-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LT51RVrzuEtrD1Ctf7IIVKuUEOazxvAge9tDHwp/gaaw3CMcUPOXz6efRlHakQPE 7NCXfZ/pbzxlM7MUuFnXtA== 0000950005-97-000374.txt : 19970401 0000950005-97-000374.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950005-97-000374 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC CAPITAL BANCORP CENTRAL INDEX KEY: 0000731805 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770003875 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13528 FILM NUMBER: 97570836 BUSINESS ADDRESS: STREET 1: 307 MAIN STREET STREET 2: P O BOX 1786 CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4087574900 MAIL ADDRESS: STREET 1: P O BOX 1786 STREET 2: 307 MAIN ST CITY: SALINAS STATE: CA ZIP: 93902-1786 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K SECURITIES AND EXCHANGE COMMISSION [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1996 or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 0-13528 PACIFIC CAPITAL BANCORP - -------------------------------------------------------------------------------- (Exact Name of registrant as specified in its charter) California 77-0003875 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 307 Main Street, Salinas, California 93901 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (408) 757-4900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] Aggregate market value of common stock held by nonaffiliates of Pacific Capital Bancorp at March 1, 1997: $106,871,000 Number of shares of Common Stock outstanding at March 1, 1997: 4,090,757 Documents Incorporated by Reference: Location in Form 10-K - ----------------------------------- --------------------- 1996 Annual Report to Shareholders. Part I, Items 1 and 2 Proxy Statement for 1997 Annual Part III, Items 10, 11, 12 and 13 Meeting of Shareholders THIS REPORT INCLUDES A TOTAL OF 115 PAGES EXHIBIT INDEX IS ON PAGE 69 TABLE OF CONTENTS
Page - --------------------------------------------------------------------------------------------------------------------- Form 10-K Annual Report Proxy (1) Statement (2) -------------------- ----------------- ---------------- Part I Item 1 Business 1 Statistical Information 4 Distribution of Assets, Liabilities, Equity, Interest Rates and Interest Differential 4 27-29 Investment Portfolio 5 12-13, 35-36 Loan Portfolio 5 8, 14-15, 31-32 Summary of Loan Loss Experience 6 33 Deposits 6 10-11 Financial Ratios 6 2 Competition 6-7 Supervision and Regulation 8-9 Capital Standards 9-11 40-41 Item 2 Properties 13 Item 3 Legal Proceedings 13 Item 4 Submission of Matters to a Vote of Securities Holders 13 Part II Item 5 Market for Registrants Common Stock and Related Stockholder Matters 13 45 Item 6 Selected Financial Data 13 1 Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations 14 22-45 Item 8 Financial Statements and Supplementary Data 14 2-26 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Part III Item 10 Directors and Executive Officers of the Registrant 14 4-9 Item 11 Executive Compensation 15 9-13 Item 12 Security Ownership of Certain Beneficial Owners and Management 15 4-5 Item 13 Certain Relationships and Related Transactions 15 15, 23 13 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 15-16 1-26 (1) The 1996 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) The Proxy Statement dated for the Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K.
ii PART I ITEM 1 BUSINESS GENERAL Pacific Capital Bancorp (the "Company") is a California bank holding company headquartered in Salinas, California and incorporated on January 26, 1983. Its principal wholly-owned subsidiaries, First National Bank of Central California (formerly First National Bank of Monterey County ), ("First National") commenced operations on April 2, 1984, and South Valley National Bank, ("South Valley") commenced operations on April 21, 1982. On November 20, 1996, the Company acquired South Valley Bancorporation ("SVB") and its banking subsidiary, South Valley, headquartered in Morgan Hill, California. Each share of SVB common stock outstanding on November 20, 1996, was converted into .92 shares of the Company's common stock. The Company issued approximately 1,291,000 shares of common stock and cash in lieu of fractional shares for all of the outstanding shares of SVB. The consolidated financial statements of the Company give effect to the merger, which has been accounted for as a pooling-of-interests. Accordingly, the accounts of SVB have been combined with those of the Company for all periods presented. First National is a full service commercial bank serving Monterey, Salinas, Carmel, Watsonville, and surrounding areas in Monterey and Santa Cruz Counties in California. South Valley is a full service commercial bank serving Morgan Hill, Gilroy, Holister, San Juan Bautista, and surrounding areas in Santa Clara and San Benito Counties in California. The Company itself does not engage in any business activities other than the ownership of the banks and the ownership of one other wholly-owned subsidiary, Pacific Capital Services Corporation ("PCSC"). PCSC has no active operations at this time. First National and South Valley are collectively referred to herein as the "Subsidiary Banks." General Banking Services The Subsidiary Banks provides a wide range of commercial banking services to individuals, professionals, and small- and medium-sized businesses. The services provided include those typically offered by commercial banks, such as: checking, interest checking and savings accounts, travelers checks, safe deposit boxes, collection services, night depository facilities and wire and telephone transfers. In addition to the above deposit services, the Subsidiary Banks also provide a full array of loan products including commercial, real estate and consumer loans as well as a variety of government assisted loan programs such as SBA or Rural Economic Community Development Service guaranteed loans. Professional firms, individuals and businesses form the core of the Subsidiary Banks customer and deposit bases. 1 The Subsidiary Banks maintain lobby hours between 9:00 a.m. and 5:00 p.m., Monday through Thursday and between 9:00 a.m. and 6:00 p.m. on Friday. South Valley's Gilroy and Hollister offices are also open from 9:00 A.M. to 12:00 P.M. on Saturday. In addition to a broad range of retail products and services, the Subsidiary Banks offer courier pick-up service, nationwide ATM access available through the Star(R) system, Cirrus(R), Plus(R) Explore(R) and Ca$h24(R), and point of sale transactions through Explore(R), Maestro(R) and Discover/Novus(R), merchant bank card support with electronic ticket capture, self directed IRA, discount brokerage services and consumer and business credit cards. First National also offers offsite ATM access at the Prunetree Shopping Center, Prunedale, California and at the Monterey Pennisula College, Monterey, Calififornia. The Subsidiary Banks do not offer trust services. Most of the Subsidiary Banks deposits are obtained from individuals, professionals and small- and medium-sized businesses. As of December 31, 1996 the Subsidiary Banks had a total of 34,524 accounts representing 18,940 interest bearing and non-interest bearing (checking) accounts with an average balance of approximately $11,410 each; 11,434 savings and money market accounts with an average balance of approximately $14,421 each; and 4,150 other time deposits with an average balance of approximately $40,046 each. The Subsidiary Banks are members of the Federal Deposit Insurance Corporation (the "FDIC") and the deposits of each depositor of the Subsidiary Banks are insured up to $100,000. The Subsidiary Banks engage in a full complement of lending activities, including commercial, consumer/installment and short-term real estate loans, with a particular emphasis on short- and medium-term commercial obligations. Commercial lending activities are directed principally toward small- to medium-sized businesses, such as professional firms, retail, light industry and manufacturing to which the Subsidiary Banks make (a) loans for working capital, (b) loans secured by receivable and inventory, (c) term loans for equipment; and (d) real estate development loans. In addition to conventional commercial lending, the Subsidiary Banks also offer an array of government assisted loan products including SBA guaranteed loans, SBA 504 loans (primarily for commercial real estate transactions), Rural Economic Community Development Services guaranteed loans and loans guaranteed under the State of California guarantee program. The Subsidiary Banks also work to meet the needs of the local municipalities by providing lease financing for a wide variety of equipment purchases including energy retrofit, fire trucks, police cars, portable classrooms, etc. Consumer lending is oriented primarily to the needs of the Subsidiary Banks customers, with an emphasis on automobile financing and real estate loans. Real estate loans include home loans and equity advance loans. In addition, the Subsidiary Banks offer construction loans, generally for single-family residences and multi-unit projects. Real estate and construction loans are typically secured by first deeds of trust and guarantees from principals of the borrower. The economic viability of the project and the borrower's credit worthiness are primary considerations in the loan underwriting decision. The Subsidiary Banks use independent local appraisers, conservative loan-to-value ratios and close monitoring of the projects during construction phases, and in the absence of rapid declines in real estate values, ultimate collectibilty of these secured loans is considered by the Subsidiary Banks management to be better than the average mix of commercial loans. The Subsidiary Banks do not make long term fixed rate real estate 2 loans and, therefore, material sustained increases or decreases in general interest rate levels have only a short-term effect on the Subsidiary Banks net yield on real estate loans. The Subsidiary Banks concentrate their lending activities in the following areas: real estate loans, commercial loans, consumer loans to individuals, and other loans. As of December 31, 1996, these four categories accounted for approximately 60.0%, 29.2%, 5.8%, and 5.0% respectively, of the Company's loan portfolio. As of December 31, 1996, the Company had total loans outstanding of $388,728,000. No material portion of the Subsidiary Bank's loan portfolio is concentrated within a single industry or group of related industries. The interest rates charged for the various loans made by the Subsidiary Banks vary with the degree of risk, size, and maturity of the loans involved and are generally affected by competition, governmental regulation and by current money market rates. The Company's consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio. The Subsidiary Banks follow the policy of non-accrual of interest on a loan when principal or interest is 90 days or more past due unless the loan is well secured and in the process of collection. Interest income from non-accrual loans is not accrued on the books, but rather is recorded only when and if received. When a loan is placed on a non-accrual basis, any previously accrued but unpaid interest is reversed and charged against current income unless there is adequate collateral to assure recovery of the accrued interest. Correspondent Banks The Subsidiary Banks have correspondent relationships with Wells Fargo Bank, N.A., Union Bank of California., Bank of America, N.T.& S.A., City National Bank and the Federal Reserve Bank of San Francisco. These relationships are a result of the Subsidiary Banks efforts to obtain a wide range of services for the Subsidiary Banks and its customers and, as net sellers of federal funds (overnight interbank loans), to minimize the risk of an undue concentration of its resources with a few entities. The Subsidiary Banks do not currently serve, nor do they have plans to serve, as a correspondent to other banks. The correspondent banks perform the following services for the Subsidiary Banks: arrange loan participations; purchase and sell federal funds; obtain lines for letters of credit; buy and sell investment securities; safekeep the Subsidiary Banks investment securities; send and receive foreign wire transactions and data processing services. Existing Locations First National currently operates five branch offices: the Monterey branch located at 495 Washington Street, Monterey; the Salinas branch located at 1001 South Main Street, Salinas; the Oldtown office located at 307 Main Street, Salinas; the Carmel branch located in the Carmel Rancho Shopping Center, Carmel; and the Watsonville branch located at 655 Main Street, Watsonville. First National Bank offers offsite 24-hour ATM services and night depository facilities at the Prunetree Shopping Center located in Prunedale, and ATM services located at the Monterey Pennisula College, 3 Monterey , California. The Company's loan administration department is located at 517 S. Main Street, Salinas. In addition to a banking office, the Oldtown office located at 307 Main Street, Salinas houses all of the Company's administrative functions as well as the Data Processing/Operations department and a Community/Board room. South Valley National Bank currently operates four branch offices: the Morgan Hill branch located at 500 Tennant Station in Morgan Hill; the Gilroy branch located at 8000 Santa Teresa Boulevard, Gilroy; the Hollister branch located at 1730 Airline Highway, Hollister; and the San Juan Bautista branch located at 301 Third Street, San Juan Bautista. As of December 31, 1996, the Company and its subsidiaries employed 259 full-time equivalent employees. Other Information Concerning the Company and the Subsidiary Banks The Company and its Subsidiary Banks hold no material patents, trademarks, licenses, franchises or concessions except for the written approvals issued by the Office of the Comptroller of the Currency (the "OCC") for the Subsidiary Banks banking offices. No material expenditures were made by the Company or its Subsidiary Banks during the last three fiscal years on research and development activities relating to the development of services or the improvement of existing services. Based upon present business activities, compliance with federal, state and local provisions regulating discharge of materials into the environment will have no material effect upon the capital expenditures, earnings and competitive position of the Company or its Subsidiary Banks. Pacific Capital Services Corporation PCSC, a wholly-owned subsidiary of the Company, was incorporated on April 22, 1985, to arrange and broker residential, commercial and construction loans and other extensions of credit. PCSC commenced operations on July 1, 1985, with a primary emphasis in the area of residential mortgage loans. In December, 1988, the functions performed by PCSC were taken over by First National and PCSC ceased operations. The Company maintains PCSC as an inactive subsidiary. SELECTED STATISTICAL INFORMATION Consolidated statistical information concerning the business of the Company and the Subsidiary Banks is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis") on pages 22 through 45 the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, (the "Annual Report") and in Notes 1-14 to the Consolidated Financial Statements on pages 1 through 21 of the Annual Report, which pages of the Annual Report are incorporated herein by reference. This information should be read in 4 conjunction with the Consolidated Financial Statements and the Notes thereto included in the Annual Report which have been incorporated herein by reference. Distribution of Average Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential The Company's average consolidated balance sheet and an analysis of net interest earnings for the years ended December 31, 1996, 1995 and 1994 is set forth in Management's Discussion and Analysis on page 27 of the Annual Report. A table setting forth the changes in interest income and interest expense in 1996 and 1995 resulting from changes in volume and changes in rates is set forth in Management's Discussion and Analysis on page 28 of the Annual Report. Investment Portfolio The amortized cost and estimated fair values of each category of investment securities at December 31, 1996, and 1995 and the maturities of investment securities at December 31, 1996, are set forth in Note 5 of the Notes to Consolidated Financial Statements on pages 12 and 13 of the Annual Report. At December 31, 1996, investment securities from the following issuers each totaled over ten percent (10%) of shareholder's equity of the Company: Amortized Estimated Cost Fair value Available-for-sale securities: U.S. Treasury and Agencies $ 64,109,000 $ 64,081,000 Agency Mortgage-Backed Securities $ 45,470,000 $ 45,176,000 Loan and Lease Portfolio The composition of the loan and lease portfolio for the five years ended at December 31, 1996, is set forth in Management's Discussion and Analysis on page 32 of the Annual Report. Maturities and sensitivity to changes in interest rates in the loan and lease portfolio, including real estate-mortgage and consumer loans, as of December 31, 1996, are summarized in Management's Discussion and Analysis on page 33 of the Annual Report. The composition of nonaccrual, past due and restructured loans and leases for the five years ended December 31, 1996, and a discussion of the Company's policy for placing loans on nonaccrual status is set forth in Management's Discussion and Analysis on page 37 of the Annual Report. 5 Summary of Loan Loss Experience An analysis of loan loss experience for the five years ended December 31, 1996, and a description of the factors which influenced management's judgment in determining the amount of the additions to the allowance charged to operating expenses in each fiscal period, as well as a discussion of the risk elements in the loan portfolio, are set forth in Management's Discussion and Analysis on page 35of the Annual Report. Deposits The average amount of and the average rate paid on major deposit categories for the years ended December 31, 1996, 1995 and 1994 is set forth in Management's Discussion and Analysis on page 39 of the Annual Report. The maturity of time certificates of deposit of $100,000 or more and other time deposits of $100,000 or more at December 31, 1996, is set forth in Management's Discussion and Analysis on page 39 of the Annual Report. Financial Ratios Certain ratios of profitability, liquidity and capital for the years ended December 31, 1996, and 1995 are summarized in the Selected Financial Data on page 1 of the Annual Report. COMPETITION In California and in the Subsidiary Banks primary service areas, major banks dominate the commercial banking industry. Among the advantages which these banks have over the Subsidiary Banks are their ability to finance wide-ranging advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand. By virtue of their larger amounts of capital, such institutions have substantially greater lending limits than the Subsidiary Banks and perform certain functions, including trust services and international banking, which are not offered directly by the Subsidiary Banks but are offered indirectly through its correspondent institutions. First National's primary service area consists of Monterey County and Southern Santa Cruz County and encompasses the cities of Monterey, Carmel, Pacific Grove, Seaside, Marina, Sand City, Del Rey Oaks, Salinas, Prunedale, Watsonville and the unincorporated communities of Pebble Beach, Carmel Valley and North Monterey County. Based on data as of the most recent practicable date, June 30, 1996, there were 82 financial institutions with $3,878.6 million in deposits serving this area. First National's market share at June 30, 1996 was as follows(1): 6 First National Total Deposits Bank Deposits First National Bank Market Service Area (in thousands) (in thousands) Share - ------------------------------------------------------------------------------- Monterey $1,395,167 $123,007 8.8% Salinas 1,439,932 133,984 9.3% Carmel 432,021 32,640 7.5% Watsonville 611,458 55,255 9.0% - ------------------------------------------------------------------------------- Total $3,878,578 $344,886 8.9% =============================================================================== South Valley's primary service area is Southern Santa Clara County and San Benito County, which includes the cities of Morgan Hill, Gilroy, Hollister and San Juan Bautista. Based upon data as of the most recent practicable date, June 30, 1996, there were 27 financial institutions with $947.2 million in deposits serving this area. South Valley's market share at June 30, 1996 was as follows(1): South Valley South Valley Total Deposits Bank Deposits National Bank Service Area (in thousands) (in thousands) Market Share - ----------------------------------------------------------------------- Morgan Hill $308,311 $62,673 20.3% Gilroy 325,585 64,637 19.9% Hollister 299,633 20,905 7.0% San Juan Bautista 13,657 10,803 79.1% - ----------------------------------------------------------------------- Total $947,186 $159,018 16.8% ===================================== ================ ================ (1) Sheshunoff(TM)Information Services Branches of California and Hawaii, June 1996 Data. Other entities, both governmental and in private industry, seeking to raise capital through the issuance and sale of debt securities, as well as other depository institutions such as thrift and loan companies and credit unions, also provide competition for the Subsidiary Banks in the acquisition of deposits. The Subsidiary Banks also compete with money market funds and other money market instruments which are not subject to interest rate ceilings. From time to time, legislation is proposed or enacted which has the effect of increasing the cost of doing business, limiting permissible activities or affecting the competitive balance between banks and other financial institutions. It is impossible to predict the competitive impact these and other changes in legislation will have on commercial banking in general or on the business of the Subsidiary Banks in particular. 7 SUPERVISION AND REGULATION The Effect of Governmental Policy on Banking The earnings and growth of the Company and the Subsidiary Banks are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System (the "FRB") influences the supply of money through its open market operations in U.S. Government securities, and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also effect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company and the Subsidiary Banks cannot be predicted. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities, or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. Regulation and Supervision of Bank Holding Companies The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and may be examined by the FRB. The FRB also has the authority to examine the Company's subsidiaries. The FRB requires the Company to maintain certain levels of capital. See "Capital Standards" herein. The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations, or conditions imposed in writing by the FRB. Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company. Any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the FRB's approval. The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. A bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. 8 Legislation was recently introduced in Congress that would repeal the current statutory restrictions on affiliations between commercial banks and securities firms. Under the proposed legislation, bank holding companies would be allowed to control both a commercial bank and a securities affiliate, which could engage in the full range of investment banking activities, including corporate underwriting. The likelihood of such legislative changes and the impact of such changes might have on the Company and the Subsidiary Banks are imposible to predict. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Transactions between the Company and the Subsidiary Banks and any future subsidiaries are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Additionally, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services. Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with all affiliates may not exceed 20% of the capital stock and surplus of such institution. The Company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary. Bank Regulation and Supervision As national banks, the Subsidiary Banks are regulated, supervised and regularly examined by the OCC. Deposit accounts at the Subsidiary Banks are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, to the maximum amount permitted by law. The Subsidiary Banks are also subject to applicable provisions of California law, insofar as such provisions are not in conflict with or preempted by federal banking law. Capital Standards The OCC and other federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are reported as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off 9 balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets and off balance sheet items. The federal banking agencies measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet items of 4%. In addition to the risk-based guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating since a strong capital position is a significant part of the rating. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following tables present the capital ratios for the Company and the Subsidiary Banks as of December 31, 1996.
The Company South Valley First National Amount Ratio Amount Ratio Amount Ratio - ------------------------------- -------------- --------------- --------------- -------------- --------------- --------------- (000's) (000's) (000's) Risk-Based Capital Ratio: Tier 1 Capital $63,469 13.91% $16,096 11.63% $42,034 13.40% Minimum Requirement 18,254 4.00% 5,534 4.00% 12,546 4.00% Excess 45,215 9.91% 10,562 7.63% 29,488 9.40% ====== ===== ====== ===== ====== ===== Total Capital 67,141 14.71% 17,409 12.58% 44,258 14.11% Minimum Requirement 36,508 8.00% 11,060 8.00% 25,092 8.00% Excess 30,633 6.71% 6,340 4.58% 19,166 6.11% ====== ===== ===== ===== ====== ===== Risk-Adjusted Assets $456,356 $138,362 $313,644 10 The Company South Valley First National Amount Ratio Amount Ratio Amount Ratio - ------------------------------ --------------- -------------- --------------- --------------- --------------- --------------- (000's) (000's) (000's) Leverage Ratio: Tier 1 Capital $63,469 10.55% $16,096 8.61% $42,034 10.29% Minimum Requirement 24,060 4.00% 7,481 4.00% 16,340 4.00% Excess 39,409 6.55% 8,615 4.61% 25,694 6.29% ====== ===== ===== ===== ====== ===== Average Quarterly Assets $601,496 $187,024 $408,502
Restrictions on Dividends and Other Distributions The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. Federal law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. The payment of dividends by a national bank is further restricted by additional provisions of federal law, which prohibits a national bank from declaring a dividend on its shares of common stock unless its surplus fund exceeds the amount of its common capital (total outstanding common shares times the par value per share). Additionally, if losses have at any time been sustained equal to or exceeding a bank's undivided profits then on hand, no dividend can be paid. Moreover, even if a bank's surplus exceeds its common capital and its undivided profits exceed its losses, the approval of the OCC is required for the payment of dividends if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. A national bank must consider other business factors in determining the payment of dividends. The payment of dividends by the Bank is governed by the Bank's ability to maintain minimum required capital levels and an adequate allowance for loan losses. The federal banking agencies also have the authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payments of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statue. The Company has paid a stock dividend every year since 1986 and cash dividends were paid in 1993, 1994, 1995 and 1996. 11 Premiums for Deposit Insurance and Assessments for Examinations As an insured depository institution, the Company is required to pay premiums for FDIC deposit insurance. The FDIC has adopted a risk-based assessment system for deposit insurance premiums. Under this system, depository institutions were charged anywhere from 23 cents to 31 cents for every $100 in insured deposits based on that institution's capital levels and supervisory subgroup assignment. In May 1995, the BIF achieved its target goal of bringing the ratio of insurance fund reserves to $1.25 for each $100 of insured deposits. Based on this reserve level, the FDIC in September 1995, reduced the range of insurance assessments to a range of $0.04 to $0.31 per $100 in insured deposits. In November 1995, the FDIC further reduced the range of insurance assessment rates from $0.04 to $0.31 to $0 to $0.31 per $100 in insured deposits. Due to these changes in assessment rates, the Company's FDIC assessment expense decreased for 1995 by $316,000 or 94.6%. During 1996, a special one-time assessment was paid by BIF-insured financial institutions to the FDIC for the purpose of assisting in the recapitalization of the Savings Association Insurance Fund (the "SAIF") The SAIF is the insurance fund reserve for savings institutions. In November 1996, the Subsidiary Banks paid $71,000 for this special assessment. Interstate Banking and Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Act"), which was enacted in 1994, codifies the authority of banks to provide specified interstate banking services on an agency basis to customers of affiliate banks as of September 1995. Also, under the act, as of September 1995, bank holding companies may acquire banks in other states, subject to certain deposit concentration limitations. Beginning June 1, 1997, and subject to certain deposit concentration and other limitations, banks may merge with other banks in states that do not "opt out" of the interstate legislation prior to June 1, 1997. Interstate mergers may be conducted prior to June 1, 1997 in states that specifically permit such mergers. In addition, prior to June 1, 1997, certain consolidations are possible using the "30-mile rule," which allows national banks to relocate their headquarters up to 30 miles away, including across state lines. Currently, several states have already "opted in" to the interstate legislation. Effective October 2, 1995, California opted in early to interstate branching by permitting other state's banks to acquire an entire California bank by merger or purchase and thereby establish one or more California branch offices, provided the acquired bank has been in existence at lease five years. Accounting Pronouncements Accounting Pronouncements - During 1996, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under this approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This statement is effective for years ending after December 31, 12 1996. The Company does not believe this statement will have any significant impact on its consolidated financial statements. ITEM 2 PROPERTIES On December 31, 1996, the Company had 10 offices, of which 4 were owned and 6 were leased by the Company or its Subsidiary Bank's. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See page 23 of the Annual Report incorporated herein by reference for further information on leases. ITEM 3 LEGAL PROCEEDINGS Neither the Company nor its Subsidiary Banks is a party to, nor is any of their property the subject of, any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of shareholders of the Company was held on October 22, 1996. The shareholders approved the Agreement and Plan of Reorganization dated July 18,1996, between the Company and SVB providing for the merger of SVB with and into the Company. There were 1,599,455 votes cast for approval, 2,818 votes against or withheld and 38,655 abstentions. There were no broker non-votes. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS For information concerning the Company's common stock and related security holder matters, see "Pacific Capital Bancorp Stock Activity" at Page 45 of the Annual Report, which is incorporated herein by reference. For information regarding dividends, see "Restrictions on Dividends and other Distributions" under Part I, Item 1 of this Form 10-K on page 13 As of September 10, 1996, there were 2,063 holders of record of the Company's Common Stock. ITEM 6 SELECTED FINANCIAL DATA For selected financial data concerning the Company, see "Selected Financial Information and Comparative Per Share Data" at Page 1 of the Annual Report, which is incorporated herein by reference. 13 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For management's discussion and analysis of financial condition and results of operations, see "Management's Discussion and Analysis" at Pages 22 through 45 of the Annual Report, which pages of the Annual Report are incorporated herein by reference. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For financial statements of the Company, see Pages 2 through 26 of the Annual Report and the "Independent Auditors" Report thereon at Page 49 which pages of the Annual Report are incorporated herein by reference. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information Concerning Directors and Executive Officers For information concerning directors and executive officers of the Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy Statement for the Company's 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein by reference. Compliance With Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and any persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the best knowledge of the Company, there are no persons who own more than ten-percent of the Company's Common Stock. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes 14 that, for the fiscal year ended December 31, 1996, all filing requirements applicable to its officers and directors have been satisfied. ITEM 11 EXECUTIVE COMPENSATION For information concerning executive compensation, see "EXECUTIVE COMPENSATION" in the Proxy Statement, which is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning security ownership of certain beneficial owners and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS OF THE COMPANY" in the Proxy Statement, which is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "INDEBTEDNESS OF MANAGEMENT" in the Proxy Statement, which is incorporated herein by reference. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The consolidated financial statements of Pacific Capital Bancorp and subsidiaries, other financial information and the Independent Auditors' Report on Consolidated Financial Statements appearing at the indicated location in the Annual Report are incorporated by reference into this report. 2. Financial Statement Schedules. In accordance with Regulation S-X, the financial statement schedules have been omitted because (a) they are not applicable to or required of the Company; or (b) the information required is included in the consolidated financial statements or notes thereto. With the exception of such information in the 1996 Annual Report incorporated herein by reference, the 1996 Annual Report is not deemed "filed" as part of this report. 15 3. Exhibits. See Index to Exhibits at pages 69 - 73 of this Form 10-K. (b) Reports on Form 8-K. A report on Form 8-K dated July 24, 1996, was filed with the Commission on July 24, 1996, reporting under Item 5 -- Other Events. The Company's stock repurchase program was amended to increase the price per share at which the Company may repurchase shares of the Company's outstanding common stock at prices ranging from $25.00 per share to $28.00 per share. A report on Form 8-K dated December 3, 1996, was filed with on December 3, 1996, reporting under Item 2 the Company's acquisition by merger of SVB and its subsidiary, South Valley, which is more fully discussed under Item 1 of this Form 10-K. A report on Form 8-K/A dated January 21, 1997 was filed on January 21, 1997 amending the Form 8-K filed on December 3, 1996 to furnish the information under Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. 16 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Consolidated Financial Statements December 31, 1996, 1995, and 1994 (With Independent Auditors' Report Thereon) 17 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES SELECTED FINANCIAL INFORMATION AND COMPARATIVE PER SHARE DATA - ------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS: Interest income $ 43,958 $ 38,678 $ 33,030 $ 29,346 $ 30,943 Interest expense 13,319 10,971 8,074 7,763 10,609 - ------------------------------------------------------------------------------------------------------------------------- Net interest income 30,639 27,707 24,956 21,583 20,334 Provision for possible loan losses 685 527 479 1,278 1,265 - ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 29,954 27,180 24,477 20,305 19,069 Other income 3,206 3,056 2,888 2,911 2,913 Other expense 22,727 19,352 17,345 16,445 15,935 Net (loss) gain on Securities Transactions (46) (73) (17) 120 3 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 10,387 10,811 10,003 6,891 6,050 Income taxes 4,348 4,200 3,778 2,426 2,088 - ------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 6,039 6,611 6,225 4,465 3,962 Cumulative effect of accounting change -- -- -- 549 -- - ------------------------------------------------------------------------------------------------------------------------- Net income $ 6,039 $ 6,611 $ 6,225 $ 5,014 $ 3,962 - ------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Income before cumulative effect of accounting change $ 1.42 $ 1.58 $ 1.51 $ 1.08 $ 0.96 Net income 1.42 1.58 1.51 1.22 0.96 Cash dividends .60 .53 .40 .30 -- Book value 15.59 15.54 14.60 13.83 13.57 BALANCES AT YEAR END Total assets 619,439 530,852 487,749 436,958 433,656 Total loans 388,728 300,895 290,352 265,903 265,647 Total deposits 547,182 465,508 427,870 382,475 382,094 Total shareholders' equity 63,646 60,533 55,002 50,039 46,068 AVERAGE DAILY BALANCES Total assets 568,686 496,007 459,695 433,558 414,928 Total loans 332,421 290,265 277,263 259,131 272,368 Total deposits 501,833 431,975 404,047 382,183 365,932 Total shareholders' equity 63,106 58,183 52,719 48,205 44,274 PERFORMANCE AND CAPITAL RATIOS Return on average assets 1.06% 1.33% 1.35% 1.16% 0.95% Return on average shareholders' equity 9.57% 11.36% 11.81% 10.40% 8.95% Average shareholders' equity to average assets 11.10% 11.73% 11.47% 11.12% 10.67% - -------------------------------------------------------------------------------------------------------------------------
18 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, - --------------------------------------------------------------------------------------------------- (In thousands, except share amounts) 1996 1995 - --------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 48,126 $ 34,327 Federal funds sold 14,910 38,226 Money market funds 13,209 6,681 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents 76,245 79,234 Investment securities: Held-to-maturity, at amortized cost (fair value of $9,741 and $15,875, respectively) 9,680 15,685 Available-for-sale, at fair value 116,528 110,143 - --------------------------------------------------------------------------------------------------- Total investment securities 126,208 125,828 Loans available for sale 5,821 3,876 Loans, net of unearned income 388,728 300,895 Less allowance for possible loan losses 3,672 3,710 - --------------------------------------------------------------------------------------------------- Net loans 385,056 297,185 Premises and equipment, net 15,300 13,507 Accrued interest receivable and other assets 10,809 11,222 - --------------------------------------------------------------------------------------------------- Total assets $ 619,439 $ 530,852 =================================================================================================== Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $ 131,332 $ 115,861 Demand, interest bearing 84,770 76,770 Savings and money market 164,890 151,337 Time certificates 166,190 121,540 - --------------------------------------------------------------------------------------------------- Total deposits 547,182 465,508 Accrued interest payable and other liabilities 8,611 4,811 - --------------------------------------------------------------------------------------------------- Total liabilities 555,793 470,319 - --------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock; no par value, 20,000,000 shares authorized and unissued Common stock; no par value, 20,000,000 shares authorized: 4,083,363 and 3,783,960 shares issued and outstanding in 1996 and 1995, respectively 49,388 42,566 Retained earnings 14,423 17,601 Net unrealized (loss) gain on available-for-sale securities (165) 366 - --------------------------------------------------------------------------------------------------- Total shareholders' equity 63,646 60,533 Commitments and contingencies - --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 619,439 $ 530,852 =================================================================================================== See accompanying notes to consolidated financial statements.
19 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, - ----------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 33,845 $ 30,490 $ 26,430 Interest on federal funds sold 1,806 1,870 1,182 Interest on investment securities: Taxable 7,557 5,415 4,461 Non-taxable 750 903 957 - ----------------------------------------------------------------------------------------------------- Total interest income 43,958 38,678 33,030 - ----------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 13,292 10,922 7,985 Other interest expense 27 49 89 - ----------------------------------------------------------------------------------------------------- Total interest expense 13,319 10,971 8,074 - ----------------------------------------------------------------------------------------------------- Net interest income 30,639 27,707 24,956 Provision for possible loan losses 685 527 479 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 29,954 27,180 24,477 - ----------------------------------------------------------------------------------------------------- Other income: Service charges 2,432 2,399 2,163 Gain on sale of loans 27 91 160 Net losses on securities transactions (46) (73) (17) Other 747 566 565 - ----------------------------------------------------------------------------------------------------- Total other income 3,160 2,983 2,871 - ----------------------------------------------------------------------------------------------------- Other expenses: Salaries and benefits 11,864 9,989 8,730 Occupancy 2,111 1,959 1,779 Equipment 2,577 1,943 1,476 Advertising and promotion 710 659 679 Stationery and supplies 563 508 456 Legal and professional fees 1,946 823 828 Regulatory assessments 147 572 1,043 Other 2,809 2,899 2,354 - ----------------------------------------------------------------------------------------------------- Total other expenses 22,727 19,352 17,345 - ----------------------------------------------------------------------------------------------------- Income before income taxes 10,387 10,811 10,003 Income taxes 4,348 4,200 3,778 - ----------------------------------------------------------------------------------------------------- Net income $ 6,039 $ 6,611 $ 6,225 ===================================================================================================== Earnings per share $ 1.42 $ 1.58 $ 1.51 ===================================================================================================== See accompanying notes to consolidated financial statements
20 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 1996, 1995, and 1994 - ------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on Total Common Common Retained Guaranteed available-for- shareholders' (In thousands, except share amounts) shares amount earnings ESOP note sale securities equity - ------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1993, as previously reported 2,327,167 $ 25,802 $ 9,638 $ (212) $ 204 $ 50,039 Adjustment to reflect pooling-of- interests 1,291,185 $ 13,126 $ 1,481 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1993, restated 3,618,352 38,928 11,119 (212) 204 50,039 Net income for the year ended December 31, 1994 -- -- 6,225 -- -- 6,225 Purchase and retirement of shares (42,772) (717) -- -- -- (717) Exercise of stock options (net of 5,284 shares retired in connection with cashless 75,071 806 -- -- -- 806 exercises) 5% stock dividend, including payment of fractional shares 117,051 2,165 (2,181) -- -- (16) Cash dividend declared -- -- (1,137) -- -- (1,137) Repayment of ESOP note -- -- -- 212 -- 212 Recognition of net unrealized loss on available-for-sale securities -- -- -- -- (410) (410) - ------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1994 3,767,702 41,182 14,026 -- (206) 55,002 Net income for the year ended December 31, 1995 -- -- 6,611 -- -- 6,611 Purchase and retirement of shares (5,606) (111) -- -- -- (111) Exercise of stock options 5% stock dividend, including 9,590 158 -- -- -- 158 payment of fractional shares 123,338 3,132 (3,147) -- -- (15) Cash dividends declared -- -- (1,684) -- -- (1,684) Recognition of net unrealized gain on available-for-sale securities -- -- -- -- 572 572 - ------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1995 3,895,024 44,361 15,806 -- 366 60,533 Net income for the year ended December 31, 1996 -- -- 6,039 -- -- 6,039 Purchase and retirement of shares (23,646) (605) -- -- -- (605) Exercise of stock options 17,981 295 -- -- -- 295 5% stock dividend, including payment of fractional shares 194,455 5,348 (5,372) -- -- (24) Cash dividends declared -- -- (2,050) -- -- (2,050) Repurchase of dissenter shares (451) (11) -- -- -- (11) Recognition of net unrealized loss on available-for-sale securities -- -- -- -- (531) (531) - ------------------------------------------------------------------------------------------------------------------------ Balances, December 31, 1996 4,083,363 $ 49,388 $ 14,423 $ -- $ (165) $ 63,646 ======================================================================================================================== See accompanying notes to consolidated financial statements
21 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, - ------------------------------------------------------------------------------------------------------------------ (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 6,039 $ 6,611 $ 6,225 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,074 1,260 1,046 Provision for possible loan losses 685 527 479 Loss on sale of investment securities, net 46 73 17 Net originations of loans available for sale (1,945) (2,891) (3,355) Proceeds from sale of loans -- 924 3,932 Gain on sale of loans (27) (91) (160) Deferral of loan origination fees (64) 40 (95) Change in accrued interest receivable and other assets (118) (837) (1,613) Change in accrued interest payable and other liabilities 3,813 93 470 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 9,503 5,709 6,946 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net change in loans (88,492) (10,739) (25,011) Maturities of investment securities 20,445 40,818 25,585 Purchases of investment securities (82,606) (95,070) (41,735) Proceeds from sale of available-for-sale securities 61,735 42,089 13,494 Capital expenditures, net (2,867) (1,536) (3,173) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (91,785) (24,438) (30,840) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 81,674 21,471 45,395 Cash received in connection with branch acquisition -- 16,167 -- Cash paid for retirement of stock (605) (111) (717) Proceeds from exercise of stock options 295 158 806 Cash paid in lieu of fractional shares (21) (15) (16) Cash paid for dividends (2,050) (1,684) (1,137) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 79,293 35,986 44,331 - ------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (2,989) 17,257 20,437 Cash and cash equivalents at beginning of year 79,234 61,977 41,540 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 76,245 $ 79,234 $ 61,977 ================================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the period: Interest $ 14,379 $ 11,827 $ 8,226 Income taxes 4,834 4,107 3,633 Release of guarantee of ESOP note -- -- 212 ================================================================================================================== Noncash investing and financing activities: Transfer from retained earnings to common stock due to stock dividends $ 5,348 $ 3,132 $ 2,165 Transfer of securities from held-to-maturity to available-for-sale -- 38,660 -- Transfer from loans to other real estate owned 352 1,940 1,577 ================================================================================================================== See accompanying notes to consolidated financial statements
22 7 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995, and 1994 (1) Summary of Significant Accounting Policies The accounting policies of Pacific Capital Bancorp (the Company) and subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The Company - Pacific Capital Bancorp is a California corporation and a multi-bank holding company which was incorporated on January 26, 1983. The Company's subsidiaries, First National Bank of Central California (First National), and South Valley National Bank (South Valley), commenced operations in 1984 and 1983, respectively. First National is a full service commercial bank serving Monterey, Salinas, Carmel, Watsonville, Prunedale and surrounding areas in Monterey and Santa Cruz Counties. South Valley is a full service commercial bank serving Morgan Hill, Gilroy, Hollister, San Juan Bautista and surrounding areas in Santa Clara and San Benito Counties. Consolidation - The accompanying consolidated financial statements include the effect of the fourth quarter 1996 acquisition of South Valley Bancorporation which was accounted for as a pooling-of-interests. These financial statements include the accounts of Pacific Capital Bancorp and its subsidiaries, First National Bank of Central California and South Valley National Bank. Accordingly, the financial information included in the consolidated financial statements and notes thereto, present the combined results of operations of Pacific Capital Bancorp and South Valley Bancorporation as if the merger had been in effect for all periods presented. All significant intercompany balances and transactions have been eliminated. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents as reported in the consolidated statements of cash flows includes cash on hand, cash balances due from banks, federal funds sold, and money market mutual funds. The cash equivalents are readily convertible to known cash within 90 days. 23 8 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Investment Securities - The Company has classified its securities for which it has the positive intent and ability to hold to maturity as held-to-maturity securities. Such securities are reported at amortized cost. The Company has classified certain securities for which it does not have the intent to hold to maturity and which are not held principally for the purpose of selling them in the near term as available-for-sale securities. Such securities are reported at fair value, with unrealized gains and losses, net of income taxes, reported in a separate component of shareholders' equity. The Company does not engage in trading activities. Amortization of premiums and accretion of discounts arising at acquisition of investment securities are included in income using methods that approximate the level yield method. Gains or losses on the sale of securities are determined based on the specific identification method. In November 1995, the Financial Accounting Standards Board (FASB) issued a special report, A Guide to Implementation of Statement No. 115, on Accounting for Certain Investments in Debt and Equity Securities Questions and Answers, (the Special Report). The Special Report allowed companies to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassifications at fair value. Reclassifications from this one-time reassessment will not call into question the intent of an enterprise to hold other debt securities to maturity in the future, provided that reclassification was performed by December 31, 1995. The Company adopted the reclassification provision in the Special Report during 1995 and transferred $38,660,000 of held-to-maturity securities into available-for-sale. Loans - Loans are stated at the principal amount outstanding. Interest on loans is credited to income on a simple interest basis. Loan origination fees and direct origination costs are deferred and amortized to income by a method approximating the level yield interest method over the estimated lives of the underlying loans. Loans contractually past due over 90 days or considered impaired are placed on nonaccrual status, unless they are well-secured by underlying collateral and are in the process of collection. When a loan is placed on nonaccrual status, the accrued interest is reversed against interest income and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status. Generally, a loan will be returned to accrual status when all delinquent principal and interest become current in accordance with the terms of the loan agreement and full collection of the principal appears probable. 24 9 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements The allowance for possible loan losses is a valuation allowance that is maintained at a level estimated to be adequate to provide for future loan losses through charges to current operating expense. The allowance is based upon a continuing review of loans by management which includes consideration of changes in the character of the loan portfolio, current and anticipated economic conditions, past lending experience, loan loss experience, and such other factors which, in management's judgment, deserve recognition in estimating potential loan losses. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for possible loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. Loans Available for Sale - The Subsidiary Banks originate loans that are guaranteed in part by the Small Business Administration. The guaranteed portion of such loans may be sold without recourse. The Subsidiary Banks retain the servicing and credit risk in the remaining unguaranteed portion. Loans available for sale are valued at lower of cost or estimated market value and are comprised of the portion of loans originated for sale, which are guaranteed by the Small Business Administration. When participating interests in loans are sold without recourse, gains are recognized at the time of the sale which are equal to the premium received less estimated future loan servicing costs and profits. Any discounts related to loan interests retained are amortized using methods that approximate the level yield interest method over the remaining life of the loan. Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are charged to expense over the estimated useful lives of the assets or the lease term on a straight-line basis as follows: - -------------------------------------------------------------------------------- Buildings 40 years Furniture and equipment 2-5 years Leasehold improvements 5 years Property under capital lease 5 years - -------------------------------------------------------------------------------- Other Real Estate Owned - Real estate and other assets acquired in satisfaction of indebtedness are recorded at the lower of the recorded loan amount or the estimated fair market value net of anticipated selling costs, and any difference between this and the loan amount is treated as a loan loss. Costs of maintaining other real estate owned, subsequent declines in fair value, if any, and gains or losses on sale are reflected in current earnings. 25 10 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established to reduce that deferred tax asset if it is more likely than not that the related tax benefits will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Income Per Share - Net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year (taking into account the shares issued in connection with the acquisition of South Valley as if these shares were issued for all periods presented) plus shares issuable assuming exercise of all employee stock options, except where antidilutive. The weighted average shares outstanding were 4,239,617, 4,192,297, and 4,113,474 in 1996, 1995, and 1994, respectively. Weighted average shares outstanding and all per share amounts included in the accompanying consolidated financial statements and notes thereto have given effect to all stock dividends. Dividends - In 1996 the Company paid four cash dividends of $0.15 per share to holders of record on March 15, June 28, September 16, and November 1, payable on March 29, June 28, September 30, and December 9, 1996, respectively. The Company also paid a five percent (5%) stock dividend payable to shareholders of record as of December 1, 1996. Reclassifications - Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. Accounting Pronouncements - During 1996, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under this approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial 26 11 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements assets it no longer controls and liabilities that have been extinguished. This statement is effective for years ending after December 31, 1996. The Company does not believe this statement will have any significant impact on its consolidated financial statements. (2) Merger On November 20, 1996, the Company acquired South Valley Bancorporation (SVB) and its banking subsidiary, South Valley National Bank, headquartered in Morgan Hill, California. Each share of SVB common stock outstanding on November 20, 1996, was converted into 0.92 shares of the Company's common stock. The Company issued approximately 1,291,000 shares of common stock and cash in lieu of fractional shares for all of the outstanding shares of SVB. The consolidated financial statements of the Company give effect to the merger, which has been accounted for as a pooling-of-interests. Accordingly, the accounts of SVB have been combined with those of the Company for all periods presented. A reconciliation of previously reported net interest income and net income follows: - ------------------------------------------------------------------------------- (In thousands) Nine months ended Years ended December 31, September 30, 1996 ----------------------------------- Net interest income (Unaudited) 1995 1994 - ------------------------------------------------------------------------------ SVB $7,786 $8,891 $7,985 PABN 14,664 18,816 16,971 - ------------------------------------------------------------------------------ Combined $22,450 $27,707 $24,956 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------- (In thousands) Nine months ended Years ended December 31, September 30, 1996 ----------------------------------- Net income (Unaudited) 1995 1994 - ------------------------------------------------------------------------------ SVB $1,460 $1,577 $1,886 PABN 4,112 5,034 4,339 - ------------------------------------------------------------------------------ Combined $5,572 $6,611 $6,225 - ------------------------------------------------------------------------------ (3) Cash and Due from Banks Cash and due from banks includes approximately $5,659,000 and $5,827,000 as of December 31, 1996 and 1995, respectively, held by the Federal Reserve Bank of San Francisco to meet required reserve balances. 27 12 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Quarterly Income Statement The following tables depict the Consolidated Statements of Income for 1996 and 1995 by quarter:
(Unaudited) 1996 - --------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - --------------------------------------------------------------------------------------------------------------------- Interest income $11,843 $11,201 $10,626 $10,288 Interest expense 3,654 3,406 3,158 3,101 - --------------------------------------------------------------------------------------------------------------------- Net interest income 8,189 7,795 7,468 7,187 Provision for loan loss 500 6 74 105 - --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,689 7,789 7,394 7,082 Other income 781 780 817 782 Other expense 7,270 5,584 4,962 4,911 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 1,200 2,985 3,249 2,953 Income taxes 733 1,207 1,256 1,152 - --------------------------------------------------------------------------------------------------------------------- Net income $ 467 $ 1,778 $ 1,993 $ 1,801 ===================================================================================================================== Net income per share $ 0.11 $ 0.41 $ 0.47 $ 0.43 ===================================================================================================================== (Unaudited) 1995 - --------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - --------------------------------------------------------------------------------------------------------------------- Interest income $10,219 $9,839 $9,487 $9,133 Interest expense 2,966 2,970 2,657 2,378 - --------------------------------------------------------------------------------------------------------------------- Net interest income 7,253 6,869 6,830 6,755 Provision for loan loss 287 90 90 60 - --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,966 6,779 6,740 6,695 Other income 684 719 936 644 Other expense 5,053 4,784 4,855 4,660 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 2,597 2,714 2,821 2,679 Income taxes 1,025 1,070 1,088 1,017 - --------------------------------------------------------------------------------------------------------------------- Net income $ 1,572 $ 1,644 $ 1,733 $ 1,662 ===================================================================================================================== Net income per share $ 0.37 $ 0.39 $ 0.42 $ 0.40 =====================================================================================================================
28 13 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investment Securities The amortized cost and estimated fair values of investment securities as of December 31 are as follows:
- --------------------------------------------------------------------------------------------------------------------- Estimated Amortized Unrealized Unrealized fair (In thousands) cost gain loss value - --------------------------------------------------------------------------------------------------------------------- 1996 - --------------------------------------------------------------------------------------------------------------------- Available-for-sale securities: U.S. Treasury and agency $64,109 $159 $187 $64,081 State and municipal 7,233 59 21 7,271 Mortgage-backed securities 45,470 9 303 45,176 - --------------------------------------------------------------------------------------------------------------------- $116,812 $227 $511 $116,528 ===================================================================================================================== Held-to-maturity securities: State and municipal $6,449 $55 $42 $6,462 Mortgage-backed securities and other 3,231 59 11 3,279 - --------------------------------------------------------------------------------------------------------------------- $9,680 $114 $53 $9,741 - --------------------------------------------------------------------------------------------------------------------- 1995 - --------------------------------------------------------------------------------------------------------------------- Available-for-sale securities: U.S. Treasury and agencies $94,820 $708 $143 $95,385 State and municipal 4,074 45 9 4,110 Mortgage-backed securities and other 10,653 3 8 10,648 - --------------------------------------------------------------------------------------------------------------------- $109,547 $756 $160 $110,143 ===================================================================================================================== Held-to-maturity securities: State and municipal $12,133 $128 $20 $12,241 Mortgage-backed securities and other 3,552 87 5 3,634 - --------------------------------------------------------------------------------------------------------------------- $15,685 $215 $25 $15,875 =====================================================================================================================
The amortized cost and estimated fair values of investment securities as of December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 29 14 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
Available-for-sale Held-to-maturity securities securities ---------- Estimated ---------- Estimated Amortized fair Amortized fair (In thousands) cost value cost value - --------------------------------------------------------------------------------------------------------------------- Due within one year $7,574 $7,592 $1,933 $1,940 Due after one through five years 60,983 60,974 3,987 4,019 Due after five through ten years 3,021 3,021 865 886 Due after ten years 45,234 44,941 1,735 1,736 - --------------------------------------------------------------------------------------------------------------------- 116,812 116,528 8,520 8,581 Freddie Mac Stock - - 500 500 Federal Reserve Bank Stock - - 660 660 ===================================================================================================================== $116,812 $116,528 $9,680 $9,741 =====================================================================================================================
As of December 31, 1996 and 1995, securities with carrying values of approximately $26,638,000 and $29,264,000, respectively, were pledged as collateral for such items as deposits of public funds, Federal Reserve Bank borrowings, bankruptcy court accounts, and U.S. Treasury, tax, and loan deposits. Included in U.S. Agency securities are certain structured notes which are more commonly known as step-up bonds. These bonds, which carry certain call features and potential coupon rate increases, had an estimated fair value of $1,459,000 and an amortized cost of $1,500,000 as of December 31, 1996. 30 15 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Loans A summary of loans as of December 31 is as follows: - ------------------------------------------------------------------------------- (In thousands) 1996 1995 - ------------------------------------------------------------------------------- Commercial $113,428 $82,583 Consumer 22,509 25,604 Real estate - mortgage 195,417 154,572 Real estate - construction 38,014 32,409 Other 20,349 6,501 - ------------------------------------------------------------------------------- 389,717 301,669 Less deferred loan fees 989 774 - ------------------------------------------------------------------------------- $388,728 $300,895 =============================================================================== The following is an analysis of the allowance for possible loan losses for the years ended December 31: - ----------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- Balance, beginning of year $3,710 $3,769 $3,753 Provision charged to expense 685 527 479 Loans charged off (1,070) (850) (665) Recoveries on loans previously charged off 347 264 202 - ----------------------------------------------------------------------------- Balance, end of year $3,672 $3,710 $3,769 ============================================================================= Loans for which interest is no longer being accrued totaled $1,564,000, $2,481,000, and $3,283,000 as of December 31, 1996, 1995, and 1994, respectively. Interest that would have been recognized on nonaccrual loans was $149,000, $379,000, and $364,000 during 1996, 1995, and 1994, respectively. The recorded investment in impaired loans was $1,564,000 and $2,481,000 at December 31, 1996 and 1995, respectively. The average balance of impaired loans during 1996 and 1995 was $2,126,000 and $1,510,000. The Company did not recognize any interest income on impaired loans during the year ended December 31, 1996. 31 16 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements The Subsidiary Banks operate in a geographic region comprising Monterey, San Benito, Santa Clara, and Santa Cruz Counties. The Bank's credit risk is therefore dependent in part to the economic condition of this region. Loans are made on the basis of a secure repayment source, namely the cash flows generated by the borrowing entity, collateral is generally a secondary source for loan qualification. It is the Bank's policy to maintain the loan to value ratio on secured loans below 75%. Management believes this practice tends to mitigate risks caused by the local economy. The Subsidiary Banks make loans to executive officers, directors, and their affiliates in the ordinary course of business. Following is an analysis of activity with respect to such loans for the years ended December 31, 1996, and 1995: - -------------------------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------------------------- Balance, beginning of year $5,002 $6,920 New loan funded 4,394 4,699 Repayments of loans (2,923) 6,617 - -------------------------------------------------------------------------------- Balance, end of year $5,711 $5,002 ================================================================================ (7) Premises and Equipment Premises and equipment as of December 31 are summarized as follows: - -------------------------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------------------------- Land $2,752 $2,752 Buildings 9,867 8,641 Furniture and equipment 8,929 7,966 Leasehold improvements 1,421 1,319 - -------------------------------------------------------------------------------- 22,969 20,678 Less accumulated depreciation and amortization 7,669 7,171 - -------------------------------------------------------------------------------- Premises and equipment, net $15,300 $13,507 ================================================================================ (8) Time Deposits As of December 31, 1996 and 1995, the Company had liabilities of $80,952,000 and $57,285,000, respectively, for time deposits in denominations of $100,000 or more. Interest expense for these deposits was $4,036,000 and $2,819,000 in 1996 and 1995, respectively. 32 17 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Income Taxes Components of income tax expense for the years ended December 31, 1996, 1995, and 1994 are as follows: - -------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $3,696 $3,053 $2,756 State 1,457 1,240 1,139 - -------------------------------------------------------------------------------- 5,153 4,293 3,895 - -------------------------------------------------------------------------------- Deferred: Federal (649) (66) (111) State (156) (27) (6) - -------------------------------------------------------------------------------- (805) (93) (117) ================================================================================ Total $4,348 $4,200 $3,778 ================================================================================ The temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant components of the deferred tax asset and liability amounts relate to the following as of December 31:
- ------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Book provision for loan losses in excess of tax provision $1,195 $1,190 Book depreciation in excess of tax 277 329 State franchise taxes 227 255 Accrued interest on nonaccrual loans recognized for tax 179 116 Expenses accrued for books not currently deductible 357 108 Unrealized loss on securities available-for-sale 118 - Loan fees and other, net 859 323 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 3,212 2,321 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Difference in recognition of organization costs and other (25) (109) Unrealized gain on available-for-sale securities - (230) - ------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities (25) (339) =================================================================================================================== Net deferred tax asset $3,187 $1,982 ===================================================================================================================
33 18 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements The net deferred tax asset represents recoverable taxes and is included in other assets in the accompanying consolidated balance sheets. The Company believes that the net deferred tax asset is realizable through sufficient taxable income within the carryback period and the current year taxable income. Actual income tax expense differs from the "expected" tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to earnings before income taxes) for the years ended December 31, as follows: - -------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Computed "expected" tax expense $3,531 $3,702 $3,402 Increase (reduction) in income taxes resulting from: Tax exempt income (368) (335) (354) Franchise taxes, net of federal income tax benefit 858 802 713 Merger and acquisition costs 325 - - Other, net 2 30 18 ================================================================================ $4,348 $4,200 $3,778 ================================================================================ (10) Benefit Plans Stock Option Plans - The Company has a stock option plan (the 1984 Stock Option Plan) under which incentive stock options or nonqualified stock options were granted to certain key employees or directors to purchase an aggregate of 60,241 shares of authorized, but unissued, common stock of the Company. Unexercised options were granted and outstanding as of December 31, 1996, for an aggregate of 60,241 shares. Options have been granted at an exercise price not less than the fair market value of such stock at the date of grant. All stock options become exercisable at the rate determined by the Company's Board of Directors and expire no later than 10 years after the date of grant. The Company's 1994 Stock Option Plan (the 1994 Plan) which was a successor to the 1984 Plan, provides for incentive stock options or nonqualified stock options for key employees or directors to purchase an aggregate of 554,154 shares of authorized, but unissued, common stock of the Company. Unexercised options were granted and outstanding as of December 31, 1996, for an aggregate of 228,199 shares with an exercise price equal to the fair market value of the Company's common stock at the date of grant. The 1994 Plan provides that options granted thereunder begin to vest 6 months after the date of grant ratably over 4 years and expire no later than 10 years after the date of grant. 34 19 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has a Directors Stock Option Plan (the 1991 Directors Plan) under which, nonqualified options may be granted to non-employee directors of the Company and its subsidiaries to purchase an aggregate of 174,225 shares of authorized, but unissued, common stock of the Company according to a formula set forth in the 1991 Plan. Unexercised options were granted and outstanding as of December 31, 1996, for an aggregate of 100,455 shares with an exercise price equal to the fair market value of the Company's common stock at the date of grant. The 1991 Plan provides that options granted thereunder begin to vest 6 months after the date of grant and expire no later than 10 years after the date of grant. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement defines a fair value based method of accounting for an employee stock option or similar equity instrument. Under this method, compensation costs are measured at the grant date based on the value of the award and are recognized over the service period, which is the vesting period. The Company applies Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation costs for the Company's three stock option plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: December 31, - -------------------------------------------------------------------------------- (In thousands, except per share) 1996 1995 - -------------------------------------------------------------------------------- Net income As reported $6,039 $6,611 Pro forma $5,883 $6,605 Earnings per share As reported $1.42 $1.58 Pro forma $1.39 $1.58 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1995, and 1996, respectively: dividend yield of 2.1% and 2.5%, expected volatility of 18% for all years, risk-free interest rates of 5.39% and 5.64%, and expected lives of 5.5 and 6.1 years, respectively. 35 20 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Below is a summary of stock option activity under all plans during 1996 and 1995: 1996 1995 - -------------------------------------------------------------------------------- Weighted Weighted average average exercise exercise Shares price Shares price - -------------------------------------------------------------------------------- Outstanding at beginning of year 433,474 $14.57 400,967 $14.33 Granted 157,153 19.13 62,321 15.00 Exercised (200,106) 14.69 (22,811) 11.73 Forfeited (1,626) 11.32 (7,003) 13.74 - -------------------------------------------------------------------------------- Outstanding end of year 433,474 $16.37 433,474 $14.57 Options exercise end of year 317,860 348,905 Weighted average fair value of options granted during the year $4.32 $3.27 - -------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number average average Weighted outstanding contractual exercise Number average Exercise Price life price outstanding exercise price - --------------------------------------------------------------------------------------------------------------------- $7.17 to $7.95 6,957 0.67 $7.20 6,957 $7.20 $12.03 to $17.23 318,312 6.53 14.71 310,504 14.67 $16.01 to $25.71 59,876 9.86 25.60 399 21.67 $26.00 3,750 9.94 26.00 - - $7.17 to $26.00 388,895 6.97 16.37 317,860 $14.51 - ---------------------------------------------------------------------------------------------------------------------
Employee Stock Ownership Plan - In 1986, the Company adopted an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Effective March 1, 1991, the Company adopted an amendment to the ESOP to restructure it as a leveraged employee stock ownership plan, which qualifies as a stock bonus plan under the Internal Revenue Code. The Company may make annual contributions to the ESOP in an amount determined by the Board of Directors. Contributions are not intended to exceed an amount estimated to be an allowable deduction for tax purposes. The Company made contributions to the ESOP of $275,000, $292,000, and $332,000 in 1996, 1995, and 1994, respectively. 36 21 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements 401(k) Plan - The Company also has a tax deferred profit sharing plan and thrift plan covering all eligible employees. The Company's contributions amounted to $71,000, $70,000, and $69,000 for the years ended December 31, 1996, 1995, and 1994. On December 31, 1996, pursuant to the merger between the Company and SVB, the 401(k) and ESOP Plans of SVB were merged with and into the respective plans of the Company. (11) Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
- ---------------------------------------------------------------------------------------------------- December 31, 1996 December 31, 1995 ------------------- ------------------ Carrying Estimated Carrying Estimated (In thousands) amounts fair value amounts fair value - ---------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $76,245 $76,245 $79,234 $79,234 Investment securities 126,208 126,269 125,828 126,018 Net loans 390,877 391,135 301,061 297,233 - ---------------------------------------------------------------------------------------------------- Liabilities: Demand deposits, noninterest bearing $131,332 $131,332 $115,861 $115,861 Demand deposits, interest bearing 84,770 84,770 76,770 76,770 Savings and money market 164,890 164,890 151,337 151,337 Time certificates 166,190 166,632 121,540 121,710 - ----------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents - The carrying amount approximates fair value because of the short maturities of these instruments. 37 22 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Investment Securities - The fair value of investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value of performing variable rate loans is judged to approximate book value for those loans whose rates reprice in less than 90 days. Rate floors and rate ceilings are not considered for fair value purposes as the number of loans with such limitations is not significant. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities - The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings and NOW accounts, and money market and checking accounts, approximates the amount payable on demand. The fair value of certificates of deposit is judged to approximate book value for those certificates whose remaining maturities are less than 90 days. For all other certificates, estimated cash flows are discounted using rates currently offered for deposits of similar remaining maturities. Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time 38 23 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. (12) Commitments and Contingencies Future minimum rental payments for Bank premises under noncancelable operating leases as of December 31, 1996 are as follows: - ----------------------------------------------------------------- Minimum lease payments Year ending December 31, (In thousands) - ----------------------------------------------------------------- 1997 $878 1998 911 1999 649 2000 443 2001 207 Thereafter 1,092 - ----------------------------------------------------------------- 4,180 Minimum rentals receivable under noncancelable subleases (621) - ----------------------------------------------------------------- $3,559 ================================================================= Rent expense under operating leases totaled $796,000, $781,000, and $764,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Related sublease rental income totaled $131,000, $82,000, and $99,000, respectively. In December 1988, the Company entered into an operating lease with a member of its Board of Directors for rental of its administrative headquarters. This lease 39 24 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements required payments totaling approximately $192,000, $188,000, and $185,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The lease expires on April 30, 1999. In the normal course of business, there are outstanding commitments, such as commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. These commitments involve elements of credit and interest rate risk. Management does not anticipate any loss will result from such commitments. As of December 31, 1996, amounts committed to extend credit under normal lending agreements aggregated approximately $140,372,000. Management reviews the risk associated with these credits in evaluating the overall adequacy of the allowance for possible loan losses. Additionally, there are approximately $4,994,000 in outstanding standby letters of credit which, in effect, are guarantees of obligations of customers. The Company, through the Subsidiary Banks, has borrowing lines of approximately $51,000,000 with primary correspondent banks. There were no borrowings outstanding under these lines as of December 31, 1996. (13) Regulatory Capital The Federal Reserve Board and the Comptroller have established a minimum leverage ratio of 3% Tier 1 capital to total assets for bank holding companies and national banks that have received the highest composite regulatory rating and are not anticipating or experiencing any significant growth. All other institutions will be required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum. Set forth on the following page are the Company's and the Subsidiary Banks' risk-based and leverage capital ratios as of December 31, 1996: 40 25 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------------------------------------------- Risk Based Capital Ratio As of December 31, 1996
- ------------------------------------------------------------------------------------------------------------------- Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- Tier 1 capital $63,469 13.91% $16,096 11.63% $42,034 13.40% Tier 1 capital minimum requirement 18,254 4.00% 5,534 4.00% 12,546 4.00% - ------------------------------------------------------------------------------------------------------------------- Excess 45,215 9.91% 10,562 7.63% 29,488 9.40% =================================================================================================================== Total capital 67,141 14.71% 17,409 12.58% 44,258 14.11% Total capital minimum requirement 36,508 8.00% 11,069 8.00% 25,092 8.00% - ------------------------------------------------------------------------------------------------------------------- Excess 30,633 6.71% 6,340 4.58% 19,166 6.11% =================================================================================================================== Risk-adjusted assets $456,356 $138,362 $313,644 =================================================================================================================== As indicated in the table above, the Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Management believes that the Company and the Bank will continue to meet their respective minimum capital requirements in the foreseeable future. - --------------------------------------------------------------------------------------------------------------------- Leverage Capital Ratio As of December 31, 1996 - --------------------------------------------------------------------------------------------------------------------- Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- Tier 1 capital to quarterly average total assets (Leverage $63,469 10.55% $16,096 8.61% $42,034 10.29% Ratio) Minimum leverage requirement 18,045 to 3.00% to 5,611 to 3.00% to 12,255 to 3.00% to 30,075 5.00% 9,351 5.00% 20,425 5.00% - ------------------------------------------------------------------------------------------------------------------- Excess 33,394 to 5.55% to 6,745 to 3.61% to 21,609 to 5.29% to 45,424 7.55% 10,485 5.61% 29,779 7.29% =================================================================================================================== Total quarterly average assets $601,496 $187,024 $408,502 ===================================================================================================================
41 26 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (14) Pacific Capital Bancorp (Parent Company Only) The following are the financial statements of Pacific Capital Bancorp: - -------------------------------------------------------------------------------- BALANCE SHEETS Years ended December 31, - -------------------------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------------------------- Assets Cash and cash equivalents $937 $1,605 Loans 1,042 1,149 Premises and equipment, net 3,022 1,865 Investment in subsidiaries 58,178 55,492 Other assets 910 725 - -------------------------------------------------------------------------------- Total Assets $64,089 $60,836 ================================================================================ Liabilities and Shareholders' Equity Liabilities $443 $303 Shareholders' equity 63,646 60,533 - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $64,089 $60,836 ================================================================================ - -------------------------------------------------------------------------------- STATEMENTS OF INCOME Years ended December 31, - -------------------------------------------------------------------------------- (In thousand) 1996 1995 1994 - -------------------------------------------------------------------------------- Equity in income of subsidiaries $3,061 $6,010 $4,257 Cash dividends received from bank subsidiaries 3,993 882 2,216 Interest income and fees on loans 136 214 187 Other expenses (1,151) (495) (435) - -------------------------------------------------------------------------------- Net income $6,039 $6,611 $6,225 ================================================================================ 42 27 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements STATEMENTS OF CASH FLOWS
Years ended December 31, - ----------------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 6,039 $ 6,611 $ 6,225 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net income of subsidiaries (7,054) (6,892) (6,473) Dividends received from subsidiaries 3,993 882 2,216 Increase in other assets (341) (68) (265) Increase (decrease) in other liabilities 140 (34) 60 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 2,777 499 1,763 - ----------------------------------------------------------------------------------------- Cash flows from investing activities: Net change in loans 107 1,931 (834) Capital expenditures (1,157) (493) (89) - ----------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (1,050) 1,438 (923) - ----------------------------------------------------------------------------------------- Cash flows from financing activities: Repurchase and retirement of stock (605) (111) (717) Proceeds from stock options exercised 284 158 806 Cash paid for fractional shares (21) (15) (16) Cash paid for dividends (2,053) (1,684) (1,137) - ----------------------------------------------------------------------------------------- Net cash used in financing activities (2,395) (1,652) (1,064) - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (668) 285 (224) Cash and cash equivalents at beginning of year 1,605 1,320 1,544 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 937 $ 1,605 $ 1,320 ========================================================================================= Supplemental disclosures: Noncash investment and financing activities: Transfer from retained earnings to common stock due to stock dividend $ 5,348 $ 3,132 $ 2,165 =========================================================================================
The ability of the Company to pay dividends will largely depend upon the dividends paid to it by the subsidiary banks. There are legal limitations on the ability of the subsidiary banks to provide funds to the Company in the form of loans, advances, or dividends. Under the National Bank Act, the subsidiary banks may not declare dividends in any calendar year that exceed certain legal limitations. The approximate amount of restricted equity of the Subsidiary Banks as of December 31, 1996 was $45,368,000. 43 PACIFIC CAPITAL BANCORP Management's Discussion and Analysis 1996 This document may contain forward-looking statements that are subject to risks and uncertainties, including, but not limited to the local economy, the real estate market in California, and other factors beyond the Company's control. Such risks and uncertainties could cause actual results to differ materially from those indicated. For a discussion of factors that could cause actual results to differ, please see the discussion contained herein. Readers should not place undue reliance on forward-looking statements, which reflect managements view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers are also encouraged to review the Company's publicly available filings with the Securities and Exchange Commission. The Company Pacific Capital Bancorp (the "Company") through its wholly owned subsidiaries, First National Bank of Central California ("First National"), and South Valley National Bank ("South Valley") engages in a broad range of financial service activities. First National and South Valley are collectively referred to herein as "Subsidiary Banks," and references to the Company include the Subsidiary Banks. On November 20, 1996, the Company acquired South Valley Bancorporation (SVB) in a transaction accounted for as a pooling-of-interests. Accordingly, these consolidated financial statements were restated on a combined basis for all periods presented. The following sections set forth a discussion of the significant operating changes, business trends, financial condition, earnings, capital position, and liquidity that have occurred in the three-year period ended December 31, 1996, together with an assessment, when considered appropriate, of external factors that may affect the Company in the future. This discussion should be read in conjunction with the Company's consolidated financial statements and notes on pages _____ of this annual report. Summary of Financial Results Net income for 1996 was $6,039,000 or $1.42 per share, a decrease of $572,000 or $0.16 per share from 1995. This decrease in net income is due to merger-related expenses incurred relating to the merger with South Valley Bancorporation. (See Note 2 to the Consolidated Financial Statements) Net income for 1996 excluding the one-time merger-related expenses was $7,540,000 or $1.78 per share. The Company's net operating income excluding merger-related charges increased significantly for the second straight year in 1996. The Company's net income for 1995 of $6,611,000 or $1.58 per share represented an increase of $386,000 or $0.07 per share over 1994. 44 In 1996 the Company paid four cash dividends of $0.15 in March, June, September, and December. In 1995, the Company distributed three $0.125 cash dividends in March, June, and September and a $0.15 cash dividend in December. In addition, the Company distributed a 5% stock dividend in each of the years in the three year period ended December 31, 1996. Earnings per share amounts have been retroactively restated to reflect these stock dividends. The return on average shareholders' equity was 9.6% in 1996, compared to 11.4% in 1995 and 11.8% in 1994. The Company believes that the economies in which it operates, Monterey, Santa Cruz, Santa Clara, and San Benito Counties, have experienced strong growth and favorable economic activity in the past two years. Signs of the strength in these local economies include sustained quality loan demand and strong deposit growth. On a national scale, the Company is forecasting a relatively flat interest rate environment due to minimal inflation prospects and very modest growth. Certain information concerning the Company's average balances, yields and rates on average interest-earning assets and interest-bearing liabilities is set forth in the following table. Interest yields and amounts earned include net loan fees of $1,211,000, $1,152,000, and $1,178,000 in 1996, 1995, and 1994, respectively. 45 AVERAGE BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994 Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest (Dollars in thousands) Balance Rate Amount Balance Rate Amount Balance Rate Amount - --------------------------------------------------------------------------------------------------------------------- Assets Earning Assets Investment securities: Taxable $124,709 6.1% $7,645 $95,408 5.7% $5,455 $88,422 5.0% $4,446 Non-taxable 14,966 5.0% 750 17,529 5.2% 903 18,698 5.1% 957 Federal funds sold 34,267 5.3% 1,805 35,564 5.3% 1,871 28,517 4.2% 1,197 - --------------------------------------------------------------------------------------------------------------------- Total investment securities 173,942 5.9% 10,200 148,501 5.5% 8,229 135,637 4.9% 6,600 Loans 332,421 10.2% 33,758 287,906 10.6% 30,449 274,788 9.6% 26,430 - --------------------------------------------------------------------------------------------------------------------- Total Earning Assets 506,363 8.7% 43,958 436,407 8.9% 38,678 410,425 8.0% 33,030 Non-Earning Assets Premises and Equipment 14,769 13,201 10,187 Other 47,554 46,399 39,083 - --------------------------------------------------------------------------------------------------------------------- Total Non-Earning Assets 62,323 59,600 49,270 - --------------------------------------------------------------------------------------------------------------------- Total Assets $568,686 $496,007 $459,695 ===================================================================================================================== Liabilities and Shareholders' Equity Interest-Bearing Deposits: Demand $77,306 1.1% $846 $87,916 1.7% $1,502 $80,428 1.5% $1,240 Savings and Money Market 168,553 2.8% 4,664 140,209 2.8% 3,913 151,882 2.5% 3,740 Time Certificates 146,359 5.3% 7,782 108,026 5.1% 5,507 84,821 3.5% 3,005 Other Interest-Bearing 716 3.8% 27 1,030 4.8% 49 2,172 4.1% 89 Liabilities - --------------------------------------------------------------------------------------------------------------------- Total 392,934 3.4% 13,319 337,181 3.3% 10,971 319,303 2.5% 8,074 Non Interest-Bearing Deposits and Other Liabilities: Demand, Non 109,615 95,824 86,916 Interest-Bearing Other Liabilities 3,031 4,819 1,297 Shareholder's Equity 63,106 58,183 52,179 - --------------------------------------------------------------------------------------------------------------------- Total 175,752 158,826 140,392 - --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $568,686 $496,007 $459,695 ===================================================================================================================== NET INTEREST INCOME $30,639 $27,707 $24,956 NET INTEREST MARGIN 6.1% 6.3% 6.1% - ---------------------------------------------------------------------------------------------------------------------
The net interest margin is expressed as the percentage of net interest income to average total earning assets. The average balance on non-accrual loans is immaterial as a percentage of total loans and as such has been included in total loans. Non-taxable securities and leases have not been calculated on a tax equivalent basis. Net Interest Income Net interest income, the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds, is the principal component of the Company's earnings. The preceding table shows the composition of average earning assets and average interest-bearing liabilities, average yields and rates, and the net interest margin for 1994 through 1996. Interest income increased $5,280,000 or 13.7% from $38,678,000 in 1995 to $43,958,000 in 1996, after increasing $5,648,000 or 17.1% from 1994 to 1995. The increase in 1996 is the result of higher average loan and investment volumes during 1996 partially offset by a slightly 46 lower yield on the loan portfolio. The increase in 1995 was due mainly to higher average yields on loans and investment securities and an increase in average volumes in loans and investments compared to 1994. Total interest and fees produced a 8.7% yield on average earning assets in 1996, compared to 8.9% and 8.0% yields on average earning assets in 1995 and 1994, respectively. The yield increase in 1995 was the result of several interest rate increases in the Subsidiary Banks' reference rate (the rate charged to the Bank's most creditworthy customers) which took place during the course of 1994 and early 1995. During 1995, the Company increased its available-for-sale securities portfolio relative to the held-to-maturity portfolio. This shift has resulted in increased liquidity for the Company. Total interest expense for 1996 was $13,319,000, an increase of $2,348,000 or 21.4% over 1995, compared to an increase of $2,897,000 or 35.9% from 1994 to 1995. The Company's cost of funds (excluding noninterest-bearing demand deposits) experienced a small increase of 0.1% from 1995 to 1996. From 1994 to 1995, the Company's cost of funds increased by 0.72% due to the prevailing rising interest rate environment and a change in the mix of deposits. The Company's net yield on interest-earning assets is affected by changes in the rates earned and paid and the volume of interest-earning assets and interest-bearing liabilities. The impact of changes in volume and rate on net interest income in 1996 and 1995 is shown in the following table. Changes attributable to both volume and rate have been allocated to rate.
- --------------------------------------------------------------------------------------------------------------------- 1996 Compared to 1995 1995 Compared to 1994 ----------------------------------------------------------- (In thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------------- Investment securities Taxable $1,675 $515 $2,190 $351 $658 $1,009 Non-taxable (132) (21) (153) (60) 6 (54) Federal funds sold (68) 2 (66) 296 378 674 Loans 4,708 (1,399) 3,309 1,262 2,757 4,019 - --------------------------------------------------------------------------------------------------------------------- Total 6,183 (903) 5,280 1,849 3,799 5,648 - --------------------------------------------------------------------------------------------------------------------- Demand, Interest Bearing (181) (475) (656) 115 147 262 Savings 791 (40) 751 (287) 460 173 Time Certificates 1,954 321 2,275 822 1,680 2,502 Fed Funds Purchased (15) (7) (22) (47) 7 (40) - --------------------------------------------------------------------------------------------------------------------- Total 2,549 (201) 2,348 603 2,294 2,897 - --------------------------------------------------------------------------------------------------------------------- Increase in Net Interest Income $3,634 $(702) $2,932 $1,246 $1,505 $2,751 =====================================================================================================================
Earning Assets Outstanding total loans averaged $332,421,000 in 1996 compared to $287,906,000 during 1995. This represents an increase of $44,515,000 or 15.5%, compared to an increase of $13,118,000 or 4.8% from 1994 to 1995. The increase in total loans outstanding during 1996 is due to increased loan demand from qualified borrowers and is reflective of the strength of the economy in most of 47 the primary markets which the Company serves. The following table summarizes the composition of the loan portfolio as of December 31:
- --------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Commercial $113,428 $82,583 $77,402 $63,926 $66,994 Real Estate - Construction 38,014 32,409 39,352 26,799 20,061 Real Estate - Mortgage 195,417 154,572 144,687 146,675 145,966 Consumer 22,509 25,604 22,907 22,185 22,762 Other 19,360 5,727 6,004 6,318 9,864 - --------------------------------------------------------------------------------------------------------------------- Total $388,728 $300,895 $290,352 $265,903 $265,647 =====================================================================================================================
The Company lends primarily to small- and medium-sized businesses within its markets, which is comprised principally of Monterey, Santa Cruz, Santa Clara, and San Benito Counties. A majority of the Company's loan portfolio consists of loans secured by commercial, industrial, and residential real estate. As of December 31, 1996, real estate mortgage and construction loans represented $233,431,000 or 60.1% of total loans, an increase of $46,450,000 from the prior year. Real estate mortgage loans included commercial real estate loans of approximately $146,777,000, one-to-four family home loans of approximately $21,434,000, equity lines of credit of approximately $20,710,000, multifamily dwelling loans of approximately $4,001,000 and farm land loans of approximately $2,495,000. Construction loans totaled $38,014,000 or 9.8% of the loan portfolio as of December 31, 1996, which represents an increase of $5,605,000 or 17.3% from December 31, 1995. Management believes that the Bank does not have any significant loss exposure with respect to such loans, due to the Bank's collateral position. In general, advances do not exceed 65% of appraised value on commercial real estate loans and 75% on residential mortgages. Continued emphasis is placed on this policy and, accordingly, appraisals are periodically updated as conditions change. The Company finances the construction of residential and commercial real estate properties. These loans are all at variable rates, are secured by first deeds of trust on the underlying properties, and generally have maturities of less than 24 months. Repayment is based on a pre-qualification analysis of the borrower's ability to obtain take-out financing. The Company's construction lending has been in areas which management believes to have favorable market conditions. Advances on residential and commercial projects are limited in general to the lower of approximately 75% and 65%, respectively, of cost or appraised value. Commercial loans not secured by real estate totaled $113,428,000 or 29.2% of the total loan portfolio at December 31, 1996. This represented an increase of $30,845,000 over 1995. Management believes that this increase in demand is a further indicator of the strength in the local economy. Consumer loans decreased $3,095,000 or 12.1% during 1996. Consumer loans, as of December 31, 1996, represent 5.8% of the total loan portfolio, compared to 8.5% of the 1995 loan portfolio. 48 The Company had undisbursed loans totaling $140,372,000 as of December 31, 1996, primarily representing available lines of credit and the unfunded portion of construction loan commitments. The following table sets forth the maturity distribution of the loan portfolio as of December 31, 1996:
- --------------------------------------------------------------------------------------------------------------------- After One In One Year Year Through After Five (In thousands) or Less Five Years Years Total - --------------------------------------------------------------------------------------------------------------------- Commercial $99,808 $10,783 $2,837 $113,428 Real Estate - Construction 35,605 2,311 98 38,014 Real Estate - Mortgage 108,576 40,094 46,747 195,417 Consumer 8,811 10,924 2,774 22,509 Other 8,939 2,796 7,625 19,360 - --------------------------------------------------------------------------------------------------------------------- Gross Loans $261,739 $66,908 $60,081 $388,728 =====================================================================================================================
The fixed rate loan categories discussed above mature as follows: $15,223,000 in 1997, $8,118,000 in 1998 $12,353,000 in 1999, $7,229,000 in 2000, and $20,888,000 in 2001, with the remaining $59,087,000 maturing thereafter. The variable loan rate categories discussed above mature as follows: $246,516,000 in 1997, $10,330,000 in 1998, $6,173,000 in 1999, $750,000 in 2000, and $1,067,000 on 2001, with the remaining $994,000 maturing thereafter. Interest Rate Sensitivity Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. If more liabilities than assets reprice in a given period (a liability sensitive position), market interest rate changes will be reflected more quickly in liability rates. If interest rates decline, a liability sensitive position will benefit net income. Alternatively, where assets reprice more quickly than liabilities in a given period (an asset sensitive position) a decline in market rates will have an adverse effect on net interest income. The table on the following page presents the interest rate sensitivity of the Company as of December 31, 1996. For any given period, the structure is matched when an equal amount of assets and liabilities reprice. Any excess of assets or liabilities over these matched items results in the gap, or mismatch, shown at the foot of the table. A negative gap indicates liability sensitivity and a positive gap indicates asset sensitivity. 49 - --------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity as of December 31, 1996 - ---------------------------------------------------------------------------------------------------------------------
Repricing Opportunity 0 - 90 91 - 180 181 - 365 Over (In thousands) Days Days Days One Year Total - --------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $14,910 $- $- $- $14,910 Loans 229,421 19,736 12,582 126,989 388,728 Taxable Investments 14,001 296 7,197 104,203 125,697 Non-taxable Investments 849 602 1,377 10,892 13,720 - --------------------------------------------------------------------------------------------------------------------- Total Earning Assets 259,181 20,634 21,156 242,084 543,055 - --------------------------------------------------------------------------------------------------------------------- Interest Bearing Demand 84,770 - - - 84,770 Savings Deposits 153,916 - 5,690 5,284 164,890 Time Certificates 51,502 44,436 65,581 4,671 166,190 - --------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 290,188 44,436 71,271 9,955 415,850 - --------------------------------------------------------------------------------------------------------------------- Gap $(31,007) $(23,802) $(50,115) $232,129 $127,205 Cumulative Gap (31,007) (54,809) (104,924) 127,205 =====================================================================================================================
The Company has remained flexible in determining the point at which to reprice deposits. This flexibility mitigates the Company's liability sensitive position in the under one year category. Quality of Loans The Company had net loan charge-offs of $723,000 and $586,000 in 1996 and 1995, respectively. Net charge-offs as a percent of average loans has remained relatively constant over the last three years at 0.22%, 0.20%, and 0.17% at December 31, 1996, 1995, and 1994, respectively. Over the last five years, the low amount of net charge-offs to average loans is reflective of management's continued emphasis on credit quality standards in the loan approval process as well as close monitoring of the loan portfolio. The Company's net charge-offs as a percent of average loans have been below most industry averages in each year reflected in the table below. Management anticipates the Company's charge-off experience in 1997 to be consistent with that experienced in 1996 primarily due to the strength and growth in the local economic areas in which the Company serves. This factor continues to be of importance in assessing the adequacy of the allowance for possible loan losses. The table on the following page summarizes the actual loan losses and provision for possible loan losses during the last five fiscal years by loan category: 50 - ---------------------------------------------------------------------------------------------------------------------
Summary of Loan Loss Activity (In thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Total loans outstanding, end of year $388,728 $300,895 $290,352 $265,903 $265,647 Average loans during the year 332,421 290,265 277,263 259,131 272,368 Allowance for possible loan losses: Balance, beginning of year 3,710 3,769 3,753 3,479 3,152 Charge-off by loan category Commercial 761 480 331 491 617 Consumer 188 129 148 327 276 Real estate 121 241 186 364 265 - --------------------------------------------------------------------------------------------------------------------- Total 1,070 850 665 1,182 1,158 - --------------------------------------------------------------------------------------------------------------------- Recoveries by loan category Commercial 239 98 144 62 112 Consumer 91 42 37 54 106 Real estate 17 124 21 62 2 - --------------------------------------------------------------------------------------------------------------------- Total 347 264 202 178 220 - --------------------------------------------------------------------------------------------------------------------- Net charge-offs 723 586 463 1,004 938 Provision charged to expense 685 527 479 1,278 1,265 - --------------------------------------------------------------------------------------------------------------------- Balance, end of year $3,672 $3,710 $3,769 $3,753 $3,479 ===================================================================================================================== Ratios: Net charge-offs to average loans 0.22% 0.20% 0.17% 0.39% 0.34% Allowance to loans at end of year 0.94% 1.23% 1.30% 1.41% 1.31% - ---------------------------------------------------------------------------------------------------------------------
Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, provisions are made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of regulatory examinations conducted by governmental agencies and through management's assessment of risk. The Company's entire allowance is a valuation allocation; that is, it has been created by direct charges against earnings through the provision for possible loan losses. The Company evaluates the allowance for possible loan losses based upon an individual analysis of specific categories of loans. The adequacy of the allowance can be determined only on an approximate basis, since estimates as to the magnitude and timing of loan losses are not predictable because of the impact of external events. In addition, the Company has for the last several years contracted with an independent loan review consulting firm to evaluate overall credit quality on an ongoing basis. Management then considers the adequacy of the allowance for possible loan losses in relation to the total loan portfolio. The provision for possible loan losses charged against earnings is based upon an analysis of the actual migration of loans to losses plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses. These factors include: specific loan conditions as determined by management; the historical relationship between charge-offs and the level of the allowance; the estimated future loss in all significant loans; known deterioration in 51 concentrations of credit, certain classes of loans or pledged collateral; historical loss experience based on volume and types of loans; the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of Company management or by bank regulatory agencies; trends in portfolio volume, maturity, and composition; off-balance sheet credit risk; volume and trends in delinquencies and nonaccruals; lending policies and procedures including those for charge-off, collection, and recovery; national and local economic conditions and downturns in specific local industries; and the experience, ability, and depth of lending management and staff. The Company evaluates the adequacy of its allowance for possible loan losses on a quarterly basis. While these factors cannot be reduced to a mathematical formula, it is management's view that the allowance for possible loan losses of $3,672,000 or 0.94% of total loans as of December 31, 1996, was adequate. This allowance is compared to $3,710,000 or 1.23% in 1995 and $3,769,000 or 1.30% in 1994. The decrease in the allowance for loan losses as a percentage of total loans from 1995 to 1996 was due to the substantial growth in total loans during 1996 without the same corresponding increase in size of the allowance for loan losses. Management believes that the quality of the loan growth coupled with the decrease in nonperforming loans during this same period warrants the decrease in the level of the allowance relative to the loan portfolio. There are, however, no assurances that in any given period the Company will not sustain charge-offs which are substantial in relation to the size of the allowance. Loans are charged to the allowance for loan losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover anticipated losses inherent in the Company's loan portfolio. Any allocation or breakdown in the allowance lends an appearance of an exactness which does not exist. Thus, the allocation below should not be interpreted as an indication of expected amounts or categories where charge-offs will occur. The allocation of the allowance for possible loan losses as of the end of the last five fiscal years is summarized in the table below:
- ------------------------------------------------------------------------------------------------------------------------ Allocation of Allowance 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category Category Category Category Category (Dollars in to Total to Total to Total to Total to Total thousands) $ Loans $ Loans $ Loans $ Loans $ Loans - ------------------------------------------------------------------------------------------------------------------------ Balance Applicable to: Commercial $1,507 29.18% $1,395 27.45% $1,607 26.66% $1,441 24.99% $1,464 24.19% Real Estate - Construction 218 9.78% 306 10.77% 590 13.55% 229 4.16% 202 8.32% Real Estate - 1,516 50.27% 1,708 51.37% 1,216 49.83% 1,785 57.82% 1,502 53.72% Mortgage Consumer 286 5.79% 272 8.51% 333 7.89% 269 7.40% 267 6.92% Other 145 4.98% 29 1.90% 26 2.07% 28 2.88% 43 1.25% - ------------------------------------------------------------------------------------------------------------------------ Total $3,672 100.0% $3,710 100.0% $3,769 100.0% $3,753 100.0% $3,479 100.0% ========================================================================================================================
Nonperforming Loans Interest income on the loan portfolio is recorded on the accrual basis. However, the Company follows the policy of discontinuing the accrual of interest income and 52 reversing any accrued and unpaid interest when the payment of principal or interest is 90 days past due unless the loan is both well secured and in the process of collection. The Company's Lending Policy provides for strict requirements for exempting loans from nonaccrual status. The composition of nonperforming loans as of the end of the last three fiscal years is summarized in the following table: - ------------------------------------------------------------------------------ Nonperforming Loans (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ Loans accounted for on a nonaccrual basis $1,564 $2,481 $3,283 Other loans contractually past due 90 days or more 17 261 734 Restructured loans 279 513 147 - ------------------------------------------------------------------------------ Total $1,860 $3,255 $4,164 ============================================================================== Loans accounted for on a nonaccrual basis experienced a substantial decrease in 1996 to $1,564,000 compared to $2,481,000 at December 31, 1995. This decrease was due to management's continuing efforts to resolve significantly past due loans combined with a strong local economy. Of total nonperforming loans as of December 31, 1996, $726,000 consisted of one real estate loan which was well-secured. In addition, the overall coverage of the allowance as a percent of nonperforming loans is 197.4%. The Company's ratio of nonperforming loans to average loans has been below most industry averages in each year reflected in the table above. The Company does not expect to sustain losses in excess of that provided for in the allowance for possible loan losses. At December 31, 1996, the Company had $279,000 in loans which were troubled debt restructurings as defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, and which were not either nonaccrual loans or loans past due 90 days or more and still accruing interest. At December 31, 1996, the Company did not have any loans other than those disclosed as nonaccrual loans, loans past due 90 days or more and still accruing interest and troubled debt restructurings where known information about possible credit problems of the borrowers cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Investments The average balance of Federal Funds Sold (overnight investments with other banks) and other short-term investments (primarily money market mutual funds) was $43,823,000 in 1996, $42,617,000 in 1995, and $29,021,000 in 1994. These investments are maintained primarily for the short-term liquidity needs of the Company. The major factors influencing the levels of required liquidity are loan demand of the Company's customers and fluctuations in the Company's level of deposits. The Company's loan to deposit ratio averaged 66.2% in 1996, compared to 67.2% in 1995, and 68.6% in 1994. 53 Average total investment securities were $130,119,000 in 1996, an increase of $23,503,000 over the 1995 average. This increase was the result of the growth in average deposits which exceeded the growth in average loans by $25,029,000. As of December 31, 1996, the aggregate book value of the investment portfolio exceeded the market value by $223,000. At December 31, 1995, the market value exceeded the book value by $786,000. This decrease in the market value of the portfolio was the result of decreasing prices in the bond market during the course of 1996. It is the Company's policy not to engage in securities trading transactions. There are no investments in the portfolio deemed to be permanently or temporarily impaired.
- --------------------------------------------------------------------------------------------------------------------- Estimated Amortized Unrealized Unrealized fair (In thousands) cost gain loss value - --------------------------------------------------------------------------------------------------------------------- 1996 - --------------------------------------------------------------------------------------------------------------------- Available-for-sale securities: U.S. Treasury and agency $64,109 $159 $187 $64,081 State and municipal 7,233 59 21 7,271 Mortgage-backed securities 45,470 9 303 45,176 - --------------------------------------------------------------------------------------------------------------------- $116,812 $227 $511 $116,528 ===================================================================================================================== Held-to-maturity securities: State and municipal $6,449 $55 $42 $6,462 Mortgage-backed securities and other 3,231 59 11 3,279 - --------------------------------------------------------------------------------------------------------------------- $9,680 $114 $53 $9,741 ===================================================================================================================== 1995 - --------------------------------------------------------------------------------------------------------------------- Available-for-sale securities: U.S. Treasury and agencies $94,820 $708 $143 $95,385 State and municipal 4,074 45 9 4,110 Mortgage-backed securities and other 10,653 3 8 10,648 $109,547 $756 $160 $110,143 ===================================================================================================================== Held-to-maturity securities: State and municipal $12,133 $128 $20 $12,241 Mortgage-backed securities and other 3,552 87 5 3,634 - --------------------------------------------------------------------------------------------------------------------- $15,685 $215 $25 $15,875 =====================================================================================================================
Funding Average total deposits increased $70,574,000 or 16.3% during 1996, compared to an increase of $27,928,000 or 6.9% during 1995 and an increase of $21,864,000 or 5.7% in 1994. Average non-interest bearing deposits increased in 1996 by $13,791,000 or 14.4% compared to an increase of $8,908,000 or 10.3% in 1995 an increase of $9,511,000 or 12.3% in 1994. Average interest-bearing deposits increased $56,067,000 or 16.7% in 1996, compared with increases of $19,020,000 or 6.0% in 1995 and $11,112,000 or 3.6% during 1994. Total deposit growth in 1997 is expected to continue but may not increase at the same rate or in the same categories. The Company is able to attract deposits by providing interest rates and services competitive with other institutions located in its market area. The Company does not have any brokered deposits or large concentrations with any one customer. Given the Company's forecast 54 for interest rates, management believes that maturing certificates of deposit will continue to be directed into short to medium term deposits.
- --------------------------------------------------------------------------------------------------------------------- Average Deposits 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Average Average Average (Dollars in thousands) Balance Rate Balance Rate Balance Rate - --------------------------------------------------------------------------------------------------------------------- Demand, Noninterest Bearing $109,615 - $95,824 - $86,916 - Demand, Interest Bearing 77,306 1.09% 87,916 1.71% 80,428 1.54% Savings and money market 168,553 2.77% 140,209 2.79% 151,882 2.46% Time Certificates 146,359 5.32% 108,026 5.10% 84,821 3.54% - ---------------------------------------------------------------------------------------------------------------------
The table above sets forth information for the last three fiscal years regarding the Company's average deposits and the average rates paid on each of the deposit categories. The remaining maturities of the Company's certificates of deposit, including public funds, in amounts of $100,000 or more as of December 31, 1996, are indicated in the table below. Interest expense on these certificates of deposit totaled $4,036,000 in 1996. - ---------------------------------------------------------------------------- (In thousands) 1996 - ---------------------------------------------------------------------------- Three month or less $32,921 Over three through six months 21,841 Over six through twelve months 26,190 Over twelve months - - ---------------------------------------------------------------------------- Total $80,952 ============================================================================ Noninterest Income Total other income increased in 1996 to $3,160,000 from $2,983,000 in 1995. The increase was primarily due to a $181,000 increase in other income partially offset by a decrease in gains on loan sales. In addition, net losses on securities transactions decreased in 1996 to $46,000 from $73,000 in 1995. Noninterest income also increased in 1995 by $112,000 as a result of an increase in service charges of $236,000 partially offset by a decrease in gains on sales of loans of $69,000. The Mortgage Banking Division of the Company is solely a brokerage operation. The Company does not originate, purchase, or sell loans in this area and thus retains no credit or servicing risk. 55 Noninterest Expense In 1996, total other operating expenses increased 17.4% to $22,727,000, after an increase of $2,007,000 or 11.6% in 1995. Of the $3,375,000 increase in 1996, $1,972,000 was attributable to merger-related expenses. These costs were primarily within the categories of salaries and benefits, equipment expense, and legal and professional expenses. Salaries and benefits expense increased $1,875,000 or 18.8% in 1996, compared to an increase of $1,259,000 or 14.4% in 1995. The increase in salaries and benefits during 1996 was mainly the result of severance costs related to the merger as well as normal salary increases. The increase in 1995 was primarily due to a greater number of employees in 1995 over 1994 and normal salary increases. As a percentage of average earning assets, salaries and benefits were 2.3% in 1996 compared to 2.3% for 1995 and 2.1% in 1994. The Company employed 259 full-time equivalent employees at year-end 1996. Occupancy expense increased $152,000 or 7.8% in 1996 compared to an increase of $180,000 or 10.1% in 1995. The increases in 1996 and 1995 were due primarily to the expansion of the Salinas office of First National as well as normal rental rate increases. All other operating expenses totaled $8,752,000 in 1996 compared to $7,404,000 in 1995, an increase of $1,348,000 or 18.2%. This increase was mainly due to merger-related expenses for data processing and legal and professional fees. In 1995, other operating expense increased by $568,000 or 8.3% as compared to an increase of $473,000 or 7.4% in 1994. The increase in 1995 was due mainly to equipment costs associated with a systems conversion at South Valley combined with an increase in other expenses partially offset by a decrease in FDIC insurance premiums at both South Valley and First National due to the recapitalization of the Bank Insurance Fund in 1995. The major components of other expenses in dollars and as a percentage of average earning assets are as indicated in the table below.
- --------------------------------------------------------------------------------------------------------------------- Other Expenses 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage of Average of Average of Average (Dollars in thousands) Amount Earning Assets Amount Earning Assets Amount Earning Assets - --------------------------------------------------------------------------------------------------------------------- Salaries and benefits $11,864 2.34% $9,989 2.29% $8,730 2.13% Occupancy 2,111 0.42% 1,959 0.45% 1,779 0.43% Equipment 2,577 0.51% 1,943 0.45% 1,476 0.36% Advertising and promotion 710 0.14% 659 0.15% 679 0.17% Forms and supplies 563 0.11% 508 0.12% 456 0.11% Legal and professional fees 1,946 0.38% 823 0.19% 828 0.20% Assessments 147 0.03% 572 0.13% 1,043 0.25% Other 2,809 0.56% 2,899 0.65% 2,354 0.58% - --------------------------------------------------------------------------------------------------------------------- Total $22,727 4.49% $19,352 4.43% $17,345 4.23% =====================================================================================================================
Income Taxes The provision for income taxes was $4,348,000 in 1996, compared to $4,200,000 in 1995 and $3,778,000 in 1994. The Company's effective tax rate for 1996 was 41.9%, compared with 38.9% for 1995, and 37.8% for 1994. The increase in 1996 was due to the fact that a majority of the merger-related costs were not tax-deductible. 56 Capital Shareholders' equity increased $3,113,000 or 5.1% in 1996. The increase was primarily a result of retention of the Company's 1996 net income and the exercise of stock options, offset in part by a repurchase of outstanding shares and a total cash dividend of $0.60 per share paid during 1996. The Company regularly assesses future capital needs so that it will remain in compliance with the capital adequacy guidelines issued by the Federal Reserve Board for bank holding companies and by the Office of the Comptroller of the Currency (the "OCC") for national banks. The Company's capital plan for 1996 contemplates continued growth in shareholders' equity through the retention of net income. The Company and the Subsidiary Banks are subject to the guidelines and regulations of the Federal Reserve Board and the Comptroller, respectively, governing capital adequacy. The Federal Reserve Board has established final risk-based and leverage capital guidelines for bank holding companies which are the same as the Comptroller's capital regulations for national banks. The Federal Reserve Board capital guidelines for bank holding companies and the OCC's regulations for national banks set total capital requirements and define capital in terms of "core capital elements" (comprising Tier 1 capital) and "supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is generally defined as the sum of the core capital elements less goodwill. The following items are defined as core capital elements: common stockholders' equity, qualifying noncumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital elements include: allowance for loan and lease losses (which cannot exceed 1.25% of an institution's risk weighted assets), perpetual preferred stock not qualifying as core capital, hybrid capital instruments and mandatory convertible debt instruments, and term subordinated debt and intermediate-term preferred stock. The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill. Risk-based capital ratios are calculated with reference to risk-weighted assets, including both on and off-balance sheet exposures, which are multiplied by certain risk weights assigned by the Federal Reserve Board or the OCC to those assets. Both bank holding companies and national banks are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, at least one-half of which must be in the form of Tier 1 capital. There are presently four risk-weight categories: 0% for cash and unconditionally guaranteed government securities; 20% for conditionally guaranteed government securities; 50% for performing residential real estate loans secured by first liens; and 100% for commercial loans. The federal banking agencies have issued a joint advance notice of proposed rulemaking to solicit comments on a framework for revising their risk-based capital guidelines to take account of interest rate risk. As required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the notice seeks comment on a proposed method of incorporating an interest rate risk component into the current risk-based capital guidelines, with the goal of ensuring that institutions with high levels of interest rate risk have sufficient capital to cover their exposures. Interest rate risk is a measure of the relationship between a change in market interest rates and 57 the resultant change in net interest income due to the repricing and/or maturity characteristics of the assets and liabilities of the Company. As financial intermediaries, depository institutions accept interest rate risk as a normal part of their business. They assume this risk whenever the interest rate sensitivity of their assets does not match the sensitivity of their liabilities or off balance sheet positions. Thus, when interest-sensitive assets and liabilities reprice at mismatched intervals, an increase or decrease in interest rates will affect net interest income. Under the proposal, interest rate risk exposures would be quantified by weighing assets, liabilities and off-balance sheet items by risk factors which approximate sensitivity to interest rate fluctuations. Institutions identified as having an interest rate risk exposure greater than a defined threshold would be required to allocate additional capital to support this higher risk. The capital to be allocated would be a dollar amount equal to the percentage by which the risk exceeds the defined threshold multiplied by the institution's total assets. Higher individual capital allocations could be required by the bank regulators based on supervisory concerns. Federal banking agencies have solicited comments on this proposal but have not yet proposed regulations to implement any interest rate risk component into the risk-based capital guidelines. Accordingly, the ultimate impact on the Bank and the Company of a final regulation in this area cannot be predicted at this time. Leverage Capital Guidelines The Federal Reserve Board and the OCC have established a minimum leverage ratio of 3% Tier 1 capital to total assets for bank holding companies and national banks that have received the highest composite regulatory rating and are not anticipating or experiencing any significant growth. All other institutions will be required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum. Set forth below are the Company's and the Subsidiary Banks' risk-based and leverage capital ratios as of December 31, 1996:
- ------------------------------------------------------------------------------------------------------------------- Risk Based Capital Ratio As of December 31, 1996 - ------------------------------------------------------------------------------------------------------------------- Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- Tier 1 capital $63,469 13.91% $16,096 11.63% $42,034 13.40% Tier 1 capital minimum requirement 18,254 4.00% 5,534 4.00% 12,546 4.00% - ------------------------------------------------------------------------------------------------------------------- Excess 45,215 9.91% 10,562 7.63% 29,488 9.40% =================================================================================================================== Total capital 67,141 14.71% 17,409 12.58% 44,258 14.11% Total capital minimum requirement 36,508 8.00% 11,069 8.00% 25,092 8.00% - ------------------------------------------------------------------------------------------------------------------- Excess 30,633 6.71% 6,340 4.58% 19,166 6.11% =================================================================================================================== Risk-adjusted assets $456,356 $138,362 $313,644 ===================================================================================================================
58 As indicated in the table on the previous page, the Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Management believes that the Company and the Bank will continue to meet their respective minimum capital requirements in the foreseeable future.
- ------------------------------------------------------------------------------------------------------------------- Leverage Capital Ratio As of December 31, 1996 - ------------------------------------------------------------------------------------------------------------------- Company South Valley First National (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- Tier 1 capital to quarterly average total assets (Leverage $63,469 10.55% $16,096 8.61% $42,034 10.29% Ratio) Minimum leverage requirement 18,045 to 3.00% to 5,611 to 3.00% to 12,255 to 3.00% to 30,075 5.00% 9,351 5.00% 20,425 5.00% - ------------------------------------------------------------------------------------------------------------------- Excess 33,394 to 5.55% to 6,745 to 3.61% to 21,609 to 5.29% to 45,424 7.55% 10,485 5.61% 29,779 7.29% =================================================================================================================== Total quarterly average assets $601,496 $187,024 $408,502 ===================================================================================================================
Federal banking laws impose restrictions upon the amount of dividends the Subsidiary Banks may declare to the Holding Company (see Note 14 to the accompanying consolidated financial statements). Federal laws also impose restrictions upon the amount of loans or advances that the Subsidiary Banks may extend to the Holding Company. In management's opinion, these do not affect the ability of the Company to meet its cash obligations. Liquidity Liquidity represents the ability of the Company to meet the requirements of customer borrowing needs as well as fluctuations in deposit flows. The Company's principal sources of asset liquidity are cash and due from banks, time deposits with other financial institutions, federal funds sold, short-term investments, and marketable investment securities. As of December 31, 1996 these sources represented $202,453,000 or 37.0% of total deposits, compared to 44.1% in 1995 and 41.0% in 1994. The decrease in 1996 reflects the growth within the loan portfolio of which a small portion was funded by maturities in the investment portfolio. Other sources of asset liquidity are maturing loans and borrowing lines of approximately $51,000,000 with primary correspondent banks. There were no borrowings outstanding under these lines as of December 31, 1996. The Company guarantees the obligations or performance of its customers by issuing standby letters of credit to a third party. These standby letters of credit are frequently issued in support of third-party obligations, such as retail company transactions and travel agency issuances. The risk involved in issuing standby letters of credit is essentially the same as the credit risk in extending loans to customers, and they are subject to the same credit origination, maintenance, and management procedures in effect to monitor other credit products. As of December 31, 1996 and 1995, outstanding standby letters of credit totaled $4,994,000 and $2,448,000, respectively. 59 The Company does not offer or engage in any other off-balance sheet products such as commitments to purchase and sell foreign exchange, interest rate or currency swaps, or financial futures and options. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and projected future levels. Effects of Changing Prices The most direct effect of inflation is higher interest rates. However, the Company's earnings are not necessarily dependent on the absolute level of interest rates. Instead, earnings are affected by the spread between the yield on loans and investments and the cost of deposits and borrowing money. Another effect of inflation is upward pressure of the Company's operating expenses. It is management's opinion that the effects of inflation on the consolidated financial statements have not been material. 60 PACIFIC CAPITAL BANCORP AND SUBSIDIARIES PACIFIC CAPITAL BANCORP STOCK ACTIVITY The common stock of the Company is listed on the NASDAQ National Market under the symbol PABN. This listing became effective on November 20, 1996. Prior to that date, the Company's common stock was listed on the OTC Bulletin Board. The high and low prices listed below reflect actual trades which occurred in the specified time frames listed. Three brokerage firms effect transactions in the Company's stock: Van Kasper & Co., Sandler O'Neill Partners, L.P.; and Hoefer & Arnett, Inc. According to the Company's records, there were 2,063 shareholders as of September 10, 1996. In 1996 the Company paid four cash dividends of $0.15 per share to holders of record on March 15, June 28, September 16, and November 1, payable on March 29, June 28, September 30, and December 9, 1996, respectively. The Company also paid a five percent (5%) stock dividend payable to shareholders of record as of December 1, 1996. For information regarding restrictions on the payment of dividends see Note 14 to the accompanying consolidated financial Statements. - ------------------------------------------------------------------------------- Ranges of Common Stock Prices - ------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------- Quarter Low High - ------------------------------------------------------------------------------- First $24.05 $28.09 Second 25.47 27.63 Third 24.77 26.67 Fourth 25.38 27.63 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1995 - ------------------------------------------------------------------------------- Quarter Low High - ------------------------------------------------------------------------------- First $17.69 $18.59 Second 17.23 19.73 Third 20.86 23.13 Fourth 22.22 24.53 - ------------------------------------------------------------------------------- 61 - ---------------------------------------------------------------------------------------------------------------------- B o a r d o f D i r e c t o r s - ----------------------------------------------------------------------------------------------------------------------
First National Bank of Central Pacific Capital Bancorp California South Valley National Bank - --------------------------------------- -------------------------------------- -------------------------------------- Charles E. Bancroft Charles E. Bancroft Laruence M. Connell Director, President & CEO Director, President & CEO President Sequioa Insurance Company Sequioa Insurance Company Connell Realty Inc. Citation Insurance Company Citation Insurance Company Joseph A. Filice Gene DiCicco Gene DiCicco Partner Owner, Watsonville Nurseries Owner, Watsonville Nurseries Greco/Filice Accountancy Lewis L. Fenton Lewis L. Fenton Eugene R. Guglielmo Attorney, Fenton & Keller Attorney, Fenton & Keller Director & Executive Officer Emilio Guglielmo Winery Gerald T. Fry Gerald T. Fry Chief Financial Officer Chief Financial Officer D. Vernon Horton Office Products, Inc. Office Products, Inc. Chairman of the Board South Valley National Bank James L. Gattis James L. Gattis Investor, Civic Leader Investor, Civic Leader Roger C. Knopf President, Knopf Construction Inc. Eugene R. Guglielmo Stanley R. Haynes Director & Executive Officer Chairman of the Board Clayton C. Larson Emilio Guglielmo Winery Cinderella Carpets Vice Chairman South Valley National bank Stanley R. Haynes D. Vernon Horton Chairman of the Board Chief Executive Officer Edward J. Lazzarini Cinderella Carpets First National Bank of Central President California Lazzco Inc. D. Vernon Horton Chairman of the Board Hubert Hudson Donald G. Mountz Pacific Capital Bancorp Property Manager, Aptos Station President Mountz, Inc. Hubert W. Hudson William J. Keller, M.D. Property Manager, Aptos Station Physician William H. Pope Certified Public Accountant William J. Keller, M.D. Clayton C. Larson Physician President James R. Price First National Bank of Central President Roger C. Knopf California LynRob Enterprises President, Knopf Construction Inc. William S. McAfee, M.D. Mary Lou Rawitser Clayton C. Larson Physician Certified Financial Planner President, Pacific Capital Bancorp William H. Pope Brad L. Smith William S. McAfee, M.D. Certified Public Accountant President Physician South Valley National Bank William K. Sambrailo William H. Pope Chariman of the Board Certified Public Accountant Charles Sambrailo Paper Co. Mary Lou Rawitser Clyn Smith, Jr., M.D. Certified Financial Planner Physician, Retired William K. Sambrailo Robert B. Sheppard Chariman of the Board Vice Chariman, Retired Charles Sambrailo Paper Co. Allstate Insurance Companies Clyn Smith, Jr., M.D. Physician, Retired Robert B. Sheppard Vice Chariman, Retired Allstate Insurance Companies
62 The Corporation The Company is a California corporation and bank holding company that was incorporated on January 26, 1983. First National and South Valley, wholly owned subsidiaries of the Company, commenced operations in 1984 and 1983, respectively.. First National and South Valley are nationally chartered commercial banks serving Monterey, Santa Cruz, Santa Clara and San Benito Counties and surrounding areas in California.
First National Bank of South Valley Registrar & Transfer Agent Form 10-K Central California National Bank -------------------------- ---------------------------- Banking Offices Banking Offices ChaseMellon Shareholder A Copy of the Company's - ----------------------------- ----------------------------- Services Form 10-K as filed with the 1001 South Main Street 500 Tennant Station Overpeck Centre Securities and Exchange Salinas, California Morgan Hill, California 85 Challenger Road Commission is available, 93902-1786 95037 Ridgefield Park, NJ without charge, upon (408) 757-4900 (408) 778-1510 07660 written request. Please direct requests to: 495 Washington Street 8000 Santa Teresa Blvd. Monterey, California Gilroy, California Market Makers Dennis A. DeCius 93942-2718 95020 Hoefer & Arnett, Inc. Executive Vice President (408) 373-4900 (408) 848-2161 353 Sacramento Street Chief Financial Officer Tenth Floor Pacific Capital Bancorp 307 Main Street 1730 Airline Highway San Francisco, California P.O. Box 1786 Salinas, California Hollister, California 94111 Salinas, California 93902-1786 95023 93902-1786 (408) 757-4900 (408) 636-5581 Sandler O'Neill Partners, LP 2 World Trade Center Corporate Counsel 655 Main Street 301 Third Streer 104th Floor Graham & James Watsonville, California San Juan Bautista, Ca. New York, New York One Maritime Plaza 95077-1540 95045 10048 San Francisco, California (408) 728-2265 (408) 623-4590 94111 Van Kasper & Co. 26380 Carmel Rancho Lane 600 California Street Certified Public Carmel, California Suite 1700 Accountants 93922-2017 San Francisco, California KPMG Peat Marwick LLP (408) 626-2900 94108 50 West San Fernando Street San Jose, California 95113
63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized. Date: March 25, 1997 PACIFIC CAPITAL BANCORP ------------------------------------- By: /S/ Clayton C. Larson ----------------------- CLAYTON C. LARSON President /S/ Charles E. Bancroft Date: March 25, 1997 - -------------------------------------------- Charles E. Bancroft, Director /S/ Dennis A. DeCius Date: March 25, 1997 - -------------------------------------------- Dennis A. DeCius Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) /S/ Gene DiCicco Date: March 25, 1997 - -------------------------------------------- Gene DiCicco, Director /S/ Lewis L. Fenton Date: March 25, 1997 - -------------------------------------------- Lewis L. Fenton, Director 66 /S/ Gerald T. Fry Date: March 25, 1997 - -------------------------------------------- Gerald T. Fry, Director /S/ James L. Gattis Date: March 25, 1997 - -------------------------------------------- James L. Gattis, Director and Secretary /S/ Hubert W. Hudson Date: March 25, 1997 - -------------------------------------------- Hubert W. Hudson, Director /S/ Stanley R. Haynes Date: March 25, 1997 - -------------------------------------------- Stanley R. Haynes, Director /S/ D. Vernon Horton Date: March 25, 1997 - -------------------------------------------- D. Vernon Horton, Chairman of the Board and Director /S/ William J. Keller Date: March 25, 1997 - -------------------------------------------- William J. Keller, Director /S/ Eugene R.Guglielmo Date: March 25, 1997 ------------------------------------------- Eugene R. Guglielmo, Director /S/ Roger C. Knopf Date: March 25, 1997 - -------------------------------------------- Roger C. Knopf, Director 67 /S/ Clayton C. Larson Date: March 25, 1997 - -------------------------------------------- Clayton C. Larson, President and Director /S/ William S. McAfee Date: March 25, 1997 - -------------------------------------------- William S. McAfee, Director /S/ William K. Sambrailo Date: March 25, 1997 - -------------------------------------------- William K. Sambrailo, Director /S/ Robert B. Sheppard Date: March 25, 1997 - -------------------------------------------- Robert B. Sheppard, Director /S/ Clyn Smith, Jr. Date: March 25, 1997 - -------------------------------------------- Clyn Smith, Jr., Director /S/ Mary Lou Rawitser Date: March 25, 1997 - -------------------------------------------- Mary Lou Rawitser, Director 68 INDEX TO EXHIBITS
Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 3.1 Articles of incorporation of the Company an amended to date. 1/ (*) 3.2 Bylaws of Company as amended to date. 2/ (*) 10.1 Lease -- 601 Abrego Street, Monterey, Premises. 3/ (*) 10.2 Lease for 1001 South Main Street, Salinas, Banking office. 2/ (*) 10.3 Lease dated December 15, 1988 by and between the Bank (*) and James L. Gattis for 307 Main Street, Salinas Old Town Office. 2/ 10.4 Lease dated May 1, 1985 by and between the Bank (*) and Pacific Capital Bancorp. 4/ 10.5 Pacific Capital Bancorp Employee Stock Ownership (*) Plan and Trust Agreement. 5/ 10.6 Master Equipment Lease Agreement between Bank and (*) Parker North American Corporation. 5/ 10.7 Lease dated September 22, 1986 between (*) Bank and The Saunders Company. 5/ */ Not Applicable. - ----------------------------------------------------------------------- 1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1988, which are incorporated by reference. 2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual Report on Form 10-K (File No. 2-87513) for the fiscal year ended December 31, 1984, which are incorporated by reference. 3/ Filed as Exhibit to the Company's Registration Statement on Form S-18 (Registration No. 2-87513), which is incorporated by reference. 4/ Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1985, which is incorporated by reference. 5/ Filed as Exhibits 10.24 through 10.26, respectively, to Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1986, which are incorporated by reference.
69
Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.8 Matrix Funding Corporation Master Lease Agreement. 1/ (*) 10.9 Lease dated January 24, 1989 by and between First National Bank (*) of Monterey County and Stanley R. Haynes. 6/ 10.13 Amendment No. One to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 2/ 10.14 Amendment No. Two to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 7/ 10.15 Amendment No. Three to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 7/ 10.16 Lease dated August 10, 1990 by and between the (*) Trustees of the Stanley Family Trust and Pacific Capital Bancorp for Carmel Office. 7/ 10.17 Assignment of Lease dated November 1, 1990 by and (*) between Pacific Capital Bancorp and First National Bank of Monterey-County for Carmel Office. 7/ 10.18 Lease dated November 12, 1990 by and between (*) First National Bank of Monterey County and Carmel Monterey Travel for Premises located at 601 Abrego Street, Monterey, California. 7/ 10.19 Prunetree Shopping Center Lease dated June 28, 1988 (*) by and between Dennis R. Keith and Pajaro Valley Bancorporation. 7/ - ----------------------------------------------------------------------- 6/ Filed as Exhibits 10.20 through 10.24, respectively, to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1989, which are incorporated by reference. 7/ Filed as Exhibits 10.25 through 10.32 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1990, which are incorporated by reference.
70
Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.20 Lease dated June 21, 1990 by and between Saucito (*) Land Co. and First National Bank of Monterey County. 7/ 10.22 Amendment No. Four to Pacific Capital Bancorp (*) Employee Stock Ownership Plan. 8/ 10.23 Amendment dated May 20, 1991 to Lease dated (*) December 15, 1988 by and between the Bank and James L. Gattis for 307 Main Street, Salinas Old Town Office. 8/ 10.24 Pacific Capital Bancorp Directors' Stock Option Plan (*) and Form of Stock Option Agreement. 8/ 10.26 Pacific Capital Bancorp 1984 Stock Option Plan (*) and Forms of Agreements as amended to date. 8/ 10.30 Business Recovery Services Agreement dated (*) September 30, 1991 by and between Bank and J.D.B. & Associates, Inc. 8/ 10.31 Consolidated Agreement dated December 17, 1991 (*) by and between Bank and Unisys with Equipment Sale Agreement, Software License Agreement and Product License Agreement by and between Bank and information Technology, Inc. 8/ 10.32 Fidelity and Deposit Company of Maryland Directors and (*) Officers Liability Insurance Policy including Bank Reimbursement. 8/ 10.33 Fidelity and Deposit Company of Maryland (*) Financial Institution Bond. 8/ 10.34 Lease dated January 28, 1993 by and between J.W. and R.W. (*) McClellan, Partners, and First National Bank of Central California. 9/ 10.35 Exercise of Lease Option as of September 19, 1992 by and (*) between First National Bank of Central California and James L. Gattis. 9/ - ----------------------------------------------------------------------- 8/ Filed as Exhibits 10.23 through 10.34 to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1991, which are incorporated by reference. 9/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1993, which are incorporated by reference.
71
Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.37 Lease dated November 18, 1993 by and between Hazel Graven (*) and Vines Stewart and First National Bank of Central California. 10/ 10.38 Software License Agreement for Platform Transfer Module and Interface (*) dated September 15, 1993 by and between First National Bank of Central California and Information Technology, Inc. 10/ 10.39 Equipment Sale Agreement dated December 16, 1993 by and (*) between First National Bank of Central California and Information Technology, Inc. 10/ 10.40 Asset/Liability Management Software Agreement dated (*) December 31, 1993 by and between First National Bank of Central California and Profitstar, Inc. 10/ 10.41 Applications dated December 28, 1993 by First National Bank (*) of Central California to become a member of the California Bankers Clearing House Association. 10/ 10.42 Consolidated Agreement for the purchase of computer hardware (*) dated December 20, 1993 by and between First National Bank of Central California and Unisys Corporation. 10/ 10.46 Amended Pacific Capital Bancorp 1994 Stock Option Plan and Form of (*) Incentive and Non-Qualified Stock Option Agreements. 9/ 10.47 Amendment No. Five to Pacific Capital Bancorp Employee (*) Stock Ownership Plan and Trust. 10/ 10.48 Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/ (*) 10.49 Equipment Sale Agreement dated March 22, 1995, by and between (*) First National Bank of Central California and Information Technology, Inc. 11/ 10.50 Equipment Sale Agreement dated February 2, 1996, by and between (*) First National Bank of Central California and Information Technology, Inc. 11/ - ----------------------------------------------------------------------- 9/ Filed as Exhibits to the Company's Registration Statement on Form S-8 (File No. 33-83848) as filed on September 8, 1994, and Amendment No. 1 to Form S-8 as filed on November 15, 1994. 10/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1994, which are incorporated by reference. 11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1995, which are incorporated by reference.
72
Exhibit Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.51 Standard Form of Agreement between Owner (Pacific Capital Bancorp) (*) and Contractor (Daniels & House Construction Co.) for the renovation of existing building and construction of new addition for First National Bank of Central California at 1001 S. Main Street, Salinas, CA, 93901, dated June 15, 1995. 11/ 10.52 Employee Welfare Benefit Plan Agreement dated January 1, 1995, (*) between Pacific Capital Bancorp and Great-West Life & Annuity Insurance Co. 11/ 10.53 Lease Agreement dated October 29, 1996 by and between James L. Gattis and Pacific Capital Bancorp for property located at 517 S. Main Street, Salinas 10.54 Employment Agreement dated May 22, 1996 between First National Bank of Central California and Clayton C. Larson 10.55 Employment Agreement dated May 22, 1996 between First National Bank of Central California and D. Vernon Horton 10.56 Employment Agreement dated May 22, 1996 between First National Bank of Central California and Dennis A. DeCius 10.57 Employment Agreement dated November 20, 1996 between South Valley National Bank and Brad L. Smith 13. Pacific Capital Bancorp 1996 Annual Report to Shareholders --- (parts not incorporated by reference are furnished for informational purposes only and are not filed only and are not filed herewith). 21. Subsidiaries of the Company 22. Opinion of KPMG Peat Marwick, LLP 24. Consent of KPMG Peat Marwick LLP. 27. Financial Data Schedule - ----------------------------------------------------------------------- 11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended December 31, 1995, which are incorporated by reference.
73 EX-10.53 2 LEASE LEASE THIS LEASE is entered into between James L. Gattis, hereinafter called "Landlord", and Pacific Capital Bancorp, hereinafter called "Tenant." NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE 1. PREMISES Section 1.01: Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, for the term, at the rental and upon the conditions herein set forth, those certain Premises consisting of approximately 5,365 square feet located on the first floor at the property commonly known as 517 Main Street, Salinas, California. Quiet Enjoyment Section 1.02: The Landlord covenants and agrees that the Tenant on paying the rent and performing the covenants contained herein shall and may peaceably and quietly hold and enjoy the Premises for the term of this Lease. Subordination Section 1.03: This Lease shall be subordinate and subject at all times to any mortgage or deed of trust covering the Premises or which at any time hereafter shall be made, and to all advances made, or hereafter to be made, upon the security hereof; provided, however, such agreement by the parties to subordinate this Lease to any after-acquired mortgages or deeds of trust is expressly conditioned upon the mortgagee or beneficiary of any such mortgage or deed of trust agreeing in writing, in form and substance satisfactory to Tenant, to recognize and honor all rights of Tenant hereunder so long a Tenant is not in material default of any provision of this Lease (after the expiration of any applicable cure period.) ARTICLE 2. USE Permitted Use Section 1.01: The Premises are to be used for bank functions and related uses and for no other purpose without the written consent of Landlord. Prohibited Use Section 2.02: Tenant shall not do or permit anything to be done in or about the Premises, nor bring, nor keep anything therein which will in any way affect fire or other insurance upon the building, or any of its contents, or which shall in any way conflict with any law, ordinance, rule, or regulation affecting the occupancy and use of the Premises, which are 2 75 or may hereafter be enacted or promulgated by any public authority, or in any way obstruct or interfere with the rights of other tenants of the building, or injure or annoy them, nor use, nor allow the Premises to be used, for any improper, immoral, unlawful or objectionable purpose. Assignment Section 2.03: Tenant shall not assign, mortgage or hypothecate this Lease, or any interest therein, or permit the use of the Premises, or any part thereof, without the prior written consent of Landlord. Consent to any such assignment or subletting shall not operate as a waiver o the necessity for a consent to any subsequent assignment or subletting, and the terms of such consent shall be binding upon any person holding by, under, or through Tenant. Landlord's consent will not be unreasonably withheld. Any such assignment or subletting without such consent shall be void, and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest therein be assignable, as to the interest of Tenant, by operation of law, without the written consent of Landlord. In the event that the Premises are leased to more than one Tenant, this Lease shall automatically transfer to the survivor or survivors, in the event of death of one Tenant. Signs Section 2.04: Tenant will not permit or suffer any signs, advertisements, or notices to be displayed, inscribed upon or affixed on any part of the outside or inside of the Premises, or in the building of which they are a part, except as Landlord or Landlord's architect may approve. Any such approved sign shall be manufacture and installed at Tenant's sole cost. Rules and Regulations Section 2.05: Tenant agrees to observe faithfully, and comply strictly with, the rules and regulations promulgated from time to time by the Landlord, as in the Landlord's judgment are necessary for the safety, care and cleanliness of the building or for the preservation of good order therein. ARTICLE 3. TERM Term Section 3.01: The term of this Lease shall be for a period of twenty nine (29) months commencing of the lst day of December, 1996 and ending of the 30th day of April, 1999. Delivery and Possession 76 Section 3.02: In the event of the inability of Landlord to deliver possession of the Premises at the time of the commencement of the term of this Lease, neither Landlord nor its agents shall be liable for any damage caused thereby, nor shall this Lease thereby become void or voidable, nor shall the term herein specified be in any way extended, but in such event Tenant shall not be liable for any rent until such time as Landlord can deliver possession. The provisions of Subdivision (1) of Section 1932 of the California Civil Code shall not apply to this Lease, and the Tenant waives the benefit of such provisions. Surrender of Premises Section 3,03: (a) Tenant agrees to surrender the Premises at the termination of the tenancy herein created, in the same condition as herein agreed they have been received, reasonable use and wear thereof and damage by the act of God or by the elements excepted. Notice of Surrender Section 3.03: (b) Tenant shall, at least thirty (30) days before the last day of the term hereof, give to Landlord a written notice of intention to surrender the Premises on that date, but nothing contained herein shall be construed as an extension of the term hereof or as consent of Landlord to any holding over by Tenant. Holding Over Section 3.04: If Tenant holds possession of the Premises after the term of this Lease, Tenant shall, at the option of Landlord, to be exercised by Landlord's giving written notice to Tenant and not otherwise, become a tenant from month to month upon the terms and conditions herein specified, so far as applicable, at the same a monthly rental as that paid for the final month of the Lease, payable in advance, in lawful money, and shall continue to be such tenant until thirty (30) days after Tenant shall have given to Landlord or Landlord shall have given to Tenant a written notice of intention to terminate such monthly tenancy. Unless Landlord shall exercise the option hereby given him, Tenant shall be a tenant at sufferance only, whether or not Landlord shall accept any rent from Tenant while Tenant is so holding over. such liens Quitclaim Deed Section 3.05: Upon the expiration or earlier termination of this Lease, Tenant agrees to deliver a quitclaim deed in favor of Landlord releasing its interest in the Premises. Option to Renew 77 Section 3.06: (a) Tenant is hereby granted and shall, if Tenant is not at the time in default under this Lease, have options to renew this Lease as follows: lst Option 5 years (May 1, 1999 to April 30, 2004) 2nd Option 5 years (May 1, 2004 to April 30, 2009) Any extension shall be on the same terms, covenants, and conditions and subject to the same exceptions and reservations herein contained, with the rent to be paid by Tenant to Landlord under each option to be increased each year in the same manner as described in Section 4.01 herein. (b) Each option shall be exercised only by Tenant's delivering to Landlord in person or by United States mail on or before one hundred eighty (180) days before expiration of the term hereof, or any renewed term, written notice of his election to renew this Lease as herein provided. (c) Failure to exercise an option shall terminate Tenant's rights under this section to any further options or extension of this Lease. ARTICLE 4. RENT Rental Section 4.01: Tenant shall pay rent, free from all claims, demands, or set-offs against Landlord or any kind or character whatsoever, in advance, to the Landlord at 376-A Main Street, Salinas, California 93901, or such other place as Landlord may designate the sum of FIFTY FOUR THOUSAND DOLLARS ($54,000.00) per year payable at the rate of FOUR THOUSAND, FIVE HUNDRED DOLLARS ($4,500.00) per month payable on the Ist of each month. Section 4.02: Commencing December 1, 1997 and upon the expiration of each twelve (12) calendar month period thereafter, the monthly rent of Four Thousand, Five Hundred Dollars and no cents ($4,500.00) shall be increased by multiplying said rent by a fraction, which fraction, shall have as its numerator the Consumer Price Index for all items for the San Francisco/Oakland Metropolitan area (1977=100), as published by the U.S. Department of Labor, Bureau of Labor Statistics for month of September just prior to the applicable twelve (12) month period, and which such fraction shall have as its denominator said Consumer Price Index as published for the month of September 1996. In no event shall the rent be less than the rent paid for the prior year. In the event the said bureau should cease to publish said Index figure, then any similar Index published by any other branch or department of the U.S. Government shall be used, and if none is so published then another Index generally recognized as 78 authoritative shall be substituted by agreement of the parties hereto, or if no such agreement of the parties hereto, or if no such agreement is reached within a reasonable time, Lessor shall select another Index. ARTICLE 5. TAXES AND UTILITIES Taxes Section 5.01: In addition to the rental to be paid by Tenant to Landlord, as set forth herein, Tenant agrees to pay to Landlord on a prorata basis all taxes and assessments levied against the leased Premises and the building. Landlord shall furnish copies of any tax bills pertaining to the demised Premises as a condition of receiving said additional rent. The additional rent is to be paid within sixty (60) days after demand by Landlord. The provisions herein contained shall apply to taxes levied or assessed by any public body, whether or not such public body shall have previously levied or assessed taxes against the herein described property or any part thereof. Tenant shall pay all taxes levied against any personal property belonging to Tenant and located on the leased Premises. The term "Real Property Tax" shall not include any increase in tax which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the premises. Utilities Section 5.02: Tenant shall pay for all water, gas, heat, trash collection, telephone, electricity, power and all other utilities and janitorial services which may be furnished to or used in or about the Premises during the term of this Lease. ARTICLE 6. IMPROVEMENTS AND REPAIRS Repairs Section 6.01: Tenant has examined and inspected and knows the condition of the Premises and every part thereof and has received the same in good order and repair and accepts the same in their present condition. Tenant shall take good care of the Premises and they shall not be altered, repaired, or changed without the written consent of Landlord. Unless otherwise provided by written agreement, all alterations, improvements and changes that may be required shall be done either by or under the direction of Landlord, but at the cost of Tenant, and shall be the property of Landlord, and shall remain upon and be rendered with the Premises, excepting however that, at Landlord's option, Tenant shall, at its expense, when surrendering the Premises, remove from the Premises and the building all partitions, counters, railing, etc., installed in the Premises by or at the cost of Tenant. All damage or injury done to the Premises by Tenant, or by any person who may be in or upon the Premises with the consent of Tenant, shall be paid for by Tenant. Mechanic's Lien 79 Section 6.02: The Tenant shall not suffer or permit any mechanic's or materialmen's liens to be filed against the fee of the real property of which the Premises form a part nor against the Tenant's leasehold interest in the Premises. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices which it deems necessary for protection from such liens. If any such liens are so filed, landlord, at its election, may pay and satisfy the same and, in such event, the sums so paid by the Landlord, with interest at the rate of ten percent (10%) per annum from the date of payment, shall be deemed to be additional rent due and payable by the Tenant at once without notice or demand. ARTICLE 7. DESTRUCTION AND CONDEMNATION Destruction Section 7.01: If the Premises or the building wherein the same are situated shall be destroyed by fire or other cause, or be so damaged thereby that they are untenantable and cannot be rendered tenantable within ninety (90) days from the date of such destruction or damage, this Lease may be terminated by Landlord or Tenant by written notice. In case the damages or destruction be not such as to permit a termination of the Lease as above provided, then a proportionate reduction shall be made in the rent herein reserved corresponding to the time during which and to the portion of the Premises of which Tenant shall be deprived of possession. The provisions of Subdivision 2 of Section 1932 of the California Civil Code, and of Subdivision 4 of Section 1933 of that Code, shall not apply to this Lease, and Tenant hereby waives the benefit of such provisions. Condemnation Section 7.02: If the whole or any part of the Premises shall be taken or condemned b any competent authority under power of eminent domain for a public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease upon ninety (90) days prior written notice to Tenant, provided such notice is given not later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. Tenant shall have reciprocal termination rights if the whole or any material part of the Premises is taken, or if access to the Premises is materially impaired. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the term hereof and for moving expenses, so long as such claim does not diminish the award available to Landlord, and such claim is payable separately to Tenant. All rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first 80 occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the rent payable hereunder shall be proportionately abated. ARTICLE 8. INDEMNITY No Liability of Landlord Section 8.01: Landlord shall not be liable to Tenant for any injury or damage that may result to any person or property by or from any cause whatsoever, and without limiting the generality of the foregoing, whether caused by water leakage of any character from the room, walls, basement, or other portion of the Premises, or caused by gas, fire, oil, electricity, or any cause whatsoever, in, on, or about the Premises or any part thereof, except for such injury or damage resulting from the negligence or willful misconduct of Landlord or any of Landlord's agents, servants, or employees. Insurance Section 8.02: Tenant agrees to maintain in full force and effect at all times during the term of this Lease or any renewal thereof, public liability and property damage insurance insuring both Tenant and Landlord in amounts not less than FIVE HUNDRED THOUSAND DOLLARS ($500,000-00) per person and ONE MILLION DOLLARS ($1,000,000.00) per occurrence for injury to or death of persons, and in the amount of not less than FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) for injury to or loss of property. Tenant shall also provide fire insurance and glass insurance in amounts reasonably required by Landlord. Tenant shall furnish to Landlord copies of such policies or certificates issued showing that said policies are in force and effect and providing that at least ten (10) days written notice will be provided to Landlord before termination or cancellation of any insurance. Indemnification of Landlord Section 8.03: Tenant agrees to hold Landlord harmless from and defend Landlord against any and all claims or liability for any injury or damage to any person or property whatsoever (1) occurring in, on, or about the Premises or any part thereof; and (2) occurring in, on or about any facilities (including without prejudice to the generality of the term "facilities", stairways, passageways, or hallways, when such injury or damage shall be caused in part or in whole by the act, negligence or fault of, or omission of any duty with respect to the same by Tenant, his agents, servants, or employees.) ARTICLE 9. DEFAULT 81 Acts Constituting a Default Section 9.01: Any and all of the following actions shall constitute a default of this Lease: (a) Use of the Premises for any purpose other than as authorized in this Lease; or (b) Default in the payment of rent or any other sums owing when due; or (c) Abandonment or vacation of Tenant from the Premises; or (d) Assignment of the Premises by Tenant, either voluntarily or by operation of law, whether by judgment, executions, death, or any other means, without the consent of Landlord; or (e) The filing by Tenant or any other person of a voluntary or involuntary petition in bankruptcy or an arrangement by or against Tenant; the adjudication of Tenant as a bankrupt or insolvent; the appointment of a receiver of the business or of the assets of Tenant, except a receiver appointed at the instance or request of Landlord; the general or any other assignment by Tenant for the benefit of his creditors; or (f) A default in the performance of any of the terms, covenants, and conditions herein contained; or (g) The inability of Tenant to pay the rent herein specified or to perform any of the terms, covenants, or conditions herein by it to be kept or performed. Remedies Upon Default Section 9.02: In the event of a default of this Lease, and in addition to all other rights and remedies Landlord may have at law including the rights specified in Section 1951.2 of the California Civil Code, Landlord shall have the option to do any or all of the foregoing: Reentry of Premises (a) Immediately reenter and remove all persons and property in a public warehouse or elsewhere at the cost of, and for the account of, the Tenant, provided, however, notwithstanding anything to the contrary in this Section 9.02 (a) or any other provision of this Lease, Landlord shall not have the right to take possession of any of Tenant's business records or the records or personal property of any customer of Tenant located in the Premises, and provided further, that any rights and remedies of 82 Landlord hereunder are subject to the right and power of the Office of the Comptroller of the Currency and/or any other bank regulatory agency to enter upon and assume control of the Premises and of any personal property located therein. Collection of Rent (b) To collect by suit or otherwise each installment of rent or other sum as it becomes due hereunder, or to enforce, by suit or otherwise, any other term or provision hereof on the part of Tenant required to be kept or performed, it being specifically agreed that all unpaid installments of rent or other sums shall bear interest at the highest rate permitted by law from the due date thereof until paid. Termination of Lease (c) Terminate this Lease, in which event Tenant agrees to immediately surrender the possession of the Premises, and to pay to Landlord, in addition to any other remedy Landlord may have, all damages Landlord may incur by reason of its default, including the cost of recovering the Premises. Measure of Damages (d) The damages Landlord may recover include: (1) The worth at the time of award of the unpaid rent which had been earned at the time of termination of the Lease; (2) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination of the Lease until the time of award exceeds the amount of rental loss that Tenant proves could have been reasonably avoided; (3) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that Tenant provides could be reasonably avoided; and (4) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform his obligations under this Lease. Removal of Property Section 9.03: Tenant hereby irrevocably appoints landlord, as agent and attorney-in-fact of Tenant, to enter upon the Premises, in the event of default by Tenant in the payment of any rent herein reserved, or in the performance of any term, covenant or condition herein contained to be kept or 83 performed by Tenant, and to remove any and all furniture and personal property whatsoever situated upon the Premises, and to place such property in storage for the account of and at the expense of Tenant. In the event that 'Tenant shall not pay the cost of storing any such property after the property has been stored for a period of ninety (90) days or more, Landlord may sell any or all of such property, at places as Landlord in his sole discretion may deem proper, without notice to Tenant or any demand upon Tenant for the payment of any part of such charges or the removal of any of such property, and shall apply the proceeds of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the costs of or charges for storing any such property; third to the payment of any other sums of money which may then or thereafter be due to the Landlord from Tenant under any of the terms thereof; and fourth, the balance, if any, to Tenant. Waiver of Damages Section 9.04: Tenant hereby waives all claims for damages that may be caused by Landlord's reentering and taking possession of the Premises or removing and storing furniture and property, as herein provided, and will save Landlord harmless from loss, costs or damages occasioned thereby, and no such reentry shall be considered or construed to be a forcible entry as the same is defined in the Code of Civil Procedure of the State of California. Waiver of Breach Section 9.05: Landlord's failure to take advantage of any default or breach of covenant on the part of Tenant shall not be, or be construed as a waiver thereof, nor shall any custom or practice which may grow up between the parties in the course of administering this instrument be construed to waive or lessen the right of Landlord to insist upon the performance by Tenant of any term, covenant or condition hereof, or to exercise any rights given him on account of any such default. a waiver of a particular breach, or default, shall not be deemed to be a waiver of the same or any other subsequent breach or default. The acceptance of rent hereunder shall not be, or be construed to be, a waiver of any term, covenant or condition of this Lease. Cumulative Remedies Section 9.06: The foregoing remedies of Landlord shall not be exclusive, but shall be cumulative and in addition to all remedies now or hereafter allowed by law or elsewhere provided. Landlord Curing Default 84 Section 9.07: Upon ten (10) days prior written notice to the Tenant by the Landlord, it is agreed that the Landlord may cure any default by the Tenant hereunder and, if necessary, may enter upon the Premises for such purpose, and in such event the cost thereof to Landlord shall be deemed additional rent payable by the Tenant, which shall become immediately due and payable. ARTICLE 10. INSPECTION AND NOTICES Inspection) Section 10.01: Subject to any applicable regulations of the Office of the Controller of the Currency or any other bank regulatory agency, Tenant will permit Landlord and its agents to enter into and upon the Premises at all reasonable times for the purpose of inspecting the same, or for the purpose of protecting owner's reversions, or to make alterations or additions to the Premises or to any other portion of the building in which the Premises are situated, without any rebate of rent to Tenant for any loss of occupancy or quiet enjoyment of the Premises, or damage, injury, or inconvenience thereby occasioned, and will permit landlord at any time within ninety (90) days prior to the expiration of this Lease to bring upon the Premises, for the purposes of inspection or display, prospective tenants thereof. Notices Section 10.02: Any notice, demand or communication under, or in connection with, this Lease may be served upon Landlord by personal service, or by mailing the same by registered mail in the United States Post Office, postage prepaid, and directed to Landlord at 376-A Main Street, Salinas, California 93901, and may likewise be served on Tenant by personal service or by so mailing the same addressed to Tenant at 517 Main Street, Salinas, California 93901. Either Landlord or Tenant may change such address by notifying the other party in writing as to such new address as Tenant or Landlord may desire used and which address shall continue as the address until further written notice. ARTICLE 11. GENERAL PROVISIONS Covenants Section 11.0l.: It is mutually agreed that the letting hereunder is made upon and subject to the terms, covenants, and conditions of this Lease and that Tenant covenants as a material part of the consideration for this Lease, to keep and perform each and all of said terms, covenants and conditions by him to be kept or performed, and that this Lease is made upon the condition of such performance. 85 Provisions Deemed Covenants and Conditions Section 11.02: The parties hereto agree that all the provisions hereof are to be construed as covenants and conditions as though the words importing such covenants and conditions were used in each instance and that all of the provisions hereof shall bind and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. Time of the Essence Section 11.03: Time is of the essence in the performance of each provision of this Lease. Cumulative Remedies Section 11.04: The specified remedies to which Landlord or Tenant may resort under the terms of this Lease are cumulative and not intended to be exclusive of any other remedies afforded by law. The waiver of the performance of any covenant, term or condition of this Lease by Landlord and Tenant shall not be construed as a waiver of any subsequent breach of the same covenant, term or condition. Attorney's Fees Section 11.05: In the event that suit is brought for the recovery of any rent due hereunder, or for the recovery of possession of said demised Premises, or for the breach of any of the terms, conditions or covenant of this Lease, the prevailing party shall be entitled to receive attorney's fees, costs and necessary disbursements, in addition to any other relief to which it or he may be entitled. Interest on Money Due Section 11.06: Any sum accruing to Landlord or Tenant under the provisions of this Lease which shall not be paid when due shall bear interest at the rate of ten percent (10%) per annum from the date written notice specifying such nonpayment is served upon the defaulting party until paid. Invalidity Section 11.07-. If any term, covenant, condition, or provision of this Lease is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions hereof shall remain in full force and effect and shall in no way be affected, impaired, or invalidated thereby. Agency Section 11-08: Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third person to create the relationship of principal and agent or of partnership or of joint venture or of any other association other than Landlord and Tenant. 86 Extensions Section 11.09: All references to the term of this Lease shall include any extensions of such term. Captions) Section 11.10: The captions of articles of this Lease are for reference only and are not to be construed in any way as a part of this Lease. Binding Effect: Counterparts Section 11.1l.: This Lease shall not be binding and in effect until a counterpart hereof has been executed and delivered by the parties each to the other. Execution Section 11.12: The parties have executed this Lease at the place and on the dates specified immediately above their respective signatures. LANDLORD: TENANT: Executed at Salinas, Ca Executed at Salinas, Ca --------------- ----------- on October 29, 1996 on November 20, 1996 ----------------------- ------------------- Pacific Capital Bancorp /s/ James L. Gattis /s/ Dennis A. DeCius - ---------------------------- ------------------------ James L. Gattis Dennis A. DeCius EVP and CFO 87 EX-10.54 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (hereinafter referred to as "Agreement") is made effective as of May 22, 1996, by and between FIRST NATIONAL BANK OF CENTRAL CALIFORNIA (hereinafter referred to as "Employer") and CLAYTON C. LARSON (hereinafter referred to as "Employee"). Employer desires to employ, as President, a person of high executive caliber with significant prior experience in banking services which Employer provides. Employee being willing to be employed by Employer as President, and Employer being willing to employ Employee on the terms, covenants and conditions hereinafter set forth, it is agreed as follows: 1. Position. Employee is hereby employed as President of Employer. 2. Employment Term. The term of this Agreement shall commence effective May 22, 1996, and continue for three (3) years thereafter through May 21, 1999, unless earlier terminated pursuant to Paragraph 6 below, such period being the term of this Agreement. 3. Employee Duties. Employee shall hold and perform the customary responsibilities and duties of the position of President, as designated by the Bylaws of Employer and as directed by Employer through its Board of Directors (hereinafter referred to as "Board"). 4. Extent of Services. Employee shall devote his full time, attention and energies to the business of Employer, and shall not, during the term of this Agreement, engage directly or indirectly, in any other business activity, except personal investments, without the prior written consent of Employer. 5. Compensation and Benefits. Employee's salary shall be at the rate of $165,672 per year, prorated for any partial year in which this Agreement is in effect (as such salary may be adjusted during the term of this Agreement, the "Base Salary"). Said salary shall be payable in equal semi-monthly installments. Any salary increase shall be at the sole discretion of the Board. Employer agrees to review and evaluate Employee's performance at the end of each fiscal year to determine whether Employee should be paid a cash bonus (the "Bonus"). The amount of such Bonus, if any, will be determined in the sole discretion of the Board. In addition, Employee shall receive the following benefits: (a) Automobile. Employer shall provide Employee with a full-size automobile, the make, model and equipment of which shall be determined by Employer, solely for his use alone during the term of this Agreement. Employer shall pay or reimburse Employee for all auto expenses incurred in the use of said automobile by Employee in the performance of his duties under this Agreement. Employer shall maintain an automobile Liability insurance 88 policy on said automobile, with coverage to include Employee's operation of said automobile and in such amounts as Employer and Employee shall agree upon. (b) Insurance. Employer shall be a participant in such group life insurance, health and long-term disability plans as are maintained by Employer, at Employer's sole cost and expense. In addition, Employer shall, at its sole cost and expense, provide Employee with a copy of standard term life insurance in the face amount of $250,000. Employee shall have the right, in Employee's sole discretion, to designate the beneficiary or beneficiaries of any such insurance. (c) Vacation. Employee shall receive four (4) weeks paid vacation per year, prorated for any partial calendar year in which this Agreement is in effect, which shall be taken at such time or times as mutually agreed upon by Employee and the Board, provided that at least two (2) weeks of such vacation shall be taken consecutively per calendar year. Employee acknowledges that the requirement of two (2) consecutive weeks of vacation is required by sound banking practices. (d) General Expenses. Employer shall, upon submission and approval of written statements and bills in accordance with the then-regular procedures of Employer, pay or reimburse Employee for any and all necessary, customary and usual expenses incurred by him while traveling for or on behalf of Employer and any and all other necessary, customary or usual expenses (including entertainment) incurred by employee for or on behalf of Employer in the normal course of business as determined to be appropriate by Employer. (e) Other Benefits. In the event that Employer in the future establishes any other benefit plan for its senior executives generally, Employee shall be eligible to participate in such plan on the terms and conditions stated in the legal documents for such plan. 6. Termination. This Agreement may be terminated prior to May 21, 1999, with or without cause in accordance with this Paragraph 6(a) through 6(f). In the event of such termination, Employee shall be released from all obligations under this Agreement, except that Employee shall remain subject to Paragraphs 7, 8, 12 (c), 12 (i) and 12 (j), and Employer shall be released from all obligations under this Agreement, except as otherwise provided in this Paragraph and Paragraphs 12(c), 12(e), 12(i) and 12 (j). (a) Early Termination By Employer Without Cause. This Agreement may be terminated without cause, for any reason whatsoever, in the sole, absolute and unreviewable discretion of Employer, upon thirty (30) days' written notice by Employer to Employee. If this Agreement is terminated pursuant to this Paragraph 6(a), or the term of this Agreement is not extended upon expiration thereof, Employee shall receive (i) the salary and insurance benefits as provided under the terms of this Agreement for a period of six (6) months from the date of such termination provided Employee shall, at his discretion, be entitled to receive such salary payment in a lump sum in lieu of receiving such salary payments over a period of six (6) months following termination; and (ii) a bonus for the year in which the termination occurs, prorated based upon the fraction of the calendar year Employee was employed, if, and only if, a bonus program for that year has been established prior to such termination and such-plan provides for calculable bonuses not based on the discretion of Employer. Such salary and insurance benefits 2 89 shall be in full and complete satisfaction of any and all rights which Employee may enjoy under this Agreement and shall be the sole compensation and/or damages payable to Employee as the result of termination of this Agreement without cause. (b) Early Termination By Employer For Cause. This Agreement may be terminated for cause by Employer immediately upon written notice to Employee, and Employee shall not be entitled to receive compensation or other benefits for any period after termination for cause. Employee understands and agrees that satisfactory performance of this Agreement on his part requires conformance with the highest standards of integrity, diligence, competence, skill, judgment and efficiency in the banking industry and that failure to conform to such standards is cause for termination of the Agreement by Employer. Cause for termination pursuant to this Paragraph 6(b) also includes: (1) failure to qualify for a surety bond as provided in Paragraph 11 of this Agreement; (2) violation of any law, rule or regulation (other than a traffic violation or similar offense); (3) acts causing termination of Employer's Banker's Blanket Bond with respect to Employee; (4) repeated insobriety or usage of drugs without prescription, (5) misappropriation of Employer's property; (6) any act of dishonesty; (7) neglect of duties or negligence in carrying out duties; (8) repeated unexcused absence; (9) breach of any material provision of this Agreement: and (10) any act or omission that is seriously detrimental to Employer's interests. (c) Early Termination By Employee. This Agreement may be terminated by Employee upon thirty (30) days' written notice to Employer. (d) Early Termination Upon Disability. If Employee becomes disabled due to a physical or mental disability so that he is unable to perform the essential functions of his position and the disability cannot be reasonably accommodated without undue hardship, Employer may at its option terminate this Agreement. Employee shall be entitled to the salary provided for in Paragraph 5 of this Agreement for a period of not to exceed six (6) months from the date of Employee's first absence due to the disability, but not beyond May 21, 1999, and to accrued but unused vacation leave. Employee's salary in the event of disability and termination therefor shall be offset by any payments received by Employee as a result of a disability insurance policy purchased by Employer for Employee. All other benefits provided for under this Agreement shall cease as of the date of termination. For purposes of this Agreement, physical or mental disability shall mean the inability of Employee to fully perform under this Agreement for a continuous period of ninety (90) days, as determined by a physician in the case of physical disability, or a psychiatrist in the case of mental disability, licensed to practice medicine in California and selected jointly by Employer and Employee. Upon demand by Employer, Employee shall act promptly to select such physician or psychiatrist jointly with Employer, shall consent to undergo any reasonable examination or test and shall authorize release of all pertinent medical records to Employer. Recurrent disabilities will be treated as separate disabilities if they result from unrelated causes or if they result from the same or related cause or causes and are separated by a continuous period of at least six (6) full months during which Employee was able to perform his duties hereunder equal to at least eighty percent (80%) of his capacity prior to disability. Otherwise, recurrent disabilities will be treated as a 3 90 continuation of previous disabilities for the purpose of determining the limitations established in this paragraph. (e) Death During Employment. This Agreement shall terminate immediately upon the death of Employee. (f) Change of Control. In the event of a change in control by merger of Employer and/or Pacific Capital Bancorp, the parent company of Employer (hereinafter referred to as "Pacific"), into another bank and/or holding company or other entity or by purchase of Employer and/or Pacific or the purchase of all or substantially all of the assets of Employer and/or Pacific by another bank and/or holding company or other person or entity, not resulting from financial difficulties or insolvency of Employer and/or Pacific, then Employee shall be paid two and one-half times his annual Base Salary plus Bonus as defined in Section 5 of this Agreement for the average of the three years immediately preceding the effective time of such change of control, which amount shall be due and payable to Employee at the effective time of such change in control together with any Base Salary and Bonus earned to such date. 7. Printed Material. All written or printed materials used by Employee in performing duties for Employer are and shall remain the property of Employer. Upon termination of employment, Employee shall promptly return such written or printed materials to Employer. 8. Disclosure of Information. Employee recognizes and acknowledges that Employer and Pacific possess information concerning their business affairs and methods of operation which constitute valuable, special and unique assets of their businesses. Employee shall not, at any time before or after termination of this Agreement, disclose to anyone any confidential information relating to Employer, Pacific or any affiliate of Pacific. For purpose of this paragraph, confidential information includes all information regarding products, services, processes, know-how, customers, suppliers, product and/or service development, business plans, research, finances, marketing, pricing, costs and any other proprietary matters relating to Employer, Pacific or any affiliate of Pacific. Employee recognizes and acknowledges that all financial information concerning any of Employer's customers is strictly confidential, and Employee shall not at any time before or after termination of this Agreement disclose to anyone any such financial information or any part thereof, for any reason or purpose whatsoever. 9. Noncompetition by Employee. During the term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any competing banking business; provided, however, Employee shall not be restricted by this paragraph from owning securities of corporations listed on a national securities exchange or regularly traded by national securities dealers, so long as such investment does not exceed one percent (1%) of the market value of the outstanding securities of such corporation. 10. Moral Conduct. Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will 4 91 reasonably tend to degrade him or to bring him into public hatred, contempt or ridicule or that will reasonably tend to shock or offend the community or to prejudice Employer or the banking industry in general. 11. Surety Bond. Employee agrees that he will furnish all information and take any steps necessary to enable Employer to obtain or maintain a fidelity bond, satisfactory to Employer. conditional on the rendering of a true account by Employee of all monies, goods or other property which may come into the custody, charge or possession of Employee during the term of this employment. Employer shall pay all premiums on the bond. If Employee cannot qualify for a surety bond at any time during the term of this Agreement, Employer shall have the option to terminate this Agreement immediately. 12. General Provisions. This Agreement is further governed by the following provisions: (a) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements among the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of a party which are not embodied herein, and that no other agreement, statement, representation, inducement or promise not contained in this Agreement shall be valid or binding. Any modification, waiver or amendment of this Agreement will be effective only if it is in writing and signed by the party to be charged. (b) Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (c) Choice of Law and Forum. This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent preempted by the laws of the United States. Any action or proceeding brought upon or arising out of this Agreement or its termination shall be brought in a forum located within the State of California. (d) Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon Employer, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire all or substantially all of Employer's assets and business or with or into which Employer or Pacific may be consolidated, merged or otherwise reorganized, and this provision shall apply in the event of any subsequent merger, consolidation reorganization or transfer. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives. The rights and obligations of Employee under this Agreement shall not be transferable by Employee by 5 92 assignment or otherwise and such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. (e) Indemnification. Employer shall indemnify Employee to the maximum extent permitted under the Bylaws of Employer and the governing laws for any liability or loss arising out of Employee's actual or asserted misfeasance or nonfeasance in the good faith performance of his duties or out of any actual or asserted wrongful act against or by Employer, including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. If available at reasonable rates, which shall be determined by the Employer in its sole discretion, Employer shall endeavor to apply for and obtain directors' and officers' liability insurance to indemnify and insure Employer and Employee from such liability or loss. (f) Severability. In the event that any term or condition contained in this Agreement shall, for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. (g) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (h) Notices. Any notices to be given hereunder by any party to another party may be effected either by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses indicated at the end of this Agreement, but each party may change his or her address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing. (i) Arbitration. Any controversy or claim arising out of or relating to this Agreement or alleged breach of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three (3) arbitrators, one (1) to be chosen directly by each party and the third (3rd) arbitrator to be selected by the two (2) arbitrators so chosen. Each party shall pay the fees of the arbitrator he/it selects and of his/its own attorneys, and the expenses of his/its witnesses and all other expenses connected with presenting his/its case. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, administrative fees, the fee of the third (3rd) arbitrator, and all other fees and costs shall be borne equally by the parties. (j) Attorneys' Fees and Costs. If any action at law or in equity is brought by a party upon or arising out of this Agreement or its termination, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements incurred in the action, in addition to any other relief to which he may be entitled. 6 93 IN WITNESS WHEREOF, the parties hereto have set their hands this 22nd day of May, 1996, in the City of Salinas, County of Monterey, State of California. EMPLOYER: FIRST NATIONAL BANK OF CENTRAL CALIFORNIA By: /s/ William H. Pope ----------------------------------- Its: Executive Committee Chairman ----------------------------------- EMPLOYEE: /s/ Clayton C. Larson ----------------------------------------- Clayton C. Larson 2 La Pradera Carmel, CA 93923 7 94 EX-10.55 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (hereinafter referred to as "Agreement") is made effective as of May 22, 1996, by and between FIRST NATIONAL BANK OF CENTRAL CALIFORNIA (hereinafter referred to as "Employer") and D. VERNON HORTON (hereinafter referred to as "Employee"). Employer desires to employ, as Chairman, a person of high executive caliber with significant prior experience in the banking services which Employer provides. Employee being willing to be employed by Employer as Chairman, and Employer being willing to employ Employee on the terms, covenants and conditions hereinafter set forth, it is agreed as follows: 1. Position. Employee is hereby employed as President of Employer. 2. Employment Term. The term of this Agreement shall commence effective May 22, 1996, and continue for three (3) years thereafter through May 21, 1999, unless earlier terminated pursuant to Paragraph 6 below, such period being the term of this Agreement. 3. Employee Duties. Employee shall hold and perform the customary responsibilities and duties, of the position of Chairman as designated by the Bylaws of Employer and as directed by Employer through its Board of Directors (hereinafter referred to as "Board"). 4. Extent of Services. Employee shall devote his full time, attention and energies to the business of Employer, and shall not, during the term of this Agreement, engage directly or indirectly, in any other business activity, except personal investments, without the prior written consent of Employer. 5. Compensation and Benefits. Employee's salary shall be at the rate of $171,254 per year, prorated for any partial year in which this Agreement is in effect (as such may be adjusted during the term of this Agreement, the "Base Salary"). Said salary shall be payable in equal semi-monthly installments. Any salary increase shall be at the sole discretion of the Board. Employer agrees to review and evaluate Employee's performance at the end of each fiscal year to determine whether Employee should be paid a cash bonus (the "Bonus"). The amount of such bonus, if any, will be determined in the sole discretion of the Board. In addition, Employee shall receive the following benefits: (a) Automobile. Employer shall provide Employee with a full-size automobile. the make, model and equipment of which shall be determined by Employer, solely for his use alone during the term of this Agreement. Employer shall pay or reimburse Employee for all auto expenses incurred in the use of said automobile by Employee in the performance of his duties under this Agreement. Employer shall maintain an automobile liability insurance policy on said automobile, with coverage to include Employee's operation of said automobile and in such amounts as Employer and Employee shall agree upon. 95 (b) Insurance. Employer shall be a participant in such group life insurance, health and long-term disability plans as are maintained by Employer, at Employer's sole cost and expense. In addition, Employer shall, at its sole cost and expense, provide Employee with a copy of standard term life insurance in the face amount of $250,000. Employee shall have the right, in Employee's sole discretion, to designate the beneficiary or beneficiaries of any such insurance. (c) Vacation. Employee shall receive four (4) weeks paid vacation per year, pronated. for any partial calendar year in which this Agreement is in effect, which shall be taken at such time or times as mutually agreed upon by Employee and the Board, provided that at least two (2) weeks of such vacation shall be taken consecutively per calendar year. Employee acknowledges that the requirement of two (2) consecutive weeks of vacation is required by sound banking practices. (d) General Expenses. Employer shall, upon submission and approval of written statements and bills in accordance with the then-regular procedures of Employer, pay or reimburse Employee for any and all necessary, customary and usual expenses incurred by him while traveling for or on behalf of Employer and any and all other necessary, customary or usual expenses (including entertainment) incurred by employee for or on behalf of Employer in the normal course of business as determined to be appropriate by Employer. (e) Other Benefits. In the event that Employer in the future establishes any other benefit plan for its senior executives generally, Employee shall be eligible to participate in such plan on the terms and conditions stated in the legal documents for such plan. 6. Termination. This Agreement may be terminated prior to May 21, 1999, with or without cause in accordance with this Paragraph 6(a) through 6(f). In the event of such termination, Employee shall be released from all obligations under this Agreement, except that Employee shall remain subject to Paragraphs 7, 8, 12 (c), 12 (i) and 12 (j), and Employer shall be released from all obligations under this Agreement, except as otherwise provided in this Paragraph and Paragraphs 12(c), 12(e), 12(i) and 12(j). (a) Early Termination By Employer Without Cause. This Agreement may be terminated without cause, for any reason whatsoever, in the sole, absolute and unreviewable discretion of Employer, upon thirty (30) days' written notice by Employer to Employee. If this Agreement is terminated pursuant to this Paragraph 6(a), if the term of this Agreement is not extended upon expiration thereof, Employee shall receive (i) the salary and insurance benefits as provided under the terms of this Agreement for a period of six (6) months from the date of such termination provided Employee shall, at his discretion, be entitled to receive such salary payment in a lump sum in lieu of receiving such salary payments over a period of six (6) months following termination; and (ii) a bonus for the year in which the termination occurs, prorated based upon the fraction of the calendar year Employee was employed, if, and only if, a bonus program for that year has been established prior to such termination and such plan provides for calculable bonuses not based on the discretion of Employer. Such salary and insurance benefits shall be in full and complete satisfaction of any and all rights which Employee may enjoy under 96 this Agreement and shall be the sole compensation and/or damages payable to Employee as the result of termination of this Agreement without cause. (b) Early Termination By Employer For Cause. This Agreement may be terminated for cause by Employer immediately upon written notice to Employee, and Employee shall not be entitled to receive compensation or other benefits for any period after termination for cause. Employee understands and agrees that satisfactory performance of this Agreement on his part requires conformance with the highest standards of integrity, diligence, competence, skill, judgment and efficiency in the banking industry and that failure to conform to such standards is cause for termination of the Agreement by Employer. Cause for termination pursuant to this Paragraph 6(b) also includes: (1) failure to qualify for a surety bond as provided in Paragraph 11 of this Agreement; (2) violation of any law, rule or regulation (other than a traffic violation or similar offense); (3) acts causing termination of Employer's Banker's Blanket Bond with respect to Employee; (4) repeated insobriety or usage of drugs without prescription; (5) misappropriation of Employer's property; (6) any act of dishonesty; (7) neglect of duties or negligence in carrying out duties; (8) repeated unexcused absence; (9) breach of any material provision of this Agreement; and (10) any act or omission that is seriously detrimental to Employer's interests. (c) Early Termination By Employee. This Agreement may be terminated by Employee upon thirty (30) days' written notice to Employer. (d) Early Termination Upon Disability. If Employee becomes disabled due to a physical or mental disability so that he is unable to perform the essential functions of his position and the disability cannot be reasonably accommodated without undue hardship, Employer may at its option terminate this Agreement. Employee shall be entitled to the salary provided for in Paragraph 5 of this Agreement for a period of not to exceed six (6) months from the date of Employee's first absence due to the disability, but not beyond May 21, 1999, and to accrued but unused vacation leave. Employee's salary in the event of disability and termination therefor shall be offset by any payments received by Employee as a result of a disability insurance policy purchased by Employer for Employee. All other benefits provided for under this Agreement shall cease as of the date of termination. For purposes of this Agreement, physical or mental disability shall mean the inability of Employee to fully perform under this Agreement for a continuous period of ninety (90) days, as determined by a physician in the case of physical disability, or a psychiatrist in the case of mental disability, licensed to practice medicine in California and selected jointly by Employer and Employee. Upon demand by Employer, Employee shall act promptly to select such physician or psychiatrist jointly with Employer, shall consent to undergo any reasonable examination or test and shall authorize release of all pertinent medical records to Employer. Recurrent disabilities will be treated as separate disabilities if they result from unrelated causes or if they result from the same or related cause or causes and are separated by a continuous period of at least six (6) full months during which Employee was able to perform his duties hereunder equal to at least eighty percent (80%) of his capacity prior to disability. Otherwise, recurrent disabilities will be treated as a continuation of previous disabilities for the purpose of determining the limitations established in this paragraph. 97 (e) Death During Employment. This Agreement shall terminate immediately upon the death of Employee. (f) Change of Control. In the event of a change in control by merger of Employer and/or Pacific Capital Bancorp, the parent company of Employer (hereinafter referred to as "Pacific"), into another bank and/or holding company or other entity or by purchase of Employer and/or Pacific or the purchase of all or substantially all of the assets of Employer and/or Pacific by another bank and/or holding company or other person or entity, not resulting from financial difficulties or insolvency of Employer and/or Pacific, then Employee shall be paid two and one-half times his annual Base Salary plus Bonus as defined in Section 5 of this Agreement for the average of the three years immediately preceding the effective time of such change of control, which amount shall be due and payable to Employee at the effective time of such change in control together with any Base Salary and Bonus earned to such date. 7. Printed Material. All written or printed materials used by Employee in performing duties for Employer are and shall remain the property of Employer. Upon termination of employment, Employee shall promptly return such written or printed materials to Employer. 8. Disclosure of Information. Employee recognizes and acknowledges that Employer and Pacific possess information concerning their business affairs and methods of operation which constitute valuable, special and unique assets of their businesses. Employee shall not, at any time before or after termination of this Agreement, disclose to anyone any confidential information relating to Employer, Pacific or any affiliate of Pacific. For purpose of this paragraph, confidential information includes all information regarding products, services, processes, know-how, customers, suppliers, product and/or service development, business plans, research, finances, marketing, pricing, costs and any other proprietary matters relating to Employer, Pacific or any affiliate of Pacific. Employee recognizes and acknowledges that all financial information concerning any of Employer's customers is strictly confidential, and Employee shall not at any time before or after termination of this Agreement disclose to anyone any such financial information or any part thereof, for any reason or purpose whatsoever. 9. Noncompetition by Employee. During the term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any competing banking business; provided, however, Employee shall not be restricted by this paragraph from owning securities of corporations listed on a national securities exchange or regularly traded by national securities dealers, so long as such investment does not exceed one percent (1%) of the market value of the outstanding securities of such corporation. 10. Moral Conduct. Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will reasonably tend to degrade him or to brine, him into public hatred, contempt or ridicule or that 98 will reasonably tend to shock or offend the community or to prejudice Employer or the banking industry in general. 11. Surety Bond. Employee agrees that he will furnish all information and take any steps necessary to enable Employer to obtain or maintain a fidelity bond, satisfactory to Employer, conditional on the rendering of a true account by Employee of all monies, goods or other property which may come into the custody, charge or possession of Employee during the term of this employment. Employer shall pay all premiums on the bond. If Employee cannot qualify for a surety bond at any time during the term of this Agreement, Employer shall have the option to terminate this Agreement immediately. 12. General Provisions. This Agreement is further governed by the following provisions: (a) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements among the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of a party which are not embodied herein, and that no other agreement, statement, representation, inducement or promise not contained in this Agreement shall be valid or binding. Any modification, waiver or amendment of this Agreement will be effective only if it is in writing and signed by the party to be charged. (b) Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (c) Choice of Law and Forum. This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent preempted by the laws of the United States. Any action or proceeding brought upon or arising out of this Agreement or its termination shall be brought in a forum located within the State of California. (d) Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon Employer, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire all or substantially all of Employer's assets and business or with or into which Employer or Pacific may be consolidated, merged or otherwise reorganized, and this provision shall apply in the event of any subsequent merger, consolidation, reorganization or transfer. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives. The rights and obligations of Employee under this Agreement shall not be transferable by Employee by assignment or otherwise and such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. 99 (e) Indemnification. Employer shall indemnify Employee to the maximum extent permitted under the Bylaws of Employer and the governing laws for any liability or loss arising out of Employee's actual or asserted misfeasance or nonfeasance in the good faith performance of his duties or out of any actual or asserted wrongful act against or by Employer, including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. If available at reasonable rates, which shall be determined by the Employer in its sole discretion, Employer shall endeavor to apply for and obtain directors' and officers' liability insurance to indemnify and insure Employer and Employee from such liability or loss. (f) Severability. In the event that any term or condition contained in this Agreement shall, for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. (g) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (h) Notices. Any notices to be given hereunder by any party to another party may be effected either by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses indicated at the end of this Agreement, but each party may change his or her address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing. (i) Arbitration. Any controversy or claim arising out of or relating to this Agreement or alleged breach of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three (3) arbitrators, one (1) to be chosen directly by each party and the third (3rd) arbitrator to be selected by the two (2) arbitrators so chosen. Each party shall pay the fees of the arbitrator he/it selects and of his/its own attorneys, and the expenses of his/its witnesses and all other expenses connected with presenting his/its case. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, administrative fees, the fee of the third (3rd) arbitrator, and all other fees and costs shall be borne equally by the parties. (j) Attorneys' Fees and Costs. If any action at law or in equity is brought by a party upon or arising out of this Agreement or its termination, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements incurred in the action, in addition to any other relief to which he may be entitled. 100 IN WITNESS WHEREOF, the parties hereto have set their hands this 22nd day of June, 1996, in the City of Salinas, County of Monterey, State of California. EMPLOYER: FIRST NATIONAL BANK OF CENTRAL CALIFORNIA By:/s/ William H. Pope -------------------- Its: Executive Committee Chairman ----------------------------- EMPLOYEE: /s/ D. Vernon Horton -------------------- D. Vernon Horton 19535 Redding Drive Salinas, CA 93908 101 EX-10.56 5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (hereinafter referred to as "Agreement") is made effective as of May 22, 1996, by and between FIRST NATIONAL BANK OF CENTRAL CALIFORNIA (hereinafter referred to as "Employer") and DENNIS A. DeCIUS (hereinafter referred to as "Employee"). Employer desires to employ, as Senior Vice President and Chief Financial Officer, a person of high executive caliber with significant prior experience in the banking services which Employer provides. Employee being willing to be employed by Employer as Senior Vice President and Chief Financial Officer, and Employer being willing to employ Employee on the terms, covenants and conditions hereinafter set forth, it is agreed as follows: 1. Position. Employee is hereby employed as Senior Vice President and Chief Financial Officer of Employer. 2. Employment Term. The term of this Agreement shall commence effective May 22, 1996, and continue for three (3) years thereafter through May 21, 1999, unless earlier terminated pursuant to Paragraph 6 below, such period being the term of this Agreement. 3. Employee Duties. Employee shall hold and perform the customary responsibilities and duties of the position of Senior Vice President and Chief Financial Officer as designated by the Bylaws of Employer and as directed by Employer through its Board of Directors (hereinafter referred to as "Board"). 4. Extent of Services. Employee shall devote his full time, attention and energies to the business of Employer, and shall not, during the term of this Agreement, engage directly or indirectly, in any other business activity, except personal investments, without the prior written consent of Employer. 5. Compensation and Benefits. Employee's salary shall be at the rate of $109,027 per year, prorated for any partial year in which this Agreement is in effect (as such salary may be adjusted during the term of this Agreement, the "Base Salary"). Said salary shall be payable in equal semi-monthly installments. Any salary increase shall be at the sole discretion of the Board. Employer agrees to review and evaluate Employee's performance at the end of each fiscal year to determine whether Employee should be paid a cash bonus ("the Bonus"). The amount of such bonus, if any, will be determined in the sole discretion of the Board. In addition, Employee shall receive the following benefits: a) Automobile. Employer shall provide Employee with a full-size automobile, the make, model and equipment of which shall be determined by Employer, solely for his use alone during the term of this Agreement. Employer shall pay or reimburse Employee for all auto expenses incurred in the use of said automobile by Employee in the performance of his duties under this Agreement. Employer shall maintain an automobile liability insurance policy on said 1 102 automobile, with coverage to include Employee's operation of said automobile and in such amounts as Employer and Employee shall agree upon. b) Insurance. Employer shall be a participant in such group life insurance, health and long-term disability plans as are maintained by Employer, at Employer's sole cost and expense. In addition, Employer shall, at its sole cost and expense, provide Employee with a copy of standard term life insurance in the face amount of $250,000. Employee shall have the right, in Employee's sole discretion, to designate the beneficiary or beneficiaries of any such insurance. c) Vacation. Employee shall receive four (4) weeks paid vacation per year, prorated for any partial calendar year in which this Agreement is in effect, which shall be taken at such time or times as mutually agreed upon by Employee and the Board, provided that at least two (2) weeks of such vacation shall be taken consecutively per calendar year. Employee acknowledges that the requirement of two (2) consecutive weeks of vacation is required by sound banking practices. d) General Expenses. Employer shall, upon submission and approval of written statements and bills in accordance with the then-regular procedures of Employer, pay or reimburse Employee for any and all necessary, customary and usual expenses incurred by him while traveling for or on behalf of Employer and any and all other necessary, customary or usual expenses (including entertainment) incurred by employee for or on behalf of Employer in the normal course of business as determined to be appropriate by Employer. e) Other Benefits. In the event that Employer in the future establishes any other benefit plan for its senior executives generally, Employee shall be eligible to participate in such plan on the terms and conditions stated in the legal documents for such plan. 6. Termination. This Agreement may be terminated prior to May 21, 1999, with or without cause in accordance with this Paragraph 6(a) through 6(f). In the event of such termination, Employee shall be released from all obligations under this Agreement, except that Employee shall remain subject to Paragraphs 7, 8, 12(c), 12(i) and 12(j), and Employer shall be released from all obligations under this Agreement, except as otherwise provided in this Paragraph and Paragraphs 12(c), 12(e), 12(i) and 12(j). a) Early Termination By Employer Without Cause. This Agreement may be terminated without cause, for any reason whatsoever, in the sole, absolute and unreviewable discretion of Employer, upon thirty (30) days' written notice by Employer to Employee. If this Agreement is terminated pursuant to this Paragraph 6(a), if the term of this Agreement is not extended upon expiration thereof, Employee shall receive (i) the salary and insurance benefits as provided under the terms of this Agreement for a period of six (6) months from the date of such termination provided Employee shall, at his discretion, be entitled to receive such salary payment in a lump sum in lieu of receiving such salary payments over a period of six (6) months following termination; and (ii) a bonus for the year in which the termination occurs, prorated based upon the fraction of the calendar year Employee was employed, if, and only if, a bonus program for that year has been established prior to such termination and such plan provides for calculable bonuses not based on the discretion of Employer. Such salary and insurance benefits 2 103 shall be in full and complete satisfaction of any and all rights which Employee may enjoy under this Agreement and shall be the sole compensation and/or damages payable to Employee as the result of termination of this Agreement without cause. b) Early Termination By Employer For Cause. This Agreement may be terminated for cause by Employer immediately upon written notice to Employee, and Employee shall not be entitled to receive compensation or other benefits for any period after termination for cause. Employee understands and agrees that satisfactory performance of this Agreement on his part requires conformance with the highest standards of integrity, diligence, competence, skill, judgment and efficiency in the banking industry and that failure to conform to such standards is cause for termination of the Agreement by Employer. Cause for termination pursuant to this Paragraph 6(b) also includes: (1) failure to qualify for a surety bond as provided in Paragraph 11 of this Agreement; (2) violation of any law, rule or regulation (other than a traffic violation or similar offense); (3) acts causing termination of Employer's Banker's Blanket Bond with respect to Employee; (4) repeated insobriety or usage of drugs without prescription; (5) misappropriation of Employer's property; (6) any act of dishonesty; (7) neglect of duties or negligence in carrying out duties; (8) repeated unexcused absence; (9) breach of any material provision of this Agreement; and (10) any act or omission that is seriously detrimental to Employer's interests. c) Early Termination By Employee. This Agreement may be terminated by Employee upon thirty (30) days' written notice to Employer. d) Early Termination Upon Disability. If Employee becomes disabled due to a physical or mental disability so that he is unable to perform the essential functions of his position and the disability cannot be reasonably accommodated without undue hardship, Employer may at its option terminate this Agreement. Employee shall be entitled to the salary provided for in Paragraph 5 of this Agreement for a period of not to exceed six (6) months from the date of Employee's first absence due to the disability, but not beyond May 21, 1999, and to accrued but unused vacation leave. Employee's salary in the event of disability and termination therefor shall be offset by any payments received by Employee as a result of a disability insurance policy purchased by Employer for Employee. All other benefits provided for under this Agreement shall cease as of the date of termination. For purposes of this Agreement, physical or mental disability shall mean the inability of Employee to fully perform under this Agreement for a continuous period of ninety (90) days, as determined by a physician in the case of physical disability, or a psychiatrist in the case of mental disability, licensed to practice medicine in California and selected jointly by Employer and Employee. Upon demand by Employer, Employee shall act promptly to select such physician or psychiatrist jointly with Employer, shall consent to undergo any reasonable examination or test and shall authorize release of all pertinent medical records to Employer. Recurrent disabilities will be treated as separate disabilities if they result from unrelated causes or if they result from the same or related cause or causes and are separated by a continuous period of at least six (6) full months during which Employee was able to perform his duties hereunder equal to at least eighty percent (80%) of his capacity prior to disability. Otherwise, recurrent disabilities will be treated as a continuation of previous disabilities for the purpose of determining the limitations established in this paragraph. 3 104 e) Death During Employment. This Agreement shall terminate immediately upon the death of Employee. f) Change of Control. In the event of a change in control by merger of Employer and/or Pacific Capital Bancorp, the parent company of Employer (hereinafter referred to as "Pacific"), into another bank and/or holding company or other entity or by purchase of Employer and/or Pacific or the purchase of all or substantially all of the assets of Employer and/or Pacific by another bank and/or holding company or other person or entity, not resulting from financial difficulties or insolvency of Employer and/or Pacific, then Employee shall be paid one and one-half times his annual Base Salary plus Bonus as defined in Section 5 of this Agreement for the average of the three years immediately preceding the effective time of such change of control, which amount shall be due and payable to Employee at the effective time of such change in control together with any Base Salary and Bonus earned to such date. 7. Printed Material. All written or printed materials used by Employee in performing duties for Employer are and shall remain the property of Employer. Upon termination of employment, Employee shall promptly return such written or printed materials to Employer. 8. Disclosure of Information. Employee recognizes and acknowledges that Employer and Pacific possess information concerning their business affairs and methods of operation which constitute valuable, special and unique assets of their businesses. Employee shall not, at any time before or after termination of this Agreement, disclose to anyone any confidential information relating to Employer, Pacific or any affiliate of Pacific. For purpose of this paragraph, confidential information includes all information regarding products, services, processes, know-how, customers, suppliers, product and/or service development, business plans, research, finances, marketing, pricing, costs and any other proprietary matters relating to Employer, Pacific or any affiliate of Pacific. Employee recognizes and acknowledges that all financial information concerning any of Employer's customers is strictly confidential, and Employee shall not at any time before or after termination of this Agreement disclose to anyone any such financial information or any part thereof, for any reason or purpose whatsoever. 9. Noncompetition by Employee. During the term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any competing banking business; provided, however, Employee shall not be restricted by this paragraph from owning securities of corporations listed on a national securities exchange or regularly traded by national securities dealers, so long as such investment does not exceed one percent (1%) of the market value of the outstanding securities of such corporation. 10. Moral Conduct. Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will reasonably tend to degrade him or to bring him into public hatred, contempt or ridicule or that 4 105 will reasonably tend to shock or offend the community or to prejudice Employer or the banking industry in general. 11. Surety Bond. Employee agrees that he will furnish all information and take any steps necessary to enable Employer to obtain or maintain a fidelity bond, satisfactory to Employer, conditional on the rendering of a true account by Employee of all monies, goods or other property which may come into the custody, charge or possession of Employee during the term of this employment. Employer shall pay all premiums on the bond. If Employee cannot qualify for a surety bond at any time during the term of this Agreement, Employer shall have the option to terminate this Agreement immediately. 12. General Provisions. This Agreement is further governed by the following provisions: a) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements among the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of a party which are not embodied herein, and that no other agreement, statement, representation, inducement or promise not contained in this Agreement shall be valid or binding. Any modification, waiver or amendment of this Agreement will be effective only if it is in writing and signed by the party to be charged. b) Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. c) Choice of Law and Forum. This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent preempted by the laws of the United States. Any action or proceeding brought upon or arising out of this Agreement or its termination shall be brought in a forum located within the State of California. d) Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon Employer, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire all or substantially all of Employer's assets and business, or with or into which Employer or Pacific may be consolidated, merged or otherwise reorganized, and this provision shall apply in the event of any subsequent merger, consolidation, reorganization or transfer. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives. The rights and obligations of Employee under this Agreement shall not be transferable by Employee by assignment or otherwise and such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. 5 106 e) Indemnification. Employer shall indemnify Employee to the maximum extent permitted under the Bylaws of Employer and the governing laws for any liability or loss arising out of Employee's actual or asserted misfeasance or nonfeasance in the good faith performance of his duties or out of any actual or asserted wrongful act against or by Employer, including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. If available at reasonable rates, which shall be determined by the Employer in its sole discretion, Employer shall endeavor to apply for and obtain directors' and officers' liability insurance to indemnify and insure Employer and Employee from such liability or loss. f) Severability. In the event that any term or condition contained in this Agreement shall, for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. g) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. h) Notices. Any notices to be given hereunder by any party to another party may be effected either by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses indicated at the end of this Agreement, but each party may change his or her address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing. i) Arbitration. Any controversy or claim arising out of or relating to this Agreement or alleged breach of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three (3) arbitrators, one (1) to be chosen directly by each party and the third (3rd) arbitrator to be selected by the two (2) arbitrators so chosen. Each party shall pay the fees of the arbitrator he/it selects and of his/its own attorneys, and the expenses of his/its witnesses and all other expenses connected with presenting his/its case. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, administrative fees, the fee of the third (3rd) arbitrator, and all other fees and costs shall be borne equally by the parties. j) Attorneys' Fees and Costs. If any action at law or in equity is brought by a party upon or arising out of this Agreement or its termination, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements incurred in the action, in addition to any other relief to which he may be entitled. 6 107 IN WITNESS WHEREOF, the parties hereto have set their hands this 22nd day of May, 1996, in the City of Salinas, County of Monterey, State of California. EMPLOYER: FIRST NATIONAL BANK OF CENTRAL CALIFORNIA By: /s/ William H. Pope -------------------------------------- Its: Executive Committee Chairman -------------------------------------- EMPLOYEE: /s/ Dennis A. DeCius -------------------- Dennis A. DeCius 1172 S. Main, #169 Salinas, CA 93901 7 108 EX-10.57 6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (hereinafter referred to as "Agreement") is made effective as of November 20, 1996, by and between SOUTH VALLEY NATIONAL BANK (hereinafter referred to as "Employer") and BRAD L. SMITH (hereinafter referred to as "Employee"). Employee being willing to be employed by Employer as President and Chief Executive Officer, and Employer being willing to employ Employee on the terms, covenants and conditions hereinafter set forth, it is agreed as follows: 1. Position. Employee is hereby employed as President and Chief Executive Officer of Employer. 2. Employment Term. The term of this Agreement shall commence effective November 20, 1996, and continue for two (2) years thereafter through November 20, 1998, unless earlier terminated pursuant to Paragraph 6 below, such period being the term of this Agreement. 3. Employee Duties. Employee shall hold and perform the responsibilities and duties of the position of President and Chief Executive Officer as specified on Exhibit A attached hereto. 4. Extent of Services. Employee shall devote his full time, attention and energies to the business of Employer, and shall not, during the term of this Agreement, engage directly or indirectly, in any other business activity, except personal investments, without the prior written consent of Employer. 5. Compensation and Benefits. Employee's salary shall be at the rate of One Hundred Fifty Three Thousand, One Hundred Fifty Dollars ($153,150) per year, prorated for any partial year in which this Agreement is in effect (as such salary may be adjusted during the term of this Agreement, the "Base Salary"). Said salary shall be payable in equal semi-monthly installments. Any salary increase shall be at the sole discretion of the Board. Employer agrees to review and evaluate Employee's performance at the end of each fiscal year to determine whether Employee should be paid a cash bonus (the "Bonus"). The amount of such Bonus, if any, and any salary increase will be determined in the sole discretion of Employers Board of Directors (the "Board"), subject to review and approval by the Board of Directors of Pacific Capital Bancorp ("Pacific") or its designated representatives. In addition, Employee shall receive the following benefits: (a) Automobile. For one (1) year after the date hereof, Employer shall provide Employee with a full-size automobile, the make, model and equipment of which shall be determined by Employer, solely for his use during the term of this Agreement. Employer shall pay or reimburse Employee for all auto expenses incurred in the use of said automobile by Employee in the performance of his duties under this Agreement. Employer shall maintain an 1 109 automobile liability insurance policy on said automobile, with coverage to include Employee's operation of said automobile and in such amounts as Employer and Employee shall agree upon. Upon the expiration of one (1) year after the date hereof, Employer may, in its sole discretion, renew the benefits under this Paragraph 5(a). (b) Insurance. Employer shall be a participant in such group life insurance, health and long-term disability plans as are maintained by Employer, at Employer's sole cost and expense. In addition, for one (1) year after the date hereof Employer shall, at its sole cost and expense, provide Employee with a copy of standard term life insurance in the face amount of Six Hundred Fifty Thousand Dollars ($650,000). Employee shall have the right, in Employee's sole discretion, to designate the beneficiary or beneficiaries of any such insurance. Upon the expiration of one (1) year after the date hereof, Employer may, in its sole discretion, continue providing such life insurance to Employer under this Paragraph 5(b). (c) Vacation. Employee shall receive four (4) weeks paid vacation per year, prorated for any partial calendar year in which this Agreement is in effect, which shall be taken at such time or times as mutually agreed upon by Employee and the Board, provided that at least two (2) weeks of such vacation shall be taken consecutively per calendar year. Employee acknowledges that the requirement of two (2) consecutive weeks of vacation is required by sound banking practices. (d) General Expenses. Employer shall, upon submission and approval of written statements and bills in accordance with the then-regular procedures of Employer, pay or reimburse Employee for any and all necessary, customary and usual expenses incurred by him while traveling for or on behalf of Employer and any and all other necessary, customary or usual expenses (including entertainment) incurred by employee for or on behalf of Employer in the normal course of business as determined to be appropriate by Employer. 6. Termination. This Agreement may be terminated prior to November 20, 1998, with or without cause in accordance with this Paragraph 6(a) through 6(c). In the event of such termination, Employee shall be released from all obligations under this Agreement, except that Employee shall remain subject to Paragraphs 7, 8, 12(c), 12(i), and 13, and Employer shall be released from all obligations under this Agreement, except as otherwise provided in this Paragraph and Paragraphs 12(c), 12(e), and 12(i). (a) Early Termination By Employer Without Cause. This Agreement may be terminated without cause, for any reason whatsoever, in the sole, absolute and unreviewable discretion of Employer, upon thirty (30) days' written notice by Employer to Employee. If this Agreement is terminated pursuant to this Paragraph 6(a). Employee shall be entitled to receive two (2) times Employee's average annual compensation for the five (5) years immediately preceding the date of this Agreement, payable in bi-monthly installments on the first and fifteenth days of each month. Such payment shall be in full and complete satisfaction of any and all rights which Employee may enjoy under this Agreement and shall be the sole compensation and/or damages payable to Employee as the result of termination of this Agreement without cause. All other benefits and rights due to Employee under this Agreement shall immediately 2 110 cease upon such payment. Employee acknowledges and agrees that such payment is in lieu of all damages, payments and liabilities under this Agreement and shall constitute Employee's sole and exclusive remedy hereunder. (b) Early Termination By Employer For Cause. This Agreement may be terminated for cause by Employer immediately upon written notice to Employee, and Employee shall not be entitled to receive compensation or other benefits for any period after termination for cause. Employee understands and agrees that satisfactory performance of this Agreement on his part requires conformance with the highest standards of integrity, diligence, competence, skill, judgment and efficiency in the banking industry and that failure to conform to such standards is cause for termination of the Agreement by Employer. Cause for termination pursuant to this Paragraph 6(b) also includes: (1) failure to qualify for a surety bond as provided in Paragraph 11 of this Agreement; (2) violation of any law, rule or regulation (other than a traffic violation or similar offense); (3) acts causing termination of Employer's Banker's Blanket Bond with respect to Employee; (4) repeated insobriety or usage of drugs without prescription; (5) misappropriation of Employer's property; (6) any act of dishonesty; (7) neglect of duties or negligence in carrying out duties; (8) repeated unexcused absence; (9) breach of any material provision of this Agreement: and (10) any act or omission that is seriously detrimental to Employer's interests. (c) Early Termination By Employee. This Agreement may be terminated by Employee upon thirty (30) days' written notice to Employer and shall terminate immediately upon the death of Employee. If this Agreement is terminated pursuant to this Paragraph 6(c), Employee shall be entitled to receive two (2) times Employee's average annual compensation for the five (5) years immediately preceding the date of this Agreement, payable in bi-monthly installments on the first and fifteenth days of each month. All other benefits and rights due to Employee under this Agreement shall immediately cease upon such payment. Employee acknowledges and agrees that such payment is in lieu of all damages, payments and liabilities under this Agreement and shall constitute Employee's sole and exclusive remedy hereunder. 7. Printed Material. All written or printed materials used by Employee in performing duties for Employer are and shall remain the property of Employer. Upon termination of employment, Employee shall promptly return such written or printed materials to Employer. 8. Disclosure of Information. Employee recognizes and acknowledges that Employer, Pacific and their affiliates possess information concerning their business affairs and methods of operation which constitute valuable, special and unique assets of their businesses. Employee shall not, at any time before or after termination of this Agreement, disclose to anyone any confidential information relating to Employer, Pacific or any affiliate of Pacific. For purpose of this paragraph, confidential information includes all information regarding products, services, processes, know-how, customers, suppliers, product and/or service development, business plans, research, finances, marketing, pricing, costs and any other proprietary matters relating to Employer, Pacific or any affiliate of Pacific. Employee recognizes and acknowledges that all financial information concerning any of Employer's customers is strictly confidential, and 3 111 Employee shall not at any time before or after termination of this Agreement disclose to anyone any such financial information or any part thereof, for any reason or purpose whatsoever. 9. Noncompetition by Employee. During the term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any competing banking business; provided, however, Employee shall not be restricted by this paragraph from owning securities of corporations listed on a national securities exchange or regularly traded by national securities dealers, so long as such investment does not exceed one percent (1%) of the market value of the outstanding securities of such corporation. 10. Moral Conduct. Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will reasonably tend to degrade him or to bring him into public hatred, contempt or ridicule or that will reasonably tend to shock or offend the community or to prejudice Employer or the banking industry in general. 11. Surety Bond. Employee agrees that he will furnish all information and take any steps necessary to enable Employer to obtain or maintain a fidelity bond, satisfactory to Employer. conditional on the rendering of a true account by Employee of all monies, goods or other property which may come into the custody, charge or possession of Employee during the term of this employment. Employer shall pay all premiums on the bond. If Employee cannot qualify for a surety bond at any time during the term of this Agreement, Employer shall have the option to terminate this Agreement immediately. 12. General Provisions. This Agreement is further governed by the following provisions: (a) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements among the parties with respect to such employment. Each party acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of a party which are not embodied herein, and that no other agreement, statement, representation, inducement or promise not contained in this Agreement shall be valid or binding. Any modification, waiver or amendment of this Agreement will be effective only if it is in writing and signed by the party to be charged. (b) Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 4 112 (c) Choice of Law and Forum. This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent preempted by the laws of the United States. Any action or proceeding brought upon or arising out of this Agreement or its termination shall be brought in a forum located within the State of California. (d) Binding Effect of Agreement. This Agreement shall inure to the benefit of and be binding upon Employer, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire all or substantially all of Employer's assets and business or with or into which Employer or Pacific may be consolidated, merged or otherwise reorganized, and this provision shall apply in the event of any subsequent merger, consolidation reorganization or transfer. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives. The rights and obligations of Employee under this Agreement shall not be transferable by Employee by assignment or otherwise and such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. (e) Indemnification. Employer shall indemnify Employee to the maximum extent permitted under the Bylaws of Employer and the governing laws for any liability or loss arising out of Employee's actual or asserted misfeasance or nonfeasance in the good faith performance of his duties or out of any actual or asserted wrongful act against or by Employer, including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. If available at reasonable rates, which shall be determined by the Employer in its sole discretion, Employer shall endeavor to apply for and obtain directors' and officers' liability insurance to indemnify and insure Employer and Employee from such liability or loss. (f) Severability. In the event that any term or condition contained in this Agreement shall, for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. (g) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (h) Notices. Any notices to be given hereunder by any party to another party may be effected either by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses indicated at the end of this Agreement, but each party may change his or her address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing. (i) Arbitration. Any controversy or claim arising out of or relating to this Agreement or alleged breach of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the 5 113 award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three (3) arbitrators, one (1) to be chosen directly by each party and the third (3rd) arbitrator to be selected by the two (2) arbitrators so chosen. Each party shall pay the fees of the arbitrator he/it selects and of his/its own attorneys, and the expenses of his/its witnesses and all other expenses connected with presenting his/its case. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, administrative fees, the fee of the third (3rd) arbitrator, and all other fees and costs shall be borne equally by the parties. The substantially prevailing party in any such arbitration shall be entitled to reasonable attorneys' fees, costs and necessary disbursements incurred therein, in addition to any other relief to which he may be entitled. 13. Indemnification for Negligence or Misconduct. Employee shall indemnify and hold Employer harmless from all liability for loss, damage or injury to persons or property resulting from the gross negligence or intentional conduct of the Employee. IN WITNESS WHEREOF, the parties hereto have set their hands this 20th day of November, 1996, in the City of , County of , State of California. EMPLOYER: SOUTH VALLEY NATIONAL BANK By: /s/ Clayton C. Larson --------------------- Its:Vice Chairman ------------- EMPLOYEE: /s/ Brad L. Smith ----------------- Brad L. Smith 6 114 EX-21 7 SUBSIDIARIES OF PACIFIC CAPITAL BANCORP EXHIBIT 21 SUBSIDIARIES OF PACIFIC CAPITAL BANCORP Name State of Incorporation - -------------------------------------------- -------------------------------- First National Bank of Central California California South Valley National Bank California Pacific Capital Services Corporation California EX-22 8 EXHIBIT 22 Exhibit 22 KPMG Peat Marwick LLP The Board of Directors Pacific Capital Bancorp: We have audited the accompanying consolidated balance sheets of Pacific Capital Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Capital Bancorp and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ------------------------- January 24, 1997 65 EX-24 9 CONSENT OF INDEPENDENT AUDITORS KPMG Peat Marwick LLP 50 West San Fernando Street San Jose, CA 95113 Consent of Independent Auditors ------------------------------- The Board of Directors Pacific Capital Bancorp: We consent to incorporation by reference in the registration statement No. 33-83848 on Form S-8 of Pacific Capital Bancorp and subsidiaries of our report dated January 24, 1997, relating to the consolidated balance sheets of Pacific Capital Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Pacific Capital Bancorp and subsidiaries. /s/ KPMG Peat Marwick LLP March 25, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
9 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1995 DEC-31-1996 24,891 48,126 1,287 693 10,326 14,910 0 0 75,896 116,528 8,596 9,680 8,662 9,741 215,220 388,728 2,397 3,672 353,579 619,439 307,819 547,182 0 0 2,784 8,611 0 0 31,325 49,388 0 0 0 0 11,741 14,258 353,579 619,439 20,461 33,845 5,305 10,113 79 0 25,845 43,958 7,029 13,292 7,029 13,319 18,816 30,639 135 685 (73) (46) 10,394 22,727 8,214 10,387 8,214 10,387 0 0 0 0 5,034 6,039 2 0 2 0 9 0 993 1,564 141 17 0 279 0 0 2,438 3,710 321 1,070 145 347 2,397 3,672 2,397 3,672 0 0 0 0
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