume and rate variances, explains how much of the difference in
interest income or expense compared to the corresponding period of 1999 is due
to changes in the balances (volume) and how much is due to changes in rates. For
example, Table 1 shows that for the first quarter of 2000, NOW accounts averaged
$313,284,000, interest expense for them was $545,000, and the average rate paid
was 0.71%. In the first quarter of 1999, NOW accounts averaged $291,216,000,
interest expense for them was $589,000, and the average rate paid was 0.82%.
Table 2 shows that the $44,000 decrease in
20
<PAGE>
interest expense for demand deposits from the first quarter of 1999 to the first
quarter of 2000 is the net result of a $45,000 increase in interest expense due
to the higher balances in 2000, offset by a reduction of $89,000 in interest
expense due to the lower rates paid during 2000.
These tables also disclose the net interest margin for the reported periods. Net
interest margin is the ratio of net interest income to average earning assets.
This ratio is useful in allowing the Company to monitor the spread between
interest income and interest expense from month to month and year to year
irrespective of the growth of the Company's assets. If the Company is able to
maintain the net interest margin as the Company grows, the amount of net
interest income will increase. If the net interest margin decreases, net
interest income can still increase, but earning assets must increase at a higher
rate. This serves to replace the net interest income that is lost by the
decreasing rate by increasing the volume.
21
<PAGE>
<TABLE>
TABLE 1 - AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
<CAPTION>
(dollars in thousands) Three months ended Three months ended
March 31, 2000 March 31, 1999
-------------------------------------- --------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $362,945 $4,949 5.53% $186,531 $2,227 4.80%
Securities: (2)
Taxable 548,046 8,269 6.12% 606,600 9,000 6.02%
Non-taxable 143,479 3,670 10.23% 134,775 3,553 10.54%
------------ --------- ------------ ----------
Total securities 691,525 11,939 6.97% 741,375 12,553 6.84%
------------ --------- ------------ ----------
Loans and leases: (3)
Commercial 579,753 13,659 9.55% 375,967 8,289 8.94%
Ready equity 53,086 1,251 9.56% 46,685 1,009 8.77%
Real estate 1,097,755 22,701 8.27% 987,080 21,075 8.54%
Installment and consumer loans 172,176 4,666 10.99% 148,178 3,782 10.35%
Leasing 105,874 2,619 10.03% 82,710 2,060 10.10%
Tax refund loans 212,025 17,068 32.65% 42,496 7,120 67.95%
------------ --------- ------------ ----------
Total loans and leases 2,220,669 61,964 11.26% 1,683,116 43,335 10.37%
------------ --------- ------------ ----------
Total earning assets 3,275,139 78,852 9.72% 2,611,022 58,115 8.97%
Allowance for credit losses (31,395) (32,303)
Other assets 231,551 210,403
------------ ------------
TOTAL ASSETS $3,475,295 $2,789,122
============ ============
LIABILITIES
Deposits:
Interest-bearing demand $313,284 545 0.71% $291,216 589 0.82%
Savings and money market 827,253 6,535 3.20% 779,109 5,221 2.72%
Time deposits 1,170,107 15,841 5.49% 785,953 9,467 4.89%
------------ --------- ------------ ----------
Total interest-bearing deposits 2,310,644 22,921 1,856,278 15,277
Borrowed funds 195,175 2,756 5.73% $75,997 993 5.30%
------------ --------- --------- ------------ ---------- -------
Total interest-bearing liabilities 2,505,819 25,677 4.16% 1,932,275 16,270 3.41%
Noninterest-bearing demand deposits 692,215 603,432
Other liabilities 31,634 33,729
------------ ------------
TOTAL LIABILITIES 3,229,668 2,569,436
Shareholders' equity 245,627 219,686
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,475,295 $2,789,122
============ ============
Net interest rate spread 5.56% 5.56%
NET INTEREST INCOME AND NET
--------- ----------
INTEREST MARGIN $53,175 6.54% $41,845 6.44%
========= ==========
<FN>
(1) Income amounts are presented on a fully taxable equivalent basis. The
federal statutory rate was 35% for all periods presented.
(2) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value which are included in other assets.
(3) Nonaccrual loans are included in loan balances. Interest income includes
related fees income.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
TABLE 2 - RATE/VOLUME ANAYSIS (1) (2)
<CAPTION>
(in thousands) Three months ended
March 31, 2000 vs March 31, 1999
----------------------------------------------------------
Change in Change in
Average Income/ Rate Volume
Balance Expense Effect Effect
----------------------------------------------------------
<S> <C> <C> <C> <C>
EARNING ASSETS:
Short-term investments $176,414 $2,722 $ 377 $ 2,345
Securities: (3)
Taxable (58,554) (731) 150 (881)
Non-taxable 8,704 117 (106) 223
----------------------------------------------------------
Total securities (49,850) (614) 44 (658)
----------------------------------------------------------
Loans and leases: (4)
Commercial 203,786 5,370 604 4,766
Ready equity 6,401 242 96 146
Real estate 110,675 1,626 (665) 2,291
Installment and consumer loans 23,998 884 244 640
Leasing 23,164 559 (14) 573
Tax refund loans 169,529 9,948 (18,456) 28,402
----------------------------------------------------------
Total loans and leases 537,553 18,629 (18,191) 36,818
----------------------------------------------------------
TOTAL EARNING ASSETS $664,117 20,737 (17,769) 38,504
==============
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $22,068 (44) (89) 45
Savings and money market 48,144 1,314 991 323
Time deposits 384,154 6,374 1,747 4,627
----------------------------------------------------------
Total deposits 454,366 7,644 2,649 4,995
Borrowed funds 119,178 1,763 206 1,557
TOTAL INTEREST-BEARING
LIABILITIES $573,544 9,407 2,855 6,552
==============--------------------------------------------
NET INTEREST INCOME (4) $11,330 ($20,624) $31,952
============================================
<FN>
(1) Income amounts are presented on a fully taxable equivalent (FTE) basis. The
federal statutory rate was 35% for all periods presented.
(2) The change not solely due to volume or rate has been prorated into rate and
volume components.
(3) Average securities balances are based on amortized cost, excluding SFAS 115
adjustments to fair value which are included in other assets.
(4) Nonaccrual loans are included in loan balances. Interest income includes
related fee income.
</FN>
</TABLE>
23
<PAGE>
Because such large proportions of the Company's balance sheet is made up of
interest-earning assets and interest-bearing liabilities, and because such a
large proportion of its earnings is dependent on the spread between interest
earned and interest paid, it is critical that the Company measure and manage its
interest rate sensitivity. Measurement is done by estimating the impact of
changes in interest rates over the next twelve months on net interest income and
on net economic value. Net economic value is the net present value of the cash
flows arising from assets and liabilities discounted at their acquired rate plus
or minus assumed changes.
Estimating changes in net interest income or net economic value from increases
or decreases in balances is relatively straight forward. Estimating changes that
would result from increases or decreases in interest rates is substantially more
difficult. Estimation is complicated by a number of factors: (1) some financial
instruments have interest rates that are fixed for their term, others that vary
with rates, and others that are fixed for a period and then reprice using then
current rates; (2) the rates paid on some deposit accounts are set by contract
while others are priced at the option of the Company; (3) the rates for some
loans vary with the market, but only within a limited range; (4) customers may
prepay loans or withdraw deposits if interest rates move to their disadvantage,
effectively forcing a repricing sooner than would be called for by the
contractual terms of the instrument; and (5) interest rates do not change at the
same time or to the same extent.
To address the complexity resulting from these and other factors, a standard
practice developed in the industry is to compute the impacts of hypothetical
interest rate "shocks" on the Company's asset and liability balances. A shock is
an immediate change in all interest rates. The resulting impacts indicate how
much of the Company's net interest income and net economic value are "at risk"
(would deviate from the base level) if rates were to change in this manner.
Although interest rates normally would not change suddenly in this manner, this
exercise is valuable in identifying exposures to risk and in providing
comparability both with other institutions and between periods. The results
reported below for the Company's December 31, 1999, and March 31, 2000 balances
indicate that the Company's net interest income at risk over a one year period
and net economic value at risk from 2% shocks are within normal expectations for
such sudden changes:
Shocked by -2% Shocked by +2%
-------------- --------------
As of December 31, 1999
Net interest income (4.26%) +3.00%
Net economic value +8.84% (6.61%)
As of March 31, 2000
Net interest income (4.34%) +3.14%
Net economic value +9.27% (7.09%)
The differences in the results are due to changes in the relative size of the
various components of the Company's balance sheet (the product mix) over the
last three months and the changes in the maturities and/or repricing
opportunities of the financial instruments held. Because the effect of changes
on net interest income is measured over the next twelve months, the results will
depend on whether more assets or liabilities will reprice within that period. If
the Company has more assets repricing within one year than it has liabilities,
then net interest income will increase with increases in rates and decrease as
rates decline. The opposite effects will be observed if more liabilities than
assets reprice in the next twelve months. As indicated in several other sections
of this discussion, much of the growth in loans has occurred in types which have
fixed rates for at least several years and much of this growth has been funded
by lowering short-term investments. As indicated, these changes tend to cause
liabilities to reprice sooner than assets and reduce net interest income at
least over the next 12 months. To offset this effect, the Company took several
actions late in the 2nd quarter and throughout the 3rd quarter, including sales
of securities, fixed-rate longer-term borrowing, and entering into
fixed-for-variable interest rate swaps.
The same changes to the balance sheet and mitigating steps mentioned above in
connection with net interest income also account for the changes in net economic
value. However, the computation of net economic value discounts all cash flows
over the life of the instrument, not only the next twelve months. Therefore, the
results tend to be more pronounced. For
24
<PAGE>
example, in estimating the impact on net interest income of a two percent rise
in rates on a security maturing in three years, only the negative impact during
the first year is captured in net interest income. In estimating the impact on
net economic value, the negative impact for all three years is captured.
The changes in net interest income and net economic value resulting from the
hypothetical increases and decreases in rates are not exactly symmetrical in
that the same percentage of increase and decrease in the hypothetical interest
rate will not cause the same percentage change in net interest income or net
economic value. This occurs because various contractual limits and
non-contractual factors come into play. An example of the former is the
"interest rates cap" on loans, which may limit the amount that rates may
increase. An example of the latter is the assumption on how low rates could be
lowered on administered rate accounts. The degree of symmetry changes as the
base rate changes from period to period and as there are changes in the
Company's product mix. For instance, the assumed floors on deposit rates are
more likely to come into play in a 2% decrease if the base rate is lower. To the
extent that consumer variable rate loans are a larger proportion of the
portfolio than in a previous period, the caps on loan rates, which generally are
present only in consumer loans, would have more of an adverse impact on the
overall result.
For these computations, the Company makes certain assumptions that significantly
impact the results. For example, the Company must make assumptions about the
duration of its non-maturity deposits because they have no contractual maturity,
and about the rates that would be paid on the Company's administered rate
deposits as external yields change. These assumptions are reviewed each quarter
and changed as deemed appropriate to reflect the best information available to
Management.
In addition to the simulations using the sudden rate changes, hypothetical
scenarios are also used that include gradual interest rate changes. The most
recent modeling using these more realistic hypothetical scenarios confirms that
the Company's interest rate risk profile is relatively balanced, i.e., the
negative impact on net economic value from hypothetical changes in interest
rates is not excessive, and that the results are within normal expectations.
However, along with the assumptions used for the shock computations, these
computations using gradual changes require certain additional assumptions with
respect to the magnitude, direction and volatility of the interest rate
scenarios selected which affect the results.
The Company's exposure to interest rate risk is discussed in more detail in the
1999 10-K MD&A.
DEPOSITS AND RELATED INTEREST EXPENSE
While there occasionally may be slight decreases in average deposits from one
quarter to the next, the overall trend is one of growth as shown in Chart 1. As
noted in the discussion accompanying the chart and as discussed in the section
titled "Refund Anticipation Loan and Refund Transfer Programs," there was a
significant increase in deposits during the first quarter of 2000 to fund these
programs. These deposits bear a higher interest rate than other deposits and the
rate paid on time deposits as shown in Table 1 reflect this higher rate.
The rate of growth of any financial institution is restrained by the capital
requirements discussed in the section of this report titled "Capital Resources
and Company Stock". Growth at too rapid a pace will result in capital ratios
that are too low. The normal orderly growth experienced by the Company has been
planned by Management and Management anticipates that it can be sustained
because of the strong capital position and earnings record of the Company. The
increases have come by maintaining competitive deposit rates, introducing new
deposit products, the opening of new retail branch offices, the assumption of
deposits in the FVB and CSB acquisitions, and successfully encouraging former
customers of merged financial institutions to become customers of the Company.
The abnormal growth in deposits related to the tax refund programs was carefully
planned to provide the least expensive source of funding and within the context
of maintaining the Company's well-capitalized classification as measured at each
quarter-end.
LOANS AND RELATED INTEREST INCOME
The end-of-period loan balances as of March 31, 2000, have increased by $79.8
million compared to December 31, 1999, and by $353.9 million compared to March
31, 1999. As shown in the table in Note 5 to the consolidated financial
statements, each one of the categories of loans increased in the last 12 months
except nonresidential real estate.
25
<PAGE>
Residential real estate loans have continued to increase but at a slower rate
than was seen in 1998 and 1999. Recent increases in interest rates have reduced
the demand for refinancing. Most of the residential real estate loans held are
adjustable rate mortgages ("ARMS") that have initial "teaser" rates. The yield
increases for these loans as the teaser rates expire. Applicants for these loans
are qualified based on the fully-indexed rate.
The balances of nonresidential real estate loans tend to vary more than other
loan types because the average size is larger than for other loan types and
typically have shorter maturities. Therefore originations and payoffs have a
proportionally larger impact on the outstanding balance.
Construction loans have also grown over the last year. Silicon Valley, which is
adjacent to the Company's northern market areas, has recently seen rapidly
rising housing prices because of limited supply. This has caused new housing
construction activity to increase in areas that are within commuting distance,
and the Company is financing some of this construction.
Commercial loans have shown the largest increase over the last 12 months as
businesses in the Company's market areas continue to benefit from the strong
economy.
The consumer loan portfolio has increased primarily because of an increased
number of indirect auto loans. Indirect auto loans are loans purchased from auto
dealers. The dealers' loans must meet the credit criteria set by the Company.
About 90% or more of tax refund loans are made in the first quarter of each year
with the remainder in the second quarter. The expanded program in 2000 resulted
in $46.7 million of loans outstanding at the end of the quarter compared to
$18.4 million in tax refund loans outstanding at March 31, 1999. There were no
such loans outstanding at December 31, 1999.
The average balances and yields for loans for the first three months of 2000 and
1999 are reported in Table 1. As explained in the section below titled "Refund
Anticipation Loan and Refund Transfer Programs," the fees charged for the tax
refund loans are unrelated to the time they are outstanding and related more to
the cost to process and the credit risk. The yields reported in Table 1 for
these loans therefore are significantly impacted by the length of time they are
outstanding, because the income is annualized. Average yields for the first
three months of 2000 and 1999 without the effect of tax refund loans were 8.96%
and 8.95%, respectively.
The Federal Open Market Committee of the Federal Reserve Board has increased its
target market rates a number of times in the last 12 months. Along with most
other financial institutions, the Company has increased its prime rate to
reflect the change in market rates. Despite these increases, the average rate
earned on loans aside from tax refund loans has remained virtually identical to
the rate in the first quarter of 1999. Among the reasons for this are (1) only
those loans which are indexed to prime are repriced by this change, (2) many
customers have refinanced or repaid their fixed rate loans made in prior years
when rates were higher, and (3) customers are now presented with a number of
nonbank sources from which to borrow. This competition has brought about a
lowering of the rates to attract borrowers.
OTHER LOAN INFORMATION
In addition to the outstanding loans reported in the accompanying financial
statements, the Company has made certain commitments with respect to the
extension of credit to customers.
(in thousands) March 31, December 31,
2000 1999
---- ----
Commitments to extend credit
Commercial $395,386 $369,695
Consumer 72,824 70,744
Standby letters of credit 23,410 20,811
The majority of the commitments are for one year or less. The majority of the
credit lines and commitments may be withdrawn by the Company subject to
applicable legal requirements. The Company does anticipates that a majority of
the above commitments will not be fully drawn on by customers. Consumers do not
tend to borrow the maximum amounts
26
<PAGE>
available under their home equity lines and businesses typically arrange for
credit lines in excess of their expected needs to handle contingencies.
The Company defers and amortizes loan fees collected and origination costs
incurred over the lives of the related loans. For each category of loans, the
net amount of the unamortized fees and costs are reported as a reduction or
addition, respectively, to the balance reported. Because the fees collected are
generally less than the origination costs incurred for commercial and consumer
loans, the total net deferred or unamortized amounts for these categories are
additions to the loan balances.
CREDIT QUALITY AND THE ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is provided in recognition that not all loans
will be fully paid according to their contractual terms. The Company is required
by regulation, generally accepted accounting principles, and safe and sound
banking practices to maintain an allowance that is adequate to absorb losses
that are inherent in the portfolio of loans and leases, including those not yet
identified. The methodology used to determine the adequacy of the allowance for
credit loss is discussed in detail in Note 1 to the Consolidated Financial
Statements presented in the Company's Annual Report for 1999 on Form 10-K. This
methodology involves estimating the amount of credit loss inherent in each of
the loan and lease portfolios taking into account such factors as historical
charge-off rates, economic conditions, and concentrations by industry,
geography, and collateral type. In addition, generally accepted accounting
principles require the establishment of a valuation allowance for impaired loans
as described in Note 5 to the financial statements.
Table 3 shows the amounts of noncurrent loans and nonperforming assets for the
Company at the end of the first quarter of 2000, and at the end of the previous
four quarters.
Shown for both the Company and its peers are the coverage ratio of the allowance
to total loans and the ratio of noncurrent loans to total loans. While the
Company does not determine its allowance for credit loss to achieve particular
target ratios, the Company does nonetheless compute its ratios and compares them
with peer ratios as a check on its methodology. Only two other banks operate
national refund loan and transfer programs. Therefore, refund loans and the
portion of the allowance for credit losses that specifically relates to refund
loans are excluded from the Company's figures and ratios for the table for
comparability.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate).
27
<PAGE>
<TABLE>
Table 3--ASSET QUALITY
(dollars in thousands)
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
2000 1999 1999 1999 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 2,784 $ 80 $ 347 $ 122 $ 301
Nonaccrual loans 11,666 14,152 14,313 16,319 17,915
------- ------- ------- ------- -------
Total noncurrent loans 14,450 14,232 14,660 16,441 18,216
Foreclosed real estate -- -- -- -- --
------- ------- ------- ------- -------
Total nonper-
forming assets $14,450 $14,232 $14,660 $16,441 $18,216
======= ======= ======= ======= =======
Allowance for credit losses
other than RALs $27,635 $28,198 $28,404 $29,616 $29,637
Allowance for RALs 3,209 488 -- -- 1,871
------- ------- ------- ------- -------
Total allowance $30,844 $28,686 $28,404 $29,616 $31,508
======= ======= ======= ======= =======
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.37% 1.42% 1.49% 1.63% 1.75%
Coverage ratio of
allowance for credit
losses to noncurrent loans 191% 198% 194% 180% 163%
Ratio of noncurrent
loans to total loans 0.72% 0.72% 0.77% 0.90% 1.08%
Ratio of nonperforming
assets to total assets 0.41% 0.49% 0.51% 0.60% 0.68%
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 1.82% 1.85% 1.99% 2.06%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 221% 210% 223% 209%
Ratio of noncurrent
loans to total loans n/a 0.58% 0.62% 0.89% 0.99%
Ratio of nonperforming
assets to total assets n/a 0.83% 0.88% 0.62% 0.69%
</TABLE>
<TABLE>
The allowance for credit losses (other than tax refund loans) compared to total
loans remains slightly lower than the corresponding ratios for the Company's
peer group. This is consistent with the fact that the Company generally has a
lower ratio of net charge-offs to average loans as shown in the following table:
Ratio of Net Charge-Offs to Average Loans:
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Pacific Capital Bancorp (excl. tax refund loans) 0.24% 0.02% (0.03%) 0.12% 0.86%
FDIC Peers 0.68% 1.08% 1.03% 0.89% 0.69%
</TABLE>
28
<PAGE>
Management identifies and monitors other loans that are potential problem loans
although they are not now delinquent more than 90 days. Table 4 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for March 31, 2000 (amounts in thousands).
Table 4--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
Noncurrent Other Potential
Loans Problem Loans
---------------------------
Loans secured by real estate:
Construction and
land development $ -- $ 2,388
Agricultural -- 3,208
Home equity lines 258 749
1-4 family mortgage 2,437 4,471
Multifamily -- 135
Nonresidential, nonfarm 2,803 9,138
Commercial and industrial 7,548 17,939
Leases 364 227
Other consumer loans 1,040 2,115
Other Loans -- --
------- -------
Total $14,450 $40,370
======= =======
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of March 31, 2000 (amounts in thousands).
Doubtful $4,566
Substandard $4,148
Special Mention $1,279
The total of the above numbers is less than the total allowance. Most of the
allowance is allocated to loans which are not currently regarded as potential
problem loans, but for which, based on the Company's experience, there are
unidentified losses among them. The amounts allocated both to potential problem
loans and to all other loans are determined based on the factors and methodology
discussed in Note 1 to the Consolidated Financial Statements presented in the
Company's Annual Report on Form 10-K. Based on these considerations, Management
believes that the allowance for credit losses at March 31, 2000 was adequate to
cover the losses inherent in the loan and lease portfolios as of that date.
HEDGES, DERIVATIVES, AND OTHER DISCLOSURES
The Company has established policies and procedures to permit limited types and
amounts of off-balance sheet hedges to help manage interest rate risk. The
Company has entered into several interest rate swaps to mitigate interest rate
risk late in 1999. Under the terms of these swaps, the Company pays a fixed rate
of interest to the counterparty and receives a floating rate of interest. Such
swaps have the effect of converting fixed rate financial instruments into
variable or floating rate instruments. Such swaps may be related to specific
instruments or pools of instruments--loans, securities, or deposits with similar
interest rate characteristics or terms. The notional amount of the swaps in
place at March 31, 2000 was $34 million with a market value of approximately
$512,000.
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2001 or earlier
should
29
<PAGE>
the Company so choose. The Company expects to implement this reporting on
January 1, 2001. This statement is not expected to have a material impact on the
operating results or the financial position of the Company.
The Company has not purchased any securities arising out of highly leveraged
transactions, and its investment policy prohibits the purchase of any securities
of less than investment grade, the so-called "junk bonds."
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cash in excess of the amount needed to fund loans, invest in securities, or
cover deposit withdrawals is sold to other institutions as Federal funds or
invested with other institutions on a collateralized basis as securities
purchased under agreements to resell ("reverse repo agreements"). These
agreements are investments which are collateralized by securities or loans of
the borrower and mature on a daily basis. The sales of Federal funds are on an
overnight basis as well. The amount of Federal funds sold and reverse repo
agreements purchased during the quarter is an indication of Management's
estimation during the quarter of immediate cash needs, the excess of funds
supplied by depositors over funds lent to borrowers, and relative yields of
alternative investment vehicles.
As shown in Table 1, the average balance of these short-term investments for the
first three months of 2000 was more than for the first three months of 1999. As
explained in the section below titled "Refund Anticipation Loan and Refund
Transfer Programs," the reason for this change is that the Company had to
arrange for a substantial amount of funding for the refund loan program. The
funding could not be arranged for as short a period as was needed for the tax
refund loans, and the Company therefore had an excess amount of funds on hand
for much of the first quarter. Some of this excess was used to purchase
securities, but most was sold as Federal funds or invested with other
institutions in reverse repo agreements.
OTHER BORROWINGS, LONG-TERM DEBT AND RELATED INTEREST EXPENSE
Other borrowings consist of securities sold under agreements to repurchase,
Federal funds purchased, Treasury Tax and Loan demand notes, and borrowings from
the "FRB". Generally, Federal funds have been purchased only from other local
financial institutions as an accommodation to them. However, because of the need
for additional funding this year to support the very strong loan demand, the
Company has purchased additional funds. Nonetheless, because the average total
of other borrowings still represents a very small portion of the Company's
source of funds (less than 5%), all of these short-term items have been combined
for the following table.
Table 5 indicates for other borrowings the average balance (dollars in
millions), the rates and the proportion of total assets funded by them over the
last six quarters.
Table 5--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- -------------- -------------- ----------------------
December 1998 $33.5 4.40% 1.3%
March 1999 26.7 4.43 1.0
June 1999 44.3 4.54 1.6
September 1999 30.1 4.68 1.1
December 1999 61.7 5.13 2.2
March 2000 82.2 3.81 2.4
The amount of these borrowings rose in the fourth quarter of 1999 as the growth
in loans continued to exceed the growth in deposits and the Company turned to
nondeposit sources to fund the loan growth.
Long-term debt consists of advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). The outstanding advances from the FHLB March 31, 2000
totaled $118.5 million. The scheduled maturities of the advances are $40.5
million in 1 year or less, $15.4 million in 1 to 3 years, and $62.6 million in
more than 3 years.
Table 6 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by long-term
debt over the last six quarters.
30
<PAGE>
Table 6--LONG-TERM DEBT
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- -------------- ------------- ----------------------
December 1998 $35.8 5.96% 1.4%
March 1999 49.3 5.66 1.8
June 1999 67.9 5.73 2.5
September 1999 107.9 5.90 3.9
December 1999 88.4 6.07 3.1
March 2000 112.9 7.02 3.3
The Company has increased this long-term debt over the last two quarters. This
has been done both to provide funding for the loan growth noted above and
because much of the loan growth has been in fixed rate products. FHLB advances
are among the easiest means of mitigating the market risk incurred through the
growth in fixed loans. One of the methods of managing interest rate risk is to
match repricing characteristics of assets and liabilities. When fixed-rate
assets are matched by similar term fixed-rate liabilities, the deterioration in
the value of the asset when interest rates rise is offset by the benefit to the
Company from having the matching debt at lower than market rates.
OTHER OPERATING INCOME AND EXPENSE
Other operating income consists of income earned other than interest. On an
annual basis, trust fees are the largest component of other operating income.
Management fees on trust accounts are generally based on the market value of
assets under administration.
There are several reasons for the variation in fees from quarter to quarter.
Trust customers are charged for the preparation of the fiduciary tax returns.
The preparation generally occurs in the first quarter of the year. This accounts
for approximately $288,000 of the fees earned in the first three months of 1999
and $306,000 of the fees earned in the first three months of 2000. Variation is
also caused by the recognition of probate fees. These fees are accrued when the
work is completed, rather than as the work is done, because it is only upon the
completion of probate that the amount of the fee is established by the court.
Other categories of noninterest operating income include various service
charges, fees, and miscellaneous income. Included within "Other Service Charges,
Commissions & Fees" are the electronic refund transfer fees (described below in
"Refund Anticipation Loan and Refund Transfer Programs"), service fees arising
from credit card processing for merchants, escrow fees, and a number of other
fees charged for special services provided to customers.
The following table shows some of the major items of other operating income and
expense for the three months ended March 31, 2000 and 1999 that are not
specifically listed in the consolidated statements of income.
31
<PAGE>
TABLE 7--OTHER OPERATING INCOME AND EXPENSE
(dollars in thousands)
Three Months Ended
March 31,
------------------------
2000 1999
------------------------
Noninterest income
Merchant credit card processing $ 1,745 $ 1,559
Trust fees $ 3,823 $ 3,351
Refund transfer fees $ 6,609 $ 5,808
Noninterest expense
Marketing $ 533 $ 550
Consultants $ 1,343 $ 2,465
Merchant credit card clearing fees $ 1,386 $ 1,214
The largest component of noninterest expense is staff expense. There is some
increase in this expense each quarter caused by the addition of staff. Other
factors cause some variation in staff expense from quarter to quarter. Staff
expense will usually increase in the early part of each year because adjustments
arising from the annual salary review for all Company exempt employees are
effective on either January 1 or March 1. In 2000, these increases averaged
approximately 5%. In addition, some temporary staff is added in the first
quarter for the RAL program.
Employee bonuses are paid from a bonus pool, the amount of which is set by the
Board of Directors based on the Company meeting or exceeding its goals for net
income. The Company accrues compensation expense for the pool for employee
bonuses throughout the year based on projected net income for the year.
Staff size is closely monitored in relation to the growth in the Company's
revenues and assets. The following table compares salary and benefit costs as a
percentage of revenues and assets for the three-month periods ended March 31,
2000 and 1999.
Three Months Ended
March 31,
2000 1999
Salary and benefits as
a percentage of total
revenues 15.7% 18.0%
Salary and benefits as
a percentage of average
assets 0.42% 0.46%
The Company leases rather than owns most of its premises. Many of the leases
provide for annual rent adjustments. Equipment expense fluctuates over time as
needs change, maintenance is performed, and equipment is purchased. Some of the
additional occupancy expense relates to new facilities that were leased
subsequent to the fire at the Company's administrative headquarters which
occurred February 20, 1999. 105 employees that worked in the building needed to
be immediately located to different work locations. Vacant commercial office
space of sufficient size is very limited in the area. In order to provide new
work space for the displaced employees, the Company rented a building much
larger than the former administrative building. In general, the new space is
more expensive than the former building. Insurance will cover the cost for the
same amount of space; however, the additional space may not be reimbursable.
Some of the additional space will be utilized by moving employees from other
leased space and the remainder of the building will be subleased. Occupancy
expense is higher in 2000 than in 1999 because of the additional space.
Eventually, this cost will be offset with subleasing income and the
discontinuation of other lease expense as employees are moved to the new
building.
Included in other noninterest expense is consultant expense for legal and
professional services. The amount incurred in the first quarter of 2000 is
substantially less than that incurred in the first quarter of 1999. A large
proportion of the 1999
32
<PAGE>
expenses were consultant fees incurred by the Company's Information Technology
department related to two major technology projects. The first was directed at
ensuring that all of the Company's information systems, operational processes,
and physical facilities were prepared for the Century Date Change (also known as
"Y2K"). The Company began to prepare for this several years previously, but the
intensity of efforts was stepped up in early 1999 to resolve all of the issues
well in advance of January 1, 2000. The second project was the integration of
the information systems of First National Bank/South Valley National Bank with
those used by Santa Barbara Bank & Trust. Specifically, the Company does not
carry staff levels sufficient to handle two complex, infrequent projects like
these along with normal operational demands. In addition, the Y2K project had to
be completed under a rigid time schedule that permitted no slippage from
deadlines. Therefore, the Company engaged outside assistance in the form of
contract programming support to accomplish both of these projects concurrently.
As described in the last two sections of this discussion and analysis, the
Company has announced that reached agreements to merge/acquire two other
financial institutions. Some extra expense may be incurred in connection with
the system integration for these two institutions, but it is not expected that
the projects will be as extensive as was the integration of the First National
Bank/South Valley Bank systems and integration of one of the systems is not
expected until 2001.
INCOME TAX
Income tax expense is comprised of a current tax provision and a deferred tax
provision for both Federal income tax and state franchise tax. The current tax
provision recognizes an expense for what must be paid to taxing authorities for
taxable income earned this year. The deferred tax provision recognizes an
expense or benefit related to items of income or expense that are included in or
deducted from taxable income in a period different than when the items are
recognized in the financial statements under generally accepted accounting
principles. Examples of such timing differences and the impact of the major
items are shown in Note 8 to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K.
With each period end, it is necessary for Management to make certain estimates
and assumptions to compute the provision for income tax. Management uses the
best information available to develop these estimates and assumptions, but
generally some of these estimates and assumptions are revised when the Company
files its tax return in the middle of the following year. In accordance with
generally accepted accounting principles, revisions to estimates are recorded as
income tax expense or benefit in the period in which they become known.
For the last several years, the effective tax rate (income tax expense divided
by pre-tax income) for the Company has been increasing. The increase in loan
income and the expansion of the tax refund programs in 2000 compared to 1999
increased taxable income at a much higher rate than tax-exempt income increased
over the same period. The effective rate for the first quarter of 2000 was 40.1%
compared to 38.1% for the first quarter of 1999. The Company continues to
purchase tax-exempt securities but the rates on securities purchased over the
last several years have been at lower rates than the rates that applied to the
large amount of municipal securities purchased in the mid-80's many of which
have recently matured.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at acceptable cost in
order to meet cash needs, such as might be caused by fluctuations in deposit
levels, customers' credit needs, and attractive investment opportunities. The
Company's objective is to maintain adequate liquidity at all times.
The Company has defined and manages three types of liquidity: (1) "immediate
liquidity," which is the ability to raise funds today to meet today's cash
obligations, (2) "intermediate liquidity," which is the ability to raise funds
during the next few weeks to meet cash obligations over that time period, and
(3) "long term liquidity," which is the ability to raise funds over the entire
planning horizon to meet anticipated cash needs due to strategic balance sheet
changes. Adequate liquidity is achieved by (a) holding liquid assets that either
will mature within several weeks or can easily be sold, (b) maintaining the
ability to raise deposits or borrow funds, and (c) keeping access open to
capital markets.
Immediate liquidity is provided by the prior day's maturing Federal funds sold
and repurchase agreements, any cash in excess of the Federal Reserve balance
requirement, unused Federal funds lines from other banks, and unused repurchase
agreement facilities with other banks or brokers. The Company maintains total
sources of immediate liquidity of not less than 5% of total assets, increasing
to higher targets during that portion of the first quarter when the tax refund
loan program is active. At the end March 31, 2000, these sources of immediate
liquidity were well in excess of that minimum.
33
<PAGE>
Sources of intermediate liquidity include maturities or sales of short-term
money market instruments and securities in the Liquidity and Discretionary
Portfolios, securities in the Earnings Portfolio maturing within three months,
term repurchase agreements, advances from the FHLB, and deposit increases from
special programs. The Company projects intermediate liquidity needs and sources
over the next several weeks based on historical trends, seasonal factors, and
special transactions. Appropriate action is then taken to cover any anticipated
unmet needs. At the end of March 2000, the Company's intermediate liquidity was
adequate to meet all projected needs.
Long term liquidity is to be provided by special programs to increase core
deposits, reducing the size of the investment portfolios, selling or
securitizing loans, and accessing capital markets. The Company's policy is to
address cash needs over the entire planning horizon from actions and events such
as market expansions, acquisitions, increased competition for deposits,
anticipated loan demand, economic conditions and the regulatory outlook. At the
end of March 2000, the Company's long term liquidity was adequate to meet cash
needs anticipated over its planning horizon.
CAPITAL RESOURCES AND COMPANY STOCK
The following table presents a comparison of several important amounts and
ratios for the first quarter of 2000 and 1999 (dollars in thousands).
<TABLE>
Table 8--CAPITAL RATIOS
<CAPTION>
1st Quarter 1st Quarter
2000 1999 Change
-------------- ------------- -------------
<S> <C> <C> <C>
Amounts:
Net Income $ 19,820 $ 14,521 $ 5,299
Average Total Assets 3,475,295 2,789,122 686,173
Average Equity 245,627 219,686 25,941
Ratios:
Equity Capital to Total Assets (period end) 7.06% 8.30% (1.24%)
Annualized Return on Average Assets 2.29% 2.11% 0.18%
Annualized Return on Average Equity 32.37% 26.81% 5.56%
</TABLE>
The operating earnings of the subsidiary banks are the largest source of capital
for the Company. For reasons mentioned in various sections of this discussion,
Management expects that there will be variations from quarter to quarter in
operating earnings. Areas of uncertainty or seasonal variations include asset
quality, loan demand, and the tax refund loan and transfer programs. A
substantial increase in charge-offs might require the Company to record a larger
provision for loan loss to restore the allowance to an adequate level, and this
would negatively impact earnings. As loan demand has increased, the Company has
been able to reinvest proceeds from maturing investments at higher rates, which
would positively impact earnings. Income from the tax refund loan and transfer
programs, occurring almost entirely in the first quarter, introduce significant
seasonality and cause the return on average assets and return on average equity
ratios to be substantially higher in the first quarter of each year than they
will be in subsequent quarters.
Capital must be managed at both the Company and at the individual bank levels.
The FRB sets minimum capital guidelines for U.S. banks and bank holding
companies based on the relative risk of the various types of assets. The
guidelines require banks to have capital equivalent to at least 8% of risk
adjusted assets. To be classified as "well capitalized", the Company is required
to have capital equivalent to at least 10% of risk adjusted assets. As of March
31, 2000, the Company's risk-based capital ratio was 10.36%. The Company must
also maintain a Tier I capital (total shareholder equity less goodwill and other
intangibles) to risk adjusted assets ratio of 6%, and 5% of average tangible
assets, respectively. As of March 31, 2000, Tier I capital was 9.18% of risk
adjusted assets and 6.92% of average tangible assets.
The ratio of equity capital to total assets has decreased over the last year as
assets have increased at a higher rate than equity capital. This occurred for
several reasons. The first is that the strong loan demand noted above has caused
a high rate of asset growth. The second is that in the fourth quarter of 1998,
the Company's net income was significantly reduced by the one-
34
<PAGE>
time costs incurred in connection with the closing of the merger with Pacific
Capital Bancorp. The Company, however, did not reduce its dividend to
shareholders for this quarter and therefore more capital was paid out in
dividends to shareholders than was added to capital from net income. The third,
which is almost totally restricted in its impact to the first quarter of 2000,
is the growth in assets related to the tax refund programs as explained below in
the section titled "Refund Anticipation Loan and Refund Transfer Programs."
While the earnings of its wholly-owned subsidiaries are recognized as earnings
of the Company, specific dividends must be declared and paid by the subsidiary
banks to the parent in order for it to pay dividends to its shareholders. As a
state-chartered bank, California law limits the amount of dividends that may be
paid by SBB&T to Bancorp. As a nationally-chartered bank, FNB's ability to pay
dividends is governed by federal law and regulations.
California law limits dividends that may be paid by a bank without specific
approval by the California Department of Financial Institutions to the lesser of
the bank's retained earnings or the total of its undistributed net income for
the last three years. The dividends needed to be paid by SBB&T to the Bancorp
for the acquisitions of FVB and CSB exceeded the amount allowable without prior
approval of the California Department of Financial Institutions ("CDFI"). As
part of its approval of the acquisitions, the CDFI approved the excess
distributions. During 1998 and 1999, it also approved other dividends from SBB&T
to the Bancorp to partially fund the latter's quarterly cash dividends to its
shareholders and for other incidental purposes. SBB&T was able to pay $3 million
in dividends to Bancorp during the first quarter of 2000 without specific
approval, but will need to request approval for additional dividends that will
be needed during the year, both for its portion of the Bancorp cash dividend
paid to shareholders and for the Los Robles acquisition. Management expects that
approval will continue to be granted due to strong earnings and the
well-capitalized position of SBB&T.
Because the former Pacific Capital's merger with South Valley Bancorporation was
a stock-only transaction, FNB did not have to pay a large dividend to its
holding company as SBB&T did. FNB therefore has ample ability to pay dividends
to the Bancorp for all normal operating needs and for shareholder dividends.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements other than the acquisition of Los Robles Bancorp
planned at this time. However, as the Company pursues its stated plan to expand
beyond its current market areas, Management will consider opportunities to form
strategic partnerships with other financial institutions that have compatible
management philosophies and corporate cultures and that share the Company's
commitment to superior customer service and community support. Such
transactions, depending on their structure, may be accounted for as a purchase
of the other institution by the Company. To the extent that consideration is
paid in cash rather than Company stock, the assets of the Company would increase
by more than its equity and therefore the ratio of capital to assets would
decrease.
The current quarterly dividend rate is $0.20 per share. When annualized, this
represents a payout ratio of approximately 40% of earnings per share for the
trailing 12 months.
REGULATION
The Company is closely regulated by Federal and State agencies. The Company and
its subsidiaries may only engage in lines of business that have been approved by
their respective regulators, and cannot open or close offices without their
approval. Disclosure of the terms and conditions of loans made to customers and
deposits accepted from customers are both heavily regulated as to content. The
subsidiary banks are required by the provisions of the Community Reinvestment
Act ("CRA") to make significant efforts to ensure that access to banking
services is available to all members of their communities. As a bank holding
company, Bancorp is primarily regulated by the Federal Reserve Bank ("FRB"). As
a member bank of the Federal Reserve System that is state-chartered, SBB&T's
primary Federal regulator is the FRB and its state regulator is the CDFI. As a
nationally chartered bank, FNB's primary regulator is the Office of the
Comptroller of the Currency. As a non-bank subsidiary of the Company, Pacific
Capital Commercial Mortgage, Inc. is regulated by the FRB. Each of these
regulatory agencies conducts periodic examinations of the Company and/or its
subsidiaries to ascertain their compliance with laws, regulations, and safe and
sound banking practices.
The regulatory agencies may take action against bank holding companies and banks
should they fail to maintain adequate capital or to comply with specific laws
and regulations. Such action could take the form of restrictions on the payment
of dividends to shareholders, requirements to obtain more capital from
investors, or restrictions on operations. The Company
35
<PAGE>
and the subsidiary banks have the highest capital classification, "well
capitalized," given by the regulatory agencies and therefore, except for the
need for approval of dividends paid from SBB&T to Bancorp, are not subject to
any restrictions as discussed above. Management expects the Company and the
subsidiary banks to continue to be classified as well capitalized in the future.
REFUND ANTICIPATION LOAN AND REFUND TRANSFER PROGRAMS
Since 1992, SBB&T has extended tax refund anticipation loans to taxpayers who
have filed their returns electronically with the IRS and do not want to wait for
the IRS to send them their refund check. SBB&T earns a fixed fee per loan for
advancing the funds. The fees are more related to processing cost and credit
risk exposure than to the cost of funding the loans for the length of time that
they are outstanding. Nonetheless, the fees are required to be classified as
interest income. Because of the April 17 tax filing date, almost all of the
loans are made and repaid during the first quarter of the year.
If a taxpayer meets SBB&T's credit criteria for the refund loan product, and
wishes to receive a loan with the refund as security, the taxpayer applies for
and receives an advance less the transaction fees, which are considered finance
charges. SBB&T is repaid directly by the IRS and remits any refund amount over
the amount due SBB&T to the taxpayer.
There is a higher credit risk associated with refund loans than with other types
of loans because (1) SBB&T does not have personal contact with the customers of
this product; (2) the customers conduct no business with SBB&T other than this
once a year transaction; and (3) contact subsequent to the payment of the
advance, if there is a problem with the tax return, may be difficult because
many of these taxpayers have no permanent address.
If the taxpayer does not meet the credit criteria or does not want a loan, SBB&T
can still facilitate the receipt of the refund by the taxpayer through the
refund transfer program. This is accomplished by SBB&T authorizing the tax
preparer to issue a check to the taxpayer once the refund has been received by
SBB&T from the IRS. The fees received for acting as a transfer agent are less
than the fees received for the loans. These fees are reported among "other
service charges, commissions and fees, net" in the consolidated statements of
income.
While SBB&T is one of very few financial institutions in the country to operate
these electronic loan and transfer programs, the electronic processing of
payments involved in these programs is similar to other payment processing
regularly done by the Company and other commercial banks for their customers
such as direct deposits and electronic bill paying. The refund loan and transfer
programs had significant impacts on the Company's activities and results of
operations during the first quarters of 1999 and 2000. These impacts are
discussed in the following six sections.
1. An IRS Change in the Program Caused Expanded Volume:
Prior to 1995, upon receipt of an electronically filed tax return, the IRS would
send a return notice to the filer indicating whether the IRS had a lien
outstanding against any refund due the taxpayer. Such liens might be placed on
refunds because of prior underpayments, delinquent student loans, or unpaid
taxes. Because the primary source of repayment for tax refund loans is the IRS,
not the taxpayer, banks operating loan programs relied on this notice in
determining whether to make a loan to the taxpayer.
In 1995, the IRS discontinued this practice, and banks had to use other means to
determine whether they were likely to have their loans repaid. These other means
added to the costs of making the loans and they were not as reliable in
determining collectibility. Fees for loans were therefore raised to pay for the
additional transaction costs and to cover the higher credit losses.
Congress has given the IRS a mandate to increase the number of returns that are
filed electronically in order to keep IRS costs down. Greater use of the refund
loan and transfer programs helps the IRS to meet this mandate because they are
connected to electronic filing. In 2000, the IRS resumed sending the return
notice indicating whether it would withhold the taxpayer's refund because of
funds owed the Federal government. The banks running national programs decreased
their transaction fees for loans because better credit determinations could be
made at lower cost. This served to encourage more taxpayers to use the products,
especially the loan product. It also permitted the Company and other providers
to lend against a higher proportion of each refund.
36
<PAGE>
The consequence of this IRS change was to increase the total volume of
transactions, to increase the proportion of loans compared to transfers, and to
increase the size of the loans made.
2. Seasonality Impact on Earnings:
Because the programs relate to the filing of income tax returns, activity is
concentrated in the first quarter of each year. This causes first quarter income
to average about 30% of each year's net income. Because of the expansion of the
program in 2000, Management expects that net income for the first quarter will
be approximately 38% of net income for the year.
3. Product Mix Impact on Revenues:
In 2000, the product mix between loans and transfers was more heavily weighted
towards loans than it had been since 1995. This meant that interest income
arising from the program was higher both because the overall volume of
transactions in the programs was larger and because more of the transactions
were loans rather than transfers. This resulted in higher net interest income
and net interest margin than would otherwise be expected. Even though the
product mix shifted towards loans, as noted below in the summary of operating
results, the expanded program caused income from transfers to increase as well,
but at a lower rate than loans.
4. Funding Impact on Various Balance Sheet and Income and Expense Accounts:
In prior years, SBB&T funded the loans by first drawing down its overnight
liquid assets and then by borrowing overnight. The borrowing was done through
use of its unsecured Federal funds credit lines with other financial
institutions and by entering into repurchase agreements with other financial
institutions that used SBB&T's securities as collateral for the overnight
borrowings.
Again in 2000, SBB&T used liquid assets and borrowed overnight to fund the
loans. In addition, SBB&T increased its borrowings from the FHLB during this
period. With the larger program, interest expense on these borrowings increased
over the amounts incurred in 1999. However, because of the substantial increase
in the program in 2000, SBB&T could not fund the loans using only these sources.
While it expanded the number and amount of credit lines available to it,
Management decided that the best assured source of funding would be to engage
brokerage firms to sell certificates of deposit. Approximately $385 million of
these CDs were issued with terms of two, three, and six months. Shorter
maturities would have been preferable because the funding need is concentrated
in the only first three weeks of February, but they were not available in
sufficient quantity. The average rate for these CDs was 6.30%. These brokered
CDs account for the increase in the average time deposits outstanding and the
increase in interest expense on these accounts during the first quarter of 2000,
as reported in Table 1, compared to the amounts for the first quarter of 1999.
Among the amounts reported in Note 9 to the financial statements for each
operating segment of the Company are interest expense, internal charges for
funds, and intersegment revenues. Though issued for the refund loan program, the
CDs were booked in the Branch Activities segment, since that is where all
deposit funding is recorded for SBB&T. The proceeds from the CDs were in essence
lent to the Tax Refund Programs segment. This segment reports the cost of
borrowing the funds as an internal charge for funds and the Branch Activities
segment recognizes intersegment revenues in the amount of the charge.
The impact of using this method of funding is that SBB&T had an excess of funds
after the loans began to be repaid by the IRS in substantial quantities. These
funds were initially sold into overnight Federal funds market and reverse repos
with other financial institutions, increasing the average balance of, and the
interest income from, these short-term instruments for the quarter as shown in
Table 1. However, because the rates earned on these overnight investments were
below the interest rate paid on the deposits, the Company began to place the
funds into securities and commercial paper that had maturities matching the CDs
or would be easily salable to provide the funds necessary to redeem the CDs.
These instruments had interest rates more closely matching the CD rates and
therefore the negative carrying cost was reduced.
Other liabilities reported in the consolidated balance sheet were substantially
higher at March 31, 2000 than at December 31, 1999. The primary reason for this
increase relates to one of its contractors in the program. SBB&T collects fees
for this contractor and holds the fees for application against credit losses
incurred on the loans made by this contractor. The amount held at March 31, 2000
for this purpose was $22.4 million.
5. Summary of Operating Results:
37
<PAGE>
Gross revenues for the refund loan and transfer programs were $7.5 million and
$5.9 million, respectively, for the first quarter of 1999, with operating
expenses of $1.8 million. The Company added $2.8 million to the allowance for
credit loss for refund loans through a charge to provision expense during the
quarter and added another $2.1 million to the allowance from recoveries on loans
charged off in prior years. The Company charged-off $3.3 million in refund loans
during this quarter of 1999.
During the first quarter of 2000, the Company recognized fees for refund loans
of $17.6 million and fees for transfers of $6.6 million. Operating expenses
totaled $2.3 million.
The Company estimates that about 1.3% of refund loans will not be collected in a
timely fashion from the IRS. Using this estimate, during the quarter ended March
31, 2000, the Company provided for these potential losses by adding $3.6 million
to the allowance for credit loss from refund loans through a charge to provision
expense and adding another $2.0 million to the allowance from recoveries on
loans charged off in prior years. The Company charged-off $2.9 million in RAL's
against this allowance in the first quarter of 2000. Some of these loans may yet
be paid during the remainder of this year or during the 2001 filing season. In
addition, following past practice, the Company expects to charge-off any
remaining uncollected refund loans by June 30.
There is no credit risk associated with the refund transfers because checks are
issued only after receipt of the refund payment from the IRS.
6. Expectations for the Remainder of 2000:
Additional loans and transfers were made between the end of the first quarter of
2000 and the tax filing deadline of April 17. But this activity represents a
small proportion of the total activity for the season. Some additional revenues
will be generated from this activity. Because SBB&T does not recognize interest
income on the loans or transfer income until the IRS has remitted the refunds to
it, there will also be some revenue recognized from loans and transfers made
prior to March 31.
During the first quarter, SBB&T charged off loans that had been outstanding more
than six weeks. In addition it provided an allowance for credit loss in an
amount estimated to cover losses on the remaining outstanding loans. During the
second quarter, SBB&T will likely receive payments on some of these loans that
were charged off and on loans charged off in prior years. In addition, some of
the outstanding loans which appeared collectible at March 31 will become
delinquent and need to be charged off. These activities will require adjustments
to the provision for credit loss by charging or crediting income for the second
quarter. Management does not anticipate that the adjustments will be
significant. As in prior years, still outstanding loans will be charged off at
the end of the second quarter. Collections that are eventually received on these
loans will be added to the allowance for credit losses.
Lastly, during the second quarter, as well as during the rest of 2000, the tax
refund programs will continue to incur expenses for salaries, occupancy, legal,
data processing, etc. These expenses will tend to lower the reported profit for
the segment compared to the figure reported in Note 9. However, these expenses
are not expected to exceed several hundred thousand dollars.
The Company is one of a number of financial institutions named as party
defendants in a patent infringement lawsuit recently filed by an unaffilliated
financial institution. The lawsuit generally relates to the Company's tax refund
program.
The Company has retained outside legal counsel to represent its interests in
this matter. The Company does not believe that it has infringed any patents as
alleged in the lawsuit and intends to vigorously defend itself in this matter.
The amount of alleged damages are not specified in the papers received by the
Company. Therefore, Management connot estimate the amount of any possible loss
at this time in the event of an unfavorable outcome.
YEAR 2000
The Company provided extensive information regarding its preparations for the
Century Date Change in the 1999 10-K MD&A. It was reported in that discussion
that "no significant problems were encountered with the Company's critical
systems and through the writing of this discussion, the Company has become aware
of no significant problems encountered by its customers or the other financial
institutions with which it does business. The Company has become aware of no
significant impact on its customers' abilities to repay loans due to problems
with their systems. The Company will remain alert to the potential for problems
to arise later in 2000, especially because it will be a leap year."
As of the writing of this discussion, the above statements are still correct,
and this topic will not be included in future reports unless problems arise.
38
<PAGE>
MERGER WITH SAN BENITO BANK
In February 2000, the Company signed a merger agreement with Hollister,
California-based San Benito Bank. The agreement provides for existing San Benito
Bank shareholders to receive 0.605 shares of Pacific Capital Bancorp common
stock for each of their outstanding shares of common stock. The merger
transaction will be accounted for as a pooling of interests. As of the date of
the agreement, based on the closing price per share of Company stock, the value
of the merger would be estimated to be $51.8 million. However, the final value
will be based on the price per share at the time the transaction closes, which
may result in a value more or less than that stated above. Subject to
shareholder and regulatory approvals, the merger is expected to close in the
third quarter of 2000. One-time charges to be taken at the time of closing are
estimated to be $1.6 million after tax. Administrative and operational support
units will be based out of First National Bank of Central California, creating
the merger savings that will make the transaction accretive to earnings per
share in the first full operating year for the combined company.
At December 31, 1999, San Benito Bank reported net income of $2.3 million, with
total assets of $201million, total deposits of $181 million, total loans of $109
million, and total shareholders' equity of $18 million. San Benito Bank
maintains three offices in the communities of Hollister and San Juan Bautista in
San Benito County, and an office in Gilroy in Santa Clara County.
ACQUISITION OF LOS ROBLES BANCORP
In March 2000, the Company signed a definitive agreement to acquire Thousand
Oaks, California-based Los Robles Bancorp, parent company of Los Robles Bank.
The agreement provides for each outstanding share of Los Robles Bancorp common
stock to be converted into the right to receive $23.12 in cash, and each
outstanding stock option to receive the difference between $23.12 and the
exercise price of the option in cash. The acquisition will be accounted for
under the purchase method of accounting. As of the date of the agreement, the
estimated value of the transaction is approximately $32.5 million, representing
2.73 times Los Robles' book value at December 31, 1999, 15.6 times 1999
earnings. Subject to regulatory approval and the approval of shareholders of Los
Robles Bancorp, the acquisition is expected to close in the third quarter of
2000. One-time charges to be taken at the time of closing are estimated to be
$0.6 million after tax. It is anticipated that Los Robles Bank will be merged
into Santa Barbara Bank & Trust.
At December 31, 1999, Los Robles Bancorp reported year-to-date net income of
$2.0 million and total assets of $149 million. Los Robles Bank operates three
banking offices in Ventura County, one each in Thousand Oaks, Westlake Village,
and Camarillo, and has two loan production offices, one in Thousand Oaks and one
in Orange County.
- - --------------------------------------------------------------------------------
Note A - To obtain information on the performance ratios for peer banks, the
Company primarily uses The FDIC Quarterly Banking Profile, published by the FDIC
Division of Research and Statistics. This publication provides information about
all FDIC insured banks and certain subsets based on size and geographical
location. Geographically, the Company is included in a subset that includes 12
Western States plus the Pacific Islands. By asset size, the Company is included
in the group of financial institutions with total assets from $1-10 billion. The
information in this publication is based on year-to-date information provided by
banks each quarter. It takes about 2-3 months to process the information.
Therefore, the published data is always one quarter behind the Company's
information. For this quarter, the peer information is for the fourth quarter of
1999. All peer information in this discussion and analysis is reported in or has
been derived from information reported in this publication.
39
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description
3 Certificate of Determination of Rights, Preference and Privileges
of Series A Preferred Stock
4
4.1 1998 Amended and Restated Trust Agreement of Pacific Capital
Bancorp Voluntary Employee's beneficiary association.
4.2 1998 Amended and Restated Key Employee Retiree Health Plan
4.3 1998 Amended and Restated Retiree Health Plan
27 Financial Data Schedule for March 31, 2000
(b) Two reports on Form 8-K were filed during the quarter ended March 31,
2000.
The announcement of the Agreement and Plan of Reorganization providing
for the acquisition of the San Benito Bank by Pacific Capital Bancorp
was reported on a Form 8-K filed with the Commission on March 7, 2000.
The announcement of the definitive agreement to acquire Los Robles
Bancorp was reported on a Form 8-K filed with the Commission on April
12, 2000.
40
<PAGE>
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized:
PACIFIC CAPITAL BANCORP
/s/ William S. Thomas, Jr.
William S. Thomas, Jr. May 15, 2000
President
Chief Executive Officer
/s/ Donald Lafler
Donald Lafler May 15, 2000
Executive Vice President
Chief Financial Officer
41
CERTIFICATE OF DETERMINATION
OF
RIGHTS, PREFERENCE AND PRIVILEGES
OF
SERIES A PREFERRED STOCK
OF
PACIFIC CAPITAL BANCORP
David W. Spainhour and Donald J. Smith hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Pacific Capital Bancorp, a California corporation.
2. Pursuant to authority given by said corporation's Articles of
Incorporation, the Board of Directors of said corporation has duly adopted the
following recitals and resolutions:
WHEREAS, the Articles of Incorporation of this corporation provide for
a class of shares known as Preferred Stock, issuable from time to time
in one or more series; and
WHEREAS, the Board of Directors of this corporation is authorized to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred
Stock, to fix the number of shares constituting any such series, and to
determine the designation thereof, or any of them; and
WHEREAS, this corporation has not issued a series of Preferred Stock,
and the Board of Directors of this corporation desires, pursuant to its
authority as aforesaid, to determine and fix the rights, preferences,
privileges and restrictions relating to a series of said Preferred
Stock and the number of shares constituting the designation of said
series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
fixes and determines the designation of, the number of shares
constituting, and the rights, preferences, privileges and restrictions
relating to, said series of Preferred Stock as follows:
1. Designation of Preferred Shares. The corporation shall have
one series of Preferred Stock which shall be designated "Series A
Preferred Stock" (the "Series A Preferred Stock"). (The Series A
Preferred Stock is hereinafter sometimes referred to as the "Preferred
Stock".)
2. Number of Preferred Shares. The number of shares
constituting the Series A Preferred Stock shall be Sixty Thousand
(60,000). Such number of shares may be increased or decreased by
resolution of the Board; provided that no decrease shall reduce the
number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any
<PAGE>
outstanding securities issued by the corporation convertible into
Series A Preferred Stock.
3. Dividends and Distributions. Subject to the rights of the
holders of any shares of any series of Preferred Stock (or any similar
stock) ranking prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of the Series A Preferred Stock shall
only be entitled, when and if declared by the Board of Directors of the
corporation, to dividends out of the retained earnings of the
corporation; provided that no dividend or distribution may be declared
or paid on any shares of Common Stock or any shares of Series A
Preferred Stock unless at the same time an equivalent dividend or
distribution is declared or paid on all outstanding shares of Common
Stock and Series A Preferred Stock. Subject to the provision for
adjustment hereinafter set forth, the amount of the dividend or other
distribution payable with respect to the Series A Preferred Stock shall
be payable at the rate per share of Series A Preferred Stock equal to
1,000 times the aggregate per share amount of all cash dividends, and
1,000 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on
the Common Stock. In the event the corporation shall at any time or
from time to time after December 14, 1999 (the "Rights Dividend
Declaration Date") declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision, combination
or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. The right to dividends on
shares of the Series A Preferred Stock shall not be cumulative, and no
right shall accrue to holders of shares of Common Stock or Series A
Preferred Stock by reason of the fact that dividends on said shares are
not or have not been declared in any period.
4. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights.
(a) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a
vote of the stockholders of the corporation. In the event the
corporation shall at any time or from time to time after the Rights
Dividend Declaration Date declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the number of votes per share to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
<PAGE>
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein, in any
Certificate of Determination creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the corporation having general voting rights shall
vote together as one class on all matters submitted to a vote of
stockholders of the corporation.
(c) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock shall have no
special voting rights and their consent shall not be required (except
to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued
as part of a new series of Preferred Stock subject to the conditions
and restrictions on issuance set forth in any Certificate of
Determination creating a series of Preferred Stock or any similar stock
or as otherwise required by law.
6. Liquidation, Dissolution or Winding Up.
(a) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the corporation, no distribution shall be
made to the holders of shares of Common Stock or other stock ranking
junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the
holders of shares of Series A Preferred Stock shall have received an
amount equal to $1,000 per share of Series A Preferred Stock, plus an
amount equal to accrued and unpaid dividends and distributions thereon
to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the holders of
shares of Series A Preferred Stock unless, prior thereto, the holders
of shares of Common Stock shall have received an amount equal to $1.00
per share of Common Stock (the "Common Amount"). Following the payment
of the full amount of the Series A Liquidation Preference and the
Common Amount in respect of all outstanding shares of Series A
Preferred Stock and Common Stock, respectively, holders of Series A
Preferred Stock and holders of shares of Common Stock shall receive
their ratable and proportionate share of the remaining assets to be
distributed on liquidation of the corporation in the ratio of 1,000 to
1 with respect to such Series A Preferred Stock and Common Stock, on a
per share basis, respectively.
(b) In the event that there are not sufficient assets
available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of
Preferred Stock, if any, which rank on a parity with the Series A
<PAGE>
Preferred Stock, then such remaining assets shall be distributed
ratably to the holders of such Series A Preferred Stock and parity
shares in proportion to their respective liquidation preferences. In
the event, that, after payment in full of the Series A Liquidation
Preference, there are not sufficient remaining assets available to
permit payment in full of the Common Amount, then such remaining assets
shall be distributed ratably to the holders of Common Stock.
(c) In the event the corporation shall at any time or
from time to time after the Rights Dividend Declaration Date declare or
pay any dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then, in each such case,
(i) the Series A Liquidation Preference in effect immediately prior to
such event shall be adjusted by multiplying such Series A Liquidation
Preference by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event and (ii) the Common Amount
in effect immediately prior to such event shall be adjusted by
multiplying such Common Amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
7. Consolidation, Merger, etc. In case the corporation shall
enter into any consolidation, merger, combination or other transaction
in which the shares of Common Stock are exchanged for or changed into
other stock or securities, cash and/or any other property, then in any
such case the shares of Series A Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share, subject to
the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the
corporation shall at any time or from time to time after the Rights
Dividend Declaration Date declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
<PAGE>
9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to
all other series of the corporation's Preferred Stock, unless the terms
of any such series shall provide otherwise.
10. Amendment. This Certificate of Determination shall not be
amended in any manner which would materially alter or change the
rights, preferences and privileges of the Series A Preferred Stock so
as to affect them adversely without the affirmative vote of the holders
of at least two-thirds (2/3) of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
3. The authorized number of shares of Preferred Stock of the
corporation is 1,000,000. No shares of any series of Preferred Stock are issued
and outstanding. The authorized number of shares of Series A Preferred Stock of
the corporation is 60,000, and no shares of Series A Preferred Stock are issued
and outstanding. The authorized number of shares of Common Stock of the
corporation is 60,000,000, of which 24,521,095 shares are issued and
outstanding.
IN WITNESS WHEREOF, the undersigned has hereunto set their hands as of
December 15, 1999.
------------------------------------
David W. Spainhour, President
------------------------------------
J. Donald Smith, Secretary
The undersigned, David W. Spainhour and Donald J. Smith, the President
and Secretary, respectively, of Pacific Capital Bancorp, a California
corporation, declares under penalty of perjury that the matters set out in the
foregoing Certificate are true of his own knowledge.
Executed at Santa Barbara, California on December 15, 1999.
------------------------------------
David W. Spainhour
------------------------------------
J. Donald Smith
1998 AMENDED AND RESTATED TRUST AGREEMENT
OF
PACIFIC CAPITAL BANCORP
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION
December 30, 1998
<PAGE>
1998 AMENDED AND RESTATED TRUST AGREEMENT
OF
PACIFIC CAPITAL BANCORP
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION
THIS AMENDED AND RESTATED TRUST AGREEMENT (the "agreement") is made and
entered into, effective on the date set forth below, by and between PACIFIC
CAPITAL BANCORP, a California corporation, in its capacity as the sponsor of the
Trust created in this Agreement ("Bancorp"), and SANTA BARBARA BANK & TRUST, a
California corporation, in its capacity as Trustee of that Trust (the
"Trustee"), with reference to the following facts:
RECITALS:
A. SANTA BARBARA BANK & TRUST, a California corporation (ASBBT"), (i)
on December 29, 1992, executed a "Trust Agreement" and a "First Amendment to
Trust Agreement" (together, the "Original Trust Agreement") in order to
establish the terms and conditions on which the Trustee would act as trustee of
a Trust holding contributions to pay the obligations of SBBT under that certain
"Santa Barbara Bank & Trust Retiree Health Plan" (the "Plan"), and (ii) amended
and restated that Prior Trust Agreement effective January 1, 1996, pursuant to
that certain "Amended and Restated Trust Agreement" (the "First Restated Trust
Agreement") (the Original Trust Agreement and the First Restated Trust Agreement
together are referred to as the "Prior Trust Agreement").
B. Effective December 30, 1998, (i) Pacific Capital Bancorp, a
California corporation ("target"), was merged with and into Bancorp, (ii)
Bancorp changed its name to "Pacific Capital Bancorp," and (iii) Bancorp became
the sponsor of the Plan for the benefit of Bancorp and all of its subsidiary
corporations.
C. Bancorp and the Trust have agreed to execute this Agreement in order
to reflect that Bancorp has become the sponsor of the Plan and the results of
the Merger Transaction.
AGREEMENTS:
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. CREATION OF TRUST
1.1 Creation. Bancorp and the Trustee hereby confirm the establishment
of the Trust as of December 29, 1992, and that Bancorp has become sponsor of the
Trust as of December 30, 1998.
1.2 Purpose and Interpretation. The purpose of the Trust is to pay the
Post-Retirement Contribution toward the cost of Coverage pursuant to the terms
of the Plan. This Agreement shall be interpreted, and the Trust shall be
operated, in such manner as to ensure that the Trust qualifies as a VEBA
satisfying the requirements of Section 501(c)(9) of the Code and all regulations
promulgated thereunder, and the requirements of the Employee Retirement Income
Security Act of 1976, as amended (AERISA").
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2. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings indicated below:
2.1 "affiliate" shall mean each corporation in which Bancorp owns all
the outstanding capital stock.
2.2 "Bancorp" means PACIFIC CAPITAL BANCORP, a California corporation
formerly known as "Santa Barbara Bancorp."
2.3 "code" means the Internal Revenue Code of 1986, as amended.
2.4 "Coverage" means coverage under a Group Health Insurance Plan.
2.5 "Covered Key Employees" means each person who (a) has been a "key
employee," as that term is defined for purposes of Code Section 419A(d)(3),
during any plan year under any plan previously maintained by Bancorp or SBBT to
provide health insurance coverage to retired employees, (b) had terminated
employment with SBBT prior to adoption of the predecessor Plan on December 29,
1992, and (c) as of that date satisfied the eligibility requirements set forth
in Section 2.1.1A of the Plan (as then in effect).
2.6 "Effective Date" means December 30, 1998.
2.7 "Employee" means each person who is a common law employee of any
Employer.
2.8 "employer" means Bancorp and each Affiliate of Bancorp.
2.9 "ERISA" means the Employee Retirement Income Security Act of 1976,
as amended.
2.10 "Group Health Insurance Plan" means, in each Plan Year, each group
medical insurance plan and each group dental insurance plan under which any
Employer offers medical or dental insurance coverage to Employees in such Plan
Year.
2.11 "Key Employee" means each Employee other than an Excluded Key
Employee who, at any time during any Plan Year under this Plan or any plan year
under any plan previously maintained by the Employer to provide health insurance
coverage to retired employees, meets the requirements of Section 2.11.1, 2.11.2,
2.11.3, or 2.11.4, below:
2.11.1 Is an officer of the Employer having annual
compensation greater than fifty percent (50.0%) of the limit on the amount of
benefits payable under a defined benefit plan, as set forth in Code Section
415(b)(1)(A). For purposes of this Section 1.16.1, the term "officer" shall mean
only those persons who have officer-type titles and exercise administrative
executive authority, and the persons who qualify as "officers" under such
definition shall be determined by the board of directors of the Employer or its
designee;
2.11.2 Is one of the ten (10) employees of the Employer who
(a) has annual compensation from the Employer in an amount greater than the
limitation on the maximum contributions which can be made to defined
contribution plans under Code Section 415(c)(1)(A), and (b) owns (or by reason
of the
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<PAGE>
constructive ownership rules of Code Section 318) is deemed to own the largest
portions of the outstanding shares of the Employer's common capital stock.
2.11.3 Is an Employee of the Corporation who owns more than
five percent (5.0%) of the outstanding capital stock of the Employer or capital
stock possessing more than five percent (5.0%) of the total combined voting
power of all capital stock of the Employer.
2.11.4 Is an Employee of the Corporation who both (a) owns
more than one percent (1.0%) of the outstanding capital stock of the Employer,
or owns capital stock of the Employer possessing more than one percent (1.0%) of
the total combined voting power of all outstanding shares of the Employer's
capital stock, and (b) receives from the Employer compensation of more than One
Hundred Fifty Thousand Dollars ($150,000) per year.
2.12 "participant" means each person who qualifies as a "participant"
under the terms of the Plan.
2.13 "plan" means the Pacific Capital Bancorp 1998 Amended and Restated
Retiree Health Plan (for Non-Key Employees) adopted effective December 30, 1998,
as amended from time to time.
2.14 "Plan Administrator" means the person serving as the "Plan
Administrator" of the Plan.
2.15 "Plan Year" shall have the same meaning ascribed to such term in
the Plan.
2.16 "SBBT" means SANTA BARBARA BANK & TRUST, a California corporation.
2.17 "trust" means the Trust established under this Agreement.
2.18 "Trustee" means SBBT, and each additional or successor trustee
serving as a trustee of the Trust.
2.19 "Trust Fund" means all contributions made by Bancorp to the Trust,
all earnings from the investment of such contributions, and all other assets
acquired by the Trustee in its capacity as Trustee or otherwise held by the
Trustee pursuant to this Agreement.
2.20 "VEBA" means a Voluntary Employees' Beneficiary Association
satisfying the requirements of Section 501(c)(9) of the Code, and the
regulations promulgated thereunder.
3. CONTRIBUTIONS
3.1 Receipt of Contributions. The Trustee shall receive such
contributions as are paid to it in cash or in kind, from time to time, by
Bancorp. Upon receipt, all such contributions, together with all income and
other gains from such contributions, shall be held, invested, reinvested, and
administered by the Trustee pursuant to the terms of this Agreement without
distinction between principal and income.
3.2 Limitation of Trustee Responsibility. The Trustee shall not be
responsible for the calculation or collection of any contribution under the
Plan, but rather shall be responsible only for such property as is actually
received by the Trustee pursuant to this Agreement.
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4. POWERS OF TRUSTEE
4.1 Investment of Funds. Pursuant to the Plan, Bancorp shall establish
and implement a funding policy consistent with the purposes of the Plan and the
requirements of law, and from time to time may direct the Trustee to exercise
its investment discretion in such manner as Bancorp determines to be
appropriate. Subject to such funding policy and periodic directions from
Bancorp, the Trustee shall invest the funds held in Trust as follows:
4.1.1 Permitted Investments. The Trustee shall invest and
reinvest the Trust Fund, without distinction between principal and income, in
such securities or other property, real or personal, wherever situated, as the
Trustee may deem advisable, including but not limited to stocks, common or
preferred, bonds, and other evidences of indebtedness, and real estate or any
interest therein. In making investments, the Trustee shall:
A. Consider, among other factors, the short-term and
long-term needs of the Plan; and
B. Not be restricted to securities or other property
of a character expressly authorized by applicable law for trust investments.
4.1.2 Employment of Custodian. The Trustee may employ a bank
or trust company pursuant to the terms of its usual and customary bank agency
agreement, under which the duties of such bank or trust company shall be of a
custodial, clerical, and record-keeping nature.
4.1.3 Pooled Funds. From time to time the Trustee may
transfer to a common, collective, or pooled trust fund maintained by any person
serving as a corporate trustee hereunder all or such part of the assets held
under this Agreement as the Trustee may deem advisable, and any such monies so
transferred shall be subject to all the terms of provisions of the common,
collective, or pooled trust fund which contemplate the commingling for
investment purposes of such Trust assets with the assets of other trusts. The
Trustee may, from time to time, withdraw from such common, collective, or pool
trust fund all or any part of the monies so invested.
4.1.4 Life Insurance Policies. The Trustee may apply for,
own, and pay premiums on life insurance policies insuring the lives of
Participants.
4.2 Other Powers. In addition to the powers expressly or impliedly
granted to the Trustee in other provisions of this Agreement, the Trustee shall
have the power:
4.2.1 Borrow. To borrow money upon such terms and
conditions, at any time or times, and for such purposes of the Trust, as the
Trustee may deem proper or desirable. For sums borrowed, the Trustee may issue
promissory notes and secure the payment thereof by mortgaging or pledging all or
any part of the assets of the Trust.
4.2.2 Real Estate. To buy, sell, and hold title to real
estate and interests therein in the name of the Trustee or in the name of the
Trustee's nominee. In accepting title to real estate, neither the Trustee nor
the Trustee's nominee shall be held to have assumed the obligation to make
payment of any encumbrances thereon from its personal assets, nor any
responsibility as to the validity of the title conveyed
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<PAGE>
to or held by the Trustee's nominee. All conveyances executed and delivered by
the Trustee or the Trustee's nominee shall be made without covenants or
warranty, except as against the Trustee's own acts.
4.2.3 Voting. With respect to all stocks, bonds, and other
securities held in the Trust, (a) to exercise all voting rights with respect to
such securities; (b) to give general and special powers of attorney without
power of substitution in order to exercise such voting rights; (c) to exercise
any conversion privileges, subscription rights or other options and to make any
payments incidental thereto; (d) to consent to or otherwise participate in
corporate reorganizations and other changes affecting corporate securities held
by the Trust; (e) to delegate discretionary powers and to pay any assessments or
charges in connection therewith; and (f) generally to exercise any of the rights
and powers otherwise exercisable by any other owner of such securities.
4.2.4 Prosecute and Defend Claims. To sue and defend in any
suit or legal proceedings by or against the Trust. The Trustee shall have full
power in the Trustee's discretion to compromise and adjust all claims and
demands in favor of or against the Trust upon such terms as the Trustee may deem
appropriate. In the administration of the Trust, the Trustee shall not be
obligated to take any action which may subject the Trustee to any expense or
liability unless the Trustee is first indemnified to the satisfaction of the
Trustee for all expenses and liabilities, including attorneys' fees, which the
Trustee may incur in connection with such action.
4.2.5 Nominee. To register in the name of the Trustee or the
Trustee's nominee any investment held by the Trust and to hold any investment in
bearer form; provided, however, (a) the books and records of the Trustee at all
times shall show that all such investments are part of the Trust Fund, and (b)
such form of registration or holding shall neither increase nor decrease the
liability of the Trustee.
4.2.6 Employment of Agents. To employ such agents,
attorneys-in-fact, experts, and investment and legal counsel, including any firm
or corporation with which the Trustee may be associated as a partner, director,
stockholder, or otherwise, and to delegate discretionary powers to or rely upon
information or advice furnished by, such agents, attorneys-in-fact, experts, or
counsel.
4.2.7 Execution of Instruments. To make, execute and deliver
any and all documents of transfer and conveyance and any and all other
instruments that may be necessary or appropriate to carry out the powers granted
in this Agreement.
4.2.8 Necessary Acts. To do all acts, whether or not
expressly authorized in this Agreement, which may be necessary or proper for the
protection of the Trust Fund or for the carrying out of any duty under the Plan
or this Agreement.
5. ADMINISTRATION OF TRUST
5.1 Standard of Care. The Trustee shall discharge its duties under this
Agreement (a) in a manner which satisfies the duties imposed upon "fiduciaries"
by ERISA, and (b) subject to such duties, (1) in the best interests of
Participants, (2) with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, and (3) by diversifying the investments of
the Trust so as to minimize the risk of large losses, unless under the
circumstances it is clearly not prudent to do so.
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<PAGE>
5.2 Accounts and Records. The Trustee shall maintain accurate and
detailed accounts of all investments, receipts, disbursements, and other
transactions under this Agreement, and all such accounts and other records
relating thereto shall be open to inspection and audit at all reasonable times
by Bancorp and any person designated by Bancorp.
5.2.1 Exclusion of Key Employees. Except for Covered Key
Employees, Bancorp and the Trustee acknowledge and agree that (a) under the
terms of the Plan, no Key Employee is entitled to receive Coverage or any other
benefits under the Plan or this VEBA; and (b) the Trustee shall not make any
payment from the Trust to or for the benefit of any Key Employee. With respect
to the Covered Key Employees, the Trustee at all times shall comply fully with
the requirements of Code Section 419A(d) (regarding the maintenance of separate
accounts for "key employees," as that term is defined in Code Section
419A(c)(3)) and any other provision of the Code requiring that contributions to
the Trust and benefits paid by the Trust with respect to "key employees" (as
that term is defined in Code Section 419A(c)(3)) be separately accounted for or
subject to other special restrictions.
5.2.2 Annual Accounting. Within sixty (60) days after the
end of each Plan Year, the Trustee shall furnish the Plan Administrator a
written statement of account setting forth all receipts and disbursements during
such Plan Year. The Plan Administrator shall acknowledge in writing receipt of
such statement, and shall advise the Trustee of its approval or disapproval of
the statement. If, within sixty (60) days after receiving such statement, the
Plan Administrator fails to disapprove the statement, then such statement shall
be deemed approved. The actual or deemed approval of the statement of account by
the Plan Administrator shall serve to release and discharge the Trustee from any
liability or accountability to the Plan Administrator with respect to the
propriety of the Trustee's acts or transactions shown on the statement of
account, except with respect to any acts or transactions as to which the Plan
Administrator shall file written objections with the Trustee within such 60-day
time period.
5.3 Exempt Function Income. Prior to filing the Trust's annual income
tax return for each taxable year, the Trustee shall designate that portion of
the Trust's income for such year as qualifies as "exempt function income" (as
such term is defined in Section 512(a)(3) of the Code). All such exempt function
income shall be segregated from the general assets of the Trust, accounted for
separately on the Trust's books and records, and used solely for the payment of
the cost of Coverage and those reasonable costs of administering the Trust which
are directly connected with the payment of the cost of the Coverage.
5.4 Payment of Benefits. Subject to Sections 5.2.1 and 8 hereof, the
Trustee shall apply the assets of the Trust to pay the Post Retirement
Contribution toward the cost of Coverage for Participants (as required by the
Plan) at such times, in such amounts, and to such persons, as the Plan
Administrator designates.
5.5 Expenses of Administration. Subject to Section 8.3, below, (a) the
Trustee's compensation, if any, shall be fixed from time to time by agreement
with Bancorp, provided, no such compensation shall be paid if the payment or
receipt of such funds would constitute a "prohibited transaction" under the Code
or ERISA; and (b) the Trustee shall be entitled to be reimbursed, by Bancorp or
from the Trust Fund, for its reasonable expenses.
6. RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
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<PAGE>
6.1 Resignation or Removal. Bancorp may remove the Trustee at any time,
without cause, by delivering a written notice of removal to the Trustee. The
Trustee may resign as a trustee under this Agreement by delivering to Bancorp a
written notice of resignation. Any such removal or resignation shall be
effective on the later of (a) the date specified in the notice of removal or
resignation, or (b) the fifteenth (15th) day after the delivery of such notice.
6.2 Successor Trustee. Upon the removal, resignation, death, or
inability of any Trustee to serve under this Agreement, a successor shall be
appointed (a) by Bancorp, or (b) if Bancorp does not then exist or is in
bankruptcy proceedings or its assets are being managed by a receiver, then by a
majority of the Participants then having an interest in the Trust. Upon
accepting appointment as a successor Trustee, the successor Trustee shall be
vested with the same powers, duties, privileges, and immunities that such
Trustee would have possessed if it originally had been named as the initial
trustee in this Agreement. Upon acceptance of such appointment by the successor
Trustee, each Trustee who shall have resigned or been removed shall assign,
transfer, and pay over to the successor Trustee all funds and properties of the
Trust.
6.3 Report by Trustee. Within sixty (60) days after resigning or being
removed, the Trustee who has so resigned or been removed shall furnish to the
Plan Administrator a written statement of account with respect to the portion of
the Plan Year for which the Trustee has served. Upon receipt of such statement,
the Plan Administrator shall acknowledge receipt thereof in writing and shall
advise the Trustee whether the Plan Administrator approves or disapproves such
statement. If the Plan Administrator fails to approve any such statement of
account within sixty (60) days after receiving the statement, then such
statement shall be deemed to be approved. The actual or deemed approval of any
such statement shall serve to release and discharge such Trustee from any
liability or accountability to Bancorp with respect to the propriety of the
Trustee's acts or transactions as shown in the statement of account.
6.4 Waiver of Notice. The Trustee and Bancorp may, by mutual agreement,
waive any required advance notice of resignation or removal set forth in Section
6.1 above.
7. AMENDMENT AND TERMINATION OF AGREEMENT
Subject to the prohibitions set forth in Section 8, below:
7.1 Amendment. This Agreement may be amended at any time, in whole or
in part, by a written instrument executed by Bancorp and the Trustee.
7.2 Termination. This Agreement may be terminated at any time by
Bancorp. Upon such termination, the assets of the Trust shall be applied in the
manner directed by the Plan Administrator.
8. PROHIBITION AGAINST DISCRIMINATION, REVERSION OR INUREMENT
Notwithstanding any other provision of this Agreement to the contrary:
8.1 Discrimination. The assets of the Trust shall be applied in a
manner which satisfies the nondiscrimination requirements of Section 505 of the
Code;
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8.2 Exclusive Benefit. The assets of the Trust at all times shall be
applied and invested for the exclusive purpose of paying the Post-Retirement
Contribution toward the cost of Coverage under the Plan and the reasonable costs
of administering the Trust;
8.3 Prohibited Reversion and Inurement. Except to the extent Bancorp
may make a good faith mathematical or other computational error in determining
the amount of its contribution in any Plan Year and except as otherwise provided
in Section 9.1, below, under no circumstances shall any assets or net earnings
of the Trust, either during the existence of the Trust or at the termination
thereof:
8.3.1 Reversion. Revert to Bancorp or be applied to or from
the benefit of Bancorp (except to the extent the Trust Fund is applied to pay
the cost of Coverage pursuant to the Plan); or;
8.3.2 Inurement. Otherwise be paid to, or inure to the
benefit of, any private individual, shareholder or other person, except through
the payment of the cost of Coverage pursuant to the Plan and the costs of
administering the Trust.
9. MISCELLANEOUS
9.1 Qualification and Initial Contribution. Bancorp and the Trustee
shall cooperate in preparing and submitting to the Internal Revenue Service all
documents that may be necessary to obtain from the Internal Revenue Service a
letter determining that the Trust, in operation with the Plan, constitutes a
VEBA and is exempt from federal income taxes under Section 501(a) of the Code.
9.1.1 Amendment. Bancorp and the Trustee shall execute any
amendment to this Agreement that may be necessary to obtain such determination
letter, and any such amendment shall have retroactive effect to the extent
necessary to ensure the qualification of the Trust as a tax-exempt VEBA as of
the effective date of this Agreement.
9.1.2 Contributions. Bancorp and the Trustee acknowledge and
agree that all contributions made by Bancorp to the Trust are made on condition
that such contributions are deductible by Bancorp under Section 419 of the Code.
If a deduction is not allowable under that Section for any portion of any such
contribution for the taxable year of Bancorp with respect to which a
contribution is made, then the non-deductible portion of such contribution shall
be returned to Bancorp if Bancorp demands such portion within one year following
(a) the last day of Bancorp's taxable year with respect to which such
contribution was made, or (b) if later, the date on which the Internal Revenue
Service disallows a deduction for all or any portion of such contribution;
provided, no portion of the earnings on such excess contribution may be returned
to the Bank, and any losses attributable to such excess contribution shall
reduce the amount which otherwise would have been returned to Bancorp under this
Section 9.1.2.
9.2 No Employment Rights. Neither the adoption and maintenance of this
Agreement, nor any express or implicit provision of this Agreement, shall be
deemed:
9.2.1 Contract. To constitute a contract between any
Employer and any other person, or to be a consideration for or an inducement or
condition of, the employment of any person;
9.2.2 Right. To give any person the right to be retained in
the employ of any Employer;
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9.2.3 Discharge. To interfere with the right of any Employer
to discharge any Employee at any time; or
9.2.4 Continuing Employment. To give any Employer the right
to require an Employee to remain in the employ of any Employer, or to interfere
with an Employee's right to terminate employment with any Employer at any time.
9.3 Interpretation. As used in this Agreement, the masculine, feminine,
and neuter gender and the singular and plural numbers each shall be deemed to
include the other whenever the context so indicates or requires. The captions to
the Sections of this Agreement are only for reference purposes, and shall not
affect in any way the meaning or interpretation of this Plan. Any capitalized
term which is set forth in this Agreement and not defined herein shall have the
meaning ascribed to such term in the Plan.
9.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the state of California, in a manner consistent with
the requirements of the Code applicable to tax-exempt VEBAs and the requirements
of ERISA applicable to welfare benefit plans and the fiduciaries of such plans.
9.5 Effective Date. The effective date of this Agreement shall be
December 30, 1998.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
effective on the Effective Date set forth above.
"BANCORP" "TRUSTEE:"
- - --------- ----------
PACIFIC CAPITAL BANCORP, a California SANTA BARBARA BANK & TRUST, a
corporation California corporation
By ___________________________________ By __________________________________
Name: Name:
Title: Title:
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PACIFIC CAPITAL BANCORP
1998 AMENDED AND RESTATED
KEY EMPLOYEE RETIREE HEALTH PLAN
December 30, 1998
<PAGE>
PACIFIC CAPITAL BANCORP
1998 AMENDED AND RESTATED
KEY EMPLOYEE RETIREE HEALTH PLAN
THIS 1998 AMENDED AND RESTATED KEY EMPLOYEE RETIREE HEALTH PLAN
("Plan") is adopted by PACIFIC CAPITAL BANCORP, a California corporation
("bancorp"), with reference to the following facts:
RECITALS:
A. Santa Barbara Bank and Trust, a California corporation ("ASBBT"), is
a wholly owned subsidiary corporation of Bancorp.
B. SBBT originally adopted this Plan effective December 29, 1992, in
order to provide health and dental insurance to retired employees of SBBT, and
later amended this Plan pursuant to (i) that certain First Amendment dated
effective January 1, 1996 (the "First Amendment"), and (ii) that certain Second
Amendment dated effective January 1, 1997 (the "Second Amendment").
C. In a merger transaction (the "Merger Transaction") that closed
effective December 30, 1998, (i) Pacific Capital Bancorp, a California
corporation ("target"), was merged with and into Bancorp, and (ii) Bancorp
changed its name to "Pacific Capital Bancorp," and as a result of that
transaction and name change Bancorp now owns all the outstanding capital stock
of not only SBBT but also other corporations.
D. Bancorp desires to adopt this Plan in order to (i) adopt this Plan
for the benefit of all eligible employees of Bancorp and all of its wholly owned
subsidiary corporations, (ii) incorporate the terms of the First Amendment and
the Second Amendment, and (iii) reflect the Merger Transaction.
PLAN:
NOW, THEREFORE, Bancorp, intending to be legally bound, hereby adopts
the following Plan.
1. DEFINITIONS
For purposes of this Plan, each of the following terms shall have the
meaning set forth below:
1.1 "affiliate" means each corporation in which Bancorp now or
hereafter owns (directly or indirectly through ownership of any subsidiary
corporation) all the outstanding capital stock.
1.2 "bancorp" means PACIFIC CAPITAL BANCORP, a California corporation
formerly known as ASANTA BARBARA BANCORP."
1.3 "cause" means (a) any act of personal dishonesty taken by the
Participant in connection with his or her responsibilities as an Employee and
intended to result in substantial personal enrichment of the
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Participant, (b) the Participant's conviction of a felony, (c) a willful act by
the Participant which constitutes gross misconduct and which is injurious to any
of the Retention Companies, or (d) continued substantial violations by the
Participant of the Participant's employment duties which are demonstrably
willful and deliberate on the Participant's part after there has been delivered
to the Participant a written demand for performance which specifically sets
forth the factual basis for the Retention Company's belief that the Participant
has not substantially performed his or her duties. Notwithstanding the foregoing
or anything in this Plan to the contrary:
1.3.1 Cause shall not be deemed to exist under clause (c) or
(d) of this Section unless and until (i) there shall have been delivered to the
Participant a written notice stating that the Participant was guilty of the
conduct described in such clause and specifying the particulars thereof in
detail and (ii) the Participant shall have been provided an opportunity to be
heard by the Board (with the assistance of the Participant's counsel if the
Participant so desires); and
1.3.2 No act or omission on the Participant's part shall be
considered "willful" or "deliberate" unless the Participant has acted, or failed
to act, with an absence of good faith and without a reasonable belief that his
or her action or failure to act was in the best interest of the Retention
Company.
1.4 "Change of Control" means:
1.4.1 The occurrence of any of the following events:
A. An acquisition (other than directly from the
Retention Company) of any voting securities of the Retention Company by any
person (as that term is used for purposes of Section 13(d) or Section 14(d) of
the Exchange Act), immediately after which such person has beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
thirty-five percent (35%) or more of the combined voting power of the Retention
Company's then outstanding voting securities; provided that in determining
whether a Change of Control has occurred, voting securities which are acquired
in a Non-Control Acquisition shall not constitute an acquisition which would
cause a Change of Control;
B. A cumulative change in the composition of the
Board of Directors of the Retention Company occurring during any two-year
period, as a result of which fewer than a majority of the directors are
Incumbent Directors; provided that no individual shall be considered an
Incumbent Director if such individual initially assumed office as a result of
either an actual or threatened Election Contest (as described in Rule 14a-11
promulgated under the Exchange Act) (an "Election Contest") or other actual or
threatened solicitation of proxies or consents by or on behalf of a person other
than the Board of Directors of the Retention Company (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
C. Approval by the shareholders of the Retention
Company of:
(1) A merger, consolidation or
reorganization involving the Retention Company, unless such merger,
consolidation or reorganization is or would be a Non-Control Transaction;
(2) A complete liquidation or dissolution of
the Retention Company, unless, as evidenced by resolution of the Board of
Directors of the Retention Company, (a) such liquidation or dissolution is
effected primarily for the purpose of consolidating the business and assets of
the liquidating
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or dissolving Retention Company with those of one or more other Retention
Companies and (b) the principal business of the liquidating or dissolving
Retention Company is continued by the surviving Retention Company immediately
after such liquidation or dissolution; or
(3) An agreement for the sale or other
disposition of all or substantially all of the assets of the Retention Company
to any person other than one or more other Retention Companies or one or more
Subsidiaries of a Retention Company.
1.4.2 If any of the events described in Section 1.4.1, above,
occur:
A. With respect to Bancorp or SBBT, then a Change of
Control shall be deemed to have occurred with respect to all of the Retention
Companies; or
B. Only with respect to FNBCC or Mortgage, a Change
of Control shall be deemed to have occurred only with respect to FNBCC or
Mortgage as appropriate.
1.4.3 Notwithstanding the foregoing, a Change of Control shall
not be deemed to occur solely because any person (the "Subject Person") acquired
beneficial ownership of more than the permitted amount of the then outstanding
voting securities of the Retention Company as a result of the acquisition of
voting securities by the Retention Company which, by reducing the number of
voting securities then outstanding, increases the proportional number of voting
securities beneficially owned by the Subject Person; provided that if a Change
of Control would occur (but for the operation of this sentence) as a result of
the acquisition of voting securities by the Retention Company, and, after such
acquisition by the Retention Company, the Subject Person becomes the beneficial
owner of any additional voting securities of such Retention Company which
increases the percentage of the then outstanding voting securities beneficially
owned by the Subject Person, then a Change of Control shall occur.
1.5 "Change of Control Date" means:
1.5.1 The earliest of:
A. The date on which the Change of Control occurs;
B. The date on which the Retention Company executes
an agreement, the consummation of which would result in the occurrence of a
Change of Control;
C. The date on which the Board of Directors of the
Retention Company approves a transaction or series of transactions, the
consummation of which would result in a Change of Control; and
D. The date Bancorp fails to satisfy its obligations
to have this Plan assumed by any successor to a Retention Company involved in
the Change of Control in accordance with Section 7 hereof.
1.5.2 If the Change of Control Date occurs as a result of an
agreement described in Section 1.5.1B, above, or as a result of the approval of
the Board described in Section 1.5.1C, above, and the Change of Control to which
such agreement or approval relates (the "Contemplated Change of Control")
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subsequently is abandoned or does not occur (regardless of the reason for such
abandonment or failure of occurrence), then effective as of the date (the "Reset
Date") of adoption of a resolution of the Board of Directors of the Retention
Company approved by three-fourths (3/4ths) of the Incumbent Directors then in
office certifying that the Contemplated Change of Control is not reasonably
likely to occur, neither the Change of Control nor the Change of Control Date
shall be deemed to have occurred for any purposes under this Plan; provided that
this sentence shall not apply (A) to any Participant whose Termination of
Employment with a Retention Company effected by such Change of Control has
occurred on and after the Change of Control Date and on or prior to the Reset
Date or (B) if the Contemplated Change of Control subsequently occurs within
three (3) months of the Reset Date. Following the Reset Date, the provisions of
the Plan shall remain in effect until the Plan is terminated in accordance with
the provisions of Section 8 hereof, and a new Severance Window Period shall
commence upon the occurrence of a subsequent Change of Control Date.
1.5.3 Notwithstanding Sections 1.5.1 and 1.5.2, above, if a
Participant's employment with a Retention Company effected by such Change of
Control terminates prior to the Change of Control Date (regardless of whether or
not the contemplated Change of Control is subsequently abandoned or does not
occur and whether or not a Reset Date is established) and it is reasonably
demonstrated that such termination of employment (a) was at the request of the
third party who has taken steps reasonably calculated to effect the Change of
Control or (b) otherwise arose in connection with or in anticipation of the
Change of Control, then, solely with respect to the affected Participant, the
Change of Control Date means the date immediately prior to the date of such
Participant's Termination of Employment and the second sentence of Section 2.7.1
shall not apply.
1.6 "code" means the Internal Revenue Code of 1986, as amended.
1.7 "Coverage" means, in each Plan Year, coverage under a Group Health
Insurance Plan.
1.8 "dependent" means, with respect to each Eligible Retiree, each
person other than a Spouse who meets the definition of a "dependent" with
respect to the Eligible Retiree under a Group Health Insurance Plan.
1.9 "Effective Date" means December 30, 1998.
1.10 "Eligible Retiree" means each Former Employee (other than a person
who, in the current Plan Year or any preceding Plan Year, is or has been a Key
Employee) who satisfies the eligibility criteria set forth in Section 2.1.1,
below.
1.11 "employee" means each person who is a common law employee of
Bancorp or any Affiliate of Bancorp.
1.12 "Employer" means Bancorp and each Affiliate of Bancorp.
1.13 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
1.14 "Excluded Key Employee" means each person who (a) has been a "Key
Employee" during any plan year under any plan previously maintained by SBBT to
provide health insurance coverage to retired employees, and (b) had terminated
employment with SBBT prior to adoption of this Plan on December 29, 1992.
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1.15 "FNBCC" means First National Bank of Central California, a
national banking organization and wholly owned subsidiary of Bancorp, some of
the branches of which operates under the name "South Valley National Bank," as
well as each entity acquired by or merged with or into First National Bank of
Central California.
1.16 "Former Employee" means each person who previously has been an
Employee but who, as of the time the determination of the person's employment
status is being made, no longer is an Employee as a result of an event or
circumstance other than the death of such person.
1.17 "Group Health Insurance Plan" means, in each Plan Year, each group
medical insurance plan and each group dental insurance plan under which Bancorp
offers medical or dental insurance coverage to Employees in such Plan Year.
1.18 "Hour of Service" means each hour for which an Employee (a) is
directly or indirectly compensated or entitled to compensation from the Employer
for the performance of duties during the applicable computation period; (b) is
directly or indirectly compensated or entitled to compensation by the Employer
(irrespective of whether the initial employment relationship has terminated) for
reasons other than the performance of duties (e.g., such as vacation, holidays,
sickness, jury duty, disability, lay-off, military duty or leave of absence)
during the applicable computation period; or (c) is awarded back pay or for
which the Employer agrees to pay back pay without regard to mitigation of
damages.
1.18.1 Period To Which Credited. All hours shall be credited
to the Employee for the computation period to which the award or agreement
concerning back pay pertains rather than to the computation period in which the
award, agreement, or payment is made. The same Hours of Service shall not be
credited under (a) or (b), as the case may be, and under (c), above.
1.18.2 Limitations on Crediting. Notwithstanding any provision
of this Plan to the contrary, (a) no more than 501 Hours of Service shall be
credited to an Employee on an account of any single continuous period during
which the Employee performs no duties (whether or not such period occurs in a
single computation period); (b) an hour for which an Employee is directly or
indirectly paid or entitled to payment, on account of a period during which no
duties are performed, is not required to be credited to the Employee if such
payment is made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, or unemployment compensation or
disability insurance, laws; and (c) Hours of Service are not required to be
credited for a payment which solely reimburses an Employee for medical or
medically related expenses incurred by the Employee.
1.18.3 Regulations. The definition of "Hours of Service" shall
be determined in accordance with the definition of that term set forth in
Department of Labor Regulations '2530.200b-2(b)&(c), the terms of which are
incorporated herein by this reference.
1.19 "Incumbent Directors" for any Retention Company means Directors of
the Retention Company who either (a) are Directors of the Retention Company as
of the Effective Date, or (b) are elected, or nominated for election, to the
Board of the Retention Company by the affirmative vote of at least a majority of
the Incumbent Directors at the time of such election or nomination; provided
that, for purposes of clause (b) of this Section, an individual whose election
or nomination is effected in connection with an
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actual or threatened Proxy Contest relating to the election of Directors to the
Retention Company shall not be considered an Incumbent Director.
1.20 "Involuntary Termination" shall have the same meaning as is
ascribed to such term under the Management Retention Plan of Bancorp as in
effect from time to time.
1.20.1 A Termination of Employment for Cause or as a result of
Employee's death or Disability;
1.20.2 Without the Participant's express written consent, the
significant reduction of the Participant's duties or responsibilities relative
to the Participant's duties or responsibilities in effect immediately prior to
such reduction;
1.20.3 A reduction by more than twenty-five percent (25%) in
the aggregate amount of the annual base salary and annual cash bonuses or
commissions payable to the Participant for any Fiscal Year relative to his or
her annual base salary and annual cash bonuses or commissions for the
immediately preceding Fiscal Year, unless the reduction in such bonuses and
commissions results primarily from a proportionate reduction in the bonus or
commission pool available to Employee based on the performance of any or all of
the Retention Companies;
1.20.4 A material reduction in the kind or level of employee
benefits to which the Participant is entitled with the result that the
Participant's overall benefits package is significantly reduced from that to
which he or she was entitled immediately prior to such reduction;
1.20.5 Without the Participant's express written consent, the
termination of the Participant's status as a member of the Senior Leadership
Team of any Retention Company;
1.20.6 Without the Participant's express written consent, the
relocation of the Participant's principal place of employment to a facility or a
location more than thirty-five (35) miles from the Participant's then present
principal place of employment;
1.20.7 Any purported termination of the Participant;
employment which is not effected for Cause or as a result of the Participant's
death or Disability; or
1.20.8 The failure of Bancorp to obtain the assumption of this
Plan by any successor to a Retention Company which is involved in the Change of
Control.
Notwithstanding anything in the Plan to the contrary, the transfer of a
Participant's employment from any Retention Company to any other Retention
Company shall not by itself be considered an Involuntary Termination described
in Section 1.20.4 or 1.20.5, above.
1.21 "Key Employee" means each Employee other than an Excluded Key
Employee who, at any time during any Plan Year under this Plan or any plan year
under any plan previously maintained by the Employer to provide health insurance
coverage to retired employees, meets the requirements of either Sections 1.21.1,
1.21.2, 1.21.3, or 1.21.4:
1.21.1 Is an officer of the Employer having annual
compensation greater than fifty percent
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(50.0%) of the limit on the amount of benefits payable under a defined benefit
plan, as set forth in Code Section 415(b)(1)(A). For purposes of this Section
1.16.1, the term "officer" shall mean only those persons who have officer-type
titles and exercise administrative executive authority, and the persons who
qualify as "officers" under such definition shall be determined by the board of
directors of the Employer or its designee;
1.21.2 Is one of the ten (10) employees of the Employer who
(a) has annual compensation from the Employer in an amount greater than the
limitation on the maximum contributions which can be made to defined
contribution plans under Code Section 415(c)(1)(A), and (b) owns (or by reason
of the constructive ownership rules of Code Section 318) is deemed to own the
largest portions of the outstanding shares of the Employer's common capital
stock;
1.21.3 An Employee of the Corporation who owns more than five
percent (5.0%) of the outstanding capital stock of the Employer or capital stock
possessing more than five percent (5.0%) of the total combined voting power of
all capital stock of the Employer; or
1.21.4 An Employee of the Corporation who both (a) owns more
than one percent (1.0%) of the outstanding capital stock of the Employer, or
owns capital stock of the Employer possessing more than one percent (1.0%) of
the total combined voting power of all outstanding shares of the Employer's
capital stock, and (b) receives from the Employer compensation of more than One
Hundred Fifty Thousand Dollars ($150,000) per year.
1.22 "Merger Transaction" means that certain merger transaction in
which Target merged with and into Bancorp effective as of December 30, 1998.
1.23 "Mortgage" means Pacific Capital Commercial Mortgage, Inc., a
California corporation and a wholly owned subsidiary of Bancorp.
1.24 "Non-Control Acquisition" means an acquisition of any voting
securities of a Retention Company by (a) an employee benefit plan (or a trust
forming a part thereof) maintained by Bancorp, (b) Bancorp or any of its
Subsidiaries, or (c) any person in connection with a Non-Control Transaction.
1.25 "Non-Control Transaction" means:
1.25.1 A merger, consolidation or reorganization of a
Retention Company in which:
A. The shareholders of the Retention Company,
immediately before such merger, consolidation or reorganization, own, directly
or indirectly, immediately after such merger, consolidation or reorganization,
in substantially the same proportion as their ownership of the voting securities
of the Retention Company immediately before such merger, consolidation or
reorganization, at least fifty-one percent (51%) of the combined voting power of
the outstanding voting securities of (i) the corporation resulting from such
merger, consolidation or reorganization (the "Surviving Corporation") or (ii)
the immediate parent corporation of the Surviving Corporation; and
B. The individuals who were Incumbent Directors of
the Retention Company at the time of the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least two-thirds
(2/3) of the members of the board of directors of (i) the Surviving Corporation
or (ii) a corporation beneficially owning, directly or indirectly, a majority of
the voting securities of
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the Surviving Corporation; and
C. No person other than (i) another Retention
Company, (ii) any employee benefit plan (or any trust forming a part thereof)
maintained by any Retention Company or the Surviving Corporation or any
subsidiary of a Retention Company or the Surviving Corporation, or (iii) any
person who, immediately prior to such merger, consolidation or reorganization
had beneficial ownership of thirty-five percent (35%) or more of the then
outstanding voting securities of the effected Retention Company, has beneficial
ownership of thirty-five percent (35%) or more of the combined voting power of
the Surviving Corporation's voting securities outstanding immediately after such
merger, consolidation or reorganization.
1.25.2 A merger, consolidation or reorganization involving
only Retention Companies shall be considered a "Non-Control Transaction"
regardless of the composition of the Board of Directors of the Retention
Companies immediately following such transaction.
1.25.3 A sale or transfer of all or substantially all of the
assets of a Retention Company to one or more other Retention Companies shall be
considered a "Non-Control Transaction" regardless of whether such sale or
transfer is as a result of liquidation of the Retention Company or otherwise.
1.26 "Non-Key Employee" means each Employee other than a Key Employee.
1.27 "Participant" means each person who satisfies the eligibility
criteria set forth in Sections 2.1.1, 2.1.2, or 2.1.3, below.
1.28 "plan" means this Pacific Capital Bancorp 1998 Amended and
Restated Key Employee Retiree Health Plan, as amended from time to time.
1.29 "Plan Administrator" means Bancorp, or such other person or
committee as Bancorp may appoint or retain from time-to-time to supervise the
administration of this Plan.
1.30 "Plan Year" means (a) the period that commenced with the original
effective date of this Plan on December 29, 1992, and ended September 30, 1993,
and (b) thereafter, each twelve-month period commencing on October 1 and ending
on September 30 in the next subsequent calendar year.
1.31 "Post-Retirement Contribution" means, with respect to each
Participant, the amount determined under Section 3.2, below, which shall be paid
under this Plan toward the cost of Coverage for such Participant.
1.32 "Pre-Retirement Contribution" means, with respect to:
1.32.1 Grandfathered Current Retiree and Spouse. Each Eligible
Retiree who satisfies the eligibility requirements set forth in Section 2.1.1A,
below, and such Retiree's Spouse, subject to Section 3.2.2, below, the amount
which SBBT was contributing toward the cost of Coverage for each such
Participant immediately prior to the original effective date of this Plan on
December 29, 1992; and
1.33 Other Eligible Retiree and Spouse. Each other Eligible Retiree and
such retiree's Spouse, the amount, determined as of the calendar month in which
the Eligible Retiree becomes a Former Employee, which the Employer is obligated
to contribute (under its Group Health Insurance Plan for Employees) in each
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month toward the cost of Coverage for such Former Employee and Spouse.
1.34 "Restricted Period" shall mean the period which:
1.34.1 Commencement. Commences on the date on which (a)
Bancorp executes with another Person a written agreement (the "Reorganization
Agreement") to acquire all or substantially all the assets of Bancorp, or to
merge, consolidate, combine, or otherwise reorganize Bancorp with any one or
more other Persons (as such term is defined for purposes of Section 13(d) or 14
of the Securities Exchange Act of 1934) in any transaction in which the
Reorganization Agreement contemplates that those Persons who are shareholders of
Bancorp as of the date such Reorganization Agreement is executed will own less
than sixty-five percent (65%) of the combined voting power of all common stock
and other voting securities of the surviving entity immediately after the
effective date of such merger, consolidation, combination, or other
reorganization; or (b) any Person other than Bancorp announces that such Person
intends to conduct a tender offer to acquire more than thirty-five percent (35%)
of the outstanding common stock and other voting securities of Bancorp; and
1.34.2 Expiration. Expires on the last day of the period of
twenty-four (24) consecutive calendar months commencing on the date of any
Change of Control.
1.35 "Retention Company" means individually any of, and "Retention
Companies" means collectively all of, Bancorp, SBBT, FNBCC and Mortgage. When
used in reference to an Employee or Participant, "Retention Company" means
whichever of Bancorp, SBBT, FNBCC and Mortgage employs the Employee or
Participant.
1.36 "SBBT" means SANTA BARBARA BANK & TRUST, a California corporation,
which is a wholly owned subsidiary of Bancorp.
1.37 "Senior Leadership Team" means the most senior management
employees of Bancorp and each Affiliate, as designated from time to time by the
Board of Directors of Bancorp or its designee.
1.38 "service" means service as a common law employee of any Employer;
provided that, for purposes of this Plan, the term "service" shall not include
(a) any service prior to January 1, 1999, with either Target or any subsidiary
corporation, all of whose outstanding capital stock was owned by Target, (b) any
service with any Target company acquired by or merged with or into Bancorp or
any Affiliate prior to the effective date of such requisition or merger only if
such employee is entitled to credit for such service under Section 1.42.5,
below, or (c) any Service prior to the occurrence of a Break in Service (as
defined in Section 1.42.3, below).
1.39 "spouse" means each person who satisfies the requirements of
Section 2.1.2, below.
1.40 "Supplemental Coverage" shall mean, for each Participant who
becomes eligible to receive Medicare coverage, individual or group health
insurance coverage (a) which provides coverage supplementing that available
under Medicare, and (b) which, when considered together with Medicare coverage
available to the Participant, provides to the Participant health insurance
coverage substantially equal to the Coverage the Participant was receiving under
this Plan immediately prior to the date on which the Participant became eligible
for Medicare.
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1.41 "target" shall mean PACIFIC CAPITAL BANCORP, a California
corporation, which merged with and into Bancorp in the Merger Transaction
effective December 30, 1998.
1.42 "Year of Service" means each computation period of twelve
consecutive months during which an Employee has one thousand (1,000) Hours of
Service.
1.42.1 Initial Computation Period. Each Employee's initial
computation period shall be the twelve-month period beginning on the date on
which the Employee first performs any Hour of Service.
1.42.2 Subsequent Computation Period. The computation period
shall shift to the Plan Year beginning with the first day of the Plan Year that
includes the first annual anniversary of the date on which the Employee first
performs an Hour of Service. An Employee who is credited with one thousand
(1,000) Hours of Service in both the initial computation period and the Plan
Year which includes such anniversary date shall be credited with two (2) Years
of Service as of the last day of such Plan Year.
1.42.3 Service Prior to Break in Service. For purposes of this
Plan, Service prior to a Break in Service shall not be taken into account in
determining the Years of Service of an Employee or former Employee with the
Employer. For purposes of this Plan, a "Break in Service" shall occur with
respect to any Employee or former Employee if (a) the employment of the Employee
with the Employer is terminated for any reason, and (b) the Employee thereafter
is not re-employed with any Employer during the one-year period following the
effective date of such termination of employment.
1.42.4 Reemployed Employee. If an Employee terminates
employment with the Employer and subsequently again becomes an Employee, then
upon reemployment (a) the computation period initially shall be the twelve-month
period commencing with the day on which the Employee first performs an Hour of
Service upon reemployment, (b) the computation period shall shift to the Plan
Year beginning with the first day of the Plan Year that includes the first
annual anniversary of the date on which the Employee resumed employment, and (c)
any such Employee who is credited with one thousand (1,000) Hours of Service in
both the initial computation period and the Plan Year which includes such
anniversary shall be credited with two (2) Years of Service as of the last day
of such Plan Year.
1.42.5 Prior Service Credit. There shall be recognized as
"Years of Service" under this Plan (a) all Years of Service by the Employee with
Community Bank of Santa Ynez Valley; and (b) all Years of Service by the
Employee with any entity acquired by Bancorp or any Affiliate (as defined below)
if the terms and conditions of such acquisition expressly require that such
prior Years of Service be credited as such under this Plan. For purposes of this
Section 1.32.4, an entity shall be deemed to be "acquired by Bancorp or any
Affiliate" if (i) that entity is merged into Bancorp or any Affiliate, or (ii)
Bancorp or any Affiliate purchases or otherwise acquires at least eighty percent
(80%) of the outstanding voting equity interests in such entity, or (iii)
Bancorp or any Affiliate acquires substantially all the assets of such entity.
Notwithstanding the foregoing, in accordance with the definition of "service" in
Section 1.28, above, no credit shall be provided under this Plan for service
prior to January 1, 1999, as an employee of Target or any wholly owned
subsidiary of Target.
2. PARTICIPATION
2.1 Eligibility Criteria. Each person who satisfies the criteria set
forth in Sections 2.1.1, 2.1.2, or 2.1.3, below, shall be eligible to
participate in this Plan.
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2.1.1 Eligible Retirees. A person shall be deemed to satisfy
the requirements of this Section 2.1.1 if that person satisfies the requirements
of either Paragraph A or Paragraph B of this Section 2.1.1.
A. A person satisfies the requirements of this
Paragraph A only if (1) that person is a Former Employee who at any time while
employed by the Employer was a Key Employee; and (2) both of the following
requirements are satisfied as of the effective date as of which that person
terminates employment with the Employer: (a) that person has completed at least
eight (8) Years of Service, and (b) that person has attained at least the age of
fifty-five (55).
B. A person shall be deemed to satisfy the
requirements of this Paragraph B if, during the Restricted Period, either (i)
the Employer terminates (or delivers to the person notice of the termination of)
such person's employment with the Employer other than for cause, or (ii) there
occurs an Involuntary Termination of such person's employment with the Employer.
2.1.2 Spouses of Eligible Retirees. A person shall be deemed
to be a Spouse satisfying the requirements of this Section 2.1.2 if either:
A. That person is married to an Employee as of the
date such Employee becomes an Eligible Retiree (provided, if such person is
treated as the Spouse of the Eligible Retiree as of the date of the Eligible
Retiree's death, then such person thereafter will be deemed to continue to be a
Spouse after the date of the Eligible Retiree's death, without regard to whether
such Spouse subsequently remarries); or
B. That person was married to an Employee as of the
date of that Employee's death, and such Employee died at a point in time at
which such Employee would have been an Eligible Retiree (as defined in Section
1.8, above) if that Employee had terminated employment with the Employer on the
day prior to the day on which such Employee died (provided, a person who is
treated as a Spouse under this Paragraph B will be deemed to continue to be a
Spouse without regard to whether such Spouse subsequently remarries).
2.1.3 Dependents of Eligible Retirees. A person shall be
deemed to satisfy the requirements of this Section 2.1.3 if either:
A. That person is a Dependent; or
B. All of the following requirements are satisfied
with respect to such person: (1) such person qualified as a "dependent" (under a
Group Health Insurance Plan) of a deceased Employee as of the date of that
Employee's death; (2) the deceased Employee would have been treated as an
Eligible Retiree if that Employee had terminated employment with the Employer on
the day prior to the date of the Employee's death; and (3) such person, in the
event the deceased Employee had become an Eligible Retiree as of such day
preceding the date on which the Employee died, would have been treated as a
Dependent of such Eligible Retiree.
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3. BENEFITS AND COMPANY CONTRIBUTION
3.1 Purchase of Coverage. In each Plan Year, each Participant shall be
eligible to purchase Coverage.
3.1.1 Mandatory Participant Contribution. If the cost of
Coverage for a Participant exceeds the amount of the Post-Retirement
Contribution which the Participant is entitled to receive pursuant to Section
3.2, below, then such Participant shall be eligible to purchase Coverage only if
that Participant pays such excess amount at the time and in the manner required
by the Plan Administrator.
3.1.2 Dependents. A Participant who is a Dependent shall be
eligible to purchase Coverage only under those Group Health Insurance Plans
under which such person qualifies as a "dependent."
3.2 Post-Retirement Contribution. Subject to Sections 3.3, 3.4, and
3.8, below, the amount of the Post-Retirement Contribution for each Participant
shall be determined under this Section 3.2. In no event shall the amount of the
Post-Retirement Contribution with respect to any Participant exceed the actual
cost of Coverage for such Participant.
3.2.1 Eligible Retirees. The Post-Retirement Contribution for
each Eligible Retiree shall be an amount equal to one hundred percent (100%) of
the Eligible Retiree's Pre-Retirement Contribution.
3.2.2 Spouses of Eligible Retirees. During the lifetime of
each Eligible Retiree, the Post-Retirement Contribution for the Spouse of such
Eligible Retiree shall be equal to one hundred percent (100%) of the Spouse's
Pre-Retirement Contribution. After the death of the Eligible Retiree, the
Post-Retirement Contribution for the surviving Spouse shall be one hundred
percent (100%) of the lesser of (a) the actual cost of Coverage for the Spouse,
or (b) the amount of the Post-Retirement Contribution for the Eligible Retiree
as of the date of the Eligible Retiree's death.
3.2.3 Dependents. An Eligible Retiree's Dependents shall not
be entitled to receive any Post-Retirement Contribution under this Plan. In
order for a Dependent to receive Coverage under this Plan, the entire cost of
Coverage for such Dependent must be paid, at the time and in the manner that the
Plan Administrator shall require, by someone other than the Employer.
3.3 Effect of Spouse's Death. Notwithstanding any other provision of
this Plan to the contrary, (a) the death of the Spouse of an Eligible Retiree
shall not affect the amount of the Post-Retirement Contribution for the Eligible
Retiree, and (b) after the date of the Spouse's death, the surviving Eligible
Retiree shall not be entitled to receive any portion of the Post-Retirement
Contribution which the deceased Spouse had been entitled to receive prior to
death.
3.4 Effect of Eligibility for Medicare. If a Participant becomes
eligible for health insurance coverage under Medicare, then effective on the
first date as of which the Participant is eligible for that coverage, the amount
of the Post-Retirement Contribution for the Participant under Section 3.2,
above, shall not exceed the cost of Supplemental Coverage (as defined in Section
1.30, above) for the Participant under a Group Health Insurance Plan then
sponsored by the Employer.
3.5 Deemed Spouses and Dependents. Each person who, by virtue of the
death of an Employee,
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is eligible to participate in the Plan as a Spouse under Section 2.1.2B, above,
or as a Dependent under Section 2.1.3B, above, shall be entitled to receive the
same Coverage and Post-Retirement Contribution (if any) under this Plan which
such person would have been entitled to receive under Section 3.2, above, if the
decedent had terminated employment with the Employer on the day prior to the
date of the decedent's death.
3.6 Increases in Post-Retirement Contribution. Bancorp may increase
from time-to-time, in its sole discretion, the amount of the Post-Retirement
Contribution payable under this Plan. In no event, however, shall the amount of
any such Post-Retirement Contribution in any Plan Year exceed by more than five
percent (5.0%) the amount of such Post-Retirement Contribution payable in the
immediately preceding Plan Year.
3.7 Unfunded Arrangement. This Plan is an unfunded arrangement to
provide health insurance coverage to Eligible Retirees, their spouses, and their
dependents. Therefore, the amount of each Post-Retirement Contribution payable
under this Plan shall be payable solely from the general assets of Bancorp. Such
Post-Retirement Contribution may be paid either directly to the insurance
company providing the Group Health Insurance Plan, or as a reimbursement to the
Participant for such, or in such other manner as is administratively convenient
to Bancorp.
3.8 Application for Participation and Contribution. In order to be
eligible to purchase Coverage and receive any applicable Post-Retirement
Contribution under this Plan, each Participant shall submit an application to
Bancorp at such time, and in such manner, as the Plan Administrator shall
announce, from time-to-time, in advance of the deadline for submitting such
applications.
3.9 Purpose and Maximum Benefit. This Plan is not intended to be, and
shall not operate as, a plan of deferred compensation. Consequently,
notwithstanding any other provision of this Plan to the contrary:
3.9.1 No Deferred Compensation. A Participant who is entitled
to receive a Post-Retirement Contribution under Section 3.2, above, shall be
entitled to receive such Post-Retirement Contribution only if the Participant
timely elects to purchase Coverage under this Plan; and
3.9.2 Limit. No Participant shall be entitled to receive under
this Plan any amount which exceeds lesser of (a) the Post-Retirement
Contribution payable for such Participant pursuant to Section 3.2, above, or (b)
the actual cost of Coverage for such Participant.
4. ADMINISTRATION
4.1 Duties of Plan Administrator. The Plan Administrator shall
administer the Plan in accordance with its terms for the exclusive benefit of
Participants.
4.2 Powers of Plan Administrator. The Plan Administrator shall have
full power and authority to administer and carry into effect the terms and
conditions of this Plan, subject to applicable requirements of law. Such power
shall include, but not be limited to, the power:
4.2.1 Rules and Regulations. To make and enforce such
reasonable rules and regulations as the Plan Administrator deems necessary or
proper for the efficient administration of the Plan, including the establishment
of any claims procedures that may be required by applicable provisions of law;
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<PAGE>
4.2.2 Interpretation. To interpret in good faith the terms and
conditions of this Plan;
4.2.3 Resolution. To resolve all questions concerning the Plan
and the eligibility of any Former Employee to participate in the same; and
4.2.4 Agents. To appoint and retain such agents, counsel,
accountants, consultants, and other persons as may be necessary or appropriate
to assist in the administration of the Plan.
4.3 Records. The Plan Administrator shall establish and maintain such
records as are necessary or appropriate to the efficient administration of the
Plan. Each Participant, upon reasonable advance notice to the Plan
Administrator, shall be entitled to inspect such of those records as pertain to
that Participant.
4.4 Appeals Procedure. If a claim for Coverage or a contribution from
Bancorp is partially or fully denied by the Plan Administrator, then the
Participant may request a review of that decision by submitting to the Plan
Administrator, not later than sixty (60) days after receiving notice of the Plan
Administrator's decision, a written request for review of the decision. Within
sixty (60) days after receiving such request, Bancorp shall review the request,
hold such hearings as Bancorp, in its sole discretion, deems appropriate, and
advise the Participant, in writing, of its decision. If the decision on review
is not provided within such sixty-day period, then the application for appeal
shall be deemed to be denied.
4.5 Filing. The Plan Administrator shall timely file all forms required
to be filed with respect to the Plan pursuant to the Code, ERISA, and all
counterpart provisions of California law.
4.6 Indemnification. Bancorp shall indemnify, defend, and hold the Plan
Administrator free and harmless from and against any and all liabilities,
damages, costs and expenses, including reasonable attorneys' fees, occasioned by
any actions which the Plan Administrator takes, or fails to take, reasonably and
in good faith, in connection with the administration of the Plan.
5. PRIOR PLANS; AMENDMENT AND TERMINATION
5.1 Prior Plans. This Plan supersedes the terms of any plan or policy
previously sponsored, maintained, or announced by Bancorp to provide health or
dental benefits to Former Employees of Bancorp.
5.2 Amendment and Termination. Bancorp shall have sole and absolute
discretion to amend or modify this Plan in any regard, and to terminate this
Plan altogether, at any time; provided, notwithstanding the foregoing or any
other provision of this Plan, during any Restricted Period Bancorp may not (a)
revoke the Plan, or (b) modify the provisions of Paragraph B of Section 2.1.1 of
the Plan, or (c) otherwise modify or amend the Plan in any manner (whether
directly or indirectly such as by amending any other employee benefit
arrangement that benefits any person who is affected by the provisions of
Paragraph B of Section 2.1.1, above) that has the effect of eliminating or
reducing the protections afforded by Paragraph B of Section 2.1.1 hereof.
6. MISCELLANEOUS
6.1 No Employment Rights. Neither the adoption and maintenance of this
Plan, nor any express or implicit provision of this Plan, shall be deemed:
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6.1.1 Contract. To constitute a contract between any Employer
and any other person, or to be a consideration for or an inducement or condition
of, the employment of any person;
6.1.2 Right. To give any person the right to be retained in
the employ of Bancorp or any Affiliate;
6.1.3 Discharge. To interfere with the right of any Employer
to discharge any Employee (including any Participant) at any time; or
6.1.4 Continuing Employment. To give any Employer the right to
require an Employee to remain in the employ of such Employer, or to interfere
with an Employee's right to terminate his employment at any time.
6.2 Enforceability; Exclusive Benefit. Subject to the provisions of
Sections 5 and 6.1, above, Bancorp:
6.2.1 Legally Enforceable. Represents that the rights created
in this Plan in favor of Participants are intended to be legally enforceable;
and
6.2.2 Exclusive Benefit. Agrees to administer or cause this
Plan to be administered for the exclusive benefit of Participants.
6.3 Interpretation. As used in this Plan, the masculine, feminine, and
neuter gender and the singular and plural numbers each shall be deemed to
include the other whenever the context indicates or requires. The captions to
various sections of this Plan are included in this Plan solely for convenience
of reference, and shall not affect in any way the meaning or interpretation of
this Plan.
6.4 Governing Law. This Plan shall be construed, administered, and
enforced in accordance with the Code, ERISA, and the laws of the State of
California.
6.5 Binding Effect. This Plan shall be binding upon all successors and
assigns of Bancorp.
(Signature appears on the following page.)
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IN WITNESS WHEREOF, Bancorp has caused this Plan to be adopted,
effective on the Effective Date as set forth above.
PACIFIC CAPITAL BANCORP, a
California corporation
- - --------------------------------- By
Date -----------------------------------
Jay D. Smith, Senior Vice President
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PACIFIC CAPITAL BANCORP
1998 AMENDED AND RESTATED RETIREE HEALTH PLAN
(Non-Key Employees)
December 30, 1998
<PAGE>
1998 AMENDED AND RESTATED RETIREE HEALTH PLAN
(Non-Key Employees)
THIS 1998 AMENDED AND RESTATED RETIREE HEALTH PLAN is adopted by
PACIFIC CAPITAL BANCORP, a California corporation ("Bancorp"), with reference to
the following facts:
RECITALS:
A. Santa Barbara Bank and Trust, a California corporation ("SBBT"), is
a wholly owned subsidiary corporation of Bancorp.
B. SBBT originally adopted this Plan effective December 29, 1992, in
order to provide health and dental insurance to retired employees of SBBT, and
later amended this Plan pursuant to (i) that certain First Amendment dated
effective January 1, 1996 (the "First Amendment"), and (ii) that certain Second
Amendment dated effective January 1, 1997 (the "Second Amendment").
C. In a merger transaction (the "Merger Transaction") that closed
effective December 30, 1998, (i) Pacific Capital Bancorp, a California
corporation ("Target"), was merged with and into Bancorp, and (ii) Bancorp
changed its name to "Pacific Capital Bancorp," and as a result of that
transaction and name change Bancorp now owns all the outstanding capital stock
of not only SBBT but also other corporations.
D. Bancorp desires to adopt this Plan in order to (i) adopt this Plan
for the benefit of all eligible employees of Bancorp and all of its wholly owned
subsidiary corporations, (ii) incorporate the terms of the First Amendment and
the Second Amendment, and (iii) reflect the Merger Transaction.
PLAN:
NOW, THEREFORE, the Bancorp, intending to be legally bound, hereby
adopts the following Plan.
1. DEFINITIONS
For purposes of this Plan, each of the following terms shall have the
meaning set forth below:
1.1 "Affiliate" means each corporation in which Bancorp now or
hereafter owns (directly or indirectly through ownership of any subsidiary
corporation) all the outstanding capital stock.
1.2 "Bancorp" means PACIFIC CAPITAL BANCORP, a California corporation
formerly known as "SANTA BARBARA BANCORP."
1.3 "Cause" means (a) any act of personal dishonesty taken by the
Participant in connection with his or her responsibilities as an Employee and
intended to result in substantial personal enrichment of the Participant, (b)
the Participant's conviction of a felony, (c) a willful act by the Participant
which constitutes gross misconduct and which is injurious to any of the
Retention Companies, or (d) continued substantial violations by the Participant
of the Participant's employment duties which are demonstrably willful and
deliberate on the Participant's part after there has been delivered to the
Participant a written demand for performance which specifically sets forth the
factual basis for the Retention Company's belief that the Participant has not
substantially performed his or her duties. Notwithstanding the foregoing or
anything in this Plan to the contrary:
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1.3.1 Cause shall not be deemed to exist under clause (c) or
(d) of this Section unless and until (i) there shall have been delivered to the
Participant a written notice stating that the Participant was guilty of the
conduct described in such clause and specifying the particulars thereof in
detail and (ii) the Participant shall have been provided an opportunity to be
heard by the Board (with the assistance of the Participant's counsel if the
Participant so desires); and
1.3.2 No act or omission on the Participant's part shall be
considered "willful" or "deliberate" unless the Participant has acted, or failed
to act, with an absence of good faith and without a reasonable belief that his
or her action or failure to act was in the best interest of the Retention
Company.
1.4 "Change of Control" means:
1.4.1 The occurrence of any of the following events:
A. An acquisition (other than directly from the
Retention Company) of any voting securities of the Retention Company by any
person (as that term is used for purposes of Section 13(d) or Section 14(d) of
the Exchange Act), immediately after which such person has beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
thirty-five percent (35%) or more of the combined voting power of the Retention
Company's then outstanding voting securities; provided that in determining
whether a Change of Control has occurred, voting securities which are acquired
in a Non-Control Acquisition shall not constitute an acquisition which would
cause a Change of Control;
B. A cumulative change in the composition of the
Board of Directors of the Retention Company occurring during any two-year
period, as a result of which fewer than a majority of the directors are
Incumbent Directors; provided that no individual shall be considered an
Incumbent Director if such individual initially assumed office as a result of
either an actual or threatened Election Contest (as described in Rule 14a-11
promulgated under the Exchange Act) (an "Election Contest") or other actual or
threatened solicitation of proxies or consents by or on behalf of a person other
than the Board of Directors of the Retention Company (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
C. Approval by the shareholders of the Retention
Company of:
(1) A merger, consolidation or
reorganization involving the Retention Company, unless such merger,
consolidation or reorganization is or would be a Non-Control Transaction;
(2) A complete liquidation or dissolution of
the Retention Company, unless, as evidenced by resolution of the Board of
Directors of the Retention Company, (a) such liquidation or dissolution is
effected primarily for the purpose of consolidating the business and assets of
the liquidating or dissolving Retention Company with those of one or more other
Retention Companies and (b) the principal business of the liquidating or
dissolving Retention Company is continued by the surviving Retention Company
immediately after such liquidation or dissolution; or
(3) An agreement for the sale or other
disposition of all or substantially all of the assets of the Retention Company
to any person other than one or more other Retention Companies or one or more
Subsidiaries of a Retention Company.
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1.4.2 If any of the events described in Section 1.4.1,
above, occur:
A. With respect to Bancorp or SBBT, then a Change of
Control shall be deemed to have occurred with respect to all of the Retention
Companies; or
B. Only with respect to FNBCC or Mortgage, a Change
of Control shall be deemed to have occurred only with respect to FNBCC or
Mortgage as appropriate.
1.4.3 Notwithstanding the foregoing, a Change of Control
shall not be deemed to occur solely because any person (the "Subject Person")
acquired beneficial ownership of more than the permitted amount of the then
outstanding voting securities of the Retention Company as a result of the
acquisition of voting securities by the Retention Company which, by reducing the
number of voting securities then outstanding, increases the proportional number
of voting securities beneficially owned by the Subject Person; provided that if
a Change of Control would occur (but for the operation of this sentence) as a
result of the acquisition of voting securities by the Retention Company, and,
after such acquisition by the Retention Company, the Subject Person becomes the
beneficial owner of any additional voting securities of such Retention Company
which increases the percentage of the then outstanding voting securities
beneficially owned by the Subject Person, then a Change of Control shall occur.
1.5 "Code" means the Internal Revenue Code of 1986, as amended.
1.6 "Coverage" means, in each Plan Year, coverage under a Group Health
Insurance Plan.
1.7 "Covered Key Employee" means each person who (a) has been a "key
employee," as that term is defined for purposes of Code Section 419A(d)(3),
during any plan year under any plan previously maintained by Bancorp to provide
health insurance coverage to retired employees, (b) had terminated employment
with Bancorp prior to adoption of this Plan on December 29, 1992, and (c) as of
that date satisfied the eligibility requirements set forth in Section 2.1.1A,
below.
1.8 "Dependent" means, with respect to each Eligible Retiree, each
person other than a Spouse who meets the definition of a "dependent" with
respect to the Eligible Retiree under a Group Health Insurance Plan.
1.9 "Effective Date" means December 30, 1998.
1.10 "Eligible Retiree" means each Former Employee (other than a person
who, in the current Plan Year or any preceding Plan Year, is or has been a Key
Employee) who satisfies the eligibility criteria set forth in Section 2.1.1,
below.
1.11 "Employee" means each person who is a common law employee of
Bancorp or any Affiliate of Bancorp.
1.12 "Employer" means Bancorp and each Affiliate of Bancorp.
1.13 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
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1.14 "FNBCC" means First National Bank of Central California, a
national banking organization and wholly owned subsidiary of Bancorp, one of the
branches of which operates under the name "South Valley National Bank," as well
as each entity acquired by or merged with or into First National Bank of Central
California.
1.15 "Former Employee" means each person who previously has been an
Employee but who, as of the time the determination of the person's employment
status is being made, no longer is an Employee as a result of an event or
circumstance other than the death of such person.
1.16 "Group Health Insurance Plan" means, in each Plan Year, each group
medical insurance plan and each group dental insurance plan under which Bancorp
offers medical or dental insurance coverage to Employees in such Plan Year.
1.17 "Hour of Service" means each hour for which an Employee (a) is
directly or indirectly compensated or entitled to compensation from the Employer
for the performance of duties during the applicable computation period; (b) is
directly or indirectly compensated or entitled to compensation by the Employer
(irrespective of whether the initial employment relationship has terminated) for
reasons other than the performance of duties (e.g., such as vacation, holidays,
sickness, jury duty, disability, lay-off, military duty or leave of absence)
during the applicable computation period; or (c) is awarded back pay or for
which the Employer agrees to pay back pay without regard to mitigation of
damages.
1.17.1 Period To Which Credited. All hours shall be credited
to the Employee for the computation period to which the award or agreement
concerning back pay pertains rather than to the computation period in which the
award, agreement, or payment is made. The same Hours of Service shall not be
credited under (a) or (b), as the case may be, and under (c), above.
1.17.2 Limitations on Crediting. Notwithstanding any
provision of this Plan to the contrary, (a) no more than 501 Hours of Service
shall be credited to an Employee on an account of any single continuous period
during which the Employee performs no duties (whether or not such period occurs
in a single computation period); (b) an hour for which an Employee is directly
or indirectly paid or entitled to payment, on account of a period during which
no duties are performed, is not required to be credited to the Employee if such
payment is made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, or unemployment compensation or
disability insurance, laws; and (c) Hours of Service are not required to be
credited for a payment which solely reimburses an Employee for medical or
medically related expenses incurred by the Employee.
1.17.3 Regulations. The definition of "Hours of Service"
shall be determined in accordance with the definition of that term set forth in
Department of Labor Regulations '2530.200b-2(b)&(c), the terms of which are
incorporated herein by this reference.
1.18 "Incumbent Directors" for any Retention Company means Directors of
the Retention Company who either (a) are Directors of the Retention Company as
of the Effective Date, or (b) are elected, or nominated for election, to the
Board of the Retention Company by the affirmative vote of at least a majority of
the Incumbent Directors at the time of such election or nomination; provided
that, for purposes of clause (b) of this Section, an individual whose election
or nomination is effected in connection with an actual or threatened Proxy
Contest relating to the election of Directors to the Retention Company shall not
be considered an Incumbent Director.
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<PAGE>
1.19 "Key Employee" means each Employee other than an Excluded Key
Employee who, at any time during any Plan Year under this Plan or any plan year
under any plan previously maintained by the Employer to provide health insurance
coverage to retired employees, meets the requirements of either Sections 1.16.1,
1.16.2, 1.16.3, or 1.16.4, below:
1.19.1 Is an officer of the Employer having annual
compensation greater than fifty percent (50.0%) of the limit on the amount of
benefits payable under a defined benefit plan, as set forth in Code Section
415(b)(1)(A). For purposes of this Section 1.16.1, the term "officer" shall mean
only those persons who have officer-type titles and exercise administrative
executive authority, and the persons who qualify as "officers" under such
definition shall be determined by the board of directors of the Employer or its
designee;
1.19.2 Is one of the ten (10) employees of the Employer who
(a) has annual compensation from the Employer in an amount greater than the
limitation on the maximum contributions which can be made to defined
contribution plans under Code Section 415(c)(1)(A), and (b) owns (or by reason
of the constructive ownership rules of Code Section 318) is deemed to own the
largest portions of the outstanding shares of the Employer's common capital
stock;
1.19.3 Employee of the Corporation who owns more than five
percent (5.0%) of the outstanding capital stock of the Employer or capital stock
possessing more than five percent (5.0%) of the total combined voting power of
all capital stock of the Employer; or
1.19.4 Employee of the Corporation who both (a) owns more
than one percent (1.0%) of the outstanding capital stock of the Employer, or
owns capital stock of the Employer possessing more than one percent (1.0%) of
the total combined voting power of all outstanding shares of the Employer's
capital stock, and (b) receives from the Employer compensation of more than One
Hundred Fifty Thousand Dollars ($150,000) per year.
1.20 "Merger Transaction" means that certain merger transaction in
which Target merged with and into Bancorp effective as of December 30, 1998.
1.21 "Non-Control Acquisition" means an acquisition of any voting
securities of a Retention Company by (a) an employee benefit plan (or a trust
forming a part thereof) maintained by Bancorp, (b) Bancorp or any of its
Subsidiaries, or (c) any person in connection with a Non-Control Transaction.
1.22 "Non-Control Transaction" means:
1.22.1 A merger, consolidation or reorganization of a
Retention Company in which:
A. The shareholders of the Retention Company,
immediately before such merger, consolidation or reorganization, own, directly
or indirectly, immediately after such merger, consolidation or reorganization,
in substantially the same proportion as their ownership of the voting securities
of the Retention Company immediately before such merger, consolidation or
reorganization, at least fifty-one percent (51%) of the combined voting power of
the outstanding voting securities of (i) the corporation resulting from such
merger, consolidation or reorganization (the "Surviving Corporation") or (ii)
the immediate parent corporation of the Surviving Corporation; and
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B. The individuals who were Incumbent Directors of
the Retention Company at the time of the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least two-thirds
(2/3) of the members of the board of directors of (i) the Surviving Corporation
or (ii) a corporation beneficially owning, directly or indirectly, a majority of
the voting securities of the Surviving Corporation; and
C. No person other than (i) another Retention
Company, (ii) any employee benefit plan (or any trust forming a part thereof)
maintained by any Retention Company or the Surviving Corporation or any
subsidiary of a Retention Company or the Surviving Corporation, or (iii) any
person who, immediately prior to such merger, consolidation or reorganization
had beneficial ownership of thirty-five percent (35%) or more of the then
outstanding voting securities of the effected Retention Company, has beneficial
ownership of thirty-five percent (35%) or more of the combined voting power of
the Surviving Corporation's voting securities outstanding immediately after such
merger, consolidation or reorganization.
1.22.2 A merger, consolidation or reorganization involving
only Retention Companies shall be considered a "Non-Control Transaction"
regardless of the composition of the Board of Directors of the Retention
Companies immediately following such transaction.
1.22.3 A sale or transfer of all or substantially all of the
assets of a Retention Company to one or more other Retention Companies shall be
considered a "Non-Control Transaction" regardless of whether such sale or
transfer is as a result of liquidation of the Retention Company or otherwise.
1.23 "Non-Key Employee" means each (a) Covered Key Employee, and (b)
each other Employee who is not a Key Employee.
1.24 "Participant" means each person who satisfies the eligibility
criteria set forth in Sections 2.1.1, 2.1.2, or 2.1.3, below.
1.25 "Plan" means this Pacific Capital Bancorp 1998 Amended and
Restated Retiree Health Plan, as amended from time to time.
1.26 "Plan Administrator" means Bancorp, or such other person or
committee as Bancorp may appoint or retain from time-to-time to supervise the
administration of this Plan.
1.27 "Plan Year" means (a) the period that commenced with the original
effective date of this Plan on December 29, 1992, and ended September 30, 1993,
and (b) thereafter, each twelve-month period commencing on October 1 and ending
on September 30 in the next subsequent calendar year.
1.28 "Post-Retirement Contribution" means, with respect to each
Participant, the amount determined under Section 3.2, below, which shall be paid
under this Plan toward the cost of Coverage for such Participant.
1.29 "Pre-Retirement Contribution" means, with respect to:
1.29.1 Grandfathered Current Retiree and Spouse. Each
Eligible Retiree who satisfies the eligibility requirements set forth in Section
2.1.1A, below, and such Retiree's Spouse, subject to Section 3.2.2,
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below, the amount which Bancorp was contributing toward the cost of Coverage for
each such Participant immediately prior to the original effective date of this
Plan on December 29, 1992; and
1.29.2 Other Eligible Retiree and Spouse. Each other
Eligible Retiree and such retiree's Spouse, the amount, determined as of the
calendar month in which the Eligible Retiree becomes a Former Employee, the
Employer is obligated to contribute (under its Group Health Insurance Plan for
Employees) in each month toward the cost of Coverage for such Former Employee
and Spouse.
1.30 "Restricted Period" shall mean the period which:
1.30.1 Commencement. Commences on the date on which (a)
Bancorp executes with another Person a written agreement (the "Reorganization
Agreement") to acquire all or substantially all the assets of Bancorp, or to
merge, consolidate, combine, or otherwise reorganize Bancorp with any one or
more other Persons (as such term is defined for purposes of Section 13(d) or 14
of the Securities Exchange Act of 1934) in any transaction in which the
Reorganization Agreement contemplates that those Persons who are shareholders of
Bancorp as of the date such Reorganization Agreement is executed will own less
than sixty-five percent (65%) of the combined voting power of all common stock
and other voting securities of the surviving entity immediately after the
effective date of such merger, consolidation, combination, or other
reorganization; or (b) any Person other than Bancorp announces that such Person
intends to conduct a tender offer to acquire more than thirty-five percent (35%)
of the outstanding common stock and other voting securities of Bancorp; and
1.30.2 Expiration. Expires on the last day of the period of
twenty-four (24) consecutive calendar months commencing on the date of any
Change of Control.
1.31 "Retention Company" means individually any of, and "Retention
Companies" means collectively all of, Bancorp, SBBT, FNBCC and Mortgage. When
used in reference to an Employee or Participant, "Retention Company" means
whichever of Bancorp, SBBT, FNBCC and Mortgage employs the Employee or
Participant.
1.32 "SBBT" means SANTA BARBARA BANK & TRUST, a California corporation,
which is a wholly owned subsidiary of Bancorp.
1.33 "Service" means service as a common law employee of any Employer;
provided that, for purposes of this Plan, the term "Service" shall not include
(a) any service prior to January 1, 1999, with either Target or any subsidiary
corporation, all of whose outstanding capital stock was owned by Target, (b) any
service with any Target company acquired by or merged with or into Bancorp or
any Affiliate prior to the effective date of such acquisition or merger only if
such employee is entitled to credit for such service under Section 1.32.5,
below, or (c) any Service prior to the occurrence of a Break in Service (as
defined in Section 1.32.3, below).
1.34 "Spouse" means each person who satisfies the requirements of
Section 2.1.2, below.
1.35 "Supplemental Coverage" shall mean, for each Participant who
becomes eligible to receive Medicare coverage, individual or group health
insurance coverage (a) which provides coverage supplementing that available
under Medicare, and (b) which, when considered together with Medicare coverage
available to the Participant, provides to the Participant health insurance
coverage substantially equal to the
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Coverage the Participant was receiving under this Plan immediately prior to the
date on which the Participant became eligible for Medicare.
1.36 "Target" shall mean PACIFIC CAPITAL BANCORP, a California
corporation, which merged with and into Bancorp in the Merger Transaction
effective December 30, 1998.
1.37 "VEBA" means the PACIFIC CAPITAL BANCORP VOLUNTARY EMPLOYEES'
BENEFICIARY ASSOCIATION, which has been adopted by Bancorp concurrently with
Bancorp's adoption of this Plan, as amended from time to time.
1.38 "Year of Service" means each computation period of twelve
consecutive months during which an Employee has one thousand (1,000) Hours of
Service.
1.38.1 Initial Computation Period. Each Employee's initial
computation period shall be the twelve-month period beginning on the date on
which the Employee first performs any Hour of Service.
1.38.2 Subsequent Computation Period. The computation period
shall shift to the Plan Year beginning with the first day of the Plan Year that
includes the first annual anniversary of the date on which the Employee first
performs an Hour of Service. An Employee who is credited with one thousand
(1,000) Hours of Service in both the initial computation period and the Plan
Year which includes such anniversary date shall be credited with two (2) Years
of Service as of the last day of such Plan Year.
1.38.3 Service Prior to Break in Service. For purposes of
this Plan, Service prior to a Break in Service shall not be taken into account
in determining the Years of Service of an Employee or former Employee with the
Employer. For purposes of this Plan, a "Break in Service" shall occur with
respect to any Employee or former Employee if (a) the employment of the Employee
with the Employer is terminated for any reason, and (b) the Employee thereafter
is not re-employed with any Employer during the period of one (1) year following
the effective date of such termination of employment.
1.38.4 Reemployed Employee. If an Employee terminates
employment with the Employer and subsequently becomes an Employee, then upon
reemployment (a) the computation period initially shall be the twelve-month
period commencing with the day on which the Employee first performs an Hour of
Service upon reemployment, (b) the computation period shall shift to the Plan
Year beginning with the first day of the Plan Year that includes the first
annual anniversary of the date on which the Employee resumed employment, and (c)
any such Employee who is credited with one thousand (1,000) Hours of Service in
both the initial computation period and the Plan Year which includes such
anniversary shall be credited with two (2) Years of Service as of the last day
of such Plan Year.
1.38.5 Prior Service Credit. There shall be recognized as
"Years of Service" under this Plan (a) all Years of Service by the Employee with
Community Bank of Santa Ynez Valley; and (b) all Years of Service by the
Employee with any entity acquired by Bancorp or any Affiliate (as defined below)
if the terms and conditions of such acquisition expressly require that such
prior Years of Service be credited as such under this Plan. For purposes of this
Section 1.25.4, an entity shall be deemed to be "acquired by Bancorp or any
Affiliate" if (i) that entity is merged into Bancorp or any Affiliate, or (ii)
Bancorp or any Affiliate purchases or otherwise acquires at least eighty percent
(80% of the outstanding voting equity interests in such entity, or (iii) Bancorp
or any Affiliate acquires substantially all the assets of such entity.
Notwithstanding the foregoing, in accordance with the definition of "Service" in
Section 1.26, above, no credit shall be
-8-
<PAGE>
provided under this Plan for service prior to January 1, 1999, as an employee of
Target or any wholly owned subsidiary of Target.
2. PARTICIPATION
2.1 Eligibility Criteria. Each person who satisfies the criteria set
forth in Sections 2.1.1, 2.1.2, or 2.1.3, below, shall be eligible to
participate in this Plan.
2.1.1 Eligible Retirees. A person shall be deemed to satisfy
the requirements of this Section 2.1.1 if that person (a) is a Former Employee
who at all times while employed by Bancorp or its Affiliates was a Non-Key
Employee, and (b) satisfies the requirements of Paragraph A, B, or C below.
A. Grandfathered Current Retiree. A person satisfies
the requirements of this Paragraph A if, as of the date this Plan originally was
adopted by SBBT on December 29, 1992, such person (i) was a Former Employee, and
(2) was eligible for coverage under the terms of the retiree health plan being
sponsored by SBBT immediately prior to the adoption of this Plan.
B. Grandfathered Future Retiree. A person satisfies
the requirements of this Paragraph B if (i) the person became a Former Employee
during the period between the date on which this Plan originally was adopted by
SBBT on December 29, 1992, and October 1, 1993, and (ii) as of the date such
person becomes a Former Employee, (x) such person has completed at least eight
(8) Years of Service, (y) such person has attained at least the age of
fifty-five (55), and (z) the sum of the number of the person's Years of Service
plus the person's age is equal to at least seventy-five (75).
C. Other Retirees. Subject to the last sentence of
this Paragraph C, a person satisfies the requirements of this Paragraph A only
if all of the following requirements are satisfied as of the effective date as
of which that person terminates employment with the Employer (i) that person has
completed at least eight (8) Years of Service, (ii) that person has attained at
least the age of fifty-five (55), and (iii) the sum of the number of the
person's Years of Service plus the person's age is equal to at least
seventy-five (75). In determining whether a person has satisfied the
requirements of this Paragraph C, such person (for all purposes under this
Paragraph C) shall be credited with five (5) Years of Service in addition to
such person's actual Years of Service, and shall be deemed to be five (5) years
older than such person's actual chronological age, if during the Restricted
Period the Employer terminates (or delivers to Employee notice of the
termination of) Employee's employment with the Employer other than for Cause.
2.1.2 Spouses of Eligible Retirees. A person shall be deemed
to be a Spouse satisfying the requirements of this Section 2.1.2 if either:
A. That person is married to an Employee as of the
date such Employee becomes an Eligible Retiree (provided, if such person is
treated as the Spouse of the Eligible Retiree as of the date of the Eligible
Retiree's death, then such person thereafter will be deemed to continue to be a
Spouse after the date of the Eligible Retiree's death, without regard to whether
such Spouse subsequently remarries); or
B. That person was married to an Employee as of the
date of that Employee's death, and such Employee died at a point in time at
which such Employee would have been an Eligible Retiree (as defined in Section
1.7, above) if that Employee had terminated employment with the Employer
-9-
<PAGE>
on the day prior to the day on which such Employee died (provided, a person who
is treated as a Spouse under this Paragraph B will be deemed to continue to be a
Spouse without regard to whether such Spouse subsequently remarries).
2.1.3 Dependents of Eligible Retirees. A person shall be
deemed to satisfy the requirements of this Section 2.1.3 if either:
A. That person is a Dependent; or
B. All of the following requirements are satisfied
with respect to such person: (1) such person was treated as a dependent (under a
Group Health Insurance Plan) of a deceased Employee as of the date of that
Employee's death; (2) the deceased Employee would have been treated as an
Eligible Retiree if that Employee had terminated employment with the Employer on
the day prior to the date of the Employee's death; and (3) such person, in the
event the deceased Employee had become an Eligible Retiree as of such day
preceding the date on which the Employee died, would have been treated as a
Dependent of such Eligible Retiree.
3. BENEFITS AND COMPANY CONTRIBUTION
3.1 Purchase of Coverage. In each Plan Year, each Participant shall be
eligible to purchase Coverage.
3.1.1 Mandatory Participant Contribution. If the cost of
Coverage for a Participant exceeds the amount of the Post-Retirement
Contribution which the Participant is entitled to receive pursuant to Section
3.2, below, then such Participant shall be eligible to purchase Coverage only if
that Participant pays such excess amount at the time and in the manner required
by the Plan Administrator.
3.1.2 Dependents. A Participant who is a Dependent shall be
eligible to purchase Coverage only under those Group Health Insurance Plans
under which such person qualifies as a "dependent."
3.2 Post-Retirement Contribution. Subject to Sections 3.3, 3.4 and
3.10, below, the amount of the Post-Retirement Contribution for each Participant
shall be determined under this Section 3.2. In no event shall the amount of the
Post-Retirement Contribution with respect to any Participant exceed the actual
cost of Coverage for such Participant.
3.2.1 Eligible Retirees. The Post-Retirement Contribution
for each Eligible Retiree shall be determined under this Section 3.2.1.
A. Grandfathered Current Retirees. The
Post-Retirement Contribution for each Eligible Retiree who satisfies the
eligibility criteria set forth in Section 2.1.1A, above, shall be:
(1) During the period beginning with the
Effective Date of this Plan and ending September 30, 1993, an amount equal to
one hundred percent (100%) of the Pre-Retirement Contribution for such Eligible
Retiree; and
-10-
<PAGE>
(2) Beginning October 1, 1993, such amount
as the Employer determined prior to October 1, 1993; provided, in no event shall
such amount be less than one hundred percent (100%) of the cost of Coverage (as
of October 1, 1992) for the Eligible Retiree under that Group Health Insurance
Plan which (a) was being sponsored by SBBT as of the original effective date of
this Plan, and (b) under which the cost of Coverage for the Eligible Retiree
would be the lowest of that for all Group Health Insurance Plans being sponsored
by SBBT as of such date.
B. Grandfathered Future Retirees. The Post-Retirement
Contribution for each Eligible Retiree who satisfies the eligibility criteria
set forth in Section 2.1.1B, above, shall be an amount equal to one hundred
percent (100%) of the Eligible Retiree's Pre-Retirement Contribution.
C. Other Retirees. The Post-Retirement Contribution
for each Eligible Retiree who satisfies the eligibility criteria set forth in
Section 2.1.1C, above, shall be an amount determined by multiplying (a) the
Pre-Retirement Contribution for such Eligible Retiree, as determined under
Section 1.20.2, above, times (b) the percentage determined under the table set
forth below in this Section 3.2.1. For purposes of interpreting the following
table, the term "Retirement" shall mean the date on which the Eligible Retiree
becomes a Former Employee.
EMPLOYEE'S PERCENTAGE OF
EMPLOYEE'S AGE COMPLETED YEARS OF SERVICE AT CONTRIBUTION
AT RETIREMENT RETIREMENT MADE BY EMPLOYER
-------------- ---------- ----------------
55-59 20+ 80%
55-59 16-19 60%
60-64 20+ 100%
60-64 16-19 80%
60-64 11-15 60%
65-69 16+ 100%
65-69 12-15 80%
65-69 8-11 60%
70+ 12+ 100%
70+ 8-11 80%
3.2.2 Spouses of Eligible Retirees. The Post-Retirement
Contribution for the Spouse of each Eligible Retiree shall be determined under
this Section 3.2.2.
A. Spouse of Grandfathered Current Retirees.
(1) During the lifetime of each Eligible
Retiree who satisfies the criteria set forth in Section 2.1.1A, above, the
Post-Retirement Contribution for the Spouse of such Eligible Retiree shall be
(a) during the period beginning with the Effective Date of this Plan and ending
September 30, 1993, an amount equal to one hundred percent (100%) of the
Pre-Retirement Contribution for such Spouse, as
-11-
<PAGE>
determined under Section 1.20.2, above; and (b) beginning October 1, 1993, such
amount as the Employer determines prior to October 1, 1993; provided, in no
event shall such amount be less than one hundred percent (100%) of the cost of
Coverage (as of October 1, 1992) for the Spouse under that Group Health
Insurance Plan which (i) was being sponsored by SBBT of the original effective
date on which this Plan was adopted by SBBT, and (ii) under which the cost of
Coverage for the Spouse would be the lowest of that for all Group Health
Insurance Plans being sponsored by SBBT as of such date.
(2) After the death of such Eligible
Retiree, the Post-Retirement Contribution for the surviving Spouse shall be one
hundred percent (100%) of the lesser of (1) the actual cost of Coverage for the
Spouse, or (2) the amount of the Post-Retirement Contribution for the Eligible
Retiree immediately prior to the date of the Eligible Retiree's death.
B0 Spouse of Grandfathered Future Retirees. During
the lifetime of each Eligible Retiree who satisfies the criteria set forth in
Section 2.1.1B, above, the Post-Retirement Contribution for the Spouse of such
Eligible Retiree shall be equal to one hundred percent (100%) of the Spouse's
Pre-Retirement Contribution. After the death of the Eligible Retiree, the
Post-Retirement Contribution for the surviving Spouse shall be one hundred
percent (100%) of the lesser of (1) the actual cost of Coverage for the Spouse,
or (2) the amount of the Post-Retirement Contribution for the Eligible Retiree
as of the date of the Eligible Retiree's death.
C0 Spouse of Other Retirees. During the lifetime of
each Eligible Retiree who satisfies the eligibility criteria set forth in
Section 2.1.1C, above, the Post-Retirement Contribution for such Eligible
Retiree's Spouse shall be the same percentage of such Spouse's Pre-Retirement
Contribution as the percentage which such Eligible Retiree is entitled to
receive under Section 3.2.1C, above.
(1) After the death of such Eligible
Retiree, the Post-Retirement Contribution for the surviving Spouse shall be the
applicable percentage of the lesser of (a) the actual cost of Coverage for the
surviving Spouse, or (b) the amount of the Post-Retirement Contribution for the
Eligible Retiree immediately prior to the date of the Eligible Retiree's death.
(2) For purposes of this Paragraph C, the
term "applicable percentage" shall mean the lesser of (a) the percentage of the
Spouse's Post-Retirement Contribution which the Spouse was entitled to receive
immediately prior to the date of the Eligible Retiree's death, or (b) the
percentage determined under the following table:
AGE OF SURVIVING PERCENTAGE OF COST
SPOUSE A RETIREE'S DEATH PAID BY EMPLOYER
------------------------ ----------------
65 & over 100%
60 - 64 80%
55 - 59 60%
50 - 54 40%
46 - 49 20%
45 & under -0-
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<PAGE>
3.2.3 Dependents. An Eligible Retiree's Dependents shall not
be entitled to receive any Post-Retirement Contribution under this Plan. In
order for a Dependent to receive Coverage under this Plan, the entire cost of
Coverage for such Dependent must be paid, at the time and in the manner that the
Plan Administrator shall require, by someone other than the Employer or the
VEBA.
3.3 Effect of Spouse's Death. Notwithstanding any other provision of
this Plan to the contrary, (a) the death of the Spouse of an Eligible Retiree
shall not affect the amount of the Post-Retirement Contribution for the Eligible
Retiree, and (b) after the date of the Spouse's death, the surviving Eligible
Retiree shall not be entitled to receive any portion of the Post-Retirement
Contribution which the deceased Spouse had been entitled to receive prior to
death.
3.4 Effect of Eligibility for Medicare. If a Participant becomes
eligible for health insurance coverage under Medicare, then effective on the
first date as of which the Participant is eligible for that coverage, the amount
of the Post-Retirement Contribution for the Participant under Section 3.2,
above, shall not exceed the cost of Supplemental Coverage (as defined in Section
1.2.2, above) for the Participant under a Group Health Insurance Plan then
sponsored by the Employer.
3.5 Deemed Spouses and Dependents. Each person who is eligible to
participate in the Plan as a Spouse under Section 2.1.2(b), above, or as a
Dependent under Section 2.1.3B, above, by virtue of the death of an Employee,
shall be entitled to receive the same Coverage and Post-Retirement Contribution
(if any) under this Plan which such person would have been entitled to receive
under Section 3.2, above, if the decedent had terminated employment with the
Employer on the day prior to the date of the decedent's death.
3.6 Increases in Post-Retirement Contribution. Bancorp may increase
from time-to-time, in its sole discretion, the amount of the Post-Retirement
Contribution payable under this Plan. In no event, however, shall the amount of
any such Post-Retirement Contribution in any Plan Year exceed by more than five
percent (5%) the amount of such Post-Retirement Contribution payable in the
immediately preceding Plan Year.
3.7 Funding of Post-Retirement Contribution. The amount of each
Post-Retirement Contribution payable under this Plan:
3.7.1 Source. Shall be paid (a) first, from the VEBA, to the
extent of the assets thereof, and (b) thereafter, from the general assets of
Bancorp.
3.7.2 Advance or Reimbursement. May be paid either directly
to the insurance company providing the Group Health Insurance Plan, or as a
reimbursement to the Participant for such, or in such other manner as is
administratively convenient to Bancorp and the VEBA.
3.8 Key Employees. No Key Employee shall be entitled to receive
Coverage or other benefits under this Plan or the VEBA.
3.8.1 Determination of Status. The determination of whether
an Employee is a Key Employee shall be made in each Plan Year.
-13-
<PAGE>
3.8.2 Effect of Status. If a person who is a Non-Key
Employee becomes a Key Employee, then effective at the time of that change in
status, such person no longer shall be entitled to receive Coverage or any other
benefits under this Plan or the VEBA at any time.
3.8.3 Bancorp Contribution. Bancorp shall not contribute to
the VEBA in any Plan Year any amount attributable to funding the cost of
Coverage for any Key Employee.
3.9 Application for Participation and Contribution. In order to be
eligible to purchase Coverage and receive any applicable Post-Retirement
Contribution under this Plan, each Participant shall submit an application to
Bancorp or the VEBA at such time, and in such manner, as the Plan Administrator
shall announce, from time-to-time, in advance of the deadline for submitting
such applications.
3.10 Purpose and Maximum Benefit. This Plan is not intended to be, and
shall not operate as, a plan of deferred compensation. Consequently,
notwithstanding any other provision of this Plan to the contrary:
3.10.1 No Deferred Compensation. A Participant who is
entitled to receive a Post-Retirement Contribution under Section 3.2, above,
shall be entitled to receive such Post-Retirement Contribution only if the
Participant timely elects to purchase Coverage under this Plan; and
3.10.2 Limit. No Participant shall be entitled to receive
under this Plan any amount which exceeds lesser of (a) the Post-Retirement
Contribution payable for such Participant pursuant to Section 3.2, above, or (b)
the actual cost of Coverage for such Participant.
4. ADMINISTRATION
4.1 Duties of Plan Administrator. The Plan Administrator shall
administer the Plan in accordance with its terms for the exclusive benefit of
Participants and in a manner which satisfies the nondiscrimination requirements
imposed upon voluntary employees' beneficiary associations by Section 505 of the
Code.
4.2 Powers of Plan Administrator. The Plan Administrator shall have
full power and authority to administer and carry into effect the terms and
conditions of this Plan, subject to applicable requirements of law. Such power
shall include, but not be limited to, the power:
4.2.1 Rules and Regulations. To make and enforce such
reasonable rules and regulations as the Plan Administrator deems necessary or
proper for the efficient administration of the Plan, including the establishment
of any claims procedures that may be required by applicable provisions of law;
4.2.2 Interpretation. To interpret in good faith the terms
and conditions of this Plan;
4.2.3 Resolution. To resolve all questions concerning the
Plan and the eligibility of any Former Employee to participate in the same; and
4.2.4 Agents. To appoint and retain such agents, counsel,
accountants, consultants, and other persons as may be necessary or appropriate
to assist in the administration of the Plan.
-14-
<PAGE>
4.3 Records. The Plan Administrator shall establish and maintain such
records as are necessary or appropriate to the efficient administration of the
Plan. Each Participant, upon reasonable advance notice to the Plan
Administrator, shall be entitled to inspect such of those records as pertain to
that Participant.
4.4 Appeals Procedure. If a claim for Coverage or a contribution from
Bancorp is partially or fully denied by the Plan Administrator, then the
Participant may request a review of that decision by submitting to the Plan
Administrator, not later than sixty (60) days after receiving notice of the Plan
Administrator's decision, a written request for review of the decision. Within
sixty (60) days after receiving such request, Bancorp shall review the request,
hold such hearings as Bancorp, in its sole discretion, deems appropriate, and
advise the Participant, in writing, of its decision. If the decision on review
is not provided within such sixty-day period, then the application for appeal
shall be deemed to be denied.
4.5 Filing. The Plan Administrator shall timely file all forms required
to be filed with respect to the Plan pursuant to the Code, ERISA, and all
counterpart provisions of California law.
4.6 Indemnification. Bancorp shall indemnify, defend, and hold the Plan
Administrator free and harmless from and against any and all liabilities,
damages, costs and expenses, including reasonable attorneys' fees, occasioned by
any actions which the Plan Administrator takes, or fails to take, reasonably and
in good faith, in connection with the administration of the Plan.
5. PRIOR PLANS; AMENDMENT AND TERMINATION
5.1 Prior Plans. This Plan supersedes the terms of any plan or policy
previously sponsored, maintained, or announced by Bancorp to provide health or
dental benefits to Former Employees of Bancorp.
5.2 Amendment and Termination. Bancorp shall have sole and absolute
discretion to amend or modify this Plan in any regard, and to terminate this
Plan altogether, at any time; provided, notwithstanding the foregoing or any
other provision of this Plan, during any Restricted Period Bancorp may not (a)
revoke the Plan, or (b) modify the provisions of Paragraph B of Section 2.1.1 of
the Plan, or (c) otherwise modify or amend the Plan in any manner (whether
directly or indirectly such as by amending any other employee benefit
arrangement that benefits any person who is affected by the provisions of
Paragraph B of Section 2.1.1, above) that has the effect of eliminating or
reducing the protections afforded by Paragraph B of Section 2.1.1 hereof.
6. MISCELLANEOUS
6.1 No Employment Rights. Neither the adoption and maintenance of this
Plan, nor any express or implicit provision of this Plan, shall be deemed:
6.1.1 Contract. To constitute a contract between any
Employer and any other person, or to be a consideration for or an inducement or
condition of, the employment of any person;
6.1.2 Right. To give any person the right to be retained in
the employ of Bancorp or any Affiliate;
6.1.3 Discharge. To interfere with the right of any Employer
to discharge any Employee (including any Participant) at any time; or
-15-
<PAGE>
6.1.4 Continuing Employment. To give any Employer the right
to require an Employee to remain in the employ of such Employer, or to interfere
with an Employee's right to terminate his employment at any time.
6.2 Enforceability; Exclusive Benefit. Subject to the provisions of
Sections 5 and 6.1, above, Bancorp:
6.2.1 Legally Enforceable. Represents that the rights
created in this Plan in favor of Participants are intended to be legally
enforceable; and
6.2.2 Exclusive Benefit. Agrees to administer or cause this
Plan to be administered for the exclusive benefit of Participants.
6.3 Interpretation. As used in this Plan, the masculine, feminine, and
neuter gender and the singular and plural numbers each shall be deemed to
include the other whenever the context indicates or requires. The captions to
various sections of this Plan are included in this Plan solely for convenience
of reference, and shall not affect in any way the meaning or interpretation of
this Plan.
6.4 Governing Law. This Plan shall be construed, administered, and
enforced in accordance with the Code, ERISA, and the laws of the State of
California.
6.5 Binding Effect. This Plan shall be binding upon all successors and
assigns of Bancorp.
IN WITNESS WHEREOF, Bancorp has caused this Plan to be adopted,
effective on the Effective Date as set forth above.
PACIFIC CAPITAL BANCORP, a California
corporation
- - --------------------------------- By
Date ---------------------------------------
Jay D. Smith, Senior Vice President
-16-
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